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

 
CONTENT
Federal Register, Volume 84 Issue 184 (Monday, September 23, 2019)
[Federal Register Volume 84, Number 184 (Monday, September 23, 2019)]
[Rules and Regulations]
[Pages 49788-49933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19309]
[[Page 49787]]
Vol. 84
Monday,
No. 184
September 23, 2019
Part II
Department of Education
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34 CFR Parts 668, 682, and 685
Student Assistance General Provisions, Federal Family Education Loan
Program, and William D. Ford Federal Direct Loan Program; Final Rule
Federal Register / Vol. 84 , No. 184 / Monday, September 23, 2019 /
Rules and Regulations
[[Page 49788]]
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DEPARTMENT OF EDUCATION
34 CFR Parts 668, 682, and 685
RIN 1840-AD26
[Docket ID ED-2018-OPE-0027]
Student Assistance General Provisions, Federal Family Education
Loan Program, and William D. Ford Federal Direct Loan Program
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Final rule.
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SUMMARY: The Department of Education (Department or We) establishes new
Institutional Accountability regulations governing the William D. Ford
Federal Direct Loan (Direct Loan) Program to revise a Federal standard
and a process for adjudicating borrower defenses to repayment claims
for Federal student loans first disbursed on or after July 1, 2020, and
provide for actions the Secretary may take to collect from schools the
amount of financial loss due to successful borrower defense to
repayment loan discharges. The Department also amends regulations
regarding pre-dispute arbitration agreements or class action waivers as
a condition of enrollment, and requires institutions to include
information regarding the school's internal dispute resolution and
arbitration processes as part of in the borrower's entrance counseling.
We amend the Student Assistance General Provisions regulations to
establish the conditions or events that have or may have an adverse,
material effect on an institution's financial condition and which
warrant financial protection for the Department, update the definitions
of terms used to calculate an institution's composite score to conform
with changes in certain accounting standards, and account for leases
and long-term debt. Finally, we amend the loan discharge provisions in
the Direct Loan Program.
DATES: These regulations are effective July 1, 2020. The incorporation
by reference of certain publications listed in these regulations is
approved by the Director of the Federal Register as of July 1, 2020.
Implementation date: For the implementation dates of the included
regulatory provisions, see the Implementation Date of These Regulations
in SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: For further information related to
borrower defenses to repayment, pre-dispute arbitration agreements,
internal dispute processes, and guaranty agency fees, Barbara
Hoblitzell at (202) 453-7583 or by email at: [email protected].
For further information related to false certification loan discharge
and closed school loan discharge, Brian Smith at (202) 453-7440 or by
email at: [email protected]. For further information regarding
financial responsibility and institutional accountability, John Kolotos
(202) 453-7646 or by email at: [email protected]. For information
regarding recalculation of subsidized usage periods and interest
accrual, Ian Foss at (202) 377-3681 or by email at: [email protected].
    If you use a telecommunications device for the deaf (TDD) or a text
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-
800-877-8339.
SUPPLEMENTARY INFORMATION:
Executive Summary
Purpose of This Regulatory Action
    Section 455(h) of the Higher Education Act of 1965, as amended
(HEA), authorizes the Secretary to specify in regulation which acts or
omissions of an institution of higher education a borrower may assert
as a defense to repayment of a Direct Loan. The regulations at 34 CFR
685.206(c) governing defenses to repayment were first put in place in
1995. Those 1995 regulations specified that a borrower may assert as a
defense to repayment ``any act or omission of the school attended by
the student that would give rise to a cause of action against the
school under applicable State law,'' (the State law standard) but were
silent on the process to assert a claim.
    In May 2015, a large nationwide school operator, filed for
bankruptcy. The following month, the Department appointed a Special
Master to create and oversee a process to provide debt relief for the
borrowers associated with those schools, who had applied for student
loan discharges on the basis of the Department's authority to discharge
student loans under 34 CFR 685.206(c).
    As a result of difficulties in application, interpretation of the
State law standard, and the lack of a process for the assertion of a
borrower defense claim in the regulations, the Department began
rulemaking on the topic of borrower defenses to repayment. On November
1, 2016, the Department published final regulations \1\ (hereinafter,
``2016 final regulations'') on the topic of borrower defenses to
repayment, which significantly expanded the rules regarding how
borrower defense claims could be originated and how they would be
adjudicated. The 2016 final regulations were developed after the
completion of a negotiated rulemaking process and after receiving and
considering public comments on a notice of proposed rulemaking. In
accordance with the HEA, the 2016 final regulations were scheduled to
go into effect on July 1, 2017.
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    \1\ 81 FR 75926.
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    On May 24, 2017, the California Association of Private
Postsecondary Schools (CAPPS) filed a Complaint and Prayer for
Declaratory and Injunctive Relief in the United States District Court
for the District of Columbia (Court), challenging the 2016 final
regulations in their entirety, and in particular those provisions of
the regulations pertaining to: (1) The standard and process used by the
Department to adjudicate borrower defense claims; (2) financial
responsibility standards; (3) requirements that proprietary
institutions provide warnings about their students' loan repayment
rates; and (4) the provisions requiring that institutions refrain from
using arbitration or class action waivers in their agreements with
students.\2\
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    \2\ Complaint and Prayer for Declaratory and Injunctive Relief,
California Association of Private Postsecondary Schools v. DeVos,
No. 17-cv-00999 (D.D.C. May 24, 2017).
