[Federal Register Volume 87, Number 133 (Wednesday, July 13, 2022)]
[Proposed Rules]
[Pages 41878-42010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-14631]



[[Page 41877]]

Vol. 87

Wednesday,

No. 133

July 13, 2022

Part II





 Department of Education





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34 CFR Parts 600, 668, 674, et al.





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

Federal Register / Vol. 87 , No. 133 / Wednesday, July 13, 2022 / 
Proposed Rules

[[Page 41878]]


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DEPARTMENT OF EDUCATION

34 CFR Parts 600, 668, 674, 682, and 685

[Docket ID ED-2021-OPE-0077]
RIN 1840-AD53, 1840-AD59, 1840-AD70, 1840-AD71


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

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This notice of proposed rulemaking (NPRM) covers student loans 
and affordability issues. This rulemaking specifically discusses issues 
involving loans under the William D. Ford Direct Loan (Direct Loan) 
Program, the Federal Perkins Loan (Perkins) Program, and the Federal 
Family Education Loan (FFEL) Program. The Secretary proposes to amend 
the regulations governing seven topics related to student loans 
administered by the U.S. Department of Education. First, we propose to 
amend the regulations governing the William D. Ford Federal Direct Loan 
(Direct Loan) Program to establish a new Federal standard and process 
for determining whether a borrower has a defense to repayment on a 
loan. We also propose to prohibit the use of certain contractual 
provisions regarding dispute resolution processes by participating 
institutions, and to require certain notifications and disclosures by 
institutions regarding their use of arbitration. Additionally, we 
propose to amend the Perkins, Direct Loan, and FFEL Program regulations 
to improve the process for granting total and permanent disability 
(TPD) discharges by eliminating the income monitoring period and 
expanding allowable documentation allowing additional health care 
professionals to provide a certification that a borrower is totally and 
permanently disabled. We further propose to amend the closed school 
discharge provisions in the Perkins Loan, Direct Loan, and FFEL 
programs to expand borrower eligibility for automatic discharges and 
eliminate provisions pertaining to reenrollment in a comparable 
program. We further propose to amend the Direct Loan and FFEL 
regulations to streamline the regulations governing false certification 
discharges. We propose to amend the Direct Loan regulations to 
eliminate interest capitalization in instances where it is not required 
by statute. Finally, we propose to amend regulations governing Public 
Service Loan Forgiveness (PSLF) in the Direct Loan program to improve 
the application process, and to clarify and expand definitions for 
full-time employment, qualifying employers, and qualifying monthly 
payments. The proposed changes would bring greater transparency and 
clarity and improve the administration of Federal student financial aid 
programs to assist and protect students, participating institutions, 
and taxpayers.

DATES: We must receive your comments on or before August 12, 2022.

ADDRESSES: For more information regarding submittal of comments, please 
see SUPPLEMENTARY INFORMATION. Comments must be submitted via the 
Federal eRulemaking Portal at Regulations.gov. However, if you require 
an accommodation or cannot otherwise submit your comments via 
Regulations.gov, please contact Mr. Jean-Didier Gaina, U.S. Department 
of Education, 400 Maryland Ave. SW, Room 2C172, Washington, DC 20202 or 
by phone at (202) 453-7551 or by email at <a href="/cdn-cgi/l/email-protection#e78d828689ca838e838e8295c980868e8986a78283c9808891"><span class="__cf_email__" data-cfemail="d2b8b7b3bcffb6bbb6bbb7a0fcb5b3bbbcb392b7b6fcb5bda4">[email protected]</span></a>.
    Federal eRulemaking Portal: Please go to www.regulations.gov to 
submit your comments electronically. Information on using 
Regulations.gov, including instructions for finding a rule on the site 
and submitting comments, is available on the site under ``FAQ.''

FOR FURTHER INFORMATION CONTACT: For assistance to individuals with 
disabilities for reviewing the rulemaking record, contact Valerie Lefor 
at (202) 453-7724 or <a href="/cdn-cgi/l/email-protection#394f58555c4b505c17555c5f564b795c5d175e564f"><span class="__cf_email__" data-cfemail="295f48454c5b404c07454c4f465b694c4d074e465f">[email protected]</span></a>. For further information 
related to interest capitalization, contact Vanessa Freeman at (202) 
453-7378 or by email at <a href="/cdn-cgi/l/email-protection#1a6c7b747f69697b347c687f7f777b745a7f7e347d756c"><span class="__cf_email__" data-cfemail="d2a4b3bcb7a1a1b3fcb4a0b7b7bfb3bc92b7b6fcb5bda4">[email protected]</span></a>. For further information 
related to borrower defenses or pre-dispute arbitration, contact Rene 
Tiongquico at (202) 453-7513 or by email at <a href="/cdn-cgi/l/email-protection#5123343f347f25383e3f36202438323e1134357f363e27"><span class="__cf_email__" data-cfemail="077562696229736e68696076726e646847626329606871">[email protected]</span></a>. For 
further information related to TPD, closed school, and false 
certification discharges, contact Brian Smith at (202) 453-7440 or by 
email at <a href="/cdn-cgi/l/email-protection#6a0818030b04441907031e022a0f0e440d051c"><span class="__cf_email__" data-cfemail="3c5e4e555d52124f515548547c5958125b534a">[email protected]</span></a>. For further information related to PSLF, 
contact Tamy Abernathy at (202) 453-5970 or by email at 
<a href="/cdn-cgi/l/email-protection#80f4e1edf9aee1e2e5f2eee1f4e8f9c0e5e4aee7eff6"><span class="__cf_email__" data-cfemail="a8dcc9c5d186c9cacddac6c9dcc0d1e8cdcc86cfc7de">[email protected]</span></a>.
    If you are deaf, hard of hearing, or have a speech disability and 
wish to access telecommunications relay services, please dial 7-1-1.

SUPPLEMENTARY INFORMATION:

Submission of Comments

    The Department will not accept comments submitted by fax or by 
email or those submitted after the comment period. To ensure that the 
Department does not receive duplicate copies, please submit your 
comments only once. Additionally, please include the Docket ID at the 
top of your comments.
    The Department strongly encourages you to submit any comments or 
attachments in Microsoft Word format. If you must submit a comment in 
Adobe Portable Document Format (PDF), the Department strongly 
encourages you to convert the PDF to ``print-to-PDF'' format, or to use 
some other commonly used searchable text format. Please do not submit 
the PDF in a scanned format. Using a print-to-PDF format allows the 
Department to electronically search and copy certain portions of your 
submissions to assist in the rulemaking process.
    Privacy Note: The Department's policy is to make all comments 
received from members of the public available for public viewing in 
their entirety on the Federal eRulemaking Portal at 
www.regulations.gov. Commenters should not include in their comments 
any information that identifies other individuals or that permits 
readers to identify other individuals. If, for example, your comment 
describes an experience of someone other than yourself, please do not 
identify that individual or include information that would allow 
readers to identify that individual. The Department will not make 
comments that contain personally identifiable information (PII) about 
someone other than the commenter publicly available on 
www.regulations.gov for privacy reasons. This may include comments 
where the commenter refers to a third-party individual without using 
their name if the Department determines that the comment provides 
enough detail that could allow one or more readers to link the 
information to the third party. If your comment refers to a third-party 
individual, to help ensure that your comment is posted, please consider 
submitting your comment anonymously to reduce the chance that 
information in your comment about a third party could be linked to the 
third party. The Department will also not make comments that contain 
threats of harm to another person or to oneself available on 
www.regulations.gov. Therefore, commenters should be careful to include 
in their comments only information that they wish to make publicly 
available.

Executive Summary

    Purpose of This Regulatory Action: College affordability and 
student loan debt have been significant challenges for many Americans. 
Student loan debt has

[[Page 41879]]

risen over the past 10 years as student loan repayment has slowed, 
while the inability to repay student loan debt has been cited as a 
major obstacle to entry into the middle class.\1\
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    \1\ R. Chakrabarti, N. Gorton, and W. van der Klaauw, ``Diplomas 
to Doorsteps: Education, Student Debt, and Homeownership,'' Federal 
Reserve Bank of New York Liberty Street Economics (blog), April 3, 
2017, http://libertystreeteconomics.newyorkfed.org/2017/04/diplomas-to-doorsteps-education-student-debt-and-homeownership.html.
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    This NPRM proposes several significant improvements to existing 
programs authorized under the Higher Education Act of 1965 (HEA), 20 
U.S.C. 1001, et seq., that grant discharges to borrowers who meet 
specific eligibility conditions. Despite the presence of these 
discharge authorities for years, if not decades, the Department is 
concerned that too many borrowers have been unable to access loan 
relief through these opportunities. In some situations, this has been 
due to regulatory requirements that have created unnecessary or unfair 
burdens for borrowers.
    These proposed changes relate to discharges available to borrowers 
in the three major Federal student loan programs: Direct Loans, Federal 
Family Education Loan (FFEL), and Perkins Loans. The most significant 
effects would be in the Direct Loan program, which has been the 
predominant source of all Federal student loans since 2010. In this 
program the Department makes loans directly to the borrower and then 
contracts with private companies known as student loan servicers to 
manage the borrower's repayment experience on behalf of the Department. 
Several of the components of these proposed regulations, such as 
interest capitalization, borrower defense to repayment, the ban on the 
use of mandatory pre-dispute arbitration, the prohibition on class 
action waivers, and the Public Service Loan Forgiveness program are 
only related to Direct Loans. Other provisions, such as closed school 
discharge, total and permanent disability discharges, and false 
certification discharges, would affect Direct Loans as well as loans 
previously issued under the FFEL Program and the Perkins Loan 
Program.\2\ In the FFEL program, private lenders issue Federal student 
loans using their own funds, then receive both a Government guarantee 
against most of the losses in the case of default and quarterly Federal 
subsidies. In the Perkins program, institutions of higher education 
(institutions) issue Federal student loans using a combination of 
Federal and institutional funds.
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    \2\ No new student loans are currently issued under either the 
FFEL and Perkins Loan programs. There have been no new FFEL loans 
issued since June 30, 2010, and the Perkins Loan program stopped 
issuing new loans on September 30, 2017.
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Borrower Defense to Repayment, Arbitration, and Class Action Waivers

    The proposed regulations for the borrower defense to repayment 
program, which applies only for Direct Loan borrowers, would expand the 
current basis for a borrower to receive a discharge for loans obtained 
to attend a particular institution. As proposed, a borrower defense 
discharge would occur when the Department determines an institution 
engaged in substantial misrepresentations or substantial omissions of 
fact, breached a loan contract, engaged in aggressive academic 
recruitment, or was subject to a judgment based on Federal or State law 
in a court or administrative tribunal of competent jurisdiction for any 
of the above behaviors. The proposed changes to the regulations 
governing borrower defense discharges are designed to further protect 
student loan borrowers from the financial effects of certain predatory 
practices. Where a borrower defense discharge is warranted, the 
proposed regulations would also enhance the Department's recoupment 
authorities, making it easier for the Department to hold institutions 
accountable for costs, reducing the financial impact to taxpayers. It 
would also include a process for the Department to recoup the cost of 
these discharges from institutions. The proposed changes are in direct 
response to numerous instances observed by the Department over time in 
which students borrow to attend an institution only to find that the 
institution's promises were untrue, leaving the borrower with a loan 
for a substandard education and often lacking the ability to obtain the 
employment they were promised. The proposed changes to the borrower 
defense regulations would apply to both public and private 
institutions. To date, much of the concerning evidence of unacceptable 
institutional practices comes from private for-profit colleges and 
universities; a large share of whose enrollment is Black students, 
Latino students, students who are older, students who are working full-
time while enrolled in college, and students who did not enroll in 
postsecondary education directly from high school. However, the 
regulations would not be limited to only private for-profit schools but 
would cover conduct at public and private nonprofit institutions as 
well.
    As proposed, the regulations would also prevent institutions 
wishing to participate in title IV programs from requiring either the 
use of mandatory arbitration or waiver of class action lawsuits, 
including prohibiting putting such requirements within the loan 
contract for a Direct Loan.

Interest Capitalization

    The proposed regulations would eliminate most interest 
capitalization on Direct Loans by removing the current regulatory 
provisions that require capitalization under circumstances when 
capitalization is not required by statute.\3\ As proposed, accrued 
interest would no longer be capitalized when: a borrower enters 
repayment; upon the expiration of a period of forbearance; annually 
after periods of negative amortization under the alternative repayment 
plan or the ICR plan; when a borrower defaults on a loan; when a 
borrower who is repaying under the income-driven repayment Pay as You 
Earn (PAYE) plan fails to recertify income or chooses to leave the 
plan; and when a borrower who is repaying under another income-driven 
repayment the Revised Pay As You Earn (REPAYE) plan fails to recertify 
income or leaves the plan. These proposed changes would decrease the 
rate at which a borrower's principal loan balance grows over time.
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    \3\ Currently, accrued interest is added to the outstanding 
principal balance and the new principal balance is used for future 
accumulation of interest.
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Public Service Loan Forgiveness

    The Public Service Loan Forgiveness (PSLF) program authorizes 
Direct Loan borrowers engaged in public service to receive a discharge 
of remaining loan balances after making the equivalent of 10 years of 
qualifying payments.\4\ The Department, however, is concerned that the 
current regulations around this program are too restrictive, 
particularly in the requirements for a payment to qualify toward 
forgiveness. For instance, the Limited PSLF Waiver announced in October 
2021 has helped more than 1 million borrowers receive on average an 
additional year of credit toward PSLF by addressing many of the same 
challenges in regulations that these proposed regulations would seek to 
fix. Accordingly, the regulations propose to improve the PSLF 
application process and allow borrowers to receive credit toward PSLF 
for months during which they are in certain deferment and forbearance 
periods while working for a qualified employer.
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    \4\ Section 455(m) of the HEA.

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[[Page 41880]]

Total and Permanent Disability Discharges

    The Higher Education Act provides for borrowers to receive a 
student loan discharge if they have a total and permanent disability. 
The proposed regulations would allow more borrowers who meet the 
statutory requirements for one of these discharges to receive a 
discharge by allowing additional categories of disability 
determinations by the Social Security Administration to qualify for a 
discharge. They would also allow additional types of medical 
professionals to certify that a borrower has a total and permanent 
disability. The regulations would also allow more borrowers who 
received a discharge to avoid having their loans reinstated by removing 
the 3-year income monitoring period that currently exists in 
regulation. The net effect of these changes would be a program that is 
simpler for eligible borrowers to access and navigate.

Closed School Discharges

    Borrowers whose college closes while they are enrolled or shortly 
after they have left can receive a closed school discharge so long as 
they have not graduated. The Department proposes to clarify and 
streamline the eligibility requirements for closed school discharges by 
providing more automatic discharges for borrowers within one year of 
their college closing. The proposed regulations would also clarify 
existing rules that limit discharges for borrowers who enroll in a 
comparable program to only apply in instances where a borrower accepts 
and completes an approved teach-out program.

False Certification Discharges

    Borrowers are eligible for a false certification discharge under 
the HEA if the institution that certifies the borrower's eligibility 
for the loan does so under false pretenses, such as when the borrower 
did not have a high school diploma or equivalent and did not meet 
alternative criteria; when the borrower had a status that disqualified 
them from meeting legal requirements for employment in the occupation 
for which they are training; or if the institution signed the 
borrower's name without authorization. A confusing web of regulations 
has established different standards and processes for false 
certification discharges depending on when the loan was disbursed. 
Furthermore, some borrowers who may be eligible for a discharge have 
not received it because the requirements are difficult to navigate. The 
proposed regulations would streamline the false certification discharge 
process for student loan borrowers by establishing standards that apply 
to all claims, regardless of when the loan was first disbursed, and 
providing for a group discharge process.

Summary of the Major Provisions of This Regulatory Action

    The proposed regulations would--
    <bullet> Amend the Direct Loan regulations to establish a new 
Federal standard for borrower defense claims applicable to applications 
received on or after July 1, 2023. Applications pending before the 
Secretary on July 1, 2023 would also be considered under the proposed 
new standard. In addition, the NPRM would expand the existing 
definition of misrepresentation, provide an additional basis for a 
borrower defense claim based on aggressive and deceptive recruitment 
practices, and allow claims based on State law standards.
    <bullet> Establish processes for group borrower defense claims that 
may be formed in response to evidence provided by State requestors or 
based on prior Secretarial Final Actions identifying conduct that could 
lead to an approved borrower defense claim under the Department's 
regulations if application were made. Secretarial Final Actions would 
include, but not be limited to, program reviews, suspension, or 
termination actions.
    <bullet> Stop interest accrual on borrowers' loans 180 days from 
the initial grant of forbearance or stopped collections if the 
Department does not make a determination on the borrower defense claim 
within certain timeframes. Interest accrual would resume once a 
decision on the claim is made.
    <bullet> Establish a reconsideration process for review of denied 
borrower defense claims.
    <bullet> Require schools to disclose publicly and notify the 
Secretary of judicial and arbitration filings and awards pertaining to 
a borrower defense claim.
    <bullet> Prohibit schools that wish to participate in title IV 
programs from requiring borrowers to agree to mandatory pre-dispute 
arbitration agreements or waiver of class action lawsuits.
    <bullet> Eliminate interest capitalization on Direct Loans where 
such capitalization is not required by statute to address growth in 
principal balances.
    <bullet> Modify the Perkins, FFEL, and Direct Loan regulations to 
streamline the application process for a TPD discharge by expanding the 
Department's use of Social Security Administration (SSA) codes beyond 
``Medical Improvement Not Expected'' when deciding if a borrower 
qualifies for TPD discharge.
    <bullet> Revise the Perkins, FFEL, and Direct Loan regulations to 
eliminate the 3-year post-discharge income monitoring period for 
borrowers eligible for TPD discharge to allow borrowers to retain their 
discharges to retain their discharges without unnecessary paperwork 
burden.
    <bullet> Allow borrowers to receive a TPD discharge if the onset of 
their disability as determined by SSA was at least 5 years prior to the 
application to better align the regulations with statutory requirements 
for a TPD discharge.
    <bullet> Expand the list of health professionals who may certify 
that a borrower is totally and permanently disabled to include licensed 
nurse practitioners (NPs), physician's assistants (PAs), and clinical 
psychologists to help borrowers more easily complete the application 
for a TPD discharge.
    <bullet> Amend the Perkins, FFEL, and Direct Loan regulations to 
simplify the closed school discharge process by expanding access to 
automatic discharges and eliminating the requirement that borrowers who 
reenroll in a comparable program lose eligibility for a discharge.
    <bullet> Streamline the FFEL and Direct Loan false certification 
regulations to provide one set of regulatory standards that would cover 
all false certification discharge claims.
    <bullet> Clarify that the Department would rely on the borrower's 
status at the time the loan was originated for a Direct Loan, and at 
the time the loan was certified for a FFEL loan, to determine 
eligibility for a false certification discharge.
    <bullet> Revise the regulations for PSLF to improve the application 
process, expand what counts as an eligible monthly payment, expand the 
definition of ``full-time'' employment, and provide additional 
clarifying definitions of public service employment to reduce confusion 
and to clearly establish the definitions of qualifying employment for 
borrowers.
    Please refer to the Summary of Proposed Changes section of this 
NPRM for more details on the above proposals.
    Costs and Benefits: As further detailed in the Regulatory Impact 
Analysis, the benefits of the proposed regulations include: (1) a 
clarified process for borrower defense discharge applications assisted 
by the creation of a single upfront Federal standard to streamline the 
Department's consideration of applications, while affording 
institutions an opportunity to respond to allegations contained in 
borrower

[[Page 41881]]

defense claims; (2) increased opportunities for borrowers to seek 
relief from institutional misconduct by prohibiting the use of 
mandatory pre-dispute arbitration and class action waivers; (3) 
improved school conduct and reduced cost to taxpayers, by holding 
individual institutions financially accountable for borrower defense 
discharges and deterring misconduct; (4) increased automated discharges 
for borrowers and additional flexibilities in establishing eligibility 
for PSLF and other loan discharges; and (5) improved access to and 
expanded eligibility for, where appropriate, closed school, TPD, and 
false certification discharges.
    Costs to taxpayers in the form of transfers include borrower 
defense claims that are not reimbursed by institutions; additional 
relief through closed school, PSLF, TPD, and false certification 
discharges to borrowers through programs to which they are legally 
entitled in the HEA; and the foregone interest where capitalizing 
interest is not required. The paperwork burden associated with 
reporting and disclosure necessary to ensure compliance with the 
proposed regulations represents an additional cost to institutions.
    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 clearly 
identify the specific section or sections of the proposed regulations 
that each of your comments addresses and to arrange your comments in 
the same order as the proposed regulations.
    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 these proposed regulations by accessing 
Regulations.gov.
    Assistance to Individuals With Disabilities in Reviewing the 
Rulemaking Record: On request we will provide a reasonable 
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 these proposed regulations. If you want to 
schedule an appointment for this type of accommodation or auxiliary 
aid, please contact the person listed under FOR FURTHER INFORMATION 
CONTACT.

Background

    The Department seeks to address longstanding concerns regarding 
Federal student loan debt by improving, streamlining, expanding, and 
strengthening regulations governing the title IV, HEA programs. 
Specifically, we propose to modify the regulations for loan discharge 
programs to strengthen institutional accountability, expand program 
access for eligible borrowers, and provide more efficient and borrower-
friendly processes overall. After analyzing the public's input provided 
during public hearings and written comments submitted in response to 
the notice of our intent to establish negotiated rulemaking committees, 
the Department identified 12 issues for consideration by a negotiated 
rulemaking committee. These 12 issues are: improving the process for 
TPD discharges, improving borrower access to closed school discharges, 
eliminating interest capitalization where it is not required by 
statute, improving the PSLF application process, clarifying employer 
eligibility and full-time employment under PSLF, improving the borrower 
defense adjudication process, strengthening borrower defense post-
adjudication processes, ensuring accountability by recovering borrower 
defense claims from institutions, prohibiting institutional use of pre-
dispute mandatory arbitration clauses or class action waivers, 
improving borrower access to false certification discharges, creating a 
new income-driven repayment plan, and establishing regulations for 
institutions to maintain a prison education program. Proposed 
regulations addressing 10 of the 12 issues listed above are included in 
this NPRM. Proposed regulations relating to a new income-driven 
repayment plan and to establish Pell Grant eligibility for incarcerated 
individuals enrolled in qualifying prison education programs will be 
published in a future NPRM or NPRMs.
    Throughout this NPRM, the Department is proposing changes that 
would allow the Secretary to use automated application processes for 
granting discharges as well as leverage other information available to 
the Secretary, consistent with regulations and statute governing the 
use and sharing of borrower data. The proposed regulations would also 
result in more borrowers receiving discharges for which they are 
eligible by eliminating the need for individual applications where 
possible, expand eligibility categories for TPD discharges, authorize 
use of additional documentation for TPD and false certification 
discharges, clarify eligibility requirements for PSLF and closed school 
discharges, and expand and clarify ways in which a borrower can 
establish a borrower defense claim. Increased discharges reduce 
repayments from borrowers, resulting in a transfer from taxpayers to 
the affected borrowers. For some discharges, especially borrower 
defense and closed school discharges, the Department will seek to 
recover funds from the institutions involved, but that is not expected 
to reimburse the full amount. Increased discharges are expected to 
increase the cost of the student loan programs to taxpayers, as 
detailed in the Regulatory Impact Analysis. Despite these increased 
costs in the form of transfers, the Department believes the benefits of 
these changes exceed the costs. The discharge programs addressed by 
these proposed regulations were all authorized by Congress. The 
Department does not believe it would be reasonable to presume that when 
Congress created those programs, it intended to limit the cost of those 
programs through the types of operational and administrative barriers 
the Department is proposing to remove in this notice of proposed 
rulemaking. The proposed changes would thus make these discharge 
programs more successful at delivering promised benefits under the HEA.

Public Participation

    The Department engaged the public in developing this NPRM through 
analysis of written comments submitted by the public outside of this 
NPRM comment solicitation, three public hearings, and three negotiated 
rulemaking sessions.
    On May 26, 2021, the Department published a notice in the Federal 
Register (86 FR 28299) announcing our intent to establish multiple 
negotiated rulemaking committees to prepare proposed regulations on the 
affordability of postsecondary education, Federal student loans, and 
institutional accountability.
    The Department developed a list of proposed regulatory provisions 
for the Affordability and Student Loans Committee (Committee) from 
advice and recommendations submitted by individuals and organizations 
in testimony at three virtual public hearings held by the Department on 
June 21, June 23, and June 24, 2021. Transcripts of the public hearings 
are

[[Page 41882]]

available at https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html?src=rn.
    In addition to oral testimony, the Department accepted written 
comments on possible regulatory provisions from interested parties and 
organizations. You may view the written comments submitted in response 
to the May 26, 2021 Federal Register notice on the Federal eRulemaking 
Portal at www.regulations.gov, within docket ID ED-2021-OPE-0077. 
Instructions for finding comments are also available on the site under 
``FAQ.''

Negotiated Rulemaking

    Section 492 of the HEA requires the Secretary to involve the public 
in the development of proposed regulations prior to publication for 
programs authorized by title IV of the HEA. After obtaining advice and 
recommendations from the public, including individuals and 
representatives of groups involved in the Federal student financial 
assistance programs, the Secretary must establish a negotiated 
rulemaking committee and subject the proposed regulations to a 
negotiated rulemaking process. All proposed regulations that the 
Department publishes on which the negotiators reached consensus must 
conform to final agreements resulting from that process, unless the 
Secretary reopens the process or provides a written explanation to the 
participants stating why the Secretary has decided to depart from the 
agreements. Further information on the negotiated rulemaking process 
can be found at: https://www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html.
    On August 10, 2021, the Department published a notice in the 
Federal Register (86 FR 43609) announcing its intention to establish 
the Committee to prepare proposed regulations for the title IV, HEA 
programs. The notice set forth a schedule for the Committee meetings 
and requested nominations for individual negotiators to serve on the 
Committee. In the notice, the Department announced the topics that the 
Committee would address.
    The Committee included the following members representing their 
respective constituencies:
    <bullet> Accrediting Agencies: Heather Perfetti, Middle States 
Commission on Higher Education, and Michale McComis (alternate), 
Accrediting Commission of Career Schools and Colleges.
    <bullet> Dependent Students: Dixie Samaniego, California State 
University, and Greg Norwood (alternate), Young Invincibles.
    <bullet> Departments of Corrections: Anne L. Precythe, Missouri 
Department of Corrections.
    <bullet> Federal Family Education Loan Lenders and/or Guaranty 
Agencies: Jaye O'Connell, Vermont Student Assistance Corporation, and 
Will Shaffner (alternate), Higher Education Loan Authority of the State 
of Missouri.
    <bullet> Financial Aid Administrators at Postsecondary 
Institutions: Daniel Barkowitz, Valencia College, and Alyssa A. Dobson 
(alternate), Slippery Rock University.
    <bullet> Four-Year Public Institutions: Marjorie Dorime-Williams, 
University of Missouri, and Rachelle Feldman (alternate), University of 
North Carolina at Chapel Hill.
    <bullet> Independent Students: Michaela Martin, University of La 
Verne, and Stanley Andrisse (alternate), Howard University.
    <bullet> Individuals with Disabilities or Groups Representing Them: 
Bethany Lilly, The Arc of the United States, and John Whitelaw, 
(alternate) Community Legal Aid Society.
    <bullet> Legal Assistance Organizations that Represent Students 
and/or Borrowers: Persis Yu, National Consumer Law Center, and Joshua 
Rovenger (alternate), Legal Aid Society of Cleveland.
    <bullet> Minority-serving Institutions: Noelia Gonzalez, California 
State University.
    <bullet> Private Nonprofit Institutions: Misty Sabouneh, Southern 
New Hampshire University, and Terrence S. McTier, Jr. (alternate), 
Washington University.
    <bullet> Proprietary Institutions: Jessica Barry, The Modern 
College of Design in Kettering, Ohio, and Carol Colvin (alternate), 
South College.
    <bullet> State Attorneys General: Joseph Sanders, Illinois Board of 
Higher Education, and Eric Apar (alternate), New Jersey Department of 
Consumer Affairs.
    <bullet> State Higher Education Executive Officers, State 
Authorizing Agencies, and/or State Regulators: David Tandberg, State 
Higher Education Executive Officers Association, and Suzanne Martindale 
(alternate), California Department of Financial Protection and 
Innovation.
    <bullet> Student Loan Borrowers: Jeri O'Bryan-Losee, United 
University Professions, and Jennifer Cardenas (alternate), Young 
Invincibles.
    <bullet> Two-year Public Institutions: Robert Ayala, Southwest 
Texas Junior College, and Christina Tangalakis (alternate), Glendale 
Community College.
    <bullet> U.S. Military Service Members and Veterans or Groups 
Representing Them: Justin Hauschild, Student Veterans of America, and 
Emily DeVito (alternate), The Veterans of Foreign Wars.
    <bullet> Federal Negotiator: Jennifer M. Hong, U.S. Department of 
Education.
    The Committee agreed to add an additional constituency for 
Departments of Corrections during its second session and approved the 
membership of Anne L. Precythe of the Missouri Department of 
Corrections. In addition, there were two non-voting advisors available 
during the negotiations: Rajeev Darolia, advisor on Economic and/or 
Higher Education Data, University of Kentucky, and Heather Jarvis, 
advisor on PSLF Issues, co-founder of FosterUs.
    The Committee met to develop proposed regulations during the months 
of October, November, and December 2021.
    At its first meeting, the Committee reached agreement on its 
protocols and reviewed the 12 issues on the agenda. The facilitators 
reminded the Committee that consensus means that there is no dissent by 
any member of the Committee and that consensus checks would be taken 
issue-by-issue.
    At its final meeting in December 2021, the Committee reached 
consensus on the proposed regulations addressing four of the 12 issues 
on its agenda: eliminating nonstatutory interest capitalizing events, 
improving the process for TPD discharges, streamlining the processes 
for false certification discharges, and establishing a framework for 
Pell Grant Eligibility for Prison Education Programs. This NPRM 
includes proposed regulations on the first three of these consensus 
items, as well as the remaining seven items on the Committee's agenda, 
summarized generally above. Proposed regulations for the fourth item on 
which consensus was reached, Pell Grant Eligibility for Prison 
Education Programs will be included in a later NPRM. We will also 
include Income-Driven repayment, on which consensus was not reached, in 
a future NPRM.
    The proposed regulations also include technical changes to the 
regulations that are needed to reflect recent amendments to the HEA and 
to correct certain technical errors. These types of changes are not 
normally subject to the statutory requirements for negotiated 
rulemaking and public notice and comment. However, since these changes 
affect the proposed regulations, the Secretary included them in the 
material considered by the Committee to ensure that the Committee 
evaluated the full scope of the proposed changes.
    More information on the work of the Committee can be found at: 
https://

[[Page 41883]]

www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html?src=rn.

Summary of Proposed Regulations

    We group major issues according to subject, with appropriate 
sections of the proposed regulations referenced in parentheses. We 
discuss other 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. Any such change not explicitly mentioned in this summary 
remains open for public comment.

1. Borrower Defense to Repayment

    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 
(i.e., a borrower defense). 20 U.S.C. 1087e(h).
    The Department first issued borrower defense regulations in 1994, 
which went into effect in 1995. The 1994 borrower defense regulation at 
Sec.  685.206(c) provided that any act or omission of the institution 
attended by the student that relates to the making of a Direct Loan for 
enrollment at the school or the provision of educational services for 
which the loan was provided, giving rise to a cause of action against 
the institution under applicable State law (the ``State law 
standard''), is a ``borrower defense.''
    In response to the precipitous closure of Corinthian Colleges, Inc. 
(Corinthian) in 2015 and the related influx of borrower defense claims 
submitted by individuals who attended institutions owned by Corinthian, 
the Department realized the need to update the borrower defense 
regulations. The Department developed new borrower defense regulations 
in 2016 that were supposed to take effect in 2017 to establish a more 
accessible and consistent borrower defense standard (the ``Federal 
standard''). We issued the final regulations on November 1, 2016, and 
those final regulations generally applied to borrowers with new loans 
that were made on or after July 1, 2017. 81 FR 75926 (Nov. 1, 2016). 
The new Federal standard clarified and streamlined the borrower defense 
claim process. While the Federal standard only applied to loans issued 
after July 1, 2017, the borrower defense claim process applied to loans 
regardless of their disbursement date. The 2016 regulation also 
enhanced protections for borrowers and improved the Department's 
ability to hold institutions financially accountable for their actions 
and omissions that resulted in loan discharges.
    In accordance with the master calendar, the 2016 borrower defense 
regulations were originally scheduled to be effective on July 1, 2017. 
However, these regulations did not take effect on their original 
effective date. After a legal challenge was filed, the Department took 
several actions to delay the effective date. See, e.g., 82 FR 27621 
(June 16, 2017). In addition, the Department initiated a new negotiated 
rulemaking process to develop new regulations, and on July 31, 2018, 
the Department published a NPRM (2018 NPRM). 83 FR 37242 (July 31, 
2018). Soon thereafter, in September 2018, a Federal court invalidated 
the Department's actions delaying implementation of the 2016 
regulations, and the 2016 regulation went into effect in October 2018. 
Bauer v. DeVos, 325 F. Supp. 3d 74 (D.D.C. 2018). See California Ass'n 
of Private Postsecondary Schs. v. DeVos, 344 F. Supp. 3d 158 (D.D.C. 
2018). Meanwhile, the Department did not withdraw the 2018 NPRM and on 
September 23, 2019, following consideration of public comments on the 
2018 NPRM, the Department published new final borrower defense 
regulations that applied to loans made on or after July 1, 2020. 84 FR 
49788 (Sept. 23, 2019). Those regulations became effective on July 1, 
2020, for loans disbursed on or after that date.
    The 2019 regulations established a more limited Federal standard 
for borrower defense claims by (1) requiring borrowers to prove that 
the institution engaged in a misrepresentation that was made with 
knowledge of its false, misleading, or deceptive nature or with a 
reckless disregard for the truth, (2) eliminating the possibility of 
using common evidence to adjudicate claims on a group basis, (3) 
requiring the borrower to document the amount of harm suffered, and (4) 
setting a 3-year limitation period on filing a claim.\5\ The 2019 
regulations do not include a reconsideration process. The 2019 
regulations only applied to loans first disbursed on or after July 1, 
2020.
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    \5\ In New York Legal Assistance Group (``NYLAG'') v. Cardona, 
Case No. 20-CV-1414 (S.D.N.Y. Mar. 17, 2021), the District Court 
found that the Department did not comply with rulemaking standards 
in promulgating the 3-year statute of limitations for affirmative 
claims and remanded consideration of that rule to the Department for 
further consideration.
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    The three borrower defense regulations are hereinafter referred to 
as ``1994 regulation,'' ``2016 regulation,'' and ``2019 regulation'' 
after the respective years in which the final regulations were issued.
    The Department believes that the more restrictive standard for 
approving a borrower defense claim and the relatively narrow statute of 
limitations for filing claims under the 2019 regulations created a 
standard that placed burdens on borrowers to obtain relief that were 
far more onerous than any State standard, and went far beyond 
evidentiary requirements and argumentation that a reasonable borrower 
could be expected to provide. In particular, the Department is 
concerned that expecting a borrower to independently document and 
corroborate the misrepresentation and specifically show the amount of 
financial harm they suffered in the manner contemplated in the 2019 
regulations would require borrowers to possess a level of data and 
knowledge about local and national labor market trends that would be 
unrealistic for an individual to possess, and would result in overly 
subjective judgments by the Department into how a borrower should 
conduct a search for employment. Moreover, without being able to rely 
upon evidence generated from in-depth investigations that other 
oversight bodies possess, including the ability to demand documents, 
borrowers face unreasonable set of requirements. The result would be 
that many borrowers who were subject to misrepresentations or other 
wrongdoing by their institutions would fail to receive an approved 
claim and discharge because they were being judged under an 
unreasonably high standard. The Department's experience reviewing 
borrower defense applications shows that many of the schools' 
substantial misrepresentations are made orally, and/or relate to high 
pressure sales tactics. Additionally, many schools do not provide 
enrolling or enrolled students with written evidence of the 
misrepresentations, which could result in the Department denying 
borrowers' claims due to a lack of documentation, despite the fact that 
many borrowers do not and cannot keep such documents over years. When 
the Department issued the 2019 regulations, the Regulatory Impact 
Analysis with that rule estimated that only 7.5 percent of the volume 
of borrower defense claims would ultimately be approved. This was a 
decline from 65 percent under the 2016 regulation. The Department 
believes that such a significant change in approval amounts suggests 
that the 2019 regulation would result in denials for too many claims 
that should have a reasonable prospect of being meritorious

[[Page 41884]]

upon consideration of evidence from additional oversight entities. 
Moreover, the anticipated low approval rate is an added concern because 
the 2019 regulations did not contain a reconsideration process, meaning 
that any borrower whose claim was unfairly denied, including through an 
administrative or technical error, would have to go to court to have 
their claim properly addressed.
    While the 2019 regulations went into effect for new loans disbursed 
on or after July 1, 2020, the Department has yet to adjudicate any 
claims under the 2019 regulations. This is due to several factors. 
First, the Department is still in the process of adjudicating 
significant numbers of claims covered by the 1994 and 2016 regulations, 
which represent a larger share of currently pending claims. Second, 
repayment of and interest accrual on all Federal loans held by the 
Department have been paused since March 2020, so borrowers who may have 
been subject to conduct that may give rise to a borrower defense claim 
may not have felt the need to apply yet because they do not currently 
have to make loan payments.
    Over the last several years, the Department has gained significant 
experience and expertise through its adjudication of claims and review 
of evidence. Doing so has put the Department in the best position to 
understand how to manage the borrower defense program efficiently. This 
includes identifying areas for improvement and refinement that would 
not have been apparent in prior rulemakings when the Department had not 
had as much experience reviewing claims.
    In this current NPRM, the Department proposes to build upon the 
lessons learned from implementation of those previous borrower defense 
regulations and a review of the 2019 regulation to construct a borrower 
defense process that is simpler and fairer for all affected parties. 
This process would maintain what was available to borrowers during the 
more than two decades between the 1994 and 2016 regulations; build on 
the clearer processes in the 2016 regulation to ensure more consistency 
for borrowers; and, incorporate some further refinements of elements 
from the 2019 regulation such as including institutional responses and 
clarifying certain types of allegations that would not lead to a valid 
borrower defense claim. The proposed process would be simpler by 
establishing a single upfront Federal standard so that borrowers are 
not subject to differential treatment, varying from a full discharge to 
a complete denial, for enrollment at the same institution depending 
solely on the date their loans were issued. The proposed process also 
would be fairer by establishing claim approval requirements that 
recognize all possible sources of evidence, including information 
gleaned from State attorneys general, rather than relying on the 
borrower to prove their entire case on their own.
    While the Department has modified the regulations several times in 
recent years, based on our ongoing and growing experience reviewing and 
adjudicating borrower defense claims, we have determined that the 
current 2019 rules are too limiting to fairly and accurately adjudicate 
claims, and that further regulations are needed to address issues that 
have continued to arise during the Department's claim review. The 
current rules require evidence that is highly unlikely to be available 
to the borrower, especially within the timeframes following their 
departure from the institution that the borrower must meet to have 
their claim considered. The current rules also exclude evidence of 
school activity in the Department's possession, gleaned from other 
Department activity, that would support borrowers' claims. These 
proposed regulations would incorporate additional information about the 
nature of claims that the Department receives, the types of evidence 
received from borrowers, and procedural improvements to help ensure 
timely decisions for borrowers. They would also more clearly establish 
the importance of the institutional response process and leverage 
existing procedures used for establishing and collecting liabilities to 
seek recoupment from institutions.
    To achieve these goals, the Department proposes to streamline 
multiple regulatory requirements, establish a new Federal standard for 
the initial adjudication of a borrower defense claim that would be 
easier for borrowers and affected parties to understand, and clarify 
the conduct that could result in an approved borrower defense claim. 
The Department believes that this approach, and the proposed use of 
common evidence, would facilitate a clearer and faster process for 
adjudication of group claims. The Department also proposes to clarify 
how discharge amounts will be determined for approved claims, including 
establishing a rebuttable presumption of full discharge; designing a 
structured process for reconsidering decisions; eliminating the 
limitations period for borrowers; and adopting a revised limitations 
period for institutional recoupment. These proposed regulations would 
incorporate additional information about the nature of claims that the 
Department receives, the types of evidence received from borrowers, and 
procedural improvements to help ensure timely decisions for borrowers. 
They would also more clearly establish the importance of the 
institutional response process and leverage existing procedures used 
for establishing and collecting liabilities to seek recoupment from 
institutions.
    Finally, to protect the title IV programs and ensure 
accountability, the Department believes it is critical that borrower 
defense regulations contain a process for the Department to recover the 
cost to the taxpayer caused by discharging all or a portion of loans 
associated with approved claims from institutions, separate and apart 
from the borrower claim adjudication process. The Department proposes 
to administer this recoupment process through its existing procedures 
for collecting other institutional liabilities. Separating the 
recoupment process from the borrower defense approval process also 
ensures that institutions will not face financial consequences from 
claim approvals tied to loans issued prior to July 1, 2023, unless the 
claim would have been approved under the borrower defense regulation in 
effect at the time the loans were issued.
    The recoupment efforts described above complement other executive 
and regulatory actions contemplated by the Department to increase 
institutional accountability. The Department anticipates that efforts 
to dissuade institutions from harmful behavior as well as increases in 
other forms of oversight would result in a reduction in future conduct 
that could lead to a borrower defense approval, thus reducing instances 
in which the Federal taxpayers would assume the costs of discharging 
loans. These action items include reinstating the Office of Enforcement 
within the Department's Federal Student Aid office and changes 
announced earlier this year to increase the frequency with which 
entities that own institutions are required to sign Program 
Participation Agreements and thus potentially face financial 
consequences if there are liabilities against the institution.\6\ The 
Department is also currently in the process of proposing new 
regulations around the 90/10 rule to implement a requirement included 
in the American Rescue Plan that proprietary institutions derive at

[[Page 41885]]

least 10 percent of their revenue from non-Federal sources.\7\ This is 
a change from previous requirements, which allowed Federal money for 
veterans and servicemembers to count toward the 10 percent revenue 
minimum. The inclusion of those benefits had in turn been a 
contributing factor toward aggressive recruitment of veterans and 
servicemembers.
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    \6\ https://www.ed.gov/news/press-releases/us-department-education-announces-steps-hold-institutions-accountable-taxpayer-losses-0.
    \7\ See 90/10 resources under ``Institutional and Programmatic 
Eligibility Committee'' https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html.
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    During the public hearings and negotiated rulemaking sessions in 
2021, the Department heard from a broad range of constituencies on the 
elements of an appropriate borrower defense framework. At the 
negotiated rulemaking sessions, negotiators expressed interest in 
developing a regulation that would provide for fair treatment of 
borrowers who had been harmed by an institution's act(s) or 
omission(s). Some negotiators expressed support for reviving the group 
claims process and establishing a reconsideration process that is fair 
for all affected parties.
    One negotiator expressed concern about the potential reputational 
harm to institutions from frivolous and unsubstantiated borrower 
defense claims. This negotiator also did not support recovering funds 
from institutions when a borrower defense claim is successful.
    Areas proposed for negotiation during the negotiated rulemaking 
sessions included the Federal standard under which a borrower may 
assert a defense to repayment; the applicable evidentiary standard; 
creating a group process for the adjudication of borrower defense 
claims; consideration of adverse Department actions against an 
institution as grounds for a group borrower defense claim; the ability 
of individuals to bring borrower defense claims; the borrower's status 
during adjudication of a claim, including a pause on interest accrual 
for a borrower with an individual application after 180 days if the 
Department fails to make a decision on the claim by that time; a 
defined limitations period for bringing borrower defense claims; an 
opportunity for the institution to respond to borrower defense claims 
filed against it; the time frames associated with adjudicating a claim; 
and issues pertaining to loans made under the FFEL Program.
    In the first session, the Department reviewed the issue papers with 
negotiators and provided a high-level summary of borrower defense 
issues with proposed solutions. In the second session, the Department 
provided proposed regulatory text to negotiators. In the final session, 
the Department provided revised and additional regulatory text based on 
negotiator feedback and explained the substantive changes made between 
sessions two and three. By the end of the negotiated rulemaking 
sessions, most negotiators expressed general support for the proposed 
changes to the borrower defense regulations. At the final consensus 
check, 16 negotiators indicated they would agree to the proposed 
borrower defense regulations, while one negotiator dissented. Because 
the committee's protocols required agreement from all negotiators, 
consensus was not reached. Materials from the borrower defense 
negotiated rulemaking sessions may be found on the Department's website 
at: https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html.

Borrower Defense to Repayment--Adjudication (Sec. Sec.  685.206, 
685.222)

    Statute: Section 455(h) of the HEA (20 U.S.C. 1087e(h)) requires 
the Secretary to specify in regulations which acts or omissions of an 
institution a borrower may assert as a defense to repayment of a Direct 
Loan, except that the borrower may not recover from the Secretary more 
than the amount the borrower has repaid on the loan.
    Current Regulations: The current borrower defense regulations 
provide different acts or omissions that could lead to an approved 
borrower defense claim, depending on when a borrower's loan was first 
disbursed:
    <bullet> Claims pertaining to loans first disbursed before July 1, 
2017, are adjudicated according to the substantive standard set forth 
in the 1994 borrower defense regulations in Sec.  685.206(c), and use 
the State law standard. The 1994 borrower defense regulations do not 
contain a definitions section.
    <bullet> Claims pertaining to loans first disbursed between July 1, 
2017, through June 30, 2020, are adjudicated according to the 
substantive standard set forth in the 2016 borrower defense regulations 
in Sec.  685.222 and uses the regulatory process for claims pertaining 
to loans first disbursed prior to July 1, 2017. These claims use 
definitions in Sec.  685.222, which defines the terms ``borrower'' and 
``borrower defense,'' and apply the Federal standard.
    <bullet> Claims pertaining to loans first disbursed after July 1, 
2020, are adjudicated under the borrower defense regulations in Sec.  
685.206(e), using definitions set forth in Sec.  685.206(e)(1).
    Proposed Regulations: Proposed 34 CFR part 685, subpart D would 
establish a framework for uniform borrower defense discharges based on 
applications received following, or already pending with the Secretary 
on, the effective date of these regulations, rather than based on a 
loan's disbursement date. Under the proposed rules, institutions would 
not face recoupment for conduct approved solely under the new Federal 
standard if the conduct occurred prior to July 1, 2023. Nor would they 
face larger amounts of recoupment if the amount of a discharge is 
greater than it would have been under the applicable prior regulation.
    The scope and purpose section of proposed subpart D is in proposed 
Sec.  685.400 and would set forth the provisions under which a borrower 
defense could be asserted. Subpart D would apply to borrower defense 
applications received on or after July 1, 2023, and to borrower defense 
applications pending with the Secretary on July 1, 2023. These are the 
dates the regulation would become effective under the master calendar 
requirements in the HEA.
    Proposed Sec.  685.401 contains the general definitions applicable 
to subpart D, including definitions for the following terms: 
``borrower,'' ``borrower defense to repayment,'' ``Department 
official,'' ``Direct Loan,'' ``school/institution,'' and ``State 
requestor.''
    Proposed subpart D also includes regulations regarding the 
adjudication of a borrower defense claim, which are described in 
greater detail below.
    Finally, Sec. Sec.  685.109 and 685.499 would make clear that, if 
any part of the proposed regulations is held invalid by a court, the 
remainder would still be in effect.
    Reasons: The Department heard from representatives of a broad range 
of constituencies, including the non-Federal negotiators in the 
negotiated rulemaking meetings, on what they thought was an appropriate 
basis for a borrower defense. The Department believes a general 
definitions section to this new subpart D is critical to ensure clarity 
in these proposed regulations. For these proposed regulations, the 
Department incorporates the following terms wholly or in part as those 
in the 2019 regulations: ``borrower,'' ``borrower defense to 
repayment,'' and, ``Direct Loan.'' Because these proposed regulations 
envision a new borrower defense framework, it is necessary to develop 
some additional new terms. The Department first proposes a definition 
of ``Department official,'' which would be a senior Department official 
or their designee to administer

[[Page 41886]]

the borrower defense process. The Department also proposes to expand 
upon the definition of ``school/institution'' to include principals of 
the institution, or of an institution under common ownership, who 
exercised substantial control over the institution. Finally, the 
Department proposes a definition of ``State requestor'' to clarify 
which entities may suggest the formation of a group claim as described 
in other sections of this NPRM.

Direct Loans and FFEL

    Section 455(h) of the HEA provides that the Secretary may discharge 
a loan pursuant to a borrower defense for a loan made ``under this 
part,'' a reference to the Direct Loan Program. This includes Direct 
Consolidation Loans made under Sec.  455(g) of the HEA. Under the 
statute, borrowers may not recover more than they have repaid. During 
negotiated rulemaking, the Department received inquiries about whether 
the borrower defense process applies to FFEL Program loans, in which 
private lenders issued Federal loans using their own funds and receive 
a Federal guarantee against most losses in the case of default as well 
as quarterly Federal subsidies. FFEL Program loans are authorized in a 
different part of the HEA. As the Department noted in the preamble of 
the 2016 regulations, the HEA generally requires that Direct Loans be 
made under the same ``terms, conditions, and benefits'' as FFEL Program 
loans. 20 U.S.C. 1087a(b)(2), 1087e(a)(1). See 81 FR at 75930. In 1995, 
the Department clarified the relationship between Direct and FFEL 
Program loans in a Dear Colleague Letter:

    Congress intended that schools participating in either FFEL or 
Direct Loan programs should receive parallel treatment on important 
issues, and the Department has already committed during negotiated 
rulemaking to apply the same borrower defense provisions to [both] 
the Direct Loan and FFEL programs. Therefore, schools that cause 
injury to student borrowers that give rise to legitimate claims 
should and, under these proposals, will bear the risk of loss, 
regardless of whether the loans are from the Direct Loan or FFEL 
Program.

Dear Colleague Letter GEN-95-8 (Jan. 1, 1995).\8\
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    \8\ See https://fsapartners.ed.gov/knowledge-center/library/dear-colleague-letters/1995-01-01/gen-95-08-direct-loan-program-schools-will-not-face-greater-potential-liabilities-ffelp-schools.
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    In the 2016 and 2019 regulations, the Department took the position 
that a FFEL borrower could raise a defense to repayment claim and have 
that claim reviewed and approved, but that receiving any relief tied to 
an approval of such a claim would require the borrower to consolidate 
any FFEL Program loans associated with the approved claim into a Direct 
Consolidation Loan. However, the time limits on filing a claim in the 
2019 regulation plus the terms of the new consolidation loans 
determining the applicable borrower defense regulation meant that it 
would be almost impossible for FFEL borrowers to receive any borrower 
defense relief after July 1, 2020, regardless of when they originally 
borrowed. For instance, under the 2019 regulation, a FFEL borrower who 
took out a loan in 2009 and left school in 2010 could have a claim 
approved today under the standards of the 1994 regulation but would 
have no way to access the associated relief under that regulation 
because as soon as they consolidate their claim, they would fall under 
the 2019 regulation and be denied under the three-year limitations 
period. The Department is concerned that the 2019 regulation results in 
the application of a stricter regulation to their claim that was not in 
effect at the time their original loans were disbursed. Applying the 
standard proposed in these regulations regardless of disbursement date 
would both solve this problem going forward and address the inequitable 
situation that would otherwise exist for FFEL borrowers from July 1, 
2020 through June 30, 2023.
    The Department is also proposing sub-regulatory improvements beyond 
the regulations that would help FFEL borrowers more easily receive a 
discharge for approved borrower defense claims, further streamlining 
and simplifying the process for borrowers. The Department has the 
authority to make Direct Consolidation Loans under Sec. Sec.  451 and 
455(g) of the HEA. FFEL borrowers must consolidate their loans into a 
Direct Consolidation loan to obtain a borrower defense discharge; 
however, the Department would allow FFEL borrowers to file and receive 
a decision on their borrower defense applications before their loans 
are consolidated. The 1994 and 2016 regulations allow borrowers with 
FFEL Program loans to have their claims reviewed and approved by the 
Department, but they must consolidate their FFEL Program loans into a 
Direct Loan through a separate process to receive the benefit of any 
loan discharges associated with an approved claim. The Department has 
heard, both from borrowers and from their representatives at negotiated 
rulemaking, that the separate consolidation requirement creates 
confusion and roadblocks for borrowers. The requirement also results in 
unequal treatment for borrowers with different types of loans. To 
address this concern, the Department proposes to streamline the 
borrower defense application process by having the application for 
borrower defense also serve as a Direct Loan consolidation application 
for borrowers with FFEL and Perkins loans, which would only be executed 
if the borrower's claim is approved, giving the borrower a streamlined 
process for receiving discharge of their loans.

State Requestor

    State requestors, such as State attorneys general, have been a 
significant and important source of evidence for many of the 
Department's approvals of borrower defense claims and the Department 
anticipates they will continue to be an important source of evidence. 
For example, while investigating student complaints, State attorneys 
general may find institutions engaging in patterns of 
misrepresentation. The Department believes State partners are critical 
in providing evidence that--as part of an independent assessment by the 
Department that also includes evidence in its possession, submissions 
from borrowers, responses from institutions under proposed 485.405, and 
other relevant sources--could result in approving borrower defense 
claims. Because this evidence often includes information about 
widespread institutional policies or practice, evidence from State 
requestors could be particularly beneficial for decisions around 
whether to form and/or approve a group borrower defense claim, which is 
when the Department makes a decision about whether to approve borrower 
defense relief for a set of similarly situated borrowers, including 
those who have not applied. These State requestors have fostered, and 
could continue to foster, a more efficient borrower defense 
adjudication process by supplying needed evidence to support the 
potential approval of claims or expanding the Department's ability to 
quickly develop the facts in cases by identifying systemic issues at an 
institution resulting in several borrowers potentially being eligible 
for relief.
    To give these State requestors regulatory recognition in the 
consideration of whether to establish a group process, the Department 
proposes to define ``State requestors'' to include States, State 
attorneys general, or State oversight or regulatory agencies with 
authority from the State (such as a State consumer financial protection 
agency with civil investigative demand

[[Page 41887]]

authority from that State). The Department proposes limiting requestors 
only to State requestors based on the Department's experience that 
State parties have been the sources of the highest-quality evidence in 
past adjudications of borrower defense applications. Additionally, the 
Department believes that inviting States to share information is 
consistent with the HEA's expectation that States, accrediting 
agencies, and the Department will conduct shared oversight through the 
program integrity ``triad.'' Already, States and the Department share 
considerable information about institutions through oversight and 
enforcement work; these established relationships have yielded critical 
support for the Department's work to ensure institutions comply with 
Federal laws and regulations, including those that could give rise to 
borrower defense claims for discharges of Federal student loans.
    The proposed position is a change from the Department's conclusions 
in the 2019 regulation and is based upon the agency's experience in 
continuing to review and approve borrower defense applications. In 
2019, the Department dismissed the importance of State enforcement 
actions on the grounds that they cover broader issues than what may be 
allowed under borrower defense. This conclusion discounted the role of 
evidence from State parties in processing borrower defense claims. The 
evidence generated from State investigations and enforcement actions 
has repeatedly given the Department important information to conduct a 
thorough and rigorous review of borrower defense claims against 
institutions such as Corinthian Colleges, Inc., ITT Technical 
Institute, the Court Reporting Institute, Minnesota School of Business 
and Globe University, and Westwood College.\9\ In several of these 
instances the Department received from State attorneys general internal 
company documents, presentations, emails, and memos that assisted in 
establishing that these institutions engaged in misrepresentations. In 
all these instances, the Department is not proposing to simply accept 
the State-offered evidence unquestioned and issue approvals based on 
it. It is recognizing the importance of considering evidence from all 
available sources and creating a simpler process for receiving such 
information from States.
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    \9\ See U.S. Department of Education press releases: https://www.ed.gov/news/press-releases/department-education-announces-approval-new-categories-borrower-defense-claims-totaling-500-million-loan-relief-18000-borrowers; https://www.ed.gov/news/press-releases/education-department-approves-415-million-borrower-defense-claims-including-former-devry-university-students; https://www.ed.gov/news/press-releases/department-education-approves-borrower-defense-claims-related-three-additional-institutions.
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Effective Date of Regulations, Claims Covered Under Proposed 
Regulations

    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. Section 410 of the General Education Provisions Act (GEPA) 
provides the Secretary with authority to make, promulgate, issue, 
rescind, and amend rules and regulations governing the manner of 
operations of, and governing the applicable programs administered by, 
the Department. 20 U.S.C. 1221e-3. Under Section 414 of the Department 
of Education Organization Act, the Secretary is authorized to prescribe 
such rules and regulations as the Secretary determines necessary or 
appropriate to administer and manage the functions of the Secretary or 
the Department. 20 U.S.C. 3474.
    Current Regulations: The ``1994 regulations'' at 34 CFR 685.206(c) 
cover loans first disbursed before July 1, 2017 and became effective 
July 1, 1995 (see 59 FR 61664, December 1, 1994); the ``2016 
regulations'' at 34 CFR 685.222 cover loans first disbursed on or after 
July 1, 2017 and before July 1, 2020 and became effective July 1, 2017 
(see 81 FR 75926, November 1, 2016); and, the ``2019 regulations'' at 
34 CFR 685.206(e) cover loans first disbursed on or after July 1, 2020 
and became effective July 1, 2020 (see 84 FR 49788, September 23, 
2019).
    Proposed Regulations: Proposed 34 CFR part 685, subpart D would 
establish a framework for uniform borrower defense discharges based on 
applications received following or already pending with the Secretary 
on the effective date of these regulations, rather than based on a 
loan's disbursement date. However, institutions would not be subject to 
recoupment actions for applications that are granted based upon this 
regulation that would not have been approved under the standard 
applicable based upon the loan's disbursement date, which could be the 
1994, 2016, or 2019 regulations. Institutions would also not be subject 
to recoupment for amounts greater than what would have been approved 
under the applicable regulation at the time the loans were disbursed.
    Reasons: Tying the applicability of borrower defense regulations to 
the date of a loan's disbursement can create significant complexity for 
administering the program and create inconsistent outcomes for 
borrowers. With regulations tied to a loan's disbursement date, it is 
possible for a single borrower to submit a single borrower defense to 
repayment claim that is covered by all three sets of regulations, 
despite involving the same act or omission at the same institution. The 
confusion is further exacerbated if a borrower consolidates their 
loans, since borrowers may have had original loans disbursed under one 
set of regulations, but the Department treats the date of the 
consolidation loan as the one used to determine what regulation their 
claim should be adjudicated under.
    To streamline and simplify the process, the proposed regulations 
provide uniform borrower defense regulations for applications pending 
with the Secretary on or after the effective date of these regulations. 
This approach would ensure that all borrowers whose claims are filed or 
pending within this timeframe are subject to the same regulatory 
framework. In promulgating the prior borrower defense regulations, the 
Department did not choose to apply this single standard because it 
would have changed the types of claims that could be approved in ways 
that might have left some borrowers worse off than the regulation in 
place at the time they took out their loan. For example, borrowers with 
loans issued prior to July 1, 2017 could bring a claim under a State 
law standard, which includes some instances where a borrower might not 
have to show they relied upon a misrepresentation depending on the 
relevant State law being applied. The 2016 regulation, however, 
included a requirement that a borrower demonstrate reliance on the 
misrepresentation without a presumption of reasonable reliance for an 
individual claim. Applying that standard to those prior loans would 
thus be more restrictive in certain circumstances. The same is true of 
the 2019 regulation and its effect on loans issued on or after July 1, 
2020. That regulation requires borrowers to produce a more 
individualized documentation of harm and eliminates the prospect of 
adjudicating similarly situated claims as a group, in contrast to what 
is available under the 2016 regulation. It would thus not have been 
feasible to have the 2016 regulation cover claims from loans that would 
have previously been associated with the 1994 regulation, nor would the 
2019 regulation have been able to cover

[[Page 41888]]

claims previously associated with either the 1994 or the 2016 
regulations. This proposed regulation would permit borrowers to bring 
claims under a series of acts or omissions that not only encompasses 
what would have been available to them under any of the three prior 
applicable regulations, but also under some additional circumstances. 
The result is that no borrower would be worse off under this regulation 
than they would be under the regulation in place at the time they 
borrowed. Given that, the Department believes it is appropriate to 
adopt a single standard that applies to all claims pending with the 
Secretary or submitted on or after July 1, 2023. As discussed in 
greater detail in the Recovery from Institutions section, the 
Department does not propose to apply this single framework for the 
purposes of institutional recoupment in all cases. The Department does 
not think it would be appropriate to hold an institution financially 
liable when the standard in place at the time the loan was disbursed 
would not have resulted in an approved claim, since the institution 
would not have had a way of knowing that certain types of conduct could 
later lead to financial consequences. The Department believes that this 
approach would also protect against any concerns institutions might 
raise related to the reputational consequences of an approved borrower 
defense claim. The approval of a borrower defense claim concerns the 
legal interaction between the Department and the borrower, not the 
institution. Moreover, the Department is unaware of any evidence 
demonstrating reputational harm to institutions that are still 
operating resulting from approved borrower defense claims. Given that 
lack of evidence, the Department believes whatever reputational harms 
to the institution might occur based on this regulatory change are 
outweighed by the benefits to the borrower. This is because this 
proposed change makes the borrower defense program more administrable 
and therefore overall better able to serve both borrowers and 
institutions through more efficient and effective adjudication.
    While the proposed coverage of this regulation could lead to some 
increased costs to the Federal Government in the form of greater 
transfers to borrowers, the Department notes that this regulation is 
just one component of a larger set of executive and regulatory efforts 
aimed at increasing institutional oversight and accountability that 
should deter future conduct that could lead to approved borrower 
defense claims. These efforts include the re-establishment of an Office 
of Enforcement within Federal Student Aid, which is tasked with 
conducting in-depth investigations of institutions. Releasing the 
results of investigations will teach institutions what types of risky 
conduct to avoid in the future. The Department also announced earlier 
in 2022 that it would start increasing the number of entities that sign 
Program Participation Agreements to include more outside owners of 
institutions. Doing so will make more entities and individuals 
responsible for liabilities against an institution, further deterring 
harmful behavior. The Department is also currently conducting separate 
rulemaking efforts to implement a statutory change included in the 2021 
American Rescue Plan to require private for-profit institutions to 
derive 10 percent of their revenue from non-Federal sources, not just 
Federal student aid programs administered by the Department. That 
change will reduce incentives for institutions to aggressively pursue 
veterans and service members in particular, which had been a source of 
aggressive recruitment in the past.

Federal Standard (Sec. Sec.  685.206, 685.222, & Part 668)

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution a 
borrower may assert as a defense to repayment of a Direct Loan, except 
that a borrower may not recover from the Secretary an amount in excess 
of the amount that the borrower has repaid.
    Current Regulations: In the current regulations, three different 
regulatory standards and limitations periods apply, depending on when a 
borrower's loan was first disbursed:
    <bullet> Loans first disbursed prior to July 1, 2017, are addressed 
under the 1994 borrower defense regulations in Sec.  685.206(c). That 
section provides that a borrower may assert a defense to repayment 
under applicable State law. The borrower may bring a claim at any point 
during the period in which the loan is being collected.
    <bullet> Loans disbursed between July 1, 2017, and June 30, 2020, 
are adjudicated under the 2016 borrower defense regulations in Sec.  
685.222, which explains the acts or omissions that could give rise to a 
borrower defense claim are judgments against the institution, breaches 
of contract, and substantial misrepresentation. Further, the borrower 
may bring such a claim at any time but may only assert a right to 
recover amounts previously collected by the Secretary on the grounds of 
that same breach of contract or substantial misrepresentation within 6 
years of the alleged breach or of the date on which the substantial 
misrepresentation reasonably could have been discovered.
    <bullet> Loans disbursed on or after July 1, 2020, are adjudicated 
under the 2019 borrower defense regulations in Sec.  685.206(e), which 
allow a borrower to assert a defense to repayment if the institution at 
which the borrower enrolled made a misrepresentation of material fact 
upon which the borrower reasonably relied, and the borrower was 
financially harmed by such misrepresentation. Claims adjudicated under 
these regulations have three years from the date the student is no 
longer enrolled at the institution to file a claim with the Department.
    Proposed Regulations: In proposed Sec.  685.401(b), a claim could 
be brought on any of five grounds:
    <bullet> Substantial misrepresentation,
    <bullet> Substantial omission of fact,
    <bullet> Breach of contract,
    <bullet> Aggressive and deceptive recruitment, or
    <bullet> A Federal or State judgment or Departmental adverse action 
against an institution that could give rise to a borrower defense 
claim.
    Also, as proposed, a violation of State law could form the basis 
for a borrower defense claim, but only if the borrower or, in the case 
of a group claim brought by a State requestor, that State requestor 
requests reconsideration of the Secretary's denial of a claim. Each is 
discussed further below. Borrowers would not be subject to a 
limitations period.
    The proposed Federal standard in Sec.  685.401(b) would incorporate 
the existing description of misrepresentation in part 668, subpart F, 
which currently defines and sets forth three categories of 
misrepresentation, each containing examples of violative conduct. 
However, the Department proposes to expand the examples in those 
categories, relating to the nature of educational programs, the nature 
of financial charges, and the employability of graduates. Proposed 
Sec.  668.75 also would establish a new misrepresentation category in 
the regulations that separately would give rise to a borrower defense 
claim under the Federal standard: ``omission of fact.''
    Proposed Sec.  668.79 would make clear that, if any part of the 
proposed regulations is held invalid by a court, the remainder would 
still be in effect.
    We propose to add a new subpart R to part 668, which would define 
and prohibit aggressive and deceptive recruitment tactics or conduct

[[Page 41889]]

(aggressive recruitment). As proposed, aggressive recruitment would be 
one of five types of acts or omissions that comprise the Federal 
standard for borrower defense claims such as: obtaining the borrower's 
contact information through websites that falsely present themselves as 
providing assistance with finding a job or obtaining government 
benefits, falsely claiming that enrollment spots are limited, taking 
advantage of a student's lack of understanding to pressure the student 
to enroll, pressuring the student to make an immediate loan decision, 
discouraging the student or prospective student from consulting with an 
independent party prior to signing documents, failing to respond to a 
student's request for additional substantive information on enrollment 
or loan obligations, using threatening or abusive language, or engaging 
in repeated unsolicited contact.
    Finally, proposed Sec.  668.509 would make clear that, if any part 
of the proposed regulations is held invalid by a court, the remainder 
would still be in effect.
    Reasons: The Department has issued three different sets of 
regulations in the past on borrower defense: 1994, 2016, and 2019. 
Those regulations include different acts and omissions as the basis for 
borrower defense claims and included different processes. Even where 
some similarities appear to exist across the three regulatory 
structures--for example, all generally list misrepresentation as a 
basis for a borrower defense--the regulations set different 
requirements for what a borrower must prove to have their application 
approved. For example, in the 1994 regulations, a borrower could have 
their application approved because their State had a standard for 
misrepresentation that did not require a demonstration of reliance. 
That same borrower under the 2016 regulation could also receive an 
approval due to a misrepresentation but would have to show that they 
relied upon that misrepresentation in making the decision to enroll. 
For both the 1994 and 2016 regulations, the borrower's claim could be 
supported by common evidence in the Department's possession, such as 
records from a college obtained by a State attorney general and shared 
with the Department. Under the 2019 regulation, that borrower not only 
has to show they relied upon the misrepresentation but that the 
institution had knowledge the misrepresentation was false, misleading, 
or deceptive, or acted with reckless disregard for the truth. The 
borrower must also document the specific amount of financial harm 
suffered. As a consequence, an identical misrepresentation by the same 
institution could yield different outcomes solely based upon the loan's 
disbursement date.
    In reviewing the hundreds of thousands of claims received from 
borrowers across the country, as well as different State laws that 
could be applied to bring a defense to repayment application under the 
1994 regulations, the Department has identified other categories of 
improper actions that it believes should give rise to a defense to 
repayment, and examples of the types of common misrepresentations that 
fall within those categories.
    As listed above, the proposed Federal standard identifies five 
categories of acts or omissions as bases for a borrower defense claim: 
(1) substantial misrepresentation, (2) substantial omission of fact, 
(3) breach of contract, (4) aggressive recruitment, and (5) State or 
Federal judgment or Departmental adverse action against an institution 
that could give rise to a borrower defense claim. For substantial 
misrepresentations and substantial omissions of fact, the Department 
proposes to use a presumption of reasonable reliance for both an 
individual and group claim.
    Each element of the proposed Federal standard is discussed in 
greater detail below.

Substantial Misrepresentation and Omission of Fact

    The Department proposes returning to the 2016 regulations' use of 
substantial misrepresentation where a misrepresentation is defined in 
34 CFR 668, subpart F, instead of a standalone definition in the 
borrower defense regulation. But, as part of adopting that framework 
from the 2016 regulation, we also propose adopting a presumption of 
reasonable reliance for all borrowers.
    Misrepresentation was a component in both the 2016 and 2019 
regulations and has been a common source for approving claims under the 
1994 regulation. Substantial misrepresentations constitute most of the 
claims that the Department has approved to date and have consistently 
served as a basis for borrower defense discharges across the several 
sets of regulations.
    The Department believes requiring borrowers to prove a substantial 
misrepresentation occurred is a more reasonable standard to use than 
the stricter one required in the 2019 regulation that also required a 
borrower to show that an institution's misrepresentation was made with 
knowledge that it was false, misleading, or deceptive or with reckless 
disregard for the truth. In constructing the proposed standard, the 
Department considered what evidence it sees borrowers regularly 
provide, based upon its review of hundreds of thousands of claims. This 
allows the Department to gauge what is a reasonable expectation of 
borrowers and what types of information that most claims are likely to 
include. Those reviews demonstrate that even the most detailed and 
extensive information provided by borrowers rarely if ever includes 
information on whether an institution had knowledge that a 
misrepresentation was false or misleading, nor an ability to gauge if 
the institution acted with a reckless disregard for the truth.
    When the Department obtains such information, it generally comes 
through internal company records that require the authority to require 
institutions to turn over documents, such as through a civil 
investigation demand, a lawsuit, or a request by a Federal agency. The 
use of such a strict standard for a borrower thus exceeds what even the 
most detailed individual applications received to date are able to 
include. While the Department has in the past indicated that this 
standard could be met by showing information provided by employees does 
not match information in formal marketing materials, the Department is 
concerned that such an approach does not provide a reasonable path for 
a borrower subject to the more common situation the Department has 
found in which the official placement rates are themselves false or 
calculated in a way that produces a misleading result.
    Moreover, the Department does not believe the intent of the 
institution is relevant when determining whether to provide the 
borrower with relief due to a misrepresentation. Intentional or not, 
the actions by the institution have resulted in harm to the borrower 
and the Department's obligation is to provide relief to ameliorate that 
harm when the evidence warrants. Issues related to institutional 
knowledge are better suited for considerations about the extent of the 
school's liability. As between the school and the borrower, the school 
is better equipped to prevent, and, where appropriate, to bear the cost 
of, a misrepresentation that turns out to be inadvertent.
    To meet this proposed substantial misrepresentation threshold, the 
borrower would have to articulate to the Department the 
misrepresentation made by the institution (e.g., they were told credits 
would transfer and they did not, they were guaranteed to get a job, 
they

[[Page 41890]]

were told the job placement rate was 90 percent, etc.). That 
misrepresentation would then have to be one that they would have relied 
upon to make the decision to take out a Direct Loan. A borrower can 
achieve that goal by relaying with some detail the story of their 
recruitment experience or some other interaction with the school.
    The Department similarly proposes to remove the requirement that a 
borrower demonstrate individualized harm from the definition of a 
misrepresentation and instead to require that the borrower demonstrate 
that the misrepresentation caused the borrower to take out a loan to 
their detriment. The Department is concerned that the requirements to 
demonstrate financial harm in the 2019 regulation created a requirement 
far beyond what a reasonable borrower should have to do. This concern 
outweighs the taxpayers' risk that a borrower could receive relief even 
without significant financial harm, particularly given the Department's 
statutory obligation to provide access to defenses to repayment for 
borrowers affected by the acts or omissions of the institutions in 
which they enroll. For instance, the 2019 regulation requires borrowers 
to prove that they could not get a job for reasons besides local or 
national recessions, or the borrower would have to document the quality 
of their job search and subsequent inability to find employment. The 
Department does not believe it is reasonable for a borrower to have to 
act as a labor economist to show they were harmed by an institution's 
misrepresentations. Moreover, the approach of individualized harm 
required in the 2019 regulations has the unintended effect of 
potentially penalizing a borrower who succeeds despite their program. 
The Department has received many borrower defense applications from 
individuals who asserted under penalty of perjury that they were more 
likely to find employment when removing the institution they attended 
from their resume. Under the 2019 regulations, these individuals would 
risk having a claim not approved because they did obtain a job, even if 
the institution was a hindering factor in their ability to do so.
    Reliance is the final component of the substantial 
misrepresentation standard. This requires a borrower to show that they 
were not only subject to the misrepresentation but that they relied 
upon it in their decision to take out a Direct Loan. While the 
Department believes reliance should be an element of a successful 
borrower defense claim that alleges a misrepresentation, we are 
concerned that an overly narrow view of what a borrower had to do in 
order to demonstrate reliance could result in a borrower's application 
being denied for lack of the use of specific phrasing. In particular, 
we are worried that there could be instances where a borrower lays out 
a misrepresentation that from the narrative provided by the borrower 
was a key factor in their decision to take out a loan but because the 
borrower did not directly specify they relied upon it their claim is 
denied. To address this concern the Department proposes that if the 
claimant does not demonstrate reliance, then the Department would find 
reasonable reliance if a prudent person would believe and act upon the 
misrepresentation if told it by another person.
    The Department also proposes to use a similar presumption of 
reasonable reliance for group borrower defense claims. The removal of 
requirements for borrowers to demonstrate individualized harm and that 
they could personally prove that an institution engaged in a 
misrepresentation that the institution made with the knowledge that it 
was false, misleading, or deceptive or made with reckless disregard for 
the truth means that the Department can and should consider claims from 
similarly situated borrowers who attended the same institution as a 
group. Because the idea behind a group claim is that all the borrowers 
in the group may have been affected by the same misrepresentation or 
omission, the Department believes it is also reasonable to use an 
assumption of reasonable reliance for group members.
    The Department has determined based on reviews of claims that, 
particularly where misrepresentations were especially widespread, the 
benefits of reduction in burden by presuming reliance, rather than 
individually determining it, exceed the costs. Efforts to individually 
evaluate these claims have substantially delayed--by years, in some 
cases--the provision of relief to borrowers. This has negative 
ramifications for borrowers whose financial circumstances are affected 
by their outstanding student loan debt in the meantime.
    The Federal Trade Commission (FTC) follows a similar approach to 
the Department's proposal to allow the Secretary to establish a 
presumption of reliance, whereby it can establish a rebuttable 
presumption that all purchasers relied on the defendant's material 
misrepresentations or omissions if they were widely disseminated and 
``were of a kind usually relied upon by reasonable prudent persons.'' 
FTC v. BlueHippo Funding, 762 F.3d 238 (2d Cir. 2014); FTC v. 
Kuykendall, 371 F.3d 745, 765 (10th Cir. 2004); FTC v. Figgie Int'l, 
Inc., 994 F.2d 595, 605-06 (9th Cir. 1993); FTC v. Sec. Rare Coin & 
Bullion Corp., 931 F.2d 1312, 1316 (8th Cir. 1991). Once the FTC 
establishes the presumption, courts typically accept the total revenue 
from the sale of the good or service as the amount of monetary relief. 
Accordingly, while the Department proposes a substantial 
misrepresentation standard to bring a successful borrower defense 
claim, the Department proposes to incorporate a presumption of 
reasonable reliance into that standard to reflect natural consumer 
behavior that the reasonable and prudent consumer would ``usually'' 
rely on.

Substantial Misrepresentation--Definitions

    With regard to the specific types of actions that could be 
considered a misrepresentation, the Department believes using the 
definition of a misrepresentation in subpart F instead of a separate 
definition of the term in borrower defense would reduce confusion for 
both borrowers and institutions and ensure a more consistent approach. 
In the 2019 regulation, the Department chose to include its own 
definition of misrepresentation. However, it did so with a non-
exhaustive list of 11 items, many of which bear significant resemblance 
to requirements that already exist in subpart F. This creates 
unnecessary ambiguity for borrowers and institutions. Since the list in 
the regulation is non-exhaustive it is unclear whether that would mean 
anything else in subpart F might also still qualify as a 
misrepresentation, providing other requirements are met. Using the 
single consistent definition from subpart F thus removes that ambiguity 
and ensures that there is a clear message to borrowers and institutions 
how borrower defense and other oversight and enforcement activities can 
interact.
    In reviewing the definition of misrepresentation in subpart F, the 
Department has identified other types of misrepresentations that it 
believes should both serve as potential grounds for approving a 
borrower defense application as well as possible future enforcement 
actions. These changes address areas of concern the Department has 
identified in the course of adjudicating borrower defense claims in 
recent years.
    The Department proposes to revise the regulations in Sec.  668.72, 
which covers misrepresentation based on the nature of the educational 
program or

[[Page 41891]]

institution. The Department proposes to amend the leading text by 
adding the phrase ``which may be included in the institution's 
marketing materials, website, or communications to students,'' to 
clarify where misrepresentation could occur and to ensure congruence 
with the other types of misrepresentation in Sec.  668.73 and Sec.  
668.74. The Department also proposes to remove sub-section (h) in Sec.  
668.72, which relates to misrepresentations of the nature and 
availability of equipment needed for educational programs, because that 
element is effectively incorporated into Sec.  668.72(f), which 
addresses facilities and equipment. The Department proposes to remove 
sub-section (j) in Sec.  668.72, related to the availability of 
employment or other financial assistance, because that element would be 
effectively covered in Sec.  668.73, which governs misrepresentations 
related to the nature of financial charges.
    In new Sec.  668.72(m), the Department proposes to add false, 
erroneous, or misleading statements concerning institutional 
selectivity rates or rankings as a form of misrepresentation, because 
it has observed institutions leveraging false data reported to widely 
recognized national rankings that result in a higher institutional or 
program rank than they would otherwise have received, inducing 
enrollment under false pretenses. Accordingly, the Department believes 
it is in the public interest to include misrepresenting selectivity 
rates or rankings or misrepresenting the data underlying the 
selectivity rates or rankings, as a form of misrepresentation.
    In new Sec.  668.72(n), the Department proposes to add 
misrepresenting the classification of the institution as nonprofit, 
public, or proprietary for purposes of its participation in the title 
IV programs as another basis for a borrower defense claim. An 
institution would be deemed to misrepresent its classification if it 
leads students or parents to believe that its status for purposes of 
title IV participation is something other than the institution's 
official classification on file with the Department for purposes of the 
title IV programs. The Department believes that obfuscating the 
classification of the institution for purposes of the title IV programs 
should be considered a misrepresentation because there are meaningful 
distinctions between the governance and treatment of revenue in excess 
of expenses at for-profit and nonprofit businesses. A student who 
chooses a college that markets itself as nonprofit may believe they are 
entering into a transaction in which additional revenue will be 
reinvested in the college and that those leading the institution do not 
have a direct financial stake in it. Institutions may not represent to 
students that they are a nonprofit institution for purposes of title IV 
when they have not met the applicable legal standards for nonprofit 
status. This also would apply to institutions that are in the process 
of converting from for-profit to nonprofit status; such an institution 
may not represent itself as nonprofit until the Department has 
confirmed it meets the standards for a nonprofit institution and 
memorialized that determination in the classification on file with the 
Department. An institution that acts inconsistently with this 
requirement would have misrepresented its classification for purposes 
of a borrower defense claim.
    In new Sec.  668.72(o), the Department proposes to add 
misrepresenting the existence of certifications or other approvals for 
the institution and/or its programs that were not actually obtained, 
and the institution's failure to remove such certifications or 
approvals from marketing materials after they are revoked or withdrawn. 
These certifications and other approvals include approvals from the 
State to offer certain programs, such as approval to offer a nursing 
program. They also include certifications for occupations such as 
medical assisting where a license may not be required but there are 
certifications that carry greater labor market value. The Department 
has observed that some institutions lagged in updating their marketing 
materials with the latest certifications or approvals or promised 
students that they would obtain certain certifications or approvals by 
the time the student graduated but where the institution never in fact 
obtained these items. The result is that when the student went to find 
employment, they discovered they were either unable to find a job or 
would be less competitive in the workforce than they expected to be 
when they enrolled in the program.
    Similarly, the Department proposes to add new Sec.  668.72(p), 
which would address misrepresentations about student externships or 
other similar opportunities, because the Department has observed that 
some institutions have made false promises about the availability of 
externships for their students or falsely represented that they held 
contracts with externship sites. The Department has observed that 
students relied on these marketing materials to inform their decision 
about whether to enroll at the institution.
    The last two proposed changes to Sec.  668.72 are new Sec.  
668.72(q), misrepresentation about the institution offering assistance 
to obtain a high school diploma or General Education Development 
certificate (GED), and new Sec.  668.72(r), misrepresentation about the 
pace of completing the program or the time it would take to complete 
the program contrary to the stated length of the educational program. 
With the rise of eligible career pathway programs and use of ``ability 
to benefit'' mechanisms to provide for title IV aid eligibility for 
qualifying students without a high school diploma or its recognized 
equivalent, the Department has observed an increase in the number of 
institutions making false promises of assistance to obtain a high 
school diploma or GED, including through program reviews and other 
oversight mechanisms in which a large number of students at the 
institution make similar allegations. Finally, the Department has seen 
that some institutions engage in widespread substantial 
misrepresentations about the time it would take to complete an 
educational program, including misrepresentations related to programs 
that require completion of an externship or similar program, and 
programs that are self-paced and rarely completed in the advertised 
time. These institutions wrongly characterize the necessary pace or 
time commitment, such as presenting program cost over four years when 
it takes 5 years to finish under the schedule set by the institution. 
Accordingly, the Department believes it is in the public interest to 
include these additional misrepresentation elements because greater 
enforcement and oversight of institutions' unlawful practices would 
both ensure such behavior is investigated and ended more quickly and 
provide borrowers with clearer regulations governing the borrower 
defense discharge standards and, at least in some cases, better 
evidence. Including these misrepresentations in the regulations would 
also ensure that borrowers have more accurate information about the 
costs of their programs.
    We also propose changes to Sec.  668.74. In the course of 
adjudicating borrower defense claims, the Department has persistently 
seen misrepresentations about the employability of graduates. These 
include job placement rate (JPR) misrepresentations, which are 
reflected in Sec.  668.74. The Department is explicitly including, as a 
form of JPR misrepresentation, placement rates that are inflated 
through manipulation of data inputs. This would help ensure that 
students have access to accurate information about the employability of 
graduates and provide access to relief

[[Page 41892]]

when they do not. These additions highlight the Department's concerns 
about how institutions calculate job placement rates, which students 
often rely on in making an informed decision about enrolling in an 
institution or program.
    The Department sought input from negotiators as to whether our 
proposed language addressed known examples of JPR manipulation and how 
the proposed language could interact with existing placement rate 
requirements used by accreditors and/or States. One negotiator 
supported a required disclosure of information regarding graduate 
employability but expressed concern that there is no standardized 
metric for institutions to use. To be clear, the Department does not 
propose to create a standardized JPR metric. Instead, we outline 
examples of past problematic institutional JPR calculations because 
they were misleading to students. These include institutions that, for 
example, excluded students who were searching for work from the 
denominator of the placement rate calculation if those students did not 
conduct a job search in the exact manner set by the institution, or 
published a JPR that included large numbers of students who obtained 
employment well before graduating from the institution, many of whom 
likely found such employment or were already employed even before 
enrolling. These also include institutions that disclosed an employment 
rate, as required by their State or accreditor, but calculated the rate 
in a manner inconsistent with the applicable State or accreditor 
methodology. Proposed Sec.  668.74 also contains a provision that 
allows the Department to verify that an institution correctly 
calculated its JPR; an institution must furnish to the Secretary 
documentation and other data that was used to calculate the 
institution's employment rate calculations.

Substantial Omission of Fact

    The 2019 and 2016 regulations included an omission of fact as a 
component within the definition of misrepresentation, meaning that 
either false information provided or true information omitted could 
give rise to an approved borrower defense claim.
    The Department proposes to continue allowing omissions to give rise 
to a borrower defense claim, but to expressly provide it in a separate 
category by adding Sec.  668.75 to address substantial omissions of 
fact. Doing so recognizes that omissions of fact have the same 
misleading effect on borrowers as other forms of misrepresentation, 
except that it occurs through the absence of information that would 
otherwise have affected the borrower's decision to enroll or take out 
loans. The Department proposes to list it separately from 
misrepresentation to assist borrowers and institutions in better 
understanding the Federal standard for initial adjudication, but 
because it would remain closely tied to misrepresentation, we propose 
adding it within subpart F.
    The addition of more text to clarify an omission of fact allows the 
Department to provide borrowers and institutions greater clarity about 
what must be disclosed to avoid an omission of fact. The Department 
proposes moving to ``substantial omission of fact'' in place of the 
2019 treatment of omission of fact for the same reasons we are 
proposing to shift from misrepresentation to substantial 
misrepresentation as outlined above. Similar to substantial 
misrepresentation, an omission of fact would be substantial if a 
borrower would not have otherwise enrolled at the institution, obtained 
a loan, or chosen that program. We believe that omissions of fact 
should include a reliance requirement to identify whether an omission 
is serious enough to have influenced a borrower's decision to enroll. 
As with substantial misrepresentations, we propose to include a 
presumption of reasonable reliance, which ensures that claims by 
borrowers--who relied in fact on the omission--are not denied simply 
because their applications fail to include the specific statement that 
the borrower relied upon the omission. We propose to apply this 
presumption of reasonable reliance to both individual and group claims.
    The Department derives its definition of omission of fact, in part, 
from the 2016 amendments to Sec.  668.71(c), where the Department 
refers explicitly to the ways in which omissions are considered in the 
regulations. See 81 FR at 76072. The Department also sought feedback 
last year from negotiators on the parameters of omission of fact, 
including a review of States' unfair, deceptive, and abusive acts or 
practices (UDAP) laws. The Department also consulted with the FTC and 
thoroughly analyzed Federal laws on UDAP that could help inform the 
Department's formation of a definition of an omission of fact. The 
Department consulted with FTC because of that agency's long-standing 
enforcement work regarding unfair and deceptive acts and practices 
under Sec. 5 of the Federal Trade Commission Act (FTC Act). After 
considering the States' use of omission of fact in consumer protection 
contexts, and the FTC's authorizing statute under the FTC Act, the 
Department is proposing to adopt language that appears in similar forms 
in Delaware, Illinois, Iowa, and New Jersey consumer laws. These States 
have the most comprehensive language related to omission and state that 
the ``concealment, suppression, or omission of any material fact with 
intent that others rely upon such concealment, suppression, or 
omission'' is an unlawful act.\10\ We propose to adopt, in part, that 
concept of omission of fact, but without the elements of ``intent,'' 
which appears in all the states' statutes cited above; or ``knowing,'' 
which is only included in New Jersey's statute. As discussed earlier in 
justifying the movement away from the 2019 definition of 
misrepresentation that included a requirement that the borrower show 
the institution had knowledge that a misrepresentation was false, 
deceptive, or misleading or given with a reckless disregard for the 
truth, the Department is concerned that it is unreasonable to expect a 
borrower to be able to document the intent or knowledge possessed by an 
institution. While there are circumstances where a borrower could 
potentially meet this bar if the information provided by a recruiter, 
such as placement rates, is different from information provided in 
other public materials, the Department has seen to date that most 
circumstances where an institution misrepresents student outcomes such 
as placement rates it does so in such a way that all the public numbers 
used are wrong and only the private internal numbers reflect the actual 
results. That type of information would only be obtainable through some 
way of accessing institutional employees or records, which is something 
that takes years of work by Federal and State regulators to acquire.
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    \10\ This language is taken from Delaware's definition of an 
unlawful practice, but the phrasing is similar for the other states 
with minor wording changes. Delaware Code Ann. Title 6, Sec.  2513 
https://delcode.delaware.gov/title6/c025/sc02/index.html; 815 
Illinois Comp. Stat. Ann. Sec.  505/2), from Ch. 121 1/2, par. 262, 
https://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2356&ChapterID=67; Iowa Code Sec.  714.16, et seq. 
https://www.legis.iowa.gov/docs/code/714.16.pdf; New Jersey's 
Consumer Fraud Act, New Jersey Statutes Annotated. 56:8-2 et seq. 
https://www.njconsumeraffairs.gov/Statutes/Consumer-Fraud-Act.pdf.
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    The 2019 regulations required that misrepresentations were those 
``made with knowledge of its false, misleading, or deceptive nature or 
with a reckless disregard for the truth'' (see 34 CFR 685.206(e)(3)). 
Upon further consideration of these policies and their

[[Page 41893]]

implications both for borrowers and taxpayers, the Department does not 
believe that misrepresentations or omissions that are made without 
knowledge or a reckless disregard should be exempt from the 
Department's oversight. Borrowers who relied on such 
misrepresentations, even if they were made unintentionally, may still 
have experienced the harm of attending a particular institution or 
borrowing Federal student loans on the basis of untruths or omissions. 
Similarly, institutions are not permitted under Section 487(c)(3) of 
the HEA to make misrepresentations, even if unintentional. And an 
unintentional omission of fact still can result in harm for the 
borrower.
    As proposed, the definition of omission of fact would include a 
non-exhaustive list of examples that could amount to an omission of 
fact in the borrower defense context. Examples include, but are not 
limited to, concealing, suppressing, or failing to provide material 
information regarding the entity that is actually providing the 
educational instruction; the availability of slots, or requirements for 
obtaining admission, in a program where the institution places students 
in a preprogram at the time of enrollment; and factors that would 
prevent an applicant, for reasons such as a prior criminal record or 
preexisting medical condition, from qualifying to meet requirements 
that are generally needed to be employed in the field for which the 
training is provided. In its oversight and compliance work, the 
Department has found some institutions omitted material information 
about the nature of their educational programs that, if disclosed 
upfront, could have resulted in a different outcome for the student and 
forgone the need for a defense to repayment. The Department invites 
comments on this proposed definition and whether the proposed 
definition is sufficiently expansive to address known types of 
omissions in which some institutions engage.
    Finally, the Department believes that each of the proposed borrower 
defense provisions discussed in this NPRM pertaining to 
misrepresentation serves one or more important, related, but distinct, 
purposes. Each of the requirements provides value to students, 
prospective students, and their families; to the public, taxpayers, and 
the Government; and to institutions separate from, and in addition to, 
the value provided by the other requirements. In particular, we believe 
that including more examples of misrepresentations in the regulations 
would more accurately reflect the Department's experiences in 
overseeing institutions; and would inform institutions about their 
obligations, as well as provide clearer indications to borrowers about 
what may constitute a borrower defense claim. If the Department is able 
to cite to these additional regulatory provisions in its enforcement 
work, it will also be able to protect taxpayer interests and end 
unlawful behavior more quickly and effectively. To best serve these 
purposes, we propose including an administrative provision in the 
regulations to make clear that the regulations are designed to operate 
independently of each other and to convey the Department's intent that 
the potential invalidity of one provision should not affect the 
remainder of the provisions.

