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Education Department Releases Final Borrower Defense Regulations

October 31, 2016

 

​The Department of Education Friday released the final regulations for the discharge of federal loans when colleges have defrauded students.

The so-called borrower defense rules apply a uniform federal standard for the handling of student loan discharges in cases where borrowers assert fraud or abuse by institutions. While this provision has existed in law for decades, it has been sparingly granted. The new regulations would greatly expand the availability and (likely success) of claims of borrower defense against repayment.

The final version of the regulations was little changed from the draft version offered for public comment, and did not significantly address concerns expressed by the higher education community that the rules do not distinguish between intentional fraud and inadvertent mistakes in cases such as advertising job placement rates—and in some ways are more stringent than the proposed rules, according to Inside Higher Ed.

While the potential impact of the final regulations remains uncertain, Inside Higher Ed also noted that there is praise for an accompanying announcement that the department would restore Pell Grant eligibility for students who were unable to finish a program after their institution shut down.

ACE and a group of 13 other higher education associations submitted comments in August on the proposed rules that expressed strong support for the department’s effort to provide clear, consistent processes through which borrowers who have been defrauded or harmed by the higher education institutions they attended may seek debt relief. But the groups also urged the department to continue to clarify the regulatory language to ensure that it will best serve borrowers, hold fraudulent institutions accountable for their misconduct and ensure a fair process for legitimate institutions.

The comments focused specifically on a limited number of issues related to the borrower defense portion of the proposed rule, including administrative concerns, defining the type and nature of claims, due process and dealing with consolidated loans.

A companion letter submitted by ACE and nine other higher education groups discussed the proposed changes in determining whether an institution is financially responsible and the consequences for being found “not financially responsible” in these situations. The associations asserted that the changes represented a significant shift in the department’s approach to the financial responsibility standards (or FRS) which is likely to result in adverse and unintended consequences for many colleges and universities, particularly smaller, tuition-dependent nonprofit institutions. Similar to the rules for discharge of loans, few changes were made to the proposed FRS language to incorporate stakeholder feedback.

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