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    In light of the pending litigation, on June 16, 2017, the
Department published a notification of the delay of the effective date
\3\ of certain provisions of the 2016 final regulations under section
705 of the Administrative Procedure Act \4\ (APA), until the legal
challenge was resolved (705 Notice). Subsequently, on October 24, 2017,
the Department issued an interim final rule (IFR) delaying the
effective date of those provisions of the final regulations to July 1,
2018,\5\ and a notice of proposed rulemaking to further delay the
effective date to July 1, 2019.\6\ On February 14, 2018, the Department
published a final rule delaying the regulations' effective date until
July 1, 2019 (Final Delay Rule).\7\
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    \3\ 82 FR 27621.
    \4\ 5 U.S.C. 705.
    \5\ 82 FR 49114.
    \6\ 82 FR 49155.
    \7\ 83 FR 6458.
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    Following issuance of the 705 Notice, the plaintiffs in Bauer filed
a complaint challenging the validity of the 705 Notice.\8\ The
attorneys general of eighteen States and the District of Columbia also
filed a complaint challenging the validity of the 705
[[Page 49789]]
Notice.\9\ Plaintiffs in both cases subsequently amended their
complaints to include the IFR and the Final Delay Rule, and these cases
were consolidated by the Court.
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    \8\ Complaint for Declaratory and Injunctive Relief, Bauer v.
DeVos, No. 17-cv-1330 (D.D.C. Jul. 6, 2017).
    \9\ Massachusetts v. U.S. Dep't of Educ., No. 17-cv-01331
(D.D.C. Jul. 6, 2017).
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    In November 2017, the Department began a negotiated rulemaking
process. The resultant notice of proposed rulemaking was published on
July 31, 2018 (2018 NPRM).\10\ The 2018 NPRM used the pre-2016
regulations, which were in effect at the time the NPRM was published,
as the basis for proposed regulatory amendments.
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    \10\ 83 FR 37242.
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    The 2018 NPRM also expressly proposed to rescind the specific
regulatory revisions or additions included in the 2016 final
regulations, which were not yet effective. Accordingly, the preamble of
the 2018 NPRM generally provided comparisons between the regulations as
they existed before the 2016 final regulations, the 2016 final
regulations, and the proposed rule. The Department received over 30,000
comments in response to the 2018 NPRM. Many commenters compared the
Department's proposed regulations to the 2016 final regulations, when
the 2016 final regulations differed from a proposed regulatory change
in the 2018 NPRM. The Department also provided a Regulatory Impact
Analysis that was based on the President's FY 2018 budget request to
Congress, which assumed the implementation of the 2016 final
regulations.
    On September 12, 2018, the Court issued a Memorandum Opinion and
Order in the consolidated matter, finding the challenge to the IFR was
moot, declaring the 705 Notice and the Final Delay Rule invalid, and
convening a status conference to consider appropriate remedies.\11\
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    \11\ Bauer, No. 17-cv-1330.
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    Subsequently, on September 17, 2018, the Court issued a Memorandum
Opinion and Order immediately vacating the Final Delay Rule and
vacating the 705 Notice, but suspending its vacatur of the 705 Notice
until 5 p.m. on October 12, 2018, to allow for renewal and briefing of
CAPPS' motion for a preliminary injunction in CAPPS v. DeVos and to
give the Department an opportunity to remedy the deficiencies with the
705 Notice.\12\ The Department decided not to issue a revised 705
notice.
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    \12\ Bauer, No. 17-cv-1330.
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    On October 12, 2018, the Court extended the suspension of its
vacatur until noon on October 16, 2018.\13\ On October 16, 2018, the
Court denied CAPPS' motion for a preliminary injunction, ending the
suspension of the vacatur.\14\
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    \13\ Minute Order (Oct. 12, 2018), Bauer, No. 17-cv-1330.
    \14\ Memorandum Opinion and Order, CAPPS, No. 17-cv-0999 (Oct.
16, 2018).
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    In the 2018 NPRM, we proposed to rescind provisions of the 2016
final regulations that had not yet gone into effect.\15\ However, as
detailed in the Department's Federal Register notice of March 19,
2019,\16\ as a result of the Court's decision in Bauer, those
regulations have now become effective. This change necessitates
technical differences in the structure of this document, which rescinds
certain provisions, and amends others, of the 2016 final regulations
that have taken effect, compared with that of the 2018 NPRM.
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    \15\ See: 83 FR 37250-51.
    \16\ 84 FR 9964.
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    In particular, while the 2018 NPRM technically proposed to amend
the pre-2016 regulations (in addition to proposing that the 2016
regulations be rescinded), these final regulations, as a technical
matter, amend the 2016 final regulations which have since taken effect.