Breach of Contract

    The 2019 regulations removed breach of contract as an element that 
could give rise to an approved borrower defense to repayment 
application even though it was included in the 2016 regulation. The 
2019 regulation argued that the majority of defense to repayment 
applications submitted to the Secretary did not allege breach of 
contract, concluding that the borrower defense standard should be 
tailored to the types of claims borrowers alleged. See 84 FR 49810-12. 
The 2019 regulations further rationalized that a standard breach of 
contract claim was potentially overbroad, and thus inappropriate as a 
basis for relief since it is not necessarily limited to the provision 
of educational services.
    With the benefit of reviewing additional borrower defense claims, 
and considering additional input from negotiators, including a request 
from a negotiator to be more definitive as to what constitutes breach 
of contract,\11\ for the reasons discussed below the Department 
believes that breach of contract should be restored as a part of the 
Federal borrower defense standard. As an initial matter, the 2019 
concern with overbreadth is inapplicable, because the Department 
proposes to clarify in new Sec.  685.401(a) (the definition of 
``borrower defense to repayment'') that an act or omission supporting a 
borrower defense must be related to the making of a Direct Loan or the 
provision of educational services for which the Direct Loan was 
intended. With that appropriate qualification, inclusion of a breach of 
contract is appropriate. As explained in 2016, breach of contract may 
be an appropriate basis for borrower defense relief when an institution 
fails to fulfill a specific contractual promise to provide certain 
training or courses. 81 FR 39341 (June 16, 2016). Breach of other terms 
of the contract that relate to the making of a Direct Loan or the 
provision of educational services may also serve as an appropriate 
basis for borrower defense relief. The Department would grant relief 
commensurate with the specific contractual injury alleged. For example, 
the Department is aware of students bringing loan-related breach of 
contract claims against postsecondary institutions or for provisions of 
educational services for which those loans were intended. See, e.g., 
Supplee v. Miller-Motte Bus. Coll., Inc., 768 S.E.2d 582 (N.C. Ct. App. 
2015); Eckols et al. v. Earle et al., No. 2016CI18165 (37th Jud. Dist., 
Bexar County), Pltfs.' Orig. Pet., Applic. for TRO and Applic. for 
Temp. Inj. at 10 (Oct. 18, 2016). This type of claim would clearly be 
appropriate for borrower defense adjudication if the breach is related 
to the making or provision of educational services intended for the 
Direct Loan but may not fall under the other four elements of the 
Federal standard depending on the nature of the contract and its 
breach. Moreover, even if there is some overlap between the types of 
conduct that would constitute a breach of contract and would otherwise 
constitute a basis for a borrower defense claim, in some instances, 
borrowers may be able to allege breach of contract claims more readily. 
The Department would investigate and adjudicate claims related to 
breaches of contract to determine whether a claim meets the 
requirements for a defense to repayment.
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    \11\ https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/nov3pm.pdf.
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Aggressive Recruitment

    The Department is also proposing to add a new category related to 
aggressive and deceptive recruitment to capture other types of acts it 
believes should serve as a basis for a borrower defense claim. While 
this category was not included in the 2019 regulation, the Department 
considered aggressive recruitment as a factor in the 2016 regulations 
in determining whether a misrepresentation was substantial enough to 
merit approval. It was not, however, conduct that could lead to 
approval on its own in that regulation. In other words, the conduct had 
to be a substantial misrepresentation in the form of aggressive 
recruitment to qualify for relief pursuant to the 2016 rule.
    The Department first raised the proposal for aggressive and 
deceptive recruitment during negotiated rulemaking. Some negotiators 
agreed

[[Page 41894]]

with including aggressive recruitment as a basis of a borrower defense 
claim and indicated that some institutions aggressively recruit certain 
specific groups of vulnerable students, such as students who are older, 
are the first in their families to attend postsecondary education, are 
attending while working full-time and or caring for families, or who 
come from low-income backgrounds. To date, the Department has received 
applications from well over 100,000 borrowers who have made allegations 
relating to admissions and urgency to enroll. This includes allegations 
that institutions recruited students who lack the basic tools needed to 
succeed in their courses, such as recruiting students for online 
programs who have no access to the internet because they are homeless. 
The Department has also seen institutions discourage students from 
consulting family and friends for additional information if they raise 
concerns about enrolling by calling them ``dreamkillers.'' And, it has 
received allegations detailing situations where recruiters tried to 
shame borrowers into enrolling by criticizing them for not providing 
more for their families.
    Because many existing State consumer protection laws include this 
sort of claim in different forms, the Department reasoned that 
including it in the Federal standard would ensure a more comprehensive 
Federal standard and ensure equitable treatment for borrowers 
regardless of where they live.
    In developing its proposed definition of aggressive recruitment, 
the Department incorporated negotiators' proposals and language from 
the 2016 regulations. The Department also consulted with the FTC and 
thoroughly analyzed Federal laws on UDAP. The Department consulted with 
FTC because of that agency's long-standing enforcement work regarding 
UDAP under Sec. 5 of the FTC Act. Similar to the Consumer Financial 
Protection Bureau (CFPB) and other Federal banking regulators, the 
Department remains convinced that UDAP can cause significant financial 
injury to consumers, erode consumer confidence, and undermine the 
financial marketplace. The FTC Act has also helped other Federal 
banking regulators in crafting their oversight and enforcement 
activities over UDAP. Thus, the Department believes that consulting 
with the FTC which has applied its standards through case law, official 
policy statements, guidance, examination procedures, and enforcement--
actions could help inform the Department's work regarding UDAP, to 
include elements of aggressive recruitment.
    Most negotiators supported the idea of including aggressive 
recruitment in the Federal standard. Some negotiators, however, 
expressed concern with the potential subjectivity of the concept and 
the risk of sweeping in innocuous encouragement or other similar 
recruiting contact by admissions representatives, enrollment management 
professionals, or other contractors engaged by an institution. These 
negotiators indicated that in the course of an admissions 
representative's day-to-day work, contact with prospective students may 
include something as simple as reminding them of a May 1 enrollment 
deadline, and there was some concern that such a reminder may be 
considered a form of aggressive recruitment. The Department believes 
the clarity of this definition demonstrates that isolated instances of 
well-intentioned recruiter behavior would not result in an approved 
claim. Rather, this definition would capture the types of sustained and 
aggressive behavior the Department has seen across more than 100,000 
borrower defense applications.
    The Department is proposing to include aggressive and deceptive 
recruitment as its own category that could lead to an approved borrower 
defense claim because it captures an important type of behavior that 
the Department has seen institutions engage in where the way a borrower 
is coerced into enrolling is so aggressive that even if the information 
presented to them was accurate and without omissions the borrower is 
not able to make a full and informed choice. The result of that is 
often a borrower enrolling in a program that is not providing them what 
they were expecting--such as a certificate in an allied health field 
when they wanted to become a nurse--or comes at a price that they 
cannot possibly afford and did not freely and fairly take on. The 
Department has seen instances, discussed above, where these aggressive 
recruitment tactics prevented or strongly discouraged students from 
being able to make an informed choice. Other Federal regulators have 
also seen instances where students were affected by aggressive 
recruitment practices that played a role in borrowers' decisions to 
take out private educational loans.\12\ Borrowers were told not to 
worry about concerns that they voiced, such as whether they would 
graduate or get a job. They were pressured to enroll either through 
artificial time constraints (such as falsely claiming there were a 
limited number of seats or the only opportunity to enroll would expire 
in just a few days) or by exploiting the borrower's lack of experience 
with higher education. Because the recruiter has greater information at 
their disposal than the potential borrower and is acting in a position 
of authority and power, the recruiter is in a position to influence the 
prospective student's decision to enroll. In these circumstances, even 
absent a misrepresentation, such as a falsified job placement rate, the 
entire recruitment experience can impede the ability of the borrower to 
understand and appreciate what they are signing up for and the 
financial and educational implications of their decision.
---------------------------------------------------------------------------

    \12\ https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-for-profit-college-chain-itt-for-predatory-lending/.
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    The Department also thinks it is important to include aggressive 
recruitment in order to clarify the interaction between what a 
recruiter may tell a prospective student who later enrolls, and the 
information the student may receive in written form. All institutions 
are required to disclose various information (see Sec. Sec.  668.41, 
668.47, and 668.164, among others) providing students with disclosures 
and information when they enroll, including through course catalogs. 
These printed or digital materials may contain factually accurate 
statements that differ from what prospective students have been told by 
a recruiter--such as a more accurate presentation of job placement 
rates, the role of accreditation, the ability to transfer credit, or 
other issues that would be important to prospective students and their 
families. In responding to the allegations in borrower defense claims, 
some institutions have asserted that written statements, even if buried 
in material provided to the students, are sufficient to correct 
inaccurate information from recruiters. The Department disagrees with 
this view. As a practical matter, the recruiter is providing personal 
support to the borrower. The recruiter is often the borrower's first 
interaction and gateway to apply for and eventually obtain Federal 
student aid, including Federal student loans. Even if the borrower 
examines the written disclosures closely before enrolling, the 
information from the recruiter may overshadow the disclosures.\13\ 
Given the information asymmetry between the recruiter and the borrower, 
and that perceived relationship of trust, the aggressive tactics of the 
institution may

[[Page 41895]]

themselves constitute a valid claim for borrower defense.
---------------------------------------------------------------------------

    \13\ https://www.help.senate.gov/imo/media/for_profit_report/PartI-PartIII-SelectedAppendixes.pdf.
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    Moreover, the Department acknowledges that the statutory ban on 
incentive compensation for recruiters or admissions employees has not 
fully achieved the intended result which was to protect students from 
the harms of aggressive recruitment. The incentive compensation rule 
bans incentive payments to recruiters based on their enrollment success 
because such payments might lead recruiters to mislead students in 
order to earn a financial bonus. 20 U.S.C. 1094(a)(20). Aggressive 
recruitment continues to proliferate in institutions as the pressure 
for increased enrollment, and in turn, receipt of Federal student 
assistance, drives institutions' continued use of such tactics. The 
Department believes enrollment that stems from such tactics should 
provide a path to an approved borrower defense claim as a form of 
aggressive recruitment.
    The Department is aware of instances where institutions will, 
either directly or through a third party, falsely appear to help 
individuals seeking Federal, State or local benefits. For example, in 
the FTC's action against Career Education Corporation (CEC), CEC 
obtained individuals' contact information from websites where the 
institution presented itself, through lead generators, as a portal for 
receiving other government benefits, such as unemployment insurance, or 
for job seeking.\14\ These individuals unwittingly provided their 
personal information to the lead generator believing submission of 
their information was a portal for government benefits. Those 
individuals, in some cases, later enrolled at the institution after 
providing their information under the guise that they would obtain 
government benefits. An individual could not reasonably be expected to 
understand that such websites were lead generators that the institution 
used to increase their enrollments.
---------------------------------------------------------------------------

    \14\ Federal Trade Comm. v. Career Educ. Corp., et al., Case No. 
1:19-cv-05739 (N.D. Ill. Eastern Dist. Oct. 9, 2019).
---------------------------------------------------------------------------

    The Department considered including an aggressive recruitment 
provision in the 2016 regulations, but at that time was concerned about 
the potential difficulty of developing clear, consistent standards for 
aggressive conduct. 81 FR at 39343. The 2016 regulations did, however, 
include aggressive recruitment as an aggravating factor in determining 
whether a borrower relied, or reasonably would have relied, on a 
misrepresentation, an indication of the Department's degree of concern 
about such behavior and its likelihood that borrowers' decisions would 
be affected by it. Id. After five more years of receiving borrower 
defense claims, and addressing concerns raised by non-Federal 
negotiators during negotiated rulemaking,\15\ the Department is 
confident that an appropriate standard can be articulated and enforced 
in the borrower defense context and that such an element is a necessary 
addition to address gaps in the Federal standard. Additionally, as 
described above and through program reviews, audits, and other 
investigations, the Department has seen that institutions engage in 
aggressive tactics. Such tactics include imposing pressure on potential 
students to make enrollment or loan decisions immediately, taking 
advantage of a student's lack of understanding of the process, stifling 
efforts for the borrower to consult with a third party, persistent and 
unsolicited contact with a prospective student, and other actions under 
which an institution exerts unreasonable pressure to induce a student 
to enroll or obtain Federal student financial aid. These abuses have 
been well documented and result in findings against the institution 
under State or Federal laws,\16\ but they currently do not meet the 
standards for a borrower defense claim. In light of the Department's 
discovery of extensive acts of aggressive recruitment and the harm to 
students, the Department is proposing to include aggressive recruitment 
in the Federal borrower defense standard.
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    \15\ https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/transc103pm.pdf.
    \16\ See, for example, https://www.ftc.gov/news-events/news/press-releases/2019/08/operator-colorado-technical-university-american-intercontinental-university-will-pay-30-million.
---------------------------------------------------------------------------

    The Department modeled the proposed aggressive recruitment 
provision in part 668, subpart R, after the misrepresentation 
regulations in part 668, subpart F, because the subpart F framework was 
the most logical structure already in place: it had a definitions 
section and outlined a non-exhaustive list of factors that could lead 
to a misrepresentation. In defining the types of aggressive recruitment 
under the subpart, Sec.  668.501, the Department balanced the need to 
establish specific guidelines to curb institutions' exertion of 
unreasonable pressure on prospective students with the need for general 
standards that broadly cover other forms of aggressive recruitment. 
Placing the standard for aggressive recruitment in its own subpart 
instead of within borrower defense also would ensure the Department 
applies consistent standards for aggressive recruitment across its 
other oversight and compliance work, which could in turn result in an 
approved borrower defense claim. Additionally, this increased oversight 
and compliance may help to deter such behavior from institutions going 
forward, helping to ultimately reduce the need for borrowers to submit 
defense to repayment claims.
    To ensure that institutions and the public have clear standards for 
what constitutes aggressive recruitment, for purposes of borrower 
defense, the Department seeks the public's input on how the Department 
can identify the extent to which an institution engages in any form of 
aggressive recruitment and the means to document this misconduct 
through program reviews and audits. Policies and procedures that law 
enforcement uses to curb these actions would be especially helpful. The 
Department also provides a non-exhaustive list of acts that could 
warrant an aggressive recruitment claim in proposed Sec.  668.501.
    Finally, the Department believes that each of the proposed 
provisions discussed in this NPRM pertaining to aggressive recruitment 
serves one or more important, related, but distinct, purposes. Each of 
the requirements provides value to students, prospective students, and 
their families; to the public, taxpayers, and the Government; and to 
institutions separate from, and in addition to, the value provided by 
the other requirements. To best serve these purposes, we would include 
this administrative provision in the regulations to make clear that the 
regulations are designed to operate independently of each other and to 
convey the Department's intent that the potential invalidity of one 
provision should not affect the remainder of the provisions.

Judgments Against Institutions and Department Actions

    In the 2016 regulations, the Department included as a basis for a 
borrower defense claim a nondefault, contested judgment obtained 
against an institution based on any State or Federal law, whether 
obtained in a court or in an administrative tribunal of competent 
jurisdiction. Under those regulations, the borrower has a defense to 
repayment if the borrower was personally affected by the judgment; that 
is, the borrower must have been a party to the case in which the 
judgment was entered, either individually or as a member of a class 
that obtained the judgment in a class action lawsuit, and the act or 
omission must have pertained to the making of a Direct Loan or the 
provision of educational services to the borrower. The Department 
believes retention of

[[Page 41896]]

this provision is in the public interest for the reasons discussed 
below.
    We believe the Department did not fully consider the importance of 
the lawsuits students brought against institutions when it removed this 
provision in the 2019 regulation. Although judgments are not as common 
as allegations of misrepresentation, they are a clear finding by a 
court that the institution engaged in misconduct. See, e.g., Supplee v. 
Miller-Motte Bus. Coll., Inc., 768 S.E. 2d 582 (N.C. Ct. App. 2015).
    In its rationale to include a judgment against an institution as 
part of the Federal standard, in 2016 the Department stated that 
including judgment against an institution would allow for recognition 
of State law and other Federal law causes of action, but would also 
reduce the burden on the Department and borrowers of having to make 
determinations on the applicability and interpretation of those laws. 
See 81 FR 39340-41. To ensure that the scope of the judgment relates 
only to borrower defense claims, the favorable judgment against an 
institution would still be required to relate to the making of a 
Federal student loan.
    Finally, the Department proposes to include Departmental final 
actions as part of a judgment against an institution standard. 
Institutions that participate in the title IV programs sign a Program 
Participation Agreement (PPA) with the Secretary. If the Secretary or 
auditor identifies through Final Program Review Determination (FPRD) or 
Final Audit Determination (FAD), for example, that an institution 
breached its PPA, a borrower who was impacted by that final action 
could have a defense to repayment claim.
    It is important for the Department to consider all information 
available to it, including its own prior investigation and oversight 
work, to reach findings. FPRDs are not only the result of the 
Department's own findings, but schools would have also had an 
opportunity to respond to the findings therein. But more importantly, 
where the Department has evidence that schools have engaged in conduct 
that constitutes the basis for a borrower defense, the Department would 
act on its own evidence rather than requiring borrowers to 
independently produce this information, which is not available to them.

State Law Standard (Sec. Sec.  685.206, 685.222)

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution a 
borrower may assert as a defense to repayment of a Direct Loan, 
notwithstanding any other provision of State or Federal law, except 
that a borrower may not recover more from the Secretary than the amount 
that the borrower has repaid on the loan.
    Current Regulations: In the current regulations, three different 
regulatory standards and limitations periods apply, depending on when a 
borrower's loan was first disbursed:
    <bullet> Loans first disbursed prior to July 1, 2017, are addressed 
under the former 1994 borrower defense regulations in Sec.  685.206(c). 
That section provides that a borrower may assert a defense to repayment 
under applicable State law.
    <bullet> Loans disbursed between July 1, 2017, and June 30, 2020, 
are adjudicated under the former 2016 borrower defense regulations in 
Sec.  685.222, which does not provide for any adjudications under 
applicable State law.
    <bullet> Loans disbursed on or after July 1, 2020, are adjudicated 
under the current borrower defense regulations in Sec.  685.206(e), 
which does not allow any adjudications under applicable State law.
    Proposed Regulations: In proposed Sec.  685.401(b), a violation of 
State law could form the basis for a borrower defense claim, but only 
if the borrower, or a State requestor in the case of a group claim 
brought by a State requestor, requests reconsideration of the 
Secretary's denial of a claim.
    Reasons: Achieving the goal of a uniform Federal standard that 
could be applied to all claims pending or filed after July 1, 2023 
requires crafting a regulation that covers all borrower defense claims 
that are pending as of that date and claims that could be filed in the 
future. However, claims filed under the 1994 regulation are based upon 
violations of State law. To ensure that no borrower risks losing access 
to the State law standard as a result of the uniform Federal standard, 
the Department proposes allowing borrowers to seek reconsideration of a 
claim under a State law standard if their initial claim is denied or 
approved only for a partial discharge. This approach covers the range 
of acts or omissions that the Department has determined should form a 
basis for a valid borrower defense to repayment application. It also 
ensures institutions are not unfairly subject to the costs of approvals 
for conduct that occurred prior to this regulation by indicating that 
the Department may only seek to recoup the cost of claims that would 
have been meritorious under the borrower defense regulation that would 
have been in effect at the time of the conduct that led to the 
approval.

Limitations Period (Sec. Sec.  685.206, 685.222, & Part 668)

    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, except that a borrower may not receive more relief than 
the borrower has repaid.
    Current Regulations: In the current regulations, three different 
limitations periods apply, depending on when a borrower's loan was 
first disbursed:
    <bullet> Loans first disbursed prior to July 1, 2017, are addressed 
under the former 1994 borrower defense regulations in Sec.  685.206(c). 
The borrower may bring a claim at any point during the period in which 
the loan is being collected.
    <bullet> Loans disbursed between July 1, 2017, and June 30, 2020, 
are adjudicated under the former 2016 borrower defense regulations in 
Sec.  685.222. The borrower may bring such a claim at any time but may 
only assert a right to recover amounts previously collected by the 
Secretary on the grounds of that same breach of contract or substantial 
misrepresentation within 6 years of the alleged breach or of the date 
on which the substantial misrepresentation reasonably could have been 
discovered.
    <bullet> Loans disbursed on or after July 1, 2020, are adjudicated 
under the current borrower defense regulations in Sec.  685.206(e), 
which require borrowers to file a claim within 3 years from the date 
the student is no longer enrolled at the institution to file a claim 
with the Department.
    Proposed Regulations: The Department proposes that borrowers with 
outstanding loans would not be subject to a limitations period.
    Reasons: The Department proposes to remove the limitations period 
for a borrower to assert a borrower defense claim under these 
regulations or to receive refunds of amounts previously paid on loans 
still outstanding. This is a change from the 2019 regulation, which 
required borrowers to file claims within 3 years of the date the 
borrower left the institution. The 2019 regulation imposed this limit 
primarily because of the time period institutions would be expected to 
keep records. However, the U.S. District Court for the Southern 
District of New York held that the 3-year limitations period for claims 
that were subject to a collections proceeding (referred to in the 2019 
regulation as ``defensive claims'') was not a logical outgrowth of the 
rulemaking and

[[Page 41897]]

remanded that provision to the Department.\17\
---------------------------------------------------------------------------

    \17\ New York Legal Assistance Group (``NYLAG'') v. Cardona, 
Case No. 20-CV-1414 (S.D.N.Y. Mar. 17, 2021).
---------------------------------------------------------------------------

    The Department believes removing any limitations period on loans 
that are still outstanding is appropriate for several reasons. First, 
as discussed in the section on record retention, the records limitation 
discussed by the Department in the 2019 regulation relates to specific 
financial aid records that are unlikely to be relevant to the 
allegations most borrowers raise based upon what the Department has 
seen in applications for borrower defense to date. Most borrower 
defense applications to date relate to allegations around what an 
institution promised during the recruitment process and how that 
aligned with either the education the borrower ultimately received, 
such as whether they were able to get a job, if they could transfer 
credits, or if key data provided during the recruitment process such as 
job placement rates were accurate. The typical financial aid records 
that have a three-year retention requirement would not have any bearing 
on those allegations since they do not include records of recruitment 
activities, but rather cover items like the disbursement record of aid. 
Similarly, the Department does not believe it would be appropriate to 
set statutes of limitations on loans that are still outstanding the way 
many State laws do by tying them to the date that a borrower knew or 
could reasonably have been expected to know the misconduct occurred. As 
noted in the 2019 regulation, properly enforcing such a statute of 
limitations is administratively burdensome. It would entail information 
that may not be included in a borrower's application and could also 
rely on other factors such as when a State opened an investigation or 
publicized its findings. Moreover, the concept of limitations tied to 
when a borrower could reasonably have known about misconduct would not 
align with the Department's proposal to allow group claims. Since one 
of the purposes of a group claim is to not require an individual 
application, the Department would not be receiving information from a 
borrower about when they knew about misconduct.
    The Department also considered whether it would be appropriate to 
establish separate statutes of limitations for forgiving balances that 
are still outstanding versus refunding amounts previously paid on loans 
that are still outstanding. The Department does not believe it would be 
appropriate to place a limitation on discharging remaining loan 
balances. Since there is no statutory time limit on repayment or 
collections activity, the Department does not want to create a 
situation where a borrower is still obligated to repay a loan on which 
the Department has concluded that the borrower should have received a 
discharge due to the institution's misconduct solely because the 
individual did not fill out an application in time. Such an approach is 
not in keeping with any of the Department's other discharge 
authorities, such as closed school discharge, false certification 
discharges, or total and permanent disability discharges, none of which 
require borrowers to apply for a discharge within a set period of time.
    Similarly, the Department does not believe it would be appropriate 
to set a separate statute of limitations for refunding amounts 
previously paid on loans that are still outstanding. None of the 
Department's other discharges limit the refunding of amounts previously 
paid based on when a borrower applies, and the statute does not specify 
a separate treatment for borrower defense. There are no limitations on 
the issuing of refunds when a borrower receives a closed school 
discharge. Other discharges limit refunds to the point at which the 
borrower became eligible for the discharge, which is also not tied to 
applying within a certain period. For false certification, refunds are 
limited to the point after the borrower meets the eligibility criteria 
for a discharge, though in essentially all cases this means refunding 
all payments since most borrowers meet the eligibility criteria for a 
discharge prior to taking out a loan. Similarly, a borrower may receive 
refunds when approved for a TPD disability discharge back to the date 
the borrower's eligibility for a discharge was established. Refunds for 
PSLF and Income-Driven Repayment, meanwhile, are provided for payments 
made beyond the 120, 240, or 300 qualifying payment threshold, 
depending on the program. Finally, applying a statute of limitations 
only to refunds of amounts paid would create significant operational 
challenges for the Department.

Exclusions

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution a 
borrower may assert as a defense to repayment of a Direct Loan, except 
that a borrower may not receive more relief than has been repaid.
    Current Regulations: The 1994 borrower defense regulations do not 
explicitly address the acts or omissions that are excluded from a 
borrower defense to repayment claim. The 2016 regulations at Sec.  
685.222(a)(3) explicitly provide that an institution's violation of the 
title IV regulations alone does not constitute a basis for a borrower 
defense claim unless that violation would fulfill one of the bases for 
a borrower defense claim. Similarly, under the 2019 borrower defense 
regulations at Sec.  685.206(e)(5), the Department explicitly excludes 
an institution's violation of an HEA requirement or Department 
regulation as a basis for a borrower defense claim unless the violation 
would otherwise constitute the basis for a successful borrower defense 
to repayment. Under current regulations, misrepresentations related to 
civil rights violations are not a basis for a borrower defense claim.
    Proposed Regulations: Proposed Sec.  685.401(d) would provide 
exclusions that would not constitute a basis for a borrower defense 
claim. Specifically, an institution's violation of institutional 
eligibility or compliance rules under the HEA or other laws would not 
form the basis for a defense to repayment claim unless the violation 
would constitute a defense to repayment under the Federal standard and 
occurred in connection with the making of a loan or provision of 
educational service for which the loan was intended. For example, an 
institution's failure to meet the Constitution Day requirements in 36 
U.S.C. 106 would not form the basis for a borrower defense to repayment 
claim.
    Reasons: The Department's consistent position since 1994 has been 
that the Department will acknowledge a borrower defense to repayment 
only if the act of omission of the institution directly relates to the 
loan or to the institution's provision of educational services for 
which the loan was provided. See 60 FR 37768, 37769 (July 21, 1995); 81 
FR at 75941, 75944.
    As a result, the Department consistently has not considered claims 
such as personal injury torts, harassment, or a violation of Federal 
civil rights laws to be grounds for alleging a defense to repayment. In 
the 2019 regulations, the Department provided a non-exhaustive list of 
circumstances that would not constitute, in and of themselves, borrower 
defenses to repayment that were directly related to the borrower's loan 
or the provision of educational services. This list included, among 
others, 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

[[Page 41898]]

educational services. See 84 FR at 49802, 49824. The Department 
emphasizes that, although the current regulations and the proposed 
regulations exclude a violation of civil rights as a basis for alleging 
a borrower defense to repayment, the Department's Office for Civil 
Rights (OCR) enforces several Federal civil rights laws related to 
education, including Title VI of the Civil Rights Act of 1964, Title IX 
of the Education Amendments of 1972, Section 504 of the Rehabilitation 
Act of 1973, and Title II of the Americans with Disabilities Act of 
1990. Individuals who believe that a recipient of Federal funds or a 
public entity that is subject to Title II has violated these Federal 
civil rights laws can file a complaint with OCR. OCR's authority 
includes obtaining reimbursement of tuition and other costs for injured 
parties when appropriate. The availability of this form of relief 
encourages individuals to file promptly with OCR. The Department 
believes that OCR's enforcement authority is better suited to 
addressing civil rights harms than including them as a new basis for a 
borrower defense to repayment.
    The proposed regulations reflect these positions.

Group Process and Group Timelines

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution a 
borrower may assert as a defense to repayment of a Direct Loan, except 
that a borrower may not receive more relief than has been repaid.
    Current Regulations: The current borrower defense regulations under 
Sec.  685.206 require an individualized review of every borrower 
defense application and thus do not permit a group review process. 
Under the 2016 standard, Sec.  685.222(f) outlined a process for 
evaluation of a group claim. Upon consideration of factors including, 
but not limited to, common facts and claims, fiscal impact, and the 
promotion of compliance by the institution or other title IV, HEA 
program participant, the Department could initiate a process to 
determine whether a group of borrowers identified by the Secretary, has 
a borrower defense. Members of the group may be identified from 
individual applications or from any other source. The Department may 
consolidate applications that have common facts and claims and resolve 
the borrowers' claims as group claims. The Department established 
separate group process procedures with respect to loans made by 
institutions that have closed in Sec.  685.222(g) and for those that 
remain open in Sec.  685.222(h). The 1994 regulations did not specify a 
group process, though the Department did employ a group process using 
those regulations, including in granting a group claim for students who 
attended American Career Institute in early 2017.
    Proposed Regulations: The Department proposes two processes for 
pursuing group claims in new Sec.  685.402. Under the first process, in 
proposed Sec.  685.402(a) and (b), the Department reserves the right to 
determine if a group of borrowers it identifies have a common defense 
to repayment at the same institution, including multiple campuses of 
the same institution. Under such a Department-initiated group process, 
the Department would have the discretion to create a group based on any 
of the following borrower defense basis: actions by the Federal 
Government, State attorneys general or other State agencies/officials 
or law enforcement activities; class action lawsuits related to 
educational programs at one institution; or State or Federal judgments 
against institutions awarded to several borrowers for reasons related 
that could give rise to a defense to repayment claim; or a group of 
individual borrower defense claims.
    Under the second process, in proposed Sec.  685.402(c), the 
Department may initiate a group process upon request from a State 
requestor, on the condition that the State requestor submit an 
application and other required information to the Department to 
determine if it should form a group. Such an application ensures the 
Department has a consistent and clear process for addressing requests 
to form a group but does not confer the ability of the State requestor 
to otherwise represent the group during the Department's process of 
reviewing and adjudicating the claims. The Secretary would further be 
able to consolidate multiple group applications related to the same 
institution or institutions. The proposed provision would require the 
Department to respond to a materially complete State requestor's 
submission within 365 days. That response would indicate whether the 
Department decided to form the requested group and, if not, would 
provide the State requestor an opportunity to seek reconsideration of 
the group formation decision. In both group processes, the Department 
would include any individual claims submitted by a borrower under new 
proposed Sec.  685.403 if that borrower is deemed part of the group. 
That borrower's claim would then be treated as part of the group claim, 
including with respect to timelines for adjudication.
    If the Department agrees to form a group under this proposed 
section, the Department would designate a Department official to 
adjudicate the borrower defense claim.
    For group claims, the Department proposes placing those loans in 
forbearance if they are in repayment and stopping collection activity 
if they are in default. While every effort would be made to identify 
the group members during the initial group formation stage, in some 
cases that may not be possible. Any borrower who was not initially 
identified \18\ could opt into the group, however, and would be granted 
forbearance or stopped collection, as appropriate. The Department would 
retroactively apply forbearance or stopped collections to the loans of 
any such borrower, and no other consequences would apply to any 
borrower that the Department adds to a group after the group's initial 
formation.
---------------------------------------------------------------------------

    \18\ It may not be possible to initially identify the full 
number of borrowers in every potential group due to data 
limitations. For example, the Department does not have reliable data 
on program-level enrollment prior to the 2015-16 financial aid award 
year. That means the Department would not be able to accurately 
identify all members of a group claim based on enrollment in a 
specific program prior to that year. In situations where data 
quality prevents the Department from identifying all group members, 
for example, the Department would make every effort to identify all 
members of the group and would reserve the opportunity for 
individuals who the Department could not initially identify to be 
included in an opt-in basis.
---------------------------------------------------------------------------

    Reasons: Upon its review of all three borrower defense regulations 
the Department believes it is better to return to allowing group 
processes, as was permissible for more than two decades under the 1994 
regulation and explicitly allowed under the 2016 regulation. The 2019 
regulation excluded the ability to conduct a group process on the 
grounds that each borrower defense claim had to be subject to a highly 
individualized review. This included requiring a borrower to prove that 
a misrepresentation was made with the knowledge that the statement was 
false, deceptive, or misleading, or made with reckless disregard for 
the truth. It also required the borrower to make an individualized 
showing of harm. As already discussed under the Substantial 
Misrepresentation and Omission of Fact section, the Department is 
proposing to remove both of those requirements for a misrepresentation 
out of concerns that expecting a borrower to prove knowledge of a 
misrepresentation's falsity or disregard for the truth sets a bar that 
would be essentially impossible for any reasonable individual to meet 
because they are not going to have inside knowledge of the way an 
institution was operating. Similarly, the

[[Page 41899]]

Department is concerned that the harm documentation as required in the 
2019 regulation risks penalizing borrowers for success achieved 
regardless of their education or to prove a level of employment 
analysis best reserved for labor economists.
    Removing these two components of the definition of a 
misrepresentation allows the Department to then determine the effects 
of a misrepresentation across a group of borrowers as opposed to an 
individual approach. While the Department does not believe that every 
instance of an alleged type of behavior that may result in an approved 
claim should be reviewed for a group of borrowers, the flexibility to 
do so when appropriate would result in a process that is more efficient 
for borrowers, institutions, and the Department.
    As discussed in the 2016 final regulations, Congress authorized the 
Department to determine subordinate questions of procedure for borrower 
defense cases, including but not limited to the scope and nature of 
alleged acts or omissions that satisfy borrower defense requirements, 
how to process borrower claims, and whether claims should be heard 
successively or as a group. See 81 FR at 75965 (generally citing FCC v. 
Pottsville Broad. Co., 309 U.S. 134, 138 (1940)). The Department thus 
has general authority to adjudicate claims as a group.
    The Department believes that, where appropriate, the most efficient 
way to evaluate borrower defense claims is to jointly adjudicate the 
claims of similarly situated borrowers that are based on common 
evidence. This is consistent with how the Department has adjudicated 
and approved claims to date under the 1994 and 2016 regulations. 
Considering the applications of similarly situated borrowers as a group 
rather than reviewing all of them individually allows addressing the 
conduct that is often pervasive and affects many borrowers at once. At 
the same time, a group process may benefit the institution by allowing 
it to present its response to the same allegations by a group of 
borrowers once rather than having to respond to numerous individual 
claims.
    The Department is mindful of the privacy of borrowers' financial 
information. Under these proposed regulations, information about a 
borrower's individual financial circumstances would not be shared with 
other borrowers that are part of the group claim. Many negotiators 
supported the Department's creation of a new group process for 
considering borrower defenses to repayment claims. They asserted that 
groups of borrowers who were all subject to the same act or omission by 
an institution should have their defenses considered as a group, and 
that a group process would be more efficient and result in more 
equitable treatment of similarly situated borrowers.
    In the 2016 regulations, the Department reserved the sole right to 
form groups for purposes of borrower defense adjudication. Although the 
Department welcomed cooperation and information from non-Federal 
partners, including State attorneys general and legal assistance 
organizations, the Department did not extend the right to request group 
formation to these external entities. The Department's recent 
experience with borrower defense, however, particularly the influx of 
individual borrower defense applications, has convinced the Department 
that State partners can provide critical assistance in assessing 
borrower defense claims. For instance, every set of approved borrower 
defense to repayment findings to date except for those at Marinello 
Schools of Beauty and DeVry University was based at least in part on 
evidence provided by a State attorney general. The Department has also 
found that allowing for the formation of a group process without a 
formal process for applications has led to confusion where States are 
not told what would be useful information to submit and are not given a 
timeline for a response. The more structured process would address this 
confusion and make it easier for the Department to successfully 
administer the borrower defense program. For these reasons, the 
Department proposes to create a framework where ``State requestors'' 
may request the formation of a group borrower defense claim. This 
process would allow requestors to share their evidence with the 
Department. The requestors however would not represent the group in 
Department proceedings and the Department would retain the sole 
responsibility to adjudicate the claim.
    The Department initially considered allowing legal assistance 
organizations to also submit a group request and would have referred to 
this process as a ``third-party group request.'' However, on further 
consideration, the Department believes that it is best to limit this 
process to State requestors. The Department has consistently and 
repeatedly received information from States that played a key role in 
approving borrower defense applications. This evidence often comes from 
multi-year investigations that included the State entity obtaining 
internal institutional records through its investigatory tools. To 
date, the investigatory authorities granted to State attorneys general 
have yielded the type of high-quality evidence that the Department 
needs to fully evaluate a claim. Limiting this process to State 
requestors also ensures the Department would administer this process by 
working with a more limited group of entities. However, nothing in this 
approach precludes legal assistance organizations from working with 
State requestors and the Department encourages them to collaborate and 
share any additional evidence they may possess that could be of use for 
a group request.
    To further ensure the potential effectiveness of group claims, the 
Department would require that all State requestor group process 
applications include several items to be considered materially 
complete. These items include the necessary identifying information to 
define the group, such as the institution, campus or campuses involved, 
the time period, and the type of allegation. The Department also 
proposes requiring that any group application contain evidence beyond 
sworn borrower statements. While borrower statements are a crucial form 
of evidence, the Department has found that additional evidence brought 
by third parties such as training materials, internal communication, 
statements of former staff of the institution, or evidence of policies 
and procedures have been among the most effective ways of demonstrating 
that conduct was widespread.
    In accepting these group claim applications from State requestors, 
the Department changes the position it took in the 2019 regulation, in 
which it suggested that State attorneys general should work with their 
own State authorizing and regulatory entities when they are concerned 
about an institution rather than coming to the Department. While the 
Department agrees that State attorneys general should pursue matters 
within their own States as appropriate, failing to accept evidence that 
may assist the Department in its own efforts to administer the borrower 
defense program would be an unnecessary limiting of the triad of the 
Department, States, and accreditors. While each part of the triad has 
its own unique area of responsibilities, the whole system is more 
effective when it engages in collaboration and information sharing; 
and, it would be a disservice to students, institutions, and taxpayers 
for the Department to ignore evidence it could easily obtain that would 
help it make fair and accurate

[[Page 41900]]

determinations as to the validity of a borrower defense application.
    Finally, the Department proposes that any individual claim filed 
under new Sec.  685.403 that is also part of a group claim be 
adjudicated with the group claim, to allow the Department to more 
easily apply any additional evidence used to form the group to that 
individual borrower's claim. If the group claim is ultimately denied, 
individual claims that were included in a group would then be 
adjudicated as individual claims. Treating an individual claim as part 
of a group until the group process is concluded ensures that borrowers 
are not subject to multiple simultaneous processes and the Department 
believes this approach would give borrowers a greater likelihood of 
approval.

Evidentiary Standard

    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, except that a borrower may not recover from the Secretary 
an amount in excess of the amount that the borrower has repaid.
    Current Regulations: Under both the 2016 and 2019 borrower defense 
regulations, the Department uses a preponderance of the evidence 
evidentiary standard. The 1994 regulations do not include an 
evidentiary standard.
    Proposed Regulations: Under the proposed regulations, the 
Department would continue the practice in the 2019 and 2016 regulations 
of using a preponderance of the evidence standard in resolving 
individual and group borrower defense claims, as set forth in proposed 
Sec.  685.401(b).
    Reasons: The Department believes that it is appropriate to use the 
preponderance of the evidence standard to adjudicate all borrower 
defense claims pending or filed after July 1, 2023. The adoption of 
this standard is consistent with both the 2016 and 2019 regulations, as 
well as the Department's practice in other proceedings regarding 
borrower debt issues. See Sec.  34.14(b), (c) (administrative wage 
garnishment); Sec.  31.7(e) (Federal salary offset). During negotiated 
rulemaking sessions, the Department proposed to continue using the 
preponderance standard, and almost all negotiators expressed support 
for this position. One negotiator believed that the Department should 
use a stricter clear and convincing evidentiary standard. The 
Department declined to accept this suggestion as it would be a higher 
bar than the Department uses for any other similar process, including 
what is used in the 2016 and 2019 regulations.

Forms of Evidence

    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, except that the borrower may not recover from the 
Secretary an amount in excess of the amount that the borrower has 
repaid.
    Current Regulations: The 1994 regulations do not specify the types 
of evidence acceptable to the Secretary in order to adjudicate a claim. 
The 2016 and 2019 borrower defense regulations specified some types of 
evidence that could be considered but did not address whether borrower 
defense applications themselves (attestations from the affected 
borrower) would be considered evidence.
    Proposed Regulations: As to evidence the Department official might 
consider in adjudicating a group claim, Sec.  685.406(b)(1) 
specifically would permit consideration of: evidence submitted as part 
of the group application; evidence submitted in connection with 
individual claims that are part of the group; evidence within the 
Department's possession; evidence or other information from the 
institution; and other relevant information. The Department official 
would also consider the group and individual applications as evidence.
    Reasons: Under the proposed regulations, the Department would 
consider information on the application (and other information appended 
to the application package) as a form of evidence to foster a more 
uniform and fair adjudication process. Because each borrower defense 
claim will depend on the circumstances, the Department does not want to 
provide an explicit list that limits what could constitute evidence. 
Doing so might inadvertently exclude some type of evidence that is 
relevant in some applications. Instead, the proposed regulations make 
clear that the application itself, including the borrower's sworn 
statement, is a form of evidence. The proposed regulations also list 
other items that could be considered evidence, such as information 
about the institution in the possession of the Secretary that are 
material to the borrower defense claim, evidence or other information 
provided by the institution during the institutional response process, 
and any other relevant information that the Department official may 
obtain to adjudicate the claim. Using a broader definition of evidence 
would take any unique circumstances into account and would avoid 
concerns that prior rules were not sufficiently clear that a borrower's 
sworn statements are a form of evidence. Borrowers may often have 
first-hand knowledge of the alleged act or omission, and the 
information they furnish through a borrower defense application may 
provide supporting evidence in areas that the Department does not 
regularly review in a routine program review or audit.
    The Department proposes in this NPRM to allow institutions to 
provide other relevant information for the Department official's 
consideration during the adjudication of the borrower defense claim, 
because other information from the institution could help the 
Department official determine the veracity of the borrower defense 
claim and to ensure a fair process. The only exception to this process 
would be for claims approved based upon final Secretarial actions, 
which are other oversight and enforcement actions taken by the 
Department for conduct that also could support a borrower defense claim 
such as findings in a final program review determination that an 
institution engaged in misrepresentations, or other actions to fine, 
limit, suspend, or terminate an institution, and other actions that 
result in a loss of title IV eligibility. In those cases, the 
institution would have already had an opportunity to provide its 
evidence to the Department through the appropriate processes.

Institutional Response Process

    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, except that a borrower may not recover from the Secretary 
an amount in excess of the amount that the borrower has repaid.
    Current Regulations: The 1994 borrower defense regulations do not 
include a process for an institutional response to a borrower defense 
claim.
    Under the 2016 regulations, the Department designates a Department 
official to conduct a fact-finding process to adjudicate the borrower 
defense claim and considers any additional information, including any 
response or submission from the institution. The Department official 
notifies the institution of the borrower defense application and of any 
opportunity for the institution to respond. Upon request, the 
Department will provide the borrower any available information about 
the borrower defense claim

[[Page 41901]]

(including information that the Department has about the institution).
    The 2019 borrower defense regulations at Sec.  685.206(e)(10) 
contain a more detailed process. Upon receipt of a borrower defense to 
repayment application, the Department notifies the institution of the 
pending application and provides the institution with a copy of the 
borrower's request and any supporting documents, a copy of any evidence 
otherwise in the possession of the Secretary, and a release of 
information signed by the student permitting the institution to provide 
the Department with information from the student's education record 
relevant to the defense to repayment claim to the institution. The 
institution is given at least 60 days to respond, and the borrower is 
given at least 60 days to reply to the institution's response.
    Proposed Regulations: In proposed Sec.  685.405, the Department 
proposes to continue to provide for an institutional response process 
but to clarify the role of an institutional response in the 
adjudication of a borrower's claim, give institutions more time to 
respond, and ensure institutional responses are held to the same 
standards as what is expected of borrowers. Under the proposed 
regulations, the Department official would notify the institution of 
the borrower defense claim, and the institution would have 90 days to 
respond. With its response, the institution would be required to 
execute an affidavit confirming that the information contained in the 
response is true and correct under penalty of perjury, the same 
requirements that are placed on the borrower's application. If the 
institution fails to respond, the Department would presume that the 
institution does not contest the allegations in the borrower defense 
claim. If the institution has closed, the Department would use the best 
contact information it has for the former owners or operators to notify 
the institution of the claim and give it a chance to respond; however, 
the Department would not continue to notify former owners or operators 
after repeated instances of nonresponse. As discussed further below, 
the limitations period would not apply if the Department provided 
notification to the institution of a claim prior to the end of the 
limitations period (see Time Limit for Recovery from Institutions 
section).
    Reasons: The Department believes it is vital to give institutions 
an opportunity to respond to allegations in a borrower defense claim. 
An institutional response would give the Department a more complete 
record on which to evaluate the borrower's application. At the same, 
the Department is concerned that prior regulations that included an 
institutional response process did not provide sufficient clarity about 
how the response would factor into the Department's adjudication 
process. Nor did those prior regulations specify that responses would 
be held to the same standards as the submission made by the borrower.
    To timely adjudicate a claim, the Department proposes to give 
institutions 90 days to respond. The Department chose to give 
institutions 30 days beyond what was afforded in the 2019 regulation to 
align it with the maximum response time afforded to institutions in the 
program review process. This is a similar situation in which the 
Department seeks feedback from an institution in response to identified 
issues with its administration of the Federal financial aid programs. 
Before issuing a Final Program Review Determination (FPRD), the 
Department affords institutions an opportunity to respond to the 
Program Review Report (PRR) in writing within 30 to 90 days (see 6-2 of 
the 2017 Program Review Guide).\19\ The program review process bears a 
lot of similarities to the borrower defense process. In both 
situations, the Department reviews evidence related to an institution. 
In the case of borrower defense, this comes from applications by a 
borrower or State requestor or evidence in the Department's possession. 
In the case of program reviews, it is based upon the Department's 
review of the institution's student records, policies, and procedures. 
For program reviews, the Department then seeks a response from the 
institution to clarify or challenge the findings reached by the 
Department. The institutional response process here fulfills a similar 
role in giving the institution an opportunity to review the borrower 
defense claim and provide its own evidence to the contrary. 
Accordingly, giving institutions the same amount of time to respond to 
a borrower defense application that they receive at the maximum for a 
program review is reasonable. In addition to this initial institutional 
response, the Department may seek additional information from an 
institution later if it deems it necessary. The institution would also 
have a separate opportunity to respond to a claim during any recoupment 
proceeding.
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    \19\ https://fsapartners.ed.gov/sites/default/files/attachments/programrevguide/2017ProgramReviewGuide.pdf.
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Process Based on Prior Secretarial Actions

    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, except that a borrower may not recover from the Secretary 
an amount in excess of the amount that the borrower has repaid.
    Current Regulations: The 1994 and 2016 borrower defense regulations 
do not specifically provide for a process for adjudicating borrower 
defense claims based on prior Secretarial actions, which are other 
oversight and enforcement actions taken by the Department for conduct 
that also could support a borrower defense claim. These include FPRDs; 
actions to fine, limit, suspend, or terminate an institution; and other 
actions that result in a loss of title IV eligibility. The fact-finding 
adjudication process in Sec.  685.222(e)(3)(i) that is applicable in 
both sets of regulations includes consideration of Department records, 
however, which could include prior Secretarial actions, and so these 
changes make clearer the process for considering prior Secretarial 
actions rather than adding a new basis for a borrower defense claim.
    The 2019 borrower defense regulations, Sec.  685.206(e)(9)(ii), 
permit the Department to consider information in its possession, which 
could include prior Secretarial actions, if the institution and the 
borrower have an opportunity to review the evidence and submit 
additional evidence.
    Proposed Regulations: Proposed Sec.  685.404 would establish a 
process by which the Department could consider prior final Secretarial 
actions against an institution in the context of determining whether to 
form and approve a group borrower defense claim. Such final action 
could include a FPRD or final audit determination (FAD); an 
institution's failure to meet the administrative capability 
requirements that relate to the provision of educational services; an 
institution's loss of eligibility due to, for example, a high cohort 
default rate (CDR); a fine, limitation, suspension, or emergency action 
relating to an institution's misrepresentation or aggressive 
recruitment; or other final Departmental actions. Because any action 
the Department would consider in this context is already ``final,'' the 
institution would not have another opportunity to provide an additional 
response to the allegations, beyond the ample opportunities already 
afforded it

[[Page 41902]]

in the prior context, before the Department makes a decision on the 
group claim.
    Reasons: The Department conducts a significant amount of oversight 
and compliance work to ensure compliance by institutions with various 
accountability provisions in the HEA. Some of these actions may uncover 
or relate to acts or omissions that also would provide a basis 
approving borrower defense claims. These oversight and compliance 
processes include multiple opportunities for institutions to appeal or 
challenge the findings. In the context of a program review, for 
example, an institution may respond to program review findings before 
the Department issues a final determination. Similarly, institutions 
have options for appealing actions to fine them or otherwise limit, 
suspend, or terminate their participation in the Federal student aid 
programs.
    The Department proposes in Sec.  685.404 to codify a process that 
better integrates such oversight and compliance work with borrower 
defense adjudication, by allowing findings generated in the course of 
other Departmental action to directly lead to the approval of borrower 
defense claims. Doing so minimizes duplication of work for the agency 
as well as the need for the institution to respond multiple times to 
the same set of findings. For example, if an FPRD or FAD reveals that 
an institution misrepresented job placement rates to students in a 
particular program, the Department may use those FPRD or FAD findings 
to form a group and eventually grant borrower defense discharges to 
affected borrowers assuming the findings also give the Department 
grounds to presume reasonable reliance for the members of the group. In 
the case of findings based upon a FPRD or FAD, the institution will 
have already had opportunities to respond to the findings before they 
are final, as well as appeal any liabilities to the Office of Hearings 
and Appeals as well as the Secretary. Because of those existing 
response and appeal opportunities the institution would not be given an 
additional opportunity to respond during the adjudication process.
    Note that the group process determination is distinct from the 
process of collecting the amount of discharged loans from an 
institution, which is discussed below. If the Department initiated an 
action to collect the amount of the discharged loans from the 
institution, the institution would have the opportunity to explain why 
it should not be liable. As also noted below, an institution would only 
be subject to a recoupment action if the claim would have been approved 
under the borrower defense regulation in place at the time the loans 
that are being approved were disbursed. That means an institution would 
not be subject to a recoupment action for loans disbursed prior to July 
1, 2023, under this section unless those claims also would have been 
approved under the 1994, 2016, or 2019 regulations, as applicable.

Record Retention

    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. Moreover, Section 443 of GEPA (20 U.S.C. 1232f) provides 
that each recipient of Federal funds under a Department program is 
required to keep records that disclose ``the amount and disposition of 
those funds,'' and to ``maintain such records for three years after the 
completion of the activity for which the funds are used.
    Current Regulations: The three sets of borrower defense regulations 
are silent as to record retention periods, but since all the loan 
programs eligible for borrower defense claims are derived from title IV 
regulations, the record retention regulations for purposes of title IV 
apply. This means an institution must retain certain records related to 
the management of its financial aid program in accordance with the 
timeframes prescribed in Sec.  668.24, which is generally three years 
unless otherwise directed by the Secretary.\20\ The same provision also 
contemplates longer retention periods, as appropriate, for all records 
involved in any loan, claim, or expenditure questioned in connection 
with a title IV, HEA audit. Any such records must be retained until the 
later of the record retention period or until the questioned claim has 
been resolved.
---------------------------------------------------------------------------

    \20\ As provided in 20 U.S.C. 1232f, each recipient of Federal 
funds under a Department program is required to keep records that 
disclose ``the amount and disposition of those funds,'' and to 
``maintain such records for three years after the completion of the 
activity for which the funds are used.''
---------------------------------------------------------------------------

    Proposed Regulations: The Department does not propose new record 
retention periods.
    Reasons: The Department believes that existing record retention 
provisions are adequate. During negotiated rulemaking, some negotiators 
expressed concern about whether the three-year retention requirement in 
Sec.  668.24 was compatible with the potentially longer timeframes 
contemplated for borrowers to submit borrower defense claims. 
Negotiators were concerned that, if an institution no longer has access 
to student records, it might be unable to adequately defend itself from 
a borrower defense claim.
    Current regulations establish a minimum for records retention, not 
a maximum period. And, the Secretary has the discretion to order a 
longer time as appropriate. In circumstances involving open claims, 
moreover, the regulations require institutions to retain records until 
the claim is resolved.
    Moreover, the records affected by the three-year limitations period 
are unlikely to be the most relevant records to a defense to repayment 
claim. To date, approved defense to repayment claims have centered on 
evidence related to institutional promises made to borrowers about the 
ability to transfer credits or obtain a job, or how many former 
students were successfully placed. The records supporting these types 
of claims would likely be based on administrative training manuals, 
marketing materials, call logs between admissions representative and 
borrowers, internal secret shopping programs, and other centralized 
documentation rather than the financial aid records of individual 
borrowers which are covered by Sec.  668.24.
    Other elements of the proposed regulations would protect 
institutions from concerns about a lack of relevant records to respond 
to a borrower's claim. First, institutions would not be subject to any 
recoupment activity not related to a Federal or State judgment that 
occurs outside of the 6-year limitations period, which is discussed 
elsewhere in this NPRM. That means the institution would be aware of 
any claim for which it might have to repay the Department within 6 
years after the borrower's last attendance at the institution. Because 
institutions would receive formal notification of the claims against 
them through the institutional response process, they would be informed 
about the effects of the tolling of the limitations period. This formal 
notification would provide institutions with sufficient notice to 
retain pertinent records while protecting taxpayers and the 
Department's ability to recuperate funds from an institution.
    Second, as noted elsewhere in this document, the Department would 
not conduct a recoupment process against an institution for any claims 
approved under this regulation that would not have been approved by the 
relevant borrower defense regulation that was in place at the time the 
loans associated with the approved claim were disbursed. That further 
limits the likelihood that the lack of relevant records would result in 
financial consequences for the institution.

[[Page 41903]]

Borrower Status During Adjudication

    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. Furthermore, Section 432(a)(6) of the HEA authorizes the 
Secretary to enforce, pay, compromise, waive, or release any right, 
title, claim, lien, or demand, however acquired, including any equity 
or any right of redemption (settlement and compromise authority).
    Current Regulations: When a borrower files a borrower defense 
claim, the 1994 and 2016 regulations in Sec.  685.222(e), and the 2019 
borrower defense regulations in Sec.  685.206(e)(8), provide for 
forbearance on any of the borrower's nondefaulted loans that are 
associated with the borrower defense claim. The 1994 and 2016 
regulations, in addition, cease collection activity on defaulted loans 
that are associated with the borrower defense claim. The 2019 
regulations do not include a pause on collections activity for 
defaulted loans on which a borrower has submitted a defense to 
repayment application.
    Proposed Regulations: Proposed Sec. Sec.  685.402(d)(2) and 
685.403(c)(3) would provide that, during adjudication of a borrower 
defense claim, all of the borrower's title IV nondefaulted loans would 
be placed in forbearance and all title IV loans in default would be 
placed in stopped collection status, regardless of whether they are 
associated with the borrower defense claim.
    Reasons: The proposal to pause all a borrower's loans instead of 
just those associated with the claim would align the regulations with 
the practice the Department has used for borrowers who apply for other 
types of discharges or forgiveness that have been in place for years 
without material consequences. While the 2016 and 2019 regulations only 
require the Department to pause loans associated with the borrower 
defense claim, the Department has found that there are significant 
issues with data accuracy related to who owned different institutions 
at various points in time, as well as ensuring that enrollment and loan 
data align. Servicers would also have to manually pause relevant loans, 
adding another opportunity for error. The Department can ensure it only 
discharges appropriate loans when approving claims because doing so 
requires an individualized review of a borrower's loans, but it is 
concerned that doing such a review on the front end would take 
significant time that would be better spent on the review and 
adjudication of the borrower's claim. Pausing all loans thus reduces 
the likelihood of errors that would harm a borrower and allows the 
Department to devote its resources to rendering timely decisions on 
applications.
    The Department is concerned that a partial pause would create 
confusion for borrowers who do not understand that they still owe 
payments on some loans but not others. It is also possible that a 
borrower would file a defense to repayment claim that pertains to some 
but not all of the loans underlying in a Federal Direct Consolidation 
Loan, in which case there is no way to offer borrowers a partial pause 
pertaining only to the loans related to the borrower defense claim. 
Placing all of a borrower's loans in forbearance or stopped collection 
status would allow the Department to automate the adjudication process 
more easily.
    The Department recognizes that any interest-free pause for a 
borrower with an individual claim increases the cost to the Government 
in the form of foregone payments and interest accumulation. At the same 
time, the Department is concerned that borrowers with potentially valid 
claims may be dissuaded from applying for borrower defense because they 
are concerned about how much interest could accumulate during the 
months, if not years, it takes to review a claim. Implementing in the 
regulation a benefit it has already been providing to cease interest 
accrual after an individual claim has been pending for a set period 
balances the increased costs to the Government from pausing interest 
with the concerns about dissuading potentially strong claims. Allowing 
interest to accumulate for some time would provide an incentive for 
borrowers to file strong claims but not face overly punitive 
consequences if the Department needs multiple years to decide a claim. 
Providing such a benefit also minimizes the amount of harm a borrower 
may suffer from the time their claim is pending.
    Under current practice, the Department ceases interest accrual once 
a claim has been pending for one year. In Sec.  685.403 the Department 
proposes to reduce this time to 180 days from the initial grant of 
forbearance or stopped collections for an individual borrower if the 
Department does not make a determination on the borrower defense claim 
within that timeframe. This practice also helps institutions with 
approved claims because it means any ultimate liability would not also 
include months or years' worth of additional interest. The Department 
believes the 180-day period is appropriate because it is concerned that 
making all borrowers face a year of interest accumulation could be too 
strong a disincentive for a borrower to file an application for fear of 
the potential added interest costs. The Department also believes this 
time frame is appropriate because it anticipates it could need multiple 
years at least at first to review a pending claim and a borrower would 
thus face less potential harm from the Department's own administrative 
limitations. The Department chose 180 days because the Department does 
not believe it would be reasonable to charge interest on a borrower's 
loans for the entirety of the time needed to review a claim, which 
could be longer than a year depending on the complexities.
    To avoid accruing interest during adjudication, individual 
borrowers would have the option to decline forbearance and continue 
making payments, including making payment through an income-driven 
repayment plan or, for borrowers in default, declining the stopped 
collection on those defaulted loans and making voluntary payments to 
rehabilitate a defaulted loan. Borrowers who decline the forbearance or 
pause on collections would also continue normal interest accumulation 
policies. The Department believes it is critical to build in 
advantageous treatment of borrowers' Federal student loans during 
adjudication, while also giving borrowers the choice to decline ceased 
payment options, so that borrowers do not forego filing a borrower 
defense claim for fear of facing higher accrued interest after 
adjudication.
    Unlike individual borrowers, identifiable borrowers who are covered 
by group claims would have their loans placed in an interest-free 
forbearance or stopped collections activity, as applicable, upon group 
formation. The Department believes it is appropriate to also provide 
these borrowers an opt-out forbearance upon group formation because it 
does not want borrowers to have to continue to make payments in 
situations where a claim might be approved and a borrower would then 
receive a discharge. This also ensures that a borrower currently in 
repayment would not fall into delinquency or default while the 
Department is reviewing the group claim. The Department proposes 
different treatment for these borrowers in a group claim as to interest 
accumulation, because it would be pausing the loans of someone who had 
not applied for borrower defense and thus not been presented with a 
choice to pause their loan payments and interest. The Department is 
concerned that it would unfairly harm

[[Page 41904]]

borrowers if it paused a borrower in a group's loans without also 
ceasing interest accumulation. Ceasing interest accumulation for these 
borrowers immediately thus ensures the Department does not cause a 
borrower's loan balance to grow when they have not explicitly asked to 
be removed from active repayment. This treatment of group claims also 
reduces the potential ultimate liability for an institution if the 
group claim is approved. Were the Department to continue to allow 
interest to accrue, then the total cost of a full or partial discharge, 
and any resulting liability, would be larger.

Timelines To Adjudicate

    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: None of the current borrower defense 
regulations imposes a timeline for adjudicating a borrower defense 
claim.
    Proposed Regulations: Proposed Sec.  685.406 includes timelines for 
adjudicating borrower defense claims. Group claims formed in response 
to a State requestor would be adjudicated within two years of the point 
at which the Department notified the State requestor that it would be 
forming the requested group. Individual claims would be adjudicated 
within 3 years from the submission of a materially complete application 
package. These adjudication timelines, however, would not apply to a 
reconsideration request or an additional review under a State law 
standard. A borrower who submitted an individual claim that was then 
included in a group claim that was only partially approved or denied 
would have their 3-year timeline paused while the group claim is under 
consideration. The timeline for reviewing that individual borrower's 
application would not have any effect on the timeline for adjudicating 
the group claim. Under the proposed regulations, the Department would 
commit to providing interim updates one year after the commencement of 
the adjudication, with expected timelines. The Department's failure to 
render a decision by the end of the timeline would render the loans 
unenforceable. An institution would not face a recoupment action for 
the cost of a loan being deemed unenforceable under this requirement 
because it would not be viewed as having received an approved borrower 
defense claim.
    When an individual claim is subsequently included in a group 
process, the processing timeline for that individual claim would 
convert to the group timeline. The individual adjudication timeline and 
notification requirements would pause until the group claim is 
resolved.
    Reasons: The Department is concerned that in the past, borrowers 
have not received decisions on their borrower defense application in a 
timely fashion. While properly reviewing the evidence around a borrower 
defense application is not something that can happen immediately, the 
Department believes it is important to provide clearer expectations for 
borrowers about how long it may take to process their claim.
    Many negotiators strongly supported the Department's proposal to 
codify adjudication timelines in the regulations. The proposed 
regulation generally imposes a two-year timeline to adjudicate a 
borrower defense claim under a group process, and a 3-year timeframe 
for an individual claim. The Department chose two years for group 
processes because this is customarily the time it takes to conduct a 
program review. This two-year adjudication period would be separate 
from the decision whether to form the group, which could take up to one 
year, thus giving group claims the same overall 3-year period afforded 
to individual claims. Individual claims would be subject to a longer 
adjudication timeframe because they may include case-specific research 
on the merits.
    Timelines and the progress update after one year would give 
borrowers greater confidence that their defense to repayment claims are 
receiving prompt and serious review. The proposed timelines also make 
clear, however, that thorough review of a claim cannot be achieved in a 
few weeks. Finally, to hold itself accountable and give institutions 
some closure during the adjudication process, the Department would 
forego collection actions against an institution if the Department does 
not meet adjudication deadlines. The Department would forgo recoupment 
in this situation because the borrower would not have an approved 
borrower defense to repayment claim and thus there is no borrower 
defense liability to seek from the institution.
    The Department recognizes that failing to decide a claim within the 
set period would increase costs for the Government. The Department's 
goal is that this provision would never result in any added costs 
because it will continue to engage in regular and thorough reviews of 
borrower defense claims.
    The Department proposes to toll the adjudication timeline and 
notifications requirements for individual claims that are included in a 
group process so that a borrower is not subject to two separate review 
timelines. The Department believes that group processes would generally 
be better for borrowers as they are likely to be supported by 
additional evidence, including potential submissions from third 
parties. If a group claim is denied, then the borrower's claim would be 
considered separately and the pause on the adjudication timelines and 
notification requirements would end.

Process To Adjudicate Borrower Defense Claims

    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 except that in no event may a borrower recover from the 
Secretary more than the borrower repaid.
    Current Regulations: The 1994 regulations establish that borrowers 
may assert a defense to repayment during proceedings which are 
available to the borrower when the Department initiates certain 
collection actions on a Direct Loan. The 2016 regulations in Sec.  
685.222(e), (f), (g), and (h) establish the general procedures to 
adjudicate a borrower defense claim based on whether the claim was an 
individual claim, group claim in an open school, or a group claim in a 
closed school.
    The 2019 regulations at Sec.  685.206(e)(9) provide the 
consideration of the order of objections and of evidence in possession 
of the Secretary to adjudicate a borrower defense claim.
    Proposed Regulations: Under proposed Sec.  685.406(a) through (d), 
the Department would adjudicate the borrower defense claim in 
accordance with these subsections. If the claim is a group claim, under 
proposed Sec.  685.406(b), the Department official considers evidence 
related to the claim, materials in the group application, individual 
claims that were part of the group, evidence within the Department's 
possession, and evidence or other information from the institution as 
well as any other relevant information. In adjudicating the group, the 
rebuttable presumption would be that everyone in the group was 
affected. Under proposed Sec.  685.406(c), the Department official 
adjudicates an individual claim based on the information available to 
the official. The Department official considers materials in the 
individual application, evidence within the Department's possession,

[[Page 41905]]

evidence or other information from the institution as well as any other 
relevant information. Finally, under proposed Sec.  685.406(d), if the 
Department official requires additional information in order to 
adjudicate the claim, an institution must respond to a Department 
official's request within 90 days of the request and an individual must 
respond within a reasonable timeframe.
    Reasons: During negotiated rulemaking, the Committee discussed the 
general process to adjudicate borrower defense claims. The Department 
proposes to codify the general process to adjudicate the borrower 
defense claim based on whether it is a group claim or an individual 
claim to make it clear that the Department would adjudicate the 
borrower defense claim. In both a group or individual claim, in 
general, the Department official considers evidence within the 
Department's custody and other relevant information in order to 
adjudicate the claim. This is a streamlined approach compared to the 
2019 regulations, which included both an initial institutional response 
and an additional required round of borrower responses to whatever 
materials the institution sends the Department. See 34 CFR 
685.206(e)(10). Because adjudication of a borrower defense claim is an 
administrative proceeding, and not a judicial proceeding that generally 
affords parties rights to cross-examination, the Department proposes 
that upon receipt of an application and an institutional response (if 
any), the Department should immediately begin adjudicating the borrower 
defense claim.
    Should the Department official require information from the 
institution, the Department proposes to give the institution 90 days to 
respond. The Department believes this is an adequate timeframe for 
response while promoting expeditious adjudication of the borrower 
defense claim. After a program review is conducted and, for example, 
the Department generally affords institutions 30 days to respond to a 
Department request for information prior to the Department's issuance 
of a Program Review Report.

Decision Letters

    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: The 1994 and 2016 regulations in Sec.  685.222 
establish that, after adjudication, the Department issues a written 
decision approving or denying the claim. The Department official's 
written decision is final as to both the claim and any relief granted.
    The 2019 regulations at Sec.  685.206(e)(11) require the Secretary 
to issue a written decision informing both the borrower and the 
institution of the decision and its basis, as well as the relief 
provided to the borrower, if any. Under Sec.  685.206(e)(13), the 
Department official's decision is final.
    Proposed Regulations: Under proposed Sec.  685.406(e), the 
Department would issue a written decision on the outcome of an 
adjudication. If the Department official approves some or all of the 
borrower defense claim, the written decision would reflect the 
discharge amount and that the borrower's loans associated with the 
claim would be placed in, or continue in, an interest-free forbearance 
until the Secretary discharges some portion or all of the loans. If the 
Department official denies the borrower defense claim, the written 
decision would include the reasons for the denial, the evidence relied 
upon, the loans that are due and payable to the Department or that 
would return to the loan's prior status, and the timeframe by which the 
Department's collection action would resume (90 days). The written 
decision also would describe the process for the borrower to request 
reconsideration of the decision. The written decision would be made 
available to an individual or member of a group and, to the extent 
practicable, the institution.
    Reasons: During negotiated rulemaking, some negotiators recommended 
that the regulations require more specificity in communication to 
borrowers, citing court cases that expressed concern with the 
information provided in the Department's communications in the past. 
The Department agrees that decision letters should provide sufficient 
information to borrowers so they can understand the decision and make 
an informed decision about whether to pursue reconsideration of their 
claims. As set forth above, proposed Sec.  685.406(e) outlines the 
information that would be provided in the Department's written decision 
letters, including the reasons for the decision, its effective date, 
and information about next steps, including reconsideration where 
applicable. The Department believes giving borrowers this information 
would ensure that borrowers have the details to decide their next 
steps, including a request for reconsideration, while balancing the 
Department's need to keep borrowers informed and resolve claims in a 
timely manner. The Department also believes its proposed 90-day period 
before resuming collections provides borrowers adequate time to return 
to repayment or to request reconsideration as discussed in the 
Reconsideration section.

Borrower Cooperation & Transfer of Recovery Rights

    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 and that in no event may a borrower recover from the 
Secretary an amount in excess of the amount the borrower repaid on 
their Direct Loan.
    Current Regulations: The 1994 regulations do not address borrower 
cooperation and the transfer of a borrower's recovery rights to the 
Secretary. The 2016 regulations in section 685.222(j) establish that 
the borrower must reasonably cooperate with the Secretary in a borrower 
defense proceeding. Section 685.222(k) provide that borrowers transfer 
to the Secretary their rights to recover from a third-party.
    The 2019 regulations at section 685.206(e)(14) establish that the 
Secretary may revoke any relief granted to a borrower who refuses to 
cooperate with the Secretary, and those regulations provide a non-
exhaustive list of what cooperation could entail. Section 
685.206(e)(15) provides that borrowers transfer to the Secretary the 
borrower's rights to recover from a third-party.
    Proposed Regulations: Under proposed Sec.  685.410, a borrower 
would be required to reasonably cooperate with the Secretary in any 
proceeding under subpart H. Under proposed Sec.  685.411, the borrower 
would be 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 contract for educational services for which the loan was 
received, against the school, its principals, its affiliates, and their 
successors, its sureties, and any private fund.
    Reasons: When a borrower files a borrower defense claim, the 
Department would require the borrower's cooperation to determine the 
facts of the claim and provide the institution with due process, as 
appropriate. Absent this cooperation, the Department could be unable to 
successfully resolve the borrower's request for relief. Rather than 
specifying what would constitute cooperation, as was done in the 2019

[[Page 41906]]

regulations, the Department believes a general statement requiring 
reasonable borrower cooperation would be wholly sufficient. As 
discussed in the preamble to the 2019 regulations, the Department 
defined cooperation to include (but was not limited to) providing 
testimony regarding any representation made by the borrower to support 
a borrower defense claim and producing, within timeframes established 
by the Secretary, any documentation available to the borrower. The 
Department argued that the regulatory text would help to ensure that 
the Department receives the borrower's cooperation in any proceedings 
against the institution. See 83 FR 37263, July 31, 2018. The Department 
now disagrees that defining cooperation would assist the Secretary in 
recovering from the institution. Just as borrower defense claims are 
adjudicated on their own merits, the Department can also assess whether 
the borrower cooperates based on the circumstances of the case. 
Accordingly, the Department need not be prescriptive on what 
constitutes cooperation.
    The HEA clearly articulates that in no event may a borrower recover 
from the Secretary an amount in excess that the borrower has repaid. 
For the Department to ensure compliance with this statutory provision, 
it is necessary that these proposed regulations contain a provision to 
prevent double recovery from the Federal Government. Although the 2016 
and 2019 regulations allow the Secretary to reinstate a borrower's 
obligation to repay for amounts that the borrower received relief from 
a claim made to a third-party (e.g.: a borrower successfully receives 
funds from a State tuition recovery fund), the Department is convinced 
that this provision is no longer necessary. In the borrower defense 
application, the Department asks the borrower to attest to any attempts 
made to recover from a third-party, and asking this question upfront 
adequately protects the Federal Government from a borrower seeking 
double recovery. In the Department's experience, after the borrower 
defense claim is approved and the case is considered closed, it is 
nearly impossible to determine if a borrower made a claim to a third-
party. Therefore, the Department believes its proposal serves a twofold 
purpose: it requires borrower cooperation and preserves its right to 
recover from third parties to mitigate loss to the Federal taxpayer 
investment.

Borrower Defense to Repayment Post-Adjudication--Reconsideration 
Process

    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 except that in no event may a borrower recover from the 
Secretary more than the borrower repaid.
    Current Regulations: Some of the Department's borrower defense 
regulations provide for a reconsideration process. The 1994 and 2016 
regulations in Sec.  685.222(e)(4) and (5) make reconsideration 
available for borrower defense claims denied wholly or in part, based 
on new evidence, and provide that the Secretary can reopen a borrower 
defense application at any time to consider evidence that was not 
considered in making the previous decision. The 2019 regulations in 
Sec.  685.206(e)(13) provide that the Department's written decision is 
the final decision of the Department and is not subject to appeal 
within the Department. There is, thus, no reconsideration process under 
the 2019 regulation.
    Proposed Regulations: Proposed Sec.  685.407 sets forth the 
circumstances under which a borrower may seek reconsideration of a 
Department official's decision on their borrower defense claim. The 
Department official's written notice would be final, but if the 
borrower's claim is denied in full or in part, that individual borrower 
or, for a group claim, a State requestor, would be able to request 
reconsideration. Permissible bases for a reconsideration request would 
be limited to administrative or technical errors; the availability of 
new evidence; or a request by the borrower (for an individual claim) or 
a State requestor (for a group claim) for reconsideration under a State 
law standard.
    While individuals would be able to request reconsideration of their 
claims, for group claims the Department proposes to limit requests for 
reconsideration to State requestors, which would include a State, a 
State attorney general, or a State regulatory agency. Individual 
members of the group would not be able to request reconsideration on 
behalf of the entire group or for any individual borrower.
    An individual borrower who is part of a group that is denied in 
full or in part would not be able to seek reconsideration until they 
received a final decision from the Department official on a separate 
individual application. If the individual had not already done so 
before group formation, the individual could submit an individual 
borrower defense application in accordance with Sec.  685.403 after a 
final decision from the Department official that resulted in a full or 
partial group denial.
    Group reconsideration requests could be made for the same reasons 
as an individual request, but a request for reconsideration under State 
law would require additional documentation, including an analysis of 
the applicable State law standard and why it would lead to an approved 
borrower defense claim. Any reconsideration request, whether from an 
individual or on behalf of a group, must be made no later than 90 days 
from the date of the Department official's written decision.
    To adjudicate a reconsideration request, the Department would 
designate a different Department official than the official who 
conducted the initial adjudication. When the reconsideration request is 
received, the borrower or group members would be placed in forbearance 
or stopped collections. The Department would have the option to request 
an additional response from the institution under the same procedures 
as described in new Sec.  685.405. There would be no set timeline for 
the Department to issue a decision on a reconsideration request.
    Finally, in new Sec.  685.407(f)(1) the Secretary would be able to 
reopen at any time a borrower defense application that was partially or 
fully denied.
    Reasons: The Department expects that borrowers or State requestors 
would include their best available evidence at the time that they file 
their original claims. Additional evidence may become available at a 
later time, however, especially from ongoing investigations by State 
attorneys general and other entities. The Department is also cognizant 
that if it made an error in its review of the claim, the borrower 
should have a method for asking that error to be addressed by the 
agency instead of needing to go to court to challenge the denial.
    Allowing a reconsideration process is a change from what the 
Department concluded in the 2019 regulation, in which it said all 
decisions would be final. It took that position partly out of concerns 
about resources to adjudicate claims and concerns about borrowers 
seeking repeated opportunities to have a claim be approved.
    Upon further consideration and further experience adjudicating 
claims, the Department disagrees with the conclusions reached in the 
2019 regulation. We believe the specific instances in which a borrower 
could seek reconsideration would limit the ability to ask for the same 
allegations to be reviewed repeatedly. Instead, they would be receiving 
a second look at their application when additional

[[Page 41907]]

evidence suggested it, when they could demonstrate an error that the 
Department should correct, or when they wish to have a review under a 
different standard than the one originally used by the Department.
    The Department acknowledges that allowing for a reconsideration 
process would be more work for the staff that reviews borrower defense 
applications, but it believes that the benefits from permitting this 
approach on net outweigh its exclusion. Without a reconsideration 
process the Department would risk having to address errors made in 
decisions through court proceedings rather than a second review. 
Litigation is more resource-consuming for the Department than 
reconsideration, and reconsideration is also more efficient and less 
expensive for borrowers. The Department also believes the ability to 
move all claims under a single upfront Federal standard would provide 
very significant operational simplification and consistency in 
decision-making that would on net make the program easier to 
administer.
    Allowing for a reconsideration process is consistent with other 
positions taken by the Department in the past. As explained in the 2016 
final regulations, the Department believes it is important to allow a 
borrower to submit new evidence that he or she may have only recently 
acquired. The Department acknowledged that there should also be 
finality in the borrower defense process as well. See 81 FR at 75963. 
Providing a pathway for borrowers to have their borrower defense claim 
reconsidered, under the limited circumstances set forth in Sec.  
685.407, brings the borrower closer to finality in their borrower 
defense claim and such reconsideration process within the Department's 
borrower defense framework mitigates the need for complex litigation 
through the court system. In addition, as part of establishing a single 
consistent set of rules that apply regardless of when a borrower's 
loans were disbursed, the Department is proposing to allow all 
borrowers to request reconsideration based on State law to reflect the 
standard in the 1994 regulations. As noted earlier in this NPRM, one of 
the Department's goals is to provide a single upfront Federal standard 
for reviewing all claims pending and received after the effective date 
of this regulation's final rule. To accomplish that, the Department 
must ensure that no borrower is presented with a narrower standard 
under the proposed rule than what they would have had under the prior 
regulation that would have previously applied to their claim. Including 
the State standard thus ensures that no one whose claim would have been 
originally subject to the 1994 regulation is worse off. The Department 
is proposing to make this option available to all borrowers, including 
not just those who would have been covered by the 1994 regulation. The 
Department is doing so because of concerns that varying reconsideration 
treatment by the disbursement date of the loan results in a process 
that is overly confusing for the borrower and is more administratively 
complex to administer. While providing the State law option to more 
borrowers adds some administrative burden, the Department believes that 
burden is more than offset by the efficiencies gained from the upfront 
review process.
    The Department believes that limiting the reconsideration process 
to new evidence, administrative errors, or State law review would 
result in only looking at an application for the second time when there 
might be a meaningful difference that could change the outcome of the 
first review. While it takes additional Department resources to 
implement this reconsideration process, the Department believes that is 
more efficient than needing to review an entirely new application or 
engaging with the borrower in the court system.
    The Department believes that providing an opportunity for 
individual claimants or State requestors to request reconsideration 
would expedite final adjudication of a borrower defense claim. Non-
Federal negotiators initially proposed that State law standards be 
included in the initial adjudication, as one element of the Federal 
standard. The Department believes such an upfront analysis would be 
unduly burdensome and delay the ability to provide relief to borrowers. 
Adjudication under a State law standard could yield the same outcome as 
under the Federal standard but would require additional time for the 
Department to analyze the State law in question. Reserving State law 
reviews for reconsideration after a full or partial denial ensures that 
they are conducted only when there is a possibility that the State law 
standard could yield a better result for the borrower than the Federal 
standard.
    The Department considered and rejected the proposal to allow an 
individual borrower that is part of a group claim to request 
reconsideration of a claim under a State law standard on behalf of the 
group. The Department believes State partners, such as State attorneys 
general, would be the most knowledgeable about their respective State 
laws. State attorneys general are charged with enforcing the laws of 
their states and in some states regulating pursuant to those laws. In 
these roles they are the foremost parties to interpret and enforce 
State statute and regulation. They would also be the ones who furnished 
the evidence and request that led to the initial approval of the group. 
These entities also are recognized to have the authority to represent 
the residents of their States in certain circumstances. Moreover, a 
State requestor's analysis of their own State law could be considered 
persuasive authority on that State's standard. The Department does not 
believe the same conditions apply to an individual. And while an 
individual could produce high-quality analyses of State laws, their 
analyses would not be entitled to the same persuasive status. 
Accordingly, an individual borrower who wants to seek reconsideration 
would have to do so on their own behalf when they have a decision 
rendered on their individual claim. The Department believes an 
individual application is the proper route for these borrowers because 
it is possible that an individual who is part of a group may have 
stronger evidence related just to themselves than what the Department 
has for the group of borrowers. This approach allows the Department to 
consider that individual evidence. The Department also believes that 
the work required of the borrower to provide their own individualized 
allegations in this situation will would yield more useful information 
to review.
    The Department determined that giving borrowers 90 days to seek 
reconsideration--and keeping loan repayment and collection activity 
paused during that time--provides a sufficient balance for borrowers to 
make a thorough decision about whether to seek reconsideration without 
allowing their loans to be paused indefinitely. Pausing Department loan 
collection activity to allow time to seek reconsideration is similar to 
the Department's process in debt collection proceedings, such as 
administrative wage garnishment under Sec.  488A of the HEA. There, 
collection activity does not commence if the borrower has requested a 
pre-offset hearing to review the existence or amount of the debt 
(analogous to a reconsideration request here). See 34 CFR 32.10. In 
this regulatory package the Department is also trying to ensure a 
consistent time period for borrowers to act if their initial 
applications for discharge on various programs or qualifying payment 
counts for Public Service Loan Forgiveness are denied, and the 
Department believes a consistent 90-day standard would result

[[Page 41908]]

in consistent procedures for the Department.
    Finally, in new Sec.  685.407(f)(1) the Department proposes 
limiting when the Secretary may reopen a borrower defense application. 
We propose that the Secretary only be allowed to reopen a borrower 
defense application that was partially or fully denied. Although this 
should be a rarely used provision, limiting the Secretary's ability to 
reopen cases only when there was a full or partial denial lessens the 
disadvantage to the borrower; for borrower defense claims that receive 
full approval, these borrowers can be assured that there would be 
finality to their cases. Thus, a borrower only stands to benefit from 
the Secretary reopening a borrower defense application that was fully 
or partially denied.

Amounts To Be Discharged/Determination of Discharge

    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 except that in no event may a borrower recover from the 
Secretary an amount in excess of the amount the borrower has repaid.
    Current Regulations: Section 685.212 establishes the general 
conditions under which the Department discharges a borrower's 
obligation to repay a loan, or a portion of a loan, under various 
discharge provisions of the HEA, including borrower defense to 
repayment.
    The 1994 and 2016 regulations in Sec.  685.222(i) provide that the 
borrower may be granted full, partial, or no discharge. In general, to 
determine the amount of relief, the Department issued examples in 
Appendix A to part 685, subpart B, but also, when calculating discharge 
for a group, can consider information derived from a sample of 
borrowers from the group. Any discharge cannot exceed the amount of the 
loan and is reduced by the amount of any refund, reimbursement, 
indemnification, restitution, compensatory damages, settlement, debt 
forgiveness, discharge, cancellation, compromise, or any other 
financial benefit received by, or on behalf of, the borrower that was 
related to the borrower defense. Nonpecuniary damages, such as 
inconvenience, aggravation, emotional distress, or punitive damages, 
are not part of the Department's calculation of harm nor the relief 
provided.
    The 2019 regulations in Sec.  685.206(e)(12) state that the 
Department determines the amount of relief, which is limited to the 
monetary loss the borrower incurred as a consequence of a 
misrepresentation. In determining the amount to be discharged, the 
Department considers the borrower's application, which includes 
information about any payments received by the borrower, such as funds 
from State judgments that the borrower is expected to put toward their 
loans, and the financial harm alleged by the borrower.
    Proposed Regulations: The Department proposes applying a rebuttable 
presumption that the borrower or group of borrowers with an approved 
claim should receive a full discharge of the loans they received for 
attendance at the institution that is the subject of the claim, unless 
a preponderance of the evidence demonstrates that the discharge should 
be a lower amount and one of three specific criteria is met.
    The three criteria proposed for use by Department staff when 
recommending other than full discharge are:
    1. Where the harm to the borrower resulted from an action that is 
easily quantifiable, such as failing to provide promised supplies or 
materials that have a fair market value of $200 or less.
    2. When the basis for approval of the borrower defense claim is 
based entirely on actions that did not involve promises by the 
institution about educational outcomes or the quality of educational 
services delivered.
    3. Where an institution provides false or inaccurate data unrelated 
to educational outcomes (for example, relating to the test scores or 
grade point averages of incoming students) to an organization that 
produces widely recognized rankings of institutions or programs, 
resulting in a ranking higher than what that institution or its 
program's true position should be.
    The proposed regulations provide examples of the limited 
circumstances under which that presumption would be rebutted. These 
circumstances would include situations where the misconduct that 
resulted in an approved borrower defense claim relates to an easily 
quantifiable sum, such as the cost of a free supplies kit that was 
promised and not delivered; substantial misrepresentations, substantial 
omissions, breaches of contract, or aggressive recruitment that do not 
relate to the education delivered by the institution or the outcomes of 
such education; or substantial misrepresentations related to widely 
recognized rankings of institutions or programs as a result of the 
submission of false data not relating to the outcomes of the education.
    Under proposed Sec.  685.408, for an approved claim not receiving a 
full discharge, the Department official would recommend to the 
Secretary a discharge amount for a borrower or group of borrowers. All 
borrowers within an approved group claim would receive the same 
recommended discharge, either in amount or as a percentage of their 
loans. In cases where the presumption of full relief is rebutted, the 
Department official would recommend the alternative amount, which may 
be an amount equal to the full harm suffered by borrowers if such sum 
is easily quantifiable, or 50 percent of the outstanding loan balance 
of the loans associated with the borrower defense claim if the amount 
of harm is not easily quantifiable. Although the Department official 
determines the amount of the discharge, the Secretary renders the final 
decision on the discharge based on the Department official's 
recommendation and the records available.
    Reasons: The Department proposes that an approved borrower defense 
to repayment claim should result in relief equal to the lesser of the 
full amount of harm to the borrower or the full amount of the Federal 
student loans covered by their claim, including amounts previously 
paid. We recognize that there may be circumstances in which the 
financial harm experienced by a borrower is less than the amount of a 
full loan discharge. The Department believes the circumstances in which 
a borrower has an approved claim but receives a partial discharge would 
be limited.
    In moving to the presumption of full discharge except for specific 
circumstances, the Department is changing the position it took with 
respect to discharge amounts in the 2019 regulation. As discussed in 
the section concerning the standards for misrepresentation, the 
Department is concerned that the 2019 rule's requirement for a borrower 
to demonstrate individual harm and the standards associated with that 
proposal could have the unintended consequence of providing lesser 
amounts of relief for a borrower who succeeded despite their program. 
For instance, connecting relief amounts to periods of unemployment that 
appear to not be attributable to local or national labor market 
conditions, or considering the borrower's effort to find a job could 
result in no relief for a borrower who did manage to find employment 
despite no assistance from the institution, even as otherwise similar 
borrowers receive larger assistance. The Department is also concerned 
that the criteria for

[[Page 41909]]

considering harm in the 2019 regulation are overly subjective or 
confusing. The Department is not equipped to pass judgment on the 
quality of a borrower's search for employment, and the 2019 rule is 
insufficiently clear as to how the Department should factor underlying 
labor market conditions into the way it then calculates harm. The 
Department is concerned that such ambiguity could lead to inconsistent 
determinations of discharge amounts.
    In removing the requirement for individualized harm determinations, 
the Department is also changing its position to allow it to pursue 
group borrower defense claims, as was explicitly authorized in the 2016 
regulation and permissible under the 1994 one. For group claims, the 
Department believes that awarding the same percentage or dollar amount 
of relief to all similarly situated borrowers would be appropriate. 
Given that the concept underlying the group claim is that borrowers 
were subject to the same substantial misrepresentations, substantial 
omissions, breaches of contract, aggressive recruitment, or judgments 
or Department actions the Department is concerned that trying to then 
establish separate relief determinations for those borrowers would risk 
inconsistent determinations that would treat similarly situated 
borrowers differently.
    When it comes to determining the amount of a discharge, the 
Department is cognizant that it can only make judgments about the value 
of an institution or program, not its quality, and that the amount of 
any relief cannot exceed the full amount of the loan balance and any 
amounts previously paid. The Department is also concerned that when 
past regulations were less specific about how to determine the proper 
amount of a discharge the Department ended up using formulas that 
resulted in borrowers receiving lesser amounts of a discharge than they 
should have, including mathematical impossibilities such as requiring 
average earnings for a group of borrowers to be below $0.
    The Department believes that the clearer framework proposed in 
these regulations would result in consistent decision-making and a 
clearer process for the Department to decide not only when a partial 
discharge may be appropriate, but also how to calculate such a 
discharge.
    This framework would replace the methods for determining the 
discharge amount that existed under the prior three borrower defense 
regulations. However, the Department believes that the rebuttable 
presumption of full discharge and the clearer structure around partial 
discharges means that no borrower whose claim was pending or filed 
after the effective date of the regulations would be worse off than 
they would have been under the regulation that would previously have 
covered their claim based on their loans' disbursement date. Relatedly, 
the Department would ensure that institutions are not subject to a 
recoupment effort from a claim that would not have been approved under 
the regulation that would otherwise have been applied to the claim 
based upon the loan's disbursement date. This consideration would also 
apply to the discharge amounts in that if the claim would have been 
approved under a prior regulation but for a lower amount than is 
approved under this regulation then the institution would not be 
subject to the higher recoupment amount.
    The move to a rebuttable presumption of a full discharge is a 
change from the 2019 regulation, but not a change in practice from the 
relief provided on borrower defense approvals to date. As of May 2022, 
all approved borrower defense discharges have been for full discharges. 
There were some approved claims that were initially subjected to two 
different partial relief formulas issued by the previous 
administration, but both formulas were challenged in court. The 
previous Administration withdrew the first formula, and this 
Administration withdrew the second out of concern that it was not 
accurately using data and was resulting in insufficient relief for 
borrowers who were harmed.
    The Department believes a rebuttable presumption of a full 
discharge would address the past problems around properly determining 
the amount of discharges for approved claims. It addresses the concerns 
the Department has about inconsistent decision-making for similarly 
situated borrowers. It also acknowledges that the act of calculating a 
specific level of harm for a borrower is a challenging task that prior 
efforts by the Department to address have resulted in legal challenges. 
The proposed list of instances in which a partial discharge may be 
appropriate also captures what the Department anticipates the likeliest 
instances in which a partial discharge may provide the most appropriate 
amount of relief for a borrower even without this framework.
    The proposed regulations include principles and examples of how to 
calculate a partial discharge amount. The Department anticipates that 
the examples would guide initial decisions as the Department reviews 
discharge amounts for approved claims.
    In proposing a framework that addresses the challenges with 
determining harm and strives for consistency in decision-making, the 
Department identified three specific circumstances that it believes 
should merit consideration for a partial discharge. The Department 
identified these three circumstances based upon allegations it has seen 
in claims, as well as public reports of instances where colleges have 
engaged in high-profile misrepresentations. The first is where the harm 
to the borrower is easily quantifiable, such as failing to provide 
promised supplies or materials that have a fair market value of a clear 
dollar amount. The Department believes this situation would make sense 
for a partial discharge because the harm is easily calculable and thus 
the concerns about inconsistency of decision-making and the use of 
flawed formulas would not apply.
    The second circumstance is when approval of the borrower defense 
claim is based entirely on actions that did not involve promises by the 
institution about educational outcomes or the quality of educational 
services delivered. This would apply, for example, when an institution 
misrepresents the profile of its incoming class, but the classroom 
instruction and the outcomes of that instruction match what was 
otherwise anticipated and marketed. The Department proposes to 
highlight this type of action as a candidate for partial discharge 
because, while it is reasonable to expect a student to enroll based 
upon the false statements, those statements did not affect the value of 
the education that was delivered or the outcomes that students 
experienced.
    The second partial discharge circumstance would not apply to 
statements made solely in the institution's marketing materials if they 
pertain to program outcomes. That is, materially false statements about 
the institution's rates of completion, passage rate on examinations 
necessary for licensure, or job placement would not rebut the 
presumption of full discharge because it is reasonable to believe a 
borrower or borrowers would have relied on those false statements and 
would not have achieved the inflated outcomes presented. For the same 
reason, misrepresentations in marketing materials about the educational 
services delivered also would not rebut the presumption of full 
discharge. For instance, evidence that an institution promised its 
classes in a nursing program would all be taught by

[[Page 41910]]

registered nurses when in fact none of the instructors were would lead 
to an approved borrower defense claim with the presumption of full 
discharge because students were enticed to enroll and take out a loan 
and the institution failed to provide the advertised instruction.
    The third circumstance in which the presumption of a full discharge 
could be rebutted is where an institution provides false or inaccurate 
data unrelated to educational outcomes, such as inflated test scores or 
grade point averages of incoming students, to an organization that 
produces widely recognized rankings of institutions or programs, 
resulting in a ranking higher than what that institution or its 
program's true position should be. The Department is concerned about 
repeated instances in which institutions have submitted false data to 
major national rankings organizations, resulting in schools or programs 
given unfairly high rankings for several years. But the Department 
believes that the harm caused to the borrower by relying upon such a 
marginally inflated ranking does not rise to the level of a full 
discharge. Many of the institutions or programs that have engaged in 
such behavior would have been highly ranked otherwise, still reject far 
more students than they accept, and have not been subject to 
allegations of low program quality or other misrepresentations that 
would support a claim for full discharge. Under these circumstances, 
partial relief could be appropriate.
    Past borrower defense regulations have cited additional examples of 
partial relief that the Department does not include here because it 
does not believe they would result in an approved borrower defense 
claim. One example was where an institution claimed to have an award-
winning professor, but that individual was on sabbatical while the 
borrower enrolled, or the individual had left the school and the 
marketing materials remained outdated. The Department does not 
contemplate any discharge for such a situation in the proposed 
regulations, because we do not believe it is reasonable to assume that 
the borrower would be guaranteed a space in the professor's class or 
relied on the particular misrepresentation, the presence of a specific 
professor, to their detriment when deciding to enroll and take out a 
student loan.
    Instances where the Department official rebuts the presumption of a 
full discharge also would require a determination of the partial 
discharge amount a borrower or group of borrowers should receive. This 
amount may be expressed in dollar or percentage terms, depending on the 
harm experienced by the borrower or group of borrowers. For example, a 
breach of contract with an easy-to-calculate effect on the borrower 
might be expressed as a set dollar amount for all borrowers, while a 
more complex instance could be expressed as a share of the loan amount. 
The Department also recognizes that there could be situations in which 
the level of harm is not clear. This could include instances where the 
Department official may need to make judgments about the value of 
educational services delivered that are too difficult to define and 
quantify. In situations where the Department is not able to calculate 
the value of the education, the Department proposes borrowers receive a 
discharge equal to 50 percent of the loan associated with the borrower 
defense claim. The Department chose this threshold because it evenly 
divides the uncertainty of quantifying the harm between the taxpayer 
and the borrower after the Department has determined that the 
presumption of a full discharge has been rebutted. A borrower would 
then have an option to ask for reconsideration of this amount and 
furnish different information that might support a higher discharge 
amount. The Department seeks feedback on its proposal for borrowers to 
receive a discharge equal to 50 percent of the loan associated with the 
borrower defense claim in situations where the Department is unable to 
calculate the value of the education.
    To clarify how partial and full discharges would be considered 
under the proposed regulations, the Department offers in this preamble 
the following examples:
    1. A school represents in its marketing materials or in an 
enrollment contract that students will receive a supplies kit as part 
of their enrollment that has a value of $150. A student chooses that 
program instead of a comparably priced program that does not provide 
the supplies kit. The institution ends up charging the borrower for the 
supply kit instead of providing it for free. The Department does not 
find any other basis for a discharge.
    Adjudication result: The borrower should have an approved borrower 
defense claim with a discharge amount of $150. The institution breached 
its contract with the student. However, the harm from the breach of 
contract is clearly calculable because it stemmed from the cost of a 
specific item that did not carry significant value.
    2. An individual wishes to enroll in a highly selective graduate 
program. The school gives inflated data to a school ranking 
organization regarding the 25th and 75th percentile scores on the GRE 
of recent entrants and includes those inflated data in its own 
marketing materials. These inflated data raise the place of the program 
in the ranking organization's published rankings. Degrees from the 
program continue to serve as an effective, well-regarded credential.
    Adjudication outcome: The borrower should receive no discharge or a 
minimal discharge. The institution made a false statement that a 
borrower reasonably could have relied upon to choose that program 
instead of another one that is similarly ranked. However, it was made 
to an organization that publishes widely recognized rankings and 
primarily concerned false data not related to the outcomes of the 
education. The Department official would rebut the presumption of full 
discharge. The exact amount of the discharge would depend on a few 
factors. One would be the program's inflated ranking versus what should 
have been its accurate ranking, which may be ascertained by looking at 
its ranking prior to the provision of inflated data. If the program 
still would have been among similarly ranked programs with accurate 
data with no other evidence that the education delivered is different 
than what was promised, then the Department official would likely 
recommend no discharge due to a lack of evidence that the reliance upon 
the misrepresentation was to the detriment of the borrower. They 
attended a highly ranked and highly selective program and programs in 
that category can move around in annual rankings anyway. If the 
inflated data significantly raised the program's rank then a small 
discharge may be appropriate.
    3. An individual wishes to enroll in a highly selective graduate 
program. The school gives significantly inflated data to a school 
ranking organization regarding the rate at which its graduates obtain 
jobs. These inflated data raise the program's rank in the 
organization's publications. The institution features both the inflated 
placement rate data and the inflated ranking data in a national ad 
campaign and in its marketing materials.
    Adjudication outcome: The borrower should receive a full discharge. 
The institution misrepresented the employability of graduates in a 
program, which is a key factor under consideration for students, who 
often cite getting a job as one of the primary goals of an education. 
Even though the institution reported the falsified data to a national 
ranking organization, it also

[[Page 41911]]

featured that data in marketing materials. As a result, if the claim is 
approved the Department official would be unlikely to rebut the 
presumption of a full discharge.
    Related examples: The same analysis would apply to 
misrepresentations with significantly inflated data related to the rate 
at which students passed required examinations to obtain State 
licensure, the rate at which students complete the program, earnings of 
graduates, or other indicators that speak to the outcomes of the 
education.
    4. A school represents to prospective students, in widely 
disseminated materials, that their educational program will lead to 
employment in an occupation that requires State licensure. The program 
does not, in fact, meet minimum education requirements in any State to 
enable its graduates to sit for the exam necessary for them to obtain 
licensure.
    Adjudication outcome: Borrowers should receive a full discharge. As 
a result of the school's misrepresentation, the borrowers cannot work 
in the occupation in which they reasonably expected to work when they 
enrolled. Accordingly, borrowers received limited or no value from this 
educational program.
    Related examples: A similar analysis would apply if the institution 
had said it would provide required internships, clinicals, or 
externships that were not in fact provided to the students because this 
affects students' ability to work in the fields for which they are 
trained. Borrowers would have similar outcomes if a law school lacks 
accreditation by the American Bar Association (ABA) and fails to inform 
students that the lack of such accreditation means that they cannot sit 
for the bar exam in specific States or omits the fact that only a small 
fraction of graduates of the institution passes the bar exam in the 
limited number of States in which a student may take that exam without 
graduating from an ABA accredited law school.
    5. A school states to a prospective student that all of the faculty 
in its nursing program are nurses or physicians. The borrower enrolls 
in the program in reliance on that statement. In fact, none of the 
program's teachers, other than the director, is a nurse or physician. 
The teachers at the school are not qualified to teach medical assisting 
and the student is not qualified for medical assistant jobs based on 
the education received at the school.
    Adjudication outcome: The borrower should receive a full discharge. 
None of the program's teachers have the promised qualifications. In 
contrast to reasonable students' expectations, based on information 
provided by the school, the typical borrower received no value from the 
program.
    6. A school represents in its marketing materials that three of its 
undergraduate faculty members in a particular program have received the 
highest award in their field. A borrower choosing among two comparable, 
selective programs enrolls in that program in reliance on the 
representation about its faculty. However, although the program 
otherwise remains the same, the school had failed to update the 
marketing materials to reflect the fact that the award-winning faculty 
had left the school.
    Adjudication outcome: The borrower's claim would not be approved. 
Although the institution made a misrepresentation to the borrower and 
should update its marketing materials, it is unreasonable to presume 
that a borrower would have relied upon this misrepresentation to 
enroll. The mere presence of award-winning faculty on a university's 
staff does not guarantee that the borrower would have been able to take 
classes from them. Many universities employ well-known faculty who have 
minimal teaching responsibilities. A student may have ultimately not 
chosen to major in the field in which the instructor teaches or the 
class might have had limited enrollment.
    7. An individual interested in becoming a registered nurse meets 
with a school's admissions counselor, who explains that the school does 
not have a nursing program, but incorrectly states that completion of a 
medical assisting program is a prerequisite for any nursing program. 
Based on this information, the borrower enrolls in the school's medical 
assisting program rather than searching for another nursing program, 
believing that completing a medical assisting program is a necessary 
step toward becoming a nurse. After one year in the program, the 
borrower realizes that it is not necessary to become a medical 
assistant before entering a nursing program.
    Appropriate relief: This borrower should receive a full discharge. 
Because it is not necessary to become a medical assistant prior to 
entering a nursing program, the borrower has made no progress toward 
the career they sought, and in fact has received an education that 
cannot be used for its intended purpose.
    In all of the above scenarios, the discharge recommendation reached 
by the Department official would be presented to the Secretary, who 
would choose whether to accept, reject, or modify the Department 
official's recommendation. The Department seeks feedback on these 
examples of the discharge recommendation reached by the Department 
official.

