Legal Alert

DOE Changes Student Borrower Defense Rules

September 19, 2019

The U.S. Department of Education (DOE) released final regulations for student borrower defense-to-repayment claims on August 30, 2019. The regulations create a number of notable changes, including permitting education institutions that receive Title IV funding to utilize pre-dispute arbitration and class-action waiver agreements, altering how borrower defense-to-repayment claims are processed, and reducing the financial responsibility reporting requirements.

Under the Obama-era rules, institutions are prohibited from using pre-dispute arbitration agreements or class-action waivers. The new regulations allow institutions to use these agreements so long as they are in plain language and the agreements are disclosed to students in multiple places, including during the student’s entrance counseling and online.

The regulations also revise how individual borrower defense-to-repayment claims are processed. Under the new regulations, a borrower begins the process by submitting an application proffering a defense to repayment. Then, the educational institution has a chance to respond, and the borrower has an opportunity to review the material submitted by the institution and rebut it. Once that process is complete, the DOE will issue a final, nonappealable order that sets forth the basis for its determination. The new regulations differ from the Obama-era regulations by guaranteeing the institution a chance to respond to individual claims prior to the DOE’s decision.

Under the current rules, educational institutions that participate in Title IV programs must inform the DOE of certain triggering events and, upon notification of a triggering event, the DOE will determine whether the institution is financially responsible. If the DOE determines the institution is not financially responsible, the DOE typically will require the institution to post a letter of credit to continue to participate in Title IV programs through provisional certification.

Triggering events include borrower defense-to-repayment claims brought by a government agency, or any other lawsuit brought against the educational institution that survives summary judgment—no matter the type of lawsuit or amount in controversy.  The current rules, which took effect in May 2019, impose significant reporting burdens on institutions who participate in Title IV programs.

The new regulations divide triggering events into “mandatory” and “discretionary” categories.

The mandatory events under the new regulations include:
  • Liabilities arising from a final settlement, judgment, or determination from an action brought by a federal or state entity.
  • Withdrawal of an owner’s equity from the institution, with certain exceptions.
  • Actions taken by the Securities and Exchange Commission (SEC) against the institution, delisting by a national securities exchange of an institution’s securities, or failure by an institution to timely report to the SEC.
  • The institution experiences two or more discretionary triggering events within a given fiscal year, unless a triggering event is resolved before any subsequent event(s) occurs.
The discretionary events under the new regulations include:
  • The institution’s accrediting agency issues an order that could result in the loss of the institution’s accreditation.
  • The institution violates a provision of a security or loan.
  • The institution’s state licensing or authorizing agency informs the institution it intends to withdraw its licensure or authorization.
  • A for-profit institution violates the requirement that no more than 90 percent of its revenue come from Title IV programs.
  • The institution has high annual drop-out rates, as calculated by the Secretary of Education.
  • The institution’s two most recent cohort default rates are 30 percent or higher, with certain exceptions.

Most of the finalized regulations will not go into effect until July 1, 2020. However, the new regulations relating to financial responsibility—including triggering events—will be available for immediate implementation once published in the Federal Register.

If you have any questions about the DOE regulations, please join us on October 4 for our webinar on the reporting requirements.

Copyright © 2019 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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