Thus, we describe the changes to the final regulations and show them in
the amendatory language at the end of the document based on the
currently effective 2016 final regulations. We do this in order to
accurately instruct the Federal Register's amendments to the Code of
Federal Regulations.
    With the 2016 final regulations in effect, the Department initially
considered publishing a second NPRM that used those regulations as the
starting point, rather than the pre-2016 regulations. However, given
that the policies we proposed in the 2018 NPRM were not affected by the
set of regulations that served as the underlying baseline, and that we
provided a meaningful opportunity for the public to comment on each of
the regulatory proposals in the NPRM and on the rescission of the 2016
final regulations, we determined that an additional NPRM would further
delay the finality of the rulemaking process for borrowers and schools
without adding meaningfully to the public's participation in the
process. The Department addressed the provisions in these final
regulations in the 2018 NPRM and afforded the public a meaningful
opportunity to provide comment. For these reasons, despite the
intervening events since publication of the 2018 NPRM, we are
proceeding with the publication of these final regulations.
    Additionally, after further consideration, we are keeping many of
the regulatory changes that were included in the 2016 final
regulations. Some of the revisions proposed in the 2018 NPRM are
essentially the same as, or similar to, the revisions made by the
Department in the 2016 final regulations, which are currently in
effect. The Department is not rescinding or further amending the
following regulations in title 34 of the Code of Federal Regulations,
even to the extent we proposed changes to those regulations in the 2018
NPRM:
     Sec.  668.94 (Limitation),
     Sec.  682.202(b) (Permissible charges by lenders to
borrowers),
     Sec.  682.211(i)(7) (Forbearance),
     Sec.  682.405(b)(4)(ii) (Loan rehabilitation agreement),
     Sec.  682.410(b)(4) and (b)(6)(viii) (Fiscal,
administrative, and enforcement requirements), and
     Sec.  685.200 (Borrower eligibility).
    The Department also did not propose to rescind in the 2018 NPRM,
and is not rescinding here, 34 CFR 685.223, which concerns the
severability of any provision of subpart B in part 685 of title 34 of
the Code of Federal Regulations; 34 CFR 685.310, which concerns the
severability of any provision of subpart C in part 685 of title 34 of
the Code of Federal Regulations; or 34 CFR 668.176, which concerns the
severability of any provision of subpart L in part 668 of title 34 of
the Code of Federal Regulations. If any provision of subparts B or C in
part 685, subpart L in part 668, or their application to any person,
act, or practice is at some point held invalid by a court, the
remainder of the subpart or the application of its provisions to any
person, act, or practice is not affected.
    While the negotiated rulemaking committee that considered the draft
regulations on these topics during 2017-2018 did not reach consensus,
these final regulations reflect the results of those negotiations and
respond to the public comments received on the regulatory proposals in
the 2018 NPRM. The regulations are intended to:
     Provide students with a balanced, meaningful borrower
defense to repayment claims process that relies on a single, Federal
standard;
     Grant borrower defense to repayment loan discharges that
are adjudicated equitably, swiftly, carefully, and fairly;
     Encourage students to directly seek remedies from schools
when acts or omissions by the school, including those that do not
support a borrower defense to repayment claim, fail to
[[Page 49790]]
provide a student access to the educational or job placement
opportunities promised, or otherwise cause harm to students;
     Ensure that schools, rather than taxpayers, bear the
burden of billions of dollars in losses from approvals of borrower
defense to repayment loan discharges;
     Establish that the Department has a complete record to
review in adjudicating claims by allowing schools to respond to
borrower defense to repayment claims and provide evidence to support
their responses;
     Discourage schools from committing fraud or other acts or
omissions that constitute misrepresentation;
     Encourage closing institutions to engage in orderly teach-
outs rather than closing precipitously;
     Enable the Department to properly evaluate institutional
financial risk in order to protect students and taxpayers;
     Eliminate the inclusion of lawsuits as a trigger for
letter of credit requirements until those lawsuits are settled or
adjudicated and a monetary value can be accurately assigned to them;
     Provide students with additional time to qualify for a
closed school loan discharge and protect students who elect this option
at the start of a teach-out, even if the teach-out exceeds the length
of the regular lookback period;
     Adjust triggers for Letters of Credit to reflect actual,
rather than potential, liabilities; and
     Reduce the strain on the government, and the delay to
borrowers in adjudicated valid claims, due to large numbers of borrower
defense to repayment applications.