Borrower Defense to Repayment--Recovery From Institutions

    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. Section 454(a)(3) of the HEA requires the institution to 
accept responsibility and financial liability stemming from its failure 
to perform the functions set forth in its program participation 
agreement--the document institutions must sign to participate in the 
Federal financial aid programs where they agree to abide by the rules 
and requirements governing the programs.
    Current Regulations: Under Sec.  685.206(e)(16), the 2019 
regulation provides that Secretary uses the procedures under 34 CFR 
part 668 subpart G to collect the amount of a discharged loan 
associated with an approved borrower defense claim from an institution 
for loans first disbursed on or after July 1, 2020. In 2017, the 
Department codified the process for the Secretary to initiate recovery 
proceedings through the Office of Hearings and Appeals (OHA), primarily 
through its regulations at Sec.  668.87. See 82 FR 6253, January 17, 
2017. Under this section, claims under either the 1994 or 2016 
regulations are presented to a hearing official who renders a decision 
on both the approval of the claim(s) and the establishment of any 
resulting liability for the institution.
    Proposed Regulations: The Department proposes to remove Sec.  
668.87 in its entirety. In its place, the Department proposes to 
include in proposed Sec.  685.409 a general framework under which the 
Department would attempt to recover from institutions the amounts that 
the Secretary discharges for both individual and group borrower defense 
claims and to leverage the procedures already in place at part 668, 
subpart H, which govern how the Department pursues liabilities related 
to program reviews. The Department would have the option to forego 
recovery proceedings under these proposed regulations in situations 
such as where the cost of collecting would be more than the amount to 
recover or recovery would be outside of the six-year limitations 
period.
    Newly proposed Sec.  668.100 in subpart G to part 668 would make 
clear that, if any part of the proposed regulations is

[[Page 41912]]

held invalid by a court, the remainder would still be in effect.
    Reasons: The Department proposes to separate the process of 
reviewing and approving borrower defense applications from the 
recoupment process. As part of that change, the Department would handle 
the process of recoupment through the same existing procedures we 
currently use to assess program review liabilities. This means 
institutions would not have to go through a process they might be less 
familiar with to address liabilities from borrower defense. The 
Department is concerned that the requirements in Sec.  668.87 that 
connect the review and potential approval of group borrower defense 
applications directly to recoupment proceedings is out of keeping with 
the Department's practices for other similar discharge programs and 
could result in extensive delays in resolving group claims. Under Sec.  
668.87, the approval of a group claim and the establishment of the 
institutional liability stemming from it are connected through a single 
process that is conducted before a hearing official. The Department is 
concerned that such an approach conflates two different concerns--the 
interaction between the Department and the borrower and the interaction 
between the Department and the institution. For instance, the processes 
for discharges related to closed schools or false certification have 
separate mechanisms for approving discharges for borrowers and then 
seeking any recoupment from an institution. This ensures that borrowers 
are able to receive the assistance they are guaranteed under the Higher 
Education Act while also preserving the due process rights of 
institutions, which can take months if not years to fully exhaust. The 
connected processes in Sec.  668.87 have the added disadvantage of 
creating an entirely new and separate process for group claims that is 
different from any other process for assessing a liability than 
institutions currently face. Instead of using the procedures in Sec.  
668.87, the Department proposes to recover from institutions the 
amounts discharged for group claims as outlined in the program review 
process \21\ authorized under Sec. Sec.  498 and 498A of the HEA. This 
includes the procedures for institutions to respond to the allegations 
to establish a liability against the institution. The institution could 
then contest the liability through the procedures laid out in that 
section. Consistent with those procedures, the Department would 
generate a Program Review Report (PRR) based upon the evidence in its 
possession, evidence from borrower defense applications, any 
institutional response, any other relevant information, and the amounts 
that the Secretary discharged. This PRR would include a liability 
amount. The set of procedures for contesting liabilities through 
program reviews is long-established and many institutions will be 
familiar with this method. It includes ample opportunities for 
responding to the liability, as well as a process for contesting the 
liability through the Office of Hearings and Appeals, appealing to the 
Secretary, and then going to Federal district court. As a result, 
institutions will would not have to learn a new process.
---------------------------------------------------------------------------

    \21\ For an overview of the program review process, please see 
the 2017 Program Review Guide for Institutions: https://fsapartners.ed.gov/sites/default/files/attachments/programrevguide/2017ProgramReviewGuide.pdf.
---------------------------------------------------------------------------

    The suggested approach better balances the interests of borrower 
defense claimants, the Department, taxpayers, and institutions than the 
current structure of Sec.  668.87. Borrower defense claimants would 
receive faster answers on group applications by having the Department 
conduct its review process separate from recoupment. Taxpayers and the 
Department would still preserve a process for seeking recoupment for 
liabilities from an institution. And the institution would be subject 
to a familiar, long-established process that already affords 
significant due process rights before a liability can become final.
    In establishing this process, the Department also recognizes that 
there may be circumstances where recovery is not feasible. Institutions 
would only face recoupment for conduct that would have been approved 
under the regulation that governed the conduct at the time it occurred 
in the amount that would have been granted under that regulation. In 
other words, for loans first disbursed in 2018 that are part of an 
approved claim, the institution would only face a recoupment action if 
the claim would have been approved under the 2016 regulation. And, if 
the claim would have resulted in a partial discharge under the prior 
regulation but received a full discharge under these proposed rules, 
then the Department would only seek recoupment for the partial amount. 
If the claim would have been approved under the 1994, 2016, or 2019 
regulations, however, the Department would seek recoupment under the 
applicable regulation.
    The Department also proposes that it would have the option to not 
seek recoupment in circumstances where doing so would not make 
financial sense, such as where the cost of collecting on the claim 
would exceed the amount of the claim. The Department would also not 
seek to recoup on a claim that falls outside the six-year limitations 
period. Finally, the Department believes that each of the proposed 
provisions discussed in this NPRM serves one or more important, 
related, but distinct, purposes. Each of the requirements provides 
value to students, prospective students, and their families; to the 
public, taxpayers, and the Government; and to institutions separate 
from, and in addition to, the value provided by the other requirements. 
To best serve these purposes, we would include this administrative 
provision in the regulations to make clear that the regulations are 
designed to operate independently of each other and to convey the 
Department's intent that the potential invalidity of one provision 
should not affect the remainder of the provisions.

Time Limit for Recovery From the Institution

    Statute: Section 454(a)(3) of the HEA provides that the institution 
accepts responsibility and financial liability stemming from the 
institution's failure to perform its functions pursuant to its program 
participation agreement.
    Current Regulations: For loans first disbursed on or after July 1, 
2020, Sec.  685.206(e)(16) provides that Secretary may initiate a 
proceeding to collect the amount of a discharged loan associated with 
an approved borrower defense claim from an institution within 5 years 
of the final determination to approve the claim. This applies to loans 
disbursed on or after July 1, 2020.
    Under Sec.  685.222(e)(7), the 2016 regulation provides that the 
Secretary may initiate a proceeding to collect the amount of a 
discharge loan associated with an approved borrower defense claim 
within 6 years of when the borrower discovers or could have reasonably 
discovered a substantial misrepresentation or 6 years of when the 
institution breached its contract with the student, or at any point for 
a claim approved due to a judgment. The 6-year limit does not apply if 
at any point during that time the institution is notified of the claim 
by the borrower, a representative of the borrower or the Department; a 
class action complaint; or written notice from a Federal or State 
agency with the ability to investigate the institution for issues that 
could relate to a borrower defense claim.
    For loans first disbursed before July 1, 2017, the 1994 regulations 
in Sec.  685.206(c) provide that the Secretary

[[Page 41913]]

may initiate recovery proceedings that align with the record retention 
period, unless the institution did not receive notice of the claim 
during that period.
    Proposed Regulations: Under proposed Sec.  685.409(c), the 
Department would adopt a six-year limitations period to recover the 
amount of borrower discharge from the institution for loans disbursed 
on or after July 1, 2023. This period would start on the date the 
institution reported that the borrower graduated or withdrew or at any 
time if the act or omission was a judgment against an institution. The 
Department proposes the six-year limit would not apply if during that 
period the institution received notice of the claim from the 
Department; a class action lawsuit; or written notice from a Federal or 
State agency with the ability to investigate the institution for issues 
that could relate to a borrower defense claim. These time limits would 
apply for both individual and group claims. The Department official's 
notification to the institution of a borrower defense claim before the 
end of the limitations period would toll the 6-year limitations period.
    Reasons: The Department believes it is critical for it to use the 
authority granted to it by Congress in Sec. 454(a)(3) of the HEA to 
recoup the cost of approved borrower defense claims from institutions 
rather than having taxpayers bear all the expenses. To do so, the 
Department proposes to create a framework for recouping from 
institutions the cost of discharges associated with an approved 
borrower defense claim for loans disbursed on or after July 1, 2023, 
that is similar to what was included in the 2016 regulation, but with a 
simpler way of measuring the length of the time during which the 
Department could seek to recoup.
    During negotiated rulemaking, some negotiators expressed concern 
about the lack of a limitations period for borrowers to file claims, 
which they believed could pose significant difficulties for 
institutions that may be financially liable for approved claims. The 
Department believes that the proposed notice of claims and limitations 
period on recoupment provides adequate protection for institutions 
while preserving financial remedies for the Department. The Department 
proposes to shift away from a time limit on recoupment tied from the 
date of the final determination as was used in the 2019 regulation to 
one from the date the institution reported that the borrower graduated 
or withdrew. The 2019 rule's approach worked within its overall 
framework because there was an overall limit that required claims to be 
submitted within 3 years of a borrower's last date of attendance at the 
institution. Because the Department is proposing to remove that 
limitations period the Department does not believe a date tied to when 
the claim is approved would be appropriate since that could mean 
seeking to recoup from an institution for an approved claim that 
relates to behavior from many years earlier. The Department also 
considered the structure used in the 2016 regulation of basing the time 
period on when a borrower knew or could have known about a 
misrepresentation or when the institution breached the contract.
    The Department, however, is concerned that it would be very 
difficult to properly establish such a date because it would require 
working with the borrower to ascertain the appropriate date or 
otherwise inferring one from instances such as public filing of 
lawsuits. Moreover, because the Department is not proposing a 
limitations period for the borrower, the question of when the borrower 
became aware of the misrepresentation or the breach of contract 
occurred become less relevant for the borrower. Accordingly, the 
Department believes that using a period tied to the last date of the 
borrower's attendance at the institution would be simpler to administer 
and for the institution to track and follow.
    The Department believes having a defined limitations period for 
recoupment from institutions is important. By law, many Federal 
enforcement and collection actions are subject to a defined limitation 
period. 28 U.S.C. 2462, for example, provides a five-year limitation 
period for certain Federal enforcement, fine, and forfeiture actions. 
The 2019 regulations also incorporate a five-year limitations period 
against institutions. The Department reviewed various States' 
limitations periods for consumer protection claims. Some States have a 
limitations period for claims relating to consumer protection that is 
six years long. This includes States such as Maine (14 M.R.S. Sec.  
752), Minnesota (Minn. Stat. Sec.  541.05), and New Jersey (N.J.S.A. 
2A:14-1). Given the different uses of a five- or six-year limitations 
period, the Department seeks feedback on which period would be better 
to use for borrower defense recoupment proceedings.
    While the limitations period generally restricts how long after a 
given date the Department may initiate a recoupment action, the 
Department believes that period should be suspended when the 
institution receives formal notice of the allegations related to the 
claim. Such notice would make the institution aware of the issue and 
the possibility of related action, essentially alleviating the concerns 
that a limitations period is meant to address. Receiving such formal 
notice would result in the institution needing to maintain relevant 
records and thus addresses any concerns about institutions no longer 
retaining any relevant records. The Department proposes to define 
formal notice that could cause the limitations period to no longer 
apply as: being notified by the Department of borrower defense claims; 
a class action complaint asserting relief for a class that may include 
the borrower and that may form the basis of a borrower defense claim; 
or written notice, including a civil investigative demand or other 
written demand for information, from a Federal or State agency that has 
power to initiate an investigation into conduct of the school relating 
to specific programs, periods, or practices that may have affected the 
borrower, for underlying facts that may form the basis of a borrower 
defense claim. Including class actions and written notice tied to 
investigations captures major instances in which an institution would 
be made aware that there is alleged conduct that could relate to a 
borrower defense claim. Moreover, both of those processes also require 
the institution to maintain records, which avoids the concerns about 
lacking sufficient information to respond to older allegations.
    The Department also proposes that the limitations period should not 
apply to Department actions to recoup claims approved as a result of a 
judgment. As we reasoned in the 2016 NPRM, the availability of evidence 
for a borrower defense that is based on a judgment in a court or 
administrative tribunal is not a concern, as the only evidence required 
is the judgment itself. In that NPRM, we proposed no limitations 
period. See 81 FR 39344. We therefore find it compelling to adopt a 
similar approach of no limitations period for judgments against an 
institution.

2. Pre-Dispute Arbitration Agreements--General Background

    In 2016, the Department amended the Direct Loan Program regulations 
in Sec.  685.300 to condition an institution's participation in the 
Direct Loan Program on its PPA not to utilize pre-dispute mandatory 
arbitration agreements or class action waivers that (1) are related to 
the making of a Direct Loan or the provision of educational services 
for which the Direct Loan was provided, and (2) could form the basis of 
borrower defense claims. This limitation was consistent with the HEA, 
which allows

[[Page 41914]]

institutions to participate in the Federal Direct Loan program and 
allow their students to borrow funds through that program, subject to 
certain terms and conditions. In 2019, the Department removed the 
prohibition of mandatory pre-dispute arbitration and class action 
waivers from the regulations and instead provided that institutions 
that required borrowers to sign a mandatory pre-dispute arbitration 
agreement or class action waiver as a condition of enrollment to make 
plain language disclosures about the use of such agreements. The 
Department argued that disclosures about institutions' use of these 
agreements would allow students to make informed decisions about their 
enrollment (see 84 FR 49879).

Pre-Dispute Arbitration Agreements and Class Action Waivers

    Statute: Section 454 of the HEA authorizes the Secretary to impose 
conditions on institutions that wish to participate in the Direct Loan 
Program. Institutions that participate in the Direct Loan Program must 
enter into a PPA with the Department. 20 U.S.C. 1087d. Section 
454(a)(6) of the HEA authorizes the Secretary to include in that PPA 
``provisions as the Secretary determines are necessary to protect the 
interest of the United States and to promote the purposes of'' the 
Direct Loan Program.
    Current Regulations: If institutions use a pre-dispute mandatory 
arbitration agreement or class action waiver, they are required to make 
disclosures and issue notices to borrowers about the terms and 
conditions of those agreements.
    Specifically, in Sec.  668.41(h) institutions are required to 
disclose information about these agreements in a plain language 
disclosure, available to enrolled and prospective students and to the 
public, on the institution's website where admissions and tuition and 
fees information are made available. Further, in Sec.  
685.304(a)(6)(xiii) through (x)(v) institutions must include in their 
required entrance counseling information on the institution's internal 
dispute resolution process and who the borrower may contact regarding a 
dispute related to educational services for which the Direct Loan was 
made. Institutions are required to review with the student borrower the 
pre-dispute arbitration or class action waiver agreement and when it 
will apply, how to enter into the process and who to contact with 
questions.
    Proposed Regulations: The Department proposes to prohibit the use 
of mandatory arbitration or class action waivers as discussed below. 
Under the proposed rules at Sec.  685.300(d), as part of the PPA, each 
institution would have to agree, as a condition of participating in the 
Direct Loan Program, that it will not require students to use an 
internal dispute resolution process before the student pursues a 
borrower defense claim. As proposed, this provision would apply to all 
PPAs executed after the rule is effective.
    In addition, in proposed Sec.  685.300(e), under the PPA, 
institutions would be prohibited from relying on a mandatory pre-
dispute arbitration agreement, or any other mandatory pre-dispute 
agreement with a student who obtained or benefitted from a Direct Loan, 
in any aspect of a class action related to a borrower defense claim, 
until the presiding court rules that the case cannot proceed as a class 
action. The proposed regulations include a non-exhaustive list of what 
would constitute reliance on a mandatory pre-dispute arbitration 
agreement with respect to a class action, including seeking dismissal, 
deferral, or stay of a class action; excluding a person or persons from 
joining a class action; avoiding discovery; and/or filing an 
arbitration claim. Finally, the Department proposes to require that 
certain provisions regarding class action bans be included in any 
agreement with a student who receives a Direct Loan to attend the 
school or who for whom a Direct PLUS Loan was obtained.
    Proposed Sec.  685.300(f) would provide that, as part of the PPA, 
the institution would agree that it will not enter into a mandatory 
pre-dispute arbitration agreement to arbitrate a borrower defense claim 
or rely in any way on a pre-dispute arbitration agreement with respect 
to any aspect of a borrower defense claim. The proposed regulations 
include a non-exhaustive list of what would constitute reliance on a 
pre-dispute arbitration agreement, including seeking dismissal, 
deferral, or stay of a judicial action; avoiding discovery; and/or 
filing an arbitration claim. Finally, the Department proposes to 
require that certain provisions relating to notices and the terms of 
the pre-dispute arbitration agreements be included in any agreement 
with a student who receives a Direct Loan to attend the school or for 
whom a Direct PLUS Loan was obtained.
    Under the proposed rules at Sec.  685.300(g) and (h), institutions 
would be required to submit certain arbitral records and judicial 
records connected with any borrower defense claim filed against the 
school to the Secretary by certain deadlines. The Department would 
maintain a centralized database of these records that would be 
accessible to the public.
    Finally, the proposed rules at Sec.  685.300(i) provide a general 
definitions section. This includes a revised definition of ``borrower 
defense claim'' that maintains congruence with definitions elsewhere in 
the title IV regulations. The Department achieves this by cross-
referencing the definition of ``borrower defense claims'' as defined in 
the 1994, 2016, 2019, and new subpart D to part 685.
    Reasons: These proposed regulations would add limitations 
pertaining to arbitration and class action waivers. Section 454(a)(6) 
of the HEA authorizes the Secretary to include in the PPA ``provisions 
as the Secretary determines are necessary to protect the interest of 
the United States and to promote the purposes of'' the Direct Loan 
Program. From compliance reviews, reports from the public, and a review 
of institutions' enrollment agreements, the Department has seen 
instances when institutions have compelled borrowers to arbitrate a 
borrower defense claim, required an internal dispute process prior to 
filing a borrower defense claim, and prohibited a class of affected 
borrowers from filing borrower defense claims. These restrictive 
provisions in students' enrollment agreements stymie a borrower's 
ability to fully reap the rights and benefits of the Direct Loan 
Program by hindering their rights to pursue a borrower defense claim or 
unduly delaying when a borrower defense claim was filed or could be 
filed. As discussed in the 2016 NPRM (see 81 FR 39381), for these 
Direct Loans to be repayable, the loans must be enforceable obligations 
of borrowers. Acts and omissions that give rise for a borrower to 
assert a defense to repayment frustrate the purposes of the Direct Loan 
Program--financing students' postsecondary expenses and obtaining 
repayment. Mandatory pre-dispute arbitration agreements and class 
action waivers further impede borrowers' ability to file borrower 
defense claims and receive appropriate relief and discharges. Absent 
these proposed regulations, borrowers in distress would likely default, 
institutions would be insulated from recovery actions, and the risk and 
liabilities would be transferred to the Federal taxpayer. For these 
reasons, these proposed regulations would protect the interests of the 
United States for borrower defense claims asserted on Direct Loans, 
while ensuring the successful financing of postsecondary education by 
providing loans repayable by current recipients of this Federal public 
benefit.
    In the preamble of the NPRM published on June 16, 2016, we 
described the concerns regarding

[[Page 41915]]

mandatory arbitration and class action waiver requirements. 81 FR at 
39380-86. The preamble to the June 16, 2016, NPRM described how 
Corinthian Colleges used the mandatory arbitration and class action 
waiver provisions in its student enrollment agreements to shift the 
cost of its misrepresentations from the company to the Federal 
taxpayers. 81 FR at 39382-83. Moreover, the NPRM noted that there was a 
lack of transparency both to students and the public regarding the 
outcome of arbitrations, the results of which are generally not public. 
See generally 81 FR at 39381-85. The 2019 regulations took a different 
approach and concluded that the general Federal policy in favor of 
arbitration outweighed the particular issues of mandatory arbitration 
and class action waivers in the context of the Department's Federal 
student financial aid programs.
    The Department has taken another look at mandatory arbitration and 
class action waiver requirements as they relate to the Federal Direct 
Loan Program. The Department reviewed both the 2016 NPRM and the 2019 
final rule. The Department has determined that the lack of information 
for students cited in the 2016 NPRM remains a concern and makes it 
extremely difficult for current and prospective students to judge the 
potential burdens and risks they are assuming when they choose to 
attend an institution that includes mandatory arbitration and class 
action waivers in its enrollment agreement.
    The 2019 regulations removed the restrictions on the use of 
mandatory arbitration agreements and class action waivers, based on the 
general Federal policy in favor of arbitration and a view that 
arbitration is generally less costly for the parties and results in 
more timely resolutions. The Department specifically cited the Supreme 
Court's decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 
(2018), and Congress' disapproval of regulations issued by the Consumer 
Financial Protection Bureau that would have limited mandatory 
arbitration and class action waivers. See 84 FR at 49839-40.
    Both the 2016 and 2019 regulations note that the Federal 
Arbitration Act (FAA) reflects the Federal policy favoring arbitration. 
In issuing the 2016 regulations, the Department specifically 
acknowledged that the agency lacks ``the authority, and does not 
propose, to displace or diminish the effect of the FAA.'' 81 FR at 
76023. The Department also specifically noted that the 2016 rule ``does 
not invalidate any arbitration agreement, whether already in existence 
or obtained in the future.'' Id. Instead, the 2016 regulations 
conditioned an institution's future participation in the Federal Direct 
Loan Program on its agreement not to impose mandatory arbitration and 
class action waiver requirements relating to borrower defense claims on 
borrowers of Federal Direct Loans. As noted by the District Court in 
California Ass'n of Private Postsecondary Sch. v. DeVos, 436 F. Supp. 
3d 333, 344 (D.D.C. 2020), vacated as moot, No. 20-5080, (D.C. Cir. 
Oct. 14, 2020), ``if a school wants to participate in a federal program 
and to benefit from the many billions of dollars that the United States 
distributes in Direct Loans every year, it must agree to abide by the 
conditions that the Secretary reasonably determines are necessary to 
protect the public and the integrity of the program.'' \22\ In that 
case, the court concluded that the Department's 2016 regulations were 
consistent with the Secretary's authority under the HEA and did not 
conflict with the FAA.
---------------------------------------------------------------------------

    \22\ We note that regulations issued by the U.S. Department of 
Health and Human Services in 2019, which barred health care 
facilities participating in the Medicare and Medicaid programs from 
requiring residents to agree to binding arbitration as a condition 
for admission, were similarly upheld based on the agency's authority 
to condition participation in those programs. Northport Health 
Servs. of Arkansas v. U.S. Dep't of Health and Human Servs., 14 
F.4th 856, 866-69 (8th Cir. 2021).
---------------------------------------------------------------------------

    The 2019 regulations permit institutions to include pre-dispute 
arbitration agreements or class action waivers in enrollment agreements 
with their students or in other documents that must be signed by the 
student as a condition of enrollment. The student often has little or 
no say in the selection of the arbitrator, the choice of venue, or the 
ability to appeal, among other factors.
    As the court cases above demonstrate, the decision reflected in the 
2019 regulations to permit institutions to include these required 
provisions was based on an incorrect understanding of the interplay 
between the HEA and the FAA and the mistaken conclusion that the FAA 
undercut the policy reflected in the 2016 regulations. The 2019 
regulations also failed to adequately balance the costs and benefits of 
arbitration, focusing too heavily on the conclusion that arbitration 
provides speedier results and failing to take into account the 
protection of the interests of the United States, whose funds are at 
stake for borrower defense claims asserted on Federal Direct Loans.
    As discussed in the preamble of both the 2016 and 2019 regulations, 
there have been a variety of studies regarding the relative costs and 
benefits of arbitration versus litigation, with mixed conclusions. 81 
FR 31982 (2016 NPRM); 84 FR at 49841-49844 (2019 Final Rule). Moreover, 
no study the Department is aware of has addressed arbitration in the 
context of higher education and student loans. Therefore, in proposing 
regulations regarding arbitration and class actions in the borrower 
defense context, the Department is relying on its experience in the 
student loan area. As discussed in depth in the preamble to the 2016 
NPRM, 81 FR at 39382-83, the Department's experience with Corinthian 
Colleges and other institutions demonstrates that, had class actions 
been permitted, borrowers may have been able to directly pursue relief 
from the institution rather than relying on recovery from the Federal 
taxpayer through borrower defense discharges of their student loans. 
The impediment to class actions and the institutions' ability to force 
students into arbitration removed a significant deterrent threat. When 
students have the option to pursue class action relief, they have the 
chance to recover compensation for the damages they may have suffered, 
including the costs related to their loans.
    Moreover, we note that, to prevent double recovery, and as 
discussed more fully in the Borrower Cooperation & Transfer of Recovery 
Rights section of this NPRM, Sec. 455(h) of the HEA provides that in no 
event may a borrower recover from the Secretary relief in excess of the 
amount such borrower has repaid on their Direct Loan.
    The Department also is concerned that the use of arbitration 
clauses or class action waivers in enrollment agreements would stifle 
students' ability to bring complaints to the attention of oversight 
bodies, leaving taxpayers to assume the financial risk if those 
borrowers fail to repay their loans. As discussed in the 2016 NPRM, 81 
FR at 39380, agreements that bar relief by class action lawsuits remove 
the financial risk to an institution because the institution is 
insulated from the acts or omissions that gave rise to the borrower 
defense claim for which the taxpayers would assume the losses 
associated with the discharge. Moreover, class action waivers could 
impede borrowers from obtaining compensatory relief for themselves and 
further prevent borrowers from obtaining injunctive relief to compel an 
institution, in a timely manner, to desist from the conduct that caused 
them injury and could continue to cause other borrowers, injury in the 
future. Class action waivers effectively allow an institution to 
perpetuate misconduct with much less risk of adverse financial 
consequences than if the institution

[[Page 41916]]

could be held accountable in a class action lawsuit. 81 FR at 39382.
    As discussed in the 2016 NPRM, Corinthian Colleges included 
explicit class action waiver provisions in enrollment agreements, and 
used those, with mandatory pre-dispute arbitration clauses, to resist 
class actions by students. Suits brought against Corinthian Colleges 
were dismissed, and taxpayers were left to assume the financial losses 
resulting from the institution's misconduct. 81 FR at 39383.
    The Department reiterates its 2016 position that regulating 
institutions' use of these agreements is necessary to ``protect the 
interests of the United States and to promote the purposes'' of the 
Direct Loan Program under Sec.  454(a)(6) of the HEA, 20 U.S.C. 
1087d(a)(6). 81 FR at 76022. By using these agreements, institutions 
could evade accountability, curtail borrowers' rights to bring a 
borrower defense claim to the Department, and leave the Federal 
taxpayer on the hook for the institution's misconduct.
    Another issue that impedes the Department's oversight of 
institutions' use of these mandatory arbitration agreements is that 
arbitral records are often shielded from public view. Borrowers and 
prospective students are unable to access records reflecting the 
outcomes of arbitration proceedings and their potential impact on the 
borrower's enrollment at the institution, as these records are not 
required to be made available publicly. Prospective students may not be 
able to make informed choices about their decision to attend a 
postsecondary institution or obtain a Direct Loan without public 
knowledge of these arbitration and judicial records. The opacity of 
these arbitral records under current regulations also weakens the 
Department's ability to exercise oversight over institutions and to 
``protect the interests of the United States,'' by hampering the 
Department's ability to identify patterns of abuse and wrongdoings and 
take appropriate corrective action. Moreover, allowing arbitration but 
requiring notice to the Department when such arbitration was initiated 
undermines the deterrent effect that these proposed regulations would 
have: to prevent and discourage institutions' wrongdoing upfront, 
rather than waiting until an institution engages in wrongdoing.
    We note that the prohibition on institutions' use of mandatory 
arbitration and class action waiver provisions regarding borrower 
defense claims in their enrollment agreements was in effect between 
July 1, 2017, and July 1, 2020. At no time during that period or during 
the negotiated rulemaking hearings or committee meetings that preceded 
this NPRM did institutions identify any significant problems or issues 
from removing such provisions from their student agreements or 
otherwise complying with the regulations. On the other hand, since 
issuance of the 2019 regulations, the Department has heard from 
borrowers, advocates representing students, State attorneys general, 
and the public about problems stemming from these mandatory pre-dispute 
arbitration agreements and class action waivers and the lack of 
transparency regarding arbitral records. Collectively, these 
constituency groups highlighted the difficulties these agreements or 
class action waivers present in bringing a lawsuit based on the type of 
institutional conduct that would give rise to a borrower defense claim, 
as well as concerns that institutions may try to use internal dispute 
processes to dissuade the filing of a borrower defense claim.
    In light of the constituency groups' concerns that institutions 
foreclosed on borrowers' right to bring a lawsuit and created 
challenges to filing a borrower defense claim, the Department revived 
the issues surrounding pre-dispute arbitration agreements and class 
action waivers. During the negotiated rulemaking sessions, the 
Department proposed to prohibit institutions that participate in the 
Direct Loan program from obtaining, through the use of contractual 
provisions or other agreements, a pre-dispute agreement for arbitration 
to resolve claims brought by a borrower against the institution that 
could form the basis of a borrower defense claim. The Department 
proposed to restore prohibitions on institutions obtaining from a 
borrower, either in an arbitration agreement or in another form, a 
waiver of their right to initiate or participate in a class action 
lawsuit regarding such claims, and from requiring students to engage in 
internal dispute processes before contacting accrediting or government 
agencies with authority over the institution regarding such claims. 
Institutions would be required to notify the Department and to disclose 
to students the institution's use of arbitration on acts or omissions 
related to the making of a Direct Loan or the provision of educational 
services for which the Direct Loan was provided, and to provide certain 
arbitral records and judicial records connected with any borrower 
defense claim filed against the school to the Department, which would 
be shared with the public.
    All but one non-Federal negotiator supported the Department's 
reinstatement of the requirements in the 2016 regulations; the one 
dissenting non-Federal negotiator opposed the reinstatement of the 
restrictions on pre-dispute arbitration agreements and class action 
waivers. Some of the negotiators suggested that the Department should 
expand the limitation by defining a borrower defense claim for this 
purpose as any unlawful act or omission by the institution. Other 
negotiators urged the Department to extend the prohibition on mandatory 
pre-dispute arbitration to include private loans. Some negotiators also 
suggested that the regulations should include a specific enforcement 
provision that would require the Secretary to enforce the provisions of 
the PPA. Other negotiators suggested that the disclosure and notice 
requirements should ensure the language in the disclosures meet 
students at their level, as these students often get lost in the 
``legalese'' of the documents they are required to sign as a condition 
of enrollment.
    One negotiator disagreed with the Department's proposal. This 
negotiator generally agreed that transparency relating to arbitration 
and class action waivers is important but argued that alternative 
dispute resolution processes such as arbitration are less costly for 
students and more efficient in resolving complaints. This negotiator 
noted that the Department already has an FSA Feedback System to address 
Federal student aid complaints and, for institutions that participate 
in Department of Veterans Affairs (VA) educational programs, the VA has 
a complaint resolution system that provides aggrieved servicemember-
students a path for lodging complaints affecting VA programs. The 
negotiator who disagreed with the Department's proposal also expressed 
concern over cybersecurity and student privacy regarding reporting and 
disclosure of arbitral and judicial records related to borrower defense 
claims. The Department discusses these provisions below.
    After hearing from the negotiators and carefully reviewing the 
current regulations, the Department proposes a prohibition against the 
use of pre-dispute arbitration agreements and class action waivers for 
the reasons discussed above.

General--Applicability to Direct Loans

    During negotiated rulemaking, the Department proposed limiting the 
prohibition against pre-dispute arbitration agreements to agreements 
related to the making of a Direct Loan or provision of educational 
services for which the Direct Loan was intended.

[[Page 41917]]

Some negotiators requested an expansion of the prohibition to include 
other actions taken by agents of the institution, including online 
program managers (OPM). These negotiators reasoned that an OPM should 
also be subject to the prohibition against pre-dispute arbitration 
agreements. One negotiator argued that the Department's authority under 
20 U.S.C. 1094(a)(27) to regulate preferred lender arrangements would 
allow the Department to extend the reach of the prohibition.
    Consistent with the Department's position since 1995, see 60 FR at 
37769, the Department's authority with respect to the terms and 
conditions of the institution's PPA with the Secretary only pertains to 
the making of a Direct Loan or the provision of educational services 
for which the Direct Loan was intended. OPMs may be covered under these 
regulations only to the extent they are providing services that are 
part of the borrower's educational program for which the Direct Loan 
was intended.

Pre-Dispute Arbitration Agreements--Agreements Currently in Force

    The Department acknowledges that many existing loan agreements 
include mandatory arbitration provisions or class action waivers or may 
be executed prior to the effective date of the final regulations. In 
that circumstance, similar to the Department's approach in developing 
the 2016 regulations, 81 FR at 39386, the proposed regulations would 
prohibit a participating institution from attempting to exercise such 
agreements and would require a participating institution to either 
amend the agreements or notify the students who executed those 
agreements that the institution will not attempt to exercise those 
agreements in a manner proscribed by the regulations. Note that in 
September 2018, a Federal court invalidated the Department's actions to 
delay implementation of the 2016 regulations, including the provisions 
on the prohibition of the pre-dispute arbitration agreements and class 
action waivers, and those rules went into effect in October 2018. The 
Court held that the rule did not have retroactive effect. California 
Ass'n of Private Postsecondary Schs. v. DeVos, 344 F. Supp. 3d 158, 173 
(D.D.C. 2018).
    It is important to note that these regulations would not invalidate 
those past contracts. These regulations would simply condition the 
institution's future participation in the Direct Loan program on the 
institution not enforcing of certain provisions in those contracts 
going forward. As discussed in the 2016 regulations (see 81 FR 76024, 
November 1, 2016):

    Regulations commonly change the future consequences of 
permissible acts that occurred prior to adoption of the regulations, 
and such regulations are not retroactive, much less impermissibly 
retroactive, if they affect only future conduct, and impose no fine 
or other liability on a school for lawful conduct that occurred 
prior to the adoption of the regulations. The regulations do not 
make an institution prospectively ineligible because it has already 
entered into contracts with arbitration provisions. The regulations 
impose no fine or liability on a school that has already obtained 
such agreements. The regulations address only future conduct by the 
institution, and only as that conduct is related to the 
institution's participation in the Federal Direct Loan Program.

    The PPAs that institutions enter into with the Secretary provide 
notice to institutions that they must comply with all statutory 
provisions of or applicable to title IV of the HEA, and all applicable 
regulatory provisions, including new regulations that go into effect 
during the institution's participation. See 34 CFR 668.14(b)(1). And as 
discussed in 2016, the HEA gives the Secretary authority to modify the 
terms of the PPA as needed to protect Federal interests and promote the 
objectives of the Direct Loan program. See 81 FR 76023.

Pre-Dispute Arbitration Agreements--Public Disclosure of Agreements and 
Judicial Proceedings

    Some negotiators expressed privacy concerns for individuals, or the 
institution, if the regulations required public disclosure of 
arbitration agreements and judicial proceedings related to borrower 
defense claims. They argued that these records contain confidential 
information. These negotiators also raised the potential of a 
cybersecurity incident if these records are made publicly available.
    The Department notes that institutions are already required to 
furnish other sensitive information to the Department, some of which is 
made public, including Tier 1 and Tier 2 arrangements under the cash 
management regulations at part 668, subpart K; and Clery Act campus 
safety and security reports, among others. Under the proposed 
regulations and to protect privacy, the Department expects institutions 
to submit arbitral and judicial records with personally identifiable 
information redacted. The Department would subsequently disclose these 
redacted records publicly. Separate and apart from this proposed 
provision, the Department maintains its general authority to request 
information from institutions, including original, unredacted versions 
of arbitral or judicial records that relate to Direct Loans or the 
educational program for which a Direct Loan was intended.
    The Department remains committed to protecting students' 
information to the extent permissible under applicable privacy laws, 
such as the Family Educational Rights and Privacy Act (FERPA), while 
ensuring compliance with requirements under the Freedom of Information 
Act (FOIA).

Pre-Dispute Arbitration Agreements--Definitions

    The Department proposes to align the definition of ``borrower 
defense claim'' for purposes of the prohibition on mandatory 
arbitration and class action waivers with the definition in the 
applicable borrower defense regulations. The Department believes that 
referencing the applicable borrower defense regulations themselves 
would make the meaning of ``borrower defense claims'' clear for each 
set of regulations.
    In Young v. Grand Canyon Univ., 980 F.3d 814 (11th Cir. 2020), the 
court considered a mandatory arbitration agreement that forced a 
borrower to arbitrate his borrower defense claims rather than file a 
lawsuit. The institution moved to compel arbitration pursuant to the 
agreement, which the student signed as part of his application for 
admission. The district court granted the institution's motion to 
compel, holding that the borrower's claims for misrepresentation and 
breach of contract were not ``borrower defense claims'' as defined in 
the Department's regulations prohibiting mandatory pre-dispute 
arbitration agreements.\23\ The Court of Appeals for the 11th Circuit 
reversed, concluding that the plain language of the pre-dispute 
arbitration regulations contemplated such claims, and thus that the 
borrower could not be compelled to arbitrate them. The court noted, 
however, that the definition of ``borrower defense claim'' for purposes 
of the pre-dispute arbitration prohibition could have been written more 
clearly.
---------------------------------------------------------------------------

    \23\ Carr et al. v. Grand Canyon Univ., Inc. et al., Case No. 
1:19-cv-01707-TCB (N.D. Ga. Aug. 19, 2019).
---------------------------------------------------------------------------

    A negotiator urged the Department to add a definition of 
``provision of educational services'' in the regulations addressing 
mandatory pre-dispute arbitration agreements. However, the Department 
believes that this concept is sufficiently defined in the borrower 
defense regulations, under the existing regulations in Sec.  
685.20[euro])(1)(iv) and in proposed Sec.  685.401(a).

[[Page 41918]]

Pre-Dispute Arbitration Agreements-Technical Conforming Changes

    Section 668.41(h) provides that institutions that require pre-
dispute arbitration agreements and/or class action waivers as a 
condition of enrollment must make certain plain language disclosures to 
enrolled students, prospective students, and the public about the use 
of such agreements. The plain language disclosure must state that the 
institution cannot compel a student to use an internal dispute process 
and cannot require the student to waive their right to file a borrower 
defense claim with the Department. The disclosure also must confirm 
that arbitration tolls any limitation period for filing such claims. 
The format of the plain language disclosure must be in at least 12-
point font and must be on the institution's website or in the college 
catalog. Institutions are prohibited from relying solely on an intranet 
site to provide such disclosures and notices to prospective students or 
the public. Finally, Sec.  668.41(h)(2) defines ``class action'', 
``class action waiver'', and ``pre-dispute arbitration agreement'' for 
purposes of this section.
    For loans first disbursed on or after July 1, 2020, current Sec.  
685.304(a)(6) requires certain additional written disclosures if an 
institution requires a student to sign a pre-dispute arbitration 
agreement or a class action waiver as a condition of enrollment. 
Specifically, if an institution requires either form to be signed, 
Sec.  685.304(a)(6)(xiii) requires the institution to provide a written 
description of its dispute resolution process and who the student may 
contact at the school if the student has a dispute relating to Direct 
Loans or the educational services for which the loans were provided. 
With respect to pre-dispute arbitration agreements, Sec.  
685.304(a)(6)(xiv) requires the institution to provide a written 
description of how and when any pre-dispute arbitration agreement 
applies, how such arbitration agreement functions, and whom the student 
may contact with questions. Finally, for class action waivers, Sec.  
685.304(a)(6)(xv) requires the institution to provide a written 
description of the applicability of class action waivers, alternatives 
to class action waivers, and whom the student may contact with 
questions.
    The Department proposes to remove Sec.  668.41(h) because they 
would be unnecessary given other proposed changes. The proposed 
regulations at Sec.  685.300 would contain provisions requiring 
institutions to make specific disclosures about their use of mandatory 
pre-dispute arbitration agreements and class action waivers.
    The Department also proposes to remove Sec.  685.304(a)(6)(xiii) 
through (xv). The proposed regulations at Sec.  685.300 would state the 
conditions under which disclosures would be required and provide 
deadlines for such disclosures.
    The Department proposes deleting the identified provisions because 
these issues would be addressed by the proposed regulations and render 
the requirements in Sec.  668.41(h) unnecessary. Because Sec.  
668.41(h) would be unnecessary, the cross references to that provision 
in Sec.  685.304 would reflect these technical changes.

3. Interest Capitalization (Sec. Sec.  685.202, 685.209)

    Background: Interest capitalization occurs when any accrued, unpaid 
interest becomes part of the principal balance of a borrower's loan. 
Capitalization is triggered by certain events, as provided by either 
the statute or by regulation. For student loans, interest 
capitalization is most often triggered after a period of deferment or 
forbearance. Once interest is capitalized and becomes part of the loan 
principal, the new principal balance begins to accrue interest at the 
rate applicable to the loan, which increases the overall cost of the 
loan. Thus, interest capitalization effectively causes a borrower to 
pay interest on principal and accrued interest.
    This issue was subject to negotiated rulemaking and consensus was 
reached on the proposal to remove interest capitalization on Direct 
Loans where it is not required by the HEA. As proposed, interest 
capitalization on Direct Loans would be retained only where it is 
specifically required by the HEA. Because there would be fewer 
situations in which interest is capitalized, this proposal would result 
in a loss in revenue and therefore would increase costs for the 
Government and consequently U.S. taxpayers. However, the proposal is 
expected to result in lower total payments over time for borrowers, 
thereby increasing the likelihood that borrowers would repay their 
loans in full. Given this benefit, the Department believes that the 
benefits for borrowers exceed these costs and justify the change.
    Statute: Section 428H(e)(2) of the HEA, which applies to the Direct 
Loan Program under the parallel terms and conditions provisions in 
Sec.  455(a)(1) of the HEA, provides that interest may be capitalized: 
when a loan enters repayment, at the expiration of the grace period (in 
the case of a loan that qualifies for a grace period), at the 
expiration of a period of deferment or forbearance, or when the 
borrower defaults.
    Section 455(f)(1) requires capitalization at the end of a deferment 
period for Direct Unsubsidized Loans, Direct PLUS Loans, and Direct 
Unsubsidized Consolidation Loans.
    Section 493C(b)(3)(B) requires capitalization when a borrower who 
is repaying under the income-based repayment (IBR) plan stops repaying 
under that plan or is determined to no longer have a partial financial 
hardship.
    Current Regulations: Under Sec.  685.202(b)(2), the Secretary may 
capitalize interest on a Direct Loan when a borrower enters repayment. 
Section 685.202(b)(3) provides that for an unsubsidized Direct Loan and 
for all Direct Loans during periods of forbearance, the Secretary 
capitalizes the unpaid interest that has accrued on the loan upon the 
expiration of the deferment or forbearance. Section 685.202(b)(4) 
provides that the Secretary annually capitalizes unpaid interest on a 
Direct Loan during any period of negative amortization under the 
alternative repayment plan described in Sec.  685.201(l) or under the 
income-contingent repayment (ICR) plan described in Sec.  685.209(b). 
Section 685.202(b)(5) provides that the Secretary may capitalize unpaid 
interest on a Direct Loan when a borrower defaults on the loan.
    Section 685.209(a)(2)(iv) provides that interest is capitalized on 
a Direct Loan when a borrower who is repaying under the Pay As You Earn 
(PAYE) repayment plan is determined to no longer have a partial 
financial hardship or chooses to leave the PAYE plan. Under Sec.  
689.209(a)(5)(iii)(B), unpaid interest is also capitalized when a 
borrower repaying under the PAYE plan fails to annually recertify their 
income.
    Under Sec.  685.209(c)(2)(iv), any unpaid interest is capitalized 
at the time a borrower leaves the Revised Pay As You Earn plan.
    Finally, Sec.  685.221(b)(4) and Sec.  685.221(e)(3)(ii) 
incorporate the requirements from Sec.  493C(b)(3)(B) of the HEA that 
interest is capitalized at the time a borrower chooses to leave the IBR 
plan or begins making payments that are not based on income, which 
includes when a borrower repaying under the IBR plan no longer has a 
partial financial hardship or fails to recertify income.
    Proposed Regulations: The Department proposes to remove the 
provisions in Sec. Sec.  685.202 and 685.209 on interest capitalization 
of Direct Loans where it is not required by the HEA,

[[Page 41919]]

including when capitalization is permitted (but not required) under the 
HEA. We propose to eliminate the regulatory provisions stating that 
unpaid interest is capitalized or may be capitalized when a borrower 
enters repayment; upon the expiration of a period of forbearance; 
annually during periods of negative amortization under the alternative 
repayment plan or the ICR plan; when a borrower defaults; when a 
borrower who is repaying under the PAYE plan fails to recertify income, 
or chooses to leave the plan; and when a borrower who is repaying under 
the REPAYE plan leaves the plan.
    Specifically, we propose to remove--
    <bullet> Sec.  685.202(b)(2), which provides that for a Direct 
Unsubsidized Loan, a Direct Unsubsidized Consolidation Loan that 
qualifies for a grace period under the regulations that were in effect 
for consolidation applications received before July 1, 2006, a Direct 
PLUS Loan, or for a Direct Subsidized Loan for which the first 
disbursement is made on or after July 1, 2012, and before July 1, 2014, 
the Secretary may capitalize the unpaid interest that accrues on the 
loan when the borrower enters repayment.
    <bullet> The provision in Sec.  685.202(b)(3) that provides that 
the Secretary capitalizes interest that accrues on Direct Loans during 
periods of forbearance.
    <bullet> Section 685.202(b)(4), which provides that, subject to 
some exceptions, the Secretary annually capitalizes unpaid interest 
when a borrower is paying under the alternative repayment plan or the 
income-contingent repayment plan described in Sec.  685.209(b) and the 
borrower's scheduled payments do not cover the interest that has 
accrued on the loan.
    <bullet> Section 685.202(b)(5), which states that the Secretary may 
capitalize unpaid interest when a borrower defaults on a loan.
    <bullet> Section 685.209(a)(2)(iv)(A)(2), providing that accrued 
interest is capitalized at the time a borrower chooses to leave the 
PAYE repayment plan.
    <bullet> Section 685.209(a)(2)(iv)(B), which provides that the 
amount of accrued interest capitalized when a borrower is determined to 
no longer have a partial financial hardship is limited to 10 percent of 
the original principal balance at the time the borrower entered 
repayment under the PAYE repayment plan and after the amount of accrued 
interest reaches that limit, interest continues to accrue, but is not 
capitalized while the borrower remains on the PAYE repayment plan.
    <bullet> Section 685.209(c)(2)(iv), providing that any unpaid 
accrued interest is capitalized at the time a borrower leaves the 
REPAYE plan.
    The Department is not proposing changes to the regulations related 
to interest capitalization where capitalization is required by the 
statute. This includes when a borrower exits a period of deferment on 
an unsubsidized loan or when a borrower who is repaying loans under the 
IBR plan is determined to no longer have a partial financial hardship, 
including if they fail to annually recertify income.
    Reasons: The Department is concerned that frequent interest 
capitalization increases what a Direct Loan borrower owes and may 
extend the time it takes for some borrowers to repay their loans. This 
may result in delinquency and or default for borrowers who cannot 
manage payments on higher loan balances. Recent studies have shown that 
growing loan balances lead to both financial and psychological 
challenges to successful repayment by borrowers. Borrowers reported 
being overwhelmed with their increasing loan balances, with many 
expressing frustration and diminished motivation to make payments 
toward balances that continue to grow.\24\ The Department is concerned 
that such diminished motivation may result in higher rates of 
delinquency and or default, which has significant negative consequences 
for borrowers, including negative credit reporting and the possibility 
of garnished wages or loss of tax refunds. The Department believes that 
the negative effects on borrowers of interest capitalization outweigh 
the added costs that come from ending this practice where allowed. 
Furthermore, there may be many circumstances where borrowers are not 
aware that capitalization may occur or do not understand the impact 
that interest capitalization has on their loan balance. The act of 
rolling unpaid interest into a borrower's principal balance can be a 
frustrating experience for borrowers who are confused as to what 
triggered the capitalization or surprised by the higher amount they owe 
because of capitalization. Borrowers also frequently express 
frustration and surprise with interest capitalization, at least in part 
because this is not an occurrence they are likely to have experienced 
with other financial products. Given that borrowers already express 
significant confusion from the overall complexity of student loan 
repayment and the various options available to them, the Department 
does not believe alternative approaches to eliminating interest 
capitalization, such as improved education, would successfully address 
the problem. As mentioned in the background section for this provision, 
the Department recognizes the cost impact of this proposal from lost 
revenue but believes the benefits for borrowers exceed these costs and 
justify the change. Therefore, the Department proposes to eliminate 
interest capitalization for Direct Loans in instances where it has the 
authority to do so.
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    \24\ https://www.pewtrusts.org/en/research-and-analysis/articles/2020/04/08/policymakers-should-consider-impact-of-growing-student-loan-balances-on-borrowers-and-taxpayers.
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    The Department also proposes to eliminate instances where the 
regulations currently permit but do not require interest 
capitalization. This change provides greater clarity for borrowers 
since it may not be clear when the Department does or does not 
capitalize interest. This change also eliminates concerns that such 
permissive instances could be applied inconsistently.
    The Committee reached consensus on this issue. The proposal to 
eliminate interest capitalization where not statutorily required was 
enthusiastically received by all the committee members and received 
unanimous support. Many committee members applauded the Department for 
its efforts to remove interest capitalization in the situations 
described above.
    Some committee members requested that the Department provide this 
benefit to borrowers who consolidate their other Federal student loans 
into a Federal Direct Consolidation Loan. The Department could not 
agree to that request because a consolidation loan does not result in 
capitalization; rather, it is a new loan with a new principal balance 
made up of the principal and interest that the borrower owed on each of 
the underlying loans.
    Some negotiators asked the Department to extend this approach to 
FFEL loans. However, the Department noted that it does not have the 
authority to prohibit a FFEL lender from capitalizing interest.
    One committee member requested that the Department provide more 
information to help the committee members understand how interest 
capitalization impacts certain groups of borrowers and requested that 
the Department apply this benefit retroactively. The Department replied 
that the regulatory changes to eliminate interest capitalization would 
be prospective, consistent with our standard rulemaking procedures.

[[Page 41920]]

4. Closed School Discharge (Sec. Sec.  674.33(g), 682.402(d), and 
685.214)

    Statute: Sections 437(c)(1) and 464(g) of the HEA provide for 
closed school loan discharges for borrowers in the Perkins Loan and 
FFEL Programs who are unable to complete a program of study because 
their school closed. The closed school discharge provisions also apply 
to Direct Loans, under the parallel terms, conditions, and benefits 
provision in 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 loan 
discharge. Pursuant to Sec. Sec.  674.33(g)(4) and 685.214(c)(1), a 
Perkins or Direct Loan borrower must submit a written request and sworn 
statement to apply for a closed school discharge.
    If a loan holder in the Perkins, FFEL or Direct Loan Program or a 
FFEL guaranty agency determines that a borrower may qualify for a 
closed school discharge, the loan holder provides the borrower with a 
discharge application and an explanation of the qualifications and 
procedures for obtaining a discharge. The loan holder or guaranty 
agency promptly suspends any efforts to collect from the borrower on 
any affected loan. Under Sec. Sec.  674.33(g)(8)(v), 
682.402(d)(6)(ii)(H), 682.402(d)(7)(ii), 685.214(f)(4) and 
685.214(g)(4), if a borrower fails to submit an application for a 
closed school discharge within 60 days of the loan holder or guaranty 
agency providing the application to the borrower, the loan holder or 
guaranty agency resumes collection and grants forbearance of principal 
and interest for the period in which collection activity was suspended.
    Sections 674.33(g)(4)(i)(B), 682.402(d)(1)(i), and 
685.214(c)(1)(i)(B) provide that to qualify for a closed school 
discharge, a borrower must have been enrolled in the school at the time 
the school closed or must have withdrawn from the school not more than 
120 days before the school closed. These regulations also provide that 
the Secretary may extend the 120-day timeframe if exceptional 
circumstances justify an extension.
    Under Sec. Sec.  674.33(g)(4)(i)(C) and 685.214(c)(1)(i)(C), a 
Perkins or Direct Loan 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 or by transferring academic credits earned at the closed school 
to another school. This also applies to FFEL borrowers under former 
Sec.  682.402(d)(3)(ii)(C), which was inadvertently removed from the 
Code of Federal Regulations as of July 1, 2019.
    Under Sec. Sec.  674.33(g)(1)(ii)(A), 682.402(d)(1)(ii)(A), and 
685.214(a)(2)(i), a school's closure date is the date the school ceases 
to provide educational instruction in all of its programs, as 
determined by the Department.
    Under Sec. Sec.  674.33(g)(3)(i)(B), 682.402(d)(8) and 
685.214(c)(3)(i), the Secretary (and a guaranty agency, in the case of 
a FFEL Program loan) may discharge a loan without an application for an 
eligible borrower based on information in the Secretary's or guaranty 
agency's possession. The Secretary (and a guaranty agency in the case 
of a FFEL loan) discharges a Perkins or FFEL borrower's loan if the 
borrower did not subsequently re-enroll in a title IV school within 
three years of the school's closure, for schools that closed on or 
after November 1, 2013, pursuant to Sec. Sec.  674.33(g)(3)(ii) and 
682.402(d)(8)(ii). The Secretary discharges a Direct Loan if the 
borrower did not re-enroll within three years of the school's closure 
for schools that closed on or after November 1, 2013 and before July 1, 
2020, pursuant to Sec.  685.214(c)(3)(ii).
    Current regulations in part 674, subpart B of the Perkins 
regulations and part 682, subpart D of the FFEL regulations do not 
address severability. Current regulations in part 685, subpart B and 
subpart C of the Direct Loan regulations address severability.
    Proposed regulations: The Department proposes to revise Sec.  
685.214 to remove the separate closed school discharge application 
requirements for Direct Loans disbursed on or after July 1, 2020, and 
Direct Loans disbursed before July 1, 2020, that appear in current 
Sec.  685.214(c), (d)(1), (f) and (g).
    Proposed Sec. Sec.  674.33(g)(4) and 685.214(d)(1) would provide 
that the borrower must submit a completed closed school discharge 
application to the Secretary and that the factual assertions in the 
application must be true and made by the borrower under penalty of 
perjury.
    Proposed Sec. Sec.  674.33(g)(8)(v), 682.402(d)(6)(ii)(H) and 
685.214(g)(4) would extend the time period that a borrower has to 
submit a closed school discharge application before the forbearance 
period expires to 90 days of the Secretary or other loan holder 
providing the discharge application to the borrower. Under proposed 
Sec.  685.214(g)(4), if the Secretary resumes collection on a Direct 
Loan after the 90 days the Secretary would not capitalize unpaid 
interest that accrued on the loan during the period of suspension of 
collection activity that exists in current Sec.  685.214(f)(4) and 
(g)(4).
    Proposed Sec. Sec.  674.33(g)(1)(ii)(A), 682.402(d)(1)(ii)(A), and 
685.214(a)(2)(i) would specify that, for purposes of a closed school 
discharge, a school's closure date is the earlier of the date that the 
school ceases to provide educational instruction in most programs, as 
determined by the Secretary, or a date chosen by the Secretary that 
reflects when the school had ceased to provide educational instruction 
for most of its students.
    Proposed Sec. Sec.  674.33(g)(1)(ii)(D), 682.402(d)(1)(ii)(D), and 
685.214(a)(2)(iii) would define ``program'' for purposes of determining 
the school's closure date as the credential defined by the level and 
Classification of Instructional Program (CIP) code in which a student 
is enrolled. Under the proposed definition, the Secretary may define a 
borrower's program as multiple levels or CIP codes if:
    <bullet> The enrollment occurred at the same institution in closely 
proximate periods;
    <bullet> The school granted a credential in a program while the 
student was enrolled in a different program; or
    <bullet> The programs must be taken in a set order or were 
presented as necessary for borrowers to complete to succeed in the 
relevant field of employment.
    Proposed Sec. Sec.  674.33(g)(3)(i)(B), 682.402(d)(8)(i)(B) and 
685.214(c)(1) would provide that the Secretary--and a guaranty agency 
in the case of a FFEL Program loan--may discharge a loan without an 
application for an eligible borrower based on information in the 
Secretary or guaranty agency's possession if the borrower did not 
complete an institutional teach-out plan implemented by the school or a 
teach-out agreement at another school, approved by the school's 
accrediting agency and, if applicable, the school's State authorizing 
agency.
    Proposed Sec. Sec.  674.33(g)(3)(ii), 682.402(d)(8)(ii) and 
685.214(c)(1) would remove the current requirement that a borrower may 
only qualify for a closed school discharge without an application if 
the borrower does not re-enroll in an eligible title IV school within 
three years of the school's closure date.
    Proposed Sec.  682.402(d)(3) would restore provisions to the FFEL 
regulations that were inadvertently removed as of July 1, 2019.
    Proposed Sec. Sec.  674.33(g)(4)(i)(C), 682.402(d)(3)(iii) and 
685.214(d)(1)(i)(C)

[[Page 41921]]

would retain the current requirement that a borrower state on the 
closed school discharge application that the borrower did not complete 
an eligible institutional teach-out plan performed by the school or a 
teach-out agreement at another school and remove the requirement that 
the borrower state that they did not complete a comparable program of 
study at another school.
    Under proposed Sec. Sec.  674.33(g)(3)(ii), 682.402(d)(8)(ii) and 
685.214(c)(2), if a borrower accepts but does not complete an 
institutional teach-out plan implemented by the school or a teach-out 
agreement at another school, approved by the school's accrediting 
agency and, if applicable, the school's State authorizing agency, the 
Secretary would discharge the loan within one year of the borrower's 
last date of attendance in the teach-out program.
    Proposed Sec. Sec.  674.33(g)(4)(i)(B), 682.402(d)(1)(i) and 
685.214(d)(1)(i)(A) would provide that a borrower who withdrew from the 
school not more than 180 days before the school closed may qualify for 
discharge, an increase in time from the 120-day period under current 
regulations for Perkins and FFEL loans. The Secretary would be able to 
extend the 180-day period if exceptional circumstances justify an 
extension.
    Proposed Sec. Sec.  674.33(g)(9), 682.402(d)(9) and 685.214(h) 
would contain an expanded, but nonexhaustive, list of exceptional 
circumstances that would justify the Secretary extending the new 180-
day timeframe. The expanded list of exceptional circumstances would 
include, but not be limited to:
    <bullet> Revocation or withdrawal by an accrediting agency of the 
school's institutional accreditation;
    <bullet> Placement of the school on probation by its accrediting 
agency or the issuance of a show-cause order by the institution's 
accrediting agency, or placement on an accreditation status, by its 
accrediting agency for failing to meet one or more of the agency's 
standards;
    <bullet> Revocation or withdrawal by the State authorization or 
licensing authority to operate or to award academic credentials in the 
State;
    <bullet> Termination by the Department of the school's 
participation in a title IV, HEA program;
    <bullet> A finding by a State or Federal government agency that the 
school violated State or Federal laws related to education or services 
to students;
    <bullet> A State or Federal court judgment that a school violated 
State or Federal laws related to education or services to students;
    <bullet> The teach-out of the student's educational program exceeds 
the 180-day look back period for a closed school discharge;
    <bullet> The school responsible for the teach-out of the student's 
educational program fails to perform the material terms of the teach-
out plan or agreement, such that the student does not have a reasonable 
opportunity to complete his or her program of study;
    <bullet> The school discontinued a significant share of its 
academic programs;
    <bullet> The school permanently closed all or most of its in-person 
locations while maintaining online programs; or
    <bullet> The Department placed the school on the heightened cash 
monitoring payment method as defined in Sec.  668.162(d)(2).
    Conforming changes reflecting the revisions discussed above would 
be made to Sec. Sec.  682.402(d)(6)(ii) and 682.402(d)(7) of the FFEL 
regulations.
    Proposed Sec.  682.424 would make it clear that, if any part of the 
proposed regulations is held invalid by a court, the remainder would 
still be in effect.
    Reasons: Under the current regulations, to qualify for a closed 
school discharge, a borrower must have been enrolled at the institution 
on the date of its closure or have withdrawn no more than 120 days 
prior to its closure for loans made before July 1, 2020, or 180 days 
prior to the school's closure for loans made on or after July 1, 2020. 
The borrower may not have graduated from the school or transferred 
their credits to complete the same or a comparable program at another 
school to qualify for the discharge. Through this rulemaking, the 
Department proposes to address the disparity in eligibility criteria 
for receipt of a closed school discharge based on the disbursement date 
of the loan, as well as to address other issues that we believe impede 
borrowers from obtaining closed school discharges. We propose to modify 
the current regulations in several ways to increase access to closed 
school discharges for borrowers who have experienced the disruption of 
being enrolled in a school that closes, and who are burdened by student 
loan debt for an educational program that they were unable to complete 
through no fault of their own.
    Automatic closed school discharges, which are granted by the 
Department based on information in its possession, are available to 
certain borrowers under different conditions. The Department is 
proposing to make automatic closed school discharges available to all 
Direct Loan, FFEL and Perkins Loan borrowers under the same criteria. 
In addition, the proposed regulations would reduce the time frame for a 
borrower to qualify for an automatic closed school discharge from three 
years to one year after the school has closed. The U.S. General 
Accountability Office (GAO) found that over 70 percent of borrowers who 
received automatic closed school discharges under the three-year 
provision were in default on the loan.\25\ The GAO has also noted that, 
without an automatic discharge option, only a small percentage of 
eligible borrowers ever obtain relief through a closed school 
discharge. Providing for automatic closed school discharges for all 
qualified Direct Loan, FFEL loan and Perkins Loan borrowers and 
automatically discharging loans more quickly (e.g., within one year 
instead of the current three years) would make it far less likely that 
borrowers who are qualified for discharges but who fail to apply would 
default on their loan before receiving relief through an automatic 
discharge. The Department weighed the risks to borrowers of defaulting 
on a loan for which they are eligible for a discharge against the 
possibility that some students may opt to re-enroll and transfer their 
credits after one year. However, the Department believes that students 
are best protected by establishing a one-year period for automatic 
discharges. In addition to protecting borrowers against default, a one-
year period still provides borrowers time to decide whether they want 
to continue their studies through an approved teach-out plan. A 
borrower may need some time after a school closes to sort out their 
educational options. Providing an automatic discharge one year after 
closure should give borrowers enough time to make thoughtful 
educational decisions but not be so long that there is a risk that 
those who are struggling would have their loans default.
---------------------------------------------------------------------------

    \25\ Government Accountability Office. (2021). ``College 
Closures: Many Impacted Borrowers Struggled Financially Despite 
Being Eligible for Loan Discharges.'' Testimony before the 
Subcommittee on Higher Education and Workforce Investment, Committee 
on Education and Labor, House of Representatives. (GAO Publication 
No. 21-105373). Washington, DC: U.S. Government Printing Office.
---------------------------------------------------------------------------

    The non-Federal negotiators were generally supportive of the 
Department's proposal. Several non-Federal negotiators were concerned 
about the Department's initial proposal that would not have extended 
the possibility of automatic discharges for borrowers who attended 
schools that closed before 2014. The Department initially proposed this 
limitation on automatic closed school discharges because the 
Department's enrollment

[[Page 41922]]

information for those years is not sufficient to determine if a 
borrower re-enrolled in a comparable program. Non-Federal negotiators 
argued that the borrowers who attended schools that closed before 2014 
are the borrowers who are least likely to be aware that they may 
qualify for closed school discharges.
    Several non-Federal negotiators also proposed eliminating the 
comparable program requirement that prevents a borrower who has 
enrolled in a comparable program from qualifying for a closed school 
discharge in its entirety. Without this limitation on eligibility for a 
closed school discharge, the lack of Departmental data showing whether 
borrowers re-enrolled in comparable programs for those years would be a 
moot point. In the view of these negotiators, the existing requirement 
disincentivizes re-enrollment. As noted by the negotiators, the best 
outcome for a borrower who attended a school that closed would be for 
the borrower to re-enroll elsewhere and complete their education. 
However, if a borrower is faced with the decision to either re-enroll 
or to obtain a loan discharge, the borrower is likely to opt for the 
discharge.
    One non-Federal negotiator expressed a concern that the proposed 
automatic discharges would result in fewer students completing teach-
out plans or transferring their credits to other schools. This 
negotiator felt that the Department's proposal could result in the 
Department discharging student loans for thousands of borrowers who 
withdrew from their institution for personal reasons and were not 
impacted by the school closure or by any potential degradation of 
educational quality prior to the school closing.
    Other non-Federal negotiators noted that institutions that close 
have, in many cases, been spiraling downward, and that school closure 
does not occur in a vacuum. In the case of sudden closures, there are 
often a string of events that occurred before the school's 
accreditation is terminated or the school has its front doors locked 
with no warning. For an institution that has been steadily declining 
prior to closure, the credits earned at the school may not be 
transferrable.
    In contrast to this view, one of the non-Federal negotiators made 
the point that each school closure is unique, and that while there are 
many examples of schools that have not handled closure well, some 
schools do effectuate an orderly, planned closure. This negotiator 
stated that school closure is not necessarily a sign that the quality 
of instruction at the school has deteriorated and that there can be 
unique transactions such as mergers, consolidations, or acquisitions 
that end with an institution officially closing, but prior to the 
closure the school was still in good standing. According to the 
negotiator, the transaction that resulted in the school closure may 
have been intended to result in a stronger institution, and schools 
that close under these circumstances are likely to have established 
effective teach-out programs or to have ensured that their credits are 
transferrable to another institution.
    Several non-Federal negotiators disagreed with this line of 
reasoning. They argued that, regardless of whether the school closure 
is precipitous or carefully planned, a student attending a school that 
closes is harmed. Even for a student who can transfer credits to 
another school, the experience of going through a school closure can 
still be devastating. The student may have given up a job to attend the 
school or may have spent months or years in a program that the student 
will not be able to finish. Students may have taken out private or 
institutional loans to further their education at the school. These 
types of loans are not covered under the closed school discharge 
provisions, which only apply to Federal title IV loans.
    During the first negotiating session and in explaining our initial 
proposal, the Department emphasized that our goal with these proposed 
regulations is to create more ways for a borrower to qualify for an 
automatic discharge. Under the proposed rules, re-enrolling would not 
preclude a borrower from obtaining a closed school discharge. However, 
the Department did not collect and does not have reliable data on 
students' programs prior to 2014; therefore, the borrower could not 
qualify for an automatic discharge prior to 2014. Such borrowers could 
still apply for a closed school discharge by providing an attestation 
that they did not enroll in a comparable program. Initially, the 
Department's proposed regulations would have defined ``comparable 
program'' as a program with the same credential level and in the same 
field of study, and which accepted most of the credits transferred from 
the closed school. The Department pointed out that this would be a less 
stringent standard than the standard in the 2016 rule pertaining to 
automatic closed school discharges, which provided that a borrower who 
enrolled elsewhere would not qualify for an automatic discharge.
    Under current practice, a borrower applying for a closed school 
discharge must certify under penalty of perjury whether the borrower is 
enrolled in or has completed a comparable program at another school. If 
the borrower has enrolled in or completed a comparable program, the 
borrower must certify whether the new school accepted transfer credits 
from the closed school or did not require the borrower to complete core 
credits after evaluating the borrower's competency. If transfer credits 
were accepted or the borrower was not required to complete core 
credits, the borrower is not eligible for a closed school discharge. 
Since re-enrollment information at that level of detail would not 
normally be in the Department's routine databases, in the case of an 
automatic closed school discharge, if the Department has information 
indicating that the borrower has re-enrolled in a comparable program, 
the Department does not grant an automatic discharge. However, the 
borrower may still apply directly for a closed school discharge, and, 
by providing the certifications discussed above and meeting the 
additional eligibility criteria, qualify for a closed school discharge.
    The Department's initial proposal would have provided a more 
generous set of eligibility criteria for granting automatic closed 
school discharges.
    The Department emphasized that we would retain a wait-out period 
because we believe that it is important to allow time between the 
school closure and the automatic discharge to give a borrower an 
opportunity to decide whether to re-enroll in another program. For many 
borrowers, particularly those close to completing their credential, 
obtaining the degree or certificate they were pursuing will be their 
preferred option following a school closure. However, we believe that 
the current three-year period is too long. If the timeframe is longer 
than one year, it is possible that the loan will go into default before 
the automatic closed school discharge would be granted, as evidenced by 
the high number of automatically discharged loans in default status as 
found by GAO. Specifically, GAO reported that more than half of 
borrowers who eventually received an automatic discharge on their loans 
following a closure first defaulted on their loans; and more than half 
of those borrowers did so within 18 months of their school closing.
    A non-Federal negotiator proposed removing the re-enrollment 
limitation entirely but retaining the one-year timeframe. This proposal 
was supported by many members of the negotiating committee. The 
Department agreed to consider this proposal.

[[Page 41923]]

    The Department also noted that, under the proposed regulations, the 
clock on the automatic discharge timeframe would be paused while the 
borrower is in a teach-out program and would re-start after they leave 
the teach-out without graduating the program. The non-Federal 
negotiators were generally supportive of this proposal.
    The Department noted the disparity in the timeframe for a borrower 
to have withdrawn from the school to qualify for a closed school 
discharge which, depending on the loan disbursement date, could be 120 
or 180 days prior to the school closing. The Department proposed making 
the timeframe consistent at 180 days for all borrowers. As outlined in 
the 2018 NPRM (83 FR at 37268), when we last amended the closed school 
regulations, we determined that 180 days is a reasonable timeframe 
after considering summer breaks and the potential for a student to have 
withdrawn one semester prior to a school's precipitous closure, which 
could be as many as 180 days earlier. The proposed changes also ensure 
equity for all borrowers regardless of loan disbursement date.
    The non-Federal negotiators supported this proposal, although some 
expressed concern that schools might manipulate the date of closure, 
rendering borrowers ineligible for a closed school discharge. They 
asked whether there are specific triggering events that the Department 
uses to determine whether a school is considered closed for purposes of 
a closed school discharge. The Department indicated that there are and 
provided the negotiators with a chart that is used to make these 
determinations.
    Determining the date of an institutional closure to include 
circumstances where an institution has ceased instruction in most 
programs or for most students allows the Department to address 
situations where an institution may effectively cease operating without 
formally closing to limit discharges for borrowers. This provision 
would not automatically apply if, for example, a small institution 
remains open but ends a program or two but would capture a circumstance 
where an institution continues only one small program while otherwise 
ceasing all other enrollment. This would limit the ability of an 
institution to manipulate the closed school discharge process.
    The Department noted that the existing regulations give the 
Secretary the authority to extend the discharge timeframe (whether 120 
or 180 days) under exceptional circumstances. The existing regulations 
provide illustrative examples of exceptional circumstances, and the 
Department proposed adding additional illustrative examples to that 
list. The proposed six additional examples illustrate circumstances 
that the Department believes justify an extension of the look-back 
timeframe. While the current regulations include revocation or 
withdrawal of accreditation by the institutional accrediting agency, 
the Department proposes that other actions--such as an accrediting 
agency putting the institution on probation or issuing a show cause 
order--could indicate that the institution is at risk of losing its 
accreditation, thereby placing the borrower in an untenable situation 
should a resulting closure occur outside the look-back timeframe. 
Similarly, after receiving comments and feedback from legal aid 
representatives and State attorneys general, the Department proposes to 
add administrative findings and court judgments that a school violated 
State or Federal law related to education or services to students as 
additional examples that would warrant an extension of the look-back 
timeframe. Finally, based on its experience, the Department proposes 
three additional examples that could indicate that the school is in 
danger of closing and placing its borrowers at risk: when a school 
discontinues a significant share of its academic programs; when a 
school permanently closes all or most of its in-person locations while 
maintaining online programs; and when the school has been placed on 
heightened cash monitoring as defined under Sec.  668.162(d)(2). Each 
of these circumstances indicates that the institution may be at risk of 
closing, and we propose to include these examples as situations that 
warrant an extension for the borrower.
    Non-Federal negotiators expressed concerns relating to stackable 
credentials and the issuance of retroactive credentials as methods 
schools use to prevent borrowers from qualifying for closed school 
discharges. The Department agreed that closing schools issuing 
retroactive credentials to borrowers to prevent them from qualifying 
for closed school discharges is a concern. Non-Federal negotiators also 
discussed the problem of schools forcing borrowers into an associate 
degree program before a bachelor's degree program, even when the 
student is only interested in obtaining the bachelor's degree. 
Negotiators argued that, in some cases, borrowers are unknowingly 
placed in associate degree programs but are led to believe that they 
are working toward a bachelor's degree. In these cases, if a school 
closes, the loans used to obtain the associate degree are not eligible 
for discharge. Only the loans used to obtain the subsequent bachelor's 
degree may qualify.
    To address these concerns, the Department proposed expanding the 
definition of ``program'' to give the Department the discretion to 
determine whether an institution has placed a student in a different 
program or awarded the student a different degree to make the student 
ineligible for a closed school discharge. The revised definition would 
cover enrollments that occurred at the same institution in close 
proximate periods, or if a school granted a credential for one program 
while the student was enrolled in a different program. While there are 
many circumstances in which dual enrollment or reverse credentialing 
can benefit students, the Department is concerned about past instances 
where some institutions have required students to start in programs 
other than the ones the students wanted to pursue, broken up programs 
into multiple pieces when a student needs to complete all of them to 
succeed in the relevant field of employment, or retroactively awarded 
credentials in a way that then reduces the amount of closed school 
discharges because a borrower cannot receive a discharge related to a 
program from which they graduated.
    The Department is proposing to eliminate the current regulations 
relating to a borrower re-enrolling in a comparable program. However, 
we are not proposing to remove the limitation regarding a borrower 
completing the program through a teach-out agreement. A borrower would 
only qualify for a closed school discharge if the borrower did not 
complete an institutional teach-out plan performed by the school or 
through a teach-out agreement with another school approved by the 
school's accrediting agency and, if applicable, the school's state 
authorizing agency.
    The Department believes removing the re-enrollment criteria would 
better reflect the legislative intent of the HEA and avoids the 
significant challenges that exist in implementing the requirement. 
Under Sec.  437(c) of the HEA, a borrower may receive a closed school 
discharge if they are unable to complete the program in which they are 
enrolled. The HEA does not mention the possibility that enrollment in a 
comparable program would limit the borrower's eligibility for a 
discharge. The intent of the comparable program requirement in the 
regulations is to encourage borrowers to get a degree or certificate. 
However, this may result in

[[Page 41924]]

too many situations where a borrower loses the ability to receive a 
discharge even though the program they are enrolled in is not a true 
extension of the program they were in at the institution that closed. 
Similarly, there is no definition of what constitutes a comparable 
program, creating a risk that a borrower will incorrectly believe a 
program to be comparable when it is objectively not comparable. The 
Department proposes to address this issue by only barring discharges to 
situations in which the borrower accepts and completes an approved 
teach-out program. The purpose of a teach-out program is to provide 
students a smooth path to completion of their program while minimizing 
the common problems that occur during transfer. Approved teach-out 
plans include agreements between the two institutions around credit 
transfer and programs and ensure the new program provides similar 
content. Teach-out programs with these features may be more clearly 
viewed as an extension of the student's original program. Schools that 
are engaged in a planned closure or a planned closure of a program are 
in a better position to arrange a formal teach-out than schools that 
close precipitously. A school that closes precipitously, unless it 
already has a teach-out plan in place, may not be able to provide a 
teach-out for its students.
    Though participating in a teach-out program may be the most 
expeditious way for a borrower to complete their original program, the 
Department proposes that students who start a teach-out program be 
eligible for an automatic discharge if they do not complete it. This 
proposal would minimize the high-stakes nature of a borrower's decision 
of whether to continue in a teach-out program and would encourage more 
students to attempt to continue their education. It also acknowledges 
that, despite a student's effort to continue the prior program, there 
may be meaningful differences between the schools and programs that 
make completion nonviable. These differences can include the teach-out 
option being too far away for the borrower or that the teach-out 
program is taught online when the borrower was previously attending an 
in-person program. The Department also believes that it is 
inappropriate to limit a borrower's eligibility for a discharge solely 
on the basis that they have been offered a teach-out program. Under 
such a policy, an institution could limit its possible closed school 
discharge liability simply by offering teach-out options in 
inconvenient locations that are not feasible for borrowers.
    As noted above, during the negotiated rulemaking, the Department 
shared subregulatory guidance in the form of a table that indicates 
when certain conditions constitute a closed school. The non-Federal 
negotiators requested that the subregulatory guidance be publicly 
available to provide institutions with a clearer understanding of when 
a school is considered closed, beyond the regulatory language. The 
negotiators recommended putting the guidance in the FSA Handbook or 
including it as part of the preamble to this NPRM.
    The Department agreed to make the document available in a more 
public forum but noted that the document needed some technical updating 
and revisions. The updated and revised version of the information will 
be made available in Volume 2 of the Federal Student Aid Handbook, 
which will be made available on the Department's website at https://fsapartners.ed.gov/knowledge-center/fsa-handbook.
    One non-Federal negotiator had significant concerns about the 
proposed language. This negotiator objected to the proposal to define a 
closed school to include a school that has ceased to provide 
educational instruction for most of its students. The non-Federal 
negotiator added that this would mean a student attending a school that 
has not closed would be eligible for closed school discharge. The non-
Federal negotiator noted that institutions add and discontinue program 
offerings routinely in response to student demand and changes in the 
labor market and argued that programmatic innovation should be 
encouraged so that institutions continuously improve offerings to help 
students succeed in the workforce. The non-Federal negotiator felt that 
the Department's proposal could be particularly damaging to small 
institutions that want to switch up program offerings and only offer 
three or four programs in total. Under the proposed regulations, 
instead of starting new programs and discontinuing old programs, some 
colleges may keep old programs afloat simply to avoid a closed school 
discharge liability. In this negotiator's view, the proposed definition 
of a closed school departs from the plain meaning of that term in the 
HEA. The negotiator contended that to obtain relief under the statute, 
the school must have closed.
    This non-Federal negotiator also noted that the proposed 
regulations would represent a significant shift away from the concept 
that a borrower who enrolls in a comparable program would not qualify 
for a closed school discharge. The Department's new proposal would 
provide loan discharges to all borrowers who attend a school that 
closed except those who completed their programs through a teach-out 
agreement. In the negotiator's view, this would create a perverse 
incentive for borrowers not to enroll in a teach-out program because it 
would be more financially rational for a borrower to transfer credits 
to another school than to participate in a teach-out. The negotiator 
believed that teach-out arrangements are generally positive for 
students and expressed disappointment that the Department would propose 
a policy that would disincentivize enrollment in a teach-out program. 
If a borrower is close to completing their program when the school 
closes and can transfer all of their credits, they may only need to 
take one or two classes at the new school. However, they can still be 
eligible for full student loan relief under the proposal. The 
negotiator stated that this creates a windfall for students, which 
would primarily be paid by taxpayers. Lastly, the negotiator objected 
to the Department's intention to make these changes to the closed 
school discharge regulations apply retroactively to all title IV 
borrowers.
    The Department responded that the objections raised by the non-
Federal negotiator represented general differences of opinion over the 
direction of the proposed regulations. The Department emphasized that 
the proposed revisions to the regulations are intended to ensure that 
borrowers who have experienced school closures have easier access to 
closed school discharges and to address a multitude of potential closed 
school situations that could adversely affect borrowers. In particular, 
the proposed regulations seek to ensure that borrowers are not left 
worse off if they accept a teach-out agreement following a closure and 
that teach-out opportunity does not meet the student's needs or live up 
to the promise of the program they originally signed up for--a 
situation that has been a reality for many students affected by 
precipitous school closures in the past. We do not believe that 
offering choices to students disincentivizes the use of a teach out and 
agree that we want to provide pathways for students to complete their 
academic program. Moreover, the Department believes that the proposal 
in these regulations would be more likely to encourage a borrower to 
accept a teach out because doing so would not eliminate their ability 
to receive a discharge just by trying the program at the new 
institution. The choice of

[[Page 41925]]

whether to take a teach out is thus lower stakes for a borrower than it 
is under current circumstances.
    The Department did not believe that there was a feasible way to 
bridge the differences between the proposed regulatory language and the 
non-Federal negotiator's objections. The non-Federal negotiator agreed. 
Therefore, the Committee was not able to reach consensus on these 
proposed regulations.
    With regard to severability, we believe that each of the proposed 
provisions discussed in this NPRM serves one or more important, 
related, but distinct, purposes. Each of the requirements provides 
value to students, prospective students, and their families; to the 
public, taxpayers, and the Government; and to institutions separate 
from, and in addition to, the value provided by the other requirements. 
To best serve these purposes, we would include this administrative 
provision in the regulations to make clear that the regulations are 
designed to operate independently of each other and to convey the 
Department's intent that the potential invalidity of one provision 
should not affect the remainder of the provisions.