Summary of the Major Provisions of This Regulatory Action: For the
Direct Loan Program, the Final Regulations
     Establish a revised Federal standard for borrower defenses
to repayment asserted by borrowers with loans first disbursed on or
after July 1, 2020;
     Revise the process for the assertion and resolution of
borrower defense to repayment claims for loans first disbursed on or
after July 1, 2020;
     Provide schools and borrowers with opportunities to
provide evidence and arguments when a defense to repayment application
has been filed and to provide an opportunity for each side to respond
to the other's submissions, so that the Department can review a full
record as part of the adjudication process;
     Require a borrower applying for a borrower defense to
repayment loan discharge to supply documentation that affirms the
financial harm to the borrower is not the result of the borrower's
workplace performance, disqualification for a job for reasons unrelated
to the education received, or a personal decision to work less than
full-time or not at all;
     Revise the time limit for the Secretary to initiate an
action to collect from the responsible school the amount of any loans
first disbursed on or after July 1, 2020, that are discharged based on
a successful borrower defense to repayment claim for which the school
is liable;
     Modify the remedial actions the Secretary may take to
collect from the responsible school the amount of any loans discharged
to include those based on a successful borrower defense to repayment
claim for which the school is liable; and
     Expand institutional responsibility and financial
liability for losses incurred by the Secretary for the repayment of
loan amounts discharged by the Secretary based on a borrower defense to
repayment discharge.
    The final regulations for the Direct Loan Program also include many
of the same or similar provisions as the 2016 regulations, which are
currently in effect. For example, both the 2016 regulations and these
final regulations:
     Require a preponderance of the evidence standard for
borrower defense to repayment claims;
     Provide that a violation by a school of an eligibility or
compliance requirement in the HEA or its implementing regulations is
not a basis for a borrower defense to repayment unless the violation
would otherwise constitute a basis under the respective regulations;
     Allow the same universe of people to file a borrower
defense to repayment claim, as the definition of ``borrower'' in the
2016 final regulations is the same as the definition of ``borrower'' in
these final regulations;
     Provide a borrower defense to repayment process for both
Direct Loans and Direct Consolidation Loans;
     Allow the Secretary to determine the order in which
objections will be considered, if a borrower asserts both a borrower
defense to repayment and other objections;
     Require the borrower to provide evidence that supports the
borrower defense to repayment;
     Automatically grant forbearance on the loan for which a
borrower defense to repayment has been asserted, if the borrower is not
in default on the loan, unless the borrower declines such forbearance;
     Require the borrower to cooperate with the Secretary in
the borrower defense to repayment proceeding; and
     Transfer the borrower's right of recovery against third
parties to the Secretary.
    The final regulations also revise the Student Assistance General
Provisions regulations to:
     Provide that schools that require Federal student loan
borrowers to sign pre-dispute arbitration agreements or class action
waivers as a condition of enrollment to make a plain language
disclosure of those requirements to prospective and enrolled students
and place that disclosure on their website where information regarding
admission, tuition, and fees is presented; and
     Provide that schools that require Federal student loan
borrowers to sign pre-dispute arbitration agreements or class action
waivers as a condition of enrollment to include information in the
borrower's entrance counseling regarding the school's internal dispute
and arbitration processes.
    The final regulations also:
     Amend the financial responsibility provisions with regard
to the conditions or events that have or may have an adverse material
effect on an institution's financial condition, and which warrant
financial protection for students and the Department;
     Update composite score calculations to reflect certain
recent changes in Financial Accounting Standards Board (FASB)
accounting standards;
     Update the definitions of terms used to describe the
calculation of the composite score, including leases and long-term
debt;
     Revise the Direct Loan program's closed school discharge
regulations to extend the time period for a borrower to qualify for a
closed school discharge to 180 days;
     Revise the Direct Loan program's closed school loan
discharge regulations to specify that if offered a teach-out
opportunity, the borrower may select that opportunity or may decline it
at the beginning of the teach-out, but if the borrower accepts it, he
or she will still qualify for a closed school discharge only if the
school fails to meet the material terms of the teach-out plan or
agreement approved by the school's accrediting agency and, if
applicable, the school's State authorizing agency;
     Affirm that in instances in which a teach-out plan is
longer than 180 days, a borrower who declines the teach-out opportunity
and does not transfer credits to complete a comparable program,
continues to qualify, under the
[[Page 49791]]
exceptional circumstances provision, for a closed school loan
discharge;
     Modify the conditions under which a Direct Loan borrower
may qualify for a false certification discharge by specifying that the
borrower will not qualify for a false certification discharge based on
not having a high school diploma in cases when the borrower could not
reasonably provide the school a high school diploma and has not met the
alternative eligibility requirements, but provided a written
attestation, under penalty of perjury, to the school that the borrower
had a high school diploma; and
     Require institutions to accept responsibility for the
repayment of amounts discharged by the Secretary pursuant to the
borrower defense to repayment, closed school discharge, false
certification discharge, and unpaid refund discharge regulations.
     Prohibit guaranty agencies from charging collection costs
to a defaulted borrower who enters into a repayment agreement with the
guaranty agency within 60 days of receiving notice of default from the
agency.
Timing, Comments and Changes
    On July 31, 2018, the Secretary published a notice of proposed
rulemaking (NPRM) for these parts in the Federal Register.\17\ The
final regulations contain changes from the NPRM, which are fully
explained in the Analysis of Comments and Changes section of this
document.
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    \17\ 83 FR 37242.
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    Implementation Date of These Regulations: Section 482(c) of the HEA
requires that regulations affecting programs under title IV of the HEA
be published in final form by November 1, prior to the start of the
award year (July 1) to which they apply. However, that section also
permits the Secretary to designate any regulation as one that an entity
subject to the regulations may choose to implement earlier with
conditions for early implementation.
    The Secretary is exercising her authority under section 482(c) of
the HEA to designate the following new regulations at title 34 of the
Code of Federal Regulations included in this document for early
implementation beginning on September 23, 2019, at the discretion of
each institution, as appropriate:
    (1) Section 668.172(d).
    (2) Appendix A to Subpart L of Part 668.
    (3) Appendix B to Subpart L of Part 668.
    The Secretary has not designated any of the remaining provisions in
these final regulations for early implementation. Therefore, the
remaining final regulations included in this document are effective
July 1, 2020.
    Incorporation by Reference. In Sec.  [thinsp]668.172(d) of these
final regulations, we reference the following accounting standard:
Financial Accounting Standards Board (FASB) Accounting Standards Update
(ASU) 2016-02, Leases (Topic 842).
    FASB issued ASU 2016-02 to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities
on the balance sheet and disclosing key information about leasing
arrangements. This standard is available at www.fasb.org, registration
required.
    Public Comment. In response to our invitation in the July 31, 2018,
NPRM, more than 38,450 parties submitted comments on the proposed
regulations, which included comments also relevant to the 2016
regulations, the implementation of which had been delayed.
    We discuss substantive issues under the sections of the proposed
regulations to which they pertain. Generally, we do not address
technical or other minor changes or recommendations that are out of the
scope of this regulatory action or that would require statutory changes
in the preamble.
Analysis of Comments and Changes
    An analysis of the comments and of any changes in the regulations
since publication of the 2018 NPRM follows.
Borrower Defenses--General (Sec.  685.206)
    Comments: Many commenters supported the Department's proposals to
improve the borrower defense to repayment regulations. These commenters
asserted that the proposed regulations would provide the necessary
accountability in the system to prevent fraud, while giving borrowers a
path to a more expedient resolution of complaints through arbitration
or a school's internal dispute processes.
    Some commenters claim that the regulations demonstrate government
overreach by creating regulations that would add billions of dollars to
Federal spending.
    Discussion: We appreciate the comments in support of the proposed
borrower defense to repayment regulations.
    We disagree with commenters who state that these regulations
represent government overreach. 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 455(h) of the HEA states:
``Notwithstanding any other provision of State or Federal law, the
Secretary shall specify in regulations which acts or omissions of an
institution of higher education a borrower may assert as a defense to
repayment of a loan made under this part, except that in no event may a
borrower recover from the Secretary, in any action arising from or
relating to a loan made under this part, an amount in excess of the
amount such borrower has repaid on such loan.''
    The Department is not creating a new borrower defense to repayment
program but rather is revising the terms under which a borrower may
assert a defense to repayment of a loan, for loans first disbursed on
or after July 1, 2020, which is the anticipated effective date of these
regulations. The Department believes that these regulations strike an
appropriate balance between attempting to correct aspects of the 2016
final regulations, that people criticized as Federal Government
overreach, and the interests of students, institutions, and the Federal
Government.
    The Department acknowledges that the 2016 final regulations
anticipated that taxpayers would bear a great expense and seeks to
cabin that burden through these final regulations. The Department
generally seeks to decrease costs to Federal taxpayers and decrease
Federal spending through these final regulations. These costs are more
fully outlined through the Regulatory Impact Assessment section to
follow.
    Changes: None.
    Comments: One group of commenters supported the regulations for
providing a better balance between relief for borrowers and due process
for schools by providing both parties with an equal opportunity to
provide evidence and arguments and to review and respond to evidence.
These commenters acknowledged that balance is essential to a fair
process. They expressed concern, however, that the pendulum has shifted
too far once again and asserted that in comparison to the 2016 final
regulations, the proposed regulations, which elevated the evidentiary
standard to clear and convincing, make it too difficult for borrowers
to obtain relief.
    Other commenters generally opposed the Department's proposed rules
concerning the borrower defense to repayment. One commenter suggested
that the proposed rules would effectively block relief for the vast
majority of borrowers, while shielding institutions from accountability
for their misconduct.
[[Page 49792]]
    Another group of commenters contended that the NPRM favors
predatory institutions over students, doing so based upon unsupported
assertions and hypotheticals that ignore and distort data and evidence.
    Discussion: We appreciate the commenters' concern that, in
attempting to strike a balance, the pendulum may have swung too far,
making it more difficult for harmed borrowers to receive relief.
Similarly, the Department appreciates the commenters' recognition that
the proposed regulations better balance the rights of students and
institutions alike. In the sections below, we discuss changes we have
made in the final regulations to achieve the balance and fairness
commenters from all perspectives encouraged.
    For example, and as described below, under the final regulations,
borrowers will be required to demonstrate a misrepresentation by a
preponderance of the evidence instead of the clear and convincing
evidence proposed alternative standard that was included in the 2018
NPRM.