5. Total and Permanent Disability Discharge (Sec. Sec.  674.61, 
682.402, and 685.213)

    This issue was subject to negotiated rulemaking and consensus was 
reached on the proposal.
    Statute: Sections 437(a)(1) and 464(c)(1)(F) of the HEA provide for 
a discharge of a borrower's Perkins or FFEL program loan if the 
borrower becomes totally and permanently disabled as determined in 
accordance with the Secretary's regulations, or if the borrower is 
unable to engage in any substantial gainful activity by reason of any 
medically determinable physical or mental impairment that can be 
expected to result in death or has lasted, or can be expected to last, 
for a continuous period of not less than 60 months. The TPD discharge 
provisions also apply to Direct Loans under Sec.  455(a) of the HEA.
    Current Regulations: Under Sec. Sec.  674.61(b)(2)(iv), 
682.402(c)(2)(iv), and 685.213(b)(2), a TPD discharge may be certified 
by a doctor of medicine (MD) or a doctor of osteopathy (DO). In 
addition, under certain circumstances, a borrower may qualify for a TPD 
discharge based on an SSA notice of award indicating that the borrower 
qualifies for Social Security Disability Insurance (SSDI) or 
Supplemental Security Income (SSI) benefits. The SSA has different time 
frames for conducting follow-up disability reviews depending on the 
nature and severity of the individual's disability. If the borrower's 
next scheduled SSA disability review will be within five to seven 
years, the borrower would fulfill the requirements in the HEA for a 
total and permanent disability discharge.
    Sections 674.61(b)(6)(I), 682.402(c)(6), and 685.213(b)(7)(i) state 
that a borrower's Perkins, FFEL, or Direct Loan program loan may be 
reinstated after the borrower has received a TPD discharge if the 
borrower:
    <bullet> Has annual employment earnings that exceed 100 percent of 
the poverty guideline for a family of two;
    <bullet> Receives a new TEACH Grant or title IV loan;
    <bullet> Fails to ensure that the full amount of any disbursement 
of a title IV loan or TEACH Grant received prior to the discharge date 
that is made is returned; or
    <bullet> Receives a notice from SSA indicating that the borrower is 
no longer disabled or that the borrower's continuing disability review 
will no longer be within the five- to seven-year period.
    If a loan is reinstated, Sec. Sec.  674.61(b)(6)(iii), 
682.402(c)(6)(iii), and 685.213(b)(7)(iii) specify that the notice of 
reinstatement sent to the borrower explain that the first payment due 
date following reinstatement would be no earlier than 60 days.
    Current regulations in part 674, subpart D (Perkins) and part 682, 
subpart D (FFEL) do not address severability.
    Proposed Regulations: Under proposed Sec. Sec.  674.61(b)(2)(iv), 
682.402(c)(2)(iv), and 685.213(b)(2), a TPD discharge application may 
be certified by an NP, a PA licensed by a State, or a licensed 
certified psychologist at the independent practice level, in addition 
to an MD or DO. The type of SSA documentation that may qualify a 
borrower for a TPD discharge would be expanded to include an SSA 
Benefit Planning Query or other SSA documentation deemed acceptable by 
the Secretary. In addition to SSA documentation indicating that a 
borrower qualifies for SSDI or SSI benefits with a next scheduled 
disability review in five years to seven years, a borrower would 
qualify for a TPD discharge based on SSA documentation indicating that 
the borrower--
    <bullet> Qualifies for SSDI or SSI benefits with a next scheduled 
disability review within three years, and the borrower's eligibility 
for disability benefits in the three-year review category has been 
renewed at least once;
    <bullet> Has a disability onset date for SSDI or SSI of at least 
five years prior to the application for a disability discharge or has 
been receiving SSDI or SSI benefits for at least five years prior to 
the application for TPD;
    <bullet> Qualifies for the SSA compassionate allowance program; or
    <bullet> Is currently receiving SSA retirement benefits and met any 
of the above requirements prior to qualifying for SSA retirement 
benefits.
    Conforming changes identifying the additional medical professionals 
who would be authorized to certify a TPD discharge application, and the 
additional SSA documentation that would be acceptable for a TPD 
discharge would be made throughout Sec. Sec.  674.61(b), 682.402(c), 
and 685.213(b) of the Perkins, FFEL, and Direct Loan regulations.
    Proposed Sec. Sec.  674.61(b)(6)(i), 682.402(c)(6), and 
685.213(b)(7)(i) would eliminate the existing reinstatement 
requirements, except for the provision which provides that a borrower's 
loan is reinstated if the borrower receives a new TEACH Grant or a new 
title IV loan within three years of the date the TPD discharge was 
granted.
    For a loan that is reinstated, proposed Sec. Sec.  
674.61(b)(6)(iii), 682.402(c)(6)(iii), and 685.213(b)(7)(iii) would 
revise the regulations governing the notification of reinstatement to 
provide that the notice will explain to the borrower that the first 
payment due date following reinstatement will be no earlier than 90 
days after the date of the notification of reinstatement, instead of no 
earlier than 60 days.
    The provisions in Sec. Sec.  674.61(b)(7), 682.402(c)(7), and 
685.213(b)(8) that describe a borrower's responsibilities after 
receiving a total and permanent disability discharge would be removed.
    Proposed Sec.  685.213(d) would provide that the Secretary will 
grant a TPD discharge without an application if the Secretary obtains 
the appropriate documentation from the Department of Veterans Affairs 
(VA) or SSA.
    Proposed Sec. Sec.  674.65 and 682.424 would make it clear that, if 
any part of the proposed regulations is held invalid by a court, the 
remainder would still be in effect.
    Reasons: Prior to the negotiations that resulted in this NPRM, the 
Department took important steps to improve the TPD discharge process 
for eligible borrowers. On November 26, 2019, the Department published 
in the Federal Register an interim final rule (IFR) amending and 
updating the regulations pertaining to TPD discharges for veterans. The 
IFR removed administrative burdens that may have prevented at least 
20,000 totally and

[[Page 41926]]

permanently disabled veterans from obtaining discharges of their 
student loans by automating the process for granting TPD discharges 
based on a data match with the VA. On August 23, 2021, we published a 
final rule in the Federal Register that adopted and amended the 
regulations established in the IFR. The final rule:
    <bullet> Expanded the automatic TPD discharge process to borrowers 
who are eligible for SSDI and/or SSI benefits and whose next scheduled 
disability review is no earlier than five to seven years;
    <bullet> Clarified that borrowers determined to be eligible for a 
TPD discharge based on data that the Secretary obtains from VA or the 
SSA are not required to submit a TPD application to have their Federal 
student loans discharged;
    <bullet> Described the process used by the Secretary to 
automatically discharge Federal student loans for a borrower who is 
determined to be eligible for a TPD discharge based on data obtained 
from either VA or the SSA;
    <bullet> Specified the contents of the notice the Secretary sends 
to borrowers who are determined to be eligible for a TPD discharge 
based on data that the Secretary obtains from VA or from the SSA; and
    <bullet> Provided for the return of payments to the person who made 
payments on the loan on or after the effective date of the 
determination by VA or SSA for borrowers who receive the automatic TPD 
discharge.
    In addition to these regulatory changes, the Department also 
announced in March 2021 that we would relax the TPD monitoring period 
requirements during the national emergency due to the pandemic and 
reinstate TPD discharges for any borrower who had not responded to 
requests for earnings information.
    With this rulemaking, the Department proposes to build on the 
reforms to the TPD discharge process described above.
    During the negotiated rulemaking sessions, the Department proposed 
eliminating the TPD income monitoring period altogether. The Department 
has found that, rather than acting as a guardrail, requiring borrowers 
who are totally and permanently disabled to submit annual income 
information has caused significant numbers of loans discharged due to 
TPD to be reinstated simply because the borrower did not respond to a 
paperwork request and not because they had earnings above the threshold 
for reinstatement. The Department noted that around half of the loans 
discharged due to total and permanent disability are reinstated because 
of a failure by the borrower to respond to the request for earnings 
information.
    The non-Federal negotiators agreed with this proposal as part of 
reaching consensus on the overall total and permanent disability 
regulatory text. However, since the Department was not proposing to 
eliminate the reinstatement requirements regarding borrowers who obtain 
additional title IV loans after receiving a TPD discharge, they 
recommended that the three-year monitoring period be reduced to one 
year. The Department considered this proposal, but ultimately 
determined that retaining the three-year monitoring period for this 
purpose is appropriate. Because we are taking steps with these 
regulations to make it easier for borrowers to receive TPD discharges, 
the Department has not been presented with a reason to change our 
current position on having a three-year limitation on borrowers taking 
out additional title IV loans.
    Under current regulations, a borrower may qualify for a TPD 
discharge based on an SSA determination that a borrower is in SSA's 
Medical Improvement Not Expected (MINE) disability status. The MINE 
status is the only current SSA disability status that the Department 
uses for TPD discharges based on SSA disability determinations.
    The Department noted that there are other SSA disability categories 
that may meet the Department's criteria for a TPD discharge. These 
statuses include qualifying for SSA's Compassionate Allowance Program, 
which is a status where the borrower has one of a predefined set of 
serious conditions that is highly likely to result in the borrower 
qualifying for disability benefits. Another status is Medical 
Improvement Possible (MIP). MIP requires a disability review within 
three years, so a borrower whose MIP status was renewed at least once 
would meet the HEA requirement that a borrower's medical impairment 
last, or be expected to last, at least five years.
    Individuals in the MIP category are required to undergo a medical 
review within three years of SSA's initial determination that they are 
qualified for SSA disability benefits. Therefore, a borrower who is in 
the MIP category and whose approval for disability benefits is 
subsequently renewed would be in that disability status for six years 
and would meet the HEA definition of a medical condition that has 
lasted or is expected to last at least five years. To address this 
situation, the Department is proposing to allow borrowers whose MIP 
status has been renewed at least once to qualify for a TPD discharge 
based on SSA documentation.
    Finally, the Department noted that when an individual in the MINE 
or MIP category reaches retirement age, the individual becomes eligible 
for SSA retirement benefits. These individuals would now receive SSA 
retirement benefits rather than disability benefits and would no longer 
appear in the Department's data match as eligible for SSA disability 
benefits.
    The non-Federal negotiators agreed with allowing borrowers in these 
additional SSA disability categories to qualify for TPD discharges and 
recommended that individuals who may not be in the MINE or MIP 
categories but have a disability onset date for SSDI or SSI purposes of 
at least five years prior to applying for a TPD discharge qualify for 
the discharge.
    One negotiator supportive of these proposals asked why the proposed 
regulatory language continued to provide for a TPD application process 
for borrowers who qualify for a TPD discharge based on the data match 
with SSA. The Department responded that applications for TPD discharge 
are also based on a physician's certification. Borrowers would still 
need to submit an application that is reviewed by the Department. In 
addition, borrowers who qualify based on SSA documentation may want to 
apply for the discharge prior to being reflected in an SSA data match 
or may want to apply at a later time after initially turning down an 
automatic TPD discharge. Finally, retaining the application process 
allows borrowers who may be inadvertently missed in the SSA data match 
to apply directly to the Department for the discharge. This could 
include borrowers who have reached retirement age after previously 
being in an eligible SSA category but who are no longer identified in 
the Department's data matches.
    In addition to expanding the types of SSA categories that would 
qualify a borrower for a TPD discharge, the Department also proposed 
expanding the type of SSA documentation that a borrower may provide 
when applying for the discharge. Currently the only SSA documentation 
submitted by a borrower that is acceptable under the regulations is the 
SSA Notice of Award. However, the Department has also commonly accepted 
an SSA Benefit Planning Query (BPQY) which contains similar information 
to the Notice of Award. A BPQY is also easier for a borrower to obtain 
than an SSA Notice of Award. This technical change would conform with 
current practice.
    The non-Federal negotiators agreed with this proposal but were 
concerned that the proposed regulation may limit

[[Page 41927]]

the Department's flexibility to accept other types of SSA 
documentation. The non-Federal negotiators mentioned other types of 
documentation that might serve the same purpose, such as 1099 tax forms 
that indicate that an individual has received SSA disability benefits 
for at least five years and printouts from the MINE social security 
website. Non-Federal negotiators recommended that the proposed 
regulations allow the Department to retain flexibility to accept other 
types of documentation not specifically referenced in the regulatory 
language. To address this concern the Department adjusted the proposed 
language to indicate the other types of documentation it could accept 
was a non-exhaustive list.
    The Department also proposed expanding the list of the types of 
healthcare professionals authorized to certify a TPD discharge 
application. We proposed expanding the list of eligible certifiers to 
include both NPs and PAs who are licensed to practice in the United 
States. As noted by one negotiator, a shortage of physicians is a major 
problem in poor and rural areas. Allowing NPs and PAs to certify TPD 
applications would be an enormous benefit for borrowers who seek care 
from these providers--particularly for those who do not have access to 
doctors.
    The Department raised the concern that, while at the time of the 
negotiations we had identified a source verifying licensure of NPs, we 
had still not identified a source for verifying licensure status of 
PAs. Another concern related to allowing PAs to certify TPD 
applications was raised by a non-Federal negotiator, who noted that a 
PA's scope of practice is often defined by a collaboration agreement 
with the physician, and that such agreements are often required by 
insurance companies to cover procedures carried out by PAs. This 
negotiator recommended that the proposed regulation include a qualifier 
noting that a PA can certify a TPD discharge application if it is 
within the PA's scope of practice. The Department did not adopt this 
proposal. The types of agreements often required by insurance companies 
defining a PAs scope of practice would not routinely address the PA's 
authority to certify TPD applications. One non-Federal negotiator, 
supportive of the proposal, also raised the issue of borrowers living 
abroad, who may have difficulty getting certifications from healthcare 
practitioners licensed to practice ``in a State.'' This negotiator 
recommended building in some flexibility regarding the State licensure 
requirement for health care professionals certifying TPD applications 
for borrowers living outside the United States.
    The Department did not agree with this recommendation. The State 
licensure requirement provides assurances that individuals certifying 
TPD are qualified to make disability determinations. It would not be 
feasible for the Department to verify comparable licensing standards in 
foreign countries.
    Finally, the Department proposed adding language to the regulations 
that would provide greater protection around the certification of the 
TPD discharge applications. We proposed adding language stating that 
the Department would analyze physician's certification forms to verify 
any patterns that suggest potential cause for concern. This could 
include large numbers of forms certified by a single individual, for 
example. In such cases, the regulatory language would authorize the 
Department to refer concerning practices to the Office of Inspector 
General (OIG), and to decline to accept health care practitioners' 
certifications in such cases. We noted that this would provide added 
protection for taxpayers, considering that we are also proposing to 
eliminate the income monitoring period and give more options for the 
current physician's certification.
    In general, the non-Federal negotiators did not support this 
proposal. They were concerned about the term ``patterns of concern,'' 
which some felt was ambiguous. Another concern was that opening the 
certifying authority to NPs and PAs would have the potential of an 
individual certifying a high volume of TPD applications simply because 
that individual could not assist patients in this way before the 
regulatory change. The negotiators noted that this could be a problem 
especially in rural communities, where PAs and NPs serve many patients 
due to the lack of doctors in these areas.
    The negotiators expressed concern that the proposed regulation 
would create a chilling effect, and that some health care professionals 
would be less likely to feel comfortable certifying TPD applications if 
the Department retained this proposed language in the final 
regulations.
    The Department responded that every few years there are some 
significant criminal prosecutions involving physicians who falsified 
TPD discharge applications. The proposed regulatory language was 
intended to address those situations and was designed to put people on 
notice that we are going to analyze the information that we receive 
through the TPD discharge process, and we will take action to protect 
the Federal fiscal interest when warranted. The Department noted that 
we already have the authority to do this, regardless of whether the 
language is included in the regulations. However, we were proposing to 
include the language as a way of providing notice that we intend to 
conduct this level of oversight to the TPD discharge process. 
Ultimately, the Department agreed to remove the language from the 
proposed regulations since the language is not needed for the 
Department to refer such cases to OIG.
    The Department made further changes to the proposed regulatory 
language in response to the concerns raised by the non-Federal 
negotiators. We propose to accept SSA disability determinations showing 
a disability onset date of at least five years prior to the date of 
application for TPD or an indication that the borrower has been 
receiving SSDI or SSI benefits for at least five years prior to the 
application for TPD. We propose expanding the SSA documentation 
requirements to include ``other documentation deemed acceptable by the 
Secretary,'' in response to the recommendation that the proposed 
regulations allow the Department to accept documentation not specified 
in the regulations. This would provide the Department with flexibility 
to accept documentation that we may not have been aware of at the time 
the regulation is finalized, but that when presented by a borrower 
indicates that they meet the criteria for discharge.
    The non-Federal negotiators supported the proposed TPD regulations, 
as revised based on their recommendations, and reached consensus on 
this issue.
    With regard to severability, we believe that each of the proposed 
provisions discussed in this NPRM serves one or more important, 
related, but distinct, purposes. Each of the requirements provides 
value to students, prospective students, and their families; to the 
public, taxpayers, and the Government; and to institutions separate 
from, and in addition to, the value provided by the other requirements. 
To best serve these purposes, we propose including an administrative 
provision in the regulations to make clear that the regulations are 
designed to operate independently of each other and to convey the 
Department's intent that the potential invalidity of one provision 
should not affect the remainder of the provisions.

6. False Certification Discharge (Sec. Sec.  682.402(e), 685.215(c) and 
685.215(d)

    Statute: Section 484(d) of the HEA contains the requirements that 
an

[[Page 41928]]

individual who does not have a high school diploma or a recognized 
equivalent of a high school diploma must meet to qualify for title IV, 
HEA aid. Section 437(c) of the HEA provides for the discharge of a 
borrower's liability to repay a FFEL Program 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 
Sec.  455(a) of the HEA.
    Current Regulations: Sections 682.402(e), 685.215(c) and 685.215(d) 
describe the qualifications and procedures for receiving a false 
certification discharge in the FFEL and Direct Loan programs.
    Section 682.402(e)(1)(i)(A) provides that a FFEL borrower may 
qualify for a false certification discharge if the school certified the 
eligibility of a borrower who was admitted based on the ``ability to 
benefit'' (ATB) from its training, but the borrower did not meet the 
eligibility requirements in part 668 and in Sec.  484(d) of the HEA. 
Section 682.402(e)(13) describes a variety of different ATB standards 
that have been applicable to different enrollment periods.
    Section 685.215(a)(1) provides that a Direct Loan borrower who does 
not meet the applicable alternative to high school graduation 
eligibility criteria qualifies for the discharge if the borrower 
reported not having a high school diploma or equivalent to the school.
    Sections 682.402(e)(1)(i)(B) and 685.215(a)(1)(iii) provide that a 
borrower qualifies for a false certification discharge if the school 
signed the borrower's name on the loan application or promissory note 
without the authorization of the borrower.
    Sections 682.402(e)(1)(i)(C) and 685.215(a)(1)(v) state that a 
borrower qualifies for a false certification discharge if the school 
certified the borrower's eligibility for a FFEL or Direct Loan as a 
result of the crime of identity theft.
    Section 685.215(a)(1)(iv) provides that a Direct Loan borrower may 
qualify for a false certification discharge if the school certified the 
eligibility of a student who would not meet the requirements for 
employment in the occupation for which the training program supported 
by the loan was intended due to a physical or mental condition, age, 
criminal record, or other requirement accepted by the Secretary that 
was imposed by State law.
    Current FFEL regulations in part 682, subpart D, do not address 
severability.
    Proposed Regulations: Proposed Sec. Sec.  682.402(e)(6) and 
685.215(d) would amend the procedures for applying for a false 
certification discharge. The proposed regulations would remove the 
provisions in Sec.  685.215(a)(1), (c), (d) and (e) that established 
separate false certification discharge procedures and eligibility 
requirements for loans disbursed before July 1, 2020, and loans 
disbursed on or after July 1, 2020.
    Under proposed Sec. Sec.  682.402(e)(6)(iii) and 685.215(d)(3), if 
a FFEL or Direct Loan borrower submits an application for discharge 
that a FFEL program loan holder or the Secretary determines is 
incomplete, the loan holder or Secretary would notify the borrower of 
that determination and allow the borrower 30 days to amend the 
application and provide supplemental information. If the borrower does 
not amend the application within 30 days of receiving the notification, 
the borrower's application would be closed as incomplete, and the loan 
holder or Secretary would resume collection on the loan and grant 
forbearance to the borrower for the period in which collection activity 
was suspended.
    Under proposed Sec.  682.402(e)(6)(iv) and (v), if a FFEL borrower 
submits a complete application to the loan holder, the holder would 
file a claim with the guaranty agency no later than 60 days after the 
holder receives the borrower's complete application. The guaranty 
agency would determine whether the available evidence supports the 
claim for discharge. Proposed Sec.  682.402(e)(6)(vii) would require a 
guaranty agency to issue a decision that explains the reasons for any 
adverse determination on a false certification discharge application, 
describes the evidence on which the decision was made, and provides the 
borrower, upon request, copies of the evidence. The guaranty agency 
would consider any response or additional information from the borrower 
and notify the borrower as to whether the determination is changed. 
Proposed Sec.  682.402(e)(6)(ix) would provide the borrower with the 
option to request that the Secretary review the guaranty agency's 
decision.
    Proposed Sec. Sec.  682.402(e)(6)(x) and 685.215(d)(7) would 
provide that a borrower whose discharge request is denied is not 
precluded from re-applying for a false certification discharge if the 
borrower has additional supporting evidence. We do not propose to 
impose a deadline by which a borrower who seeks to re-apply must do so.
    We propose to eliminate the reference to ``ability to benefit'' in 
current Sec.  602.402(e)(1)(i)(A). Instead, Sec.  682.402(e)(1)(ii)(A) 
would specify that a FFEL 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 under section 484(d) of the HEA and Sec.  
668.32(e).
    The earlier ATB standards were all based in statute. Since there 
have been many changes to the statutory requirements over the years, 
and could be more changes in future years, we are proposing to remove 
the regulatory language and simply cross-reference the relevant HEA 
section. The detailed descriptions of ability to benefit eligibility 
criteria applicable to different cohorts of borrowers in Sec.  
682.402(e)(13) of the FFEL regulations would be removed. This is a 
conforming change to a change that we made to the Direct Loan 
regulations several years ago.
    Under proposed Sec.  682.402(e)(1)(ii)(B), if a school certified 
the eligibility of a FFEL borrower who is not a high school graduate 
(and who does not meet the applicable alternative to high school 
graduate requirements) the borrower would qualify for a false 
certification discharge if the school:
    <bullet> Falsified the borrower's high school graduation status;
    <bullet> Falsified the borrower's high school diploma; or
    <bullet> Referred the borrower to a third party to obtain a 
falsified high school diploma.
    Proposed Sec.  685.215(a)(1)(i) and (ii) would remove the language 
in the Direct Loan regulations that limited the provisions described 
above to Direct Loans made before July 1, 2020, add a cross-reference 
to the alternative to graduation from high school requirements in Sec.  
668.32(e), and provide that a borrower would qualify for the discharge 
if the borrower did not meet the alternative to high school graduation 
requirements that were in effect when the loan was originated.
    Proposed Sec.  682.402(e)(3)(ii) would describe the requirements a 
FFEL borrower must meet to qualify for a discharge due to a false 
certification of high school graduation status. Proposed Sec.  
685.215(c)(1)(i) and (ii) would specify that a Direct Loan borrower 
would qualify for the discharge if the borrower did not meet high 
school graduation requirements at the time the loan was originated, 
rather than at the time the loan was disbursed.
    Proposed Sec.  682.402(e)(1)(ii)(C) would specify that a FFEL 
borrower qualifies for a false certification discharge if the borrower 
failed to meet the applicable State requirements for employment due to 
a physical or mental condition, age, criminal record, or other reason 
accepted by the Secretary that would prevent the borrower from 
obtaining

[[Page 41929]]

employment in the occupation for which the training program supported 
by the loan was intended in the student's State of residence at the 
time the loan was certified. Proposed Sec.  682.402(e)(3)(iii) would 
state the requirements a FFEL borrower must meet to obtain a discharge 
based on a disqualifying condition.
    Proposed Sec.  685.215(a)(1)(iv) would specify that a Direct Loan 
borrower qualifies for a discharge due to a disqualifying condition if 
the borrower did not meet the applicable State requirements at the time 
the loan was originated.
    Proposed Sec.  685.215(a)(3) would describe what it means for a 
loan to be ``originated'' for purposes of a false certification 
discharge of a Direct Loan.
    Proposed Sec. Sec.  682.402(e)(3)(iv), 682.402(e)(3)(v), 
685.215(c)(3), and 685.215(c)(4) would remove the requirements that a 
borrower applying for a false certification discharge based on an 
unauthorized signature or unauthorized payment provide signature 
samples.
    Proposed Sec. Sec.  682.402(e)(3)(vi) and 685.215(c)(5) would 
replace the documentation requirements for a false certification 
discharge due to identity theft, including the signature sample 
requirements, and replace them with a nonexhaustive list of 
documentation a borrower may provide to apply for the discharge. The 
list includes:
    <bullet> A judicial determination of identity theft relating to the 
individual;
    <bullet> A FTC identity theft affidavit;
    <bullet> A police report alleging identity theft relating to the 
individual;
    <bullet> Documentation of a dispute of the validity of the loan due 
to identity theft filed with at least three major consumer reporting 
agencies; and
    <bullet> Other evidence acceptable to the Secretary.
    Proposed Sec.  682.402(e)(15) would change the provisions for 
granting a false certification discharge without an application in the 
FFEL Program to include cases in which the Department or the guaranty 
agency has information in its possession showing that the school has 
falsified the Satisfactory Academic Progress (SAP) of its students.
    Proposed Sec. Sec.  682.402(e)(16) and 685.215(c)(10) would provide 
that a State Attorney General or non-profit legal services 
representative may submit an application for a group false 
certification discharge to the Secretary.
    The proposed FFEL program regulations would include conforming 
changes to Sec.  682.402(e)(7) through Sec.  682.402(e)(14) reflecting 
the changes discussed above.
    Proposed Sec.  682.424 would make it clear that, if any part of the 
proposed regulations is held invalid by a court, the remainder would 
still be in effect.
    Reasons: As noted above, FFEL and Direct Loan borrowers may 
currently qualify for false certification discharges if the borrower's 
eligibility to borrow was falsely certified by the school or was 
falsely certified due to the crime of identity theft. A borrower may 
currently qualify for false certification discharge if:
    <bullet> The borrower did not have a high school diploma or its 
recognized equivalent and did not meet the applicable alternative 
eligibility criteria;
    <bullet> The borrower had a status, including either a physical or 
mental condition, age, criminal record, or other circumstance, that 
disqualified them from meeting the legal requirements for employment in 
the occupation for which the training program supported by the loan was 
intended;
    <bullet> The school signed the borrower's name on the loan 
application or promissory note without authorization; or
    <bullet> The borrower was a victim of identity theft.
    The current false certification regulations have two separate sets 
of eligibility criteria depending on when the loans were first 
disbursed, either before July 1, 2020, or after July 1, 2020. The 
regulations effective on or after July 1, 2020, make it more difficult 
for borrowers to obtain false certification discharges than the 
regulations that were in place prior to July 1, 2020. The proposed 
regulations are more in keeping with the statutory intent of the false 
certification discharge by providing easier access to the discharge for 
eligible borrowers. The Department believes that maintaining the 
stricter standards effective July 1, 2020, for one cohort of borrowers 
while providing more equitable standards for another cohort of 
borrowers would be unfair and arbitrary. Unless there is a programmatic 
reason for different cohorts of borrowers seeking the same Federal 
benefit to apply under different requirements, we believe the 
requirements should be consistent. Therefore, we are proposing 
consistent false certification discharge standards for all cohorts of 
borrowers. In addition to the equity issues, it is challenging for the 
Department to process false certification discharge applications under 
two sets of eligibility criteria. With these proposed regulations, the 
Department seeks to standardize the eligibility criteria for a false 
certification discharge, regardless of when a borrower's FFEL or Direct 
Loan was made. In addition, we are proposing to revise some of the 
current provisions in the false certification regulations that we 
believe are overly burdensome for borrowers. By proposing standards 
that cover all false certification discharge claims, regardless of when 
the loan was first disbursed, and by reducing the administrative burden 
created by some of the existing regulatory requirements, we hope to 
provide more clarity to borrowers and to make it easier for borrowers 
who qualify for a false certification discharge to receive that relief. 
For this purpose, a loan is considered originated when the school has 
certified the loan and the loan is created within the FSA system. The 
actual disbursement of the loan could take place months thereafter. 
This proposal would help to ensure that students meet the title IV 
eligibility requirements by discouraging institution from authorizing 
loan disbursements to ineligible students.
    The non-Federal negotiators were supportive of this proposal. One 
negotiator noted that using the disbursement date rather than the 
origination date allows the school to falsify the eligibility of a 
borrower and then, during the months that may elapse between 
origination date and disbursement date, try to cure it by allowing the 
borrower to complete six credit hours of their program. This negotiator 
requested that the Department include in the regulatory language a 
definition of ``origination.'' The negotiator was concerned that the 
determination of the origination date for purposes of a false 
certification should be close to the time a student signs the 
promissory note.
    Another non-Federal negotiator noted that a student may lie to an 
institution and to the Department about the student's high school 
graduation status to access the Federal student aid programs. When a 
student is lying and the lie was not coached or coerced by an 
institution, the negotiator asked for assurances that the Department 
would not hold institutions accountable for false certification 
liability concerning high school completion.
    Other non-Federal negotiators stated that mistakes can be made both 
by institutions and students and noted that there is a distinction 
between an honest mistake and intentional fraud on the part of either 
party. These negotiators asserted that unless there is evidence that 
the institution has intentionally misled or deceived the student, the 
school should not be liable.
    The Department responded that if a participant in the student 
financial aid programs is found to have lied on a form

[[Page 41930]]

or committed fraud, the Department pursues that liability through 
appropriate steps that can include assessing liabilities against the 
school or seeking restitution from the student under the False Claims 
Act.
    The Department emphasized that the purpose of these proposed 
regulations is to address situations under which a student would 
qualify for a false certification discharge. For the Department to hold 
a school liable for the discharge, the Department would have to go 
through an administrative process to establish the liability and then 
prove that liability before a hearing official. We would need 
sufficient evidence to demonstrate that the school is responsible for 
the discharged amount. The school is not automatically liable for the 
discharged amount.
    The Department pointed out that the proposed regulations would 
rescind the provision that any borrower who attested to having a high 
school diploma or equivalent does not qualify for false certification 
discharge. This would ensure that borrowers can seek a discharge 
through the false certification regulations if they were coerced or 
deceived by their school and had reported not having a valid high 
school diploma or equivalent. The non-Federal negotiators were 
generally supportive of this proposal.
    Non-Federal negotiators also expressed concern that schools would 
falsely certify satisfactory academic progress for enrolled students 
who are not meeting minimal requirements to continue in an educational 
program. The Department agreed that the proposal to allow the 
Department to grant false certification discharges without an 
application due to falsification of satisfactory academic progress 
would provide clarity to borrowers and institutions and ensure that all 
borrowers are treated under the same standards.
    One non-Federal negotiator recommended expanding the disqualifying 
status false certification conditions to include de facto prohibitions 
to employment as well as legal prohibitions. The negotiator provided 
examples of such type of prohibitions, including the inability of 
students to obtain employment because the school lacked the type of 
programmatic accreditation needed for the occupation or because the 
student does not speak English. The Department considered this proposal 
but determined that including prohibitions that are not established by 
State law would not be feasible. De facto prohibitions, which may 
simply be standard practices of a particular industry, as opposed to 
clearly defined rules that would render a borrower unemployable in that 
industry, could not reasonably be considered grounds for a false 
certification discharge. The Department also noted that claims by a 
school that it had certain programmatic accreditation that it did not 
would be more appropriately adjudicated as a borrower defense 
discharge.
    The Department's current regulations require borrowers to submit an 
application within 60 days of their loan being placed into forbearance. 
The proposed regulations would allow borrowers whose initial 
application is incomplete 30 days to submit supplemental information. 
This would expand the time frame by which borrowers can send 
information to support their false certification application. If the 
borrower does not amend their application within 30 days, the claim 
would be closed as incomplete, and collection would resume on the loan. 
The borrower would still have the option to reapply. These reforms 
would make it easier for a borrower to obtain and provide the 
information to support their false certification discharge application. 
The Department sees no downside in making it easier for borrowers to 
demonstrate eligibility for a benefit to which they are statutorily 
entitled. We are proposing to limit this time period for submitting 
additional information to 30 days because it would not be in the 
interests of the borrower for the loan to stay in forbearance 
indefinitely, and the total of 90 days should be sufficient time for a 
borrower to collect and submit the evidence needed to support the 
discharge claim.
    The non-Federal negotiators generally supported the Department's 
proposal to remove the requirement that borrowers submit signature 
samples to qualify for certain categories of false certification 
discharge. However, they were concerned that, in certain claims, a 
signature would be helpful and by removing the requirement to submit 
them, borrowers may not realize that they may still have the option to 
submit signature samples. Negotiators asked if there was a mechanism 
for the Department to inform a borrower that signature samples would be 
helpful in reviewing the borrower's claim.
    The Department responded that in cases where there may be other 
evidence that could support the borrower's claim, the Department does 
now, and will continue to, inform borrowers that, if they have 
additional information, such as a signature sample, it would be helpful 
to provide it.
    In discussing the proposed revisions to the identity theft 
provisions, the Department pointed out that we are proposing to replace 
the current requirement that a borrower must provide a judicial 
determination of identity theft as the sole acceptable evidence with a 
list of possible alternative forms of evidence, such as an FTC identity 
theft affidavit, or a police report, or a dispute of a loan with all 
three credit bureaus. We explained that we decided to include multiple 
types of evidence for a borrower to prove identity theft since a single 
type of evidence may not be sufficient, and, in most cases, a judicial 
determination of identity theft would be difficult and time consuming 
for a borrower to obtain.
    The negotiators supported these proposed revisions. One negotiator 
noted that the FTC identity theft affidavit is lengthy, and that 
requiring the use of additional evidence to demonstrate identify theft 
creates multiple hurdles for borrowers. The negotiator cautioned 
against requiring multiple sources of evidence to prove identify theft 
and requested that the Department ensure that there is some flexibility 
in the kinds of evidence that can be presented to the Department to 
make a claim of false certification due to identity theft.
    The Department noted that allowing the use of additional evidence 
of identity theft was not intended to make it more difficult for 
borrowers to qualify for a discharge under these provisions but is 
intended to broaden the current categories of acceptable documentation 
for identity theft false certification claims while protecting against 
insufficient claims. The Department also noted that the proposed 
regulations also would include ``other evidence accepted by the 
Secretary'' to allow for flexibility for the borrower in requesting a 
discharge. We propose this provision to allow the Secretary to accept 
evidence that the Department may not be aware of at the time these 
regulations are promulgated, but that make a strong case that the 
borrower qualifies for the discharge.
    As noted above, a non-Federal negotiator asserted that if a school 
falsely certified its own institutional or programmatic eligibility to 
participate in the title IV programs, it should constitute a false 
certification of a borrower under the statute. The Department, however, 
believes this proposal is not consistent with the statute. The statute 
refers to a school falsely certifying the eligibility of a borrower and 
not to the school falsely certifying its own eligibility. In our

[[Page 41931]]

view, the latter might be a basis for borrower defense discharge, not a 
false certification or borrower eligibility issue.
    Some negotiators raised concerns about the determination of when a 
loan is considered originated for purposes of a false certification 
discharge, particularly in reference to the mention of the Common 
Origination and Disbursement (COD) system in the proposed regulation. 
Negotiators were concerned that future successor systems to COD are not 
mentioned. The Department clarified that reference to a successor 
system to COD is not necessary since loan origination is not tied to a 
specific Department of Education system.
    A non-Federal negotiator proposed adding a group discharge 
provision to the regulations. This negotiator felt that, although the 
Department has existing authority to grant group discharges and has 
done so in the past, amending the regulations to identify the instances 
in which the Department would provide for group discharges would be 
beneficial to borrowers. The negotiator believed that it would be 
particularly useful for borrowers who attended the same school and who 
attest to similar violations for which there is common evidence that 
would allow for an accurate discharge for a group of borrowers. The 
non-Federal negotiator contended that a regulatory provision that 
requires the Department to accept group discharge applications is a 
necessity. The negotiator noted that many borrowers do not know of 
their right to file for a false certification discharge and so the 
group process is particularly important. The negotiator also asserted 
that the Department has not responded to group applications in the 
past. Without regulatory language that explicitly provides for group 
discharge, the negotiator stated that it is difficult for advocates and 
borrowers to obtain relief through a group discharge process.
    The negotiator also argued that it is much more difficult for an 
advocate to seek to compel unlawfully withheld action or unreasonably 
delayed conduct without statutory or regulatory language specifically 
requiring the Department to act on a group discharge application.
    After considering these arguments, the Department agreed with the 
negotiator and added language to the proposed regulations providing for 
group applications for false certification discharges. The proposed new 
language would provide that a State attorney general or nonprofit legal 
services representative may submit an application for a group discharge 
to the Secretary.
    The Department also clarified that, in the FFEL Program, guaranty 
agencies (GAs) would not be expected to accept group applications. 
Group applications for FFEL borrowers would be submitted to the 
Department and, if the Department approved the application, the 
Department would notify the appropriate GAs to discharge the loan, as 
the Department currently does under 34 CFR 682.402(e)(11)(iii) for 
false certification discharge applications for which a borrower 
requests a review of a false certification discharge application by the 
Secretary.
    With this final issue resolved, the Committee reached consensus on 
the proposed false certification discharge regulations.
    With regard to severability, we believe that each of the proposed 
provisions discussed in this NPRM serves one or more important, 
related, but distinct, purposes. Each of the requirements provides 
value to students, prospective students, and their families; to the 
public, taxpayers, and the Government; and to institutions separate 
from, and in addition to, the value provided by the other requirements. 
To best serve these purposes, we would include this administrative 
provision in the regulations to make clear that the regulations are 
designed to operate independently of each other and to convey the 
Department's intent that the potential invalidity of one provision 
should not affect the remainder of the provisions.

7. Public Service Loan Forgiveness (PSLF)

Qualifying Employer and Definitions for PSLF (Sec.  685.219(b))
    Background: The Department has received significant public input 
regarding the requirement that a borrower be employed full-time with a 
qualifying public service employer to qualify for PSLF. The Department 
believes that additional definitions in the regulations, including 
defining the term ``full-time'' in a manner that takes into 
consideration the traditional work schedule for non-tenured faculty at 
institutions, and adds flexibility in determining full-time employment, 
would clarify eligibility for the PSLF program. The Department reviews 
and responds to numerous borrower inquiries regarding the issues with 
the Department's determination of qualifying employers, qualifying 
payments, and overall requirements for PSLF. The Department uses this 
information to formalize changes in the PSLF program that would assist 
borrowers in achieving loan forgiveness, clarify steps for our 
servicers, and provide more transparency in the PSLF processes.
    Statute: Section 455(m) of the HEA provides for forgiveness of the 
remaining balance due on an eligible non-defaulted Federal Direct Loan 
(Federal Direct Stafford Loan, Federal Direct PLUS Loan,\26\ Federal 
Direct Unsubsidized Stafford Loan, or Federal Direct Consolidation 
Loan) after the borrower has made 120 monthly payments on the eligible 
Federal Direct Loan while the borrower is employed full-time in a 
public service job. The 120 monthly payments must be made under at 
least one of the following qualifying repayment plans: the income-based 
repayment plan; the standard repayment plan based on a 10-year 
repayment period; the income contingent repayment plan; or, except for 
the alternative repayment plan, any other repayment plan if the monthly 
payment amount is not less than what would have been paid under the 
standard 10-year repayment plan. The 120 payments do not have to be 
made consecutively.
---------------------------------------------------------------------------

    \26\ Parents who take out Federal Direct PLUS Loans to pay the 
costs of attendance for their dependent children are not eligible to 
repay the parent PLUS loans under any of the income-driven repayment 
plans. However, if a parent PLUS loan is consolidated into a Direct 
Consolidation Loan, the consolidation loan may be paid under the 
income-contingent repayment plan and would then qualify for PSLF.
---------------------------------------------------------------------------

    Section 455(m)(3)(B) of the HEA defines a ``public service job'' as 
a full-time job in:
    <bullet> Emergency management;
    <bullet> Government (excluding serving as a member of Congress);
    <bullet> Military service;
    <bullet> Public safety;
    <bullet> Law enforcement;
    <bullet> Public health (including nurses, nurse practitioners, 
nurses in a clinical setting, and full-time professionals engaged in 
health care practitioner occupations and health care support 
occupations), as such terms are defined by the Bureau of Labor 
Statistics;
    <bullet> Public education;
    <bullet> Social work in a public child or family service agency;
    <bullet> Public interest law services (including public defense or 
legal advocacy on behalf of low-income communities at a nonprofit 
organization);
    <bullet> Early childhood education (including licensed or regulated 
childcare, Head Start, and State funded prekindergarten);
    <bullet> Public service for individuals with disabilities;

[[Page 41932]]

    <bullet> Public service for the elderly;
    <bullet> Public library sciences; or
    <bullet> School-based library sciences and other school-based 
services.
    A public service job may also include:
    <bullet> A full-time job at an organization that is described in 
section 501(c)(3) of Title 26 and exempt from taxation under section 
501(a) of such title;
    <bullet> Teaching as a full-time faculty member at a Tribal College 
or University as defined in section 316(b); or
    <bullet> Teaching as a full-time faculty member in high-needs 
subject areas or areas of shortage (including nurse faculty, foreign 
language faculty, and part-time faculty at community colleges), as 
determined by the Secretary.
    The statute does not include separate definitions of any of the 
listed public service jobs, nor does it include definitions of other 
terms or specify what constitutes full-time employment.
    Current Regulations: Current Sec.  685.219(b) contains definitions 
of key terms, including the definitions of ``full-time'' and ``public 
service organization.'' The current regulations incorporate the concept 
of qualifying employment into the defined term ``public service 
organization.'' Under the current regulations, qualifying employers 
generally include Federal, State, local, and Tribal Government 
agencies; nonprofit organizations that are described in section 501 
(c)(3) of the Internal Revenue Code and exempt from taxation under 
Sec.  501(a) of the Internal Revenue Code; and other organizations that 
provide certain specific public services listed in Sec.  455(m)(3)(B) 
of the HEA, other than a business organized for profit, a labor union, 
or a partisan political organization.
    Proposed Regulations: The Department proposes adding new 
definitions and modifying some existing definitions in Sec.  685.219(b) 
to clarify what are ``qualifying employers'' and ``full-time'' work 
under PSLF.
    Specifically, the Department proposes to add the following 11 
definitions:
    <bullet> ``civilian services to the Military,''
    <bullet> ``early childhood education program,''
    <bullet> ``non-tenure track employment,''
    <bullet> ``public health,''
    <bullet> ``non-governmental public service,''
    <bullet> ``public service for individuals with disabilities,''
    <bullet> ``public service for the elderly,''
    <bullet> ``public education service,''
    <bullet> ``public library services,''
    <bullet> ``school library services,'' and
    <bullet> ``qualifying repayment plan.''
    As with existing regulations, these new definitions would relate to 
qualifying services only relevant for organizations that provide 
certain specific public services listed in Sec.  455(m)(3)(B) of the 
HEA, other than a business organized for profit, a labor union, or a 
partisan political organization.
    The Department further proposes to expand or clarify the current 
five definitions: ``employee or employed,'' ``full-time,'' ``military 
service,'' ``other school-based service,'' and ``qualifying employer.'' 
With regard to ``civilian services to military'' in particular, the 
Department proposes to clarify that this definition speaks to providing 
services to or on behalf of members, veterans, or the families or 
survivors of members or veterans of the U.S. Armed Forces. Military 
service, while technically government employment, is generally 
considered and referred to as military service or non-civilian Federal 
employment rather than just government employment for the purposes of 
qualifying for PSLF.
    The Department proposes to define ``full-time'' as: (1) working in 
qualifying employment in one or more jobs at least an average of 30 
hours per week for the time period certified; (2) working at least 30 
hours per week throughout a contractual or employment period of at 
least 8 months in a 12-month period, such as in the situation of 
elementary and secondary school teachers, in which case the borrower is 
deemed to have worked full-time; or (3) working the equivalent of 30 
hours per week as determined by multiplying each credit or contact hour 
taught per week by at least 3.35 in non-tenure track employment at an 
institution of higher education.
    The Department proposes to define ``non-governmental public 
service'' as services provided directly by employees of a nonprofit 
organization where the organization has devoted a majority of its full-
time equivalent employees to work in at least one of the following 
areas: emergency management, civilian service to military personnel and 
military families, public safety, law enforcement, public interest law 
services, early childhood education, public service for individuals 
with disabilities and/or the elderly, public health, public education, 
public library services, school library, or other school-based 
services.
    The Department proposes to define ``public service for individuals 
with disabilities'' as services performed for or to assist individuals 
with disabilities (as defined in the Americans with Disabilities Act 
(42 U.S.C. 12102)) that are provided to a person because of the 
person's status as an individual with a disability.
    The Department proposes to define ``public service for the 
elderly'' as services that are provided to individuals who are aged 62 
years or older and that are provided to a person because of the 
person's status as an individual of that age.
    The Department proposes to define ``public education service'' as 
the provision of educational enrichment and/or support to students in a 
public school or a school-like setting, including teaching.
    The Department proposes to define ``public library service'' as the 
operation of public libraries or services that support their operation.
    The Department proposes to define ``school library services'' as 
the operations of school libraries or services that support their 
operation.
    The Department proposes to remove the current definition of 
``public service organization'' and replace it with a definition of the 
term ``qualifying employer.'' The proposed definition includes (1) A 
United States-based Federal, State, local, or Tribal Government 
organization, agency, or entity, including the U.S. Armed Forces or the 
National Guard; (2) a public child or family service agency; (3) a non-
profit organization under section 501(c)(3) of the Internal Revenue 
Code of 1986 that is exempt from taxation under section 501(a) of the 
Internal Revenue Code; (4) a Tribal college or university; or (5) a 
nonprofit organization that provides a non-governmental public service, 
attested to by the employer on a form approved by the Department, and 
that is not a business organized for profit, a labor union, or a 
partisan political organization.
    Reasons: The proposed definitions would provide greater certainty, 
simplicity, and clarity to borrowers and employers and ensure that the 
Department is fulfilling the statutory intent of encouraging borrowers 
to work in public service.
    Since the creation of the PSLF program almost 15 years ago, the 
Department has interpreted public service to mean employment with a 
government organization, a nonprofit organization under section 
501(c)(3) of the Internal Revenue Code that is exempt from taxation 
under section 501(a) of the Internal Revenue Code, or another type of 
nonprofit organization that provides services in areas specified by 
Congress so long as it is not a labor union or a partisan political 
organization. During the negotiations, some non-Federal negotiators 
cited the exclusion of for-profit organizations as qualifying employers 
that provide services in specified areas as a primary

[[Page 41933]]

reason for not agreeing with the Department's proposed regulations. In 
considering any changes to the eligible employers, the Department must 
craft proposals that are operationally viable to ensure that the 
Department is able to process PSLF benefits in a timely manner. In 
particular, the Department currently could not implement any changes 
that require it to: (i) perform an in-depth and individualized review 
of the eligibility for any significant number of additional employers 
and particularly for for-profit employers, which have far less required 
transparency than nonprofit organizations and thus require more 
extensive investigation; or (ii) assess individual borrowers' job 
descriptions to determine whether some, but not all, positions within 
an employer qualify for PSLF. Based upon those operational 
considerations, the Department seeks feedback on two possible changes 
where the Department is assessing operational and legal feasibility and 
policy alignment. The first is around the concerns raised by some non-
Federal negotiators about some doctors in California and Texas who work 
full-time at private, non-profit hospitals but who are ineligible for 
PSLF because State law prohibits them from being hired by the hospital 
itself. This is a change that would not expand the universe of 
qualifying employers but rather adjust for whom a qualifying employer 
may sign a PSLF form. ED invites comment on whether borrowers who 
provide services to a qualifying employer but are ineligible to provide 
those services as an employee due to State law should be able to 
participate in the program through the qualifying employer. The second 
is around whether for-profit early childhood education employers, as 
defined in Sec.  103(8) of the Higher Education Act (20 U.S.C. 1003) 
and for which the majority of full-time equivalent employees provide a 
qualifying service such as education for young children, should be 
qualifying employers for purposes of PSLF. Among other potential 
reasons, this might be operationally feasible because early childhood 
education is a category of employment that already has a specific 
definition in the HEA which references licensure and regulation and the 
universe of eligible employers might be simpler to identify. In 
responding to comments on operational issues as well as the two 
possible items above, the Department is particularly interested in the 
following questions: (1) What criteria and sources of information can 
the Department use to identify eligible for-profit early childhood 
education employers in a consistent and simple manner that does not 
require an individualized review of employer or borrower specific 
activities? As mentioned above, an expansion of eligible employers 
without simple and clear criteria that minimizes the judgment required 
by the Department would be impossible to administer. The Department is 
interested in potential solutions for addressing these operational 
limitations. For example, are there sources that could identify IRS 
employer identification numbers for licensed and regulated early 
childhood education programs, as defined in Sec.  103(8) of the Higher 
Education Act (20 U.S.C. 1003)? Could those same sources identify 
whether the employer meets other requirements in this regulation, such 
as having a majority of an employer's full-time equivalent employees 
provide a qualifying service in the form of early childhood education 
for young children?
    (2) Should the Department use the eligibility for, or receipt of, 
certain Federal funding as a requirement for a for-profit early 
childhood education employer to be a qualifying employer for the 
purposes of PSLF? Are there sources of information identifying employer 
identification numbers of Federally funded early childhood education 
programs, consistent with the definition of early childhood education 
noted above?
    (3) Could the Department limit PSLF eligibility to only for-profit 
early childhood education employers for which another Federal agency 
such as the U.S. Department of Health and Human Services has provided 
employer identification numbers and information that would help the 
Department easily assess eligibility?
    (4) Is it consistent with the purposes and goals of the PSLF 
program to include for-profit early childhood education as qualifying 
employment? For instance, to what extent would the inclusion of for-
profit licensed and regulated early childhood education providers as 
eligible employers improve recruitment and retention of the early 
childhood workforce, increase early educator degree and credential 
attainment, and improve access to quality early childhood education for 
children and families?
    (5) Are there other considerations for including for-profit early 
childhood education as a type of qualifying employer for PSLF? For 
example, this could include Congress' specific mention of licensed and 
regulated childcare programs in Sec.  103(8) of the Higher Education 
Act (20 U.S.C. 1003), or the PSLF legislative history.
    The Department's proposed definition of ``qualifying employer'' 
reflects the statutory requirements and the goals of public service. We 
believe that the additional definitions would help to clarify the 
meaning of public service toward that end and align the regulations 
with the statutory intent of the PSLF Program.
    Through these proposed regulations, the Department would also 
modify the regulations in response to public comments we received 
during the public hearings and negotiation sessions. Specifically, the 
Department would modify the definition of ``full-time'' to include any 
employee who works a minimum average of 30 hours of work per week 
during the period being certified.\27\ Currently, in most cases, if the 
borrower has a single employer, ``full-time'' is defined as the greater 
of 30 hours per week or the number of hours the employer considers 
full-time or a minimum of 30 hours throughout a contractual employment 
period of at least 8 months in a 12-month period, such as elementary 
and secondary school teachers. The Department's proposed definition 
also would include a conversion calculation to use in determining 
whether someone in non-tenure track employment at institutions is 
employed full-time. The determination of how many hours these borrowers 
worked for PSLF purposes would be calculated by multiplying each credit 
or contact hour the employee has by at least 3.35. The calculation 
aligns with the conversion rates used in California and Oregon to 
certify that an adjunct instructor is eligible for PSLF.\28\ This ratio 
would require an adjunct to teach at least nine credit hours a term to 
be considered full-time. That figure is three-quarters of the hours 
needed for a student to be considered full-time for Federal financial 
aid purposes (12). That is the same relationship between the number of 
weekly hours required to be considered full-time for PSLF (30), which 
is three-quarters of the standard 40-hour workweek. Originally, the 
Department proposed multiplying each credit hour by 2.5. The 
negotiators felt this number was too low because the Department did not 
consider contact hours as hours worked and did not accurately reflect 
of the hours that non-tenured staff work when teaching courses. The 
Department agreed that multiplying each credit or contact hour by 3.35 
would more accurately reflect

[[Page 41934]]

the hours worked by non-tenured staff and the negotiators agreed. The 
proposed regulations would also add a definition to clarify the meaning 
of ``non-tenure track employment'' based on current practice. Providing 
greater clarity in the regulations would help employers who may be 
unsure how to properly certify PSLF applications for these individuals.
---------------------------------------------------------------------------

    \27\ https://www.irs.gov/affordable-care-act/employers/identifying-full-time-employees.
    \28\ https://leginfo.legislature.ca.gov/faces/home.xhtml.
---------------------------------------------------------------------------

    As suggested by the negotiators, the Department has also proposed 
definitions of ``public health'' and ``non-governmental public 
service,'' including public service for individuals with disabilities 
and the elderly, to provide clarity for borrowers.
    Some negotiators suggested that the Department should determine a 
borrower's eligibility for PSLF by evaluating the borrower's job 
description instead of determining eligibility based on the activities 
of their employer. The Department notes that making individual 
determinations about PSLF eligibility based upon a borrower's specific 
job would be administratively infeasible. The Department does not have 
the capacity to review individual job descriptions. Further, obtaining 
the necessary documentation to make borrower-by-borrower decisions 
would add a significant burden to anyone participating in the program.
    One Committee member suggested that the Department use the Standard 
Occupational Classification (SOC) System codes which classify workers 
into occupational categories for the purpose of collecting, 
calculating, or disseminating data. As discussed during the 
negotiations, the Department did not have a viable way to 
operationalize a process to review individual job descriptions to 
determine borrower eligibility and still does not. Moreover, the 
statute does not require such individual review. The statute refers to 
broad eligibility for certain types of services traditionally embedded 
in the government or nonprofit sectors. The Department is concerned 
that determining eligibility based on job description rather than 
employer would lead to borrowers working for the same employer having 
different eligibility statuses, creating significant confusion and 
disparities within an organization. Such a process would also require 
employers to make potentially new determinations about what SOC code a 
borrower's occupation should fall into for the sole purpose of PSLF. 
The Department also proposes to continue using the employer approach 
because it would be more equitable for all employees of an 
organization. If the Department relied on individual job descriptions, 
it is likely that many support staff who provide services to the 
organization rather than to its clients would not qualify even though 
their services are vital to keeping the organization itself in 
operation. The Department would not have adequate processes to monitor 
the complexities around reviewing these applications to ensure 
borrowers would not lose benefits if they changed jobs while working 
for the same employer. Moreover, the Department would not have the 
ability to review the accuracy or appropriateness of every job 
description.
    The Department is proposing one clarifying change from its 
continued approach of using the services provided by the organization 
to determination eligibility for PSLF. In the past, the Department 
considered an organization to be a qualifying employer for the purposes 
of PSLF if its primary purpose was to provide a qualifying service. The 
idea behind this concept was that an entire organization should not be 
designated as a qualifying employer if only a couple of its employees 
are providing a qualifying service because that demonstrates that the 
qualifying service is not in fact a core part of the organization's 
work. However, the Department has found that determining an 
organization's primary purpose can be confusing and hard to apply. 
Therefore, the Department proposes to use a more quantitative standard 
for determining that an employer is providing a public service--that 
the majority of an organization's full-time equivalent employees must 
be providing a qualifying service for the organization to be a 
qualifying employer for PSLF.
    The Department heard concerns from several negotiators and public 
commenters during the negotiated rulemaking process that there are 
borrowers who are working with qualifying government and nonprofit 
organizations but who are not eligible for PSLF because they are 
employed either directly through a contract with the qualifying 
employer or as the employee of an organization that has a contract with 
the qualifying employer. For instance, the Department heard from 
borrowers who work as contractors to provide support to K-12 students 
on a full-time basis but who are not eligible for PSLF because they are 
not employees of a qualifying employer. We also heard negotiators 
discuss public defenders in rural areas who work on a contract basis 
and also do not qualify for PSLF. The Department also heard about 
nonprofit hospitals where doctors work as contractors even while nurses 
or other medical professionals work as full-time employees. The 
Department is considering whether it should adjust eligibility to 
account for these types of situations. For example, a provision would 
note that, only for the purposes of PSLF, the eligible borrowers would 
include a borrower who works as a contractor at a qualifying employer 
if that qualifying employer is willing to certify the periods worked by 
that individual.
    The Department seeks comments on whether to revise the program in 
this way or to address these issues in another manner. The Department 
also seeks feedback on whether qualifying employers would be willing to 
sign PSLF forms on behalf of their contractors; how to ensure 
consistency within and among employers about signing PSLF forms for 
contractors so there are not disparities based upon a borrower's pay, 
level of education, or job function; and what additional guidance 
employers would need to implement this change. The Department is also 
interested in feedback about whether there could be ways to distinguish 
which types of contractors should be eligible, such as restricting 
eligibility to a contractor whose job site is co-located with a 
qualifying employer--either virtually, in-person, or with individuals 
served by the qualifying employer, such as students--versus one who 
works completely separately from the qualifying employer.

8. Improving the PSLF Processes (Sec. Sec.  685.219 and 682.414(b))

    Statute: Section 455(m) provides that the Secretary shall cancel 
the balance of interest and principal due on any eligible Federal 
Direct Loan for borrowers who are not in default, have repaid their 
loans under a qualifying repayment plan, and have made 120 payments 
while employed in a public service job and at the time of forgiveness. 
The statute does not define the PSLF application process.
    Current Regulations: Section 685.219 establishes the conditions 
under which a borrower may qualify for PSLF and lists the specific 
eligibility criteria that a borrower must meet to receive PSLF. The 
regulations specify that the borrower must make each of the required 
120 monthly payments within 15 days of the scheduled due date for the 
full scheduled installment amount for that payment to qualify toward 
PSLF. Under Sec.  685.219(e), after a borrower makes 120 qualifying 
payments on a loan, the borrower may request forgiveness of the 
remaining balance by submitting a request on a form approved by the 
Department. The payments do not have to be made consecutively. If the 
Department

[[Page 41935]]

determines the eligibility criteria is not met, the Department resumes 
repayment obligations the loan.
    Proposed Regulations: The Department proposes to revise Sec.  
685.219(c)(1)(iii) so that borrowers have more ways to have payments 
count toward forgiveness. This includes counting payments that are 
equal to the full scheduled payment, even if the payment is made in 
multiple installments or outside the 15-day period in current 
regulations so long as the loan is not in default. The Department also 
would revise in Sec.  685.219(c)(2) so that a borrower who makes a lump 
sum or monthly payments equal to or greater than the full scheduled 
amount made in advance of the borrower's scheduled payment due date may 
also receive credit toward forgiveness on those additional payment 
amounts. These lump sum payments can be counted for a period of months 
not to exceed the date of the borrower's next annual repayment plan 
recertification date under the qualifying repayment plan. For example, 
a borrower who makes a $50 monthly payment on an income-driven 
repayment plan could pay that $50 a month or make a one-time payment of 
$600 during that year and receive credit for a year of payments.
    Current regulations do not allow any periods of deferment or 
forbearance to count toward PSLF. In Sec.  685.219(c)(2)(v), the 
Department proposes to allow each month in which a borrower is in one 
of the following deferment or forbearance periods to count as a month 
of payment for PSLF purposes if the borrower certifies qualifying 
employment for the period of time covered by the deferment or 
forbearance:
    <bullet> Cancer treatment deferment under Sec.  455(f)(3) of the 
Act;
    <bullet> Economic hardship deferment under Sec.  685.204(g), 
including a Peace Corps service deferment;
    <bullet> Military service deferment under Sec.  685.204(h);
    <bullet> Post-active-duty student deferment under Sec.  685.204(i);
    <bullet> AmeriCorps forbearance under Sec.  685.205(a)(4);
    <bullet> National Guard Duty forbearance under Sec.  685.205(a)(7);
    <bullet> U.S. Department of Defense Student Loan Repayment Program 
forbearance under Sec.  685.205(a)(9); and
    <bullet> Administrative forbearance and mandatory administrative 
forbearance under Sec.  685.205(b)(8) or Sec.  685.205(b)(9).
    In Sec.  685.219(c)(3), the Department proposes to count toward the 
required 120 monthly qualifying payments, those qualifying payments 
made by a borrower on an eligible Direct Loan that the borrower later 
consolidates into a Direct Consolidation Loan.
    Proposed Sec.  685.219(e), which broadly reflects the Department's 
current practice, explains the process by which a borrower documents 
qualifying employment and requests forgiveness after making 120 
qualifying payments on the eligible loans for which forgiveness is 
requested. In proposed new Sec.  685.219(f), the Department would 
authorize forgiveness on eligible loans without an application from the 
borrower when the Department has sufficient information to determine 
the borrower's eligibility without an application. For example, the 
Department has announced its intentions to enter into data matching 
agreements with the U.S. Office of Personnel Management so that it can 
identify Federal employees who are eligible for PSLF. Once those 
matches are active, the Department could possibly award sufficient PSLF 
credit for forgiveness without the borrower taking any action. The same 
could be true with other data matches under consideration. All other 
borrowers would be required to provide the necessary information on a 
form approved by the Department along with the employer's 
certification.
    If a borrower is unable to obtain the employer's certification, the 
Department would attempt to determine if the borrower was working for a 
qualifying employer at the time the qualifying payment was made based 
on the documentation provided by the borrower or otherwise available to 
the Department. If the Department determines the borrower meets the 
requirements for loan forgiveness, the Department would notify the 
borrower of this determination and the remaining balance of principal 
and accrued interest on the eligible loans would be forgiven. For 
borrowers who do not meet the requirements for forgiveness, the 
Department would notify the borrower of the decision, resume loan 
repayment obligations, and grant forbearance of payment on both 
principal and interest for the period in which collection activity was 
suspended. No interest would be capitalized per changes proposed in 
other sections of this NPRM.
    The Department also proposes new regulations to create a 
reconsideration process under proposed Sec.  685.219(g) for borrowers 
whose applications for forgiveness were denied or who disagree with the 
Department's determination of the number of qualifying payments or 
months of qualifying employment that have been earned by the borrower, 
which formalizes the current non-regulatory process. Borrowers whose 
applications have been denied would have 90 days to request 
reconsideration on a form approved by the Department. The Department 
proposes that borrowers whose forgiveness applications were denied 
before the effective date of the final regulations would have 180 days 
from the effective date of the regulations to request reconsideration.
    In new Sec.  685.219(g)(6), the Department would also propose to 
count time toward forgiveness for a borrower who postponed monthly 
payments under a deferment or forbearance that would not lead to a 
qualifying payment under the proposed regulations. The Department 
proposes that a borrower would have to meet certain criteria to have a 
month counted as a qualifying payment for this purpose. First, the 
borrower would have to have been employed full-time at a qualifying 
employer as defined under Sec.  685.219 during the forbearance or 
deferment period. Second, the borrower would have to make a payment 
equal to or greater than the amount they would have paid at that time 
on a qualifying repayment plan. For example, a borrower with a monthly 
payment of $100 under the standard 10-year plan who spent a year on a 
forbearance while employed at a qualifying employer could make an 
additional payment of $600 and receive credit for six of those months.
    In Sec.  682.414(b)(4), the Department would propose to require 
FFEL Program lenders to report detailed information related to a 
borrower's deferments, forbearances, repayment plans, delinquency, and 
contact information on any FFEL loan to the Department by an 
established deadline.
    Reasons: In August 2020, the Department updated the description of 
a qualifying payment by allowing the payment to count as a qualifying 
payment if it was made in full within 15 days of the payment due 
date.\29\ On October 6, 2021, the Department announced a limited PSLF 
waiver during which borrowers may receive credit for payments that 
previously did not qualify for PSLF or TEPSLF.\30\ These

[[Page 41936]]

administrative steps demonstrated improvements to the PSLF process for 
borrowers. In addition, in October 2021, the Department waived certain 
PSLF rules, such as the requirement to make a qualifying payment within 
a specified time, under a specific repayment plan, and on a loan from a 
particular program for a limited time due to the COVID-19 pandemic.\31\ 
Through the proposed rules described in this NPRM, the Department seeks 
to continue to improve upon the program and convert certain of the 
temporary changes into permanent regulatory changes under a continuing 
basis.
---------------------------------------------------------------------------

    \29\ https://fsapartners.ed.gov/knowledge-center/library/electronic-announcements/2020-10-28/changes-public-service-loan-forgiveness-pslf-program-and-new-single-pslf.
    \30\ Press Release, U.S. Department of Education, ``U.S. 
Department of Education Announces Transformational Changes to the 
Public Service Loan Forgiveness Program, Will Put Over 550,000 
Public Service Workers Closer to Loan Forgiveness,'' October 6, 
2021, https://www.ed.gov/news/press-releases/us-department-education-announces-transformational-changes-public-service-loan-forgiveness-program-will-put-over-550000-public-service-workers-closer-loan-forgiveness.
    \31\ Ibid.
---------------------------------------------------------------------------

    Specifically, the Department proposes to amend the regulations 
governing PSLF to treat months in which a borrower is in certain 
deferment and forbearance periods as months of qualifying payments. The 
proposed changes would also streamline and clarify the application 
process for PSLF, provide increased flexibility to borrowers, remove 
application barriers where practicable, and allow the Department to 
communicate with borrowers from the FFEL Program instead of (or in 
addition to) lenders, and provide overall improvements to the process. 
While consensus was not reached on the proposed regulations for PSLF, 
the negotiating committee generally agreed with the Department's 
proposals regarding expanded qualifying payment periods; eliminating 
the 15-day payment date requirement; clarifying requirements related to 
lump sum payments; allowing months spent in certain forbearances and 
deferments to count as months in repayment; allowing prior payments on 
Direct Loans to count toward the 120 payments required for forgiveness 
if the borrower repays the loan on which the payments were made through 
a Direct Consolidation Loan; automating the application process where 
practicable; requiring FFEL Program lenders to report additional 
details to the Department related to the loans; and formalizing a 
reconsideration process where borrowers seeking PSLF may request a 
review and redetermination of the decision on whether the borrower had 
a qualifying employer, qualifying payments, or on the denial of an 
application for forgiveness.
    Many of the negotiators did not agree with the Department's 
proposed regulatory language that would provide a path for borrowers to 
receive credit for past periods of deferment or forbearance while the 
borrower was working for a qualifying employer. The negotiators 
requested instead that the Department automate the PSLF process. These 
negotiators also wanted the Department to allow payments made on FFEL 
Program loans that are repaid through a Direct Consolidation Loan to 
count toward PSLF forgiveness. Under the current interpretation of the 
law, the 120 monthly payments have to be made on the loan for which the 
borrower requests forgiveness. So, a borrower who consolidates a Direct 
Loan and later applies for forgiveness of the Consolidation Loan does 
not receive credit for payments made on the loan before it was 
consolidated. However, the negotiators advanced a different 
interpretation of the HEA, suggesting that counting payments made on 
loans later consolidated into the Direct Loan Program and regardless of 
whether the loan consolidated was a Direct Loan would also be a 
permissible interpretation of the HEA.
    Negotiators also wanted to include additional forbearances and 
deferments and proposed to provide a forbearance to borrowers seeking 
PSLF until the effective date of the regulations and to count the 
months in this forbearance as qualifying payments.
    The Department proposes to include certain specific forbearance and 
deferment periods as qualifying periods for PSLF because of concerns 
based on past practices that borrowers, who are likely to have a $0 
payment on an income-driven repayment plan which would make them 
eligible to receive PSLF credit, could instead be offered one of these 
deferments or forbearances. A borrower who chose to pause their 
payments through one of these deferments or forbearances would be 
giving up the opportunity to receive credit toward PSLF. For example, 
deferments tied to military service, Peace Corps or post-active duty or 
forbearances related to AmeriCorps, National Guard Duty, or U.S. 
Department of Defense student loan repayment are instances in which a 
borrower is engaging in employment that would qualify for PSLF. 
Allowing these deferments and forbearances to count toward PSLF 
prevents the borrower from losing months or years of progress toward 
forgiveness by making the wrong choice or getting inaccurate advice. We 
also seek feedback on whether, if possible to operationalize, the 
Department should include comparable deferments for Direct Loan 
borrowers with FFEL Program loans described in 34 CFR 685.204(j). The 
Department is aware that this problem has affected a substantial number 
of borrowers. For instance, in October 2021, the Department announced a 
limited PSLF waiver that allows borrowers to count other repayment 
plans, and deferments or forbearances used while working for a 
qualifying employer, toward forgiveness. As a result of that time-
limited waiver, approximately 127,000 borrowers have been approved for 
$7.3 billion in forgiveness as of mid-May 2022. More than 1 million 
additional borrowers also receive an average of 12 months credit toward 
forgiveness. These data indicate that even better servicing and clearer 
information for borrowers would likely be unable to address the scale 
of the challenge.\32\ The Department also proposes to provide credit 
toward PSLF for periods in which a borrower is on an economic hardship 
or cancer deferment. Borrowers on an economic hardship deferment would 
have a $0 payment on an income-driven repayment plan, which already 
counts toward forgiveness. Borrowers on a cancer treatment deferment 
should not have to choose between pausing their loan payments while 
receiving life-saving medical treatment or receiving credit toward 
PSLF. The Department also proposes to allow months spent in 
administrative or certain mandatory administrative forbearances to 
count as a qualifying payment where the borrower does not control 
whether their loans are paused. While borrowers would not receive 
credit for qualifying months when a servicer pauses a borrower's 
payments while it reviews PSLF paperwork or other circumstances, the 
Department proposes that a borrower be able to receive credit for these 
months by making any required payment under the hold harmless period. 
The Department believes that this measure will would ensure borrowers 
do not lose forgiveness credit during prolonged time spent in a 
forbearance due to paperwork processing.
---------------------------------------------------------------------------

    \32\ https://studentaid.gov/announcements-events/pslf-limited-waiver.
---------------------------------------------------------------------------

    The negotiators requested that additional deferment and forbearance 
periods be counted as time toward forgiveness. The Department has not 
included the other deferment periods, such as the period of an 
unemployment deferment, in the proposed regulations because borrowers 
utilizing that deferment would not meet the employment requirements for 
PSLF. The Department also did not include the rehabilitation training 
deferment in the proposed regulations because eligibility for this 
deferment requires that the

[[Page 41937]]

borrower be in a program that prevents them from being employed for 
more than 30 hours a week, which is an employment requirement for PSLF. 
The Department believes that granting credit toward PSLF for those 
periods would create a conflict because under the deferment, the 
borrower would not be engaging in the 30 hours a week of work required 
to qualify for PSLF.
    The Department recognizes that many borrowers may have paused their 
payments through deferments or forbearances that we are not proposing 
to credit toward PSLF. The Department announced in April 2022 
improvements to past challenges with the use of deferments and 
forbearances that will help many of these individuals. Specifically, 
the Department will be awarding credit toward PSLF for borrowers who 
spent more than 3 years cumulatively in a forbearance or 12 consecutive 
months in a forbearance, and for months spent in any deferment prior to 
2013 besides an in-school deferment. These changes will only result in 
PSLF credit for periods after the program's creation in October 2007, 
and borrowers must have qualifying employment during those months. The 
Department believes that these changes will address many of the most 
concerning instances of forbearance, but for other periods as well as 
in the future the Department proposes to offer a hold harmless period. 
This would provide those borrowers who were working for a qualifying 
employer during the periods of forbearance or deferment an opportunity 
to get PSLF credit for those months by making payments equal to what 
the borrowers would have owed during that time. A borrower would 
receive credit toward forgiveness without the need to make an 
additional payment for any month in which the borrower would have had a 
$0 payment on an income-driven repayment plan but obtained a 
forbearance instead. The Department believes, that with these proposed 
regulations, borrowers would have an opportunity to regain progress 
toward forgiveness that would otherwise be lost without putting them 
through a burdensome process of proving they were steered, misled, or 
otherwise taken advantage of.
    The Department has manually reviewed PLSF applications to determine 
qualifying payments and/or qualifying employment on an informal basis. 
The Department believes that by formalizing and codifying a 
reconsideration process, borrowers would be able to officially request 
the Department take another look at their qualifying payment and/or 
qualifying employer eligibility through a process determined by the 
Secretary. The Department believes that 90 days from the denial notice 
is more than adequate time for a borrower to submit a reconsideration 
request. This reconsideration period also aligns with what the 
Department is proposing for the borrower defense to repayment 
reconsideration process.
    The Department could not agree to the negotiators' request that 
payments on FFEL loans or other Federal student loans not made under 
Part D of the HEA count for PSLF purposes. Section 455(m)(1)(A) of the 
HEA specifically provides that the 120 monthly payments must have been 
made on an eligible Federal Direct Loan.
    The Department already requires FFEL Program lenders to contact 
FFEL Program borrowers and provide information about PSLF. The 
Department proposes to require FFEL lenders to report additional 
information under 682.414 so that borrowers (particularly those with 
loans from multiple programs) are receiving accurate, timely, and 
helpful messages directly from the Department about the repayment and 
forgiveness of their Federal student loans to ensure that all Federal 
loan borrowers are informed on PSLF information and information about 
other digital tools offered by the Department.
    The Department believes that these proposed regulations would 
improve the Department's ability to administer forgiveness to borrowers 
who qualify for PSLF, increase the number of qualifying borrowers who 
receive forgiveness, and increase the number of borrowers who receive 
forgiveness by aligning with the number of months of qualifying 
employment. The corresponding increase in discharges would represent a 
greater cost to the taxpayer, but the Department believes that the 
benefits received by borrowers by obtaining discharges under the PSLF 
statute justify the costs.

Executive Orders 12866 and 13563

Regulatory Impact Analysis

    Under Executive Order 12866, the Office of Management and Budget 
(OMB) must determine whether this regulatory action is ``significant'' 
and, therefore, subject to the requirements of the Executive Order and 
subject to review by 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.
    The Department estimates the quantified annualized economic and net 
budget impacts to be $85.1 billion in increased transfers among 
borrowers, institutions, and the Federal Government, including 
annualized transfers of $9.1 at 3 percent discounting and $10.0 billion 
at 7 percent discounting, and annual quantified costs of $5.3 million 
related to paperwork burden. Therefore, this proposed action is 
``economically significant'' and subject to review by OMB under section 
3(f) of Executive Order 12866. Notwithstanding this determination, 
based on our assessment of the potential costs and benefits 
(quantitative and qualitative), we have tentatively determined that the 
benefits of this proposed regulatory action would justify the costs.
    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

[[Page 41938]]

    (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.''
    We are issuing these proposed regulations as these policies are 
better in light of the facts and to comply with executive orders. In 
choosing among alternative regulatory approaches, we selected those 
approaches that maximize net benefits. Based on the analysis that 
follows, the Department believes that these regulations are consistent 
with the principles in Executive Order 13563.
    We have also determined that this regulatory action would not 
unduly interfere with State, local, and Tribal governments in the 
exercise of their governmental functions.
    As required by OMB Circular A-4, we compare the final regulations 
to the current regulations. In this regulatory impact analysis, we 
discuss the need for regulatory action, potential costs and benefits, 
net budget impacts, and the regulatory alternatives we considered.

1. Need for Regulatory Action

    The Department has identified a significant need for regulatory 
action to address regulatory burdens, alleviate administrative burden, 
and ensure Federal student loan borrowers are more easily able to 
access the loan discharges to which they are entitled under the Higher 
Education Act of 1965, as amended (HEA). Accordingly, these proposed 
regulations would alleviate some of the burden on students, 
institutions, and the Department, as discussed further in the Costs and 
Benefits section of this RIA.
    In recent years, outstanding Federal student loan debt has 
increased considerably and, for too many borrowers, that burden has 
been costly. More than 1 million borrowers defaulted on a Federal 
student loan each year in the periods prior to the nationwide pause of 
student loan interest and repayment first implemented by the Department 
and then extended by Congress in the Coronavirus Aid, Relief, and 
Economic Security (CARES) Act. Millions of others fell behind on their 
payments and risked default. For those who have defaulted, consequences 
can be significant, with many borrowers having their tax refunds or 
other expected financial resources garnished or offset, their credit 
histories marred, and their financial futures put on hold. To alleviate 
some of this burden, the administration enacted the American Rescue 
Plan Act of 2021 where all student loan forgiveness and discharges of 
any loan type is Federal tax-free through December 31, 2025.
    We continually examine our regulations to improve the Federal 
student loan programs and it was the primary goal of this negotiated 
rulemaking. This NPRM specifically addresses regulatory changes to 
discharges that will help borrowers to reduce or eliminate debt for 
which they should not be responsible to pay. The Department will also 
propose regulatory changes to income driven repayment plans in a future 
NPRM that would greatly benefit borrowers.
    The Department seeks to reduce the burden for students and 
borrowers to access the benefits to which they are entitled through 
several provisions in these proposed regulations. This includes 
streamlining the borrower defense regulations and establishing a 
process for group consideration of claims from borrowers with common 
claims or affected by the same unacceptable institutional act or 
omission; easing the process of accessing false certification 
discharges; clarifying the rules borrowers must comply with for the 
PSLF program; reducing the burden caused by interest capitalization; 
ensuring totally and permanently disabled borrowers have the ability to 
access and maintain a discharge more easily; and allowing borrowers to 
automatically access a closed school loan discharge. Throughout these 
proposed regulations, we accommodate and, where possible, require, that 
these benefits are provided automatically, so that borrowers are not 
required to submit unnecessary paperwork to benefit from provisions 
included in the HEA. We also preserve borrowers' ability to pursue 
their grievances in court by prohibiting pre-dispute arbitration 
clauses or class action waivers in institutions' enrollment agreements.
    These efforts to reduce burden for students and institutions would 
also indirectly reduce the burden on the Department by, for example, 
limiting the need for adjudication of individual claims for borrower 
defense in some cases, simplifying the criteria that need to be checked 
to determine if payments count toward PSLF, and limiting the need for 
the Department to process paperwork by providing discharges on a more 
automatic basis for borrowers whose schools close or when a borrower 
has a total and permanent disability.
    These proposed regulations would affect each of the three major 
Federal student loan programs. This includes the Direct Loan program, 
which is the sole source of Federal student loans issued by the 
Department of Education today, as well as loans from the Federal Family 
Education Loan Program, which stopped issuing new loans in 2010 and the 
Perkins Loan Program, which stopped issuing new loans in 2017. Changes 
to TPD, closed school discharges, and false certification discharges 
would affect all three programs. Changes to interest capitalization, 
borrower defense, arbitration, and Public Service Loan Forgiveness 
would only affect Direct Loans.
Interest Capitalization
    Virtually all struggling borrowers likely saw their balances 
increase due to interest capitalization. Interest capitalization may 
have occurred due to time in forbearances or deferments. Furthermore, 
interest capitalization following in-school grace periods affects all 
borrowers with unsubsidized loans. Eliminating interest capitalization 
stops compounding the costs and makes loans more affordable for 
borrowers. While eliminating interest capitalization doesn't remove 
borrowers' debt burden, it would help to increase affordability for 
students whose balances might continue to grow. That's particularly 
true for the low-income or struggling borrowers who tend to use 
deferments and forbearances more heavily, and thus see more 
capitalizing events throughout their repayment periods.
Pre-Dispute Arbitration
    Often, schools that have taken advantage of students have forced 
those students to shield their complaints by requiring students to 
participate in private arbitration proceedings, where the terms are set 
by the institution, rather than allowing them their day in court. These 
pre-dispute arbitration agreements require students to agree to the 
terms before a conflict ever arises and often dictate whether the 
student can appeal the decision. Though pre-dispute agreements are not 
inherently predatory in practice, they can be applied in predatory ways 
toward borrowers such as undermining borrowers' rights to avail 
themselves of

[[Page 41939]]

certain loan discharges, depriving borrowers of the protections in the 
HEA. We have seen arbitration applied across different industries 
including consumer protection and employment, and in the realm of 
education, pre-dispute arbitration agreements are often linked to 
propriety education enrollment agreements.\33\ As a result, successive 
cohorts of students may have experienced the same predatory behavior. 
Additionally, while the Department is aware of arguments that 
arbitration lowers the costs of dispute resolution for borrowers 
relative to litigation, a study of consumer finance cases analyzed by 
the Consumer Financial Protection Bureau found that most resulted in no 
determination on the merits of the allegation by the arbitrator, and 
those that did (and where counsel was retained) resulted in attorney's 
fees awarded at a similar rate to both consumers and companies.\34\
---------------------------------------------------------------------------

    \33\ Habash, T. and Shireman, R., (April 28, 2016). How College 
Enrollment Contracts Limit Students' Rights, The Century Foundation. 
Retrieved from https://tcf.org/content/report/howcollege-enrollment-contracts-limit-students-rights/.
    \34\ Consumer Financial Protection Bureau. (2015.) ``Arbitration 
Study: Report to Congress.'' https://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf.
---------------------------------------------------------------------------

    The Department observed several issues and problems around pre-
dispute arbitration and class action waivers. First, institutions may 
use arbitration clauses in enrollment agreements to effectively 
discourage students from pursuing complaints. This enables an 
institution to avoid financial risk associated with its wrongdoing and 
shift the risk to the taxpayers and federal government through 
subsequent borrower defense discharges. Additionally, borrowers cannot 
have their day in court because some enrollment agreements prevent 
their ability to participate in lawsuits, including class action 
litigation. This further insulates institutions from the potential 
financial risk of their wrongdoing and the lack of transparency 
surrounding institutions' arbitration requirements and limits on class 
actions.
Closed School Discharge
    Borrowers have also faced the negative financial impacts of 
institutions closing, often without adequate warning, interrupting 
borrowers' ability to continue and complete their desired educational 
programs. Many of these borrowers were left with debt but no degree, 
sometimes facing new barriers to education such as geographic location, 
nontransferable credits, and inability to complete their degree. This 
has negatively affected borrowers' ability to make their payments, 
creating a need for improved processes for closed school discharges.
    Several aspects of the closed school discharge process have limited 
the ability of borrowers to receive closed school discharges. Final 
regulations published in the Federal Register on November 1, 2016, 
provided for automatic closed school discharges to borrowers who were 
eligible for a closed school discharge but did not apply for one, and 
who did not enroll elsewhere within three years of the institution's 
closure. Final regulations published on Sept. 23, 2019, eliminated this 
provision. The proposed ruleset would reinstate a form of the 2016 
provision.
    Closed school discharges for borrowers who withdrew from a school 
prior to the school closing are also not consistent across years in the 
discharge window available to borrowers. Additionally, under Sec.  
685.214(c)(1)(i)(B), the Secretary may extend the closed school 
discharge window under ``exceptional circumstances.'' The non-
exhaustive list of exceptional circumstances provided in the 
regulations does not include many events that may occur on the path to 
closure and could reasonably be associated as a cause of that closure. 
In addition, the September 23, 2019, regulations removed some of the 
exceptional circumstances that were included in the prior regulations, 
such as ``a finding by a State or Federal government agency that the 
school violated State or Federal law,'' and that remain highly relevant 
factors in some college closures. This proposed regulation aims to 
remedy these issues.
Total and Permanent Disability Discharge
    Another area in which the current regulations create gaps for 
borrowers is related to total and permanent disability discharge. For 
borrowers who are unable to meaningfully work, their student loan debt 
became exceedingly burdensome, leaving many in dire financial 
circumstances, despite being eligible for discharges of their Federal 
student loans under the HEA. Some eligible borrowers are not fully 
aware of existing relief pathways, but for those who are aware of TPD 
discharges, they face a complex and onerous procedure to ensure 
borrowers continue to meet the statutory test of not being able to 
engage in gainful employment to acquire and maintain discharges.
    The Department has identified several aspects of the TPD discharge 
process that could be improved through regulation. First, the 
Department currently runs a 3-year post-discharge income monitoring 
period, for which the documentation requirements are burdensome for 
affected borrowers. Since 2013, loans for more than half of the 1 
million borrowers who received a TPD discharge were reinstated because 
the borrower did not respond to requests for income documentation, 
although an analysis conducted by the Department with Internal Revenue 
Service (IRS) data suggests that 92 percent of these borrowers did not 
exceed the earnings threshold, and that these results are similar for 
borrowers whose discharge is based on the SSA or physician's 
certification process. Second, borrowers who currently qualify for TPD 
discharges based on SSA disability determinations must be in SSA's 
Medical Improvement Not Expected (MINE) category to qualify, although 
there are other SSA disability categories that may support a discharge. 
For borrowers applying for a TPD discharge based on a disability 
determination by the SSA, acceptable documentation for the TPD 
discharge is limited to the notice of award that the borrower receives 
from the SSA and for borrowers applying for a TPD discharge based on a 
physician's certification, only a Doctor of Medicine or a Doctor of 
Osteopathy may certify the TPD discharge form. This ruleset aims to 
mitigate and to streamline total and permanent disability discharge 
process.
False Certification Discharge
    The Department also identified opportunities to improve false 
certification discharges. These are discharges available to borrowers 
under the HEA if the institution that certifies the borrower's 
eligibility for the loan does so under false pretenses, such as when 
the borrower did not have a high school diploma or equivalent and did 
not meet alternative criteria; when the borrower had a status that 
disqualified them from meeting legal requirements for employment in the 
occupation for which they are training; or if the institution signed 
the borrower's name without authorization.
    One challenge the Department identified with false certification 
discharges is that the different standards and processes for false 
certification discharges depending on when the loan was disbursed that 
can create confusion for borrowers. The proposed regulations would 
streamline the false certification discharge process for student loan 
borrowers to establish standards that apply to all claims, regardless 
of when the loan was first disbursed, and provide for a group discharge 
process. The proposed rules would also reduce

[[Page 41940]]

the burden on borrowers to prove eligibility for false certification 
discharges if they did not have a high school diploma, if the 
institution falsely signed the borrower's name for the loan, or if the 
borrower had a disqualifying condition (those that would prevent the 
borrower from obtaining employment due to applicable State requirements 
related to criminal record, age, physical or mental condition, or other 
factors) at the time they took out the loan.
Public Service Loan Forgiveness
    The HEA provides forgiveness of remaining balances for borrowers 
who work in qualifying employment in public service and who make 120 
qualifying payments. However, the Department is concerned that too many 
borrowers have found it difficult to navigate the program's 
requirements due to unclear or complex definitions and complex, overly 
stringent requirements regarding the payments made on the loan. For 
instance, the current regulations leave the definition of what 
constitutes full-time employment up to interpretation by each employer, 
even though the underlying statutory requirement is only that the 
borrower be employed for at least 30 hours a week. This creates 
inconsistency, such as through scenarios where one employer considers 
40 hours a week as full-time employment and another employer may 
consider 35 hours as full-time employment, so a borrower employed 35 
hours a week may be denied or granted qualifying employment depending 
on their employer, despite working in the same type of work. There are 
also situations where professors and contingent faculty have difficulty 
obtaining employer certification of their qualifying employment because 
their employers are unsure of what conversion factor to use in 
converting course load into hours worked per week.
    The Department would like to improve the PSLF application process 
and provide automation in instances where the Secretary has enough 
information to determine eligibility for forgiveness. This will 
significantly reduce the borrower's burden, as well as the Department's 
burden, to review and approve applications. The current PSLF 
application process is difficult for many borrowers, who often struggle 
both with meeting the complex terms of the program and with the process 
of applying to demonstrate their eligibility.
Borrower Defense to Repayment
    Borrowers whose colleges take advantage of them, such as by 
misrepresenting job placement rates or other important information 
about the program, are eligible for a borrower defense discharge on 
their loans. However, the process--which was rarely used prior to 
2015--has resulted in many borrowers filing claims that remain pending 
due to burdensome review processes and differing standards and 
processes depending on when the borrower took out their loan. The 
Department proposes changes to the borrower defense regulations to make 
these policies more consistent, regardless of when the borrower took 
out the loan, and to ensure a more timely and effective process for 
reviewing borrowers' claims. The Department also seeks to implement 
measures that would reduce the burden on institutions of participating 
in borrower defense proceedings with the proposed changes in group 
claims and recoupment. Allowing group claims ensures that institutions 
with large numbers of outstanding claims would likely only have to 
respond once to a request for information regarding the allegations 
that could lead to an approved borrower defense claim. Institutions 
would not face some financial liabilities because the Department would 
only seek recoupment for discharges tied to conduct that would have 
been approved under the applicable prior regulation in place at the 
time the loans were disbursed. Additionally, separating the approval of 
borrower defense claims from recoupment of loan discharge costs from 
the institution also limits the burden on educational institutions, 
when we seek to establish liabilities from a discharge paid. The use of 
pre-existing processes for recoupment proceedings also means 
institutions will not need to learn and participate in an entirely new 
liability and appeals process.

2. Summary

----------------------------------------------------------------------------------------------------------------
              Provision                      Reg section                    Description of provision
----------------------------------------------------------------------------------------------------------------
                                          Borrower Defense to Repayment
----------------------------------------------------------------------------------------------------------------
Uniform Borrower Defense to Repayment  Sec.   685, subpart D..  Would establish a new uniform borrower defense
 Framework.                                                      to repayment framework based on applications
                                                                 received following or already pending with the
                                                                 Secretary on the effective date of these
                                                                 regulations, rather than based on a loan's
                                                                 disbursement date.
Grounds for Borrower Defense Claims..  Sec.   685.401(b)......  Outlines the five grounds on which a defense to
                                                                 repayment claim could be brought: substantial
                                                                 misrepresentation, substantial omission of
                                                                 fact, breach of contract, aggressive
                                                                 recruitment, or a State or Federal judgment or
                                                                 final Department action against an institution
                                                                 that could give rise to a borrower defense
                                                                 claim. A misrepresentation or omission would be
                                                                 substantial if a borrower relied upon it, with
                                                                 the Department using a presumption of
                                                                 reasonable reliance for individual and group
                                                                 claims.
Preponderance of Evidence Standard...  Sec.   685.401(b)......  Would establish that the Department would review
                                                                 the claims based on a preponderance of the
                                                                 evidence standard.
Group Process........................  Sec.   685.402.........  Would establish two processes for pursuing group
                                                                 borrower defense claims. Under the first, the
                                                                 Department determines if a group of borrowers
                                                                 it identifies has a defense to repayment. Under
                                                                 the second, the Department may initiate a group
                                                                 process upon request from a State requestor.
Forbearance and Stop Collection......  Sec.   685.402(d)(2),    Would establish that, during adjudication of a
                                        Sec.   685.403(c)(3).    borrower defense claim, all of the borrower's
                                                                 Title IV loans would be placed in forbearance
                                                                 or stopped collection status, including loans
                                                                 that are not associated with the borrower
                                                                 defense claim. Loans associated with an
                                                                 individual claim would cease accumulating
                                                                 interest after the claim has been pending for
                                                                 180 days. Loans associated with a group claim
                                                                 would cease accumulating interest upon
                                                                 formation of the group.

[[Page 41941]]

 
Prior Final Departmental Actions.....  Sec.   685.404.........  Would establish a process by which the
                                                                 Department could consider prior final
                                                                 Departmental actions against an institution in
                                                                 the context of determining whether to form a
                                                                 group borrower defense claim.
Institutional Response Process.......  Sec.   685.405.........  Would establish that the institution would have
                                                                 90 days to respond to the Department official's
                                                                 notification to the institution of the borrower
                                                                 defense claim and its basis.
Timeline.............................  Sec.   685.406(f)......  Would establish that group claims would be
                                                                 adjudicated within 2 years of the Department's
                                                                 notification of group claim formation, while
                                                                 individual claims would be adjudicated within 3
                                                                 years from the submission of a materially
                                                                 complete application package.
Written Decision.....................  Sec.   685.406(e)......  Would establish that the Department would issue
                                                                 a written decision on the outcome of an
                                                                 adjudication. The written decision also would
                                                                 describe the process for the borrower to
                                                                 request reconsideration of the decision. The
                                                                 written decision would be made available to an
                                                                 individual or member of a group and, to the
                                                                 extent practicable, the institution.
Reconsideration Process..............  Sec.   685.407.........  Sets forth the circumstances under which a
                                                                 borrower would be able to seek reconsideration
                                                                 of a Department official's decision on their
                                                                 borrower defense claim. The Department
                                                                 official's written notice would be final, but
                                                                 if the borrower's claim is denied in full or in
                                                                 part, that individual borrower, or for a group
                                                                 claim, a State requestor, would be able to
                                                                 request reconsideration. A reconsideration
                                                                 request would be allowed if there were
                                                                 administrative or technical errors, new
                                                                 evidence became available, or the borrower or
                                                                 State requestor wishes the claim to be
                                                                 reconsidered under a State law standard. Group
                                                                 reconsideration requests could be made for the
                                                                 same reasons as an individual request, but a
                                                                 request for reconsideration under State law
                                                                 would require additional documentation,
                                                                 including an analysis of the applicable State
                                                                 law standard and why it would lead to an
                                                                 approved borrower defense claim.
Discharge............................  Sec.   685.408.........  Would establish discharge process. For an
                                                                 approved claim, the Department official would
                                                                 recommend a discharge amount for a borrower or
                                                                 group of borrowers. All borrowers within an
                                                                 approved group claim would receive the same
                                                                 recommended discharge, either in amount or as a
                                                                 percentage of their loans. In making a
                                                                 discharge recommendation, the Department
                                                                 official would apply a rebuttable presumption
                                                                 that the borrower or group of borrowers with an
                                                                 approved claim should receive a full discharge
                                                                 of the loans they received for attendance at
                                                                 the institution that is the subject of the
                                                                 claim, unless in certain circumstances a
                                                                 preponderance of the evidence demonstrates that
                                                                 the discharge should be for a lower amount.
Recovery from Institution............  Sec.   685.409.........  Would strike 34 CFR 668.87 in its entirety and
                                                                 establish a general framework to recover from
                                                                 institutions the amounts that the Secretary
                                                                 discharges and to leverage the processes
                                                                 already in place at 34 CFR Part 668, part H.
Limitations Period...................  Sec.   685.409(c)......  Would adopt a 6-year limitations period to
                                                                 recover from the institution the amount of the
                                                                 borrower defense discharge received by
                                                                 borrowers who attended the institution, running
                                                                 from the borrower's last date of attendance at
                                                                 the institution or at any time if the act or
                                                                 omission was a judgment against an institution.
----------------------------------------------------------------------------------------------------------------
                                          False Certification Discharge
----------------------------------------------------------------------------------------------------------------
Uniform Standard.....................  Sec.   685.215(a)(1)...  Would use the borrower's status regarding having
                                                                 a high school diploma or its recognized
                                                                 equivalent or meeting the alternative to
                                                                 graduation from high school eligibility
                                                                 requirements at the time the loan was
                                                                 originated, not at the time the loan was
                                                                 disbursed.
Specification........................  Sec.   685.215(c), Sec.  Would explicitly state in the regulations that
                                          682.402(e)(3).         all loans may qualify for the discharge based
                                                                 on a false certification of high school diploma
                                                                 or equivalent by the school.
Disqualifying Status.................  Sec.   685.215(c)(2),    Would include disqualifying status as a false
                                        Sec.   682.402(e)(3).    certification discharge condition for all
                                                                 loans.
Signature Specimen...................  Sec.   685.215(c)(3),    Would remove the requirement that borrowers
                                        Sec.   685.215(c)(4),    submit signature specimens.
                                        Sec.   682.402(e)(3).
Judicial Determination...............  Sec.   685.215(c)(5),    Would replace the provision which requires a
                                        Sec.   682.402(e)(3).    judicial determination of identity theft with
                                                                 provisions allowing alternative evidence.
Grant Without Applying...............  Sec.   685.215(c)(9),    Would specify that the Secretary may grant a
                                        Sec.   682.402(e)(15).   false certification discharge without an
                                                                 application due to the institution's
                                                                 falsification of Satisfactory Academic Progress
                                                                 for all loans.
Timeline.............................  Sec.   685.215(d), Sec.  Would require borrowers to submit an application
                                          682.402(e)(6).         for a false certification discharge within 60
                                                                 days of their loan being placed into
                                                                 forbearance but allow borrowers an additional
                                                                 30days to submit supplemental information.
Rescind Regulation...................  Sec.   685.215(e)......  Would rescind the provision that any borrower
                                                                 who attests to a high school diploma or
                                                                 equivalent does not qualify for a false
                                                                 certification discharge.
----------------------------------------------------------------------------------------------------------------

[[Page 41942]]

 
                                                      PSLF
----------------------------------------------------------------------------------------------------------------
Definitions..........................  Sec.   685.219(b)......  Would add eleven new terms: ``civilian service
                                                                 to the Military,'' ``early childhood education
                                                                 program,'' ``non-tenure track employment,''
                                                                 ``public health,'' ``non-governmental public
                                                                 service,'' ``public service for individuals
                                                                 with disabilities,'' ``public service for the
                                                                 elderly,'' ``public education service,''
                                                                 ``public library services,'' ``school library
                                                                 services,'' and ``qualifying repayment plan.''
                                                                 Would modify five existing terms: ``employee or
                                                                 employed,'' ``full-time,'' ``military
                                                                 service,'' ``other school-based service,'' and
                                                                 ``qualifying employer.'' These definitions are
                                                                 relevant for nonprofit organizations that
                                                                 provide certain specific public services listed
                                                                 in Sec.   455(m)(3)(B) of the HEA, other than a
                                                                 business organized for profit, a labor union,
                                                                 or a partisan political organization.
Amounts Paid.........................  Sec.                     Would establish amounts paid by the borrower on
                                        685.219(c)(1)(iii).      a loan that are equal to the full scheduled
                                                                 payment due would count toward forgiveness even
                                                                 if the payment is made in multiple installments
                                                                 or outside the 15-day period in current
                                                                 regulations.
Amounts Paid.........................  Sec.   685.219(c)(2)...  Would clarify that the lump sum or monthly
                                                                 payments equal to or greater than the full
                                                                 scheduled amount made in advance of the
                                                                 borrower's scheduled payment due date could
                                                                 count for a period of months not to exceed the
                                                                 date of the borrower's next annual repayment
                                                                 plan recertification date under the qualifying
                                                                 repayment plan.
Deferment or Forbearance Period......  Sec.   685.219(c)(2)(v)  Would allow months in which a borrower is in an
                                                                 identified determent or forbearance period to
                                                                 count as a month of payment for PSLF if the
                                                                 borrower certifies qualifying employment for
                                                                 the period of time covered by the deferment or
                                                                 forbearance.
Direct Consolidation Loan............  Sec.   685.219(c)(3)...  Would count those payments made on an eligible
                                                                 Direct Loan that the borrower later
                                                                 consolidates into a Direct Consolidation Loan
                                                                 as qualifying payments for PSLF.
Current Practice.....................  Sec.   685.219(e)......  Would reflect the Department's current practice
                                                                 and process for borrowers to document
                                                                 qualifying employment and request PSLF after
                                                                 making 120 qualifying payments.
Automation...........................  Sec.   685.219(f)......  Would establish that the Department would grant
                                                                 PSLF without an application if the Department
                                                                 has sufficient information to determine
                                                                 eligibility without an application. The
                                                                 Department would attempt to determine if the
                                                                 borrower was working for a qualifying employer
                                                                 at the time the payment was made. If the
                                                                 Department determines the borrower is eligible
                                                                 for PSLF, the Department would notify the
                                                                 borrower and forgive the remaining balance. If
                                                                 the borrower is ineligible for PSLF, the
                                                                 Department would notify the borrower, resume
                                                                 loan repayment obligation, and grant
                                                                 forbearance for the time spent in forbearance.
Reconsideration Process..............  Sec.   685.219(h)......  Would formalize a reconsideration process for
                                                                 PSLF applications who were denied or disagree
                                                                 with the Department's determination regarding
                                                                 the number of qualifying payments or months of
                                                                 qualifying employment. Borrowers would have 90
                                                                 days from application denial to request
                                                                 consideration and 180 days from the effective
                                                                 date of the regulation to request
                                                                 reconsideration if denied prior to the
                                                                 effective date of these final regulations.
Qualified Payment During Deferment or  Sec.   685.219(h)(6)...  Would count time toward PSLF for a borrower who
 Forbearance.                                                    postponed monthly payments under a deferment or
                                                                 forbearance that would not lead to a qualifying
                                                                 payment. During the forbearance or deferment
                                                                 period, the borrower must have been employed
                                                                 full-time at a qualifying employer and then
                                                                 make an additional payment or payments equal to
                                                                 or greater than the amount the borrower would
                                                                 have paid at the time of a qualifying repayment
                                                                 plan.
Federal Family Education Loans (FFEL)  Sec.   682.414(b)(4)...  Would require FFEL Program guaranty agencies to
                                                                 report detailed information related to
                                                                 deferments, forbearances, repayment plans,
                                                                 delinquency, and contact information on any
                                                                 FFEL.
----------------------------------------------------------------------------------------------------------------
                                             Interest Capitalization
----------------------------------------------------------------------------------------------------------------
When Entering Repayment..............  Sec.   685.202(b)(2)...  Would remove section that provides that, for
                                                                 Direct Unsubsidized Loans, Direct Unsubsidized
                                                                 Consolidation Loans that qualify for a grace
                                                                 period under the regulations that were in
                                                                 effect for consolidation applications received
                                                                 before July 1, 2006, and for Direct PLUS Loans,
                                                                 or Direct Subsidized Loans for which the first
                                                                 disbursement is made on or after July 1, 2012,
                                                                 and before July 1, 2014, the Secretary may
                                                                 capitalize the unpaid interest that accrues on
                                                                 the loan when the borrower enters repayment.
During Forbearance...................  Sec.   685.202(b)(3)...  Would remove provision that provides that the
                                                                 Secretary capitalizes interest that accrues on
                                                                 Direct Loans during periods of forbearance.
Under Alternative Repayment or ICR     Sec.   685.202(b)(4)...  Would remove section that provides that, subject
 Plan.                                                           to some exceptions, the Secretary annually
                                                                 capitalizes unpaid interest when a borrower is
                                                                 paying under the alternative repayment plan or
                                                                 the income-contingent repayment plan described
                                                                 in Sec.   685.209(b) and the borrower's
                                                                 scheduled payments do not cover the interest
                                                                 that has accrued on the loan.

[[Page 41943]]

 
Upon Loan Default....................  Sec.   685.202(b)(5)...  Would remove section that provides that the
                                                                 Secretary may capitalize unpaid interest when a
                                                                 borrower defaults on a loan.
When Leaving PAYE Plan...............  Sec.                     Would remove section that provides that accrued
                                        685.209(a)(2)(iv)(A)(2   interest is capitalized at the time a borrower
                                        ).                       chooses to leave PAYE repayment plan.
Under PAYE Plan......................  Sec.                     Would remove section that limits the amount of
                                        685.209(a)(2)(iv)(B).    accrued interest capitalized under Sec.
                                                                 685.209(a)(2)(iv)(A)(1) to 10 percent of the
                                                                 original principal balance at the time the
                                                                 borrower entered repayment under PAYE repayment
                                                                 plan, and that, after the amount of accrued
                                                                 interest reaches that limit, interest continues
                                                                 to accrue, but is not capitalized while the
                                                                 borrower remains on PAYE repayment plan.
When Leaving REPAYE Plan.............  Sec.                     Would remove section that provides that any
                                        685.209(c)(2)(iv).       unpaid accrued interest is capitalized at the
                                                                 time a borrower leaves REPAYE plan.
----------------------------------------------------------------------------------------------------------------
                                    Total and Permanent Disability Discharge
----------------------------------------------------------------------------------------------------------------
Certification and SSA Documentation..  Sec.                     Would add language to provide that, in addition
                                        674.61(b)(2)(iv), Sec.   to an MD or DO, a Total and Permanent
                                          682.402(c)(2)(iv),     Disability (TPD) discharge application may be
                                        Sec.   685.213(b)(2).    certified by an NP, a PA licensed by a State,
                                                                 or a licensed certified psychologist at the
                                                                 independent practice levels.
                                                                Would expand the types of SSA documentation that
                                                                 may qualify a borrower for a TPD discharge to
                                                                 include an SSA Benefit Planning Query or other
                                                                 SSA documentation deemed acceptable by the
                                                                 Secretary; in addition to SSA documentation
                                                                 indicating that a borrower qualifies for SSDI
                                                                 or SSI benefits with a next scheduled
                                                                 disability review in 5 years to 7 years, a
                                                                 borrower would qualify for a TPD discharge
                                                                 based on SSA documentation indicating that the
                                                                 borrower--
                                                                <bullet> Qualifies for SSDI or SSI benefits with
                                                                 a next scheduled disability review within 3
                                                                 years, and the borrower's eligibility for
                                                                 disability benefits in 3-year review category
                                                                 has been renewed at least once;
                                                                <bullet> Has a disability onset date for SSDI or
                                                                 SSI of at least 5 years prior or has been
                                                                 receiving SSDI or SSI benefits for at least 5
                                                                 years prior to application for TPD;
                                                                <bullet> Qualifies for SSA compassionate
                                                                 allowance program; or
                                                                <bullet> Is currently receiving SSA retirement
                                                                 benefits and met any of the above requirements
                                                                 prior to qualifying for SSA retirement
                                                                 benefits.
Certification Conforming Changes.....  Sec.   674.61(b), Sec.   Would add conforming changes to Perkins, FFEL,
                                         682.402(c), Sec.        and Direct Loan regulations identifying the
                                        685.213(b).              additional medical professionals who would be
                                                                 authorized to certify a TPD discharge
                                                                 application, and the additional SSA
                                                                 documentation that would be acceptable for a
                                                                 TPD discharge.
Reinstatement Requirements...........  Sec.   674.61(b)(6)(i),  Would remove existing reinstatement
                                        Sec.   682.402(c)(6),    requirements, except for provision that
                                        Sec.                     provides that a borrower's loan is reinstated
                                        685.213(b)(7)(i).        if borrower receives a new TEACH Grant or a new
                                                                 Title IV loan within 3 years of date the TPD
                                                                 discharge was granted.
Reinstatement Notification...........  Sec.                     Would revise language regarding notification of
                                        674.61(b)(6)(iii),       reinstatement to borrowers; provides that
                                        Sec.                     notice would explain to the borrower that first
                                        682.402(c)(6)(iii),      payment due date following reinstatement would
                                        Sec.                     be no earlier than 90 days after date of the
                                        685.213(b)(7)(iii).      notification of reinstatement, instead of no
                                                                 earlier than 60 days.
Borrower Responsibilities............  Sec.   674.61(b)(7),     Would remove provisions that describe a
                                        Sec.   682.402(c)(7),    borrower's responsibilities after receiving a
                                        Sec.   685.213(b)(8).    total and permanent disability discharge.
VA or SSA Documentation..............  Sec.   685.213(d)......  Would add language that provides that the
                                                                 Secretary would grant a TPD discharge without
                                                                 an application if the Secretary obtains
                                                                 appropriate documentation from the Department
                                                                 of Veterans Affairs (VA) or SSA.
----------------------------------------------------------------------------------------------------------------
                                             Closed School Discharge
----------------------------------------------------------------------------------------------------------------
Application Requirements.............  Sec.   685.214.........  Would remove separate closed school discharge
                                                                 application requirements for Direct Loans
                                                                 disbursed on or after July 1, 2020, and Direct
                                                                 Loans disbursed before July 1, 2020, that
                                                                 appear in current Sec.  Sec.   685.214(c),
                                                                 (d)(1), (f) and (g).
Application Completion...............  Sec.   674.33(g)(4) and  Would codify current practice by adding language
                                        Sec.   685.214(d)(1).    that provides that the borrower must submit a
                                                                 completed closed school discharge application
                                                                 to the Secretary and that factual assertions in
                                                                 the application must be true and made by the
                                                                 borrower under penalty of perjury.
Application Extension................  Sec.   674.33(g)(8)(v),  Would extend the time period that a borrower has
                                        Sec.                     to submit a closed school discharge application
                                        682.402(d)(6)(ii)(H),    before the forbearance period expires to within
                                        Sec.   685.214(g)(4).    90 days of the Secretary or other loan holder
                                                                 providing the discharge application to the
                                                                 borrower.
                                                                Under Sec.   685.214(g)(4), if the Secretary
                                                                 resumes collection on Direct Loan after the 90
                                                                 days the Secretary would not capitalize unpaid
                                                                 interest that accrued on the loan during the
                                                                 period of suspension of collection activity
                                                                 that exists in current Sec.   685.214(f)(4) and
                                                                 (g)(4).

[[Page 41944]]

 
School Closure Date..................  Sec.                     Would specify that, for purposes of a closed
                                        674.33(g)(1)(ii)(A),     school discharge, a school's closure date is
                                        Sec.                     the earlier of the date that school ceases to
                                        682.402(d)(1)(ii)(A),    provide educational instruction in most
                                        Sec.                     programs, as determined by the Secretary, or a
                                        685.214(a)(2)(i).        date chosen by the Secretary that reflects when
                                                                 school had ceased to provide educational
                                                                 instruction for most of its students.
Definition of Program................  Sec.                     Would add definition of ``program'' for purposes
                                        674.33(g)(1)(ii)(D),     of determining school's closure date as
                                        Sec.                     credential defined by level and Classification
                                        682.402(d)(1)(ii)(D),    of Instructional Program (CIP) code in which a
                                        Sec.                     student is enrolled; under the proposed
                                        685.214(a)(2)(iii).      definition, the Secretary may define a
                                                                 borrower's program as multiple levels or CIP
                                                                 codes if:
                                                                <bullet> The enrollment occurred at same
                                                                 institution in closely proximate periods;
                                                                <bullet> The school granted a credential in a
                                                                 program while the student was enrolled in a
                                                                 different program; or
                                                                <bullet> The programs were presented as
                                                                 necessary for borrowers to complete to succeed
                                                                 in relevant field of employment.
Discharge for Teach-Out..............  Sec.                     Would add language to provide that the Secretary
                                        674.33(g)(3)(i)(B),      (and a guaranty agency, in the case of a FFEL
                                        Sec.                     loan) may discharge a loan without an
                                        682.402(d)(8)(i)(B),     application for an eligible borrower based on
                                        Sec.   685.214(c)(1).    information in the Secretary or guaranty
                                                                 agency's possession if the borrower did not
                                                                 complete an institutional teach-out plan
                                                                 implemented by the school or a teach-out
                                                                 agreement at another school, approved by the
                                                                 school's accrediting agency and, if applicable,
                                                                 the school's State authorizing agency.
Borrower Does Not Re-Enroll..........  Sec.                     Would remove limitation that a borrower may only
                                        674.33(g)(3)(ii), Sec.   qualify for a closed school discharge without
                                          682.402(d)(8)(ii),     an application if the borrower does not re-
                                        Sec.   685.214(c)(1).    enroll in an eligible Title IV school within 3
                                                                 years of the school's closure date. Instead,
                                                                 would provide a discharge automatically if a
                                                                 borrower within 1 year of the school's closure
                                                                 date unless the borrower accepts and completes
                                                                 an approved teach-out agreement.
Teach-Out Plan on Application........  Sec.                     Would maintain requirement that a borrower state
                                        674.33(g)(4)(i)(C),      on the closed school discharge application that
                                        Sec.                     the borrower did not complete an eligible
                                        682.402(d)(3)(iii),      institutional teach-out plan performed by the
                                        Sec.                     school or a teach-out agreement at another
                                        685.214(d)(1)(i)(C).     school and would remove requirement that the
                                                                 borrower state that they did not complete a
                                                                 comparable program of study at another school.
Discharge For Not Completing Teach-    Sec.                     Would add language that provides if a borrower
 Out Plan.                              674.33(g)(3)(ii), Sec.   accepts but does not complete an institutional
                                          682.402(d)(8)(ii),     teach-out plan implemented by the school or a
                                        Sec.   685.214(c)(2).    teach-out agreement at another school, approved
                                                                 by the school's accrediting agency and, if
                                                                 applicable, the school's State authorizing
                                                                 agency, then the Secretary would discharge the
                                                                 loan within one year of the borrower's last
                                                                 date of attendance in the teach-out program.
Discharge for Borrowers 180 Days       Sec.                     Would add language to standardize the time frame
 Before Closure.                        674.33(g)(4)(i)(B),      for closed school discharge eligibility to
                                        Sec.                     allow borrowers who withdrew from the school
                                        682.402(d)(1)(i), Sec.   not more than 180 days before the school closed
                                          685.214(d)(1)(i)(A).   to qualify.
List of Exceptional Circumstances....  Sec.   674.33(g)(9),     Would expand non-exhaustive list of exceptional
                                        Sec.   682.402(d)(9),    circumstances that would justify the Secretary
                                        Sec.   685.214(h).       extending the 180-day time frame. The expanded
                                                                 list of exceptional circumstances would
                                                                 include, but not be limited to:
                                                                <bullet> Revocation or withdrawal by an
                                                                 accrediting agency of school's institutional
                                                                 accreditation;
                                                                <bullet> Placement of school on probation,
                                                                 issuance of a show-cause order, or an
                                                                 equivalent status by the institution's
                                                                 accrediting agency for failing to meet one or
                                                                 more of the agency's standards;
                                                                <bullet> Revocation or withdrawal by State
                                                                 authorization or licensing authority to operate
                                                                 or to award academic credentials in the State;
                                                                <bullet> Termination by the Department of
                                                                 school's participation in a Title IV, HEA
                                                                 program;
                                                                <bullet> A finding by a State or Federal
                                                                 government agency that school violated State or
                                                                 Federal law related to education or services to
                                                                 students;
                                                                <bullet> A State or Federal court judgment that
                                                                 a school violated State or Federal law related
                                                                 to education or services to students;
                                                                <bullet> The teach-out of student's educational
                                                                 program exceeds 180-day look back period for a
                                                                 closed school discharge;
                                                                <bullet> The school responsible for teach-out of
                                                                 student's educational program fails to perform
                                                                 the material terms of teach-out plan or
                                                                 agreement, such that the student does not have
                                                                 a reasonable opportunity to complete his or her
                                                                 program of study;
                                                                <bullet> The school discontinued a significant
                                                                 share of its academic programs;
                                                                <bullet> The school permanently closed all or
                                                                 most of its in-person locations while
                                                                 maintaining online programs; or
                                                                <bullet> The Department placed the school on
                                                                 heightened cash monitoring payment method as
                                                                 defined in section 668.162(d)(2).
----------------------------------------------------------------------------------------------------------------

[[Page 41945]]

 
                                             Pre-Dispute Arbitration
----------------------------------------------------------------------------------------------------------------
Complaint Through Internal Dispute     Sec.   685.300(d)......  Would prohibit institutions, as a condition of
 Process.                                                        participating in the Direct Loan program, from
                                                                 requiring students to pursue a complaint based
                                                                 on a borrower defense claim through an internal
                                                                 dispute process before presenting it to an
                                                                 accreditor or relevant government agency.
Relying on Pre-Dispute Arbitration     Sec.   685.300(e)......  Would prohibit institutions from relying on a
 Agreement with Respect to a Class                               pre-dispute arbitration agreement, or any other
 Action.                                                         pre-dispute agreement with a student who
                                                                 obtained or benefitted from a Direct Loan, in
                                                                 any aspect of a class action related to a
                                                                 borrower defense claim, until presiding court
                                                                 rules that case cannot proceed as a class
                                                                 action.
                                                                Would include a non-exhaustive list of what
                                                                 would constitute reliance on a pre-dispute
                                                                 arbitration agreement with respect to a class
                                                                 action, including seeking dismissal, deferral,
                                                                 or stay of a class action; excluding a person
                                                                 or persons from joining a class action;
                                                                 avoiding discovery; and/or filing an
                                                                 arbitration claim.
                                                                Would add provisions regarding class action bans
                                                                 being included in any agreement with a student
                                                                 who receives a Direct Loan to attend the school
                                                                 or for whom a Direct PLUS Loan was obtained.
Arbitrate Borrower Defense Claim and   Sec.   685.300(f)......  Would require an institution, as part of the
 List of What Constitutes Reliance.                              PPA, to agree it would not enter into a pre-
                                                                 dispute arbitration agreement to arbitrate a
                                                                 borrower defense claim or rely in any way on a
                                                                 pre-dispute arbitration agreement with respect
                                                                 to any aspect of a borrower defense claim.
                                                                Would include a non-exhaustive list of what
                                                                 would constitute reliance on a pre-dispute
                                                                 arbitration agreement, including seeking
                                                                 dismissal, deferral, or stay of a judicial
                                                                 action; avoiding discovery; and/or filing an
                                                                 arbitration claim.
                                                                Would add provisions relating to notices and the
                                                                 terms of the pre-dispute arbitration agreements
                                                                 be included in any agreement with a student who
                                                                 receives a Direct Loan to attend the school or
                                                                 for whom a Direct PLUS Loan was obtained.
Arbitral and Judicial Records........  Sec.   685.300(g), Sec.  Would require institutions to submit certain
                                          685.300(h).            arbitral records and judicial records connected
                                                                 with any borrower defense claim filed against
                                                                 the school to the Secretary by certain
                                                                 deadlines.
Definitions..........................  Sec.   685.300(i)......  Would add general definitions section that
                                                                 includes a revised definition of ``borrower
                                                                 defense claims'' that maintains congruence with
                                                                 definitions elsewhere in the Title IV
                                                                 regulations.
----------------------------------------------------------------------------------------------------------------

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as a ``major rule,'' as defined by 5 U.S.C. 804(2).

3. Discussion of Costs and Benefits

    The proposed regulations are broadly intended to provide benefits 
to struggling borrowers by improving the administration of specific 
aspects of Federal student loan programs. These are borrowers who have 
difficulty keeping up with their payments, often ending up in 
forbearance, delinquency, or default, and as a result, see their 
balances grow through interest accrual and capitalization. Borrowers 
often struggle to manage their student loan debt due, in part, to acts 
or omissions by the institution of higher education they attended, a 
category that includes closed schools and schools that engage in the 
types of behaviors that can lead to approved borrower defense claims.
    The Department believes that these proposed regulations will 
provide critical support to underserved borrowers. For instance, Black 
borrowers are disproportionately likely to face repayment difficulties 
and growing balances. Within recent cohorts, Black college graduates 
faced a likelihood of default that was five times larger than that of 
white borrowers.\35\ Black borrowers enter repayment after earning a 
bachelor's degree with higher debt than borrowers in other racial 
groups, and also continue to see their balances increase rather than 
fall.\36\
---------------------------------------------------------------------------

    \35\ Scott-Clayton, J. (2018, January 10). The looming student 
loan default crisis is worse than we thought. Brookings Institution 
Evidence Speaks Report, vol. 2 #34. Retrieved from: https://www.brookings.edu/research/the-looming-student-loan-default-crisis-is-worse-than-we-thought/.
    \36\ Scott-Clayton, J. (2016, October 10). Black-white disparity 
in student loan debt more than triples after graduation. Brookings 
Institution Evidence Speaks Report, vol. 2 #3. Retrieved from: 
https://www.brookings.edu/wp-content/uploads/2016/10/es_20161020_scott-clayton_evidence_speaks.pdf.
---------------------------------------------------------------------------

    Family income, college completion status, and the type of college a 
student borrowed to attend are additional factors that relate to 
repayment difficulties. One study finds that students who borrowed to 
attend two-year for-profit colleges were 26 percent more likely to 
default than those who borrowed at four-year public colleges, and that 
family income is a strong predictor of default risk.\37\ Using data 
from the College Scorecard, a different analysis finds that across all 
institution types, undergraduate noncompleters have substantially 
higher default rates compared to those who completed a degree or 
credential.\38\ Borrowers in these groups also spend more time with 
their loans in forbearance and are more likely to see their balances 
increase after entering repayment.\39\
---------------------------------------------------------------------------

    \37\ Hillman, N.W. (2014). College on credit: A multilevel 
analysis of student loan default. The Review of Higher Education, 
37(2), 169-195.
    \38\ Itzkowitz, M. (2018, August 8). Want More Students To Pay 
Down Their Loans? Help Them Graduate. Third Way report. Retrieved 
from: http://thirdway.imgix.net/pdfs/want-more-students-to-pay-down-their-loans-help-them-graduate.pdf.
    \39\ Department analysis of the 2004/2009 Beginning 
Postsecondary Students Study, estimated via PowerStats (table 
references: ivbztb and qobjsb).
---------------------------------------------------------------------------

    The remainder of this subsection of the RIA summarizes the 
conclusions and information which the Department relied on, such as 
technical studies, assumptions, data, and methodologies, to develop 
this regulation.

3.1 Borrower Defense

    These proposed regulations seek to improve the process for 
adjudicating borrower defense claims and for

[[Page 41946]]

recouping from institutions the cost of discharges associated with 
approved claims. The Department anticipates that these proposed 
regulations would have many benefits for borrowers, as well as some 
reduction of burden for institutions of higher education. In total, the 
Department believes the expected increase in borrower defense 
discharges and the expected increase in recoupment, as compared with 
the 2019 regulations, would deter behavior that could form the basis 
for a borrower defense claim and ensure more borrowers are able to 
access a loan discharge, as provided for in the HEA.
    The Department's proposal would establish a uniform Federal 
standard for initial adjudication of borrower defense claims, 
regardless of when a loan was disbursed, which would streamline 
administration of the borrower defense regulations and increase 
protections for students. This would ensure that all borrower defense 
claims could be adjudicated under the same standard. However, 
institutions would not be subject to recoupment actions for 
applications that are granted based upon this regulation that would not 
have been approved under the standards of the 1994, 2016, or 2019 
regulations. Nor would institutions be subject to a recoupment amount 
greater than what they would have faced under the standards of the 
1994, 2016, or 2019 regulations, as applicable. A uniform standard also 
would significantly reduce the time necessary to determine eligibility 
and relief for borrower defense claims, ensuring that borrowers would 
receive faster determinations. The use of a uniform Federal standard 
for initial adjudication would also ensure all borrowers receive 
consistent review, unlike current rules that outline different 
requirements depending on when a loan was disbursed.
    The Federal standard would provide a clearer path for approval of 
borrower defense claims while still limiting approval to circumstances 
where the Department determines that serious improper behavior 
occurred. We propose to add aggressive recruitment as grounds for a 
borrower defense to repayment. The Department is adding this category 
based upon its experience in administering the borrower defense 
regulation and because the Department is concerned about instances in 
which aggressive and deceptive recruitment tactics have prevented a 
borrower from making an informed choice. The proposed language would 
also clarify that if a recruiter engages in these tactics but then 
provides accurate written disclosures, the latter cannot undo the 
actions of the former. We also propose to restore the categories of 
breach of contract and judgment as grounds for a borrower defense 
claim, which were included in the 2016 regulation but removed in the 
2019 regulation. We have also expanded the category of judgment to 
include final Department actions against an institution that could give 
rise to a borrower defense claim. This includes actions such as a final 
program review determination that finds an institution has engaged in 
misrepresentations. To clearly delineate that omission of fact is a 
form of misrepresentation we have listed it separately.
    The regulations also propose clearer protections for borrowers 
while their cases are under consideration by Department officials by 
placing a borrower's loan in forbearance or stopping collections 
activity would stop while the case is being adjudicated. Interest 
accumulation would cease immediately in the case of a group claim or 
after 180 days for an individual claim. Individual claims would be 
adjudicated within 3 years from the receipt of a complete application. 
Group claims would be adjudicated within 2 years from the receipt of a 
complete application. Previously, there was no timeline for 
adjudicating borrower defense claims. As a result, many borrowers who 
filed claims have found themselves waiting for years to have their 
claims adjudicated; of nearly 81,000 claims submitted in 2017, for 
instance, more than 15,000 (nearly one in five) remaining pending. More 
than one in five claims submitted in 2018 and nearly one in four claims 
submitted in 2019 also remain pending.\40\ In late June 2022, the 
Department announced it had reached a settlement agreement with the 
plaintiffs in Sweet v. Cardona, a lawsuit challenging the Department's 
timeliness in rendering decisions on borrower defense claims, as well 
as other matters. Because that settlement process is still underway any 
effects of that agreement are not contemplated in this regulation. The 
Department's failure to render a decision by the end of the timeline 
would render the loans unenforceable. Loans in such a circumstance 
would not be viewed as a borrower defense claim so an institution would 
not face a recoupment action for the cost of those loans.
---------------------------------------------------------------------------

    \40\ Department analysis of data retrieved from the CEMS 
Borrower Defense System in June 2022. Values were rounded to the 
nearest 10.
---------------------------------------------------------------------------

    The Department has proposed to include a group process for borrower 
defense to repayment claims. This process would allow for the use of 
existing information within the Department's records, such as prior 
Secretarial actions, which were limited by the 2019 regulations. This 
would ensure a more efficient process. The process would also invite 
State requestors to provide evidence that could lead the Department to 
initiate a group claim, which would provide critical assistance for the 
Department in investigating and assessing borrower defense claims. The 
Department estimates that as much as 75 percent of borrower defense 
volume associated with private for-profit colleges could be associated 
with group claims, with the rates in public and private nonprofit 
sectors a minority of volume. While the staff time required to 
investigate the evidence behind a group claim could be longer than what 
is needed for an individual claim, applying the same adjudication 
result to a group of borrowers would result in an overall reduction in 
staff time. Approving group claims would also result in the filing of 
fewer individual claims, as the approved group claims would result in 
discharges for borrowers who have not yet applied, eliminating the need 
for such borrowers to submit applications.
    The Department proposes to presume that a borrower with an approved 
claim is eligible for a full discharge and specify limited instances in 
which the Department could rebut that presumption. All borrowers with 
approved claims to date have been approved for a full discharge. 
However, as the Department continues to review and adjudicate claims, 
there may be circumstances where a claim is approved, and a partial 
discharge is warranted. The Department believes a presumption that 
borrowers would get a full discharge would help to ease the burden on 
both the borrower and the Department by limiting the cases in which it 
must determine the relief amount to a subset of claims.
    If a claim is not approved, or is not approved for full discharge, 
a reconsideration process would allow a borrower to submit new evidence 
that was not available in the initial application. This process would 
afford borrowers an opportunity to be considered under a State law 
standard if a decision under the Federal standard does not result in an 
approved claim for a full discharge.
    By increasing relief to borrowers, improving the borrower defense 
standard, restoring a group process, establishing the presumption of 
full relief, and providing a reconsideration process, these proposed 
regulations would result in additional transfers from the Department to 
borrowers, or from institutions to borrowers when the

[[Page 41947]]

Department successfully recovers from the institutions. All borrowers 
would fall under a single, more expansive rule and would be able to 
receive relief more quickly and efficiently.
    The process that the Department proposes would also afford 
institutions an appropriate opportunity to respond. The Department's 
allowance for group processes in the proposed regulations means that 
institutions would need to respond only once regarding a group claim, 
instead of sending responses to a potentially large number of 
individual claims. While institutions would be expected to provide a 
response within 90 days to claims, the separation of approval and 
recovery processes means that institutions would not be expected to 
engage in extended contestation of claims for which the Department 
decides not to pursue recoupment.
    In the past, the Department has seen institutions attempt to 
increase enrollment by resorting to conduct that later leads to 
borrower defense approvals. For instance, institutions aggressively 
marketed inflated job placement rates to encourage students to enroll 
in their institution. Holding institutions accountable for this type of 
misrepresentation, as well as adding in aggressive recruitment as a 
type of conduct that can lead to approved borrower defense claims, 
would benefit institutions that do not engage in these tactics. This is 
because approved borrower defense claims may deter institutions from 
providing students with inaccurate information and from using 
aggressive recruitment tactics, helping institutions with better 
conduct and outcomes more successfully compete for enrollment.
    The proposed rules provide for a process to recover the discharged 
amount from institutions after the adjudication of borrower defense 
cases. Recovery from institutions is important to offset costs to the 
Federal government and taxpayers from approved borrower defense claims. 
It also holds institutions accountable for past behavior and would help 
to deter future practices that could form the basis for additional 
borrower defense claims. The Department anticipates that, by 
establishing a process for recoupment from institutions and by 
providing for a faster adjudication process, it would be able to 
recover more funds from institutions because those schools would be 
less likely to have closed by the time liabilities are assessed than is 
the case under current regulations.
    The Department also believes that a stronger and more expansive 
borrower defense process would result in positive changes in 
institutional behavior. For instance, as past title IV policy changes 
to increase accountability, such as the cohort default rate measure and 
the 90/10 rule, have demonstrated, institutions are likely to change 
their practices to respond and conform to new regulations. Accordingly, 
we expect that, over time, institutions would engage less frequently in 
acts or omissions that could give rise to a borrower defense claim.
Costs of the Regulatory Changes
    As detailed in the Net Budget Impact section, the proposed changes 
to borrower defense are expected to reduce transfers from affected 
borrowers to the Federal government as their obligation to repay loans 
is discharged. We estimate this transfer to have an annualized net 
budget impact of $2.6 billion and $2.3 billion at 7 percent and 3 
percent discount rates, respectively. This would be partially 
reimbursed by affected institutions with the annualized recoveries 
estimated at $51 and $49 million at 7 percent and 3 percent discount 
rates. The Department anticipates that all costs are transfers, other 
than minimal costs related to implementation. If the Department recoups 
from institutions the forgiven dollars, they are transfer from 
institutions to borrowers. Otherwise, they are transfers from Federal 
budget to borrowers. Details about these estimates are in the Net 
Budget Impacts section of this document, and the Department invites 
further feedback on the estimates.
    In the proposed Federal standard for defense to repayment claims, a 
claim could be brought on any of the following five grounds: 
substantial misrepresentation, substantial omission of fact, breach of 
contract, aggressive recruitment, and a State or Federal judgment or 
final Department action against an institution that could give rise to 
a borrower defense claim. The first two grounds incorporate and expand 
34 CFR part 668, subpart F, which currently defines three categories of 
misrepresentation, relating to the nature of education programs, the 
nature of financial charges, and the employability of graduates. 
Aggressive recruitment is added as a new ground for a borrower defense 
to repayment application and is outlined in 34 CFR part 668, subpart R. 
The proposed Federal standard would be applied to all borrowers 
regardless of when their loans were disbursed. Borrower defense to 
repayment applications that are currently awaiting adjudication upon 
the effective date of the regulations would be adjudicated based on the 
proposed regulations. Since the proposed regulations expanded on the 
categories in which borrowers may be eligible for a borrower defense 
claim, these pending cases could be approved where they otherwise may 
not be under existing regulations. In addition, the Department expects 
an increase in the number of borrower defense to repayment applications 
when the proposed regulations would go into effect due to the expanded 
coverage of types of institutional misconduct. However, the Department 
also expects a deterrent effect from the proposed regulations as 
institutions adjust their behavior according to the proposed rules.
    The proposal to expand group borrower defense claims includes a 
process initiated by State requestors and a process based on prior 
Secretarial final actions, as well as general ability for the Secretary 
to form a group. With these changes, the Department expects that 
individuals who have a valid borrower defense to repayment claim they 
could assert, but who were previously unaware of their eligibility or 
unfamiliar with the process, could become members of a group claim. The 
Department would presume that a borrower with an approved claim is 
eligible for a full discharge, except in limited situations. All 
borrowers with approved claims to date have been approved for a full 
discharge.
    The proposed reconsideration process could increase costs in the 
form of burden for the Department, although these costs are likely to 
be small. In general, there are three possible outcomes for a borrower 
defense to repayment application: denial, approval with partial 
discharge, and approval with full discharge. The Department expects a 
percentage of borrowers whose borrower defense applications are denied 
or approved with partial discharge to seek reconsideration, which would 
increase administrative costs and time compared to previous regulations 
that do not have reconsideration processes. In addition, cases brought 
by State requestors may also seek reconsideration, provided that the 
State requestor specifies the exact State standard that applies and why 
they think it would result in a different decision.
    While these proposed regulations would result in higher short-term 
costs for the Federal government in the form of transfers to borrowers, 
the Department expects that some of these payments would be recovered 
from institutions over time. While the Department would likely be 
unable to recover from institutions that are no longer operating when 
borrower defense

[[Page 41948]]

claims have been adjudicated, the proposed regulations would increase 
the likelihood that the Department could recover from relevant 
institutions before they are closed because (1) group claims against an 
institution would increase the expected benefit of recovering from the 
institution since it would result in large amounts of discharge if 
approved; (2) the Department is expected to respond to group claims 
within 2 years of a materially complete application, which would 
increase the possibility that the institution is still in operation; 
and (3) the streamlined process of borrower defense claims would allow 
borrowers, State requestors, and the Department to act more quickly on 
borrower defense applications. As a result, the costs in the form of 
transfers to borrowers that would result from the proposed regulations 
on borrower defense to repayment could be smaller for the Federal 
government in the long term as it receives transfers from institutions.
Benefits of the Regulatory Changes
    The proposed regulations would result in administrative cost 
savings for the Department, efficiencies in responding to claims for 
institutions, and benefits to borrowers. In addition, borrowers may 
benefit from a deterrent effect of these proposed regulations.
    Borrowers who would benefit the most from these proposed 
regulations are relatively disadvantaged. To date, borrower defense 
applicants have disproportionately attended schools in the proprietary 
sector. Of more than 487,000 borrower defense claims received since 
2015, more than 367,000--about three out of four borrower defense 
applicants--attended proprietary institutions. Meanwhile, just 5 
percent of applicants attended public institutions.\41\ These numbers 
understate the share of borrowers who attended private for-profit 
institutions because the data reflect the sector of an institution at 
the time a borrower applied, not when they attended. That means a 
borrower who attended a college when it was a proprietary institution 
but applied after it became a nonprofit would be coded as an 
application from a nonprofit institution.
---------------------------------------------------------------------------

    \41\ Department analysis of data retrieved from the CEMS 
Borrower Defense System in June 2022. School Type is determined 
using the ``School Type'' field on each case in the system. Each 
value is rounded to the nearest 10.
---------------------------------------------------------------------------

    Borrowers who received Pell Grants while enrolled and borrowers who 
struggle to repay their loans and default would benefit from these 
proposed regulations. Eighty-two percent of borrower defense applicants 
received a Pell Grant indicating they were low-income while in college, 
and at least 22 percent of applicants are currently in default on their 
loans, consisting of approximately 95,000 borrowers.\42\ This number 
does not include borrowers previously in default who have had their 
claims approved and discharged, but it does include some borrowers 
whose claims have been approved and are in the process of being 
discharged. As a result, it potentially understates the potential 
degree to which borrower defense applicants have been in default.
---------------------------------------------------------------------------

    \42\ Data analysis of borrower defense applicants.
---------------------------------------------------------------------------

    The proposed single Federal standard for initial adjudication, 
uniform borrower defense regulations, and a more streamlined process 
(such as presuming a full discharge) would reduce the staff time per 
borrower needed to adjudicate borrower defense applications. These 
savings would largely come from being able to apply consistent rules 
across all borrowers while still ensuring that each case receives a 
thorough and rigorous review to determine whether their claims should 
be approved or denied.
    The proposed group process would significantly reduce the staff 
time required to investigate and adjudicate borrower defense cases on a 
per-borrower basis. The proposed regulations include two means by which 
the Department can pursue a group process. Specifically, a group 
process can be initiated by the Department based on either common 
evidence from cases being adjudicated or prior Secretarial final 
action, or a State may request that a group process be initiated.
    When the Department initiates a group process, it would thus be 
considering the possibility of approval for tens of borrowers all at 
once, if not hundreds or thousands. While the scope of this work would 
require significantly more time than reviewing any one individual 
claim, it is far more efficient than on a per-borrower basis. In 
addition, the evidence available during group claims is expected to be 
more extensive than what the Department may possess for an individual 
claim. The process for group claims tied to prior final actions by the 
Secretary would be particularly efficient because the Department would 
draw upon prior work done by the agency, minimizing the amount of 
duplication in investigation that needs to occur. This would result in 
a significant saving of Department staff time and ensure faster 
adjudication for borrowers, as well as a straightforward process for 
subsequent recoupment. This proposed process is more efficient than how 
the Department has addressed borrower defense claims to date. For those 
claims, it has first worked to reach common findings--a process similar 
to what would be done to determine a group claim. But after reaching 
those common findings for approval, the Department then conducts 
reviews of individual claims to determine if the allegations provided 
by the borrower match the common findings. This results in a second 
step of claim review that has disqualified some borrowers who may have 
experienced the misconduct that led to approvals, but whose claims did 
not necessarily articulate those experiences. Such a secondary review 
would not be necessary in the proposed group process, though the 
Department would continue to review borrower eligibility to ensure 
findings are applied appropriately only to affected borrowers.
    The use of group processes can also provide some efficiencies for 
institutions in the process of responding to claims. Institutions would 
have to respond to individual claims separately, which could require 
them to respond to hundreds if not thousands of separate claims from 
similarly situated borrowers. By contrast, a group approach would 
require institutions to offer only a single response back.
    The proposed regulations could also result in significant benefits 
to borrowers who qualify for a borrower defense to repayment approval. 
In particular, it would help to reduce the burden of applying where the 
Department is able to identify eligible borrowers for relief on their 
loans but where some borrowers might not know they are eligible or how 
to access relief. These borrowers who are eligible for borrower defense 
discharges, but may not know how to access relief, are unlikely to have 
benefited from the education they received and may be distressed 
borrowers who are delinquent, in default, or have previously defaulted 
on their student loans. These loan repayment struggles create further 
barriers for borrowers' personal financial circumstances, but also add 
to the Department's administrative burden when there are borrowers in 
the system who are eligible for a discharge but instead are in default. 
The proposed regulation would allow more eligible borrowers access to 
relief through group claims, which would bring benefit to both 
borrowers and the Department.
    The Department believes that the expansion of eligibility for 
borrower defense to repayment claims and the reintroduction of a 
rigorous group process would result in positive change

[[Page 41949]]

in institutional behaviors due to the deterrent effect. It would also 
benefit institutions that do not engage in conduct that leads to 
approved borrower defense claims. The Department has seen in the past 
that some institutions with poor outcomes have used fraudulent or 
misleading materials in marketing and recruitment to attract new 
students. This may place institutions that remain truthful about their 
outcomes at a competitive disadvantage in attracting and enrolling 
students. Curbing the conduct that leads to approved borrower defense 
claims thus helps institutions that never engaged in those behaviors in 
the first place. It is possible that in some limited circumstances tied 
to the worst behavior, the approval of borrower defense claims could 
result in the exit of an institution from the Federal financial aid 
programs. An institution that engages in problematic practices for 
years could face significant liabilities from approved borrower defense 
claims that they cannot afford. As with deterring institutions from 
engaging in misleading or other questionable marketing practices, 
having the institutions with the worst behaviors exit the Federal aid 
programs would provide benefits to all other institutions that are 
operating in more truthful and ethical manners.

3.2 False Certification Discharge

    False certification discharges ensure that borrowers whose 
institutions falsely certified their eligibility for a Federal student 
loan are able to access relief on that debt. The Department decided in 
September 2019 that borrowers who took out loans after July 1, 2020, 
are ineligible for a false certification discharge if they were unable 
to provide an official high school transcript or diploma, and loans 
disbursed after July 1, 2020, are not eligible for disqualifying status 
discharge as well. After these regulatory changes, we observed a sharp 
decline in the number of borrowers and total amounts of false 
certifications discharged in 2021. The number of borrowers who were 
granted false certification discharge was 400 in 2020 but was only 100 
in 2021, and the total amount of false certification discharges was 
$4.8 million in 2020 but only $0.8 million in 2021, suggesting that 
borrowers were facing increased barriers to accessing false 
certification discharges to which they were entitled.

                            Table 1--False Certification Discharges, by Calendar Year
----------------------------------------------------------------------------------------------------------------
                                                                                                    Average per
                          Calendar year                              Borrowers     Amount  ($ M)   borrower  ($
                                                                                                        K)
----------------------------------------------------------------------------------------------------------------
2019............................................................             300             3.8            12.7
2020............................................................             400             4.8            12.0
2021............................................................             100             0.8             8.0
                                                                 -----------------------------------------------
    Total.......................................................             800             9.4            11.8
----------------------------------------------------------------------------------------------------------------

    The effects for borrowers could be significant. In 2020, prior to 
the new regulations, the discharge approval rate was about 7.3 percent, 
and the average amount discharged per application was $9,310.

                Table 2--Number of False Certification Approvals and Discharge Amounts, by Reason
----------------------------------------------------------------------------------------------------------------
                                                  7/1/19 to 6/30/ 7/1/20 to 6/30/  2020 calendar
                                 Discharge type         20              21        year estimated   2020 subtotal
----------------------------------------------------------------------------------------------------------------
Applications Approved.........  FC--ATB                      520             145             330             470
                                FC--DQS                       30              10              30
                                FC--UNS                      200              30             120
Applications Denied...........  FC--ATB                     3500            1510            2510            6000
                                FC--DQS                     1500             770            1130
                                FC--UNS                     3530            1190            2360
Loans Discharged..............  FC--ATB                     1170             250             710             980
                                FC--DQS                       50              40              50
                                FC--UNS                      400              40             220
Amount Discharged.............  FC--ATB               $5,764,280      $1,274,520      $3,519,400      $4,404,220
                                FC--DQS                 $219,130        $305,600        $262,370
                                FC--UNS               $1,161,290         $83,610        $622,450
                                                 ---------------------------------------------------------------
    Average amount discharged   ................  ..............  ..............  ..............          $9,310
     per application.
    Average amount discharged   ................  ..............  ..............  ..............          $4,510
     per loan.
    Average approve rate......  ................  ..............  ..............  ..............            7.3%
----------------------------------------------------------------------------------------------------------------
Data source: Federal Student Aid (FSA)
Note: 2020 calendar year is estimated with the average of 2020 and 2021 fiscal years. ATB stands for the ability
  to benefit, DQS for disqualifying status, and UNS for unauthorized signature. All figures are rounded to the
  nearest 10.

    To address the decline in borrower access to necessary discharges 
on their loans, and to ensure the regulations governing these 
discharges are streamlined and understandable to eligible borrowers, 
the Department proposes one set of regulatory standards to cover all 
false certification discharge claims.
    The Department proposes a uniform standard that would improve 
borrower access to false certification discharges by clarifying that 
eligibility for the discharge begins at the time the loan

[[Page 41950]]

was originated, not at the time the loan was disbursed. Current 
regulations for Direct Loan and FFEL (FFEL) Program loans also contain 
separate requirements for loans first disbursed before July 1, 2020, 
and loans first disbursed on or after July 1, 2020, which confuse 
borrowers and create equity issues for borrowers who may struggle to 
navigate this complexity. This uniform standard would ensure that more 
borrowers have access to the proposed expanded eligibility and that 
they are not forced to navigate a complex and overlapping set of 
regulatory frameworks. As with the proposed borrower defense standard, 
we believe that this uniform standard would streamline the 
administration of the regulations and better protect students while 
reducing confusion among borrowers, institutions, servicers, and the 
Department.
    The Department proposes to rescind the requirement that any 
borrower who falsely attests that they have a high school diploma or 
its equivalent does not qualify for a false certification discharge. 
This would ensure that borrowers can seek a discharge if they were 
coerced or deceived by their institution of higher education and as a 
result reported having a valid high school diploma or its equivalent 
when they in fact did not, further expanding access to false 
certification discharges.
    The Department also proposes to specify that the Secretary may 
grant a false certification discharge, including without an 
application, if the institution falsified Satisfactory Academic 
Progress (SAP) for all loans. We would grant group discharges based on 
the falsification of SAP and the Department would establish the dates 
and borrowers affected. The discharge would only cover loans for those 
borrowers for the period covered by the falsification of SAP and does 
not discharge all the borrower's other loans or all loans at the 
institution. The Department is aware of problematic practices by 
institutions that have falsified SAP, which is a basic eligibility 
requirement for continued access to Title IV, HEA aid, and believes 
that this proposed addition would ensure that borrowers whose 
institutions falsely confirmed their eligibility through these 
practices have access to loan relief, and that institutions may be held 
accountable for their actions.
    The Department proposes to remove the requirement that borrowers 
submit signature specimens when applying for discharge due to 
unauthorized loan, unauthorized payment, or identity theft, and replace 
the need that a borrower provides a judicial determination of identity 
theft with the ability to submit alternative evidence. This would 
expand access to false certification discharges by reducing the burden 
of documents-preparation on borrowers and simplifying the application 
process.
    The Department's proposal would also establish a group process for 
awarding discharges to similarly situated borrowers. In part, this 
addition was in response to negotiators who noted that the Department 
has rarely utilized its authority to grant group false certification 
discharges. As a result, the Department believes that borrowers would 
receive more equitable and consistent treatment, because they would be 
able to access relief on their loans regardless of whether they 
applied, based on evidence the Department collects or has in its 
possession. A State attorney general or nonprofit legal services 
representative would be able to submit an application for a group false 
certification discharge to the Department. This would ensure a more 
efficient process than is typically available, whereby third-party 
requestors and other stakeholders would be able to contribute directly 
to the fact-finding process required before adjudicating the 
application. The group process, and associated improvements, would also 
help to significantly reduce staff time required to investigate and 
adjudicate individuals' applications when common facts and 
circumstances are present.
Costs of the Regulatory Changes
    Increased accessibility of discharges may encourage more borrowers 
to file claims or may result in additional discharges as a result of 
borrowers' access to a group process. The Department expects an 
increase in the Federal government's expenditure and an increase in the 
time in processing the claims in the short term, but a minimal long-
term cost. The Department anticipates the costs associated from these 
proposed changes will be transfer costs. The short-term increase in 
expenditures would come from the following proposed regulations:
    The Department proposes to rescind the provision that any borrower 
who attests to having obtained a high school diploma or equivalent does 
not qualify for a false certification discharge on that basis. The 
Department is aware of numerous instances in which borrowers were 
forced or misled by their institution into attesting to holding a high 
school diploma, or into obtaining a diploma on false pretenses. In 
cases where such evidence is available, the Department believes the 
institution should be held accountable for its misconduct, and the 
borrower should be able to access a discharge of their eligible loans. 
This could lead to more borrowers applying and being granted loan 
discharges in the future.
    The Department also proposes to remove the requirement that 
borrowers submit signature specimens and replaces the provision of a 
judicial determination of identity theft with alternative evidence. 
Similarly, the Department anticipates that removing this barrier would 
allow more eligible borrowers to apply without having their 
applications rejected, and may, therefore, increase the costs of 
approved false certification discharges.
Benefits of the Regulatory Changes
    The proposed process, which would be more streamlined, would ease 
the administrative burden on the Department for the review of claims 
and for appeals of denials that are escalated for further review. Most 
importantly, the proposed process contemplates the benefits to the 
borrowers themselves who are entitled to discharges when their 
institution wrongfully saddles them with debt they are not eligible for 
and wastes their aid eligibility.
    The Department also expects that there would be some behavioral 
impact as institutions respond to changes in the regulations and reduce 
their use of such predatory practices, since the Department could 
assess liabilities against the institution for the discharges. In 
addition, this deterrent of strengthening and streamlining these 
regulations is expected to offer some benefit to taxpayers. Therefore, 
the long-term transfer costs may be reduced.
    Taken together, the proposed regulations would result in a more 
streamlined process, rescind limitations on borrower eligibility from 
current regulations, and remove and replace requirements, which are 
expected collectively to improve borrowers' accessibility to false 
certification discharge. The Department expects that these proposed 
rules would ensure more borrowers have access to relief. While this 
would increase costs to taxpayers through additional false 
certification discharges, the Department also anticipates that some of 
these costs would be recouped from the institutions responsible, and 
that these proposed rules would be more efficient.

3.3 PSLF

    The Department proposes to clarify its regulations on PSLF to help 
borrowers better understand and access the program, particularly by 
simplifying the rules regarding what constitutes a qualifying payment, 
and to streamline

[[Page 41951]]

the Department's processing of the applications it receives for 
forgiveness. Overall, we anticipate that these proposed regulations 
would increase the amounts of Federal student loan forgiveness through 
PSLF.
    The Department proposes to further clarify the types of employers 
whose employees can qualify for PSLF and to clarify the definition of 
full-time employment that meets the terms of the program to address 
inconsistencies in how different employers may consider full-time 
employment and in how non-tenured faculty are treated. While most of 
these changes are modest, we believe they would bring benefits to 
borrowers in the form of more consistent treatment. This may also 
provide additional clarity to employers, ensuring they can better 
understand the program and inform borrowers of their eligibility.
    Where possible, the Department would seek to automate the process 
of identifying public servants and accounting for their time worked to 
ensure they automatically receive progress toward PSLF. For instance, 
the Department is working to implement data matches with other Federal 
agencies that would enable it to account for federal employees and 
service members. The benefit of these data matches for borrowers is 
increased access for those who would otherwise not have met the 
paperwork requirements, but who may be eligible for relief on their 
loans. The Department has also announced longer-term efforts to work 
with States and private nonprofit organizations to obtain data that 
would similarly allow for discharges without an application. We 
anticipate a significant percentage increase in the total amount of 
loans forgiven due to greater use of automation made possible by 
changes proposed in these regulations. Most borrowers employed by the 
Federal government would be able to receive PSLF benefits without 
submitting an application. We also expect that borrowers identified for 
forgiveness through these data matches would have information that is 
validated by government agencies, ensuring greater program integrity 
among a larger share of applicants who receive forgiveness.
    Automation would also have considerable benefits, both for the 
Department and for borrowers, in terms of reducing the administrative 
burden. While there are initial costs associated with developing the 
automation, the future cost savings far outweigh the development costs. 
In 2021, the Department received 776,000 applications for employment 
certification and/or forgiveness, all of which needed to be evaluated 
individually. Prior to any data match, the Department was aware of 
approximately 110,000 Federal employees and 17,000 service members who 
had certified some employment toward PSLF and anticipates that many 
others could opt to certify employment in the future. Automating the 
consideration of those borrowers' employment and/or PSLF applications 
would reduce the investment of staff resources required to analyze PSLF 
applications.
    The Department proposes to relax the requirements around loan 
payments to ensure more eligible borrowers have access to PSLF, 
partially addressing the low success rate of PSLF applications. 
Currently, the regulations governing qualifying payments are extremely 
rigid. Payments must be made on-time (within 15 days of the due date), 
or they do not count as qualifying payments. Payments also must be made 
in full, so payments off by only a few cents or payments that are made 
in more than one installment are disqualified. Additionally, some 
public servants have opted for deferments or forbearances available to 
borrowers who are working in public service jobs--such as for 
AmeriCorps and Peace Corps--without realizing those months would not 
qualify for PSLF. The Department believes simpler payment rules and 
counting some deferments and forbearances would significantly reduce 
confusion around the program. In addition, borrowers would 
significantly benefit by being able to make qualifying payments for 
prior deferment or forbearances where there was no qualifying payment. 
This change grants borrowers the ability to make up payments that did 
not previously qualify as well as not reset the clock toward 
consolidation.
    These changes would increase costs to the government in the form of 
greater transfers to borrowers eligible for PSLF, as take-up of the 
benefit increases due to automation and as more borrowers become 
eligible for PSLF outside of the narrow constraints of the existing 
rules but consistent with the statutory purpose of the PSLF program. 
Borrowers who work in Federal agencies where data matching agreements 
are arranged will benefit as a higher fraction of eligible borrowers 
receive forgiveness and the burden in applying for benefits is reduced. 
All other things equal, among borrowers for whom receiving forgiveness 
becomes more likely, borrowers with higher debt levels, including some 
graduate borrowers, will experience greater amounts of loan 
forgiveness.
    The Department also proposes to formalize a reconsideration process 
and establish a clear timeline by which borrowers must submit a 
reconsideration request. These refinements would streamline the 
application process and provide a clearer timeline to apply for PSLF or 
request a reconsideration. The Department anticipates that this 
reconsideration process would increase administrative burden for the 
agency and for borrowers, but that it would allow for a fairer and more 
equitable process to access PSLF where borrowers believe the Department 
has erred in its determination.
Costs of the Regulatory Changes
    As detailed in the Net Budget Impact section, the proposed changes 
to PSLF are expected to reduce transfers from affected borrowers to the 
Federal government as their loans are forgiven. We estimate this 
transfer to have an annualized net budget impact of $3.0 billion and 
$2.8 billion at 7 percent and 3 percent discount rate, respectively. 
The Department anticipates most of these costs would be transfers as 
borrowers who are employed by a non-profit organization that provides 
non-governmental public services more easily access PSLF benefits. In 
particular, we expect that the expansion of eligibility, the inclusion 
of additional payments as qualifying payments, and increases in take-up 
facilitated by automating the benefit where it is possible to identify 
eligible borrowers through a data match would increase transfers from 
the government to eligible borrowers. The revised definitions of 
qualifying services are not anticipated to impact a significant number 
of borrowers but will provide greater clarity about eligibility.
Benefits of the Regulatory Changes
    The Department anticipates several benefits based on these 
regulatory changes to PSLF. The Department seeks to reduce the burden 
of accessing PSLF benefits for borrowers who are employed by a non-
profit organization that provides non-governmental public services and 
streamline the process to obtain these benefits. The Department 
received over 917,000 employment certification forms in 2019, 
certifying that borrowers are working toward forgiveness, and 825,000 
employment certification forms in 2020. The Department also received 
96,000 forgiveness applications in 2019 and 135,000 forgiveness 
applications in 2020 from borrowers who may believe they completed the 
requirements of the program to qualify for forgiveness.

[[Page 41952]]

Starting in late 2020, the combined form replaced the separate process 
of borrowers submitting employment certification forms and forgiveness 
applications. The Department received 130,000 combined forms in 2020 
and 776,000 combined forms in 2021. Over the last few years, the 
Department has seen fewer submitted PSLF forms, with 1,013,000 forms 
submitted in 2019; 1,090,000 forms submitted in 2020; and 776,000 forms 
submitted in 2021. However, after the announcement of the Limited PSLF 
Waiver in October 2021 that temporarily waived some program 
requirements through the end of October 2023, the Department has seen 
significant growth in applications compared to earlier periods. Due to 
the implementation of an automated process for some eligible borrowers, 
we are anticipating a significant decrease in the number of 
applications received because an application would not need to be 
submitted if the Department has the necessary information to assess 
whether the borrower met the PSLF requirements during the automated 
process. Under this proposed process, a borrower would be notified if 
the borrower meets the requirements for loan forgiveness. After the 
borrower is notified, the Department would suspend collection and the 
remaining balance of principal and accrued interest would be forgiven.
    By streamlining the PSLF process, the Department anticipates a 
reduction in the administrative burden and time savings for application 
processing. There would also be a burden reduction on qualifying 
employers as the employers would have a simpler time verifying what 
they are attesting to, such as the hours worked by the borrower.
    We anticipate these regulations would impact numerous borrowers who 
would now qualify for PSLF under the clarified definitions of 
qualifying employment but previously did not qualify for PSLF. The 
updated list of deferments and forbearances are anticipated to benefit 
a significant number of borrowers who would otherwise not be able to 
consider those months toward forgiveness. A significant number of 
borrowers who would ordinarily have to apply for PSLF are anticipated 
to receive student loan forgiveness without submitting an application, 
namely military service members and Federal employee borrowers who 
would automatically receive credit toward PSLF using Federal data 
matches.

3.4 Interest Capitalization

    Interest capitalization occurs when any unpaid interest is added to 
the principal loan amount of a Federal student loan, further increasing 
the outstanding principal balance. Interest is then charged on the 
higher principal balance, and the overall cost of repaying the loan 
increases. Capitalization can occur when a borrower changes repayment 
plans, as well as after periods of deferment or forbearance.
    The Department is concerned that interest capitalization can 
adversely affect student loan borrowers by significantly increasing 
what they owe on their loans, which may extend the time it takes to 
repay them. Additionally, borrowers may not fully understand the impact 
of interest capitalization. While there are circumstances where 
interest capitalization is required by statute, such as when borrowers 
exit a deferment period and when they leave Income-Based Repayment 
plans, the Department believes that it is important to eliminate 
capitalization events where it has the authority to do so. Borrower 
misunderstanding of interest accrual and capitalization and resulting 
confusion about the accuracy of one's loan balance contributed to the 
most frequent type of borrower complaint received by the 
Department.\43\ Qualitative evidence from focus groups with struggling 
borrowers also has shown that borrowers find capitalized interest to be 
complex and burdensome, noting that many borrowers do not realize which 
decisions result in capitalization and feel overwhelmed and frustrated 
by growing balances on loans.\44\ A recent study suggests that among 
borrowers enter an income-driven repayment plan after becoming 
delinquent on their payments, most fail to recertify and, as a result, 
have their interest capitalize.\45\
---------------------------------------------------------------------------

    \43\ Report by the FSA Ombudsman, in Federal Student Aid. (2019, 
November 15). Annual Report FY 2019. https://www2.ed.gov/about/reports/annual/2019report/fsa-report.pdf.
    \44\ Delisle, J. & Holt, A. (2015, March). Why student loans are 
different: Findings from six focus groups of student loan borrowers. 
New America Foundation. Retrieved from: https://files.eric.ed.gov/fulltext/ED558774.pdf; Pew Charitable Trusts (2020, May). Borrowers 
Discuss the Challenges of Student Loan Repayment. https://www.pewtrusts.org/-/media/assets/2020/05/studentloan_focusgroup_report.pdf.
    \45\ Herbst, D. (forthcoming.) ``The Impact of Income-Driven 
Repayment on Student Borrower Outcomes.'' American Economic Journal: 
Applied Economics. Retrieved from: https://djh1202.github.io/website/IDR.pdf.
---------------------------------------------------------------------------

    Data from the 2003-04 Beginning Postsecondary Students Study (BPS), 
which tracked students from entry in 2003-04 through 2009 with an 
additional administrative match through 2015, sheds greater light on 
the distributional consequences of interest capitalization and the 
forbearance events that are a source of capitalization. The statistics 
that follow all concern students who first entered college in 2003-04 
and borrowed a Federal student loan at some point within 12 years of 
entry (as of 2015). Among those students, 43 percent had a larger 
amount of principal balance outstanding in 2015 compared to what they 
originally borrowed.
    Among borrowers who did not consolidate their loans (e.g., the 
group for whom the growth in balance can be attributed to interest 
capitalization), 27 percent had a higher principal balance as seen in 
Table 3. Borrowers who are Black, received a Pell Grant, and borrowers 
from low-income families are overrepresented in this group. 
Specifically, 52 percent of Black borrowers had a higher principal 
balance compared to 22 percent of White borrowers. There are also 
differences based upon income, with 33 percent of Pell Grant recipients 
(versus 14 percent of non-recipients), and 34 percent of borrowers from 
families with income at or below the federal poverty line at college 
entry (versus 22 percent of borrowers with income at least 2.5 times 
the federal poverty line) having principal balances that exceed their 
original amount borrowed. Gaps also exist by attainment. Among 
borrowers who did not consolidate their loans, those who did not 
complete any degree or credential were 60 percent more likely to see 
their principal balance grow than bachelor's degree recipients.\46\
---------------------------------------------------------------------------

    \46\ Department analysis of the 2004/2009 Beginning 
Postsecondary Students Study, estimated via PowerStats (table 
reference: qobjsb).
---------------------------------------------------------------------------

    While the BPS data cannot break down the exact sources of interest 
capitalization, this analysis indicates that borrowers in the groups 
most likely to experience capitalization also are more likely to 
experience periods in forbearance, which is one cause of interest 
capitalization. Nearly 80 percent of Black or African-American student 
loan borrowers in the BPS sample had a forbearance at some point within 
12 years of first enrollment as seen in Table 3 below. Among American 
Indian or Alaska Native or Hispanic or Latino borrowers, the rates of 
forbearance usage were 64 percent and 59 percent respectively. By 
contrast, about half of white students used a forbearance.\47\
---------------------------------------------------------------------------

    \47\ Department analysis of the 2004/2009 Beginning 
Postsecondary Students Study, estimated via PowerStats (table 
reference: ivbztb).
---------------------------------------------------------------------------

    The results are similar by Pell Grant receipt and family income at 
college entry. Nearly two-thirds of Pell Grant recipients who also 
borrowed had a

[[Page 41953]]

forbearance at some point compared to just 40 percent of non-Pell 
students. Among borrowers from families with income at or below the 
federal poverty line in 2003-04, 64 percent had a forbearance at some 
point compared with 46 percent of borrowers from families with income 
at least 2.5 times the federal poverty line at college entry. Finally, 
62 percent of borrowers who did not complete a degree or credential had 
a forbearance, compared with 46 percent of those who earned a 
bachelor's degree.
    Data from the same study also show that the groups of borrowers 
that are more likely to have had a forbearance also had more total 
forbearances within 12 years of entering college. On average, Black or 
African American borrowers who had at least one forbearance had nearly 
six forbearances compared to four for white borrowers as seen in Table 
3. Similarly, borrowers who received a Pell Grant and had a forbearance 
had an average of nearly five forbearances, compared to just over three 
for non-Pell students.\48\ This means borrowers in these groups would 
be subject to more capitalizing events than their peers.
---------------------------------------------------------------------------

    \48\ Ibid.

       Table 3--Principal Balance Growth and Forbearance Usage Among 2003-04 College Entrants Who Borrowed
----------------------------------------------------------------------------------------------------------------
                                                      Share of borrowers
                                                        whose principal
                                                        balance exceeds   Share of borrowers   Average number of
                                                        original amount        who had a      forbearances among
                    Borrower type                     borrowed within 12  forbearance at any  borrowers who ever
                                                        years of entry      time within 12     had a forbearance
                                                       (among those who     years of entry    within 12 years of
                                                            did not               (%)                entry
                                                       consolidate)  (%)
----------------------------------------------------------------------------------------------------------------
All.................................................                  27                  56                 4.5
Black or African American...........................                  52                  79                 5.7
White...............................................                  22                  50                 4.0
Hispanic or Latino..................................                  25                  59                 4.5
American Indian or Alaska Native....................                 ***                  64                 3.1
Asian or Native Hawaiian/other Pacific Islander.....                  13                  39                 3.0
Received a Pell Grant...............................                  33                  64                 4.8
Never received a Pell Grant.........................                  14                  41                 3.4
Family income at or below 100 FPL in 2003-04........                  34                  64                 5.0
Family income 101-250 FPL in 2003-04................                  31                  63                 4.7
Family income above 250 FPL in 2003-04..............                  22                  48                 3.9
No degree or credential as of 2009..................                  31                  62                 4.8
Earned undergraduate certificate or associate degree                  30                  61                 4.6
 as of 2009.........................................
Earned bachelor's degree as of 2009.................                  19                  46                 3.8
----------------------------------------------------------------------------------------------------------------
Source: Beginning Postsecondary Students Study, estimated via PowerStats.

    Capitalizing events present a significant burden to borrowers as 
they see their balances quickly rise with interest capitalization that 
is compounded over time. The events described in the table below are 
circumstances in which the Department proposes to eliminate interest 
capitalization.

                 Capitalization Events Being Eliminated
------------------------------------------------------------------------
 
-------------------------------------------------------------------------
Borrower who repaying under the PAYE plan fails to recertify income, or
 chooses to leave the plan.
Borrower who is repaying under the REPAYE plan leaves the plan.
Negative Amortization Under the alternative repayment plan or the ICR
 plan.
Exiting Forbearance.
Entering Repayment.
Default.
------------------------------------------------------------------------

Costs of the Regulatory Changes
    As detailed in the Net Budget Impact section, the changes to 
interest rate capitalization are expected to reduce transfers from 
affected borrowers to the Federal government as their obligation to 
repay loans is lessened by the removal of capitalizing events. We 
estimate this transfer to have an annualized net budget impact of $1.29 
billion and $1.26 billion at 7 percent and 3 percent discount rate, 
respectively. The main costs associated with the ruleset represent a 
transfer of benefits from the Federal government to the eligible 
borrower, primarily forgone revenue from payments on the higher balance 
and resulting increase in interest due to elimination the capitalizing 
events listed above. In addition, as less interest income is received 
by the government, the costs of the programs to taxpayers increase, as 
less income is available to offset losses. More details on the costs to 
the government are provided in the Net Budget Impact Section.
Benefits of the Regulatory Changes
    The Department anticipates that some borrowers may see the lack of 
capitalizing events for borrowers exiting certain Income-Driven 
Repayment (IDR) plans as enabling them to switch out of IDR and instead 
enroll in a Standard or other repayment plan. For some borrowers, this 
could mean that they pay less on either a monthly basis or over the 
life of the loan (e.g., if they exit an IDR plan and enter an Extended 
or Graduated repayment plan with lower

[[Page 41954]]

monthly payments). For some, they could pay more; a borrower could 
switch out of IDR and into a Standard plan, for instance, before their 
IDR monthly payment reaches that amount.
    The lack of capitalizing events can also have broader societal 
benefits by reducing debt burdens for groups that may be most affected 
by interest capitalization--borrowers from low-income families, Black 
borrowers, and borrowers who do not complete a college credential.\49\ 
First, student debt has been shown to reduce households' ability to 
accumulate wealth through homeownership.\50\ Thus, eliminating interest 
capitalization for these events may help reduce existing disparities in 
this wealth-building asset by race and family income.\51\ Additionally, 
student loan debt is negatively correlated with the probability that a 
borrower starts a business, suggesting that gaps in entrepreneurship by 
race may decrease if eliminating capitalization events reduces 
disparities in debt burdens for borrowers of color.\52\
---------------------------------------------------------------------------

    \49\ Department analysis of the 2004/2009 Beginning 
Postsecondary Students Study, estimated via PowerStats (table 
reference: ivbztb and qobjsb).
    \50\ Mezza, A., Ringo, D., Sherlund, S., & Sommer, K. (2020). 
Student loans and homeownership. Journal of Labor Economics, 38(1), 
215-260.
    \51\ U.S. Census Bureau (2019). Table 22: Homeownership Rates by 
Race and Ethnicity of Householder. Retrieved from https://www.census.gov/housing/hvs/data/ann19ind.html.
    \52\ For evidence on the correlation between student debt and 
entrepreneurship, see Krishnan, K., & Wang, P. (2019). The cost of 
financing education: can student debt hinder entrepreneurship? 
Management Science, 65(10), 4522-4554.
    For evidence on gaps in entrepreneurship by race, see Hipple, 
S.F. & Hammond, L.A. (2016). Self-Employment in the United States. 
U.S. Bureau of Labor Statistics. https://hdl.handle.net/1813/79426.
---------------------------------------------------------------------------

3.5 Total and Permanent Disability Discharge

    The Department is committed to simplifying the Total and Permanent 
Disability (TPD) process for eligible borrowers. In addition to 
allowing for automatic discharges when a borrower is identified through 
a data match with the Social Security Administration (SSA), which was 
announced in summer 2021, the Department is also proposing new 
regulations for TPD to ensure it provides relief to eligible borrowers 
uniformly across its loan programs, including Federal Perkins Loans, 
FFEL loans, and William D. Ford Federal Direct Loans.
    The Department proposes to expand the categories of SSA disability 
status that qualify for TPD discharges. Currently regulations only 
allow borrowers to qualify for a discharge if their status is Medical 
Improvement Not Expected (MINE). In this status, an individual's status 
is reviewed every 5 to 7 years, which fits the requirement in the HEA 
that a borrower have a disability that is expected to result in death 
or that has persisted or is expected to persist for at least 60 
consecutive months while the borrower does not engage in gainful 
employment. The Department proposes to add additional categories for 
Compassionate Allowance (applied where the applicant has one of a 
certain set of predefined conditions); Medical Improvement Possible 
(MIP), if that status has been renewed at least once and therefore has 
been or would be in a disability status for at least 6 years; if the 
borrower had one of the qualifying statuses and has since aged into 
retirement; and borrowers with a disability onset data for SSDI or SSI 
that is at least 5 years prior to the TPD application. More borrowers 
would be eligible for TPD discharges with the addition of these 
categories.
    The Department also proposes to eliminate the post-discharge income 
monitoring period. Currently, borrowers must supply their income 
information annually through a 3-year post-discharge monitoring period 
to ensure that they continue to meet the criteria for the program. If 
borrowers do not respond to these requests, their loans are reinstated, 
regardless of whether the borrowers' earnings are above set thresholds. 
The Department is concerned that high numbers of borrowers have their 
loans reinstated not because they fail to meet the criteria but simply 
because they fail to submit the required paperwork. The Government 
Accountability Office's (GAO) 2016 report on Social Security offsets 
reported that more than 61,000 loans discharged through TPD, totaling 
more than $1.1 billion, were reinstated in fiscal year 2015 alone; and 
that 98 percent of those were reinstated because the borrower did not 
provide the requisite information for the monitoring period.\53\ 
Meanwhile, an analysis conducted by the Department using Internal 
Revenue Service (IRS) data suggests that 92 percent of these borrowers 
did not exceed the earnings criteria required to retain their 
eligibility.
---------------------------------------------------------------------------

    \53\ Government Accountability Office. (2016). ``Social Security 
Offsets: Improvements to Program Design Could Better Assist Older 
Student Loan Borrowers with Obtaining Permitted Relief.'' (GAO 
Publication No. GAO-17-45.) Washington, DC: U.S. Government Printing 
Office. Retrieved from https://www.gao.gov/products/gao-17-45.
---------------------------------------------------------------------------

    The Department also proposes to streamline the process for applying 
for a TPD discharge where automation is not feasible. We propose to 
amend the TPD regulations to expand allowable documentation that can be 
submitted as evidence of a qualifying disability status, including the 
current practice of accepting a Benefit Planning Query Handbook, and to 
expand the list of medical professionals eligible to certify an 
individual's total and permanent disability to include nurse 
practitioners, physician assistants, and licensed or certified 
psychologists at independent practice level who are licensed to 
practice in the United States.
Costs of the Regulatory Changes
    As detailed in the Net Budget Impact section, the changes to total 
and permanent disability are expected to reduce transfers from affected 
borrowers to the Federal government as their obligation to repay loans 
is discharged. We estimate this transfer to have an annualized net 
budget impact of $2.4 billion and $2.2 billion at 7 percent and 3 
percent discount rate, respectively.
    As a result of expanding the SSA categories that qualify for TPD 
discharges, the Department estimates increased costs to the taxpayer in 
the form of transfers to the additional borrowers who would be eligible 
for, and receive, TPD discharges.
    Because more borrowers would also be able to retain their 
discharges and not see their loans reinstated, the Department also 
anticipates that this proposed change would increase costs to taxpayers 
in the form of transfers in direct benefits to those borrowers.
    The proposed changes to expand allowable documentation and the list 
of certifying medical professionals are expected to modestly increase 
the amounts discharged through TPD through transfers to affected 
borrowers, as more borrowers overcome these barriers and apply for 
discharges.
Benefits of the Regulatory Changes
    The Department believes that many more borrowers would be eligible 
for TPD discharges with the addition of SSA categories. Based on the 
Social Security Administration's Disability Analysis File (DAF) Public 
Use File for 2019 (PUF19), the MINE population represented 
approximately 24.5 percent of total SSI recipients, while the MIP 
category represented 22.9 percent at first reexamination.\54\
---------------------------------------------------------------------------

    \54\ Note that 44.9 percent of the SSA data also contains 
missing reason code for medical re-examination where there is no 
data available, but applicable to the beneficiary having a populated 
date of initial SSDI or SSI eligibility, so it is likely that the 
MIP and MINE categories may represent a higher portion of the 
overall data; however, no additional description is publicly 
available.

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

[[Page 41955]]

    Eliminating the post-discharge income monitoring period would also 
ensure consistency between borrowers with an SSA determination of 
disability status and those with a VA determination. Total and 
permanent disability discharges based on determinations by the 
Department of Veteran Affairs are not subject to a post-discharge 
monitoring period (though some veterans may apply for or receive a TPD 
discharge based on an SSA determination instead). The Department 
believes this change would reduce the burden that borrowers with a 
total and permanent disability face in retaining their discharge, as 
the time and effort involved in providing income information during the 
monitoring process would be eliminated.
    The Department also believes that expanding allowable documentation 
and the list of certifying medical professionals would increase 
transfers to borrowers through discharges by lowering administrative 
burdens that borrowers face, including in reducing the costs that 
borrowers face in obtaining the necessary documentation of their 
disability.

3.6 Closed School Discharge

    The Department proposes to improve access to closed school loan 
discharges for borrowers who are unable to complete their programs due 
to the closure of their institution. While there are many closures that 
occur in an orderly fashion with advance notice, the majority of 
students affected by closures in the last several years were mid-
program and unable to complete their program at the college where they 
started.
    Presently, the process for closed school discharges includes 
specific eligibility requirements that can limit borrowers who have 
been affected by school closure from receiving the loan discharge. 
Through the proposed regulations, the Department aims to expand 
eligibility for closed school discharges. In 2016, the Department 
issued regulations that provided automatic closed school discharges to 
borrowers who were eligible for a closed school discharge but did not 
apply for one and who did not enroll elsewhere within 3 years of the 
institution's closure.\55\ A 2021 GAO report on college closures found 
that 43 percent of those eligible for a CSD had not re-enrolled 3 years 
later. Moreover, the report found that 70 percent of borrowers who 
eventually received an automatic discharge were in default or past due, 
a sign of significant financial distress among this subset of 
borrowers. Given this, the Department proposes to implement the 
automatic process for borrowers. We propose to provide such automatic 
discharges within 1 year of closure, which would significantly benefit 
affected borrowers.
---------------------------------------------------------------------------

    \55\ 81 FR 75926.
---------------------------------------------------------------------------

    Borrowers who left a school shortly before it closed can also 
receive a closed school discharge. However, the discharge windows have 
not been consistent across years for these borrowers. Loans made prior 
to July 1, 2020, were generally subject to a 120-day window, while 
borrowers with loans made after that date were subject to a 180-day 
window. The Department proposes to standardize the window, making it 
180 days for all borrowers, regardless of when the loan was disbursed.
    The Secretary can also extend this 180-day window under exceptional 
circumstances. However, the current non-exhaustive list under Sec.  
685.214(c)(1)(i)(B) does not include many events that may reasonably be 
associated with a closure, such as the school being placed on 
probation. Additionally, the 2019 regulations removed items that were 
included in prior regulations, such as ``a finding by a State or 
Federal government agency that the school violated State or Federal 
law.'' \56\ The Department proposes to expand this list to include this 
and several other items.
---------------------------------------------------------------------------

    \56\ 84 FR 49788.
---------------------------------------------------------------------------

    Finally, the Department proposes to remove the requirement that 
borrowers may not receive a closed school discharge if they opt to 
transfer credits to a ``comparable program.'' Borrowers currently lose 
access to a closed school discharge if they transfer any of their 
credits to another program, even if they only transfer a single credit 
and otherwise reset their progress to completion. This makes the 
borrower's choice to continue their education needlessly high stakes. 
The possibility of losing the discharge, even if a borrower only 
transfers a low number of credits, could also dissuade borrowers from 
even trying to continue their education; and risks punishing a borrower 
who chooses to continue their education but determines the new program 
is not working for them, as they would have lost the ability to 
discharge their loans. The Department proposes to address these 
concerns by removing the ``comparable program'' requirement and instead 
providing discharges for all borrowers unless they accept and complete 
an approved teach-out.
Costs of the Regulatory Changes
    As detailed in the Net Budget Impact section, the changes to closed 
school discharge are expected to reduce transfers from affected 
borrowers to the Federal government as their obligation to repay loans 
is discharged. We estimate this transfer to have an annualized net 
budget impact of $763 million and $697 million at 7 percent and 3 
percent discount rate, respectively. The Department will work to 
recover from institutions the amounts that the Secretary discharges and 
to leverage the processes already in place at 34 CFR part 668, part H. 
Based on historical Closed School Discharge data, the average discharge 
amount at the institutional level was $2.4 million based on discharge 
amounts from 573 closed institutions. Based on the same data, the 
majority of closed school discharge loan amounts (88.5 percent), were 
from closed proprietary schools. The table below illustrates the 
historical average closed school discharge amounts by institution type 
from 1991 through early April 2022, which are a good estimate of the 
discharge costs per loan by institution type for future closed school 
loan discharges.

                          Table 4--Closed School Discharge Amounts by Institution Group
----------------------------------------------------------------------------------------------------------------
                                                                      Average      Sum of closed    % of Total
                        Institution group                            discharge        school       closed school
                                                                      amount        discharges      discharges
----------------------------------------------------------------------------------------------------------------
Private 2 to 3 Years............................................          $2,876      $5,771,862            0.41
Private 4 Years or More.........................................           5,030     106,347,003            7.60
Private Less Than 2 Years.......................................           2,610       1,461,896            0.10
Proprietary 2 to 3 Years........................................           3,265     387,352,052           27.68
Proprietary 4 Years or More.....................................           5,074     823,679,386           58.85
Proprietary Less Than 2 Years...................................           3,002      74,336,389            5.31

[[Page 41956]]

 
Public 4 Years or More..........................................           3,258         570,211            0.04
Public Less Than 2 Years........................................           3,692         116,264            0.01
----------------------------------------------------------------------------------------------------------------

    In addition to the cost that the closed institutions will bear, the 
Department will also incur costs associated with the closed school 
discharges. These costs would represent a transfer of benefits between 
the Federal government and the borrower. The Department would have to 
discharge the affected loans prior to trying to recover the funds from 
the institutions in order to provide a timely discharge for the 
borrower. Ultimately, the size of the transfer from the Department to 
borrowers would be the difference in funds between the discharge amount 
and the recovery amount from the institution. The Department would also 
incur administrative costs associated with the process of recovering 
funds from closed institutions, especially in cases where the 
institutions may be facing litigation, such as due to bankruptcy or 
legal violations. This represents net new costs to the Department.
Benefits of the Regulatory Changes
    Automatic loan discharges would significantly benefit affected 
borrowers who are eligible for a discharge. In particular, after 
entering repayment, affected borrowers may receive a discharge before 
they could default on their loans. The Department would also face a 
reduced administrative burden due to the reduced staff time required to 
review applications for borrowers who meet the eligibility criteria for 
a closed school discharge.
    Regarding the proposal to standardize the closed school discharge 
window, the Department believes this would modestly increase 
eligibility for the discharge for some borrowers, though application 
rates for closed school discharge tend to be relatively low and are not 
likely to increase significantly. The Department is also proposing to 
expand the non-exhaustive list of exceptional circumstances required 
for the Secretary to use their authority to extend the 180-day window. 
In certain cases, this would increase eligibility for closed school 
discharges, potentially by several years. However, this authority would 
be employed on a case-by-case basis and thus the overall impact is 
expected to be modest.
    The Department believes that by removing the ``comparable program'' 
requirement and instead providing discharges for all borrowers unless 
they accept and complete an approved teach-out would encourage 
borrowers to continue their education because they would still be able 
to keep their discharge if the teach out option does not work for them. 
It also means a borrower who continues seeking higher education but 
loses all or most progress toward their degree would not have to worry 
about whether they would receive relief.
    This approach would also encourage institutions to manage closures 
more carefully. In particular, institutions would have a stronger 
incentive to make sure borrowers have access to high-quality and 
affordable teach-out options; otherwise, the institution that is 
closing would face larger liabilities associated with closed school 
discharges.

3.7 Pre-Dispute Arbitration

    The Department proposes to prohibit pre-dispute arbitration and 
class action waivers in institutions' enrollment agreements to ensure 
borrowers have access to fair processes and to provide insight and 
evidence to the Department that may be needed to adjudicate borrower 
defense claims. Mandatory pre-dispute arbitration and class action 
waivers may allow institutions to minimize financial risk associated 
with wrongdoing and instead may shift the risk of wrongdoing to 
taxpayers and the Federal government through subsequent borrower 
defense discharges. In addition, a quick result provided by arbitration 
does not necessarily consider the interests of taxpayers who have funds 
at stake for borrower defense claims and Direct Loans. While the 
Department included a similar provision in its 2016 borrower defense 
regulations, the prohibition was rescinded by the 2019 regulations.
    Borrowers also may not understand the implications of agreeing to a 
mandatory pre-dispute arbitration requirement or a class action waiver 
and what that means for future attempts to seek relief. In a study on 
arbitration clauses, legal researchers surveyed a random sample of 
consumers and concluded respondents generally lacked an understanding 
about the terms of the arbitration agreement and what that meant for 
their ability to seek relief in court. These researchers expressed 
concern about whether the consent consumers provide when they enter 
into a contract that contains an arbitration clause is knowing consent, 
and therefore valid.\57\
---------------------------------------------------------------------------

    \57\ Sovern, Jeff and Greenberg, Elayne E. and Kirgis, Paul F. 
and Liu, Yuxiang, `Whimsy Little Contracts' with Unexpected 
Consequences: An Empirical Analysis of Consumer Understanding of 
Arbitration Agreements (February 19, 2015). 75 Maryland Law Review 1 
(2015), St. John's Legal Studies Research Paper No. 14-0009, http://dx.doi.org/10.2139/ssrn.2516432.
---------------------------------------------------------------------------

    By prohibiting Direct Loan-participating institutions from using 
certain restrictive contractual provisions regarding dispute resolution 
and requiring notification and disclosure regarding their use of 
arbitration, schools would be prevented from keeping complaint 
information hidden from borrowers facing potential borrower defense 
issues faced by their borrowers. Keeping complaint and arbitration 
information hidden from public view hinders the Department's ability to 
investigate patterns of student complaints.
    In addition, borrowers' ability to pursue individual and class-
action litigation would make it difficult for schools to hide 
potentially deceptive practices from current or prospective students 
and would allow students who have been harmed by an institution to sue 
for damages and recoup their financial losses. Providing a litigation 
option could also mitigate the potential conflict of interest between 
the arbitrators and the institutions that hire them, leading to more 
fair outcomes for students. Taxpayer dollars would be better protected 
by ensuring that grievances from enrollees in problematic schools could 
be publicly aired through the court system.
    The Department notes that the impact of these proposed changes 
would be largely limited to the for-profit sector. In a 2016 study by 
an independent think tank, researchers looked at enrollment contracts 
of more than 270 institutions across the country. None of the public 
colleges surveyed and only one private nonprofit college required its 
students to agree to arbitration as a condition of enrollment. Among 
private for-profit colleges, the researchers found

[[Page 41957]]

significant differences depending on whether the institution 
participated in the Federal student aid programs. A majority (93 of the 
158) private for-profit colleges that participate in the Federal aid 
programs used a forced arbitration clause compared to just one of the 
49 that do not participate in the aid programs.\58\
---------------------------------------------------------------------------

    \58\ Habash, Tariq, and Robert Shireman. ``How College 
Enrollment Contracts Limit Students' Rights.'' The Century 
Foundation, 28 Apr. 2018, https://tcf.org/content/report/how-college-enrollment-contracts-limit-students-rights/.
---------------------------------------------------------------------------

Costs of the Regulatory Changes
    The costs associated with the proposed changes would be affected by 
whether institutions are less likely to engage in behavior that could 
lead to an approved borrower defense claim as a result of not using 
mandatory pre-dispute arbitration clauses or class action waivers. If 
institutions that engage in conduct that could lead to an approved 
borrower defense claim do not change their behavior, then there could 
be a number of costs related to more grievances ending up in court. 
This would include the cost to students of seeking judicial 
intervention, though such costs may be offset if their claims in court 
are successful. Costs can also increase for institutions, as they tend 
to incur higher legal fees during litigation. Institutions would not 
only face higher administrative costs, but institutions are also likely 
to face higher number of settlements and the costs associated with 
them, as it is expected that the students will be able to reach more 
favorable decisions in court than during arbitration. These costs 
would, however, decrease if institutions currently engaging in conduct 
that could lead to an approved borrower defense claim cease such 
conduct as a result of this change. These external factors do not 
represent any additional costs for the Department.
    In addition to costs in the form of transfers to borrowers and 
administrative burden for the Department, there may be an increase in 
the time it takes to resolve disputes through non-arbitration means, as 
litigation proceedings rely on more detailed discovery and presentation 
of evidence than arbitration. Finally, bringing additional cases to 
court that have generally been resolved through arbitration may create 
a burden on the courts, leading to longer litigation time and increased 
costs for students and institutions.
Benefits of the Regulatory Changes
    Borrowers will see benefits due to a prohibition on arbitration 
clauses and class-action waivers. Research indicates that the rate at 
which consumers receive favorable decisions in arbitration is quite low 
and the amounts they secure when they do are very small. Only 9 percent 
of disputes that go to arbitration end with relief for the 
consumer.\59\ When a 2015 CFPB report looked at cases from one of the 
major arbitration companies it found that consumers won just over 
$172,000 in damages and $189,000 in debt forbearance across more than 
1,800 disputes in six different financial markets. By contrast, the 
CFPB's analysis of individual cases brought in Federal court for all 
but one of these markets found that consumers were awarded just under 
$1 million in cases where the judge issued a decision. It is difficult 
to directly compare the success rate for an individual in arbitration 
compared to those who take their claims to court because the 
overwhelming majority of cases end in settlements in which the results 
are not easily ascertainable. The same CFPB study referenced above 
found that about 50 percent of the more than 1,200 individual cases 
filed in federal court that were analyzed resulted in settlement. But 
the analysis could not determine what share of those settlements were 
favorable to borrowers.\60\
---------------------------------------------------------------------------

    \59\ Shierholz, Heidi. ``Correcting the Record: Consumers Fare 
Better under Class Actions than Arbitration.'' Economic Policy 
Institute, 1 Aug. 2017, https://www.epi.org/publication/correcting-the-record-consumers-fare-better-under-class-actions-than-arbitration/.
    \60\ Arbitration Study: Report to Congress, pursuant to Dodd-
Frank Wall Street Reform and Consumer Protection Act Sec.  1028(a). 
Consumer Financial Protection Bureau. (2015, March). Retrieved from 
https://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf.
---------------------------------------------------------------------------

    Given that pre-arbitration agreements are prevalent in for profit 
institutions' enrollment agreements, these benefits would have a 
greater impact on Black students, who tend to be overrepresented at 
for-profit institutions compared to other educational institutions.\61\ 
The prohibition would also support these students in filing borrower 
defense claims where warranted.
---------------------------------------------------------------------------

    \61\ Urban Institute. (2020, June). Racial and Ethnic 
Representation in Postsecondary Education. Tom[aacute]s Monarrez, 
Kelia Washington. https://www.urban.org/research/publication/racial-and-ethnic-representation-postsecondary-education.
---------------------------------------------------------------------------

4. Net Budget Impacts

    These proposed regulations are estimated to have a net Federal 
budget impact in costs over the affected loan cohorts of $85.1 billion, 
consisting of a modification of $46.3 billion for loan cohorts through 
2022 and estimated costs of $38.7 billion for loan cohorts 2023 to 
2032. 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 provisions most responsible for the costs of the proposed 
regulations are those related to the discharge of borrower's loans, 
especially the changes to borrower defense, closed school discharges, 
and total and permanent disability discharges. The specific costs for 
each provision are described in the following subsections covering the 
relevant topics.

4.1 Borrower Defense

    As noted in this preamble, the regulatory provisions related to 
borrower defense have undergone revisions starting in 2016 and then 
again in 2019 and the patterns of claim submission and processing have 
not reached a steady level to serve as a clear basis for estimating 
future claims. Additional claims are expected from existing loan 
cohorts, and the level and timing of claims from older cohorts is not 
likely to be indicative of claims for future cohorts because borrower 
defense was not an active area of loan discharges during the early 
years in repayment of those older cohorts. In addition, the 
institutions that to date have been among the largest sources of 
borrower defense claims have been closed for many years. Therefore, we 
are using a revised version of the approach used to estimate the costs 
of borrower defense for the 2016 and subsequent regulations to generate 
estimates for the proposed borrower defense provisions. The Department 
has used the data it has available on borrower defense claims, 
projected loan volumes, Departmental expertise, the discussions at 
negotiated rulemaking, and information about past investigations into 
the type of institutional acts or omissions that would give rise to 
borrower defense claims to develop scenarios that the Department 
believes would capture the range of net budget impacts associated with 
the borrower defense proposed regulations. The estimated cost of the 
proposed borrower defense changes is a modification to cohorts through 
2022 of $17.26 billion and a cost of $2.75 billion for cohorts 2023-
2032. The Department would continue to refine these estimates, welcomes 
comments about the assumptions used in developing them, and would 
consider those comments as the final regulations are developed.

[[Page 41958]]

    Where possible, we are adjusting the assumptions made about school 
conduct, borrowers' chances of making a successful claim, and recovery 
rates to reflect information from pending claims.
    Almost 90 percent of borrower defense claims are from the 
proprietary sector. This also includes institutions that have a 
significant number of claims and therefore may be more likely to have a 
group claim process applied to them. This is reflected in the school 
conduct assumption in Table 5.
    While there are many factors and details that would determine the 
cost of the proposed regulations, ultimately a borrower defense claim 
entered into the student loan model (SLM) by risk group, loan type, and 
cohort would result in a reduced stream of cash flows compared to what 
the Department would have expected from a particular cohort, risk 
group, and loan type. The net present value of the difference in those 
cashflow streams generates the expected cost of the proposed 
regulations.
    In order to generate an expected level of claims for processing in 
the SLM, the Department used President's Budget 2023 (PB2023) loan 
volume estimates to identify the maximum potential exposure to borrower 
defense claims for each cohort, loan type, and sector. The Department 
expects only a fraction of that amount to be affected by institutional 
behavior that results in a borrower defense claim. Other factors that 
would affect the cost are the rate of consolidation from the FFEL 
program, the percentage of claims that go through a group process, the 
potential deterrent effect of claims on school practices, investigative 
activities of State authorities, increased borrower awareness of 
borrower defense, and borrower eligibility for other discharges, 
especially closed school discharges.
    As costs are estimated against a specific baseline, it is important 
to note that the President's Budget for 2023 assumed a higher level of 
borrower defense claims based more on the 2016 assumptions \62\ than 
the 2019 regulation assumptions.\63\ This was based on processing of 
claims and other announcements that led the Department's Budget Service 
to assume successful claims would be increasing. Some of the costs that 
could have been attributed to the proposed regulations are already in 
the baseline as a result of this modeling change. As the 2016 borrower 
defense assumptions were fairly conservative, the borrower defense 
adjustment for some cohort and risk group combinations may be lower 
than the current baseline levels. In order to provide some information 
about this factor, the Department ran the President's Budget Fiscal 
Year 2023 (PB23) baseline with any addition for borrower defense 
removed and also with the 2019 regulatory assumptions applied. Removing 
the borrower defense adjustment had a net budget impact of $-8.6 
billion and using the reduced adjustment associated with the 2019 
regulations resulted in a net budget impact of $-8.0 billion in savings 
compared to the PB23 baseline.
---------------------------------------------------------------------------

    \62\ 81 FR 211 p. 76057.
    \63\ 84 FR 184 p. 49894.
---------------------------------------------------------------------------

    The model to estimate borrower defense claims under the proposed 
regulations relies upon the following factors:
    Conduct Percent, which represents the share of loan volume 
estimated to be affected by institutional behavior resulting in a 
defense to repayment application.
    Group Process percent, which is the share of affected loan volume 
we expect to be subject to a group claim.
    Claim Balance Adjustment Factor, which captures the potential 
change in borrowers' balances from origination to the time of their 
discharge and was added because this regulation addresses claims from 
older cohorts, not just future loan cohorts so this factor could be 
more significant.
    Borrower Percent, which is the percent of loan volume associated 
with approved defense to repayment applications; and
    Recovery Percent, which estimates the percent of gross claims for 
which funds are recovered from institutions, with both of these varying 
by inclusion in a group process or not.
    To generate gross claims volume (gc), loan volumes (lv) by risk 
group were multiplied by the Conduct Percent (cp), Group Process 
percent (gpp), the Claim Balance Adjustment factor (cbf), and the 
Borrower Percent for groups and individual claims (bp_g or bp_i). To 
generate net claims volume (nc) processed in the Student Loan Model, 
gross claims were then multiplied by the Recovery Percent. That is, gc 
= gc_g + gc_i when gc_g = (lv * cp *-cbf * gc-* bp_g) and gc_i-= (lv * 
cp *-cbf * (1-gc) * bp_i) and nc = nc_g + nc_i where nc_g = gc_g-(gc_g 
* rp_g) and nc_i = gc_i-(gc_i * rp_i).
    Additional discussion of these factors follows their presentation 
in Table 5, with the comparable values for the 2016 and 2019 borrower 
defense regulations presented in Table 6.