    We disagree with commenters who contend that the proposed rules
would have blocked relief to borrowers who were victimized by bad
actors. Nevertheless, we have revised the rules to provide a fairer and
more equitable process for borrowers to seek relief when institutions
have committed acts or omissions that constitute a misrepresentation
and cause financial harm to students. The Department, in turn, has a
process to recover the losses the Department sustains from institutions
as a result of granting borrower defense to repayment discharges. This
process is outlined in subpart G of Part 668, of Title 34 of the Code
of Federal Regulations.
    We also disagree with commenters that the proposed rules indicate
that the Department sides with institutions over students, and notes
that those commenters used unsupported assertions and hypothetical
examples to support their comments. We disagree that the proposed
regulations would have shielded bad actors from being held accountable
for their actions. These final regulations send a clear and unequivocal
message that institutions need to be truthful in their communications
with prospective and enrolled students.
    Throughout this document, as in the 2018 NPRM, we explain the
reasons and rationales for these final regulations using data and real-
world examples, while drawing upon the Department's experience since
the publishing of the 2016 final regulations. The Department remains
committed to protecting borrowers and taxpayers from institutions
engaging in predatory behavior--regardless of whether those
institutions are propriety, non-profit, selective, or open enrollment--
which includes misrepresenting an institution's admissions standards
and selectivity. The proposed and final regulations also ensure that
schools are accountable to taxpayers for losses from the appropriate
approval of borrower defense to repayment claims. Borrowers continue to
have a meaningful avenue to seek a discharge from the Department, and
nothing in these rules burdens a student's ability to access consumer
protection remedies at the State level.
    Changes: None.
    Comments: Several commenters expressed dismay at the Department's
30-day timetable, which the commenters characterized as accelerated,
for considering comments and publishing a final rule. These commenters
felt that a ``rush to regulate'' had resulted in a public comment
period that did not give the public enough time to fully consider the
proposals and a timeline that did not afford the Department enough time
to develop an effective, cost-efficient rule. Another commenter also
asserted that we were following a hastened review schedule and were
inappropriately allowing only a 30-day comment period on an NPRM that
the commenter asserts was riddled with inaccuracies. The commenter said
that, while the APA requires a minimum of 30 days for public comment
during rulemaking,\18\ a longer period was needed in this instance to
allow affected parties to provide meaningful comment and information to
the Department. The commenter noted that the Administrative Conference
of the United States recommends a 60-day comment period when a rule is
economically significant and argued that this recommendation is
appropriate in this case due to the vast number of individuals affected
by a regulation that modifies the Department's responsibilities for
over $1 trillion in outstanding loans.
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    \18\ 5 U.S.C. 553(d).
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    Discussion: We disagree with the commenters who contend that the
Department's timetable for developing borrower defense to repayment
regulations did not give the public enough time to fully consider the
proposals. The 30-day public comment period provided sufficient time
for interested parties to submit comments, particularly given that
prior to issuing the proposed regulations, the Department conducted two
public hearings and three negotiated rulemaking sessions, where
stakeholders and members of the public had an opportunity to weigh in
on the issues at hand. The Department also posted the 2018 NPRM on its
website several days before publication in the Federal Register,
providing stakeholders additional time to view the proposed regulations
and consider their viewpoints on the NPRM. Further, the Department
received over 30,000 comments, many representing large constituencies.
The large number of comments received indicates that the public had
adequate time to comment on the Department's proposals.
    Additionally, the 30-day period referenced in 5 U.S.C. 553(d)
refers to the period of time between the publication of a substantive
rule and its effective date and not the amount of time necessary for
public comment. The applicable case law, interpreting the APA,
specifies that comment periods should not be less than 30 days to
provide adequate opportunity to comment.
    With respect to the comment concerning inaccuracies in the NPRM, we
address those concerns in response to comments summarized below.
    Changes: None.
    Comments: Another group of commenters offered their full support
for our efforts to assist students in addressing wrongs perpetrated
against them by schools that acted fraudulently or made a
misrepresentation with respect to their educational services. The
commenters asserted that, when students are defrauded, they need to
have the means to remedy the situation. According to these commenters,
colleges routinely overpromise and under-deliver for their students and
must be held accountable to their students for their failures. These
commenters recommended the Department proactively use the many tools
already at its disposal to uniformly pursue schools throughout each
sector of higher education that are not serving their students well
rather than rely on the borrower defense to repayment regulations,
which necessarily provide after-the-fact relief for borrowers. The
commenters asserted that addressing a problem before it becomes a
borrower defense to repayment issue should be the first priority, thus
saving current and future students from harm. Another group of
commenters offered a similar suggestion and proposed that the
Department examine the effectiveness of its gatekeeping obligations
under title IV of the HEA as well as the nature of its relationship
with accrediting agencies
[[Page 49793]]
and States, to prevent participation by bad actors in the title IV
programs.