                           Table 5--Assumptions for Primary Borrower Defense Scenario
----------------------------------------------------------------------------------------------------------------
                                       2-yr         2-yr NFPT/         4-yr         4-yr NPFT/
          Cohort range            Proprietary  %     Public  %    Proprietary  %     Public  %        GRAD  %
----------------------------------------------------------------------------------------------------------------
                                 Loan volume related to borrower defense claims
----------------------------------------------------------------------------------------------------------------
pre-2000........................             5.0             1.0             5.0             1.0             1.6
2000-2005.......................            10.0             2.0            10.0             2.0             3.2
2006-2010.......................            16.0             2.0            16.0             2.0             4.1
2011-2016.......................            18.0             1.7            18.0             1.7             4.1
2017-2022.......................            14.0             1.5            14.0             1.5             3.4
2023-2028.......................            10.0             1.3            10.0             1.3             2.6
2028+...........................             8.0             1.1             8.0             1.1             2.1
----------------------------------------------------------------------------------------------------------------
                             Percentage of borrower defense volume from group claims
----------------------------------------------------------------------------------------------------------------
pre-2000........................            15.0             5.0            15.0             5.0             8.0
2000-2005.......................            35.0            12.0            35.0            12.0            15.5
2006-2010.......................            65.0            14.0            65.0            14.0            20.7
2011-2016.......................            75.0            14.0            75.0            14.0            28.0
2017-2022.......................            65.0             9.5            65.0             9.5            20.0
2023-2028.......................            45.0             5.5            45.0             5.5            14.0

[[Page 41959]]

 
2028+...........................            35.0             5.0            35.0             5.0            10.0
----------------------------------------------------------------------------------------------------------------
                          Percentage of borrower defense volume from individual claims
----------------------------------------------------------------------------------------------------------------
pre-2000........................            85.0            95.0            85.0            95.0            92.0
2000-2005.......................            65.0            88.0            65.0            88.0            84.6
2006-2010.......................            35.0            86.0            35.0            86.0            79.3
2011-2016.......................            25.0            86.0            25.0            86.0            72.0
2017-2022.......................            35.0            90.5            35.0            90.5            80.0
2023-2028.......................            55.0            94.5            55.0            94.5            86.0
2028+...........................            65.0            95.0            65.0            95.0            90.0
----------------------------------------------------------------------------------------------------------------
                                    Share of volume approved in group claims
----------------------------------------------------------------------------------------------------------------
pre-2000........................            25.0            15.0            25.0            15.0            20.0
2000-2005.......................            65.0            50.0            65.0            50.0            60.0
2006-2010.......................            70.0            50.0            70.0            50.0            60.0
2011-2016.......................            75.0            50.0            75.0            50.0            60.0
2017-2022.......................            75.0            50.0            75.0            50.0            60.0
2023-2028.......................            75.0            60.0            75.0            60.0            65.0
2028+...........................            75.0            60.0            75.0            60.0            65.0
----------------------------------------------------------------------------------------------------------------
                                  Share of volume approved in individual claims
----------------------------------------------------------------------------------------------------------------
pre-2000........................             5.0             2.0             5.0             2.0             4.0
2000-2005.......................             8.0             2.0             8.0             2.0             6.0
2006-2010.......................            12.0             5.0            12.0             5.0             8.0
2011-2016.......................            12.0             5.0            12.0             5.0            10.0
2017-2022.......................            12.0             8.0            12.0             8.0            10.0
2023-2028.......................            12.0             8.0            12.0             8.0            10.0
2028+...........................            12.0             8.0            12.0             8.0            10.0
----------------------------------------------------------------------------------------------------------------
                                     Recovery percentage on approved claims
----------------------------------------------------------------------------------------------------------------
pre-2000........................             1.0             1.0             1.0             1.0             1.0
2000-2005.......................             6.0             4.0             6.0             4.0             4.0
2006-2010.......................            10.0             8.0            10.0             8.0             8.0
2011-2016.......................            10.0             8.0            10.0             8.0             8.0
2017-2022.......................            10.0             8.0            10.0             8.0             8.0
2023-2028.......................            15.0            12.0            15.0            12.0            12.0
2028+...........................            15.0            12.0            15.0            12.0            12.0
----------------------------------------------------------------------------------------------------------------


                                Table 6--Assumptions for Primary Borrower Defense Scenarios in 2016 and 2019 Regulations
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2016 Regulation                                 2019 Regulation
                         Cohort                          -----------------------------------------------------------------------------------------------
                                                              Public          Private       Proprietary       Public          Private       Proprietary
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Conduct Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017....................................................             3.0             3.0              20             N/A             N/A             N/A
2018....................................................             2.4             2.4              16             N/A             N/A             N/A
2019....................................................             2.0             2.0            13.6             N/A             N/A             N/A
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             8.0            1.14            1.14             7.6
2025....................................................             1.2             1.2             7.8            1.14            1.14            7.41
2026....................................................             1.2             1.2             7.7            1.05            1.05            7.32
2027....................................................             N/A             N/A             N/A            1.05            1.05            7.32
2028....................................................             N/A             N/A             N/A            1.05            1.05            7.32
2029....................................................             N/A             N/A             N/A            1.05            1.05            7.32
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Allowable Applications Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Cohorts.............................................             N/A             N/A             N/A              70              70              70
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Borrower Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017....................................................              35              35              45             N/A             N/A             N/A

[[Page 41960]]

 
2018....................................................            36.8            36.8            47.3             N/A             N/A             N/A
2019....................................................            38.6            38.6            49.6             N/A             N/A             N/A
2020....................................................            42.4            42.4            54.6             3.3             3.3            4.95
2021....................................................            46.7            46.7              60            3.75            3.75           5.475
2022....................................................              50              50              63           4.125           4.125           5.925
2023....................................................              50              50              65             4.5             4.5             6.3
2024....................................................              50              50              65             4.8             4.8            6.75
2025....................................................              50              50              65            5.25            5.25           6.975
2026....................................................              50              50              65            5.25            5.25             7.5
2027....................................................             N/A             N/A             N/A            5.25            5.25             7.5
2028....................................................             N/A             N/A             N/A            5.25            5.25             7.5
2029....................................................             N/A             N/A             N/A            5.25            5.25             7.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Recovery Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017....................................................              75            23.8            23.8             N/A             N/A             N/A
2018....................................................              75            23.8            23.8             N/A             N/A             N/A
2019....................................................              75           26.18           26.18             N/A             N/A             N/A
2020....................................................              75            28.8            28.8              75              16              16
2021....................................................              75           31.68           31.68              75              20              20
2022....................................................              75           33.26           33.26              75              20              20
2023....................................................              75           34.93           34.93              75              20              20
2024....................................................              75           36.67           36.67              75              20              20
2025....................................................              75            37.4            37.4              75              20              20
2026....................................................              75            37.4            37.4              75              20              20
2027....................................................             N/A             N/A             N/A              75              20              20
2028....................................................             N/A             N/A             N/A              75              20              20
2029....................................................             N/A             N/A             N/A              75              20              20
--------------------------------------------------------------------------------------------------------------------------------------------------------

Conduct Percent
    As with previous estimates, the conduct percent reflects the 
experience with existing claims coming predominantly from the 
proprietary sector. This factor also captures the potential deterrent 
effect of the proposed regulations. As claims are processed and 
examples of conduct that results in claims become better known, we 
believe institutions would strive to avoid similar behavior. We also 
expect that the improvement or closing of some institutions that have 
significant findings against them should reduce the level of potential 
claims in future loan cohorts.
Group Process Percent
    The share of claims suitable for a group process is expected to 
vary by institutional control and loan cohort. The further back a 
cohort of loans were originated, the less likely there is to be 
evidence of conduct that would support a group claims process, so the 
group process percent for the pre-2000 loan cohort group is lower than 
for more recent years. Of current pending claims, approximately 90 
percent of those expected to be subject to a group claims process have 
come from cohorts 2006 to 2016 and we would expect that period to 
generate the highest share of group claims. We expect conduct that 
would generate a group claim to decrease following the 2016 regulation 
and subsequent attention to borrower defense, with more of an effect in 
future years when more claims have been processed through the system.
Claim Balance Factor
    The assumptions generating our borrower defense claims are applied 
to volume estimates at origination, but borrower defense claims are 
likely to happen several years into repayment when payments that have 
been made would be subject to refund or balances will have grown 
through accrued interest or fees. To account for this, the Department 
looked at borrower defense claims in 2021 and determined the maximum 
potential claim between the claim amount, the current outstanding 
balance, and the balance when the loan entered repayment plus 
accumulated interest through 2021. This maximum balance was compared to 
the origination amount to generate an adjustment factor that was 
averaged across loan type. The factors applied to Stafford, PLUS, and 
Unsubsidized loans are 1.32, 1.68, and 1.54, respectively. These 
factors are based on balance comparisons for existing loans and include 
capitalization events that will be eliminated under this rule as well 
as potential interest accrual beyond the 180-day window for loan 
subject to a borrower defense claim established in these regulations. 
Other changes such as the revisions to the REPAYE plan anticipated in a 
separate regulatory package could also affect these adjustment factors. 
We are not reducing the adjustment factors for those potential effects 
to provide a conservative estimate of borrower defense claims, but the 
interaction with other regulatory or legislative actions is a source of 
uncertainty for the net budget impact of the borrower defense 
provisions.
    The claim balance factor also acknowledges that borrower defense 
gives discharge of outstanding balance (and potentially refunds 
payments made) so an estimate starting from volumes (origination 
amounts) needs to be increased to account for interest or payments.
Borrower Percent--Group and Individual
    This assumption captures the share of claims expected to lead to a 
discharge. Factors such as the federal standard, reconsideration 
process, the number of claims against individual institutions, 
enrollment periods associated with the claims, and type of allegations 
seen to date affect these figures. This is higher for group claims 
based on the potential

[[Page 41961]]

referrals and common reliance on evidence from investigations.
Recovery Percent--Group and Individual
    The recovery percent would vary by cohort and institutional 
control. Recoveries for existing borrower defense claims have not been 
high, which is consistent with other discharge recoveries, particularly 
closed school discharges. Another factor that affects potential 
recoveries is the timing as the limitations period and application of a 
standard to all claims pending or submitted after the effective date of 
the regulations may limit the Department's ability to recover claims 
related to activities many years ago. We expect claims for future 
cohorts to happen earlier in the repayment period of the loans and 
therefore to have a somewhat increased chance of having a recovery.
    As noted throughout this RIA, the Department recognizes the 
uncertainty associated with the factors contributing to the primary 
budget assumptions presented in Table 6. To provide some information 
about the effect of this uncertainty, the Department developed two 
alternate scenarios to capture a range of net budget impact from the 
proposed borrower defense regulations. The low budget impact scenario 
reduces the group percentage and increases recoveries to the 37 percent 
maximum assumed in the 2016 regulations. The high budget impact 
scenario assumes a slower deterrent effect and keeps the highest 
conduct percent for an additional cohort range, increases the highest 
group percentage and maintains that level for future cohorts, and 
eliminates all recoveries. The revised assumptions for these scenarios 
are detailed in Table 7 with the results presented in Table 8.

                                                  Table 7--Revised Assumptions for Alternate Scenarios
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                               NPFT/
                     Cohort range                      Proprietary_low       NPFT/       GRAD_low (%)   Proprietary_high    public_high    GRAD_high (%)
                                                             (%)        public_low (%)                         (%)              (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Loan volume related to borrower defense claims
--------------------------------------------------------------------------------------------------------------------------------------------------------
pre-2000.............................................             5.00             1.0             1.6              5.0              1.0             1.6
2000-2005............................................            10.00             2.0             3.2             10.0              2.0             3.2
2006-2010............................................            16.00             2.0             4.1             16.0              2.0             4.1
2011-2016............................................             18.0             1.7             4.1             18.0              2.0             4.1
2017-2022............................................            14.00            1.50            3.38             18.0              1.7             4.1
2023-2028............................................            10.00            1.30            2.61            14.00             1.50            3.38
2028+................................................             8.00            1.10            2.14            10.00             1.30            2.61
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Percentage of borrower defense volume from group claims
--------------------------------------------------------------------------------------------------------------------------------------------------------
pre-2000.............................................                5             2.5               4               15                5               8
2000-2005............................................               30             6.0               8               35               12              15
2006-2010............................................               50             7.0              11               70               14              24
2011-2016............................................               60             7.0              14               80               14              30
2017-2022............................................               50             5.0              10               80               10              30
2023-2028............................................               40             3.0               7               80                6              30
2028+................................................               30             2.5               5               80                5              30
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              Percentage of borrower defense volume from individual claims
--------------------------------------------------------------------------------------------------------------------------------------------------------
pre-2000.............................................               95              98              96               85               95              92
2000-2005............................................               70              94              93               65               88              85
2006-2010............................................               50              93              90               30               86              76
2011-2016............................................               40              93              86               20               86              70
2017-2022............................................               50              95              90               20               91              70
2023-2028............................................               60              97              93               20               95              70
2028+................................................               70              98              95               20               95              70
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Recovery percentage on approved claims
--------------------------------------------------------------------------------------------------------------------------------------------------------
pre-2000.............................................              1.0             1.0             1.0                0                0               0
2000-2005............................................              6.0             6.0             6.0                0                0               0
2006-2010............................................             10.0            10.0            10.0                0                0               0
2011-2016............................................             23.8            23.8            23.8                0                0               0
2017-2022............................................             37.4            37.4            37.4                0                0               0
2023-2028............................................             37.4            37.4            37.4                0                0               0
2028+................................................             37.4            37.4            37.4                0                0               0
--------------------------------------------------------------------------------------------------------------------------------------------------------


                    Table 8--Budget Estimates for Borrower Defense Scenarios Sensitivity Runs
----------------------------------------------------------------------------------------------------------------
                                                                    Low budget    Primary budget    High budget
                             $ (mns)                                  impact          impact          impact
----------------------------------------------------------------------------------------------------------------
Modification....................................................          11,535          17,259          22,158
Outlays for Cohorts 2023-2032...................................           1,565           2,750           6,966
----------------------------------------------------------------------------------------------------------------
    Total.......................................................          13,100          20,010          29,124
----------------------------------------------------------------------------------------------------------------


[[Page 41962]]

4.2 Closed School

    These proposed regulations are expected to increase closed school 
discharges by creating a uniform 180-day enrollment window, increasing 
the use of administrative data to provide discharges without an 
application, eliminating the re-enrollment condition, and some other 
process changes. To estimate the effect of these changes, the 
Department generated a data file summarizing borrower loan amounts for 
different enrollment windows prior to closure as well as any existing 
discharges associated with those loans. This was used to generate a 
ratio of potential additional claims compared to current discharges to 
be applied to the closed school component of the discharge assumption. 
The adjustment factor varied by loan model risk group from 1.11 to 7.46 
and was applied to all cohorts for claims from 2023 on. Together, the 
changes related to the closed school provisions cost $3.47 billion for 
past cohorts and $3.043 billion for cohorts 2023-2032.

4.3 Total and Permanent Disability

    The main driver of the Department's estimated costs for the total 
and permanent disability provisions of the proposed regulation is the 
inclusion of additional SSA determination categories that qualify a 
borrower for a discharge without an application and the inclusion of 
those receiving SSA retirement benefits who fit into those categories. 
These proposed changes are expected to result in additional transfers 
to borrowers. The Department's existing data match with SSA does not 
provide the data needed to estimate the increased discharge from this 
change. We know from SSA data that the added categories have 300,000 
additional borrowers compared to approximately 323,000 borrowers 
included in the categories already eligible through the match from 
September 2021.\64\ However, this is not necessarily indicative of 
student loan borrower distributions across those categories, since data 
are not currently available to the Department on the disability 
statuses of student loan borrowers. Additionally, these figures are 
inclusive of borrowers who might be eligible through the current 
regulations and/or who would apply for a discharge, rather than 
receiving the discharge automatically through a data match as under the 
proposed regulations. Thus, some of these borrowers would not be a new 
discharge but rather could simply be moving between categories. To 
estimate this effect, the Department used an adjustment factor in the 
TPD match with SSA in the Death, Disability, and Bankruptcy (DDB) 
assumption from 1.5 to 2.25, resulting in the $10.67 billion 
modification to past cohorts and $9.588 billion for cohorts 2023-2032. 
The initial adjustment factor was based on data related borrowers in 
the SSA match prior to September 2020 when it was an opt-in process 
that indicated total discharges were around 40 percent of total loan 
disbursements and around 70 percent of outstanding balances across all 
risk groups and cohorts. The other provisions to expand the types of 
medical professionals who can support an application and otherwise make 
the process of obtaining a discharge easier could also increase 
transfers to borrowers through total and permanent disability 
discharges. The Department does not have information to estimate this 
increase but assumes most of the future discharges will be through the 
automatic matches so the effect of these changes will be lower than the 
recent opt-out match provisions. We did not explicitly assign a certain 
percentage of the increased adjustment factor to these administrative 
changes but would not expect it to be more than 0.10 percent of the 
total effect with the additional eligibility categories being more 
significant. By itself, that increase in TPD discharges would increase 
costs by $4.1 billion. We do not estimate a significant cost impact 
from the elimination of the 3-year monitoring period for reinstatement 
of payment obligations because our baseline is conservative in assuming 
that many of those income monitoring issues eventually get resolved. To 
estimate the effect of this provision, we did run a version of the DDB 
assumption that excluded any reinstatements from the disability claims 
from the PB23 baseline, but the resulting effect was not significant 
enough to change the overall discharge rate at the four decimal level 
used in the student loan model. We welcome comments on these 
assumptions and will consider any received in estimating the costs of 
the final regulations.
---------------------------------------------------------------------------

    \64\ Department of Education analysis based on estimates of 
United States sample SSA data as of 2019 of those with a status of 
MINE or MIP and data provided by the Department in August 19, 2021, 
press release, ``Over 323,000 Federal Student Loan Borrowers to 
Receive $5.8 Billion in Automatic Total and Permanent Disability 
Discharges,'' retrieved from https://www.ed.gov/news/press-releases/over-323000-federal-student-loan-borrowers-receive-58-billion-automatic-total-and-permanent-disability-discharges.
---------------------------------------------------------------------------

4.4 PSLF

    The proposed changes to the public service loan forgiveness 
regulations have an estimated cost of $12.7 billion as a modification 
to cohorts through 2022 and $13.2 billion for cohorts 2023-2032. One 
important factor to note is that the baseline for this estimate did not 
include any effect of the limited PSLF waiver announced in October 2021 
as well as adjustments to the counting of progress toward income-driven 
repayment announced in April 2022, so the modification to past cohorts 
in this estimate is picking up some of that effect. The change to 
include certain periods of deferment or forbearance to count toward 
PSLF and to count payments made on underlying loans prior to 
consolidation will reduce the time period for some existing PSLF 
recipients to achieve forgiveness. The Department used information 
linking consolidations to underlying loans to determine the months paid 
prior to consolidation and used that to reduce the time to PSLF 
forgiveness for affected borrowers. A similar process was followed for 
the deferments and forbearances that count toward PSLF. Estimated 
deferments and forbearances are tracked for PSLF borrowers in the 
budget model, and for the proposed change, time associated with 
qualifying deferments and forbearances were included toward the 10 
years of payments required for forgiveness. Together, these changes led 
to the $25.9 billion estimated cost increase for the PSLF changes. 
Allowing lump sum payments, installments, and late payments to count 
toward PSLF will result in borrowers being more likely to reach 120 
qualifying payments at the same time they have 120 months of qualifying 
employment. This is in contrast to the current situation where large 
numbers of payments not being counted means borrowers may need far more 
than 120 months of qualifying employment to reach that same number of 
qualifying payments. Reconsideration should also help those who had 
issues with their initial applications. These factors are not 
specifically modeled in this estimate. The Department does not have 
data at this time regarding these factors and welcomes comments on the 
expected increase from them. These factors are not explicitly accounted 
for in the Department's baseline which is fairly conservative in 
assuming those assumed to have qualifying employment would make the 
appropriate payments other than periods of deferment or forbearance. 
These administrative and definitional factors are captured to some 
degree by a ramp up to the maximum percentage of borrowers assumed to 
receive PSLF forgiveness in our modeling, with levels that reflect the 
low percent of PSLF forgiveness in the

[[Page 41963]]

initial years of borrowers potentially being eligible. To provide a 
sense of the effect of these changes, the Department considered an 
alternate scenario that increased the PSLF percent to the highest level 
we consider reasonable given the level of employment in government or 
nonprofit sectors based on U.S. Census bureau data on employment sector 
by educational attainment.\65\ In the alternate scenario, we increased 
the maximum PSLF percent and shifted the ramp-up so each cohort range 
was one level higher than in the baseline, resulting in the PSLF 
percentages shown in Table 5. The PSLF percent is the percentage of 
borrowers assumed to receive PSLF in our modeling and ramps up across 
years. An increase in the PSLF percent results in additional 
forgiveness. We are showing increases in the PSLF percent because 
nothing in the regulations would lead to reduced PSLF forgiveness 
compared to our baseline level. The alternate scenario is on top of the 
deferment, forbearance, and consolidation changes.
---------------------------------------------------------------------------

    \65\ Data from the American Community Survey from the U.S. 
Census Bureau on employment by sector (employer ownership) and 
educational attainment among workers age 25 to 64.

                 Table 9--Alternate Assumptions for PSLF
------------------------------------------------------------------------
                                                             Alternate
                                           PB23 max (%)    scenario max
                                                                (%)
------------------------------------------------------------------------
2-year..................................           14.65           20.00
4-year..................................           28.88           32.00
Graduate................................           30.74           38.00
------------------------------------------------------------------------


 
                                        Alternate scenario PSLF percents
-----------------------------------------------------------------------------------------------------------------
                          Cohort range                              2-year (%)      4-year (%)     Graduate (%)
----------------------------------------------------------------------------------------------------------------
2010 or less....................................................            6.28           10.83           13.18
2011-2015.......................................................           10.46           18.05           21.96
2016-2020.......................................................           14.65           28.88           30.74
2021 and above..................................................           20.00           32.00           38.00
----------------------------------------------------------------------------------------------------------------

    The net budget impact of the reduced transfers from borrowers to 
the government from increased forgiveness in this alternate scenario is 
shown in Table 10.

      Table 10--Net Budget Impacts of PSLF in Primary and Alternate
                               Assumptions
------------------------------------------------------------------------
               $ (mns)                  PSLF_primary     PSLF_alternate
------------------------------------------------------------------------
Modification........................            12,724            36,379
Outlays for Cohorts 2023-2032.......            13,175            23,116
                                     -----------------------------------
    Total...........................            25,898            59,494
------------------------------------------------------------------------

    The modification cost for early cohorts is significantly affected 
by the increase in the alternative scenario because the baseline PSLF 
level for the 2010 cohort and earlier are lower than the outyear 
cohorts. This reflects the level of forgiveness seen in the program to 
date.

4.5 Interest Capitalization

    The proposed provisions to remove all interest capitalization on 
Direct Loans that is not required by the HEA is estimated to cost $12.4 
billion, consisting of a modification to cohorts through 2022 of $2.2 
billion and increased outlays of $10.2 billion for cohorts 2023-2032. 
The estimated impact of $12.4 billion is for loans in all types of 
repayment plans, but the estimation process differs for non-IDR and IDR 
loans as noted below. Interest capitalization is calculated in the 
Student Loan Model in accordance with specific conditions, so to 
estimate this cost for non-IDR loans, we must turn off that 
capitalization as applicable. We expect capitalization upon entering 
repayment to be the primary driver of the net budget impact for these 
provisions since it affects all borrowers from the effective date of 
the regulations. For this NPRM, we calculated an adjustment factor by 
loan type, cohort, non-IDR repayment plan, years since loan 
origination, and SLM risk group to represent the effect of removing 
capitalization upon entering repayment to generate the net budget 
impact for non-IDR loans. The adjustment factors vary significantly 
with later cohorts having increased adjustment since more of the cohort 
will enter repayment following the effective date of the proposed 
regulations. The SLM is being revised to fully incorporate the change 
to the rule and is expected to be completed by the publication of the 
final regulations.
    For the interest capitalization that affects IDR borrowers, we 
adjusted the calculations in our IDR sub-model that capitalized 
interest. One limitation to note is that our current IDR modeling does 
not estimate borrowers leaving IDR plans so there is no capitalization 
for that in the baseline and no impact of that provision (leaving PAYE 
and REPAYE) in this estimate. However, we did create a capitalization 
event based on the estimated probability that a borrower would leave 
PAYE or REPAYE in 2023 or later. This estimate does not change the 
borrowers' plan or subsequent payments and just captures the effect of 
capitalization at that point. The proposed regulations would result in 
reduced repayments from borrowers by removing capitalization for 
leaving

[[Page 41964]]

PAYE or REPAYE, and we estimate a net budget impact of $108.3 million, 
consisting of a modification to past cohorts of $29.8 million and $79.5 
million for cohorts 2023-2032. While interest capitalization is a 
fairly straightforward calculation, there are several sources of 
uncertainty for these estimates. As mentioned, the SLM is being revised 
to fully account for all the potential effects and our current 
adjustment factors may not account for the full level or timing of 
capitalization events that are being eliminated for non-IDR borrowers. 
Additionally, while entering repayment and the timing patterns for that 
are supported by significant history, other capitalization events 
affected by the proposed regulations may be more subject to behavioral 
changes. Predicting effects of eliminating capitalization related to 
forbearances or defaults does depend on having the level, timing, 
repayment plan, and risk group mix of those underlying events estimated 
accurately. If the pattern of those events changes from historical 
trends as borrowers return to payment following the Covid payment 
pause, the costs associated with eliminating capitalization for those 
events will vary from what we have estimated here. For IDR borrowers, 
the level of leaving plans or borrowers initial plan selection could be 
affected by other developments related to the IDR plans. The Department 
welcomes comments on the estimates presented here and will consider 
them in analysis of the final rule.

4.6 Pre-Dispute Arbitration Clauses

    At this time, the Department does not estimate a significant budget 
impact on title IV programs from the prohibition on pre-dispute 
arbitration agreements and the related disclosures. It is possible that 
borrowers not having to go through arbitration could result in some 
additional borrower defense claims, but we expect those costs have been 
captured in the borrower defense score. Disclosure of certain judicial 
and arbitral records may cause some borrowers to enroll at other 
institutions than they would have attended, but we expect that 
borrowers would receive similar amounts of aid overall, so we do not 
estimate a significant impact on the Title IV portfolio from these 
changes.

4.7 False Certification

    The proposed regulations would also change the false certification 
discharge rules to establish common false certification discharge 
procedures and eligibility requirements, regardless of when a loan was 
originated, and to clarify that the Department would rely on the 
borrower's status at the time the loan was originated, rather than when 
the loan was certified, for determining false certification discharge. 
The proposed revisions to the identity theft provisions would make it 
easier for affected borrowers to provide evidence for a discharge.
    All of the provisions related to false certification should 
increase transfers to borrowers through additional false certification 
discharges. Under existing regulations, false certification discharges 
represent a very low share of discharges granted to borrowers. Over the 
past 3 years, approximately 800 borrowers have received a total of $9.4 
million in false certification discharges, compared with approximately 
455,000 borrowers and $10.67 billion in disability discharges or 573 
closed institutions and $1.38 billion in closed school discharges. The 
Department does not expect an increase in false certification claims to 
result in a significant budget impact. The Department would continue to 
evaluate the changes to the false certification discharge and welcomes 
comments to consider as the final analysis of the proposed regulations 
is developed.

5. Accounting Statement

    As required by OMB Circular A-4, we have prepared an accounting 
statement showing the classification of the expenditures associated 
with the provisions of these regulations. This table provides our best 
estimate of the changes in annual monetized transfers as a result of 
these proposed regulations. Expenditures are classified as transfers 
from the Federal Government to affected student loan borrowers.

Table 11--Accounting Statement: Classification of Estimated Expenditures
                              [In millions]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
          Category                                   Benefits
------------------------------------------------------------------------
Updated and clarified                             not quantified
 borrower defense process
 and Federal standard to
 increase protection for
 student borrowers and
 taxpayers.
Improved awareness and usage                      not quantified
 of closed school, TPD, and
 false certification
 discharges and PSLF.
Improved consumer                                 not quantified
 information about
 institutions' performance
 and practices.
------------------------------------------------------------------------
          Category                                     Costs
------------------------------------------------------------------------
                                                      7%              3%
Costs of compliance with                           $5.83           $5.85
 paperwork requirements.
------------------------------------------------------------------------
          Category                                   Transfers
------------------------------------------------------------------------
                                                      7%              3%
Borrower Defense claims from  Primary...         2,632.3         2,292.2
 the Federal government to
 affected borrowers.
Reimbursements of borrower    Primary...            51.2            48.6
 defense claims from
 affected institutions to
 the Federal government.
Closed school discharges                             763             697
 from the Federal government
 to affected students.
Total and Permanent                                2,375           2,172
 discharges from the Federal
 government to affected
 students.
Increased PSLF amounts to                          3,000           2,761
 eligible borrowers from
 administrative changes,
 better definitions of
 qualifying employment,
 allowing lump sum and
 installment payments, and
 counting payments prior to
 consolidation, and counting
 certain periods of
 deferment and forbearance.
Elimination of non-statutory                      $1,290        $1,260.5
 interest capitalization.
------------------------------------------------------------------------

6. Alternatives Considered

    As part of the development of these regulations, the Department 
engaged in a negotiated rulemaking process in which we received 
comments and proposals from non-Federal negotiators representing 
numerous impacted constituencies. These included higher education 
institutions, consumer

[[Page 41965]]

advocates, students, financial aid administrators, accrediting 
agencies, and State attorneys general, among others. Non-Federal 
negotiators submitted a variety of proposals relating to the issues 
under discussion. Information about these proposals is available on our 
rulemaking website at https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html.

6.1 Borrower Defense

    Some non-Federal negotiators believed that State standards should 
be a primary consideration rather than secondary, such as during 
reconsideration. The Department believes that a single Federal standard 
for initial adjudication would be easier for borrowers and affected 
parties to understand. Requiring adjudication of State laws at the 
outset would be confusing, burdensome, and can lead to inconsistent 
treatment across States. The Department thinks that the proposed single 
Federal standard for initial review of claims encompasses most items 
that would be in State standards and would result in fewer situations 
where something would be approved under a State standard but not a 
Federal one. While the Department believes there would be few 
circumstances where a claim could be approved under State law but not 
the Federal standard, we propose allowing claims to be reconsidered 
under a State law. In the case of group claims brought by a State 
requestor this review could occur prior to the issuance of a formal 
denial.
    It was also suggested during the negotiations that the Department 
should allow more types of third parties to propose group claims, 
including individual borrowers and legal assistance organizations. 
However, the Department believes the State requestors have been the 
most consistent source of high-quality external evidence that have led 
to the approval of claims so far. While legal assistance organizations 
have provided useful information as well, the Department is concerned 
about the administrability of allowing dozens more entities to submit 
requests for a group process. The Department also already has existing 
collaborative oversight responsibilities with States as both are 
members of the regulatory triad that also includes accreditation 
agencies. With respect to individual borrowers, the Department thinks 
it is unlikely that an individual borrower would possess the type of 
evidence needed for forming a group claim. Having legal assistance 
organizations and individuals instead work with States to put together 
a group claim would thus result in applications that are more likely to 
be turned into group claims.
    The Department had considered tying together recovery from 
institution to adjudication for borrower defense to repayment cases, as 
under the 2016 rule, but ultimately decided against proposing that. The 
Department is concerned that the recovery process could significantly 
slow the process of providing relief to borrowers, which could result 
in significant costs for borrowers who are forced to put their lives on 
hold while they wait for relief. The Department would continue to 
recoup liabilities once claims have been approved and liabilities 
assessed, consistent with the Department's practices in other types of 
discharges where the school may be liable. The Department expects the 
deterrent effect that would result from the proposed regulation to be 
similar to that of the 2016 rule. Some non-Federal negotiators 
recommended that the Department identify broader instances in which it 
would not recoup funds out of concern that the Department would only 
approve claims in which it is going to be able to recoup funds. While 
the Department has a strong commitment to recoupment, it also 
recognizes that there are many instances of institutional conduct that 
could lead to approved borrower defense claims that either occurred at 
institutions that have since closed and lack assets to recoup against 
or that occurred outside the limitations period for recoupment.
    The Department also considered whether it should provide a full 
discharge for all borrowers with approved claims or adopt a higher 
evidentiary standard to rebut the presumption of full relief. The 
Department believes that adopting a higher evidentiary standard for 
rebutting the presumption of full relief would be inappropriate because 
the rest of the borrower defense regulation uses preponderance of the 
evidence, and it should use a consistent standard. Similarly, while 
borrowers are presumed to have a full discharge when their cases are 
approved in the proposed regulations, the Department believes that 
there would be circumstances where a borrower was subject to a 
substantial misrepresentation or other conduct that led to an approved 
claim, but the degree of harm suffered by the borrower is less than the 
amount of a full discharge. The Department believes that the use of a 
rebuttable presumption in limited circumstances balances the goal of 
erring on the side of full discharges while preserving flexibility to 
discharge lesser amounts when warranted.
    Some non-Federal negotiators noted that it is difficult for the 
Department to ensure that collection is in fact stopped after a 
borrower has submitted a borrower defense application. These 
negotiators proposed that the Secretary should reimburse the borrower 
for the amount collected if the Secretary collects on a loan placed in 
forbearance or stopped collections in violation of proposed Sec.  
685.403(d) or Sec.  685.403(e). While the Department appreciates the 
concerns of negotiators and agrees that forbearances must be 
implemented accurately, the Department does not believe it is necessary 
or appropriate to mandate a reimbursement amount in regulations, as 
other remedies exist for correcting such administrative errors.
    The Department also considered whether it should mandate that 
borrower defense claims be reviewed and decided by an individual who is 
completely independent from the rest of the Department. The Department, 
however, does not think it could mandate such a structure in 
regulations since it would require promising resources that are subject 
to annual appropriations.

6.2 False Certification

    The Department previously considered a new form for a common law 
forgery loan discharge for borrowers whose signature was forged by 
someone other than a school employee. This applied only to Department-
held Federal student loans, but the Department is encouraging other 
loan holders to create a process like this one. Until we launched this 
form, the Department evaluated all forgery claims using the discharge 
forms that only apply where the school falsified a signature or if 
there was a judicially proven crime of identity theft. This new form 
for a common law forgery loan discharge provides borrowers an 
alternative option. But it would not benefit many borrowers who do not 
fit into the false certification categories since the number of 
applications under the FFEL Program is very small and would continue to 
shrink.
    The Department considered relying on the disbursement date as an 
alternative to relying on the origination date, but the Department is 
concerned that relying on the disbursement date allows institutions 
time to remedy an already completed false certification that a student 
was eligible for a loan (e.g., a student without a high school diploma 
or equivalent did not meet the ability to benefit requirement of having 
completed six credits toward their

[[Page 41966]]

credential at the time of origination, but did at the time of 
disbursement). Instead, relying on the origination date would ensure 
that institutions may be held accountable for their misconduct even if 
it is subsequently corrected prior to disbursement.
    The Department considered whether to expand eligibility for false 
certification discharges to cover circumstances such as barriers to 
employment. However, we are concerned that de facto barriers to 
employment (e.g., jobs that likely would not hire someone with a 
criminal background, despite there being no specific related 
requirement for state licensure in that field) rather than being 
explicit prohibitions (e.g., jobs that cannot legally be held by 
someone with a criminal background) would create a substantial burden 
on institutions to be aware of such barriers and may not reliably 
identify borrowers eligible for such discharge.

6.3 PSLF

    Several alternatives to better define and improve PSLF were 
recommended by non-Federal negotiators. Currently, government employees 
and those who work for a nonprofit organization under section 501(c)(3) 
of the Internal Revenue Code of 1986 and exempt from taxation under 
section 501(a) of the Internal Revenue Code are eligible for qualifying 
PSLF employment. Furthermore, employees of other organizations (other 
than a business organized for profit, a labor union, or a partisan 
political organization) can only have their employment qualify if their 
organization provides one of the other public services identified in 
the HEA and mirrored in regulations.
    One alternative proposed was to include PSLF eligibility for 
borrowers working to provide public services at nonprofit hospitals in 
certain states who are employed by for-profit organizations because 
they are barred by state law from working directly for the hospital. 
This negotiator stated that most of those borrowers provide public 
services under a for-profit organization. Other negotiators and 
documents submitted by negotiators mentioned low-wage workers in areas 
such as home health care or early childhood education who are similarly 
more likely to work at a for-profit employer and are thus ineligible 
for PSLF under existing regulations. Some suggested that the Department 
assess eligibility based on SOC codes that classify workers into 
occupational categories. While the Department agrees that the other 
occupations identified by the negotiators provide valuable services, 
the Department lacks the resources to review for-profit employers, 
which also have far less required transparency than nonprofit 
organizations and which would thus require an even more extensive 
investigation, or to assess individual borrowers' job descriptions to 
determine whether their occupations should qualify for PSLF. The 
Department's longstanding position has been that there are meaningful 
distinctions between for-profit and nonprofit organizations that have 
been encoded in broader tax law and that it should honor those 
distinctions. Because of these concerns the Department is seeking 
additional comments on this issue from the public, as discussed in 
greater detail in the preamble.
    The Department also heard from public commenters who expressed 
concerns about the presence of laws in certain states that prevent 
physicians from being directly employed by private nonprofit hospitals. 
The result is that those doctors are legally unable to get access to 
PSLF as employees. The Department is considering whether this issue 
could be addressed by creating a separate eligibility test for 
situations such as these. We have included requests for additional 
public comment on this issue as described in the preamble.
    The Department also considered whether it should count all 
deferments and forbearances toward PSLF, or all deferments or 
forbearances used before a certain date to capture when the Department 
made improvements to discourage practices that steered borrowers into 
deferments or forbearances unnecessarily. The Department is concerned 
that counting all forbearance and deferments could create a 
disincentive to make PSLF payments. In addition, there are some 
deferments and forbearances that directly conflict with PSLF employment 
requirements, for example, unemployment and rehabilitation training. 
The Department intends for those qualifying forbearances and deferments 
to align with the purpose of PSLF.
    Several non-federal negotiators brought up forbearance-steering and 
wanted to include situations of forbearance steering as qualifying 
payments. While the Department is concerned about instances where 
borrowers have ended up in forbearances due to poor advice, there is 
not a clear definition of what forbearance-steering would include. In 
addition, this would require the borrower to prove steering, which the 
Department believes is a difficult and unattainable bar for most 
borrowers and would have the effect of creating a process akin to 
borrower defense for loan repayment counting. Instead, the hold 
harmless period would provide borrowers a way to gain credit for those 
months in deferment or forbearance without needing to adjudicate why 
they ended up in that status.

6.4 Interest Capitalization

    While the Department put forth a proposal eliminating interest 
capitalization on non-statutory capitalizing events, some non-Federal 
negotiators suggested eliminating it for all capitalizing events in 
order to reduce confusion and inconsistency. However, certain 
capitalizing events are statutory, such as for IBR, FFEL, and 
deferments. The Department proposes to eliminate interest 
capitalization where we have the discretion to do so in order to reduce 
the cost of borrowing for students.
    Some federal negotiators proposed not capitalizing interest when a 
borrower consolidates their federal student loans. The Department 
considered this proposal but thinks the capitalization that occurs in 
this instance is different than the other areas where the Department is 
eliminating it. A borrower must take intentional steps to consolidate 
their loans and is not required to do so. By contrast, many of the 
other instances of interest capitalization occur either without the 
borrower understanding that capitalization would occur or as an added 
penalty for a borrower who is already struggling on their loan and 
pauses their payments.
    The Department also considered whether the concerns of 
capitalization could instead be addressed by providing borrowers with 
greater education on what is capitalization and why it occurs. However, 
the Department concluded that such an approach would be unlikely to 
work because many instances of capitalization are either unavoidable or 
reflect borrower struggles. In the former category, all borrowers must 
eventually enter repayment, so educating them more about capitalization 
in that instance would not provide any benefits. The area where 
education could potentially make a greater difference is capitalization 
tied to forbearance usage. However, many borrowers rely on forbearance 
in times of struggle, so it is unclear that greater education could 
work.

[[Page 41967]]

6.5 Total and Permanent Disability Discharge

    Some proposed that the Department fully eliminate monitoring of 
borrowers' eligibility for loans following a total and permanent 
disability discharge. However, while the Department supports removing 
the income monitoring period, we feel it should be maintained for new 
loans. The Department is concerned that we should not be distributing 
new loans if borrowers have a demonstrated disability that prevents 
them from working and ultimately repaying that loan. A student's 
borrowing eligibility is made under the assumption that repayment can 
be made. If a borrower is trying to take out loans already knowing that 
repayment will not be possible, then the Department is taking on the 
risk of default and should not distribute the loan. We have a duty to 
protect taxpayer money, and if there is no probability of repayment, we 
do not deem it prudent to provide such loans.

6.6 Closed School Discharge

    Some non-federal negotiators suggested a different definition of 
closure that would have restricted discharges in circumstances where 
other nearby institutions were willing to allow the borrower to 
continue their program, among other conditions. The Department believes 
such an approach would have unfairly made discharges unavailable to 
borrowers for reasons we would struggle to judge, such as how 
accessible a nearby program is for specific borrowers. Negotiators also 
wrestled with difficulties in defining adequate proximity regarding 
closed schools. However, the Department is concerned that identifying 
nearby programs within ``reasonable proximity'' would be highly 
subjective, and a narrowed definition could mean that a borrower loses 
their discharge unfairly.
    When looking at automatic discharges, the Department decided to 
reduce the period before automatic discharges occur following closure 
from 3 years (as provided for under the 2016 regulations) to 1 year. 
GAO noted in its report on college closures that a majority of the 
borrowers who received automatic discharges were in default, and that 
without automatic relief, only a small percentage of eligible borrowers 
ever got the relief they were owed. This change would make it less 
likely that borrowers who do not apply for closed school discharges 
could end up in default before receiving automatic relief.
    Regarding the window to qualify for a discharge, some non-Federal 
negotiators questioned whether this period of time should be increased, 
but the Department notes that 180 days is consistent with past 
regulations. Our expanded list of exceptional circumstances would 
address other circumstances where the path to closure begins earlier.
    At present, a borrower loses access to a discharge if they transfer 
any of their credits to another program. The Department assessed the 
potential value of retaining that requirement but is proposing to 
eliminate the requirement that the borrower cannot have transferred 
credits (other than through an approved teach-out that they complete) 
because we are concerned it is confusing to borrowers and may be 
preventing them from accessing discharges. We believe that, instead, it 
is preferable to ensure borrowers are able to access the loan relief 
benefits to which they are entitled. Looking ahead, the Department 
believes the improvement of data sources would allow us to better 
identify and automate closed school discharges.
    Negotiators also suggested making the set of exceptional 
circumstances included in the regulations as required rather than 
possible extensions of the eligibility window for closed school 
discharges. The Department feels that this standard should be on a 
case-by-case basis, and notes that the use of the exceptional 
circumstance's provisions would require individualized determinations 
to assess the individual case of each school closure. However, the 
Department believes that its proposal to expand the non-exhaustive list 
would send clear signals on how the Secretary may use this authority 
going forward.

6.7 Pre-Dispute Arbitration

    During rulemaking sessions, negotiators considered expanding the 
proposed prohibition on pre-dispute arbitration clauses to include all 
types of complaints, not just those related to borrower defense. The 
Department's legal authority is based on the relevance of arbitration 
to the making of a Direct Loan or provision of educational services for 
which the Direct Loan was intended. In this NPRM, the Department takes 
the position that, in order to protect the interests of the United 
States and to promote the purposes of the Direct Loan Program in 
accordance with the HEA and the Department's PPA with institutions, 
mandatory pre-dispute arbitration agreements cannot foreclose on 
borrowers' right to file a borrower defense claim with the Secretary.
    Additionally, some negotiators proposed that the Department should 
not collect arbitral and judicial records. However, the Department 
needs to be able to see and understand the patterns of complaints to 
anticipate and investigate possible claims since these arbitral records 
and outcomes from arbitration are largely not publicly accessible but 
are highly relevant for enforcement and investigation purposes.
    Negotiators also proposed allowing institutions to require 
arbitration clauses through enrollment agreements. At the crux of these 
proposed rules, the Department aims to protect borrowers by prohibiting 
mandatory arbitration clauses and believes borrowers should have an 
opportunity to have their day in court. Allowing borrowers the 
opportunity to go through the judicial system could help deter bad 
acting schools from engaging in behaviors that the Department does not 
endorse or allow. Borrowers' ability to litigate can also provide a 
certain level of transparency to the general public and to the 
Department and allows for understanding of resolutions in instances of 
litigation. Litigation may also allow claimants to band together to 
bring class action lawsuits and reduce potential legal costs, as well 
as bring about attention to misconduct that may also be affecting other 
students.
    Additionally, although arbitration is conducted by a third party, 
there is some evidence of bias in favor of the company over the 
consumer, at least where the company is regularly involved in such 
claims.\66\ With litigation, that problem is eliminated as the judge 
acts as an impartial body without receiving payment from either of the 
parties.
---------------------------------------------------------------------------

    \66\ Horton, D. and Chandrasekher, A. After the Revolution: An 
Empirical Study of Consumer Arbitration (June 4, 2015), Georgetown 
Law Journal, Vol. 104, 2015, Forthcoming, UC Davis Legal Studies 
Research Paper No. 436, Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2614773. ``. . . consumers facing 
corporations that arbitrate routinely suffer a pronounced 
disadvantage'' (page 110).
---------------------------------------------------------------------------

7. Regulatory Flexibility Act

    Section 605 of the Regulatory Flexibility Act (5 U.S.C. 603(a)) 
allows an agency to certify a rule if the rulemaking does not have a 
significant economic impact on a substantial number of small entities.
    The Small Business Administration (SBA) defines ``small 
institution'' using data on revenue, market dominance, tax filing 
status, governing body, and population. The majority of entities to 
which the Office of Postsecondary Education's (OPE) regulations apply 
are postsecondary institutions, however, which do not report such data 
to the

[[Page 41968]]

Department. As a result, for purposes of this NPRM, the Department 
proposes to continue defining ``small entities'' by reference to 
enrollment, to allow meaningful comparison of regulatory impact across 
all types of higher education institutions.\67\
---------------------------------------------------------------------------

    \67\ In previous regulations, the Department categorized small 
businesses based on tax status. Those regulations defined ``non-
profit organizations'' as ``small organizations'' if they were 
independently owned and operated and not dominant in their field of 
operation, or as ``small entities'' if they were institutions 
controlled by governmental entities with populations below 50,000. 
Those definitions resulted in the categorization of all private 
nonprofit organization as small and no public institutions as small. 
Under the previous definition, proprietary institutions were 
considered small if they are independently owned and operated and 
not dominant in their field of operation with total annual revenue 
below $7,000,000. Using FY2017 IPEDs finance data for proprietary 
institutions, 50 percent of 4-year and 90 percent of 2-year or less 
proprietary institutions would be considered small. By contrast, an 
enrollment-based definition captures a similar share of proprietary 
institutions, allowing consistent comparison to other types of 
institutions.

                         Table 12--Small Institutions Under Enrollment-Based Definition
----------------------------------------------------------------------------------------------------------------
                 Level                            Type                 Small           Total          Percent
----------------------------------------------------------------------------------------------------------------
2-year................................  Public..................             328           1,182           27.75
2-year................................  Private.................             182             199           91.46
2-year................................  Proprietary.............           1,777           1,952           91.03
4-year................................  Public..................              56             747            7.50
4-year................................  Private.................             789           1,602           49.25
4-year................................  Proprietary.............             249             331           75.23
                                                                 -----------------------------------------------
    Total.............................                                     3,381           6,013           56.23
----------------------------------------------------------------------------------------------------------------
Source: 2018-19 data reported to the Department.

    Table 12 summarizes the number of institutions affected by these 
proposed regulations.

Table 13--Estimated Count of Small Institutions Affected by the Proposed
                               Regulations
------------------------------------------------------------------------
                                               Small      As percent  of
                                           institutions        small
                                             affected      institutions
------------------------------------------------------------------------
Borrower Defense........................              50            1.47
False Certification.....................               0               0
PSLF....................................               0               0
Eliminate Interest Capitalization.......               0               0
Total Permanent Disability Discharge....               0               0
Closed School Discharge.................               0               0
Pre-dispute Arbitration.................           1,285            38.0
------------------------------------------------------------------------

    The Department has determined that the negative economic impact on 
small entities affected by the regulations would not be significant. 
The proposed changes to False Certification, PSLF, Total Permanent 
Disability Discharge, and Closed School Discharge would not have an 
impact on small institutions. These types of discharges are between the 
borrower and the lender, which often is the Department. The Department 
anticipates this will impact 310 small lenders that will be required to 
expand their current reporting and will take approximately 50 hours to 
update their systems. A few small institutions could be impacted by the 
proposed regulations where there is a large group Borrower Defense 
claim. Based on recent experience of the Department, adjudicating 
borrower defense to repayment cases and recouping from institutions, 
small institutions are not expected to be impacted by the proposed 
regulations in BD because the Department is unlikely to recoup from 
isolated BD cases from small institutions. The proposed changes to 
eliminate interest capitalization will not have an impact on small 
institutions as this is also an action between the borrower and lender.
    The Department anticipates approximately 38 percent of small 
institutions will be impacted by these pre-dispute arbitration proposed 
regulations. We derived the percentage that would be impacted from a 
report by the Century Foundation which sampled schools using 
arbitration clauses in their enrollment contracts.\68\ Of the sampled 
schools, 62 percent of proprietary institutions and 2.9 percent of 
private nonprofit institutions used arbitration clauses. The study 
found public schools did not utilize arbitration clauses. We applied 
those proportions to the number of small proprietary institutions (both 
2 year and 4 year) and Private nonprofit (both 2 year and 4 year) and 
arrived at 1,285 or 38.01 percent of total small business institutions. 
We would not anticipate there is a significant cost impact to amend 
future contracts.
---------------------------------------------------------------------------

    \68\ How College Enrollment Contracts Limit Students' Rights. 
(2016, April 28). The Century Foundation. https://tcf.org/content/report/how-college-enrollment-contracts-limit-students-rights/.

[[Page 41969]]



           Table 14--Estimated Cost Range for Small Institutions Affected by the Proposed Regulations
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Compliance area                            Small
                                    institutions
                                        affected    Cost range per institution
                                   Estimated overall cost range
----------------------------------------------------------------------------------------------------------------
BD employment rate background                 50             500             750          25,000          37,500
 check..........................
Pre-dispute arbitration update             1,285             125             160         160,625         205,600
 future agreements..............
Lenders.........................             310           2,231           2,343      691,622.40         726,330
----------------------------------------------------------------------------------------------------------------

    While these proposed regulations would have an impact on some small 
institutions, there will not be a significant cost and compliance 
impact.

8. Paperwork Reduction Act of 1995

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department provides the general public and Federal agencies 
with an opportunity to comment on proposed and continuing collections 
of information in accordance with the Paperwork Reduction Act of 1995 
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps ensure that: The public 
understands the Department's collection instructions, respondents can 
provide the requested data in the desired format, reporting burden 
(time and financial resources) is minimized, collection instruments are 
clearly understood, and the Department can properly assess the impact 
of collection requirements on respondents.
    Sections 668.41, 668.74, 674.33, 674.61, 682.402, 682.414, 685.213, 
685.214 685.215, 685.219, 685.300, 685.304, 685.402, 685.403, and 
685.407, 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: The Department proposes to remove the requirements in 
current Sec.  668.41(h).
    Burden Calculation: With the removal of the regulatory language in 
Sec.  668.41(h) the Department would remove the associated burden of 
4,720 hours under OMB Control Number 1845-0004.

        Student Assistance General Provisions--Student Right to Know (SRK)--OMB Control Number: 1845-0004
----------------------------------------------------------------------------------------------------------------
                                                                                                Cost $44.41 per
                                                                                                institution from
              Affected entity                  Respondent       Responses       Burden hours     the 2019 final
                                                                                                      rule
----------------------------------------------------------------------------------------------------------------
For-Profit................................            -944             -944           -4,720          -$209,615
----------------------------------------------------------------------------------------------------------------

Section 668.74 Employability of Graduates

    Requirements: In the course of adjudicating borrower defense 
claims, the Department has persistently seen misrepresentations about 
the employability of graduates. In this NPRM, the Department is 
explicitly including as a form of job placement rate misrepresentation 
placement rates that are inflated through manipulation of data inputs. 
Proposed section 668.74(g)(2) contains a provision that allows the 
Department to verify that an institution correctly calculated its job 
placement rate by requiring an institution to furnish to the Secretary, 
upon request, documentation and other data that was used to calculate 
the institution's employment rate calculations.
    Burden Calculation: The Department believes that such a request 
will impose only a modest burden on the part of any institution to 
provide the existing background data upon which the employment rates 
that are presented were calculated. We believe that such required 
reporting would be made by 2 Private Not-for-profit, 2 For-Profit and 2 
Public institutions annually. It is anticipated that 6 institutions 
will receive such a request and that it will take 8 hours to copy and 
prepare for submission to the Department such evidence of their 
calculated employment rates for a total of 48 burden hours (6 
institutions X 1 response x 8 hours = 48 burden hours).

                       Student Assistance General Provisions--OMB Control Number 1845-0022
----------------------------------------------------------------------------------------------------------------
                                                                                  Burden hours =    Cost $46.59
                 Affected entity                    Respondent     Responses per    8 hours per    per hour for
                                                                    respondent       response      institutions
----------------------------------------------------------------------------------------------------------------
Private Not-for-Profit..........................               2               1              16            $745
For-Profit......................................               2               1              16            $745
Public..........................................               2               1              16            $745
                                                 ---------------------------------------------------------------
    Total.......................................               6                              48          $2,235
----------------------------------------------------------------------------------------------------------------


[[Page 41970]]

Sections 674.33(g), 682.402(d), and 685.214 Closed School Discharge

    Requirements: The proposed regulations would amend the Perkins, 
FFEL, and Direct Loan regulations to simplify the closed school 
discharge process. Proposed Sec. Sec.  674.33(g)(4), 682.402(d)(3) and 
685.214(d)(1) would provide that the borrower must submit a completed 
closed school discharge application to the Secretary and that the 
factual assertions in the application must be true and made by the 
borrower under penalty of perjury. Additionally, the number of days 
that a borrower had withdrawn from a closed school to qualify for a 
closed school discharge would be extended from 120 days to 180 days.
    Burden Calculation: These changes would require an update to the 
current closed school discharge application form. We do not believe 
that the language update will significantly 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. The burden changes would be assessed to OMB Control Number 
1845-0058, Loan Discharge Applications (DL/FFEL/Perkins).

Sections 674.61, 682.402(d), and 685.213 Total and Permanent Disability 
(TPD) Discharge

    Requirements: Under proposed changes to Sec. Sec.  
674.61(b)(2)(iv), 682.402(c)(2)(iv), and 685.213(b)(2), a TPD discharge 
application would be allowed to be certified by a nurse practitioner, a 
physician's assistant licensed by a State, or a licensed certified 
psychologist at the independent practice level in addition to a 
physician who is a Doctor of Medicine or Osteopathy legally authorized 
to practice in a State. The type of Social Security Administration 
(SSA) documentation that may qualify a borrower for a TPD discharge 
would be expanded to include an SSA Benefit Planning Query or other SSA 
documentation deemed acceptable by the Secretary. The NPRM also 
proposes to amend the Federal Perkins Loan (Perkins), Direct Loan, and 
Federal Family Education Loan (FFEL) Program regulations to improve the 
process for granting total and permanent disability (TPD) discharges by 
eliminating the income monitoring period. Proposed Sec. Sec.  
674.61(b)(6)(i), 682.402(c)(6), and 685.213(b)(7)(i) would eliminate 
the existing reinstatement requirements, except for the provision which 
provides that a borrower's loan is reinstated if the borrower receives 
a new TEACH Grant or a new title IV loan within 3 years of the date the 
TPD discharge was granted.
    Burden Calculation: These proposed changes would require an update 
to the current total and permeant disability discharge application 
form. We do not believe that the language update will significantly 
change the amount of time currently assessed for the borrower to 
complete the Discharge Application (TPD-APP) application form from 
those which has already been approved. These proposed rules would 
eliminate the Post-Discharge Monitoring form (TPD-PDM) from the 
collection and will create a decrease in overall burden from the 1845-
0065 collection. The forms 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. The burden 
changes would be assessed to OMB Control Number 1845-0065, Direct Loan, 
FFEL, Perkins and TEACH Grant Total and Permanent Disability Discharge 
Application and Related Forms.

682.402(e), 685.215(c) and 685.215(d) False Certification Discharge

    Requirements: These proposed regulations streamline the FFEL and 
Direct Loan false certification regulations to provide one set of 
regulatory standards that would cover all false certification discharge 
claims. Sections 682.402(e) and 685.215(c)(5) state that a borrower 
qualifies for a false certification discharge if the school certified 
the borrower's eligibility for a FFEL or Direct Loan as a result of the 
crime of identity theft. Additionally, 685.215(c)(10) would provide for 
a new application to allow a state Attorney General or nonprofit legal 
services representative to submit a request to the Secretary for a 
group discharge under section (c).
    Burden Calculation: These changes would require an update to the 
current false certification discharge application forms. We do not 
believe that the language update will significantly change the amount 
of time currently assessed for the borrower to complete the forms from 
those which has already been approved. The forms 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. New forms to capture the requirements of the 
identity theft section and the group discharge request will be created 
and made available for comment through a full public clearance package 
before being made available for use by the effective date of the 
regulations. The burden changes would be assessed to OMB Control Number 
1845-0058, Loan Discharge Applications (DL/FFEL/Perkins).
    Requirements: Under proposed Sec.  682.402(e)(6)(i) if a holder of 
a borrower's FFEL loan determines that a borrower may be eligible for a 
false certification discharge the holder provides the borrower with the 
appropriate application and explanation of the process for obtaining a 
discharge. The borrower burden to complete the form is captured under 
the form collection 1845-0058. Under proposed Sec.  682.402(e)(6)(iii) 
if a FFEL borrower submits an application for discharge that a FFEL 
program loan holder determines is incomplete, the loan holder would 
notify the borrower of that determination and allow the borrower 30 
days to amend the application and provide supplemental information.
    Burden Calculation: The Department believes that such a request 
will require burden on the part of any FFEL lender. Of the 310 FFEL 
lenders it is anticipated that 31 lenders will make such determinations 
of borrower discharge eligibility and that it will take 20 minutes to 
send an estimated 100 borrowers the correct form for completion for a 
total of 33 burden hours (100 borrowers applications x 20 minutes per 
application (.33 hours) = 33 burden hours).
    It is anticipated that 15 lenders would make a determination of 25 
borrower's incomplete application and that it would take 15 minutes to 
send borrowers the notice to amend their application for a total of 6 
burden hours (25 borrowers receiving lender notices x 15 minutes (.25 
hours) = 6 burden hours).
    It is anticipated that of the 25 borrowers who receive notice of an 
incomplete application, 20 will resubmit an amended application or 
provide additional documentation and it would take 30 minutes to make 
such amendments for a total of 10 burden hours (20 borrowers amending 
initial filings x 30 minutes (.50 hours) = 10 hours under OMB Control 
Number 1845-0020.
    Requirements: Proposed Sec.  682.402(e)(6)(vii) would require a 
guaranty agency to issue a decision that explains the reasons for any 
adverse determination on a false certification discharge application, 
describes the evidence on which the decision was made, and provides the 
borrower, upon request, copies of the evidence. The

[[Page 41971]]

guaranty agency would consider any response or additional information 
from the borrower and notify the borrower as to whether the 
determination is changed.
    Burden Calculation: The Department believes that such a request 
will require burden on the part of any guaranty agency. Of the 18 
guaranty agencies it is anticipated that the guaranty agencies will 
make such adverse determinations of 75 borrower discharge eligibility 
and that it will take 30 minutes to send borrowers the decision for a 
total of 38 burden hours (75 borrowers receiving adverse determination 
notifications x 30 minutes (.50 hours) = 38 burden hours) under OMB 
Control Number 1845-0020.
    Requirements: Proposed Sec.  682.402(e)(6)(ix) would provide the 
borrower with the option to request that the Secretary review the 
guaranty agency's decision.
    Burden Calculation: The Department believes that such a request 
will require burden on the part of any borrower. Of the 75 borrowers 
whose applications were denied by the guaranty agency, it is 
anticipated that 30 borrowers will request Secretarial review of the 
guaranty agencies decision and that it will take 30 minutes to send 
such a borrower request for a total of 15 burden hours (30 borrowers x 
30 minutes (.50 hours) = 15 burden hours) under OMB Control Number 
1845-0020.

                 Federal Family Education Loan Program Regulations--OMB Control Number 1845-0020
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $46.59
                                                                                                   institutional
                 Affected entity                    Respondent       Responses     Burden hours       $22.00
                                                                                                    individual
----------------------------------------------------------------------------------------------------------------
Individual......................................              50              50              25            $550
Private Not-for-Profit..........................              14              55              23        1,071.57
For-Profit......................................              24              99              31        1,444.29
Public..........................................              11              46              23        1,071.57
                                                 ---------------------------------------------------------------
    Total.......................................              99             250             102        4,137.43
----------------------------------------------------------------------------------------------------------------

Section 682.414 Reports

    Requirements: In Sec.  682.414(b)(4), the Department proposes to 
require FFEL Program lenders to report detailed information related to 
a borrower's deferments, forbearances, repayment plans, delinquency, 
and contact information on any FFEL loan to the Department by an 
established deadline.
    Burden Calculation: The Department believes that such a request 
will require burden on the part of any FFEL lender. It is anticipated 
that 310 lenders will be required to expand their current reporting and 
that it will take 50 hours to update systems and to initially provide 
the additional data for a total of 15,500 burden hours (310 
institutions x 50 hours = 15,500 burden hours) under OMB Control Number 
1845-0020.

                 Federal Family Education Loan Program Regulations--OMB Control Number 1845-0020
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $46.59
                 Affected entity                    Respondent       Responses     Burden hours    institutional
----------------------------------------------------------------------------------------------------------------
Private Not-for-Profit..........................              64              64           3,200        $149,088
For-Profit......................................             246             246          12,300         573,057
                                                 ---------------------------------------------------------------
    Totals......................................             310             310          15,500         722,145
----------------------------------------------------------------------------------------------------------------

Section 685.219 Public Service Loan Forgiveness

    Requirements: The Department proposes new, modified, and 
restructured definitions in Sec.  685.219(b) which would expand the use 
of the form.
    Burden Calculation: These changes would require an update to the 
current Public Service Loan Forgiveness form. We do not believe that 
the language update will significantly 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. The burden changes would be assessed to OMB Control Number 
1845-0110, Application and Employment Certification for Public Service 
Loan Forgiveness.
    Requirements: In this NPRM, the Department also proposes 
regulations to create a reconsideration process under proposed Sec.  
685.219(g) for borrowers whose applications for Public Service Loan 
Forgiveness were denied or who disagree with the Department's 
determination of the number of qualifying payments or months of 
qualifying employment that have been earned by the borrower which 
formalizes the current non-regulatory process.
    Burden Calculation: The Department is currently in the clearance 
process for an electronic Public Service Loan Forgiveness 
Reconsideration Request, OMB Control Number 1845-0164. Public comment 
on the web-based format is currently being accepted through the normal 
information clearance process under docket number ED-2022-SCC-0039.

Section 685.300 Agreements Between an Eligible School and the Secretary 
for Participation in the Direct Loan Program

    Requirements: The Department proposes to reinstate prior 
regulations that barred institutions, as a condition of participating 
in the Direct Loan program, from requiring borrowers to accept pre-
dispute arbitration agreements and class action waivers as they relate 
to borrower defense claims. Specifically, in proposed Sec.  685.300(e), 
institutions would be prohibited from relying on a pre-dispute 
arbitration agreement, or any other pre-dispute agreement with a 
student who obtained or benefitted from a Direct Loan, in any aspect of 
a class action related to a borrower defense claim, until the

[[Page 41972]]

presiding court rules that the case cannot proceed as a class action. 
In proposed Sec.  685.300(f) of the regulations, the Department 
proposes to require that certain provisions relating to notices and the 
terms of the pre-dispute arbitration agreements be included in any 
agreement with a student who receives a Direct Loan to attend the 
school or for whom a Direct PLUS Loan was obtained.
    Burden Calculation: There will be burden on any school that meets 
the conditions for supplying students with the changes to any 
agreements. Based on the Academic Year 2020-2021 Direct Loan 
information available, there were 1,026,437 Unsubsidized Direct Loan 
recipients at 1,587 for-profit institutions. Assuming 66 percent of 
these students will continue to be enrolled at the time these 
regulations become effective, about 677,448 students will be required 
to receive the agreements or notices required in Sec.  685.300(e) or 
(f). We anticipate that it will take 1,587 for-profit institutions .17 
hours (10 minutes) per student to develop these agreements or notices, 
research who is required to receive them, and forward the information 
accordingly for 115,166 burden hours (677,448 students x .17 hours) 
under OMB Control Number 1845-0021.
    Requirements: Under the proposed rules at Sec.  685.300(g) and (h), 
institutions would be required to submit certain arbitral records and 
judicial records connected with any borrower defense claim filed 
against the school to the Secretary by certain deadlines.
    Burden Calculation: The Department believes that such a request 
will require burden on any school that meets the conditions for 
supplying the records to the Secretary. We continue to estimate that 5 
percent of 1,587 for-profit institutions or an estimated 79 for-profit 
institutions would be required to submit documentation to the Secretary 
to comply with the proposed regulations. We anticipate that each of the 
79 schools will have an average of four filings thus there will be an 
average of four submissions for each filing. Because these are copies 
of documents required to be submitted to other parties, we anticipate 5 
burden hours to produce the copies and submit to the Secretary for an 
increase in burden of 6,320 hours (79 institutions x 4 filings x 4 
submissions/filing x 5 hours) under OMB Control Number 1845-0021.

           William D. Ford Federal Direct Loan Program (DL) Regulations--OMB Control Number 1845-0021
----------------------------------------------------------------------------------------------------------------
                                                                                                   Cost  $46.59
                 Affected entity                    Respondent       Responses     Burden hours    institutional
----------------------------------------------------------------------------------------------------------------
For-Profit......................................           1,587         678,712         121,486      $5,660,033
                                                 ---------------------------------------------------------------
    Total.......................................           1,587         678,712         121,486      $5,660,033
----------------------------------------------------------------------------------------------------------------

Section 685.304 Counseling Borrowers

    Requirements: The Department proposes to remove Sec.  
685.304(a)(6)(xiii) through (xv). The proposed regulations at Sec.  
685.300 would state the conditions under which disclosures would be 
required and provide deadlines for such disclosures.
    Burden Calculation: With the removal of the regulatory language in 
Sec.  685.304(a)(6)(xiii) through (xv) the Department would remove the 
associated burden of 30,225 hours under OMB Control Number 1845-0021.

           William D. Ford Federal Direct Loan Program (DL) Regulations--OMB Control Number 1845-0021
----------------------------------------------------------------------------------------------------------------
                                                                                                   Cost  $44.41
                                                                                                        per
                                                                                                   institution;
                 Affected entity                    Respondent       Responses     Burden hours     $16.30 per
                                                                                                    individual
                                                                                                     from 2019
                                                                                                    final rule
----------------------------------------------------------------------------------------------------------------
Individual......................................        -342,407        -342,407         -27,393       -$446,506
For-Profit......................................            -944            -944          -2,832       -$125,769
                                                 ---------------------------------------------------------------
    Total.......................................        -343,351        -343,351         -30,225       -$572,275
----------------------------------------------------------------------------------------------------------------

Section 685.402 Group Process for Borrower Defense

    Requirements: In these proposed Sec.  685.402(c), the Department 
may initiate a group process upon request from a state requestor, on 
the condition that the state requestor submit an application and other 
required information to the Department to adjudicate the claim.
    Burden Calculation: A new form to capture the requirements of Sec.  
685.402(c) will be created 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 685.405 Institutional response

    Requirements: In proposed Sec.  685.405, the Department proposes to 
continue to provide for an institutional response process to borrower 
defense claims. Under the proposed regulations in Sec.  685.405(a), the 
Department official would notify the institution of the borrower 
defense claim and its basis for any group or individual borrower 
defense claim. Under the proposed regulations in Sec.  685.405(b) the 
institution would have 90 days to respond. Under the proposed 
regulations in Sec.  685.405(c), with its response, the institution 
would be required to execute an affidavit confirming that the 
information contained in the response is true and correct under penalty 
of perjury on a form approved by the Secretary.
    Burden Calculation: A new form to capture the requirements of Sec.  
685.405(c) will be created and made available for comment through a 
full public clearance package before being made available for use by 
the effective date of the regulations.

[[Page 41973]]

Section 685.407 Reconsideration

    Requirements: Proposed Sec.  685.407 sets forth the circumstances 
under which a borrower or a State requestor may seek reconsideration of 
a Department official's denial of their borrower defense claim. 
Proposed Sec.  685.407(a)(4) identifies the reconsideration process, 
which includes an application approved by the Secretary.
    Burden Calculation: A new form to capture the requirements of Sec.  
685.407(a) will be created and made available for comment through a 
full public clearance package before being made available for use by 
the effective date of the regulations.
    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 (BLS) data. For 
individuals we have used the median hourly wage for all occupations, 
$22.00 per hour according to BLS. https://www.bls.gov/oes/current/oes_nat.htm#00-0000. For institutions, lenders, and guaranty agencies 
we have used the median hourly wage for Education Administrators, 
Postsecondary, $46.59 per hour according to BLS. https://www.bls.gov/oes/current/oes119033.htm.

                                            Collection of Information
----------------------------------------------------------------------------------------------------------------
                                                                                           Estimated cost $46.59
                                                                  OMB control number and   institutional $22.00
         Regulatory section             Information collection       estimated burden        individual unless
                                                                                              otherwise noted
----------------------------------------------------------------------------------------------------------------
Sec.   668.41......................  The Department proposes to   1845-0004; -4,720 hrs.  Cost from the 2019
                                      remove the requirements in                           Final Rule ($44.41
                                      current Sec.   668.41(h).                            per institution) -
                                                                                           $209,615.
Sec.   668.74......................  Proposed section             1845-0022 +48 hrs.....  +$2,235
                                      668.74(g)(2) contains a
                                      provision that allows the
                                      Department to verify that
                                      an institution correctly
                                      calculated its job
                                      placement rate by
                                      requiring an institution
                                      furnish to the Secretary,
                                      upon request,
                                      documentation and other
                                      data that was used to
                                      calculate the
                                      institution's employment
                                      rate calculations.
Sec.  Sec.   674.33(g), 682.402(d),  Proposed Sec.  Sec.          1845-0058 Burden will   Costs will be cleared
 685.214.                             674.33(g)(4),                be cleared at a later   through separate
                                      682.402(d)(3) and            date through a          information
                                      685.214(d)(1) would          separate information    collection for the
                                      provide that the borrower    collection for the      form.
                                      must submit a completed      form.
                                      closed school discharge
                                      application to the
                                      Secretary and that the
                                      factual assertions in the
                                      application must be true
                                      and made by the borrower
                                      under penalty of perjury.
Sec.  Sec.   674.61, 682.402(d),     Proposed changes expand the  1845-0065 Burden will   Costs will be cleared
 685.213.                             type of medical              be cleared at a later   through separate
                                      professional who can         date through a          information
                                      certify the Total            separate information    collection for the
                                      Permanent Disability (TPD)   collection for the      form.
                                      application. The proposed    form.
                                      changes also include an
                                      expansion of the
                                      acceptable Social Security
                                      Administration
                                      documentation for filing a
                                      TPD application. The
                                      proposed regulations also
                                      eliminate the income
                                      monitoring period for all
                                      TPD applicants except
                                      those who receive a new
                                      TEACH Grant or new title
                                      IV loan within 3 years of
                                      the TPD discharge.
Sec.  Sec.   682.402(e), 685.215(c)  These proposed regulations   1845-0058 Burden will   Costs will be cleared
 and 685.215(d).                      streamline the FFEL and      be cleared at a later   through separate
                                      Direct Loan false            date through a          information
                                      certification regulations    separate information    collection for the
                                      to provide one set of        collection for the      form.
                                      regulatory standards that    form.
                                      would cover all false
                                      certification discharge
                                      claims. Sections
                                      682.402(e) and
                                      685.215(c)(5) adds
                                      qualification for a false
                                      certification discharge if
                                      the school certified the
                                      borrower's eligibility for
                                      a FFEL or Direct Loan as a
                                      result of the crime of
                                      identity theft.
                                      Additionally,
                                      685.215(c)(10) provides
                                      for a new application to
                                      allow a state Attorney
                                      General or nonprofit legal
                                      services representative to
                                      submit a request to the
                                      Secretary for a group
                                      discharge.

[[Page 41974]]

 
Sec.   682.402(e)(6)...............  Under proposed Sec.          1845-0020 +102 hrs....  +$4,137.43
                                      682.402(e)(6)(i) if a
                                      holder of a borrower's
                                      FFEL loan determines that
                                      a borrower may be eligible
                                      for a false certification
                                      discharge the holder
                                      provides the borrower with
                                      the appropriate
                                      application and
                                      explanation of the process
                                      for obtaining a discharge.
                                      Under proposed Sec.
                                      682.402(e)(6)(iii) if a
                                      FFEL borrower submits an
                                      application for discharge
                                      that a FFEL program loan
                                      holder determines is
                                      incomplete, the loan
                                      holder would notify the
                                      borrower of that
                                      determination and allow
                                      the borrower 30 days to
                                      amend the application and
                                      provide supplemental
                                      information. Proposed Sec.
                                        682.402(e)(6)(vii) would
                                      require a guaranty agency
                                      to issue a decision that
                                      explains the reasons for
                                      any adverse determination
                                      on a false certification
                                      discharge application,
                                      describes the evidence on
                                      which the decision was
                                      made, and provides the
                                      borrower, upon request,
                                      copies of the evidence.
                                      The guaranty agency would
                                      consider any response or
                                      additional information
                                      from the borrower and
                                      notify the borrower as to
                                      whether the determination
                                      is changed. Proposed Sec.
                                       682.402(e)(6)(ix) would
                                      provide the borrower with
                                      the option to request that
                                      the Secretary review the
                                      guaranty agency's decision.
Sec.   682.414(b)..................  In Sec.   682.414(b)(4),     1845-0020 +15,500.....  +$722,145
                                      the Department proposes to
                                      require FFEL Program
                                      lenders to report detailed
                                      information related to a
                                      borrower's deferments,
                                      forbearances, repayment
                                      plans, delinquency, and
                                      contact information on any
                                      FFEL loan to the
                                      Department by an
                                      established deadline.
Sec.   685.219.....................  The Department proposes      1845-0110 Burden will   Costs will be cleared
                                      new, modified, and           be cleared at a later   through separate
                                      restructured definitions     date through a          information
                                      for the Public Service       separate information    collection for the
                                      Loan Forgiveness Program     collection for the      form.
                                      in Sec.   685.219(b) which   form.
                                      would expand the use of
                                      the form.
Sec.   685.219(g)..................  The Department proposes      1845-0164 This process  Costs will be cleared
                                      regulations to create a      is currently in         through separate
                                      reconsideration process      public review under     information
                                      for borrowers whose          docket number ED-2022-  collection for the
                                      applications for Public      SCC-0039..              form.
                                      Service Loan Forgiveness
                                      were denied or who
                                      disagree with the
                                      Department's determination
                                      of the number of
                                      qualifying payments or
                                      months of qualifying
                                      employment that have been
                                      earned by the borrower
                                      which formalizes the
                                      current non-regulatory
                                      process.
Sec.   685.300.....................  The Department proposes to   1845-0021 +121,486....  +$5,660,033
                                      reinstate prior
                                      regulations that barred
                                      institutions, as a
                                      condition of participating
                                      in the Direct Loan
                                      program, from requiring
                                      borrowers to accept pre-
                                      dispute arbitration
                                      agreements and class
                                      action waivers. Also,
                                      institutions would be
                                      required to submit certain
                                      arbitral records and
                                      judicial records connected
                                      with any borrower defense
                                      claim filed against the
                                      school to the Secretary by
                                      certain deadlines.
Sec.   685.304.....................  The Department proposes to   1845-0021 -27,393       Costs from 2019 Final
                                      removeSec.                   individual hrs.; -      Rule ($44.41 per
                                      685.304(a)(6)(xiii)          2,832 institutional     institution; $16.30
                                      through (xv). The proposed   hrs. = -30,225 hrs.     per individual) -
                                      regulations at Sec.                                  $446,506 individual
                                      685.300 would state the                              costs; -$125,769
                                      conditions under which                               institutional costs =
                                      disclosures would be                                 -$572,275.
                                      required and provide
                                      deadlines for such
                                      disclosures..
Sec.   685.402.....................  In these proposed Sec.       1845-NEW Burden will    Costs will be cleared
                                      685.402(c), the Department   be cleared at a later   through separate
                                      may initiate a group         date through a          information
                                      process upon request from    separate information    collection for the
                                      a State requestor, on the    collection for the      form.
                                      condition that the State     form.
                                      requestor submit an
                                      application and other
                                      required information to
                                      the Department to
                                      adjudicate the claim.

[[Page 41975]]

 
Sec.   685.405.....................  Under the proposed           1845-NEW Burden will    Costs will be cleared
                                      regulations in Sec.          be cleared at a later   through separate
                                      685.405(a), the Department   date through a          information
                                      official would notify the    separate information    collection for the
                                      institution of the           collection for the      form.
                                      borrower defense claim and   form.
                                      its basis for any group or
                                      individual borrower
                                      defense claim. Under the
                                      proposed regulations in
                                      Sec.   685.405(b) the
                                      institution would have 90
                                      days to respond. Under the
                                      proposed regulations in
                                      Sec.   685.405(c), with
                                      its response, the
                                      institution would be
                                      required to execute an
                                      affidavit confirming that
                                      the information contained
                                      in the response is true
                                      and correct under penalty
                                      of perjury on a form
                                      approved by the Secretary.
Sec.   685.407.....................  Proposed Sec.   685.407      1845-NEW Burden will    Costs will be cleared
                                      sets forth the               be cleared at a later   through separate
                                      circumstances under which    date through a          information
                                      a borrower or a State -      separate information    collection for the
                                      requestor may seek           collection for the      form.
                                      reconsideration of a         form..
                                      Department official's
                                      denial of their borrower
                                      defense claim. Proposed
                                      Sec.   685.407(a)(4)
                                      identifies the
                                      reconsideration process,
                                      which includes an
                                      application approved by
                                      the Secretary.
----------------------------------------------------------------------------------------------------------------

    The total burden hours and change in burden hours associated with 
each OMB Control number affected by the proposed regulations follows:

------------------------------------------------------------------------
                                                             Proposed
               Control No.                Total proposed     change in
                                           burden hours    burden hours
------------------------------------------------------------------------
1845-0004...............................          24,016          -4,720
1845-0020...............................       8,265,122         +15,602
1845-0021...............................         831,007         +91,261
1845-0022...............................       2,288,248             +48
                                         -------------------------------
    Total...............................      11,413,065        +102,191
------------------------------------------------------------------------

    We have prepared Information Collection Requests for these 
information collection requirements. If you wish to review and comment 
on the Information Collection Requests, please follow the instructions 
in the ADDRESSES section of this notification. Note: The Office of 
Information and Regulatory Affairs in OMB and the Department review all 
comments posted at www.regulations.gov.
    In preparing your comments, you may want to review the Information 
Collection Requests, including the supporting materials, in 
www.regulations.gov by using the Docket ID number specified in this 
notification. These proposed collections are identified as proposed 
collections 1845-0004, 1845-0020, 1845-0021, 1845-0022.
    We consider your comments on these proposed collections of 
information in--
    <bullet> Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
    <bullet> Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
assumptions;
    <bullet> Enhancing the quality, usefulness, and clarity of the 
information we collect; and
    <bullet> Minimizing the burden on those who must respond.
    This includes exploring the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques. 
Between 30 and 60 days after publication of this document in the 
Federal Register, OMB is required to make a decision concerning the 
collections of information contained in these proposed regulations. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives your comments on these Information 
Collection Requests by [MONTH DAY, YEAR]. 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.
Intergovernmental Review
    This program is subject to Executive Order 12372 and the 
regulations in 34 CFR part 79. One of the objectives of the Executive 
Order is to foster an intergovernmental partnership and a strengthened 
federalism. The Executive order relies on processes developed by State 
and local governments for coordination and review of proposed Federal 
financial assistance.
    This document provides early notification of our specific plans and 
actions for this program.
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: On request to the program contact person(s) 
listed under FOR FURTHER INFORMATION CONTACT, individuals with 
disabilities can obtain

[[Page 41976]]

this document in an accessible format. The Department will provide the 
requestor with an accessible format that may include Rich Text Format 
(RTF) or text format (txt), a thumb drive, an MP3 file, braille, large 
print, audiotape, or compact disc, or other accessible format.
    Electronic Access to This Document: The official version of this 
document is the document published in the Federal Register. You may 
access the official edition of the Federal Register and the Code of 
Federal Regulations at www.govinfo.gov. 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 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.
    (Assistance Listing Numbers: 84.032 Federal Family Education Loan 
Program; 84.038 Federal Perkins Loan Program; 84.268 William D. Ford 
Federal Direct Loan Program)

List of Subjects

34 CFR Part 600

    Colleges and universities, Foreign relations, Grant programs--
education, Loan programs--education, Reporting and recordkeeping 
requirements, Selective Service System, Student aid, Vocational 
education.

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 requirements, 
Student aid.

34 CFR Part 682

    Administrative practice and procedure, Colleges and universities, 
Loan programs--education, Reporting and recordkeeping requirements, 
Student aid, Vocational education.

34 CFR Part 685

    Administrative practice and procedure, Colleges and universities, 
Education, Loan programs--education, Reporting and recordkeeping 
requirements, Student aid, Vocational education.

Miguel A. Cardona,
Secretary of Education.

    For the reasons discussed in the preamble, the Secretary proposes 
to amend parts 600, 668, 674, 682, and 685 of title 34 of the Code of 
Federal Regulations as follows:

PART 600--INSTITUTIONAL ELIGIBILITY UNDER THE HIGHER EDUCATION ACT 
OF 1965, AS AMENDED

0
1. The authority citation for part 600 continues to read as follows:

    Authority:  20 U.S.C. 1001, 1002, 1003, 1088, 1091, 1094, 1099b, 
and 1099c, unless otherwise noted.

0
2. Section 600.41 is amended by revising paragraphs (a) introductory 
text, (a)(1) introductory text, and (a)(1)(i) to read as follows:


Sec.  600.41  Termination and emergency action proceedings.

    (a) If the Secretary believes that a previously designated eligible 
institution as a whole, or at one or more of its locations, does not 
satisfy the statutory or regulatory requirements that define that 
institution as an eligible institution, the Secretary may--
    (1) Terminate the institution's eligibility designation in whole or 
as to a particular location--
    (i) Under the procedural provisions applicable to terminations 
contained in 34 CFR 668.81, 668.83, 668.86, 668.88, 668.89, 
668.90(a)(1) and (4) and (c) through (f), and 668.91; or
* * * * *

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

0
3. 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, and 1231a, unless otherwise noted.
    Section 668.14 also issued under 20 U.S.C. 1085, 1088, 1091, 1092, 
1094, 1099a-3, 1099c, and 1141.
    Section 668.41 also issued under 20 U.S.C. 1092, 1094, 1099c.
    Section 668.91 also issued under 20 U.S.C. 1082, 1094.
    Section 668.171 also issued under 20 U.S.C. 1094 and 1099c and 
section 4 of 92 Stat. 1101-1109.
    Section 668.172 also issued under 20 U.S.C. 1094 and 1099c and 
section 4 of 92 Stat. 1101-1109.
    Section 668.175 also issued under 20 U.S.C. 1094 and 1099c.

0
4. Section 668.41 is amended by revising paragraph (c)(2) introductory 
text and removing paragraph (h).
    The revision reads as follows:


Sec.  668.41  Reporting and disclosure of information.

* * * * *
    (c) * * *
    (2) An institution that discloses information to enrolled students 
as required under paragraph (d), (e), or (g) of this section by posting 
the information on an internet website or an Intranet website must 
include in the notice described in paragraph (c)(1) of this section--
* * * * *
0
5. Subpart F is revised to read as follows:
Subpart F--Misrepresentation
Sec.
668.71 Scope and special definitions.
668.72 Nature of educational program or institution.
668.73 Nature of financial charges or financial assistance.
668.74 Employability of graduates.
668.75 Omission of fact.
668.79 Severability.

Subpart F--Misrepresentation


Sec.  668.71  Scope and special definitions.

    (a) If the Secretary determines that an eligible institution has 
engaged in substantial misrepresentation, the Secretary may--
    (1) Revoke the eligible institution's program participation 
agreement, if the institution is provisionally certified under Sec.  
668.13(c);
    (2) Impose limitations on the institution's participation in the 
title IV, HEA programs, if the institution is provisionally certified 
under Sec.  668.13(c);
    (3) Deny participation applications made on behalf of the 
institution; or
    (4) Initiate a proceeding against the eligible institution under 
subpart G of this part.
    (b) This subpart establishes the types of activities that 
constitute substantial misrepresentation by an eligible institution. An 
eligible institution is deemed to have engaged in substantial 
misrepresentation when the institution itself, one of its 
representatives, or any ineligible institution, organization, or person 
with whom the eligible institution has an agreement to provide 
educational programs, marketing, advertising, recruiting or admissions 
services, makes a substantial misrepresentation about the nature of its 
educational program, its financial charges, or the employability of its 
graduates. Substantial

[[Page 41977]]

misrepresentations are prohibited in all forms, including those made in 
any advertising, promotional materials, or in the marketing or sale of 
courses or programs of instruction offered by the institution.
    (c) The following definitions apply to this subpart:
    Misrepresentation. Any false, erroneous or misleading statement an 
eligible institution, one of its representatives, or any ineligible 
institution, organization, or person with whom the eligible institution 
has an agreement to provide educational programs, or to provide 
marketing, advertising, recruiting or admissions services makes 
directly or indirectly to a student, prospective student or any member 
of the public, or to an accrediting agency, to a State agency, or to 
the Secretary. A misleading statement includes any statement that has 
the likelihood or tendency to mislead under the circumstances. A 
misleading statement may be included in the institution's marketing 
materials, website, or any other communication to students or 
prospective students. A statement is any communication made in writing, 
visually, orally, or through other means. Misrepresentation includes 
any statement that omits information in such a way as to make the 
statement false, erroneous, or misleading. Misrepresentation includes 
the dissemination of a student endorsement or testimonial that a 
student gives either under duress or because the institution required 
such an endorsement or testimonial to participate in a program. 
Misrepresentation also includes the omission of facts as defined under 
Sec.  668.75.
    Prospective student. Any individual who has contacted an eligible 
institution for the purpose of requesting information about enrolling 
at the institution or who has been contacted directly by the 
institution or indirectly through advertising about enrolling at the 
institution.
    Substantial misrepresentation. Any misrepresentation, including 
omission of facts as defined under Sec.  668.75, on which the person to 
whom it was made could reasonably be expected to rely, or has 
reasonably relied, to that person's detriment.


Sec.  668.72  Nature of educational program or institution.

    Misrepresentation concerning the nature of an eligible 
institution's educational program includes, but is not limited to, 
false, erroneous or misleading statements concerning--
    (a) The particular type(s), specific source(s), nature and extent 
of its institutional, programmatic, or specialized accreditation;
    (b)(1) The general or specific transferability of course credits 
earned at the institution to other institution(s); or
    (2) Acceptance of credits earned through prior work or at another 
institution toward the educational program at the institution.
    (c) Whether successful completion of a course of instruction 
qualifies a student--
    (1) For acceptance into a labor union or similar organization; or
    (2) To receive, to apply to take, or to take the examination 
required to receive a local, State, or Federal license, or a 
nongovernmental certification required as a precondition for 
employment, or to perform certain functions in the States in which the 
educational program is offered, or to meet additional conditions that 
the institution knows or reasonably should know are generally needed to 
secure employment in a recognized occupation for which the program is 
represented to prepare students;
    (d) The requirements for successfully completing the course of 
study or program and the circumstances that would constitute grounds 
for terminating the student's enrollment;
    (e) Whether its courses are recommended or have been the subject of 
unsolicited testimonials or endorsements by:
    (1) Vocational counselors, high schools, colleges, educational 
organizations, employment agencies, members of a particular industry, 
students, former students, or others; or
    (2) Governmental officials for governmental employment;
    (f) Its size, location, facilities, equipment, or institutionally-
provided equipment, books, or supplies;
    (g) The availability, frequency, and appropriateness of its courses 
and programs in relation to the employment objectives that it states 
its programs are designed to meet;
    (h) The number, availability, and qualifications, including the 
training and experience, of its faculty, instructors, and other 
personnel;
    (i) The nature and availability of any tutorial or specialized 
instruction, guidance and counseling, or other supplementary assistance 
it will provide to its students before, during or after the completion 
of a course;
    (j) The nature or extent of any prerequisites established for 
enrollment in a course;
    (k) The subject matter, content of the course of study, or any 
other fact related to the degree, diploma, certificate of completion, 
or any similar document that the student is to be, or is, awarded upon 
completion of the course of study;
    (l) Whether the academic, professional, or occupational degree that 
the institution will confer upon completion of the course of study has 
been authorized by the appropriate State educational agency;
    (m) Actual institutional selectivity rates, rankings, or student 
admissions profiles or requirements, if they are materially different 
from those included in the institution's marketing materials, website, 
or other communications made to the student or from those provided by 
the institution to national ranking companies, accrediting agencies, 
the Secretary, or others;
    (n) The classification of the institution (nonprofit, public or 
proprietary) for purposes of its participation in title IV, HEA 
programs, if that is different from the classification determined by 
the Secretary;
    (o) Specialized, programmatic, or institutional certifications, 
accreditation, or approvals that were not actually obtained, or that 
the institution fails to remove from marketing materials, websites, or 
other communications to students within a reasonable period of time 
after such certifications or approvals are revoked or withdrawn;
    (p) Assistance that will be provided in securing required 
externships or the existence of contracts with specific externship 
sites;
    (q) Assistance that will be provided to obtain a high school 
diploma or General Educational Development Certificate (GED);
    (r) The pace of completing the program or the time it would take to 
complete the program contrary to the stated length of the educational 
program; or
    (s) Any matters required to be disclosed to prospective students 
under Sec. Sec.  668.42, 668.43, and 668.45.


Sec.  668.73  Nature of financial charges or financial assistance.

    Misrepresentation concerning the nature of an eligible 
institution's financial charges, or the financial assistance provided 
includes, but is not limited to, false, erroneous, or misleading 
statements concerning--
    (a) Offers of scholarships to pay all or part of a course charge;
    (b) Whether a particular charge is the customary charge at the 
institution for a course;
    (c) The cost of the program and the institution's refund policy if 
the student does not complete the program;

[[Page 41978]]

    (d) 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, including part-time 
employment, housing, and transportation assistance;
    (e) A student's responsibility to repay any loans provided, 
regardless of whether the student is successful in completing the 
program and obtaining employment;
    (f) The student's right to reject any particular type of financial 
aid or other assistance, or whether the student must apply for a 
particular type of financial aid, such as financing offered by the 
institution; or
    (g) The amount, method, or timing of payment of tuition and fees 
that the student would be charged for the program.


Sec.  668.74  Employability of graduates.

    Misrepresentation regarding the employability of an eligible 
institution's graduates includes, but is not limited to, false, 
erroneous, or misleading statements concerning--
    (a) The institution's relationship with any organization, 
employment agency, or other agency providing authorized training 
leading directly to employment;
    (b) The institution's intentions to maintain a placement service 
for graduates or to otherwise assist its graduates to obtain 
employment, including any requirements to receive such assistance;
    (c) The institution's knowledge about the current or likely future 
conditions, compensation, or employment opportunities in the industry 
or occupation for which the students are being prepared;
    (d) Whether employment is being offered by the institution 
exclusively for graduates of the institution, or that a talent hunt or 
contest is being conducted, including, but not limited to, through the 
use of phrases such as ``Men/women wanted to train for . . . ,'' ``Help 
Wanted,'' ``Employment,'' or ``Business Opportunities'';
    (e) Government job market statistics in relation to the potential 
placement of its graduates;
    (f) Actual licensure passage rates, if they are materially lower 
than those included in the institution's marketing materials, website, 
or other communications made to the student or prospective student; or
    (g)(1) Actual employment rates, if they are materially lower than 
those included in the institution's marketing materials, website, or 
other communications made to the student or prospective student, 
including but not limited to:
    (i) Rates that are calculated in a manner that is inconsistent with 
the standards or methodology set forth by the institution's accreditor 
or a State agency that regulates the institution, or in its 
institutional policy.
    (ii) Actual rates that the institution discloses are inflated by 
means such as:
    (A) Including individuals in an employment rate calculation who are 
not bona fide employees, such as individuals placed on a 1-day job 
fair, an internship, externship, or in employment subsidized by the 
institution;
    (B) Including students in the employment rate calculation who were 
employed in the field prior to graduation;
    (C) Excluding students from an employment rate calculation due to 
the difficulty of placing that student; or
    (D) Excluding non-respondents to a survey for calculating an 
employment rate.
    (2) Upon request, the institution must furnish to the Secretary 
documentation and other information used to calculate the institution's 
employment rate calculations.


Sec.  668.75  Omission of fact.

    An omission of fact includes the concealment, suppression, or 
absence of material information relating to the nature of the 
institution's educational programs, financial charges, or the 
employability of the institution's graduates. An omission of fact is a 
misrepresentation under Sec.  668.71 if a reasonable person would have 
considered the omitted information in making a decision to enroll or 
continue attendance at the institution. An omission of fact includes, 
but is not limited to, the concealment, suppression, or absence of 
material information or statement concerning--
    (a) The entity that is actually providing the educational 
instruction, or implementing the institution's recruitment, admissions, 
or enrollment process;
    (b) The availability of enrollment openings, or requirements for 
obtaining admission;
    (c) The factors that would prevent an applicant from meeting the 
legal or other requirements to be employed in the field for which the 
training is provided, for reasons such as prior criminal record or 
preexisting medical conditions;
    (d) The factors that would prevent an applicant from meeting the 
legal or other requirements to be employed, licensed, or certified in 
the field for which the training is provided because the academic, 
professional, or occupational degree or credential that the institution 
will confer upon completion of the course of study has not been 
authorized by the appropriate State educational or licensure agency, or 
requires specialized accreditation that the institution does not have; 
or,
    (e) The nature of the institution's educational programs, the 
institution's financial charges, or the employability of the 
institution's graduates.


Sec.  668.79  Severability.

    If any provision of this subpart or its application to any person, 
act, or practice is held invalid, the remainder of the subpart or the 
application of its provisions to any person, act, or practice shall not 
be affected thereby.
0
6. Section 668.81 is amended by revising paragraph (a)(5)(i) to read as 
follows:


Sec.  668.81  Scope and special definitions.

    (a) * * *
    (5) * * *
    (i) Borrower defense to repayment claims that are brought by the 
Department against an institution under Sec.  685.206, Sec.  685.222 or 
part 685, subpart D, of this chapter; and
* * * * *


Sec.  668.87  [Removed and Reserved]

0
7. Section 668.87 is removed and reserved.
0
8. Section 668.89 is amended by revising paragraph (b)(3)(iii) to read 
as follows:


Sec.  668.89  Hearing.

* * * * *
    (b) * * *
    (3) * * *
    (iii) For borrower defenses under Sec. Sec.  685.206(c) and (e) and 
685.222 of this chapter, the designated department official has the 
burden of persuasion in a borrower defense and recovery action; 
however, for a borrower defense claim based on a substantial 
misrepresentation under Sec.  682.222(d) of this chapter, the 
designated department official has the burden of persuasion regarding 
the substantial misrepresentation, and the institution has the burden 
of persuasion in establishing any offsetting value of the education 
under Sec.  685.222(i)(2)(i).
* * * * *


Sec.  668.91  [Amended]

0
9. Section 668.91 is amended by:
0
a. Removing paragraph (a)(2)(ii);
0
b. Redesignating paragraph (a)(2)(i) as (a)(2); and
0
c. Removing paragraph (c)(2)(x).
0
10. Section 668.100 is added to subpart G to read as follows:

[[Page 41979]]

Sec.  668.100  Severability.

    If any provision of this subpart or its application to any person, 
act, or practice is held invalid, the remainder of the subpart or the 
application of its provisions to any person, act, or practice shall not 
be affected thereby.
0
11. Subpart R is added to read as follows:
Subpart R--Aggressive and Deceptive Recruitment Tactics or Conduct
Sec.
668.500 Scope and purpose.
668.501 Aggressive and deceptive recruitment tactics or conduct.
668.509 Severability.

Subpart R--Aggressive and Deceptive Recruitment Tactics or Conduct


Sec.  668.500  Scope and purpose.

    (a) This subpart identifies the types of activities that constitute 
aggressive and deceptive recruitment tactics or conduct by an eligible 
institution. An eligible institution has engaged in aggressive and 
deceptive recruitment tactics or conduct when the institution itself, 
one of its representatives, or any ineligible institution, 
organization, or person with whom the eligible institution has an 
agreement to provide educational programs, marketing, advertising, lead 
generation, recruiting or admissions services, engages in one or more 
of the prohibited practices in Sec.  668.501. Aggressive and deceptive 
recruitment tactics or conduct are prohibited in all forms, including 
the effects of those tactics or conduct reflected in the institution's 
advertising or promotional materials, or in the marketing or sale of 
courses or programs of instruction offered by the institution.
    (b) If the Secretary determines that an eligible institution has 
engaged in aggressive and deceptive recruitment tactics or conduct, the 
Secretary may:
    (1) Revoke the eligible institution's program participation 
agreement, if the institution is provisionally certified under Sec.  
668.13(c);
    (2) Impose limitations on the institution's participation in the 
title IV, HEA programs, if the institution is provisionally certified 
under Sec.  668.13(c);
    (3) Deny participation applications made on behalf of the 
institution;
    (4) Initiate a proceeding against the eligible institution under 
subpart G of this part.


Sec.  668.501  Aggressive and deceptive recruitment tactics or conduct.

    (a) Aggressive and deceptive recruitment tactics or conduct include 
but are not limited to actions by the institution, any of its 
representatives, or any institution, organization, or person with whom 
the institution has an agreement to provide educational programs, 
marketing, recruitment, or lead generation that:
    (1) Demand or pressure the student or prospective student to make 
enrollment or loan-related decisions immediately, including on the same 
day of first contact;
    (2) Falsely claim that the student or prospective student would 
lose the opportunity to attend the institution if they did not enroll 
immediately or otherwise place an unreasonable emphasis on unfavorable 
consequences of delay;
    (3) Take advantage of a student's or prospective student's lack of 
knowledge about, or experience with, postsecondary institutions, 
postsecondary programs, or financial aid to pressure the student into 
enrollment or borrowing funds to attend the institution;
    (4) Discourage the student or prospective student from consulting 
an adviser, a family member, or other resource or individual prior to 
making enrollment or loan-related decisions;
    (5) Fail to respond to the student's or prospective student's 
requests for more information, including about the cost of the program 
and the nature of any financial aid;
    (6) Obtain the student's or prospective student's contact 
information through websites that:
    (i) Falsely appear to offer assistance to individuals seeking 
Federal, state or local benefits;
    (ii) Falsely advertise employment opportunities; or,
    (iii) Present false rankings of the institution or its programs;
    (7) Use threatening or abusive language or behavior toward the 
student or prospective student; or,
    (8) Repeatedly engage in unsolicited contact for the purpose of 
enrolling or reenrolling after the student or prospective student has 
requested not to be contacted further.
    (b) [Reserved].


Sec.  668.509  Severability.

    If any provision of this subpart or its application to any person, 
act, or practice is held invalid, the remainder of the subpart or the 
application of its provisions to any person, act, or practice shall not 
be affected thereby.

PART 674--FEDERAL PERKINS LOAN PROGRAM

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

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

0
13. Section 674.33 is amended by:
0
a. Revising paragraph (g)(1);
0
b. In paragraph (g)(2)(iv) removing the words ``credit bureaus'' and 
adding in their place the words ``consumer reporting agencies'';
0
c. Revising paragraphs (g)(3) and (4);
0
d. In paragraph (g)(6)(i) introductory text, removing the words ``In 
order to'' and adding in their place the word ``To'';
0
e. In paragraph (g)(8)(i), removing the number ``120'' and adding in 
its place the number ``180'';
0
f. Revising paragraphs (g)(8)(v) and (vii); and
0
g. Adding paragraph (g)(9).
    The revisions and addition read as follows:


Sec.  674.33  Repayment.

* * * * *
    (g) * * *
    (1) General. (i) The holder of an NDSL or a Federal Perkins Loan 
discharges the borrower's (and any endorser's) obligation to repay the 
loan if the borrower did not complete the program of study for which 
the loan was made because the school at which the borrower was enrolled 
closed.
    (ii) For the purposes of this section--
    (A) A school's closure date is the earlier of the date that the 
school ceases to provide educational instruction in most programs, as 
determined by the Secretary, or a date chosen by the Secretary that 
reflects when the school ceased to provide educational instruction for 
most of its students;
    (B) ``School'' means a school's main campus or any location or 
branch of the main campus regardless of whether the school or its 
location or branch is considered title IV eligible;
    (C) The ``holder'' means the Secretary or the school that holds the 
loan; and
    (D) ``Program'' means the credential defined by the level and 
Classification of Instructional Program code in which a student is 
enrolled, except that the Secretary may define a borrower's program as 
multiple levels or Classification of Instructional Program codes if--
    (1) The enrollment occurred at the same school in closely proximate 
periods;
    (2) The school granted a credential in a program while the student 
was enrolled in a different program; or
    (3) The programs must be taken in a set order or were presented as 
necessary for students to complete in order to succeed in the relevant 
field of employment.
* * * * *

[[Page 41980]]

    (3) Discharge without an application. (i) The Secretary may 
discharge the borrower's obligation to repay an NDSL or Federal Perkins 
Loan without an application from the borrower if the--
    (A) Borrower qualified for and received a discharge on a loan 
pursuant to Sec.  682.402(d) (Federal Family Education Loan Program) or 
Sec.  685.214 (Federal Direct Loan Program) of this chapter, and was 
unable to receive a discharge on an NDSL or Federal Perkins Loan 
because the Secretary lacked the statutory authority to discharge the 
loan; or
    (B) Secretary determines that the borrower qualifies for a 
discharge based on information in the Secretary's possession. The 
Secretary discharges the loan without an application from the borrower 
if the borrower did not complete an institutional teach-out plan 
performed by the school or a teach-out agreement with another school, 
approved by the school's accrediting agency and, if applicable, the 
school's State authorizing agency.
    (ii) If the borrower accepts but does not complete an institutional 
teach-out plan performed by the school or a teach-out agreement at 
another school approved by the school's accrediting agency and, if 
applicable, the school's State authorizing agency, then the Secretary 
discharges the loan within 1 year of the borrower's last date of 
attendance in the teach-out program.
    (4) Borrower qualification for discharge. Except as provided in 
paragraph (g)(3) of this section, to qualify for discharge of an NDSL 
or Federal Perkins Loan, a borrower must submit to the holder of the 
loan a completed closed school discharge application on a form approved 
by the Secretary, and the factual assertions in the application must be 
true and must be 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) State that the borrower--
    (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 such as those described in 
paragraph (g)(9) of this section justify an extension; and
    (C) On or after July 1, 2023, did not complete an institutional 
teach-out plan performed by the school or a teach-out agreement at 
another school, approved by the school's accrediting agency and, if the 
applicable, the school's State authorizing agency.
    (ii) State 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 credited to the borrower's 
loan obligation; and
    (iii) State that the borrower--
    (A) Agrees to provide to the holder of the loan upon request other 
documentation reasonably available to the borrower that demonstrates 
that the borrower meets the qualifications for discharge under this 
section; and
    (B) Agrees to cooperate with the Secretary in enforcement actions 
in accordance with paragraph (g)(6) of this section and to transfer any 
right to recovery against a third party to the Secretary in accordance 
with paragraph (g)(7) of this section.
* * * * *
    (v) If the borrower fails to submit the completed application 
described in paragraph (g)(4) of this section within 90 days of the 
holder of the loan's mailing the discharge application, the holder of 
the loan resumes collection and grants forbearance of principal and 
interest for the period during which collection activity was suspended.
* * * * *
    (vii) If the holder of the loan determines that a borrower who 
requests a discharge meets the qualifications for a discharge, the 
holder of the loan notifies the borrower in writing of that 
determination and the reasons for the determination.
* * * * *
    (9) Exceptional circumstances. For purposes of this section, 
exceptional circumstances include, but are not limited to--
    (i) The revocation or withdrawal by an accrediting agency of the 
school's institutional accreditation;
    (ii) The school is or was placed on probation or issued a show-
cause order, or placed on an equivalent accreditation status, by its 
accrediting agency for failing to meet one or more of the agency's 
standards;
    (iii) The revocation or withdrawal by the State authorization or 
licensing authority to operate or to award academic credentials in the 
State;
    (iv) The termination by the Department of the school's 
participation in a title IV, HEA program;
    (v) A finding by a State or Federal government agency that the 
school violated State or Federal law related to education or services 
to students;
    (vi) A State or Federal court judgment that a School violated State 
or Federal law related to education or services to students;
    (vii) The teach-out of the student's educational program exceeds 
the 180-day look back period for a closed school discharge;
    (viii) The school responsible for the teach-out of the student's 
educational program fails to perform the material terms of the teach-
out plan or agreement, such that the student does not have a reasonable 
opportunity to complete his or her program of study;
    (ix) The school discontinued a significant share of its academic 
programs;
    (x) The school permanently closed all or most of its in-person 
locations while maintaining online programs;
    (xi) The Department placed the school on the heightened cash 
monitoring payment method as defined in Sec.  668.162(d)(2).
0
14. Section 674.61 is amended by:
0
a. Revising paragraphs (b)(2) through (6);
0
b. Removing paragraph (b)(7);
0
c. Redesignating paragraph (b)(8) as paragraph (b)(7);
0
d. Revising newly redesignated paragraph (b)(7); and
0
e. Revising paragraphs (d) and (e).
    The revisions read as follows:


Sec.  674.61  Discharge for death or disability.

* * * * *
    (b) * * *
    (2) Discharge application process for borrowers who have a total 
and permanent disability as defined in Sec.  674.51(aa)(1). (i) If the 
borrower notifies the institution that the borrower claims to be 
totally and permanently disabled as defined in Sec.  674.51(aa)(1), the 
institution must direct the borrower to notify the Secretary of the 
borrower's intent to submit an application for total and permanent 
disability discharge and provide the borrower with the information 
needed for the borrower to notify the Secretary.
    (ii) If the borrower notifies the Secretary of the borrower's 
intent to apply for a total and permanent disability discharge, the 
Secretary--
    (A) Provides the borrower with information needed for the borrower 
to apply for a total and permanent disability discharge;
    (B) Identifies all title IV loans owed by the borrower and notifies 
the lenders of the borrower's intent to apply for a total and permanent 
disability discharge;

[[Page 41981]]

    (C) Directs the lenders to suspend efforts to collect from the 
borrower for a period not to exceed 120 days; and
    (D) Informs the borrower that the suspension of collection activity 
described in paragraph (b)(2)(ii)(C) of this section will end after 120 
days and the collection will resume on the loans if the borrower does 
not submit a total and permanent disability discharge application to 
the Secretary within that time.
    (iii) If the borrower fails to submit an application for a total 
and permanent disability discharge to the Secretary within 120 days, 
collection resumes on the borrower's title IV loans.
    (iv) The borrower must submit to the Secretary an application for 
total and permanent disability discharge on a form approved by the 
Secretary. The application must contain--
    (A) A certification by a physician, who is a doctor of medicine or 
osteopathy legally authorized to practice in a State, that the borrower 
is totally and permanently disabled as defined in Sec.  674.51(aa)(1);
    (B) A certification by a nurse practitioner or physician's 
assistant licensed by a State or a licensed certified psychologist at 
the independent practice level, that the borrower is totally and 
permanently disabled as defined in Sec.  674.51(aa)(1);
    (C) A Social Security Administration (SSA) Benefit Planning Query 
(BPQY) or an SSA notice of award or other documentation deemed 
acceptable by the Secretary indicating that--
    (1) The borrower qualifies for Social Security Disability Insurance 
(SSDI) or Supplemental Security Income (SSI) benefits and the 
borrower's next scheduled disability review will be within 5 to 7 
years;
    (2) The borrower qualifies for SSDI or SSI benefits and the 
borrower's next scheduled disability review will be within 3 years, and 
that the borrower's eligibility for disability benefits in the 3-year 
review category has been renewed at least once;
    (3) The borrower has a disability onset date for SSDI or SSI of at 
least 5 years prior to the application for a disability discharge or 
has been receiving benefits for a least 5 years prior to the 
application for a disability discharge;
    (4) The borrower qualifies for the SSA compassionate allowance 
program; or
    (5) For borrowers currently receiving SSA retirement benefits, 
documentation that, prior to the borrower qualifying for SSA retirement 
benefits, the borrower met the requirements in paragraph (b)(2)(iv)(C) 
of this section.
    (v) The borrower must submit the application described in paragraph 
(b)(2)(iv) of this section to the Secretary within 90 days of the date 
the physician, nurse practitioner, physician's assistant or 
psychologist certifies the application, if applicable.
    (vi) After the Secretary receives the application described in 
paragraph (b)(2)(iv) of this section, the Secretary notifies the 
holders of the borrower's title IV loans that the Secretary has 
received a total and permanent disability discharge application from 
the borrower.
    (vii) If the application is incomplete, the Secretary notifies the 
borrower of the missing information and requests the missing 
information from the borrower, the borrower's representative, or the 
physician, nurse practitioner, physician's assistant or psychologist 
who provided the certification, as appropriate. The Secretary does not 
make a determination of eligibility until the application is complete.
    (viii) The lender notification described in paragraph (b)(2)(vi) of 
this section directs the borrower's loan holders to suspend collection 
activity or maintain the suspension of collection activity on the 
borrower's title IV loans.
    (ix) After the Secretary receives a disability discharge 
application, the Secretary sends a notice to the borrower that--
    (A) States that the application will be reviewed by the Secretary;
    (B) Informs the borrower that the borrower's lenders will suspend 
collection activity or maintain the suspension of collection activity 
on the borrower's title IV loans while the Secretary reviews the 
borrower's application for discharge; and
    (C) Explains the process for the Secretary's review of total and 
permanent disability discharge applications.
    (3) Secretary's review of the total and permanent disability 
discharge application. (i) If, after reviewing the borrower's completed 
application, the Secretary determines that the data described in 
paragraph (b)(2) of this section supports the conclusion that the 
borrower is totally and permanently disabled as defined in Sec.  
674.51(aa)(1), the borrower is considered totally and permanently 
disabled as of the date--
    (A) The physician, nurse practitioner, physician's assistant, or 
psychologist certified the borrower's application; or
    (B) The Secretary received the SSA data described in paragraph 
(b)(2)(iv)(C) of this section.
    (ii) If the Secretary determines that the borrower's application 
does not conclusively prove that the borrower is totally and 
permanently disabled as defined in Sec.  674.51(aa)(1), the Secretary 
may require the borrower to submit additional medical evidence. As part 
of the Secretary's review of the borrower's discharge application, the 
Secretary may require and arrange for an additional review of the 
borrower's condition by an independent physician or other medical 
professional identified by the Secretary at no expense to the borrower.
    (iii) After determining that the borrower is totally and 
permanently disabled as defined in Sec.  674.51(aa)(1), the Secretary 
notifies the borrower and the borrower's lenders that the application 
for a disability discharge has been approved. With this notification, 
the Secretary provides the date the physician, nurse practitioner, 
physician's assistant, or psychologist certified the borrower's loan 
discharge application or the date the Secretary received the SSA data 
described in paragraph (b)(2)(iv)(C) of this section and directs each 
institution holding a Defense, NDSL, or Perkins Loan made to the 
borrower to assign the loan to the Secretary.
    (iv) The institution must assign the loan to the Secretary within 
45 days of the date of the notice described in paragraph (b)(3)(iii) of 
this section.
    (v) After the loan is assigned, the Secretary discharges the 
borrower's obligation to make further payments on the loan and notifies 
the borrower and the institution that the loan has been discharged. The 
notification to the borrower explains the terms and conditions under 
which the borrower's obligation to repay the loan will be reinstated, 
as specified in paragraph (b)(6) of this section. Any payments received 
after the date the physician, nurse practitioner, physician's 
assistant, or psychologist certified the borrower's loan discharge 
application or the date the Secretary received the SSA data described 
in paragraph (b)(2)(iv)(C) of this section are returned to the person 
who made the payments on the loan in accordance with paragraph (b)(7) 
of this section.
    (vi) If the Secretary determines that the physician, nurse 
practitioner, physician's assistant, or psychologist certification or 
the SSA data described in paragraph (b)(2)(iv)(C) of this section 
provided by the borrower does not support the conclusion that the 
borrower is totally and permanently disabled as defined in Sec.  
674.51(aa)(1), the Secretary notifies the borrower and the institution 
that the application for a disability discharge has been denied. The 
notification includes--
    (A) The reason or reasons for the denial;
    (B) A statement that the loan is due and payable to the institution 
under the

[[Page 41982]]

terms of the promissory note and that the loan will return to the 
status that would have existed had the total and permanent disability 
discharge application not been received;
    (C) A statement that the institution will notify the borrower of 
the date the borrower must resume making payments on the loan;
    (D) An explanation that the borrower is not required to submit a 
new total and permanent disability discharge application if the 
borrower requests that the Secretary re-evaluate the application for 
discharge by providing, within 12 months of the date of the 
notification, additional information that supports the borrower's 
eligibility for discharge; and
    (E) An explanation that if the borrower does not request re-
evaluation of the borrower's prior discharge application within 12 
months of the date of the notification, the borrower must submit a new 
total and permanent disability discharge application to the Secretary 
if the borrower wishes the Secretary to reevaluate the borrower's 
eligibility for a total and permanent disability discharge.
    (vii) If the borrower requests reevaluation in accordance with 
paragraph (b)(3)(vi)(D) of this section or submits a new total and 
permanent disability discharge application in accordance with paragraph 
(b)(3)(vi)(E) of this section, the request must include new information 
regarding the borrower's disabling condition that was not provided to 
the Secretary in connection with the prior application at the time the 
Secretary reviewed the borrower's initial application for a total and 
permanent disability discharge.
    (4) Treatment of disbursements made during the period from the 
certification or the date the Secretary received the SSA data until the 
date of discharge. If a borrower received a title IV loan or TEACH 
Grant before the date the physician, nurse practitioner, physician's 
assistant, or psychologist certified the borrower's discharge 
application or before the date the Secretary received the SSA data 
described in paragraph (b)(2)(iv)(C) of this section and a disbursement 
of that loan or grant is made during the period from the date of the 
physician, nurse practitioner, physician's assistant, or psychologist 
certification or the date the Secretary received the SSA data described 
in paragraph (b)(2)(iv)(C) of this section until the date the Secretary 
grants a discharge under this section, the processing of the borrower's 
loan discharge application will be suspended until the borrower ensures 
that the full amount of the disbursement has been returned to the loan 
holder or to the Secretary, as applicable.
    (5) Receipt of new title IV loans or TEACH Grants after the 
certification or after the date the Secretary received the SSA data. If 
a borrower receives a disbursement of a new title IV loan or receives a 
new TEACH Grant made on or after the date the physician, nurse 
practitioner, physician's assistant, or psychologist certified the 
borrower's discharge application or on or after the date the Secretary 
received the SSA data described in paragraph (b)(2)(iv)(C) of this 
section and before the date the Secretary grants a discharge under this 
section, the Secretary denies the borrower's discharge request and 
collection resumes on the borrower's loans.
    (6) Conditions for reinstatement of a loan after a total and 
permanent disability discharge. (i) The Secretary reinstates the 
borrower's obligation to repay a loan that was discharged in accordance 
with paragraph (b)(3)(v) of this section if, within 3 years after the 
date the Secretary granted the discharge, the borrower receives a new 
TEACH Grant or new loan under the Perkins or Direct Loan programs, 
except for a Direct Consolidation Loan that includes loans that were 
not discharged.
    (ii) If the borrower's obligation to repay a loan is reinstated, 
the Secretary--
    (A) Notifies the borrower that the borrower's obligation to repay 
the loan has been reinstated;
    (B) Returns the loan to the status that would have existed had the 
total and permanent disability discharge application not been received; 
and
    (C) Does not require the borrower to pay interest on the loan for 
the period from the date the loan was discharged until the date the 
borrower's obligation to repay the loan was reinstated.
    (iii) The Secretary's notification under paragraph (b)(6)(ii)(A) of 
this section will include--
    (A) The reason or reasons for the reinstatement;
    (B) An explanation that the first payment due date on the loan 
following reinstatement will be no earlier than 90 days after the date 
of the notification of reinstatement; and
    (C) Information on how the borrower may contact the Secretary if 
the borrower has questions about the reinstatement or believes that the 
obligation to repay the loan was reinstated based on incorrect 
information.
    (7) Payments received after the certification of total and 
permanent disability. (i) If the institution receives any payments from 
or on behalf of the borrower on or attributable to a loan that has been 
assigned to the Secretary based on the Secretary's determination of 
eligibility for a total and permanent disability discharge, the 
institution must return the payments to the sender.
    (ii) At the same time that the institution returns the payments, it 
must notify the borrower that there is no obligation to make payments 
on the loan after it has been discharged due to a total and permanent 
disability unless the loan is reinstated in accordance with Sec.  
674.61(b)(6), or the Secretary directs the borrower otherwise.
    (iii) When the Secretary discharges the loan, the Secretary returns 
to the sender any payments received on the loan after the date the 
borrower became totally and permanently disabled.
* * * * *
    (d) Discharge without an application. (1) The Secretary will 
discharge a loan under this section without an application or any 
additional documentation from the borrower if the Secretary--
    (i) Obtains data from the Department of Veterans Affairs (VA) 
showing that the borrower is unemployable due to a service-connected 
disability; or
    (ii) Obtains data from the Social Security Administration (SSA) 
described in paragraph (b)(2)(iv)(C) of this section.
    (e) Notifications and return of payments. (1) After determining 
that a borrower qualifies for a total and permanent disability 
discharge under paragraph (d) of this section, the Secretary sends a 
notification to the borrower informing the borrower that the Secretary 
will discharge the borrower's title IV loans unless the borrower 
notifies the Secretary, by a date specified in the Secretary's 
notification, that the borrower does not wish to receive the loan 
discharge.
    (2) Unless the borrower notifies the Secretary that the borrower 
does not wish to receive the discharge, the Secretary notifies the 
borrower's lenders that the borrower has been approved for a disability 
discharge.
    (3) In the case of a discharge based on a disability determination 
by VA--
    (i) The notification--
    (A) Provides the effective date of the disability determination by 
VA; and
    (B) Directs each institution holding a Defense, NDSL, or Perkins 
Loan made to the borrower to discharge the loan; and
    (ii) The institution returns to the person who made the payments 
any payments received on or after the effective date of the 
determination by VA that the borrower is unemployable due to a service-
connected disability.

[[Page 41983]]

    (4) In the case of a discharge based on a disability determination 
by the SSA--
    (i) The notification--
    (A) Provides the date the Secretary received the SSA data described 
in paragraph (b)(2)(iv)(C) of this section; and
    (B) Directs each institution holding a Defense, NDSL, or Perkins 
Loan made to the borrower to assign the loan to the Secretary within 45 
days of the notice described in paragraph (e)(2) of this section; and
    (ii) After the loan is assigned, the Secretary discharges the loan 
in accordance with paragraph (b)(3)(v) of this section.
    (5) If the borrower notifies the Secretary that they do not wish to 
receive the discharge, the borrower will remain responsible for 
repayment of the borrower's loans in accordance with the terms and 
conditions of the promissory notes that the borrower signed.
* * * * *
0
15. Section 674.65 is added to read as follows:


Sec.  674.65  Severability.

    If any provision of this subpart or its application to any person, 
act, or practice is held invalid, the remainder of the subpart or the 
application of its provisions to any person, act, or practice shall not 
be affected thereby.

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

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

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

0
17. Section 682.402 is amended by:
0
a. Revising paragraphs (c)(2)(iv) through (vii) and (c)(3) through (6);
0
b. Removing paragraph (c)(7);
0
c. Redesignating paragraphs (c)(8) through (11) as paragraphs (c)(7) 
through (10), respectively;
0
d. Revising newly redesignated paragraphs (c)(7),(9), and (10);
0
e. Revising paragraphs (d)(1) through (3);
0
f. In paragraph (d)(6)(ii)(B) introductory text, removing the number 
``120'' and adding in its place the number ``180'';
0
g. In paragraph (d)(6)(ii)(B)(2), removing the number ``120'' and 
adding in its place the number ``180'';
0
h. In paragraph (d)(6)(ii)(H), removing the number ``60'' and adding in 
its place the number ``90'';
0
i. In paragraph (d)(7)(ii), removing the number ``60'' and adding in 
its place the number ``90'';
0
j. Revising paragraph (d)(8);
0
k. Adding paragraph (d)(9);
0
l. Revising paragraph (e)(1);
0
m. In paragraph (e)(2)(v) removing the citation ``(e)(1)(ii)'' and 
adding in its place the citation ``(e)(1)(iii)'';
0
n. Revising paragraph (e)(3);
0
o. Removing paragraph (e)(13);
0
p. Redesignating paragraphs (e)(6) through (12) as (e)(7) through (13), 
respectively;
0
q. Adding a new paragraph (e)(6);
0
r. Revising redesignated paragraphs (e)(7) through (13) and paragraphs 
(e)(14) and (15); and
0
s. Adding paragraph (e)(16).
    The revisions and additions read as follows:


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

* * * * *
    (c) * * *
    (2) * * *
    (iv) The borrower must submit to the Secretary an application for a 
total and permanent disability discharge on a form approved by the 
Secretary. The application must contain--
    (A) A certification by a physician, who is a doctor of medicine or 
osteopathy legally authorized to practice in a State, that the borrower 
is totally and permanently disabled as described in paragraph (1) of 
the definition of that term in Sec.  682.200(b);
    (B) A certification by a nurse practitioner or physician's 
assistant licensed by a State, or a licensed or certified psychologist 
at the independent practice level, that the borrower is totally and 
permanently disabled as described in paragraph (1) of the definition of 
that term in Sec.  682.200(b); or
    (C) An SSA Benefit Planning Query (BPQY) or an SSA notice of award 
or other documentation deemed acceptable by the Secretary, indicating 
that--
    (1) The borrower qualifies for Social Security Disability Insurance 
(SSDI) or Supplemental Security Income (SSI) benefits and the 
borrower's next scheduled disability review will be within 5 to 7 
years;
    (2) The borrower qualifies for SSDI or SSI benefits and the 
borrower's next scheduled disability review will be within 3 years, and 
that the borrower's eligibility for disability benefits in the 3-year 
review category has been renewed at least once;
    (3) The borrower has a disability onset date for SSDI or SSI of at 
least 5 years prior or has been receiving benefits for a least 5 years 
prior to the application for a disability discharge;
    (4) The borrower qualifies for the SSA compassionate allowance 
program; or
    (5) For a borrower who is currently receiving SSA retirement 
benefits, documentation that, prior to the borrower qualifying for SSA 
retirement benefits, the borrower met any of the requirements in 
paragraph (c)(2)(iv)(C) of this section.
    (v) The borrower must submit the application described in paragraph 
(c)(2)(iv) of this section to the Secretary within 90 days of the date 
the physician, nurse practitioner, physician's assistant, or 
psychologist certifies the application, if applicable.
    (vi) After the Secretary receives the application described in 
paragraph (c)(2)(iv) of this section, the Secretary notifies the 
holders of the borrower's title IV loans that the Secretary has 
received a total and permanent disability discharge application from 
the borrower. The holders of the loans must notify the applicable 
guaranty agency that the total and permanent disability discharge 
application has been received.
    (vii) If the application is incomplete, the Secretary notifies the 
borrower of the missing information and requests the missing 
information from the borrower or the physician, nurse practitioner, 
physician's assistant or psychologist who provided the certification, 
as appropriate. The Secretary does not make a determination of 
eligibility until the application is complete.
* * * * *
    (3) Secretary's review of total and permanent disability discharge 
application. (i) If, after reviewing the borrower's completed 
application, the Secretary determines that the data described in 
paragraph (c)(2)(iv) of this section supports the conclusion that the 
borrower is totally and permanently disabled, as described in paragraph 
(1) of the definition of that term in Sec.  682.200(b), the borrower is 
considered totally and permanently disabled--
    (A) As of the date the physician, nurse practitioner, physician's 
assistant or psychologist certified the borrower's application; or
    (B) As of the date the Secretary received the SSA data described in 
paragraph (c)(2)(iv)(C) of this section.
    (ii) If the Secretary determines that the borrower's application 
does not conclusively prove that the borrower is totally and 
permanently disabled as described in paragraph (1) of the definition of 
that term in Sec.  682.200(b) the Secretary may require the borrower to 
submit additional medical evidence. As part of the Secretary's review 
of the borrower's discharge application, the Secretary may require and 
arrange for an additional review of the borrower's condition by an 
independent physician or other medical professional identified

[[Page 41984]]

by the Secretary at no expense to the borrower.
    (iii) After determining that the borrower is totally and 
permanently disabled as described in paragraph (1) of the definition of 
that term in Sec.  682.200(b), the Secretary notifies the borrower and 
the borrower's lenders that the application for a disability discharge 
has been approved. With this notification, the Secretary provides the 
date the physician, nurse practitioner, physician's assistant, or 
psychologist certified the borrower's loan discharge application or the 
date the Secretary received the SSA data described in paragraph 
(c)(2)(iv)(C) of this section and directs each lender to submit a 
disability claim to the guaranty agency so the loan can be assigned to 
the Secretary. The Secretary returns any payment received by the 
Secretary after the date the physician, nurse practitioner, physician's 
assistant, or psychologist certified the borrower's loan discharge 
application or received the SSA data described in paragraph 
(c)(2)(iv)(C) of this section to the person who made the payment.
    (iv) After the loan is assigned, the Secretary discharges the 
borrower's obligation to make further payments on the loan and notifies 
the borrower and the lender that the loan has been discharged. The 
notification to the borrower explains the terms and conditions under 
which the borrower's obligation to repay the loan will be reinstated, 
as specified in paragraph (c)(6)(i) of this section.
    (v) If the Secretary determines that the physician, nurse 
practitioner, physician's assistant, or psychologist certification or 
SSA data described in paragraph (c)(2)(iv)(C) of this section does not 
support the conclusion that the borrower is totally and permanently 
disabled as described in paragraph (1) of the definition of that term 
in Sec.  682.200(b), the Secretary notifies the borrower and the lender 
that the application for a disability discharge has been denied. The 
notification includes--
    (A) The reason or reasons for the denial;
    (B) A statement that the loan is due and payable to the lender 
under the terms of the promissory note and that the loan will return to 
the status that would have existed had the total and permanent 
disability discharge application not been received;
    (C) A statement that the lender will notify the borrower of the 
date the borrower must resume making payments on the loan;
    (D) An explanation that the borrower is not required to submit a 
new total and permanent disability discharge application if the 
borrower requests that the Secretary re-evaluate the application for 
discharge by providing, within 12 months of the date of the 
notification, additional information that supports the borrower's 
eligibility for discharge; and
    (E) An explanation that if the borrower does not request re-
evaluation of the borrower's prior discharge application within 12 
months of the date of the notification, the borrower must submit a new 
total and permanent disability discharge application to the Secretary 
if the borrower wishes the Secretary to re-evaluate the borrower's 
eligibility for a total and permanent disability discharge.
    (vi) If the borrower requests re-evaluation in accordance with 
paragraph (c)(3)(v)(D) of this section or submits a new total and 
permanent disability discharge application in accordance with paragraph 
(c)(3)(v)(E) of this section, the request must include new information 
regarding the borrower's disabling condition that was not provided to 
the Secretary in connection with the prior application at the time the 
Secretary reviewed the borrower's initial application for a total and 
permanent disability discharge.
    (4) Treatment of disbursements made during the period from the date 
of the physician, nurse practitioner, physician's assistant or 
psychologist certification or the date the Secretary received the SSA 
data described in paragraph (c)(2)(iv)(C) of this section until the 
date of discharge. If a borrower received a title IV loan or TEACH 
Grant before the date the physician, nurse practitioner, physician's 
assistant, or psychologist certified the borrower's discharge 
application or before the date the Secretary received the SSA data 
described in paragraph (c)(2)(iv)(C) of this section and a disbursement 
of that loan or grant is made during the period from the date of the 
physician, nurse practitioner, physician's assistant, or psychologist 
certification or the Secretary's receipt of the SSA data described in 
paragraph (c)(2)(iv)(C) of this section until the date the Secretary 
grants a discharge under this section, the processing of the borrower's 
loan discharge request will be suspended until the borrower ensures 
that the full amount of the disbursement has been returned to the loan 
holder or to the Secretary, as applicable.
    (5) Receipt of new title IV loans or TEACH Grants after the date of 
the physician, nurse practitioner, physician's assistant, or 
psychologist certification or after the date the Secretary received the 
SSA data described in paragraph (c)(2)(iv)(C) of this section. If a 
borrower receives a disbursement of a new title IV loan or receives a 
new TEACH Grant made on or after the date the physician, nurse 
practitioner, physician's assistant or psychologist certified the 
borrower's discharge application or the date the Secretary received the 
SSA data described in paragraph (c)(2)(iv)(C) of this section and 
before the date the Secretary grants a discharge under this section, 
the Secretary denies the borrower's discharge request and collection 
resumes on the borrower's loans.
    (6) Conditions for reinstatement of a loan after a total and 
permanent disability discharge. (i) The Secretary reinstates the 
borrower's obligation to repay a loan that was discharged in accordance 
with (c)(3)(iii) of this section if, within 3 years after the date the 
Secretary granted the discharge, the borrower receives a new TEACH 
Grant or a new loan under the Perkins or Direct Loan programs, except 
for a Direct Consolidation Loan that includes loans that were not 
discharged.
    (ii) If the borrower's obligation to repay a loan is reinstated, 
the Secretary--
    (A) Notifies the borrower that the borrower's obligation to repay 
the loan has been reinstated;
    (B) Returns the loan to the status that would have existed if the 
total and permanent disability discharge application had not been 
received; and
    (C) Does not require the borrower to pay interest on the loan for 
the period from the date the loan was discharged until the date the 
borrower's obligation to repay the loan was reinstated.
    (iii) The Secretary's notification under paragraph (c)(6)(ii)(A) of 
this section will include--
    (A) The reason or reasons for the reinstatement;
    (B) An explanation that the first payment due date on the loan 
following reinstatement will be no earlier than 90 days after the date 
of the notification of reinstatement; and
    (C) Information on how the borrower may contact the Secretary if 
the borrower has questions about the reinstatement or believes that the 
obligation to repay the loan was reinstated based on incorrect 
information.
    (7) Lender and guaranty agency actions. (i) If the Secretary 
approves the borrower's total and permanent disability discharge 
application--
    (A) The lender must submit a disability claim to the guaranty 
agency, in accordance with paragraph (g)(1) of this section;

[[Page 41985]]

    (B) If the claim satisfies the requirements of paragraph (g)(1) of 
this section and Sec.  682.406, the guaranty agency must pay the claim 
submitted by the lender;
    (C) After receiving a claim payment from the guaranty agency, the 
lender must return to the sender any payments received by the lender 
after the date the physician, nurse practitioner, physician's 
assistant, or psychologist certified the borrower's loan discharge 
application or after the date the Secretary received the SSA data 
described in paragraph (c)(2)(iv)(C) of this section as well as any 
payments received after claim payment from or on behalf of the 
borrower;
    (D) The Secretary reimburses the guaranty agency for a disability 
claim paid to the lender after the agency pays the claim to the lender; 
and
    (E) The guaranty agency must assign the loan to the Secretary 
within 45 days of the date the guaranty agency pays the disability 
claim and receives the reimbursement payment, or within 45 days of the 
date the guaranty agency receives the notice described in paragraph 
(c)(3)(iii) of this section if a guaranty agency is the lender.
    (ii) If the Secretary does not approve the borrower's total and 
permanent disability discharge request, the lender must resume 
collection of the loan and is deemed to have exercised forbearance of 
payment of both principal and interest from the date collection 
activity was suspended. The lender may capitalize, in accordance with 
Sec.  682.202(b), any interest accrued and not paid during that period, 
except if the lender is a guaranty agency it may not capitalize accrued 
interest.
* * * * *
    (9) Discharge without an application. The Secretary will discharge 
a loan under this section without an application or any additional 
documentation from the borrower if the Secretary--
    (i) Obtains data from the Department of Veterans Affairs (VA) 
showing that the borrower is unemployable due to a service-connected 
disability; or
    (ii) Obtains data from the Social Security Administration (SSA) 
described in paragraph (c)(2)(iv)(C) of this section.
    (10) Notifications and return of payments. (i) After determining 
that a borrower qualifies for a total and permanent disability 
discharge under paragraph (c)(9) of this section, the Secretary sends a 
notification to the borrower informing the borrower that the Secretary 
will discharge the borrower's title IV loans unless the borrower 
notifies the Secretary, by a date specified in the Secretary's 
notification, that the borrower does not wish to receive the loan 
discharge.
    (ii) Unless the borrower notifies the Secretary that the borrower 
does not wish to receive the discharge, the Secretary notifies the 
borrower's loan holders that the borrower has been approved for a 
disability discharge. With this notification the Secretary provides the 
effective date of the determination by VA or the date the Secretary 
received the SSA data described in paragraph (c)(2)(iv)(C) of this 
section and directs the holder of each FFEL Program loan made to the 
borrower to submit a disability claim to the guaranty agency in 
accordance with paragraph (g)(1) of this section.
    (iii) If the claim meets the requirements of paragraph (g)(1) of 
this section and Sec.  682.406, the guaranty agency pays the claim and 
must--
    (A) Discharge the loan, in the case of a discharge based on data 
from VA; or
    (B) Assign the loan to the Secretary, in the case of a discharge 
based on data from the SSA.
    (iv) The Secretary reimburses the guaranty agency for a disability 
claim after the agency pays the claim to the lender.
    (v) Upon receipt of the claim payment from the guaranty agency, the 
loan holder returns to the person who made the payments any payments 
received on or after--
    (A) The effective date of the determination by VA that the borrower 
is unemployable due to a service-connected disability; or
    (B) The date the Secretary received the SSA data described in 
paragraph (c)(2)(iv)(C) of this section.
    (vi) For a loan that is assigned to the Secretary for discharge 
based on data from the SSA, the Secretary discharges the loan in 
accordance with paragraph (c)(3)(iv) of this section.
    (vii) If the borrower notifies the Secretary that they do not wish 
to receive the discharge, the borrower will remain responsible for 
repayment of the borrower's loans in accordance with the terms and 
conditions of the promissory notes that the borrower signed.
* * * * *
    (d) * * *
    (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, as 
described in paragraph (d)(9) of this section, justify an extension.
    (ii) For purposes of the closed school discharge authorized by this 
section--
    (A) A school's closure date is the earlier of the date that the 
school ceases to provide educational instruction in most programs, as 
determined by the Secretary, or a date chosen by the Secretary that 
reflects when the school had ceased to provide educational instruction 
for most of its students;
    (B) The term ``borrower'' includes all endorsers on a loan;
    (C) A ``school'' means a school's main campus or any location or 
branch of the main campus, regardless of whether the school or its 
location or branch is considered title IV eligible, and
    (D) ``Program'' means the credential defined by the level and 
Classification of Instructional Program code in which a student is 
enrolled, except that the Secretary may define a borrower's program as 
multiple levels or Classification of Instructional Program codes if--
    (1) The enrollment occurred at the same school in closely proximate 
periods;
    (2) The school granted a credential in a program while the student 
was enrolled in a different program; or
    (3) The programs must be taken in a set order or were presented as 
necessary for borrowers to complete in order to succeed in the relevant 
field of employment.
    (2) Relief available pursuant to discharge. (i) Discharge under 
this paragraph (d) relieves the borrower of any existing or past 
obligation to repay the loan and any charges imposed or costs incurred 
by the holder with respect to the loan that the borrower is, or was 
otherwise obligated to pay.
    (ii) A discharge of a loan under this paragraph (d) qualifies the 
borrower for reimbursement of amounts paid voluntarily or through 
enforced collection on a loan obligation discharged under this 
paragraph (d).
    (iii) A borrower who has defaulted on a loan discharged under this 
paragraph (d) is not regarded as in default on the loan after 
discharge, and is eligible to receive assistance under the title IV, 
HEA programs.

[[Page 41986]]

    (iv) A discharge of a loan under this paragraph (d) must be 
reported by the loan holder to all consumer reporting agencies to which 
the holder previously reported the status of the loan, so as to delete 
all adverse credit history assigned to the loan.
    (3) Borrower qualification for discharge. Except as provided in 
paragraph (d)(8) of this section, to qualify for a discharge of a loan 
under this paragraph (d), a borrower must submit a completed closed 
school discharge application on a form approved by the Secretary and 
the factual assertions in the application must be true and must be made 
under penalty of perjury. The application explains the procedures and 
eligibility criteria for obtaining a discharge and requires the 
borrower to state that the borrower (or the student on whose behalf a 
parent borrowed)--
    (i) Received the proceeds of a loan, in whole or in part, on or 
after January 1, 1986, to attend a school;
    (ii) 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 calendar days before the 
school closed. The Secretary may extend the 180-day period if the 
Secretary determines that exceptional circumstances, as described in 
paragraph (d)(9) of this section, justify an extension;
    (iii) On or after July 1, 2023, state that the borrower did not 
complete an institutional teach-out plan performed by the school or a 
teach-out agreement at another school, approved by the school's 
accrediting agency and, if applicable, the school's State authorizing 
agency; and
    (iv) State that the borrower (or student)--
    (A) Agrees to provide to the Secretary or the Secretary's designee 
upon request other documentation reasonably available to the borrower 
that demonstrates that the borrower meets the qualifications for 
discharge under this section; and
    (B) Agrees to cooperate with the Secretary or the Secretary's 
designee in enforcement actions in accordance with paragraph (d)(4) of 
this section and to transfer any right to recovery against a third 
party to the Secretary in accordance with paragraph (d)(5) of this 
section.
* * * * *
    (8) Discharge without an application. (i) A borrower's obligation 
to repay a FFEL Program loan may be discharged without an application 
from the borrower if the--
    (A) Borrower received a discharge on a loan pursuant to Sec.  
674.33(g) of this chapter under the Federal Perkins Loan Program, or 
Sec.  685.214 of this chapter under the William D. Ford Federal Direct 
Loan Program; or
    (B) Secretary or the guaranty agency, with the Secretary's 
permission, determines that the borrower qualifies for a discharge 
based on information in the Secretary or guaranty agency's possession. 
The Secretary or guaranty agency discharges the loan without an 
application from the borrower if the borrower did not complete an 
institutional teach-out plan performed by the school or a teach-out 
agreement at another school, approved by the school's accrediting 
agency and, if applicable, the school's State authorizing agency.
    (ii) If the borrower accepts but does not complete an institutional 
teach-out plan performed by the school or a teach-out agreement at 
another school, approved by the school's accrediting agency and, if 
applicable, the school's State authorizing agency, then the Secretary 
or guaranty agency discharges the loan within 1 year of the borrower's 
last date of attendance in the teach-out program.
    (9) Exceptional circumstances. For purposes of this section, 
exceptional circumstances include, but are not limited to--
    (i) The revocation or withdrawal by an accrediting agency of the 
school's institutional accreditation;
    (ii) The school is or was placed on probation or issued a show-
cause order, or placed on an accreditation status that poses an 
equivalent or greater risk to its accreditation, by its accrediting 
agency for failing to meet one or more of the agency's standards;
    (iii) The revocation or withdrawal by the State authorization or 
licensing authority to operate or to award academic credentials in the 
State;
    (iv) The termination by the Department of the school's 
participation in a title IV, HEA program;
    (v) A finding by a State or Federal government agency that the 
school violated State or Federal law related to education or services 
to students;
    (vi) A State or Federal court judgment that a School violated State 
or Federal law related to education or services to students;
    (vii) The teach-out of the student's educational program exceeds 
the 180-day look back period for a closed school discharge;
    (viii) The school responsible for the teach-out of the student's 
educational program fails to perform the material terms of the teach-
out plan or agreement, such that the student does not have a reasonable 
opportunity to complete his or her program of study;
    (ix) The school discontinued a significant share of its academic 
programs.
    (x) The school permanently closed all or most of its ground-based 
or in -person locations while maintaining online programs.
    (xi) The school was placed on the heightened cash monitoring 
payment method as defined in Sec.  668.162(d)(2).
    (e) * * *
    (1) General. (i) The Secretary reimburses the holder of a loan 
received by a borrower on or after January 1, 1986, and discharges a 
current or former borrower's obligation with respect to the loan in 
accordance with the provisions of this paragraph (e), if the borrower's 
(or the student for whom a parent received a PLUS loan) eligibility to 
receive the loan was falsely certified by an eligible school. On or 
after July 1, 2006, the Secretary reimburses the holder of a loan, and 
discharges a borrower's obligation with respect to the loan in 
accordance with the provisions of this paragraph (e), if the borrower's 
eligibility to receive the loan was falsely certified as a result of a 
crime of identity theft. For purposes of a false certification 
discharge, the term ``borrower'' includes all endorsers on a loan.
    (ii) A student's or other individual's eligibility to borrow will 
be considered to have been falsely certified by the school if the 
school--
    (A) Certified the eligibility for a FFEL Program loan of a student 
who--
    (1) Reported not having a high school diploma or its equivalent; 
and
    (2) Did not satisfy the alternative to graduation from high school 
requirements in 34 CFR 668.32(e) and section 484(d) of the Act that 
were in effect at the time the loan was certified, as applicable.
    (B) Certified the eligibility of a student who is not a high school 
graduate based on--
    (1) A high school graduation status falsified by the school; or
    (2) A high school diploma falsified by the school or a third party 
to which the school referred the borrower;
    (C) Certified the eligibility of the student who, because of a 
physical or mental condition, age, criminal record, or other reason 
accepted by the Secretary, would not meet State requirements for 
employment (in the student's State of residence when the loan was 
certified) in the occupation for which the training program supported 
by the loan was intended;

[[Page 41987]]

    (D) Signed the borrower's name without authorization by the 
borrower on the loan application or promissory note; or
    (E) Certified the eligibility of an individual for a FFEL Program 
loan as a result of the crime of identity theft committed against the 
individual, as that crime is defined in paragraph (e)(14) of this 
section.
    (iii) The Secretary discharges the obligation of a borrower with 
respect to a loan disbursement for which the school, without the 
borrower's authorization, endorsed the borrower's loan check or 
authorization for electronic funds transfer, unless the student for 
whom the loan was made received the proceeds of the loan either by 
actual delivery of the loan funds or by a credit in the amount of the 
contested disbursement applied to charges owed to the school for that 
portion of the educational program completed by the student. However, 
the Secretary does not reimburse the lender with respect to any amount 
disbursed by means of a check bearing an unauthorized endorsement 
unless the school also executed the application or promissory note for 
that loan for the named borrower without that individual's consent.
    (iv) If a loan was made as a result of the crime of identity theft 
that was committed by an employee or agent of the lender, or if at the 
time the loan was made, an employee or agent of the lender knew of the 
identity theft of the individual named as the borrower--
    (A) The Secretary does not pay reinsurance, and does not reimburse 
the holder, for any amount disbursed on the loan; and
    (B) Any amounts received by a holder as interest benefits and 
special allowance payments with respect to the loan must be refunded to 
the Secretary, as provided in paragraphs (e)(8)(ii)(B)(4) and 
(e)(10)(ii)(D) of this section.
* * * * *
    (3) Borrower qualification for discharge. Except as provided in 
paragraph (e)(15) of this section, to qualify for a discharge of a loan 
under this paragraph (e), the borrower must submit to the holder of the 
loan an application for discharge on a form approved by the Secretary. 
The application need not be notarized, but must be made by the borrower 
under penalty of perjury, and, in the application, the borrower must--
    (i) State whether the student has made a claim with respect to the 
school's false certification 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) In the case of a borrower requesting a discharge based on not 
having had a high school diploma and not having met the alternative to 
graduation from high school eligibility requirements in 34 CFR 
668.32(e) and under section 484(d) of the Act applicable when the loan 
was certified, and the school or a third party to which the school 
referred the borrower falsified the student's high school diploma, the 
borrower must state in the application 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) Reported not having a valid high school diploma or its 
equivalent when the loan was certified; and
    (C) Did not satisfy the alternative to graduation from high school 
statutory or regulatory eligibility requirements identified on the 
application form and applicable when the loan was certified.
    (iii) In the case of a borrower requesting a discharge based on a 
condition that would disqualify the borrower from employment in the 
occupation that the training program for which the borrower received 
the loan was intended, the borrower must state in the application that 
the borrower (or student for whom a parent received a PLUS loan) did 
not meet State requirements for employment in the student's State of 
residence in the occupation that the training program for which the 
borrower received the loan was intended because of a physical or mental 
condition, age, criminal record, or other reason accepted by the 
Secretary.
    (iv) In the case of a borrower requesting a discharge because the 
school signed the borrower's name on the loan application or promissory 
note without the borrower's authorization state that he or she did not 
sign the document in question or authorize the school to do so.
    (v) In the case of a borrower requesting a discharge because the 
school, without authorization of the borrower, endorsed the borrower's 
name on the loan check or signed the authorization for electronic funds 
transfer or master check, the borrower must--
    (A) State that he or she did not endorse the loan check or sign the 
authorization for electronic funds transfer or master check, or 
authorize the school to do so; and
    (B) State that the proceeds of the contested disbursement were not 
received either through actual delivery of the loan funds or by a 
credit in the amount of the contested disbursement applied to charges 
owed to the school for that portion of the educational program 
completed by the student.
    (vi) In the case of an individual whose eligibility to borrow was 
falsely certified because he or she was a victim of the crime of 
identity theft and is requesting a discharge--
    (A) Certify that the individual did not sign the promissory note, 
or that any other means of identification used to obtain the loan was 
used without the authorization of the individual claiming relief;
    (B) Certify that the individual did not receive or benefit from the 
proceeds of the loan with knowledge that the loan had been made without 
the authorization of the individual; and
    (C) Provide a statement of facts and supporting evidence that 
demonstrate, to the satisfaction of the Secretary, that the 
individual's eligibility for the loan in question was falsely certified 
as a result of identity theft committed against that individual. 
Supporting evidence may include--
    (1) A judicial determination of identity theft relating to the 
individual;
    (2) A Federal Trade Commission identity theft affidavit;
    (3) A police report alleging identity theft relating to the 
individual;
    (4) Documentation of a dispute of the validity of the loan due to 
identity theft filed with at least three major consumer reporting 
agencies; and
    (5) Other evidence acceptable to the Secretary.
    (vii) That the borrower agrees to provide upon request by the 
Secretary or the Secretary's designee, other documentation reasonably 
available to the borrower, that demonstrates, to the satisfaction of 
the Secretary or the Secretary's designee, that the student meets the 
qualifications in this paragraph (e); and
    (viii) That the borrower agrees to cooperate with the Secretary or 
the Secretary's designee in enforcement actions in accordance with 
paragraph (e)(4) of this section, and to transfer any right to recovery 
against a third party in accordance with paragraph (e)(5) of this 
section.
* * * * *
    (6) Discharge procedures--general. (i) If the holder of the 
borrower's loan determines that a borrower's FFEL Program loan may be 
eligible for a

[[Page 41988]]

discharge under this section, the holder provides the borrower the 
application described in paragraph (e)(3) of this section and an 
explanation of the qualifications and procedures for obtaining a 
discharge. The holder also promptly suspends any efforts to collect 
from the borrower on any affected loan. The holder may continue to 
receive borrower payments.
    (ii) If the borrower fails to submit the application for discharge 
and supporting information described in paragraph (e)(3) of this 
section within 60 days of the holder providing the application, the 
holder resumes collection and grants forbearance of principal and 
interest for the period in which collection activity was suspended.
    (iii) If the borrower submits an application for discharge that the 
holder determines is incomplete, the holder notifies the borrower of 
that determination and allows the borrower an additional 30-days to 
amend their application and provide supplemental information. If the 
borrower does not amend their application within 30 days of receiving 
the notification from the holder the borrower's application is closed 
as incomplete and the holder resumes collection of the loan and grants 
forbearance of principal and interest for the period in which 
collection activity was suspended.
    (iv) If the borrower submits a complete application described in 
paragraph (e)(3) of this section, the holder files a claim with the 
guaranty agency no later than 60 days after the holder receives the 
borrower's complete application.
    (v) The guaranty agency determines whether the available evidence 
supports the claim for discharge. Available evidence includes evidence 
provided by the borrower and any other relevant information from the 
guaranty agency's records or gathered by the guaranty agency from other 
sources, including the Secretary, other guaranty agencies, Federal 
agencies, State authorities, test publishers, independent test 
administrators, school records, and cognizant accrediting associations.
    (vi) The guaranty agency issues a decision that explains the 
reasons for any adverse determination on the application, describes the 
evidence on which the decision was made, and provides the borrower, 
upon request, copies of the evidence. The guaranty agency considers any 
response from the borrower and any additional information from the 
borrower and notifies the borrower whether the determination is 
changed.
    (vii) If the guaranty agency determines that the borrower meets the 
applicable requirements for a discharge under this paragraph (e), the 
guaranty agency notifies the borrower in writing of that determination.
    (viii) If the guaranty agency determines that the borrower does not 
qualify for a discharge, the guaranty agency notifies the borrower in 
writing of that determination and the reasons for the determination.
    (ix) If the guaranty agency determines that the borrower does not 
qualify for a discharge, the borrower may request that the Secretary 
review the guaranty agency's decision.
    (x) A borrower is not precluded from re-applying for a discharge 
under this paragraph (e) if the discharge request is closed as 
incomplete, or if the guaranty agency or Secretary determines that the 
borrower does not qualify for a discharge if the borrower provides 
additional supporting evidence.
    (7) Guaranty agency responsibilities--general. (i) A guaranty 
agency shall notify the Secretary immediately whenever it becomes aware 
of reliable information indicating that a school may have falsely 
certified a student's eligibility or caused an unauthorized 
disbursement of loan proceeds, as described in paragraph (e)(3) of this 
section. The designated guaranty agency in the State in which the 
school is located shall promptly investigate whether the school has 
falsely certified a student's eligibility and, within 30 days after 
receiving information indicating that the school may have done so, 
report the results of its preliminary investigation to the Secretary.
    (ii) If the guaranty agency receives information it believes to be 
reliable indicating that a borrower whose loan is held by the agency 
may be eligible for a discharge under this paragraph (e), the agency 
shall immediately suspend any efforts to collect from the borrower on 
any loan received for the program of study for which the loan was made 
(but may continue to receive borrower payments), and inform the 
borrower of the procedures for requesting a discharge.
    (iii) If the borrower fails to submit the Secretary's approved 
application described in paragraph (e)(3) of this section within 60 
days of being notified of that option, the guaranty agency shall resume 
collection and shall be deemed to have exercised forbearance of payment 
of principal and interest from the date it suspended collection 
activity.
    (iv) If the borrower submits an application for discharge that the 
guaranty agency determines is incomplete, the guaranty agency notifies 
the borrower of that determination and allows the borrower an 
additional 30-days to amend their application and provide supplemental 
information. If the borrower does not amend their application within 30 
days of receiving the notification from the guaranty agency the 
borrower's application is closed as incomplete and the guaranty agency 
resumes collection of the loan and grants forbearance of principal and 
interest for the period in which collection activity was suspended.
    (v) Upon receipt of a discharge claim filed by a lender or a 
complete application submitted by a borrower with respect to a loan 
held by the guaranty agency, the agency shall have up to 90 days to 
determine whether the discharge should be granted. The agency shall 
review the borrower's application in light of information available 
from the records of the agency and from other sources, including other 
guaranty agencies, State authorities, and cognizant accrediting 
associations.
    (vi) A borrower's application for discharge may not be denied 
solely on the basis of failing to meet any time limits set by the 
lender, the Secretary or the guaranty agency.
    (8) Guaranty agency responsibilities with respect to a claim filed 
by a lender. (i) The agency shall evaluate the borrower's application 
request and consider relevant information it possesses and information 
available from other sources, and follow the procedures described in 
this paragraph (e)(8).
    (ii) If the agency determines that the borrower satisfies the 
requirements for discharge under this paragraph (e), it shall, not 
later than 30 days after the agency makes that determination, pay the 
claim in accordance with paragraph (h) of this section and--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the loan has been discharged, and that the lender has 
been informed of the actions required under paragraph (e)(8)(ii)(C) of 
this section;
    (B) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount; and
    (C) Notify the lender that the borrower's liability with respect to 
the amount of the loan has been discharged, and that the lender must--
    (1) Immediately terminate any collection efforts against the 
borrower with respect to the discharged loan amount and any charges 
imposed or

[[Page 41989]]

costs incurred by the lender related to the discharged loan amount that 
the borrower is, or was, otherwise obligated to pay; and
    (2) Within 30 days, report to all credit reporting agencies to 
which the lender previously reported the status of the loan, so as to 
delete all adverse credit history assigned to the loan; and
    (D) Within 30 days, demand payment in full from the perpetrator of 
the identity theft committed against the individual, and if payment is 
not received, pursue collection action thereafter against the 
perpetrator.
    (iii) If the agency determines that the borrower does not qualify 
for a discharge, it shall, within 30 days after making that 
determination--
    (A) Notify the lender that the borrower's liability on the loan is 
not discharged and that, depending on the borrower's decision under 
paragraph (e)(8)(iii)(B) of this section, the loan shall either be 
returned to the lender or paid as a default claim; and
    (B) Notify the borrower that the borrower does not qualify for 
discharge and state the reasons for that conclusion. The agency shall 
advise the borrower that he or she remains obligated to repay the loan 
and warn the borrower of the consequences of default, and explain that 
the borrower will be considered to be in default on the loan unless the 
borrower submits a written statement to the agency within 30 days 
stating that the borrower--
    (1) Acknowledges the debt and, if payments are due, will begin or 
resume making those payments to the lender; or
    (2) Requests the Secretary to review the agency's decision.
    (iv) Within 30 days after receiving the borrower's written 
statement described in paragraph (e)(8)(iii)(B)(1) of this section, the 
agency shall return the claim file to the lender and notify the lender 
to resume collection efforts if payments are due.
    (v) Within 30 days after receiving the borrower's request for 
review by the Secretary, the agency shall forward the claim file to the 
Secretary for his review and take the actions required under paragraph 
(e)(12) of this section.
    (vi) The agency shall pay a default claim to the lender within 30 
days after the borrower fails to return either of the written 
statements described in paragraph (e)(8)(iii)(B) of this section.
    (9) Guaranty agency responsibilities with respect to a claim filed 
by a lender based only on the borrower's assertion that he or she did 
not sign the loan check or the authorization for the release of loan 
funds via electronic funds transfer or master check. (i) The agency 
shall evaluate the borrower's request and consider relevant information 
it possesses and information available from other sources, and follow 
the procedures described in this paragraph (e)(9).
    (ii) If the agency determines that a borrower who asserts that he 
or she did not endorse the loan check satisfies the requirements for 
discharge under paragraph (e)(3)(v) of this section, it shall, within 
30 days after making that determination--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged, and that the lender has been informed of the actions 
required under paragraph (e)(9)(ii)(B) of this section;
    (B) Notify the lender that the borrower's liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged, and that the lender must--
    (1) Immediately terminate any collection efforts against the 
borrower with respect to the discharged loan amount and any charges 
imposed or costs incurred by the lender related to the discharged loan 
amount that the borrower is, or was, otherwise obligated to pay;
    (2) Within 30 days, report to all credit reporting agencies to 
which the lender previously reported the status of the loan, so as to 
delete all adverse credit history assigned to the loan;
    (3) Refund to the borrower, within 30 days, all amounts paid by the 
borrower with respect to the loan disbursement that was discharged, 
including any charges imposed or costs incurred by the lender related 
to the discharged loan amount;
    (4) Refund to the Secretary, within 30 days, all interest benefits 
and special allowance payments received from the Secretary with respect 
to the loan disbursement that was discharged; and
    (C) Transfer to the lender the borrower's written assignment of any 
rights the borrower may have against third parties with respect to a 
loan disbursement that was discharged because the borrower did not sign 
the loan check.
    (iii) If the agency determines that a borrower who asserts that he 
or she did not sign the electronic funds transfer or master check 
authorization satisfies the requirements for discharge under paragraph 
(e)(3)(v) of this section, it shall, within 30 days after making that 
determination, pay the claim in accordance with paragraph (h) of this 
section and--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged, and that the lender has been informed of the actions 
required under paragraph (e)(9)(iii)(C) of this section;
    (B) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount; and
    (C) Notify the lender that the borrower's liability with respect to 
the contested disbursement of the loan has been discharged, and that 
the lender must--
    (1) Immediately terminate any collection efforts against the 
borrower with respect to the discharged loan amount and any charges 
imposed or costs incurred by the lender related to the discharged loan 
amount that the borrower is, or was, otherwise obligated to pay; and
    (2) Within 30 days, report to all credit reporting agencies to 
which the lender previously reported the status of the loan, so as to 
delete all adverse credit history assigned to the loan.
    (iv) If the agency determines that the borrower does not qualify 
for a discharge, it shall, within 30 days after making that 
determination--
    (A) Notify the lender that the borrower's liability on the loan is 
not discharged and that, depending on the borrower's decision under 
paragraph (e)(9)(iv)(B) of this section, the loan shall either be 
returned to the lender or paid as a default claim; and
    (B) Notify the borrower that the borrower does not qualify for 
discharge and state the reasons for that conclusion. The agency shall 
advise the borrower that he or she remains obligated to repay the loan 
and warn the borrower of the consequences of default, and explain that 
the borrower will be considered to be in default on the loan unless the 
borrower submits a written statement to the agency within 30 days 
stating that the borrower--
    (1) Acknowledges the debt and, if payments are due, will begin or 
resume making those payments to the lender; or
    (2) Requests the Secretary to review the agency's decision.
    (v) Within 30 days after receiving the borrower's written statement 
described in paragraph (e)(9)(iv)(B)(1) of this section, the agency 
shall return the claim file to the lender and notify the lender to 
resume collection efforts if payments are due.
    (vi) Within 30 days after receiving the borrower's request for 
review by the Secretary, the agency shall forward the claim file to the 
Secretary for his review

[[Page 41990]]

and take the actions required under paragraph (e)(12) of this section.
    (vii) The agency shall pay a default claim to the lender within 30 
days after the borrower fails to return either of the written 
statements described in paragraph (e)(9)(iv)(B) of this section.
    (10) Guaranty agency responsibilities in the case of a loan held by 
the agency for which a discharge request is submitted by a borrower. 
(i) The agency shall evaluate the borrower's application and consider 
relevant information it possesses and information available from other 
sources, and follow the procedures described in this paragraph (e)(10).
    (ii) If the agency determines that the borrower satisfies the 
requirements for discharge under paragraph (e)(3) of this section, it 
shall immediately terminate any collection efforts against the borrower 
with respect to the discharged loan amount and any charges imposed or 
costs incurred by the agency related to the discharged loan amount that 
the borrower is, or was otherwise obligated to pay and, not later than 
30 days after the agency makes the determination that the borrower 
satisfies the requirements for discharge--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the loan has been discharged;
    (B) Report to all credit reporting agencies to which the agency 
previously reported the status of the loan, so as to delete all adverse 
credit history assigned to the loan;
    (C) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount; and
    (D) Within 30 days, demand payment in full from the perpetrator of 
the identity theft committed against the individual, and if payment is 
not received, pursue collection action thereafter against the 
perpetrator.
    (iii) If the agency determines that the borrower does not qualify 
for a discharge, it shall, within 30 days after making that 
determination, notify the borrower that the borrower's liability with 
respect to the amount of the loan is not discharged, state the reasons 
for that conclusion, and if the borrower is not then making payments in 
accordance with a repayment arrangement with the agency on the loan, 
advise the borrower of the consequences of continued failure to reach 
such an arrangement, and that collection action will resume on the loan 
unless within 30 days the borrower--
    (A) Acknowledges the debt and, if payments are due, reaches a 
satisfactory arrangement to repay the loan or resumes making payments 
under such an arrangement to the agency; or
    (B) Requests the Secretary to review the agency's decision.
    (iv) Within 30 days after receiving the borrower's request for 
review by the Secretary, the agency shall forward the borrower's 
discharge request and all relevant documentation to the Secretary for 
his review and take the actions required under paragraph (e)(12) of 
this section.
    (v) The agency shall resume collection action if within 30 days of 
giving notice of its determination the borrower fails to seek review by 
the Secretary or agree to repay the loan.
    (11) Guaranty agency responsibilities in the case of a loan held by 
the agency for which a discharge request is submitted by a borrower 
based only on the borrower's assertion that he or she did not sign the 
loan check or the authorization for the release of loan proceeds via 
electronic funds transfer or master check. (i) The agency shall 
evaluate the borrower's application request and consider relevant 
information it possesses and information available from other sources, 
and follow the procedures described in this paragraph (e)(11).
    (ii) If the agency determines that a borrower who asserts that he 
or she did not endorse the loan check satisfies the requirements for 
discharge under paragraph (e)(3)(v) of this section, it shall refund to 
the Secretary the amount of reinsurance payment received with respect 
to the amount discharged on that loan less any repayments made by the 
lender under paragraph (e)(11)(ii)(D)(2) of this section, and within 30 
days after making that determination--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged;
    (B) Report to all credit reporting agencies to which the agency 
previously reported the status of the loan, so as to delete all adverse 
credit history assigned to the loan;
    (C) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount;
    (D) Notify the lender to whom a claim payment was made that the 
lender must refund to the Secretary, within 30 days--
    (1) All interest benefits and special allowance payments received 
from the Secretary with respect to the loan disbursement that was 
discharged; and
    (2) The amount of the borrower's payments that were refunded to the 
borrower by the guaranty agency under paragraph (e)(11)(ii)(C) of this 
section that represent borrower payments previously paid to the lender 
with respect to the loan disbursement that was discharged;
    (E) Notify the lender to whom a claim payment was made that the 
lender must, within 30 days, reimburse the agency for the amount of the 
loan that was discharged, minus the amount of borrower payments made to 
the lender that were refunded to the borrower by the guaranty agency 
under paragraph (e)(11)(ii)(C) of this section; and
    (F) Transfer to the lender the borrower's written assignment of any 
rights the borrower may have against third parties with respect to the 
loan disbursement that was discharged.
    (iii) In the case of a borrower who requests a discharge because he 
or she did not sign the electronic funds transfer or master check 
authorization, if the agency determines that the borrower meets the 
conditions for discharge, it shall immediately terminate any collection 
efforts against the borrower with respect to the discharged loan amount 
and any charges imposed or costs incurred by the agency related to the 
discharged loan amount that the borrower is, or was, otherwise 
obligated to pay, and within 30 days after making that determination--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged;
    (B) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount; and
    (C) Report to all credit reporting agencies to which the lender 
previously reported the status of the loan, so as to delete all adverse 
credit history assigned to the loan.
    (iv) The agency shall take the actions required under paragraphs 
(e)(10)(iii) through (v) of this section if the agency determines that 
the borrower does not qualify for a discharge.
    (12) Guaranty agency responsibilities if a borrower requests a 
review by the Secretary. (i) Within 30 days after receiving the 
borrower's request for review under paragraph (e)(8)(iii)(B)(2), 
(e)(9)(iv)(B)(2), (e)(10)(iii)(B), or (e)(11)(iv) of this section, the 
agency

[[Page 41991]]

shall forward the borrower's discharge application request and all 
relevant documentation to the Secretary for review.
    (ii) The Secretary notifies the agency and the borrower of a 
determination on review. If the Secretary determines that the borrower 
is not eligible for a discharge under this paragraph (e)n, within 30 
days after being so informed, the agency shall take the actions 
described in paragraphs (e)(9)(iv) through (vii) or (e)(10)(iii) 
through (v) of this section, as applicable.
    (iii) If the Secretary determines that the borrower meets the 
requirements for a discharge under paragraph (e) of this section, the 
agency shall, within 30 days after being so informed, take the actions 
required under paragraph (e)(8)(ii), (e)(9)(ii) or (iii), (e)(10)(ii), 
or (e)(11)(ii) or (iii) of this section, as applicable.
    (13) Lender responsibilities. (i) If the lender is notified by a 
guaranty agency or the Secretary, or receives information it believes 
to be reliable from another source indicating that a current or former 
borrower may be eligible for a discharge under this paragraph (e), the 
lender shall immediately suspend any efforts to collect from the 
borrower on any loan received for the program of study for which the 
loan was made (but may continue to receive borrower payments) and, 
within 30 days of receiving the information or notification, inform the 
borrower of the procedures for requesting a discharge.
    (ii) If the borrower fails to submit the Secretary's approved 
application within 60 days of being notified of that option, the lender 
shall resume collection and shall be deemed to have exercised 
forbearance of payment of principal and interest from the date the 
lender suspended collection activity on the loan. The lender may 
capitalize, in accordance with Sec.  682.202(b), any interest accrued 
and not paid during that period.
    (iii) If the borrower submits an application for discharge that the 
lender determines is incomplete, the lender notifies the borrower of 
that determination and allows the borrower an additional 30-days to 
amend their application and provide supplemental information. If the 
borrower does not amend their application within 30 days of receiving 
the notification from the lender the borrower's application is closed 
as incomplete and the lender resumes collection of the loan and grants 
forbearance of principal and interest for the period in which 
collection activity was suspended.
    (iv) The lender shall file a claim with the guaranty agency in 
accordance with paragraph (g) of this section no later than 60 days 
after the lender receives the borrower's complete application described 
in paragraph (e)(3) of this section. If a lender receives a payment 
made by or on behalf of the borrower on the loan after the lender files 
a claim on the loan with the guaranty agency, the lender shall forward 
the payment to the guaranty agency within 30 days of its receipt. The 
lender shall assist the guaranty agency and the borrower in determining 
whether the borrower is eligible for discharge of the loan.
    (v) The lender shall comply with all instructions received from the 
Secretary or a guaranty agency with respect to loan discharges under 
this paragraph (e).
    (vi) The lender shall review a claim that the borrower did not 
endorse and did not receive the proceeds of a loan check. The lender 
shall take the actions required under paragraphs (e)(9)(ii)(A) and (B) 
of this section if it determines that the borrower did not endorse the 
loan check, unless the lender secures persuasive evidence that the 
proceeds of the loan were received by the borrower or the student for 
whom the loan was made, as provided in paragraph (e)(1)(iii) of this 
section. If the lender determines that the loan check was properly 
endorsed or the proceeds were received by the borrower or student, the 
lender may consider the borrower's objection to repayment as a 
statement of intention not to repay the loan and may file a claim with 
the guaranty agency for reimbursement on that ground but shall not 
report the loan to consumer reporting agencies as in default until the 
guaranty agency, or, as applicable, the Secretary, reviews the claim 
for relief. By filing such a claim, the lender shall be deemed to have 
agreed to the following--
    (A) If the guarantor or the Secretary determines that the borrower 
endorsed the loan check or the proceeds of the loan were received by 
the borrower or the student, any failure to satisfy due diligence 
requirements by the lender prior to the filing of the claim that would 
have resulted in the loss of reinsurance on the loan in the event of 
default will be waived by the Secretary; and
    (B) If the guarantor or the Secretary determines that the borrower 
did not endorse the loan check and that the proceeds of the loan were 
not received by the borrower or the student, the lender will comply 
with the requirements specified in paragraph (e)(9)(ii)(B) of this 
section.
    (vii) Within 30 days after being notified by the guaranty agency 
that the borrower's request for a discharge has been denied, the lender 
shall notify the borrower of the reasons for the denial and, if 
payments are due, resume collection against the borrower. The lender 
shall be deemed to have exercised forbearance of payment of principal 
and interest from the date the lender suspended collection activity, 
and may capitalize, in accordance with Sec.  682.202(b), any interest 
accrued and not paid during that period.
    (14) Definition of Identity theft. (i) For purposes of this 
section, identity theft is defined as the unauthorized use of the 
identifying information of another individual that is punishable under 
18 U.S.C. 1028, 1028A, 1029, or 1030, or substantially comparable State 
or local law.
    (ii) Identifying information includes, but is not limited to--
    (A) Name, Social Security number, date of birth, official State or 
government issued driver's license or identification number, alien 
registration number, government passport number, and employer or 
taxpayer identification number;
    (B) Unique biometric data, such as fingerprints, voiceprint, retina 
or iris image, or unique physical representation;
    (C) Unique electronic identification number, address, or routing 
code; or
    (D) Telecommunication identifying information or access device (as 
defined in 18 U.S.C. 1029(e)).
    (15) Discharge without an application. A borrower's obligation to 
repay all or a portion of an FFEL Program loan may be discharged 
without an application from the borrower if the Secretary, or the 
guaranty agency with the Secretary's permission, determines based on 
information in the Secretary's or the guaranty agency's possession that 
the borrower qualifies for a discharge. Such information includes, but 
is not limited to, evidence that the school has falsified the 
Satisfactory Academic Progress of its students, as described in Sec.  
668.34 of this chapter.
    (16) Application for a group discharge from a State Attorney 
General or non profit legal services representative. A State Attorney 
General or nonprofit legal services representative may submit to the 
Secretary an application for a group discharge under this section.
* * * * *
0
18. Section 682.414 is amended by revising paragraph (b)(4) to read as 
follows:


Sec.  682.414  Reports.

* * * * *
    (b) * * *
    (4) A report to the Secretary of the borrower's enrollment and loan 
status information, details related to the loans

[[Page 41992]]

or borrower's deferments, forbearances, repayment plans, delinquency 
and contact information, or any title IV loan-related data required by 
the Secretary, by the deadline date established by the Secretary.
* * * * *
0
19. Section 682.424 is added to subpart D to read as follows:


Sec.  682.424  Severability.

    If any provision of this subpart or its application to any person, 
act, or practice is held invalid, the remainder of the subpart or the 
application of its provisions to any person, act, or practice shall not 
be affected thereby.

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

0
20. The authority citation for part 685 is revised to read as follows:

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

0
21. Section 685.103 is amended by revising paragraph (d) to read as 
follows:


Sec.  685.103  Applicability of subparts.

* * * * *
    (d) Subpart D of this part contains provisions regarding borrower 
defense to repayment in the Direct Loan Program.
0
22. Section 685.109 is added to subpart A to read as follows:


Sec.  685.109  Severability.

    If any provision of this subpart or its application to any person, 
act, or practice is held invalid, the remainder of the subpart or the 
application of its provisions to any person, act, or practice shall not 
be affected thereby.
0
23. Section 685.202 is amended by:
0
a. Removing paragraphs (b)(2), (4), and (5);
0
b. Redesignating paragraph (b)(3) as paragraph (b)(2) and revising it.
    The revision reads as follows:


Sec.  685.202  Charges for which Direct Loan Program borrowers are 
responsible.

* * * * *
    (b) * * *
    (2) Notwithstanding Sec.  685.208(l)(5), for a Direct Loan not 
eligible for interest subsidies during periods of deferment, the 
Secretary capitalizes the unpaid interest that has accrued on the loan 
upon the expiration of the deferment.
* * * * *
0
24. Section 685.205 is amended by revising paragraph (b)(6) to read as 
follows:


Sec.  685.205  Forbearance.

* * * * *
* * * * *
    (b) * * *
    (6) Periods necessary for the Secretary to determine the borrower's 
eligibility for discharge--
    (i) Under Sec.  685.206(c) through (e);
    (ii) Under Sec.  685.214;
    (iii) Under Sec.  685.215;
    (iv) Under Sec.  685.216;
    (v) Under Sec.  685.217;
    (vi) Under Sec.  685.222;
    (vii) Under subpart D of this part; or
    (viii) Due to the borrower's or endorser's (if applicable) 
bankruptcy;
* * * * *
0
25. Section 685.206 is amended by revising paragraph (e) to read as 
follows:


Sec.  685.206  Borrower Responsibilities and Defenses.

* * * * *
    (e) Borrower defense to repayment for loans first disbursed on or 
after July 1, 2020, and before July 1, 2023. This paragraph (e) applies 
to borrower defense to repayment for loans first disbursed on or after 
July 1, 2020, and before July 1, 2023.
    (1) Definitions. For the purposes of this paragraph (e), the 
following definitions apply:
    (i) A ``Direct Loan'' under this paragraph (e) means a Direct 
Subsidized Loan, a Direct Unsubsidized Loan, or a Direct PLUS Loan.
    (ii) ``Borrower'' means:
    (A) The borrower; and
    (B) In the case of a Direct PLUS Loan, any endorsers, and for a 
Direct PLUS Loan made to a parent, the student on whose behalf the 
parent borrowed.
    (iii) A ``borrower defense to repayment'' under this paragraph (e) 
includes--
    (A) A defense to repayment of amounts owed to the Secretary on a 
Direct Loan, or a Direct Consolidation Loan that was used to repay a 
Direct Loan, FFEL Program Loan, Federal Perkins Loan, Health 
Professions Student Loan, Loan for Disadvantaged Students under subpart 
II of part A of title VII of the Public Health Service Act, Health 
Education Assistance Loan, or Nursing Loan made under part E of the 
Public Health Service Act; and
    (B) Any accompanying request for reimbursement of payments 
previously made to the Secretary on the Direct Loan or on a loan repaid 
by the Direct Consolidation Loan.
    (iv) The term ``provision of educational services'' under this 
paragraph (e) refers to the educational resources provided by the 
institution that are required by an accreditation agency or a State 
licensing or authorizing agency for the completion of the student's 
educational program.
    (v) The terms ``school'' and ``institution'' under this paragraph 
(e) may be used interchangeably and include an eligible institution, 
one of its representatives, or any ineligible institution, 
organization, or person with whom the eligible institution has an 
agreement to provide educational programs, or to provide marketing, 
advertising, recruiting, or admissions services.
    (2) Federal standard for loans first disbursed on or after July 1, 
2020, and before July 1, 2023. For a Direct Loan or Direct 
Consolidation Loan first disbursed on or after July 1, 2020, and before 
July 1, 2023, a borrower may assert a defense to repayment under this 
paragraph (e), if the borrower establishes by a preponderance of the 
evidence that--
    (i) The institution at which the borrower enrolled made a 
misrepresentation, as defined in Sec.  685.206(e)(3), of material fact 
upon which the borrower reasonably relied in deciding to obtain a 
Direct Loan, or a loan repaid by a Direct Consolidation Loan, and that 
directly and clearly relates to:
    (A) Enrollment or continuing enrollment at the institution or
    (B) The provision of educational services for which the loan was 
made; and
    (ii) The borrower was financially harmed by the misrepresentation.
    (3) Misrepresentation. A ``misrepresentation,'' for purposes of 
this paragraph (e), is a statement, act, or omission by an eligible 
school to a borrower that is false, misleading, 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 enrollment or continuing enrollment at the institution or 
the provision of educational services for which the loan was made. 
Evidence that a misrepresentation defined in this paragraph (e) may 
have occurred includes, but is not limited to:
    (i) Actual licensure passage rates materially different from those 
included in the institution's marketing materials, website, or other 
communications made to the student;
    (ii) Actual employment rates materially different from those 
included in the institution's marketing materials, website, or other 
communications made to the student;
    (iii) Actual institutional selectivity rates or rankings, student 
admission profiles, or institutional rankings that

[[Page 41993]]

are materially different from those included in the institution's 
marketing materials, website, or other communications made to the 
student or provided by the institution to national ranking 
organizations;
    (iv) The inclusion in the institution's marketing materials, 
website, or other communication made to the student of specialized, 
programmatic, or institutional certifications, accreditation, or 
approvals not actually obtained, or the failure to remove within a 
reasonable period of time such certifications or approvals from 
marketing materials, website, or other communication when revoked or 
withdrawn;
    (v) The inclusion in the institution's marketing materials, 
website, or other communication made to the student of representations 
regarding the widespread or general transferability of credits that are 
only transferrable to limited types of programs or institutions or the 
transferability of credits to a specific program or institution when no 
reciprocal agreement exists with another institution, or such agreement 
is materially different than what was represented;
    (vi) A representation regarding the employability or specific 
earnings of graduates without an agreement between the institution and 
another entity for such employment or sufficient evidence of past 
employment or earnings to justify such a representation or without 
citing appropriate national, State, or regional data for earnings in 
the same field as provided by an appropriate Federal agency that 
provides such data. (In the event that national data are used, 
institutions should include a written, plain language disclaimer that 
national averages may not accurately reflect the earnings of workers in 
particular parts of the country and may include earners at all stages 
of their career and not just entry level wages for recent graduates.);
    (vii) A representation regarding the availability, amount, or 
nature of any financial assistance available to students from the 
institution or any other entity to pay the costs of attendance at the 
institution that is materially different in availability, amount, or 
nature from the actual financial assistance available to the borrower 
from the institution or any other entity to pay the costs of attendance 
at the institution after enrollment;
    (viii) A representation regarding the amount, method, or timing of 
payment of tuition and fees that the student would be charged for the 
program that is materially different in amount, method, or timing of 
payment from the actual tuition and fees charged to the student;
    (ix) A representation that the institution, its courses, or 
programs are endorsed by vocational counselors, high schools, colleges, 
educational organizations, employment agencies, members of a particular 
industry, students, former students, governmental officials, Federal or 
State agencies, the United States Armed Forces, or other individuals or 
entities when the institution has no permission or is not otherwise 
authorized to make or use such an endorsement;
    (x) A representation regarding the educational resources provided 
by the institution that are required for the completion of the 
student's educational program that are materially different from the 
institution's actual circumstances at the time the representation is 
made, such as representations regarding the institution's size; 
location; facilities; training equipment; or the number, availability, 
or qualifications of its personnel; and
    (xi) A representation regarding the nature or extent of 
prerequisites for enrollment in a course or program offered by the 
institution that are materially different from the institution's actual 
circumstances at the time the representation is made, or that the 
institution knows will be materially different during the student's 
anticipated enrollment at the institution.
    (4) Financial harm. Under this paragraph (e), financial harm is the 
amount of monetary loss that a borrower incurs as a consequence of a 
misrepresentation, as defined in paragraph (e)(3) 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 or a loan repaid 
by a Direct Consolidation Loan, alone, 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 may include, 
but is not limited to, the following circumstances:
    (i) Periods of unemployment upon graduating from the school's 
programs that are unrelated to national or local economic recessions;
    (ii) A significant difference between the amount or nature of the 
tuition and fees that the institution represented to the borrower that 
the institution would charge or was charging, and the actual amount or 
nature of the tuition and fees charged by the institution for which the 
Direct Loan was disbursed or for which a loan repaid by the Direct 
Consolidation Loan was disbursed;
    (iii) The borrower's inability to secure employment in the field of 
study for which the institution expressly guaranteed employment; and
    (iv) The borrower's inability to complete the program because the 
institution no longer offers a requirement necessary for completion of 
the program in which the borrower enrolled and the institution did not 
provide for an acceptable alternative requirement to enable completion 
of the program.
    (5) Exclusions. The Secretary will not accept the following as a 
basis for a borrower defense to repayment under this paragraph (e)--
    (i) A violation by the institution of a requirement of the Act or 
the Department's regulations for a borrower defense to repayment under 
paragraph (c) or (d) of this section or under Sec.  685.222, unless the 
violation would otherwise constitute the basis for a successful 
borrower defense to repayment under this paragraph (e); or
    (ii) A claim that does not directly and clearly relate to 
enrollment or continuing enrollment at the institution or the provision 
of educational services for which the loan was made, including, but not 
limited to--
    (A) Personal injury;
    (B) Sexual harassment;
    (C) A violation of civil rights;
    (D) Slander or defamation;
    (E) Property damage;
    (F) The general quality of the student's education or the 
reasonableness of an educator's conduct in providing educational 
services;
    (G) Informal communication from other students;
    (H) Academic disputes and disciplinary matters; and
    (I) Breach of contract unless the school's act or omission would 
otherwise constitute the basis for a successful defense to repayment 
under this paragraph (e).
    (6) Limitations period. A borrower must assert a defense to 
repayment under this paragraph (e) within 3 years from the date the 
student is no longer enrolled at the institution. A borrower

[[Page 41994]]

may only assert a defense to repayment under this paragraph (e) within 
the timeframes set forth in this paragraph (e)(6) and paragraph (e)(7) 
of this section.
    (7) Extension of limitation periods and reopening of applications. 
For loans first disbursed on or after July 1, 2020, and before July 1, 
2023, the Secretary may extend the time period when a borrower may 
assert a defense to repayment under Sec.  685.206(e)(6) or may reopen a 
borrower's defense to repayment application to consider evidence that 
was not previously considered only if there is:
    (i) A final, non-default judgment on the merits by a State or 
Federal Court that has not been appealed or that is not subject to 
further appeal and that establishes the institution made a 
misrepresentation, as defined in paragraph (e)(3) of this section; or
    (ii) A final decision by a duly appointed arbitrator or arbitration 
panel that establishes that the institution made a misrepresentation, 
as defined in paragraph (e)(3) of this section.
    (8) Application and forbearance. To assert a defense to repayment 
under this paragraph (e), a borrower must submit an application under 
penalty of perjury on a form approved by the Secretary and sign a 
waiver permitting the institution to provide the Department with items 
from the borrower's education record relevant to the defense to 
repayment claim. The form will note that pursuant to Sec.  
685.205(b)(6)(i), if the borrower is not in default on the loan for 
which a borrower defense has been asserted, the Secretary will grant 
forbearance and notify the borrower of the option to decline 
forbearance. The application requires the borrower to--
    (i) Certify that the borrower received the proceeds of a loan, in 
whole or in part, to attend the named institution;
    (ii) Provide evidence that supports the borrower defense to 
repayment application;
    (iii) State whether the borrower has made a claim with any other 
third party, such as the holder of a performance bond, a public fund, 
or a tuition recovery program, based on the same act or omission of the 
institution on which the borrower defense to repayment is based;
    (iv) State the amount of any payment received by the borrower or 
credited to the borrower's loan obligation through the third party, in 
connection with a borrower defense to repayment described in paragraph 
(e)(2) of this section;
    (v) State the financial harm, as defined in paragraph (e)(4) of 
this section, that the borrower alleges to have been caused and provide 
any information relevant to assessing whether the borrower incurred 
financial harm, including providing documentation that the borrower 
actively pursued employment in the field for which the borrower's 
education prepared the borrower if the borrower is a recent graduate 
(failure to provide such information results in a presumption that the 
borrower failed to actively pursue employment in the field); whether 
the borrower was terminated or removed for performance reasons from a 
position in the field for which the borrower's education prepared the 
borrower, or in a related field; and whether the borrower failed to 
meet other requirements of or qualifications for employment in such 
field for reasons unrelated to the school's misrepresentation 
underlying the borrower defense to repayment, such as the borrower's 
ability to pass a drug test, satisfy driving record requirements, and 
meet any health qualifications; and
    (vi) State that the borrower understands that in the event that the 
borrower receives a 100 percent discharge of the balance of the loan 
for which the defense to repayment application has been submitted, the 
institution may, if allowed or not prohibited by other applicable law, 
refuse to verify or to provide an official transcript that verifies the 
borrower's completion of credits or a credential associated with the 
discharged loan.
    (9) Consideration of order of objections and of evidence in 
possession of the Secretary under this paragraph (e). (i) If the 
borrower asserts both a borrower defense to repayment and any other 
objection to an action of the Secretary with regard to a Direct Loan or 
a loan repaid by a Direct Consolidation Loan under this paragraph (e), 
the order in which the Secretary will consider objections, including a 
borrower defense to repayment under this paragraph (e), will be 
determined as appropriate under the circumstances.
    (ii) With respect to the borrower defense to repayment application 
submitted under this paragraph (e), the Secretary may consider evidence 
otherwise in the possession of the Secretary, including from the 
Department's internal records or other relevant evidence obtained by 
the Secretary, as practicable, provided that the Secretary permits the 
institution and the borrower to review and respond to this evidence and 
to submit additional evidence.
    (10) School response and borrower reply under this paragraph (e). 
(i) Upon receipt of a borrower defense to repayment application under 
this paragraph (e), the Department will notify the school of the 
pending application and provide a copy of the borrower's request and 
any supporting documents, a copy of any evidence otherwise in the 
possession of the Secretary, and a waiver signed by the student 
permitting the institution to provide the Department with items from 
the student's education record relevant to the defense to repayment 
claim to the school, and invite the school to respond and to submit 
evidence, within the specified timeframe included in the notice, which 
shall be no less than 60 days.
    (ii) Upon receipt of the school's response, the Department will 
provide the borrower a copy of the school's submission as well as any 
evidence otherwise in possession of the Secretary, which was provided 
to the school, and will give the borrower an opportunity to submit a 
reply within a specified timeframe, which shall be no less than 60 
days. The borrower's reply must be limited to issues and evidence 
raised in the school's submission and any evidence otherwise in the 
possession of the Secretary.
    (iii) The Department will provide the school a copy of the 
borrower's reply.
    (iv) There will be no other submissions by the borrower or the 
school to the Secretary unless the Secretary requests further 
clarifying information.
    (11) Written decision under this paragraph (e). (i) After 
considering the borrower's application and all applicable evidence 
under this paragraph (e), the Secretary issues a written decision--
    (A) Notifying the borrower and the school of the decision on the 
borrower defense to repayment under this paragraph (e);
    (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 (e)(12) of 
this section and specifying the relief determination.
    (ii) If the Department receives a borrower defense to repayment 
application that is incomplete and is within the limitations period in 
paragraph (e)(6) or (7) of this section, the Department will not issue 
a written decision on the application and instead will notify the 
borrower in writing that the application is incomplete and will return 
the application to the borrower.
    (12) Borrower defense to repayment relief under this paragraph (e). 
(i) If the Secretary grants the borrower's request

[[Page 41995]]

for relief based on a borrower defense to repayment under this 
paragraph (e), the Secretary notifies the borrower and the school that 
the borrower is relieved of the obligation to repay all or part of the 
loan and associated costs and fees that the borrower would otherwise be 
obligated to pay or will be reimbursed for amounts paid toward the loan 
voluntarily or through enforced collection. The amount of relief that a 
borrower receives under this paragraph (e) may exceed the amount of 
financial harm, as defined in paragraph (e)(4) of this section, that 
the borrower alleges in the application pursuant to paragraph (e)(8)(v) 
of this section. The Secretary determines the amount of relief and 
awards relief limited to the monetary loss that a borrower incurred as 
a consequence of a misrepresentation, as defined in paragraph (e)(3) of 
this section. The amount of relief cannot exceed the amount of the loan 
and any associated costs and fees and will be reduced by the amount of 
refund, reimbursement, indemnification, restitution, compensatory 
damages, settlement, debt forgiveness, discharge, cancellation, 
compromise, or any other financial benefit received by, or on behalf 
of, the borrower that was related to the borrower defense to repayment 
under this paragraph (e). In awarding relief under this paragraph (e), 
the Secretary considers the borrower's application, as described in 
paragraph (e)(8) of this section, which includes information about any 
payments received by the borrower and the financial harm alleged by the 
borrower. In awarding relief under this paragraph (e), the Secretary 
also considers the school's response, the borrower's reply, and any 
evidence otherwise in the possession of the Secretary, which was 
previously provided to the borrower and the school, as described in 
paragraph (e)(10) of this section. The Secretary also updates reports 
to consumer reporting agencies to which the Secretary previously made 
adverse credit reports with regard to the borrower's Direct Loan or 
loans repaid by the borrower's Direct Consolidation Loan under this 
paragraph (e).
    (ii) The Secretary affords the borrower such further relief as the 
Secretary determines is appropriate under the circumstances. Further 
relief may include determining that the borrower is not in default on 
the loan and is eligible to receive assistance under title IV of the 
Act.
    (13) Finality of borrower defense to repayment decisions under this 
paragraph (e). The determination of a borrower's defense to repayment 
by the Department included in the written decision referenced in 
paragraph (e)(11) of this section is the final decision of the 
Department and is not subject to appeal within the Department.
    (14) Cooperation by the borrower under this paragraph (e). The 
Secretary may revoke any relief granted to a borrower under this 
section who refuses to cooperate with the Secretary in any proceeding 
under this paragraph (e) or under part 668, subpart G. Such cooperation 
includes, but is not limited to--
    (i) Providing testimony regarding any representation made by the 
borrower to support a successful borrower defense to repayment under 
this paragraph (e); 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.
    (15) Transfer to the Secretary of the borrower's right of recovery 
against third parties under this paragraph (e). (i) Upon the grant of 
any relief under this paragraph (e), the borrower is deemed to have 
assigned to, and relinquished in favor of, the Secretary any right to a 
loan refund (up to the amount discharged) that the borrower may have by 
contract or applicable law with respect to the loan or the provision of 
educational services for which the loan was received, against the 
school, its principals, its affiliates and their successors, or its 
sureties, and any private fund, including the portion of a public fund 
that represents funds received from a private party. If the borrower 
asserts a claim to, and recovers from, a public fund, the Secretary may 
reinstate the borrower's obligation to repay on the loan an amount 
based on the amount recovered from the public fund, if the Secretary 
determines that the borrower's recovery from the public fund was based 
on the same borrower defense to repayment and for the same loan for 
which the discharge was granted under this section.
    (ii) The provisions of this paragraph (e)(15) apply notwithstanding 
any provision of State law that would otherwise restrict transfer of 
those rights by the borrower, limit or prevent a transferee from 
exercising those rights, or establish procedures or a scheme of 
distribution that would prejudice the Secretary's ability to recover on 
those rights.
    (iii) Nothing in this paragraph (e)(15) limits or forecloses the 
borrower's right to pursue legal and equitable relief arising under 
applicable law against a party described in this paragraph (e)(15) for 
recovery of any portion of a claim exceeding that assigned to the 
Secretary or any other claims arising from matters unrelated to the 
claim on which the loan is discharged.
    (16) Recovery from the school under this paragraph (e). (i) The 
Secretary may initiate an appropriate proceeding to require the school 
whose misrepresentation resulted in the borrower's successful borrower 
defense to repayment under this paragraph (e) to pay to the Secretary 
the amount of the loan to which the defense applies in accordance with 
part 668, subpart G. This paragraph (e)(16) would also be applicable 
for provisionally certified institutions.
    (ii) Under this paragraph (e), the Secretary will not initiate such 
a proceeding more than 5 years after the date of the final 
determination included in the written decision referenced in paragraph 
(e)(11) of this section. The Department will notify the school of the 
borrower defense to repayment application within 60 days of the date of 
the Department's receipt of the borrower's application.
0
26. Section 685.209 is amended by:
0
a. Revising paragraph (a)(2)(iv);
0
b. In paragraph (b)(1)(vii), removing the parenthetical phrase 
``(including amount capitalized)'';
0
c. Removing and reserving paragraph (b)(3)(iv);
0
d. Removing paragraph (c)(2)(iv);
0
e. Redesignating paragraphs (c)(2)(v) and (vi) as paragraphs (c)(2)(iv) 
and (v), respectively.
0
f. In paragraph (c)(4)(iii)(B), removing the words ``paragraphs 
(c)(2)(iv) and'', and adding in their place ``paragraph''.
    The revision reads as follows:


Sec.  685.209  Income-contingent repayment plans.