    Another group of commenters who generally supported the proposed
regulations noted areas of concern or disagreement. They suggested that
we amend the regulations to provide a ``material benefit'' to schools
that do not have a history of meritorious borrower defense to repayment
claims. These commenters also propose that the regulations address the
``moral hazard'' created by giving students an opportunity to receive
an education and raise alleged misrepresentations to avoid paying for
that education after they complete their education. These commenters
would like the Department to mitigate the proliferation of ``scam
artists'' and opportunists who advertise their ability to obtain, on
behalf of a borrower, ``student loan forgiveness''. They also would
like to discourage attorneys from exploiting students through the
Department's procedural rules, while harming the higher education
sector and the taxpayers in the process.
    Discussion: We agree with commenters who suggest that a better
approach is to stop misrepresentation before it starts, rather than
providing remedies after the student has already incurred debt and
expended time and energy in a program that does not deliver what it
promised. We also agree the Department should proactively use the many
tools already at its disposal such as program reviews and findings from
those reviews to pursue schools throughout each sector of higher
education that are not serving their students well. The Department
devotes significant resources to the oversight of title IV participants
and makes every effort to work with accrediting agencies and States to
identify problems early, including identifying schools that should be
prevented from participating in title IV programs altogether. The
Department recognizes accrediting agencies, and only recognized
accrediting agencies may accredit institutions so that the institutions
may receive Federal student aid.\19\ The Department of Education's
Program Compliance Office has a School Eligibility Service Group that
examines, analyzes, and makes determinations on the initial and renewal
eligibility applications submitted by schools for participation in
Federal student aid programs.\20\ This Office also performs financial
analyses, monitors financial condition, and works with state agencies
and accrediting agencies.\21\ The Office monitors schools and their
agents, through on-site and off-site reviews and analysis of various
reports, to provide early warnings of program compliance problems so
that appropriate actions may be taken.\22\
---------------------------------------------------------------------------
    \19\ 20 U.S.C. 1001, et seq.; 34 CFR 600.2; 34 CFR 600.20; 34
CFR 668.13.
    \20\ U.S. Dep't of Educ., Office of Federal Student Aid,
Principal Office Functional Statements, available at https://www2.ed.gov/about/offices/list/om/fs_po/fsa/program.html.
    \21\ Id.
    \22\ Id.
---------------------------------------------------------------------------
    We do not believe it is necessary or appropriate, nor does the
Department possess the legal authority, to provide ``material benefit''
to schools that follow the law and, therefore, do not have a history of
meritorious borrower defense to repayment claims. The Department
expects that all schools, in every sector, will engage in a forthright
and honest manner with their prospective and enrolled students and,
therefore, the Department has the discretion to impose certain
consequences upon schools who commit certain types of
misrepresentations, even if an institution has previously provided
accurate information to students.
    We agree that a borrower defense to repayment regulation that is
poorly constructed, under the statute, may create a ``moral hazard'' by
giving students an opportunity to complete their education and raise
alleged misrepresentations to avoid paying for that education. These
regulations, however, include a process by which the Department
receives information from both a borrower and the school. The
Department will evaluate whether a borrower defense to repayment claim
is meritorious, and the borrower will receive a discharge only if the
borrower demonstrates, by a preponderance of the evidence, that the
institution made a misrepresentation.
    We share the concern of commenters regarding the proliferation of
people described by the commenter as ``scam artists'' and opportunists
who disingenuously advertise ``student loan forgiveness'' and of some
plaintiff's attorneys, and others, who seek to exploit borrowers. The
Department, along with the Consumer Financial Protection Bureau (CFPB)
and the Federal Trade Commission (FTC), receive and investigate
consumer complaints regarding student loan scams. Those investigative
functions are unchanged by these regulations. State consumer protection
agencies and laws also help borrowers in this regard. Given these
additional protections, the Department maintains that these final
regulations strike the right balance between consumer protection and
due process.
    The Department also seeks to prevent borrower defense claims before
they arise by disseminating information about various institutions that
will help students make informed decisions based upon accurate data. As
stated here and throughout the rest of these final regulations, the
Department believes that schools and the Federal government each play a
role in helping students make informed choices when considering the
pursuit of postsecondary education. We are also aware that research has
shown that students across the socioeconomic spectrum receive
insufficient and impersonal guidance about colleges from their high
schools.\23\ Evidence also indicates that school selection is
critically important to students' postsecondary success, given that
students are more likely to persist to completion or degree attainment
if they attend a well-matched institution.\24\ Similarly, research has
shown that a student's choice of major or program may be even more
important than his or her choice of institution in determining long-
term career and earnings outcomes.\25\ The Department has created
online tools, like the College Scorecard \26\ and College
Navigator,\27\ that provide objective data across a range of
institutional attributes to enable prospective students and their
families to weigh their options based upon the characteristics that
they deem most important to their decision-making. While we know that
millions of users access these tools each year, we have limited
evidence on these tools' potential for impact on college-related
decisions and outcomes. Moreover, we recognize that some students may
be overwhelmed by the process of parsing through the volumes of
information on
[[Page 49794]]
potential postsecondary options and have worked to streamline data
sources through the College Scorecard and College Navigator to make it
easier for users to focus on the criteria they deem most important.