    (a) * * *
    (2) * * *
    (iv) Except as provided in paragraph (a)(2)(iii) of this section, 
accrued interest is capitalized when a borrower is determined to no 
longer have a partial financial hardship.
* * * * *
0
27. Section 685.212 is amended by adding paragraph (k)(4) to read as 
follows:


Sec.  685.212  Discharge of a loan obligation.

* * * * *
    (k) * * *
    (4) If a borrower's application for a discharge of a loan based on 
a borrower defense is approved under 34 CFR part 685, subpart D, the 
Secretary discharges the obligation of the borrower, in whole or in 
part, in accordance with the

[[Page 41996]]

procedures described in subpart D of this part.
0
28. Section 685.213 is amended by:
0
a. Revising paragraphs (b)(2) through (7);
0
b. Removing paragraph (b)(8); and
0
c. Revising paragraphs (d) and (e).
    The revisions read as follows:


Sec.  685.213  Total and permanent disability discharge.

* * * * *
    (b) * * *
    (2) Disability certification or Social Security Administration 
(SSA) disability determination. The application must contain--
    (i) A certification by a physician, who is a doctor of medicine or 
osteopathy legally authorized to practice in a State, that the borrower 
is totally and permanently disabled as described in paragraph (1) of 
the definition of that term in Sec.  685.102(b);
    (ii) A certification by a nurse practitioner or physician's 
assistant licensed by a State, or a licensed certified psychologist at 
the independent practice level, that the borrower is totally and 
permanently disabled as described in paragraph (1) of the definition of 
that term in Sec.  685.102(b);
    (iii) An SSA Benefit Planning Query (BPQY) or an SSA notice of 
award, or other documentation deemed acceptable by the Secretary, 
indicating that--
    (A) The borrower qualifies for Social Security Disability Insurance 
(SSDI) or Supplemental Security Income (SSI) benefits and the 
borrower's next scheduled disability review will be within 5 to 7 
years;
    (B) The borrower qualifies for SSDI or SSI benefits and the 
borrower's next scheduled disability review will be within 3 years, and 
that the borrower's eligibility for disability benefits in the 3-year 
review category has been renewed at least once;
    (C) The borrower has a disability onset date for SSDI or SSI of at 
least 5 years prior to the application for a disability discharge or 
has been receiving benefits for at least 5 years prior to the 
application for a TPD discharge;
    (D) The borrower qualifies for the SSA compassionate allowance 
program; or
    (E) For borrowers currently receiving SSA retirement benefits, 
documentation that, prior to the borrower qualifying for SSA retirement 
benefits, the borrower met the requirements in paragraphs 
(b)(2)(iii)(A) through (D) of this section.
    (3) Deadline for application submission. The borrower must submit 
the application described in paragraph (b)(1) of this section to the 
Secretary within 90 days of the date the physician, nurse practitioner, 
physician's assistant, or psychologist certifies the application, if 
applicable. Upon receipt of the borrower's application, the Secretary--
    (i) Identifies all title IV loans owed by the borrower, notifies 
the lenders that the Secretary has received a total and permanent 
disability discharge application from the borrower and directs the 
lenders to suspend collection activity or maintain the suspension of 
collection activity on the borrower's title IV loans;
    (ii) If the application is incomplete, notifies the borrower of the 
missing information and requests the missing information from the 
borrower or the physician, nurse practitioner, physician's assistant, 
or psychologist who certified the application, as appropriate, and does 
not make a determination of eligibility for discharge until the 
application is complete;
    (iii) Notifies the borrower that no payments are due on the loan 
while the Secretary determines the borrower's eligibility for 
discharge; and
    (iv) Explains the process for the Secretary's review of total and 
permanent disability discharge applications.
    (4) Determination of eligibility. (i) If, after reviewing the 
borrower's completed application, the Secretary determines that the 
data described in paragraph (b)(2) of this section supports the 
conclusion that the borrower meets the criteria for a total and 
permanent disability discharge, as described in paragraph (1) of the 
definition of that term in Sec.  685.102(b), the borrower is considered 
totally and permanently disabled--
    (A) As of the date the physician, nurse practitioner, physician's 
assistant, or psychologist certified the borrower's application; or
    (B) As of the date the Secretary received the SSA data described in 
paragraph (b)(2)(iii) of this section.
    (ii) If the Secretary determines that the borrower's application 
does not conclusively prove that the borrower is totally and 
permanently disabled as described in paragraph (1) of the definition of 
that term in Sec.  685.102(b), the Secretary may require the borrower 
to submit additional medical evidence. As part of the Secretary's 
review of the borrower's discharge application, the Secretary may 
require and arrange for an additional review of the borrower's 
condition by an independent physician or other medical professional 
identified by the Secretary at no expense to the borrower.
    (iii) After determining that the borrower is totally and 
permanently disabled, as described in paragraph (1) of the definition 
of that term in Sec.  685.102(b), the Secretary discharges the 
borrower's obligation to make any further payments on the loan, 
notifies the borrower that the loan has been discharged, and returns to 
the person who made the payments on the loan any payments received 
after the date the physician, nurse practitioner, physician's 
assistant, or psychologist certified the borrower's loan discharge 
application or the date the Secretary received the SSA data described 
in paragraph (b)(2)(iii) of this section. The notification to the 
borrower explains the terms and conditions under which the borrower's 
obligation to repay the loan will be reinstated, as specified in 
paragraph (b)(7)(i) of this section.
    (iv) If the Secretary determines that the physician, nurse 
practitioner, physician's assistant, or psychologist certification or 
the SSA data described in paragraph (b)(2)(iii) of this section 
provided by the borrower does not support the conclusion that the 
borrower is totally and permanently disabled, as described in paragraph 
(1) of the definition of that term in Sec.  685.102(b), the Secretary 
notifies the borrower that the application for a disability discharge 
has been denied. The notification to the borrower includes--
    (A) The reason or reasons for the denial;
    (B) A statement that the loan is due and payable to the Secretary 
under the terms of the promissory note and that the loan will return to 
the status that would have existed if the total and permanent 
disability discharge application had not been received;
    (C) The date that the borrower must resume making payments;
    (D) An explanation that the borrower is not required to submit a 
new total and permanent disability discharge application if the 
borrower requests that the Secretary re-evaluate the borrower's 
application for discharge by providing, within 12 months of the date of 
the notification, additional information that supports the borrower's 
eligibility for discharge; and
    (E) An explanation that if the borrower does not request re-
evaluation of the borrower's prior discharge application within 12 
months of the date of the notification, the borrower must submit a new 
total and permanent disability discharge application to the Secretary 
if the borrower wishes the Secretary to re-evaluate the borrower's 
eligibility for a total and permanent disability discharge.

[[Page 41997]]

    (v) If the borrower requests re-evaluation in accordance with 
paragraph (b)(4)(iv)(D) of this section or submits a new total and 
permanent disability discharge application in accordance with paragraph 
(b)(4)(iv)(E) of this section, the request must include new information 
regarding the borrower's disabling condition that was not provided to 
the Secretary in connection with the prior application at the time the 
Secretary reviewed the borrower's initial application for total and 
permanent disability discharge.
    (5) Treatment of disbursements made during the period from the date 
of the certification or the date the Secretary received the SSA data 
until the date of discharge. If a borrower received a title IV loan or 
TEACH Grant before the date the physician, nurse practitioner, 
physician's assistant, or psychologist certified the borrower's 
discharge application or before the date the Secretary received the SSA 
data described in paragraph (b)(2)(iii) of this section and a 
disbursement of that loan or grant is made during the period from the 
date of the physician, nurse practitioner, physician's assistant, or 
psychologist certification or the receipt of the SSA data described in 
paragraph (b)(2)(iii) of this section until the date the Secretary 
grants a discharge under this section, the processing of the borrower's 
loan discharge request will be suspended until the borrower ensures 
that the full amount of the disbursement has been returned to the loan 
holder or to the Secretary, as applicable.
    (6) Receipt of new title IV loans or TEACH Grants certification, or 
after the date the Secretary received the SSA data. If a borrower 
receives a disbursement of a new title IV loan or receives a new TEACH 
Grant made on or after the date the physician, nurse practitioner, 
physician's assistant, or psychologist certified the borrower's 
discharge application or on or after the date the Secretary received 
the SSA data described in paragraph (b)(2)(iii) of this section and 
before the date the Secretary grants a discharge under this section, 
the Secretary denies the borrower's discharge request and resumes 
collection on the borrower's loan.
    (7) Conditions for reinstatement of a loan after a total and 
permanent disability discharge. (i) The Secretary reinstates a 
borrower's obligation to repay a loan that was discharged in accordance 
with paragraph (b)(4)(iii) of this section if, within 3 years after the 
date the Secretary granted the discharge, the borrower receives a new 
TEACH Grant or a new loan under the Direct Loan programs, except for a 
Direct Consolidation Loan that includes loans that were not discharged.
    (ii) If the borrower's obligation to repay the loan is reinstated, 
the Secretary--
    (A) Notifies the borrower that the borrower's obligation to repay 
the loan has been reinstated;
    (B) Returns the loan to the status that would have existed if the 
total and permanent disability discharge application had not been 
received; and
    (C) Does not require the borrower to pay interest on the loan for 
the period from the date the loan was discharged until the date the 
borrower's obligation to repay the loan was reinstated.
    (iii) The Secretary's notification under paragraph (b)(7)(ii)(A) of 
this section will include--
    (A) The reason or reasons for the reinstatement;
    (B) An explanation that the first payment due date on the loan 
following reinstatement will be no earlier than 90 days after the date 
of the notification of reinstatement; and
    (C) Information on how the borrower may contact the Secretary if 
the borrower has questions about the reinstatement or believes that the 
obligation to repay the loan was reinstated based on incorrect 
information.
* * * * *
    (d) Discharge without an application. (1) The Secretary will 
discharge a loan under this section without an application or any 
additional documentation from the borrower if the Secretary:
    (i) Obtains data from the Department of Veterans Affairs showing 
that the borrower is unemployable due to a service-connected 
disability; or
    (ii) Obtains data from the Social Security Administration (SSA) 
described in paragraph (b)(2)(iii) of this section.
    (2) [Reserved].
    (e) Notification to the borrower. (1) After determining that a 
borrower qualifies for a total and permanent disability discharge under 
paragraph (d) of this section, the Secretary sends a notification to 
the borrower informing the borrower that the Secretary will discharge 
the borrower's title IV loans unless the borrower notifies the 
Secretary, by a date specified in the Secretary's notification, that 
the borrower does not wish to receive the loan discharge.
    (2) Unless the borrower notifies the Secretary that the borrower 
does not wish to receive the discharge the Secretary discharges the 
loan:
    (i) In accordance with paragraph (b)(4)(iii) of this section for a 
discharge based on data from the SSA; or
    (ii) In accordance with paragraph (c)(2)(i) of this section for a 
discharge based on data from VA.
    (3) If the borrower notifies the Secretary that they do not wish to 
receive the discharge, the borrower will remain responsible for 
repayment of the borrower's loans in accordance with the terms and 
conditions of the promissory notes that the borrower signed.
0
29. Section 685.214 is amended by:
0
a. Revising paragraph (a)(2);
0
b. Removing paragraph (g);
0
c. Redesignating paragraphs (c) through (f) as paragraphs (d) through 
(g), respectively;
0
d. Adding a new paragraph (c);
0
e. Revising redesignated paragraphs (d) through (g); and
0
f. Adding a new paragraph (h).
    The revisions and additions read as follows:


Sec.  685.214  Closed school discharge.

    (a) * * *
    (2) For purposes of this section--
    (i) A school's closure date is the earlier of the date that the 
school ceases to provide educational instruction in most programs, as 
determined by the Secretary, or a date chosen by the Secretary that 
reflects when the school had ceased to provide educational instruction 
for most of its students;
    (ii) ``School'' means a school's main campus or any location or 
branch of the main campus, regardless of whether the school or its 
location or branch is considered title IV eligible;
    (iii) ``Program'' means the credential defined by the level and 
Classification of Instructional Program code in which a student is 
enrolled, except that the Secretary may define a borrower's program as 
multiple levels or Classification of Instructional Program codes if:
    (A) The enrollment occurred at the same institution in closely 
proximate periods;
    (B) The school granted a credential in a program while the student 
was enrolled in a different program; or
    (C) The programs must be taken in a set order or were presented as 
necessary for borrowers to complete in order to succeed in the relevant 
field of employment;
* * * * *
    (c) Discharge without an application. (1) If the Secretary 
determines based on information in the Secretary's possession that the 
borrower qualifies for the discharge of a loan under this section, the 
Secretary discharges the loan without an application from the

[[Page 41998]]

borrower, if the borrower did not complete an institutional teach-out 
plan performed by the school or a teach-out agreement at another 
school, approved by the school's accrediting agency and, if applicable, 
the school's State authorizing agency.
    (2) If a borrower accepts but does not complete an institutional 
teach-out plan performed by the school or a teach-out agreement at 
another school, approved by the school's accrediting agency and, if 
applicable, the school's State authorizing agency, then the Secretary 
discharges the loan within 1 year of the borrower's last date of 
attendance in the teach-out program.
    (d) Borrower qualification for discharge. (1) Except as provided in 
paragraph (h) of this section, 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 must be 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) State 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 calendar days before the 
school closed. The Secretary may extend the 180-day period if the 
Secretary determines that exceptional circumstances, as described in 
paragraph (i) of this section, justify an extension; and
    (C) On or after July 1, 2023, state that the borrower did not 
complete an institutional teach-out plan performed by the school or a 
teach-out agreement at another school, approved by the school's 
accrediting agency and, if applicable, the school's State authorizing 
agency.
    (ii) State whether the borrower (or student) 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; and
    (iii) State that the borrower (or student)--
    (A) Agrees to provide to the Secretary upon request other 
documentation reasonably available to the borrower that demonstrates 
that the borrower meets the qualifications for discharge under this 
section; and
    (B) Agrees to cooperate with the Secretary in enforcement actions 
in accordance with paragraph (d) of this section and to transfer any 
right to recovery against a third party to the Secretary in accordance 
with paragraph (e) of this section.
    (2) [Reserved]
    (e) Cooperation by borrower in enforcement actions. (1) To obtain a 
discharge under this section, a borrower must cooperate with the 
Secretary in any judicial or administrative proceeding brought by the 
Secretary to recover amounts discharged or to take other enforcement 
action with respect to the conduct on which the discharge was based. At 
the request of the Secretary and upon the Secretary's tendering to the 
borrower the fees and costs that are customarily provided in litigation 
to reimburse witnesses, the borrower must--
    (i) Provide testimony regarding any representation made by the 
borrower to support a request for discharge;
    (ii) Produce any documents reasonably available to the borrower 
with respect to those representations; and
    (iii) If required by the Secretary, provide a sworn statement 
regarding those documents and representations.
    (2) The Secretary denies the request for a discharge or revokes the 
discharge of a borrower who--
    (i) Fails to provide the testimony, documents, or a sworn statement 
required under paragraph (d)(1) of this section; or
    (ii) Provides testimony, documents, or a sworn statement that does 
not support the material representations made by the borrower to obtain 
the discharge.
    (f) Transfer to the Secretary of borrower's right of recovery 
against third parties. (1) Upon discharge under 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 (or student) may have by contract or applicable law with 
respect to the loan or the enrollment agreement for the program for 
which the loan was received, against the school, its principals, its 
affiliates and their successors, its sureties, and any private fund, 
including the portion of a public fund that represents funds received 
from a private party.
    (2) The provisions of this section apply notwithstanding any 
provision of State law that would otherwise restrict transfer of those 
rights by the borrower (or student), 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.
    (3) Nothing in this section limits or forecloses the borrower's (or 
student's) right to pursue legal and equitable relief regarding 
disputes arising from matters unrelated to the discharged Direct Loan.
    (g) Discharge procedures. (1) After confirming the date of a 
school's closure, the Secretary identifies any Direct Loan borrower (or 
student on whose behalf a parent borrowed) who appears to have been 
enrolled at the school on the school closure date or to have withdrawn 
not more than 180 days prior to the closure date.
    (2) If the borrower's current address is known, the Secretary mails 
the borrower a discharge application and an explanation of the 
qualifications and procedures for obtaining a discharge. The Secretary 
also promptly suspends any efforts to collect from the borrower on any 
affected loan. The Secretary may continue to receive borrower payments.
    (3) If the borrower's current address is unknown, the Secretary 
attempts to locate the borrower and determines the borrower's potential 
eligibility for a discharge under this section by consulting with 
representatives of the closed school, the school's licensing agency, 
the school's accrediting agency, and other appropriate parties. If the 
Secretary learns the new address of a borrower, the Secretary mails to 
the borrower a discharge application and explanation and suspends 
collection, as described in paragraph (g)(2) of this section.
    (4) If a borrower fails to submit the application described in 
paragraph (d) of this section within 90 days of the Secretary's 
providing the discharge application, the Secretary resumes collection 
and grants forbearance of principal and interest for the period in 
which collection activity was suspended.
    (5) Upon resuming collection on any affected loan, the Secretary 
provides the borrower another discharge application and an explanation 
of the requirements and procedures for obtaining a discharge.
    (6) If the Secretary determines that a borrower who requests a 
discharge meets the qualifications for a discharge, the Secretary 
notifies the borrower in writing of that determination.
    (7) If the Secretary determines that a borrower who requests a 
discharge does not meet the qualifications for a discharge, the 
Secretary notifies that borrower in writing of that determination and 
the reasons for the determination.

[[Page 41999]]

    (h) Exceptional circumstances. For purposes of this section, 
exceptional circumstances include, but are not limited to--
    (1) The revocation or withdrawal by an accrediting agency of the 
school's institutional accreditation;
    (2) The school is or was placed on probation or issued a show-cause 
order, or was placed on an equivalent accreditation status, by its 
accrediting agency for failing to meet one or more of the agency's 
standards;
    (3) The revocation or withdrawal by the State authorization or 
licensing authority to operate or to award academic credentials in the 
State;
    (4) The termination by the Department of the school's participation 
in a title IV, HEA program;
    (5) A finding by a State or Federal government agency that the 
school violated State or Federal law related to education or services 
to students;
    (6) A State or Federal court judgment that a School violated State 
or Federal law related to education or services to students;
    (7) The teach-out of the student's educational program exceeds the 
180-day look-back period for a closed school discharge;
    (8) The school responsible for the teach-out of the student's 
educational program fails to perform the material terms of the teach-
out plan or agreement, such that the student does not have a reasonable 
opportunity to complete his or her program of study;
    (9) The school discontinued a significant share of its academic 
programs;
    (10) The school permanently closed all or most of its in-person 
locations while maintaining online programs; and
    (11) The school was placed on the heightened cash monitoring 
payment method as defined in Sec.  668.162(d)(2) of this chapter.
0
30. Section 685.215 is amended by:
0
a. Revising paragraph (a)(1);
0
b. Adding paragraph (a)(3);
0
c. Revising paragraphs (c) introductory text and (c)(1) through (5);
0
d. Redesignating paragraphs (c)(6) through (8) as paragraphs (c)(7) 
through (9), respectively;
0
e. Adding a new paragraph (c)(6);
0
f. Adding paragraph (c)(10);
0
g. Revising paragraph (d); and
0
h. Removing paragraphs (e) and (f).
    The revisions and additions read as follows:


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

    (a) Basis for discharge--(1) False certification. The Secretary 
discharges a borrower's (and any endorser's) obligation to repay a 
Direct Loan in accordance with the provisions of this section if a 
school falsely certifies the eligibility of the borrower (or the 
student on whose behalf a parent borrowed) to receive the proceeds of a 
Direct Loan. The Secretary considers a student's eligibility to borrow 
to have been falsely certified by the school if the school--
    (i) Certified the eligibility of a student who--
    (A) Reported not having a high school diploma or its equivalent; 
and
    (B) Did not satisfy the alternative to graduation from high school 
requirements under section 484(d) of the Act and 34 CFR 668.32(e) of 
this chapter that were in effect when the loan was originated;
    (ii) Certified the eligibility of a student who is not a high 
school graduate based on--
    (A) A high school graduation status falsified by the school; or
    (B) A high school diploma falsified by the school or a third party 
to which the school referred the borrower;
    (iii) Signed the borrower's name on the loan application or 
promissory note without the borrower's authorization;
    (iv) Certified the eligibility of the student who, because of a 
physical or mental condition, age, criminal record, or other reason 
accepted by the Secretary, would not meet State requirements for 
employment (in the student's State of residence when the loan was 
originated) in the occupation for which the training program supported 
by the loan was intended; or
    (v) Certified the eligibility of a student for a Direct Loan as a 
result of the crime of identity theft committed against the individual, 
as that crime is defined in paragraph (c)(6) of this section.
* * * * *
    (3) Loan origination. For purposes of this section, a loan is 
originated when the school submits the loan record to the Department's 
Common Origination and Disbursement (COD) System. Before originating a 
Direct Loan, a school must determine the student's or parent's 
eligibility for the loan. For each Direct Loan that a school disburses 
to a student or parent, the school must first submit a loan award 
record to the COD system and receive an accepted response.
* * * * *
    (c) Borrower qualification for discharge. To qualify for discharge 
under this paragraph, the borrower must submit to the Secretary an 
application for discharge on a form approved by the Secretary. The 
application need not be notarized but must be made by the borrower 
under penalty of perjury; and in the application, the borrower's 
responses must demonstrate to the satisfaction of the Secretary that 
the requirements in paragraphs (c)(1) through (7) of this section have 
been met. If the Secretary determines the application does not meet the 
requirements, the Secretary notifies the applicant and explains why the 
application does not meet the requirements.
    (1) High school diploma or equivalent. In the case of a borrower 
requesting a discharge based on not having a high school diploma and 
not having met the alternative to graduation from high school 
eligibility requirements under section 484(d) of the Act and 34 CFR 
668.32(e) of this chapter applicable when the loan was originated, and 
the school or a third party to which the school referred the borrower 
falsified the student's high school diploma, the borrower must state in 
the application that the borrower (or the student on whose behalf a 
parent received a PLUS loan)--
    (i) Reported not having a valid high school diploma or its 
equivalent when the loan was originated; and
    (ii) Did not satisfy the alternative to graduation from high school 
statutory or regulatory eligibility requirements identified on the 
application form and applicable when the loan was originated.
    (2) Disqualifying condition. In the case of a borrower requesting a 
discharge based on a condition that would disqualify the borrower from 
employment in the occupation that the training program for which the 
borrower received the loan was intended, the borrower must state in the 
application that the borrower (or student for whom a parent received a 
PLUS loan) did not meet State requirements for employment in the 
student's State of residence in the occupation that the training 
program for which the borrower received the loan was intended because 
of a physical or mental condition, age, criminal record, or other 
reason accepted by the Secretary.
    (3) Unauthorized loan. In the case of a borrower requesting a 
discharge because the school signed the borrower's name on the loan 
application or promissory note without the borrower's authorization, 
the borrower must state that he or she did not sign the document in 
question or authorize the school to do so.
    (4) Unauthorized payment. In the case of a borrower requesting a 
discharge because the school, without the borrower's authorization, 
endorsed the borrower's loan check or signed the

[[Page 42000]]

borrower's authorization for electronic funds transfer, the borrower 
must--
    (i) State that he or she did not endorse the loan check or sign the 
authorization for electronic funds transfer or authorize the school to 
do so; and
    (ii) State that the proceeds of the contested disbursement were not 
delivered to the student or applied to charges owed by the student to 
the school.
    (5) Identity theft. In the case of an individual whose eligibility 
to borrow was falsely certified because he or she was a victim of the 
crime of identity theft and is requesting a discharge, the individual 
must--
    (i) Certify that the individual did not sign the promissory note, 
or that any other means of identification used to obtain the loan was 
used without the authorization of the individual claiming relief;
    (ii) Certify that the individual did not receive or benefit from 
the proceeds of the loan with knowledge that the loan had been made 
without the authorization of the individual; and
    (iii) Provide a statement of facts and supporting evidence that 
demonstrate, to the satisfaction of the Secretary, that eligibility for 
the loan in question was falsely certified as a result of identity 
theft committed against that individual. Supporting evidence may 
include--
    (A) A judicial determination of identity theft relating to the 
individual;
    (B) A Federal Trade Commission identity theft affidavit;
    (C) A police report alleging identity theft relating to the 
individual;
    (D) Documentation of a dispute of the validity of the loan due to 
identity theft filed with at least three major consumer reporting 
agencies; and
    (E) Other evidence acceptable to the Secretary.
    (6) Definition of identity theft. (i) For purposes of this section, 
identity theft is defined as the unauthorized use of the identifying 
information of another individual that is punishable under 18 U.S.C. 
1028, 1028A, 1029, or 1030, or substantially comparable State or local 
law.
    (ii) Identifying information includes, but is not limited to--
    (A) Name, Social Security number, date of birth, official State or 
government issued driver's license or identification number, alien 
registration number, government passport number, and employer or 
taxpayer identification number;
    (B) Unique biometric data, such as fingerprints, voiceprint, retina 
or iris image, or unique physical representation;
    (C) Unique electronic identification number, address, or routing 
code; or
    (D) Telecommunication identifying information or access device (as 
defined in 18 U.S.C. 1029(e)).
* * * * *
    (10) Application for group discharge. A State Attorney General or 
nonprofit legal services representative may submit to the Secretary an 
application for a group discharge under this section.
    (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 an application and an 
explanation of the qualifications and procedures for obtaining a 
discharge. The Secretary also promptly suspends any efforts to collect 
from the borrower on any affected loan. The Secretary may continue to 
receive borrower payments.
    (2) If the borrower fails to submit the application for discharge 
and supporting information described in paragraph (c) of this section 
within 60 days of the Secretary's providing the application, the 
Secretary resumes collection and grants forbearance of principal and 
interest for the period in which collection activity was suspended.
    (3) If the borrower submits an application for discharge that the 
Secretary determines is incomplete, the Secretary notifies the borrower 
of that determination and allows the borrower an additional 30-days to 
amend their application and provide supplemental information. If the 
borrower does not amend their application within 30 days of receiving 
the notification from the Secretary the borrower's application is 
closed as incomplete and the Secretary resumes collection of the loan 
and grants forbearance of principal and interest for the period in 
which collection activity was suspended.
    (4) If the borrower submits a completed application described in 
paragraph (c) of this section, the Secretary determines whether the 
available evidence supports the claim for discharge. Available evidence 
includes evidence provided by the borrower and any other relevant 
information from the Secretary's records and gathered by the Secretary 
from other sources, including guaranty agencies, other Federal 
agencies, State authorities, test publishers, independent test 
administrators, school records, and cognizant accrediting associations. 
The Secretary issues a decision that explains the reasons for any 
adverse determination on the application, describes the evidence on 
which the decision was made, and provides the borrower, upon request, 
copies of the evidence. The Secretary considers any response from the 
borrower and any additional information from the borrower and notifies 
the borrower whether the determination is changed.
    (5) If the Secretary determines that the borrower meets the 
applicable requirements for a discharge under paragraph (c) of this 
section, the Secretary notifies the borrower in writing of that 
determination.
    (6) If the Secretary determines that the borrower does not qualify 
for a discharge, the Secretary notifies the borrower in writing of that 
determination and the reasons for the determination.
    (7) A borrower is not precluded from re-applying for a discharge 
under paragraph (c) of this section if the discharge request is closed 
as incomplete, or if the Secretary determines that the borrower does 
not qualify for a discharge if the borrower provides additional 
supporting evidence.
0
31. Section 685.219 is revised to read as follows:


Sec.  685.219  Public Service Loan Forgiveness Program (PSLF).

    (a) Purpose. The Public Service Loan Forgiveness Program is 
intended to encourage individuals to enter and continue in full-time 
public service employment by forgiving the remaining balance of their 
Direct loans after they satisfy the public service and loan payment 
requirements of this section.
    (b) Definitions. The following definitions apply to this section:
    AmeriCorps service means service in a position approved by the 
Corporation for National and Community Service under section 123 of the 
National and Community Service Act of 1990 (42 U.S.C. 12573).
    Civilian service to the military means providing services to or on 
behalf of members, veterans, or the families or survivors of deceased 
members of the U.S. Armed Forces or the National Guard that is provided 
to a person because of the person's status in one of those groups.
    Early childhood education program means an early childhood 
education program as defined in section 103(8) of the Act (20 U.S.C. 
1003).
    Eligible Direct Loan means a Direct Subsidized Loan, a Direct 
Unsubsidized Loan, a Direct PLUS Loan, or a Direct Consolidation Loan.
    Emergency management services mean services that help remediate, 
lessen, or eliminate the effects or potential effects of emergencies 
that threaten human life or health, or real property.

[[Page 42001]]

    Employee or employed means an individual--
    (i) To whom an organization issues an IRS Form W-2;
    (ii) Who receives an IRS Form W-2 from an organization that has 
contracted with a qualifying employer to provide payroll or similar 
services for the qualifying employer, and which provides the Form W-2 
under that contract;
    Full-time means:
    (i) Working in qualifying employment in one or more jobs--
    (A) A minimum average of 30 hours per week during the period being 
certified,
    (B) A minimum of 30 hours per week throughout a contractual or 
employment period of at least 8 months in a 12-month period, such as 
elementary and secondary school teachers, in which case the borrower is 
deemed to have worked full time; or
    (C) The equivalent of 30 hours per week as determined by 
multiplying each credit or contact hour taught per week by at least 
3.35 in non-tenure track employment at an institution of higher 
education.
    (ii) Routine paid vacation or paid leave time provided by the 
employer, and leave taken under the Family and Medical Leave Act of 
1993 (29 U.S.C. 2612(a)(1)) will be considered when determining if the 
borrower is working full-time.
    Law enforcement means service that is publicly funded and whose 
principal activities pertain to crime prevention, control or reduction 
of crime, or the enforcement of criminal law.
    Military service means ``active duty'' service or ``full-time 
National Guard duty'' as defined in section 101(d)(1) and (d)(5) of 
title 10 in the United States Code, does not include active duty for 
training or attendance at a service school.
    Non-governmental public service means services provided directly by 
employees of a non-governmental qualified employer where the employer 
has devoted a majority of its full-time equivalent employees to working 
in at least one of the following areas (as defined above): emergency 
management, civilian service to military personnel military service, 
public safety, law enforcement, public interest law services, early 
childhood education, public service for individuals with disabilities 
and/or the elderly, public health, public education, public library 
services, school library, or other school-based services. Service as a 
member of the U.S. Congress is not qualifying public service employment 
for purposes of this section.
    Non-tenure track employment means work performed by adjunct, 
contingent or part time faculty, teachers, or lecturers who are paid 
solely for the credit hours they teach at institutions of higher 
education.
    Other school-based service means the provision of services to 
schools or students in a school or a school-like setting that are not 
public education services, such as school health services and school 
nurse services, social work services in schools, and parent counseling 
and training.
    Peace Corps position means a full-time assignment under the Peace 
Corps Act as provided for under 22 U.S.C. 2504.
    Public education service means the provision of educational 
enrichment and/or support to students in a public school or a school-
like setting, including teaching.
    Public health means physicians, nurse practitioners, and nurses in 
a clinical setting; and those engaged in health care practitioner 
occupations, health care support occupations, and counselors, social 
workers, and other community and social service specialist occupations, 
as those terms are defined by the Bureau of Labor Statistics.
    Public interest law is legal services that are funded in whole or 
in part by a local, State, Federal, or Tribal government.
    Public library service means the operation of public libraries or 
services that support their operation.
    Public safety service means services that seek to prevent the need 
for emergency management services.
    Public service for individuals with disabilities means services 
performed for or to assist individuals with disabilities (as defined in 
the Americans with Disabilities Act (42 U.S.C. 12102)) that is provided 
to a person because of the person's status as an individual with a 
disability.
    Public service for the elderly means services that are provided to 
individuals who are aged 62 years or older and that are provided to a 
person because of the person's status as an individual of that age.
    Qualifying employer means:
    (i) A United States-based Federal, State, local, or Tribal 
government organization, agency, or entity, including the U.S. Armed 
Forces or the National Guard;
    (ii) A public child or family service agency;
    (iii) An organization under section 501(c)(3) of the Internal 
Revenue Code of 1986 that is exempt from taxation under section 501(a) 
of the Internal Revenue Code;
    (iv) A Tribal college or university; or
    (v) A nonprofit organization that--
    (A) Provides a non-governmental public service as defined in this 
section, attested to by the employer on a form approved by the 
Secretary; and
    (B) Is not a business organized for profit, a labor union, or a 
partisan political organization.
    Qualifying repayment plan means:
    (i) An income-contingent repayment plan under Sec.  685.209 or an 
income-based repayment plan under Sec.  685.221;
    (ii) The 10-year standard repayment plan under Sec.  685.208(b) or 
the consolidation loan standard repayment plan with a 10-year repayment 
term under Sec.  685.208(b); or
    (iii) Except for the alternative repayment plan, any other 
repayment plan if the monthly payment amount is not less than what 
would have been paid under the 10-year standard repayment plan under 
Sec.  685.208(b).
    School library services means the operations of school libraries or 
services that support their operation.
    (c) Borrower eligibility. (1) A borrower may obtain loan 
forgiveness under this program if the borrower--
    (i) Is not in default on the loan at the time forgiveness is 
requested;
    (ii) Is employed full-time by a qualifying employer or serving in a 
full-time AmeriCorps or Peace Corps position--
    (A) When the borrower satisfied the 120 monthly payments described 
under paragraph (c)(1)(iii) of this section; and
    (B) At the time the borrower applies for forgiveness under 
paragraph (e) of this section; and
    (iii) Satisfies the equivalent of 120 monthly payments after 
October 1, 2007, as described in paragraph (c)(2) of this section, on 
eligible Direct loans.
    (2) A borrower will be considered to have made monthly payments 
under paragraph (c)(1)(iii) of this section by--
    (i) Paying at least the full scheduled amount due for a monthly 
payment under the qualifying repayment plan;
    (ii) Paying in multiple installments that equal the full scheduled 
amount due for a monthly payment under the qualifying repayment plan;
    (iii) For a borrower on an income-contingent repayment plan under 
Sec.  685.209 or an income-based repayment plan under Sec.  685.221, 
paying a lump sum or monthly payment amount that is equal to or greater 
than the full scheduled amount in advance of the borrower's scheduled 
payment due date for a period of months not to exceed the period from 
the Secretary's receipt of the payment until the borrower's next annual 
repayment plan recertification date under the qualifying

[[Page 42002]]

repayment plan in which the borrower is enrolled;
    (iv) For a borrower on the 10-year standard repayment plan under 
Sec.  685.208(b) or the consolidation loan standard repayment plan with 
a 10-year repayment term under Sec.  685.208(b), paying a lump sum or 
monthly payment amount that is equal to or greater than the full 
scheduled amount in advance of the borrower's scheduled payment due 
date for a period of months not to exceed the period from the 
Secretary's receipt of the payment until the lesser of 12 months from 
that date or the date upon which the Secretary receives the borrower's 
next submission under subsection (e).
    (v) Receiving one of the following deferments or forbearances for 
the month:
    (A) Cancer treatment deferment under section 455(f)(3) of the Act;
    (B) Economic hardship deferment under Sec.  685.204(g);
    (C) Military service deferment under Sec.  685.204(h);
    (D) Post-active-duty student deferment under Sec.  685.204(i);
    (E) AmeriCorps forbearance under Sec.  685.205(a)(4);
    (F) National Guard Duty forbearance under Sec.  685.205(a)(7);
    (G) U.S. Department of Defense Student Loan Repayment Program 
forbearance under Sec.  685.205(a)(9);
    (H) Administrative forbearance or mandatory administrative 
forbearance under Sec.  685.205(b)(8) or (9); and
    (vi) Being employed full-time with a qualifying employer, as 
defined in this section, at any point during the month for which the 
payment is credited.
    (3) If a borrower consolidates one or more Direct Loans into a 
Direct Consolidation Loan, including a Direct PLUS Loan made to a 
parent borrower, the payments the borrower made on the Direct Loans 
prior to consolidating and that met the criteria in paragraphs 
(c)(2)(i) through (vi) of this section will count as qualifying 
payments on the Direct Consolidation Loan.
    (d) Forgiveness amount. The Secretary forgives the principal and 
accrued interest that remains on all loans for which the borrower meets 
the requirements of paragraph (c) of this section as of the date the 
borrower satisfied the last required monthly payment obligation.
    (e) Application process. (1) Notwithstanding paragraph (f) of this 
section, after making the 120 monthly qualifying payments on the 
eligible loans for which loan forgiveness is requested, a borrower may 
request loan forgiveness by filing an application approved by the 
Secretary.
    (2) If the Secretary has sufficient information to determine the 
borrower's qualifying employer and length of employment, the Secretary 
informs the borrower if the borrower is eligible for forgiveness.
    (3) If the Secretary does not have sufficient information to make a 
determination of the borrower's eligibility for forgiveness, the 
borrower must provide additional information about the borrower's 
employment and employer on a form approved by the Secretary.
    (4) If the borrower is unable to secure a certification of 
employment from a qualifying employer, the Secretary may determine the 
borrower's qualifying employment or payments based on other 
documentation provided by the borrower at the Secretary's request.
    (5) The Secretary may request reasonable additional documentation 
pertaining to the borrower's employer or employment before providing a 
determination.
    (6) The Secretary may substantiate an employer's attestation of 
information provided on the form in paragraph (e)(3) of this section 
based on a review of information about the employer.
    (7) If the Secretary determines that the borrower meets the 
eligibility requirements for loan forgiveness under this section, the 
Secretary--
    (i) Notifies the borrower of this determination; and
    (ii) Forgives the outstanding balance of the eligible loans.
    (8) If the Secretary determines that the borrower does not meet the 
eligibility requirements for loan forgiveness under this section, 
grants forbearance of payment on both principal and interest for the 
period in which collection activity was suspended. The Secretary 
notifies the borrower that the application has been denied, provides 
the basis for the denial, and informs the borrower that the Secretary 
will resume collection of the loan. The Secretary does not capitalize 
any interest accrued and not paid during this period.
    (f) Application not required. The Secretary forgives a loan under 
this section without an application from the borrower if the Secretary 
has sufficient information in the Secretary's possession to determine 
the borrower has satisfied the requirements for forgiveness under this 
section.
    (g) Reconsideration process. (1) Within 90 days of the date the 
Secretary sent the notice of denial of forgiveness under paragraph 
(e)(8) of this section to the borrower, the borrower may request that 
the Secretary reconsider whether the borrower's employer or any payment 
meets the requirements for credit toward forgiveness by requesting 
reconsideration on a form approved by the Secretary. Borrowers who were 
denied loan forgiveness under this section after October 1, 2017, and 
prior to [EFFECTIVE DATE OF FINAL RULE], have 180 days from that date 
to request reconsideration.
    (2) To evaluate a reconsideration request, the Secretary 
considers--
    (i) Any relevant evidence that is obtained by the Secretary; and
    (ii) Additional supporting documentation not previously provided by 
the borrower or employer.
    (3) The Secretary notifies the borrower of the reconsideration 
decision and the reason for the Secretary's determination.
    (4) If the Secretary determines that the borrower qualifies for 
forgiveness, the Secretary adjusts the borrower's number of qualifying 
payments or forgives the loan, as appropriate.
    (5) After the Secretary makes a decision on the borrower's 
reconsideration request, the Secretary's decision is final, and the 
borrower will not receive additional reconsideration unless the 
borrower presents additional evidence.
    (6) For any months in which a borrower postponed monthly payments 
under a deferment or forbearance and was employed full-time at a 
qualifying employer as defined in this section but was in a deferment 
or forbearance status besides those listed in paragraph (c)(2)(v) of 
this section, the borrower may obtain credit toward forgiveness for 
those months, as defined in paragraph (d) of this section, for any 
months in which the borrower--
    (i) Makes an additional payment equal to or greater than the amount 
they would have paid at that time on a qualifying repayment plan or
    (ii) Otherwise qualified for a $0 payment on an income-driven 
repayment plan under Sec.  685.209 and income-based repayment plan 
under Sec.  685.221.
0
32. Section 685.300 is amended by:
0
a. Revising paragraphs (b)(7) and (10);
0
b. Redesignating paragraphs (b)(11) and (12) as paragraphs (b)(12) and 
(13), respectively;
0
c. Adding new paragraph (b)(11);
0
d. Revising newly redesignated paragraph (b)(13); and
0
e. Adding paragraphs (d) through (i).
    The revisions and additions read as follows:


Sec.  685.300  Agreements between an eligible school and the Secretary 
for participation in the Direct Loan Program.

* * * * *
    (b) * * *

[[Page 42003]]

    (7) Provide assurances that the school will comply with loan 
information requirements established by the Secretary with respect to 
loans made under the Direct Loan Program;
* * * * *
    (10) Provide that the school will not charge any fees of any kind, 
however described, to student or parent borrowers for origination 
activities or for the provision of information necessary for a student 
or parent to receive a loan under part D of the Act or for any benefits 
associated with such a loan;
    (11) Comply with the provisions of paragraphs (d) through (i) of 
this section regarding student claims and disputes;
* * * * *
    (13) Accept responsibility and financial liability stemming from 
losses incurred by the Secretary for repayment of amounts discharged by 
the Secretary pursuant to Sec. Sec.  685.206, 685.214, 685.215, 
685.216, 685.222, and subpart D of this part.
* * * * *
    (d) Borrower defense claims in an internal dispute process. The 
school will not compel any student to pursue a complaint based on 
allegations that would provide a basis for a borrower defense claim 
through an internal dispute process before the student presents the 
complaint to an accrediting agency or government agency authorized to 
hear the complaint.
    (e) Class action bans. (1) The school will not seek to rely in any 
way on a pre-dispute arbitration agreement or on any other pre-dispute 
agreement with a student who has obtained or benefited from a Direct 
Loan, with respect to any aspect of a class action that is related to a 
borrower defense claim, unless and until the presiding court has ruled 
that the case may not proceed as a class action and, if that ruling may 
be subject to appellate review on an interlocutory basis, the time to 
seek such review has elapsed or the review has been resolved.
    (2) Reliance on a pre-dispute arbitration agreement, or on any 
other pre-dispute agreement, with a student, with respect to any aspect 
of a class action includes, but is not limited to, any of the 
following:
    (i) Seeking dismissal, deferral, or stay of any aspect of a class 
action;
    (ii) Seeking to exclude a person or persons from a class in a class 
action;
    (iii) Objecting to or seeking a protective order intended to avoid 
responding to discovery in a class action;
    (iv) Filing a claim in arbitration against a student who has filed 
a claim on the same issue in a class action;
    (v) Filing a claim in arbitration against a student who has filed a 
claim on the same issue in a class action after the trial court has 
denied a motion to certify the class but before an appellate court has 
ruled on an interlocutory appeal of that motion, if the time to seek 
such an appeal has not elapsed or the appeal has not been resolved; and
    (vi) Filing a claim in arbitration against a student who has filed 
a claim on the same issue in a class action, after the trial court in 
that class action has granted a motion to dismiss the claim and noted 
that the consumer has leave to refile the claim on a class basis, if 
the time to refile the claim has not elapsed.
    (3) Required provisions and notices: (i) After [EFFECTIVE DATE OF 
FINAL RULE], the school must include the following provision in any 
agreements with a student recipient of a Direct Loan for attendance at 
the school, or a student for whom the PLUS loan was obtained, that 
include pre-dispute arbitration or any other pre-dispute agreement 
addressing class actions: ``We agree that this agreement cannot be used 
to stop you from being part of a class action lawsuit in court. You may 
file a class action lawsuit in court or you may be a member of a class 
action lawsuit even if you do not file it. This provision applies only 
to class action claims concerning our acts or omissions regarding the 
making of the Direct Loan or our provision of educational services for 
which the Direct Loan was obtained. We agree that the court has 
exclusive jurisdiction to decide whether a claim asserted in the 
lawsuit is a claim regarding the making of the Federal Direct Loan or 
the provision of educational services for which the loan was 
obtained.''
    (ii) When a pre-dispute arbitration agreement or any other pre-
dispute agreement addressing class actions has been entered into before 
[EFFECTIVE DATE OF FINAL RULE], and does not contain the provision 
described in paragraph (e)(3)(i) of this section, the school must 
either ensure the agreement is amended to contain that provision or 
provide the student to whom the agreement applies with written notice 
of that provision.
    (iii) The school must ensure the agreement described in paragraph 
(e)(3)(ii) of this section is amended to contain the provision set 
forth in paragraph (e)(3)(i) or must provide the notice to students 
specified in that paragraph no later than the exit counseling required 
under Sec.  685.304(b), or the date on which the school files its 
initial response to a demand for arbitration or service of a complaint 
from a student who has not already been sent a notice or amendment, 
whichever is earlier.
    (A) Agreement provision. ``We agree that neither we, nor anyone 
else who later becomes a party to this agreement, will use it to stop 
you from being part of a class action lawsuit in court. You may file a 
class action lawsuit in court or you may be a member of a class action 
lawsuit in court even if you do not file it. This provision applies 
only to class action claims concerning our acts or omissions regarding 
the making of the Federal Direct Loan or the provision by us of 
educational services for which the Federal Direct Loan was obtained. We 
agree that the court has exclusive jurisdiction to decide whether a 
claim asserted in the lawsuit is a claim regarding the making of the 
Federal Direct Loan or the provision of educational services for which 
the loan was obtained.''
    (B) Notice provision. ``We agree not to use any pre-dispute 
agreement to stop you from being part of a class action lawsuit in 
court. You may file a class action lawsuit in court or you may be a 
member of a class action lawsuit even if you do not file it. This 
provision applies only to class action claims concerning our acts or 
omissions regarding the making of the Federal Direct Loan or the 
provision by us of educational services for which the Federal Direct 
Loan was obtained. We agree that the court has exclusive jurisdiction 
to decide whether a claim asserted in the lawsuit is a claim regarding 
the making of the Federal Direct Loan or the provision of educational 
services for which the loan was obtained.''
    (f) Pre-dispute arbitration agreements. (1)(i) The school will not 
enter into a pre-dispute agreement to arbitrate a borrower defense 
claim or rely in any way on a pre-dispute arbitration agreement with 
respect to any aspect of a borrower defense claim.
    (ii) A student may enter into a voluntary post-dispute arbitration 
agreement with a school to arbitrate a borrower defense claim.
    (2) Reliance on a pre-dispute arbitration agreement with a student 
with respect to any aspect of a borrower defense claim includes, but is 
not limited to, any of the following:
    (i) Seeking dismissal, deferral, or stay of any aspect of a 
judicial action filed by the student, including joinder with others in 
an action;
    (ii) Objecting to or seeking a protective order intended to avoid 
responding to discovery in a judicial action filed by the student; and

[[Page 42004]]

    (iii) Filing a claim in arbitration against a student who has filed 
a suit on the same claim.
    (3) Required provisions and notices: (i) The school must include 
the following provision in any pre-dispute arbitration agreements with 
a student recipient of a Direct Loan for attendance at the school, or, 
with respect to a Parent PLUS Loan, a student for whom the PLUS loan 
was obtained, that include any agreement regarding arbitration and that 
are entered into after [EFFECTIVE DATE OF FINAL RULE]: ``We agree that 
neither we nor anyone else will use this agreement to stop you from 
bringing a lawsuit concerning our acts or omissions regarding the 
making of the Federal Direct Loan or the provision by us of educational 
services for which the Federal Direct Loan was obtained. You may file a 
lawsuit for such a claim, or you may be a member of a class action 
lawsuit for such a claim even if you do not file it. This provision 
does not apply to lawsuits concerning other claims. We agree that only 
the court is to decide whether a claim asserted in the lawsuit is a 
claim regarding the making of the Federal Direct Loan or the provision 
of educational services for which the loan was obtained.''
    (ii) When a pre-dispute arbitration agreement has been entered into 
before [EFFECTIVE DATE OF FINAL RULE], that did not contain the 
provision specified in paragraph (f)(3)(i) of this section, the school 
must either ensure the agreement is amended to contain the provision 
specified in paragraph (f)(3)(iii)(A) of this section or provide the 
student to whom the agreement applies with the written notice specified 
in paragraph (f)(3)(iii)(B) of this section.
    (iii) The school must ensure the agreement described in paragraph 
(f)(3)(ii) of this section is amended to contain the provision 
specified in paragraph (f)(3)(iii)(A) of this section or must provide 
the notice specified in paragraph (f)(3)(iii)(B) of this section to 
students no later than the exit counseling required under Sec.  
685.304(b), or the date on which the school files its initial response 
to a demand for arbitration or service of a complaint from a student 
who has not already been sent a notice or amendment, whichever is 
earlier.
    (A) Agreement provision. ``We agree that neither we, nor anyone 
else who later becomes a party to this pre-dispute arbitration 
agreement, will use it to stop you from bringing a lawsuit concerning 
our acts or omissions regarding the making of the Federal Direct Loan 
or the provision by us of educational services for which the Federal 
Direct Loan was obtained. You may file a lawsuit for such a claim or 
you may be a member of a class action lawsuit for such a claim even if 
you do not file it. This provision does not apply to other claims. We 
agree that only the court is to decide whether a claim asserted in the 
lawsuit is a claim regarding the making of the Federal Direct Loan or 
the provision of educational services for which the loan was 
obtained.''
    (B) Notice provision. ``We agree not to use any pre-dispute 
arbitration agreement to stop you from bringing a lawsuit concerning 
our acts or omissions regarding the making of the Federal Direct Loan 
or the provision by us of educational services for which the Federal 
Direct Loan was obtained. You may file a lawsuit regarding such a claim 
or you may be a member of a class action lawsuit regarding such a claim 
even if you do not file it. This provision does not apply to any other 
claims. We agree that only the court is to decide whether a claim 
asserted in the lawsuit is a claim regarding the making of the Direct 
Loan or the provision of educational services for which the loan was 
obtained.''
    (g) Submission of arbitral records. (1) A school must submit a copy 
of the following records to the Secretary, in the form and manner 
specified by the Secretary, in connection with any borrower defense 
claim filed in arbitration by or against the school:
    (i) The initial claim and any counterclaim;
    (ii) The arbitration agreement filed with the arbitrator or 
arbitration administrator;
    (iii) The judgment or award, if any, issued by the arbitrator or 
arbitration administrator;
    (iv) If an arbitrator or arbitration administrator refuses to 
administer or dismisses a claim due to the school's failure to pay 
required filing or administrative fees, any communication the school 
receives from the arbitrator or arbitration administrator related to 
such a refusal; and
    (v) Any communication the school receives from an arbitrator or an 
arbitration administrator related to a determination that a pre-dispute 
arbitration agreement regarding educational services provided by the 
school does not comply with the administrator's fairness principles, 
rules, or similar requirements, if such a determination occurs;
    (2) A school must submit any record required pursuant to paragraph 
(g)(1) of this section within 60 days of filing by the school of any 
such record with the arbitrator or arbitration administrator and within 
60 days of receipt by the school of any such record filed or sent by 
someone other than the school, such as the arbitrator, the arbitration 
administrator, or the student.
    (3) The Secretary shall publish the records submitted by schools in 
paragraph (g)(1) of this section in a centralized database accessible 
to the public.
    (h) Submission of judicial records. (1) A school must submit a copy 
of the following records to the Secretary, in the form and manner 
specified by the Secretary, in connection with any borrower defense 
claim filed in a lawsuit by the school against the student or by any 
party, including a government agency, against the school:
    (i) The complaint and any counterclaim;
    (ii) Any dispositive motion filed by a party to the suit; and
    (iii) The ruling on any dispositive motion and the judgment issued 
by the court;
    (2) A school must submit any record required pursuant to paragraph 
(h)(1) of this section within 30 days of filing or receipt, as 
applicable, of the complaint, answer, or dispositive motion, and within 
30 days of receipt of any ruling on a dispositive motion or a final 
judgment;
    (3) The Secretary shall publish the records submitted by schools in 
paragraph (h)(1) in a centralized database accessible to the public.
    (i) Definitions. For the purposes of paragraphs (d) through (h) of 
this section, the term--
    (1) Borrower defense claim means an act or omission that is or 
could be asserted as a borrower defense as defined in:
    (i) Sec.  685.206(c)(1);
    (ii) Sec.  685.222(a)(5);
    (iii) Sec.  685.206(e)(1)(iii); or
    (iv) Sec.  685.401(a);
    (2) Class action means a lawsuit in which one or more parties seek 
class treatment pursuant to Federal Rule of Civil Procedure 23 or any 
State process analogous to Federal Rule of Civil Procedure 23;
    (3) Dispositive motion means a motion asking for a court order that 
entirely disposes of one or more claims in favor of the party who files 
the motion without need for further court proceedings;
    (4) Pre-dispute arbitration agreement means any agreement, 
regardless of its form or structure, between a school or a party acting 
on behalf of a school and a student that provides for arbitration of 
any future dispute between the parties.


Sec.  685.304  [Amended]

0
33. Section 685.304 is amended:

[[Page 42005]]

0
a. In paragraph (a)(6)(xi), by adding ``and'' after ``records;'';
0
b. In paragraph (a)(6)(xii), by removing the semicolon after ``loan'' 
and adding a period in its place; and
0
c. Removing paragraphs (a)(6)(xiii) through (xv).
0
34. Section 685.308 is amended by revising paragraph (a)(3) to read as 
follows:


Sec.  685.308  Remedial actions.

    (a) * * *
    (3) The school's actions that gave rise to a successful claim for 
which the Secretary discharged a loan, in whole or in part, pursuant to 
Sec. Sec.  685.206, 685.214, 685.216, 685.222, or subpart D of this 
part.
* * * * *
0
35. Subpart D is added to read as follows:
Subpart D--Borrower Defense to Repayment
Sec.
685.400 Scope and purpose.
685.401 Borrower defense-general.
685.402 Group process for borrower defense.
685.403 Individual process for borrower defense.
685.404 Group process based on prior Secretarial final actions.
685.405 Institutional response.
685.406 Adjudication of borrower defense applications.
685.407 Reconsideration.
685.408 Discharge.
685.409 Recovery from institutions.
685.410 Cooperation by the borrower.
685.411 Transfer to the Secretary of the borrower's right of 
recovery against third parties.
685.499 Severability.

Subpart D--Borrower Defense to Repayment


Sec.  685.400  Scope and purpose.

    This subpart sets forth the provisions under which a borrower 
defense to repayment may be asserted and applies to borrower defense 
applications pending with the Secretary on July 1, 2023, or received by 
the Secretary on or after July 1, 2023.


Sec.  685.401  Borrower defense-general.

    (a) Definitions. For the purposes of this subpart, the following 
definitions apply:
    Borrower means
    (i) The borrower; and
    (ii) In the case of a Direct PLUS Loan, any endorsers, and for a 
Direct PLUS Loan made to a parent, the student on whose behalf the 
parent borrowed.
    Borrower defense to repayment means an act or omission of the 
school attended by the student that relates to the making of a Direct 
Loan for enrollment at the school or the provision of educational 
services for which the loan was provided, and includes the following:
    (i) A defense to repayment of amounts owed to the Secretary on a 
Direct Loan including a Direct Consolidation Loan that was used to 
repay a Direct Loan, a FFEL Program Loan, Federal Perkins Loan, Health 
Professions Student Loan, Loan for Disadvantaged Students under subpart 
II of part A of title VII of the Public Health Service Act, Health 
Education Assistance Loan, or Nursing Loan made under part E of the 
Public Health Service Act; and
    (ii) Any accompanying request for reimbursement of payments 
previously made to the Secretary on the Direct Loan or on a loan repaid 
by the Direct Consolidation Loan.
    Department official means the employee of the Department who 
administers the group process described in Sec.  685.402, the 
individual process as described in Sec.  685.403, and the institutional 
response process in Sec.  685.405.
    Direct Loan means a Direct Subsidized Loan, a Direct Unsubsidized 
Loan, a Direct PLUS Loan, or a Direct Consolidation Loan.
    School and institution may be used interchangeably and include an 
eligible institution as defined in 34 CFR 600.2, one of its 
representatives, or any ineligible institution, organization, or person 
with whom the eligible institution has an agreement to provide 
educational programs or to provide marketing, advertising, recruiting, 
or admissions services. School or institution also includes persons 
affiliated with the institution as described in Sec.  668.174(b) of 
this chapter.
    State requestor means a State as defined in 34 CFR 600.2, a State 
attorney general, a State oversight or regulatory agency with the 
authority from that State.
    (b) Federal standard for borrower defense applications received on 
or after July 1, 2023, and for applications pending with the Secretary 
on July 1, 2023. A borrower with a balance due on a Direct Loan or 
other Federal student loan that is consolidated into a Federal Direct 
Consolidation Loan will be determined to have a defense to repayment of 
a Direct Loan under this subpart, if at any time the borrower 
establishes by a preponderance of the evidence that--
    (1) The institution made a substantial misrepresentation as defined 
in 34 CFR part 668, subpart F, in connection with the borrower's 
decision to attend, or to continue attending, the institution or the 
borrower's decision to take out a Direct Loan or other Federal student 
loan that is consolidated into a Federal Direct Consolidation Loan;
    (2) The institution made a substantial omission of fact, as defined 
in 34 CFR part 668, subpart F, in connection with the borrower's 
decision to attend, or to continue attending, the institution or the 
borrower's decision to take out a Direct Loan or other Federal student 
loan that is consolidated into a Federal Direct Consolidation Loan;
    (3) The institution failed to perform its obligations under the 
terms of a contract with the student and such failure was in connection 
with the borrower's decision to attend, or to continue attending, the 
institution or the borrower's decision to take out a Direct Loan or 
other Federal student loan that is consolidated into a Federal Direct 
Consolidation Loan;
    (4) The institution engaged in aggressive and deceptive recruitment 
conduct or tactics as defined in 34 CFR part 668, subpart R, in 
connection with the borrower's decision to attend, or to continue 
attending, the institution or the borrower's decision to take out a 
Direct Loan or other Federal student loan that is consolidated into a 
Federal Direct Consolidation Loan; or,
    (5)(i) The borrower, whether as an individual or as a member of a 
class, or a governmental agency has obtained against the institution a 
favorable judgment based on State or Federal law in a court or 
administrative tribunal of competent jurisdiction in connection with 
the borrower's decision to attend, or to continue attending, the 
institution or the borrower's decision to take out a Direct Loan or 
other Federal student loan that is consolidated into a Federal Direct 
Consolidation Loan; or,
    (ii) The Secretary sanctioned or otherwise took adverse action 
against the institution at which the borrower enrolled under 34 CFR 
part 668, subpart G, for reasons that could give rise to a borrower 
defense claim under paragraphs (b)(1) through (4) of this section.
    (c) Violation of State law. A borrower has a borrower defense to 
repayment under this subpart if the Secretary identifies an act or 
omission of the school attended by the student that relates to the 
making of the loan for enrollment at the school or the provision of 
educational services for which the loan was provided that would give 
rise to a cause of action against the school under applicable State 
law.
    (d) Exclusions. An institution's violation of an eligibility or 
compliance requirement in the Act or its implementing regulations is 
not a basis for a borrower defense under this

[[Page 42006]]

subpart unless the violation would otherwise constitute a basis for a 
borrower defense under this subpart.


Sec.  685.402  Group process for borrower defense.

    (a) Group process, generally. Upon consideration of factors 
including, but not limited to, common facts and claims by borrowers, 
and the promotion of compliance by an institution or other title IV, 
HEA program participant, the Secretary may initiate a process to 
determine whether a group of borrowers from one institution or commonly 
owned institutions identified by the Secretary has a borrower defense 
under this subpart.
    (b) Secretary initiated group process. The Secretary may create a 
group based upon information from sources that include but are not 
limited to--
    (1) Actions by the Federal Government, State attorneys general, 
other State agencies or officials, or other law enforcement activity;
    (2) Lawsuits related to educational programs filed against the 
institutions which are the subject of the claims or judgments rendered 
against the institutions; or,
    (3) Individual borrower defense claims pursuant to Sec.  685.403.
    (c) State requestor-initiated group process. The Secretary shall 
consider a request to form a group from a State requestor in which the 
requestor--
    (1) Submits an application to the Secretary, on a form approved by 
the Secretary that--
    (i) Identifies the requested group, including at minimum:
    (A) The name of the institution or commonly owned institutions;
    (B) The campuses or programs which are the subject of the claim, if 
applicable;
    (C) A description of the conduct that forms the basis for the 
borrower defense claim under the Federal standard in Sec.  685.401(b);
    (D) An analysis of why the requestor believes the conduct should 
result in an approved borrower defense claim under the Federal standard 
in Sec.  685.401(b); and,
    (E) The period during which the activity in (c)(1)(i)(C) of this 
section occurred;
    (ii) Provides evidence beyond sworn borrower statements that 
supports each element of the claim made in this paragraph (c)(1); and
    (iii) Provides the names and other identifying information of 
borrowers in the group to the extent available; and,
    (2) Provides any other information or supporting documentation 
reasonably requested by the Secretary within 90 days of the Secretary's 
request.
    (3) The Secretary may consolidate multiple group applications 
related to the same institution or institutions.
    (4) The Secretary shall provide a response to any materially 
complete State requestor group request under this paragraph (c) within 
365 days of receipt. That response shall include:
    (i) Whether the Secretary will choose to form a group and a 
definition of the group formed;
    (ii) If the Secretary chooses not to form a group, the reasons for 
not doing so; and
    (iii) Any additional information needed from the Sate requestor to 
continue the State requested group process.
    (5)(i) If the Secretary denies in whole or in part a State request 
to form a group under the process described in this paragraph (c), for 
reasons other than that the Secretary already has formed a group that 
includes the members of the proposed group or has findings that cover 
the members of the proposed group, the State requestor submitting the 
group claim may request that the Secretary reconsider the decision upon 
the identification of new evidence that was not previously available to 
the Secretary in forming the group.
    (ii) The State requestor submitting the group claim under this 
paragraph (c) must request reconsideration of the group formation no 
later than 90 days from the date of the Secretary's initial decision 
regarding formation of the group.
    (iii) The Secretary shall provide a response to the State requestor 
that requested reconsideration of the group's formation within 90 days 
of receipt of the reconsideration request.
    (d) Process after group formation. Upon formation of a group of 
borrowers under this section, the Secretary--
    (1) Designates a Department official to present the group's claim 
in the institutional response process described in Sec.  685.405;
    (2) For borrowers who have an application pending with the 
Secretary prior to the formation of the group, notifies those borrowers 
that they are an identified member of the group formed under this 
section and follows Sec.  685.403(d) or (e) as appropriate;
    (3) For borrowers whose names were submitted by the State requestor 
and that can be identified by the Secretary, or that can otherwise be 
identified by the Secretary, if the borrower is not in default and does 
not have a separate application pending with the Secretary, follows the 
procedures under Sec.  685.403(d) except that interest on the loan 
shall stop accumulating immediately;
    (4) For borrowers whose names were submitted by the State requestor 
and that can be identified by the Secretary, or that can otherwise be 
identified by the Secretary, if the borrower is in default and does not 
have a separate application pending with the Secretary, follows the 
procedures under Sec.  685.403(e) except that the interest on the loan 
shall stop accumulating immediately;
    (5) For possible group members that the Secretary cannot identify, 
the Secretary will take reasonable steps to identify and notify 
potential members of the group, and if the Secretary ultimately is able 
to identify any additional members, then it shall follow the process 
under paragraphs (d)(3) and (4) of this section to allow those 
additional members to opt-in the group formed; and,
    (6) If the Secretary later identifies a borrower that should have 
received the benefits as described under paragraph (d)(3) or (4) of 
this section, either prior to the adjudication of the group or after an 
adjudication that results in the approval of a group borrower defense, 
the Secretary shall retrospectively apply the benefits available to the 
borrower under those subparagraphs and no other consequences shall 
apply.


Sec.  685.403  Individual process for borrower defense.

    (a) Individual process, generally. (1) If Sec.  685.402 does not 
apply to an individual borrower who has submitted a borrower defense 
application, the Secretary shall initiate a process to determine 
whether the individual borrower has a borrower defense under this 
subpart.
    (2) If Sec.  685.402 applies to an individual borrower who is 
covered under a group borrower defense application being considered by 
the Secretary, that group borrower defense application shall toll the 
timelines under Sec.  685.406 on adjudicating the individual borrower 
application.
    (3) Paragraph (a)(1) of this section shall not apply to claims 
covered by a group claim under Sec.  685.402, including claims 
submitted prior to the formation of such a group, until after the 
Secretary makes a decision on that group claim.
    (b) Individual process. (1) The Secretary shall consider a borrower 
defense claim from an individual borrower in which the borrower--
    (i) Submits an application to the Secretary, on a form approved by 
the Secretary; and,
    (ii) Provides additional supporting evidence for the claims made 
under subparagraph (b)(1)(i) of this section, if any;

[[Page 42007]]

    (2) The individual must provide any other information or supporting 
documentation reasonably requested by the Secretary.
    (c) Individual borrower status. Upon receipt of a materially 
complete application under this section, the Secretary--
    (1) Designates a Department official to present the individual's 
claim in the institutional response process described in Sec.  685.405;
    (2) Notifies the borrower that it will adjudicate the claim under 
Sec.  685.406(c); and
    (3) Places all the borrower's loans in forbearance in accordance 
with paragraph (d) of this section or stopped enforcement collections 
in accordance with paragraph (e) of this section, as applicable.
    (d) Forbearance. The Secretary grants forbearance on all of the 
borrower's title IV loans that are not in default in accordance with 
Sec.  685.205 and--
    (1) Notifies the borrower of the option to decline forbearance and 
to continue making payments on the borrower's loans, and the 
availability of income-contingent repayment plans under Sec.  685.209 
and the income-based repayment plan under Sec.  685.221; and,
    (2) Does not charge interest on the borrower's loans beginning 180 
days from the date the borrower was initially granted forbearance under 
this paragraph (d) if the Department official has failed to make a 
determination on the borrower's claim by that date and continuing until 
the Department notifies the borrower of the decision.
    (e) Loan collection activities during adjudication of borrower 
defense claim. The Secretary--
    (1) Suspends collection activity on all defaulted title IV loans 
until the Secretary issues a decision on the borrower defense claim;
    (2) Does not charge interest on the borrower's loans beginning 180 
days from the date the Secretary initially suspended collection 
activity under subparagraph (e)(1) of this section if the Secretary has 
not made a determination on the borrower's claim by that date and 
continuing until the Department notifies the borrower of the decision;
    (3) Notifies the borrower of the suspension of collection activity 
and explains that collection activity will resume no earlier than 90 
days following final adjudication of the borrower defense claim if the 
Secretary determines that the borrower does not qualify for a full 
discharge; and
    (4) Notifies the borrower of the option to begin or continue making 
payments under a rehabilitation agreement or other repayment agreement 
on the defaulted loan.


Sec.  685.404  Group process based on prior Secretarial final actions.

    (a) For purposes of forming a Secretary-initiated group process in 
accordance with Sec.  685.402(b), the Department official may consider 
final actions as described in Sec.  685.401(b)(5)(ii). Such final 
actions include but are not limited to:
    (1) Actions arising from a final audit determination or final 
program review determination regarding the relevant institution;
    (2) An institution's failure to meet the administrative capability 
requirements that relate to the provision of educational services 
provided by the institution, in accordance with Sec.  668.16 of this 
chapter;
    (3) An institution's loss of eligibility due to its cohort default 
rates, in accordance with part 668, subpart N;
    (4) Fines, limitations, suspension, termination, or emergency 
actions against the institution taken by the Secretary in accordance 
with 34 CFR part 668, subpart G; and,
    (5) Other final actions as determined by the Secretary.
    (b) For groups based on prior Secretarial final actions in 
accordance with this section, Sec.  685.405 shall not apply to the 
affected institutions.


Sec.  685.405  Institutional response.

    (a) For purposes of adjudicating a borrower defense claim, the 
Department official notifies the institution of the group claim under 
Sec.  685.402 or individual claim under Sec.  685.403, and requests a 
response from the school. Such notification also may include, but is 
not limited to, requests for documentation to substantiate the school's 
response.
    (b)(1) The notification in paragraph (a) of this section tolls any 
limitation period by which the Secretary may recover from the 
institution under Sec.  685.409.
    (2) The Department official requests a response from the 
institution within 90 days of the Department official's notification.
    (c) With its response, the institution must submit an affidavit, on 
a form approved by the Secretary, certifying under penalty of perjury 
that the information submitted to the Department official is true and 
correct.
    (d) If the institution does not respond to the Department 
official's information request within 90 days, the Department official 
shall presume that the institution does not contest the borrower 
defense to repayment claim.


Sec.  685.406  Adjudication of borrower defense applications.

    (a) Adjudication. The Department official adjudicates a borrower 
defense claim in accordance with this section.
    (b) Group process, adjudication. (1) For a group formed under Sec.  
685.402, the Department official considers any evidence related to the 
claim, including materials submitted as part of the group application, 
individual claims that are part of the group, evidence in the 
Secretary's possession, evidence provided by the institution during the 
institutional response process described in Sec.  685.405, and any 
other relevant information.
    (2) For a group of borrowers under Sec.  685.402 for which the 
Department official determines there may be a borrower defense under 
Sec.  685.401(b), there is a rebuttable presumption that each member of 
the group relied on the act or omission giving rise to the borrower 
defense in deciding to attend, or continue attending, the institution, 
and that such reliance was reasonable.
    (c) Individual process, adjudication. For an individual process 
under Sec.  685.403, the Department official adjudicates the borrower 
defense using the information available to it. The Department official 
considers any evidence related to the claim, including materials 
submitted as part of the individual application, evidence in the 
Secretary's possession, evidence provided by the institution during the 
institutional response process described in Sec.  685.405, and any 
other relevant information.
    (d) Additional information needed from the school. If the 
Department official requires additional information from the school, 
the school must respond to the Department official's information 
request within 90 days. If the Department official requires additional 
information from the individual, the individual must respond within a 
reasonable timeframe.
    (e) Written decision. The Department official issues a written 
decision as follows:
    (1) Full or partial approval. If the Department official approves 
the borrower defense claim in full or in part--
    (i) The written decision states that Secretary's determination and 
any discharge provided under Sec.  685.408 on the basis of that claim.
    (ii) The Secretary places a borrower's Direct Loans associated with 
a group borrower defense claim into forbearance until the Secretary 
discharges the loan obligations under Sec.  685.212(k). If any balance 
remains on the Direct Loans not associated with the borrower defense

[[Page 42008]]

claim or for loans that were not fully discharged, those loans will 
return to their status prior to the claim process. The Secretary 
resumes collection activities on those Direct Loans not associated with 
the borrower defense claim or for loans that were not fully discharged 
no earlier than 90 days from the date the Department official issues a 
written decision. No interest will be charged on the loans during the 
forbearance period.
    (2) Full denial--(i) Full denial, group. If the Department official 
denies the borrower defense in full, the written decision states the 
reasons for the denial, the evidence upon which the decision was based, 
and the portion of the loans that is due and payable to the Secretary. 
The Department official informs the borrowers that for the Direct Loans 
associated with the group borrower defense claim, those loans will 
return to their status prior to the group claim process. The Secretary 
resumes collection activities on the Direct Loans associated with the 
group borrower defense claim no earlier than 90 days from the date the 
Department official issues a written decision. The Department official 
also informs individual borrower from the group claim initially 
adjudicated under Sec.  685.406(b)(1) the option to file a new borrower 
defense application under an individual process in accordance with 
Sec.  685.403.
    (ii) Full denial, individual. If the Department official denies the 
borrower defense in full, the written decision states the reasons for 
the denial, the evidence upon which the decision was based, and the 
portion of the loans that is due and payable to the Secretary. The 
Department official informs the borrowers that if any balance remains 
on the Direct Loans associated with the borrower defense claim, those 
loans will return to their status prior to the claim process. The 
Secretary resumes collection activities on the loans under which a 
forbearance or stopped collection was granted during adjudication of 
the claim in accordance with Sec. Sec.  685.403(d) and (e) and 
685.402(d)(2) through (4), no earlier than 90 days from the date the 
Department official issues a written decision. The Department official 
also informs the borrower of the opportunity to request reconsideration 
of the claim pursuant to Sec.  685.407.
    (3) Copies of written decisions. The Secretary provides copies of 
the written decision in this subsection to:
    (i) An individual whose claim was adjudicated under Sec.  
685.406(c), as applicable;
    (ii) The members of the group whose claims were adjudicated under 
Sec.  685.406(b)(1), as applicable;
    (iii) The school, to the extent practicable; and,
    (iv) The State requestor who requested the group claims process, as 
applicable.
    (f) Adjudication, timelines. (1) The Secretary shall adjudicate a 
group or individual borrower defense claim under the following 
timelines:
    (2) For a group claim under Sec.  685.402(c), within 2 years of the 
date the Department official notified the State requestor under Sec.  
685.402(c)(4).
    (3) For an individual claim under Sec.  685.403, within 3 years of 
the date the Department determines the borrower submitted a materially 
complete application.
    (4) The timelines in paragraph (f)(2) or (3) of this section shall 
not apply for additional adjudications carried out as part of the 
reconsideration process in Sec.  685.407.
    (5) An individual claim under Sec.  685.403 that is included in a 
group claim under Sec.  685.402 shall be subject to the adjudication 
timeline for that group under paragraph (f)(2) of this section, and any 
timelines associated with individual adjudication in paragraph (f)(3) 
of this section shall be tolled until the Department official renders a 
decision on the claim under Sec.  685.402.
    (6) The Secretary shall provide an interim update to the individual 
borrower submitting a claim under Sec.  685.403 or to the State 
requestor requesting a group process under Sec.  685.402 no later than 
1 year after the dates in paragraphs (f)(2) and (3) of this section. 
Such notification shall--
    (i) Indicate the Secretary's progress in adjudicating the claim or 
claims; and,
    (ii) Provide an expected timeline for rendering a decision on the 
claim.
    (7) Only those loans covered by claims on which the Secretary has 
not yet issued the written decision under paragraph (e) of this section 
by the dates identified in paragraph (f)(2) or (3) of this section 
shall be deemed unenforceable.


Sec.  685.407  Reconsideration.

    (a) The decision of the Department official is final as to the 
merits of the borrower defense and any discharge that may be granted on 
the claim. Notwithstanding the foregoing--
    (1) If the borrower defense is denied in full or in part, an 
individual may request that the Secretary reconsider their individual 
borrower defense claim on the following grounds for:
    (i) Administrative or technical errors;
    (ii) Consideration under an otherwise applicable State law standard 
under Sec.  685.401(c) in lieu of the Federal standard; or,
    (iii) Identification of evidence that was not previously provided 
by the borrower and that was not identified in the final decision as a 
basis for the Department official's determination;
    (2)(i) If the borrower defense is denied in full or in part for a 
group claim adjudicated under Sec.  685.406(b)(1), any of the State 
requestors that requested to form a group under Sec.  685.402(c) may 
request that the Secretary reconsider the borrower defense for the 
reasons provided under (a)(1)(i) through (iii) of this section. A State 
entity's reconsideration request made in accordance with subparagraph 
(a)(1)(ii) of this section must provide:
    (A) The applicable State law standard;
    (B) Why the State requestor requests use of such State law 
standard;
    (C) Why application of the State law standard would result in a 
different outcome for the group than adjudication under the Federal 
standard; and
    (D) Why the applicable State law standard would lead to a borrower 
defense.
    (ii) An individual borrower from a group claim initially 
adjudicated under Sec.  685.406(b)(1) may not file a reconsideration 
request under this section.
    (3) The borrower or State requestor that requested to form a group 
under Sec.  685.402(c) must request reconsideration under this section 
no later than 90 days from the date of the Department official's 
written decision, for any decisions issued on or after the effective 
date of these regulations.
    (4)(i) The Secretary shall consider a reconsideration request under 
paragraph (a)(1) or (a)(2)(i) of this section in which the individual 
or State requestor--
    (A) Submits an application to the Secretary, on a form approved by 
the Secretary; and,
    (B) Provides additional supporting evidence for the reconsideration 
claims made in this paragraph (a)(4)(i), if any;
    (ii) The borrower or State requestor entity submitting the 
reconsideration request must provide any other information or 
supporting documentation reasonably requested by the Secretary 
regarding the reconsideration request.
    (b) The Secretary designates a different Department official for 
the reconsideration process than the one who conducted the initial 
adjudication.
    (c) If accepted for reconsideration by the Secretary, the 
Department official follows the procedures in Sec.  685.405 to notify 
the institution of the claim and the basis for the group's borrower 
defense under Sec.  685.402 or individual's

[[Page 42009]]

borrower defense under Sec.  685.403 for purposes of adjudicating 
reconsideration of the borrower defense claim and to request a response 
from the school to the reconsideration request.
    (d) If accepted for reconsideration by the Secretary, the 
Department official follows the procedures in Sec.  685.403(d) for 
granting forbearance and Sec.  685.403(e) for defaulted loans, as 
applicable.
    (e) The Department official adjudicates the borrower's 
reconsideration request under Sec.  685.406 and provides notice of the 
final decision upon reconsideration in accordance with Sec.  
685.406(e).
    (f)(1) The Secretary may reopen at any time a borrower defense 
application that was partially or fully denied. If a borrower defense 
application is reopened by the Secretary, the Secretary follows the 
procedures in Sec.  685.403(d) for granting forbearance and for Sec.  
685.403(e) for defaulted loans, as applicable.
    (2) Upon reopening a borrower defense application under (f) of this 
section, the Department official adjudicates the claim under Sec.  
685.406 and provides notice of the final decision on the reopened case 
in accordance with Sec.  685.406(e).


Sec.  685.408  Discharge.

    (a)(1) There is a presumption that a borrower with an approved 
borrower discharge claim adjudicated under Sec.  685.406(b) or (c) is 
eligible for full discharge of the Federal student loans associated 
with the approved claim unless the Department official is presented 
with a preponderance of evidence to the contrary.
    (2) The Secretary does not limit the period on a borrower's ability 
to receive a reimbursement of payments previously made that are 
associated with a fully or partially approved claim.
    (b) The Department official may rebut the presumption that the 
borrower or borrowers are eligible for full discharge if--
    (1) The conduct that resulted in the approved borrower defense 
claim relates to an easily quantifiable sum that is related to books, 
supplies and materials, or other charges that are not direct academic 
expenses, in which case the discharge amount is equal to that sum;
    (2) The conduct that resulted in the approved borrower defense 
claim relates to a substantial misrepresentation, substantial omissions 
of fact, breaches of contract, or aggressive or deceptive recruitment 
tactics or conduct, that did not involve the educational services 
provided. In that case, the amount of the discharge is tied to the full 
amount of harm experienced by the borrower as a result of the act or 
omission, but in no case shall be greater than the full amount of the 
loan; or,
    (3) The conduct that resulted in the approved borrower defense 
claim relates to a substantial misrepresentation, substantial omissions 
of fact, breaches of contract, or aggressive or deceptive recruitment 
tactics or conduct, that did not involve the outcomes of the borrower's 
education. In that case, the amount of the discharge is tied to the 
full amount of harm experienced by the borrower as a result of the act 
or omission, but in no case shall be greater than the full amount of 
the loan.
    (c)(1) If the Department official determines that the presumption 
of full discharge has been rebutted, the official recommends an 
appropriate discharge amount to the Secretary. The discharge amount 
shall be an easily quantifiable amount that is less than the full 
amount of the loan or loans related to the claim, or 50 percent of the 
disbursed balance of the loan if the amount is not easily quantifiable.
    (2) For a group process under Sec.  685.406(b), the Department 
official shall recommend the same discharge amount to the Secretary for 
all members of the group, either in dollars or as a percentage of the 
loan amount.
    (d) In determining whether an amount is easily quantifiable, the 
Department official--
    (1) May consider factors such as the amount of debt taken on by 
borrowers at that program compared to the median debt level at all 
programs of the same level and classification of instructional program 
(CIP) code offered by all other institutions of higher education;
    (2) May consider publicly available information on the price of 
books, supplies, or other materials; and
    (3) May not base the determination upon individual or group 
measurements of the borrower's earnings or employment.
    (e) The Department official recommends an appropriate amount of 
discharge to the Secretary, which may include a discharge of all 
amounts owed to the Secretary on the loan at issue and the 
reimbursement of amounts previously collected by the Secretary on the 
loan, an easily quantifiable amount that is less than the full amount 
of the loan or loans related to the claim, or 50 percent of the 
disbursed balance of the loan if the amount is not easily quantifiable.
    (f) The Secretary makes a final decision after taking into account 
the Department official's recommendation and the record compiled under 
Sec. Sec.  685.402, 685.403, 685.404, 685.405, and 685.407, as 
applicable.
    (g) The Secretary issues a written decision setting forth the 
amount of the discharge granted, after which the designated Department 
official deciding the claim notifies the borrower of the discharge 
provided and--
    (1) Specifies the amount of the discharge;
    (2) Advises that there may be State tax implications; and
    (3) If the borrower does not receive a full discharge of all loans 
covered by the claim, advises the borrower of the option to file a 
request for reconsideration in accordance with Sec.  685.407.
    (h) Consistent with the discharge amount determined under this 
section, the Secretary discharges the borrower's obligation to repay 
all or part of the loan and associated costs and fees that the borrower 
would otherwise be obligated to pay and, if applicable, reimburses the 
borrower for amounts paid toward the loan voluntarily or through 
enforced collection.
    (i) The Secretary affords the borrower such further relief as 
appropriate under the circumstances. Such further relief includes, but 
is not limited to, one or both of the following:
    (1) Determining that the borrower is not in default on the loan and 
is eligible to receive assistance under title IV of the Act.
    (2) Updating or deleting adverse reports the Secretary previously 
made to consumer reporting agencies regarding the borrower's Direct 
Loan.
    (j) The total amount of discharge granted with respect to a 
borrower defense cannot exceed the amount of the loan and any 
associated costs and fees and will be reduced by the amount of any 
refund, reimbursement, indemnification, restitution, compensatory 
damages, settlement, debt forgiveness, discharge, cancellation, 
compromise, or any other financial benefit received by, or on behalf 
of, the borrower that was related to the borrower defense. The relief 
to the borrower may not include non-pecuniary damages such as 
inconvenience, aggravation, emotional distress, or punitive damages.


Sec.  685.409  Recovery from institutions.

    (a) For loans first disbursed on or after July 1, 2023, the 
Secretary shall collect from the school, or in the case of a closed 
school, a person affiliated with the school as described in Sec.  
668.174(b) of this chapter, any liability to the Secretary for any 
amounts discharged or reimbursed to borrowers under the

[[Page 42010]]

discharge process described in Sec.  685.408.
    (b) Notwithstanding the paragraph (a) of this section, the 
Secretary may choose not to collect from the school, or in the case of 
a closed school, a person affiliated with the school as described in 
Sec.  668.174(b) of this chapter, any liability to the Secretary for 
any amounts discharged or reimbursed to borrowers under the discharge 
process described in Sec.  685.408, under the following conditions, 
such as:
    (1) The cost of collecting would exceed the amounts received; or
    (2) The claims were approved outside of the limitations period in 
paragraph (c) of this section;
    (c)(1) The Secretary shall initiate a proceeding to collect from 
the school the amount of discharge or reimbursement resulting from a 
borrower defense under Sec.  685.408 no later than 6 years after the 
borrower's last date of attendance at the institution;
    (2) The limitations period described in paragraph (c)(1) of this 
section shall not apply if at any time prior to the end of the 
limitations period--
    (i) The Department official notifies the school of the borrower's 
claim in accordance with Sec.  685.405(b);
    (ii) The institution receives a class action complaint asserting 
relief for a class that may include the borrower for underlying facts 
that may form the basis of a claim in accordance with this subpart; or
    (iii) The institution receives written notice, including a civil 
investigative demand or other written demand for information, from a 
Federal or State agency that has power to initiate an investigation 
into conduct of the school relating to specific programs, periods, or 
practices that may have affected the borrower, for underlying facts 
that may form the basis of a claim under this subpart.
    (3) For a borrower defense under Sec.  685.401(b)(5), the Secretary 
may initiate a proceeding to collect at any time.


Sec.  685.410  Cooperation by the borrower.

    To obtain a discharge under this subpart, a borrower must 
reasonably cooperate with the Secretary in any proceeding under this 
subpart.


Sec.  685.411  Transfer to the Secretary of the borrower's right of 
recovery against third parties.

    (a) Upon the granting of any discharge under this subpart, 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 contract for educational services for which the loan 
was received, against the school, its principals, its affiliates, and 
their successors, its sureties, and any private fund.
    (b) The provisions of this section 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.
    (c) Nothing in this section limits or forecloses the borrower's 
right to pursue legal and equitable relief against a party described in 
this section 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.


Sec.  685.499  Severability.

    If any provision of this subpart or its application to any person, 
act, or practice is held invalid, the remainder of the subpart or the 
application of its provisions to any person, act, or practice shall not 
be affected thereby.

[FR Doc. 2022-14631 Filed 7-12-22; 8:45 am]
BILLING CODE 4000-01-P


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