Nonetheless, we believe that, ``armed with detailed, relevant
information on financial costs and benefits, students can more fairly
evaluate the tradeoffs of attending a certain institution and
understand the financial implications of their decisions.'' \28\
---------------------------------------------------------------------------
    \23\ Alexandria Walton Radford, Top Student, Top School?: How
Social Class Shapes Where Valedictorians Go to College, University
of Chicago Press, (2013).
    \24\ Audrey Light & Wayne Strayer, Determinants of College
Completion: School Quality or Student Ability?, 35 J. of Human Res.
299-332 (2000).
    \25\ See: Holzer, Harry J. and Sandy Baum, Making College Work:
Pathways to Success for Disadvantaged Students (Washington, DC:
Brookings Institution Press, 2017); Carnevale, Anthony, et al.,
``Learning While Earning: The New Normal,'' Center on Education and
the Workforce, Georgetown University, 2015,
1gyhoq479ufd3yna29x7ubjn-wpengine.netdna-ssl.com/wp-content/uploads/Working-Learners-Report.pdf; Schneider, Mark, ``Are Graduates from
Public Universities Gainfully Employed? Analyzing Student Loan Debt
and Gainful Employment,'' American Enterprise Institute, 2014,
www.aei.org/publication/are-graduates-from-public-universities-gainfully-employed-analyzing-student-loan-debt-and-gainful-employment/.
    \26\ U.S. Dep't of Educ., College Scorecard, available at
https://collegescorecard.ed.gov/.
    \27\ U.S. Dep't of Educ., College Navigator, available at
https://nces.ed.gov/collegenavigator/.
    \28\ Exec. Office of the U.S. President, Using Federal Data to
Measure and Improve the Performance of U.S. Institutions of Higher
Education (rev. Jan. 2017), available at https://collegescorecard.ed.gov/assets/UsingFederalDataToMeasureAndImprovePerformance.pdf.
---------------------------------------------------------------------------
    The Department has announced its intent to expand the College
Scorecard to provide program level outcomes data for all title IV
programs, which is the first time such data will be made available to
institutions or consumers.\29\ We believe that program-level data will
be more useful to students than institution-level data. The
Department's new MyStudentAid application allows the Department to
provide more information to students who are completing their Free
Application for Federal Student Aid (FAFSA) form online or interacting
with the Department's Federal Student Aid office. Accordingly, we can
ensure that more students are presented with useful information about
the institutions included on their FAFSA application in a format that
is user-friendly and does not require them to conduct an extensive
search. Such information will help students become more informed
consumers and, thus, be less likely to be deceived by an institution
that provides information contradictory to the information that the
Department makes available.
---------------------------------------------------------------------------
    \29\ See U.S. Dep't of Education, Secretary Devos Delivers on
Promise to Expand College Scorecard, Provide Meaningful Information
to Students on Education Options and Outcomes, available at https://www.ed.gov/news/press-releases/secretary-devos-delivers-promise-expand-college-scorecard-provide-meaningful-information-students-education-options-and-outcomes (May 21, 2019); See also: 84 FR
31392, 31408.
---------------------------------------------------------------------------
    Changes: None.
    Comments: Many commenters did not support the proposed regulations,
asserting that the proposed rule would undermine Congressional intent
and shortchange students to benefit corporations with a history of
fraud and abuse. These commenters assert that the 2018 NPRM contained
errors and logical flaws and was colored throughout by a disturbingly
cynical attitude about students, along with a naively charitable view
of school owners and investors. They argued that the notion that
borrower complaints of fraud result from poor choices in the
marketplace and that information will cure the problem has been
rejected by research and analysis and is not supported by the
structure, text, or legislative history of the HEA. They further assert
that the legislative history does not blame students for poor choices
and recognizes that schools and the government have a role in helping
students avoid poor-value programs. They predicted that the
Department's proposed rule would have significant, negative
implications for both defrauded borrowers and taxpayers. Another
commenter predicted that the effect of proposed regulations would be to
depress the percentage of tertiary-trained Americans and increase the
rate of borrower bankruptcy filings. This commenter further asserted
that the proposed regulations would lower the value of education in the
U.S. and cause schools to treat students as economic pawns to be
matriculated for profit motives over educational ones.
    Some commenters stated that any time limitation should be waived in
cases where borrowers could produce new evidence to assert a claim or
reopen a decision.
    Another commenter asserted that the 2016 final regulations benefit
Latino and African American students, who are disproportionately
concentrated in for-profit colleges and harmed by predatory conduct.
This commenter urged the Department to retain the 2016 final
regulations.
    Many of the commenters who did not support the proposed changes
urged the Department to withdraw the 2018 NPRM and allow for the full
implementation of the borrower defense regulations published in 2016.
    Discussion: We appreciate the concerns raised by the commenters.
Our goal in the NPRM and in these final regulations is to balance the
interests of students with those of taxpayers. We need to ensure, for
instance, that borrowers receiving relief have claims supported by
evidence and to protect the taxpayer dollars that fund the Direct Loan
Program. The Department does not agree that the NPRM portrays students
or their behaviors in a negative manner or is overly charitable to
schools and their investors.
    To the contrary, we believe that students have the capacity to make
reasoned decisions and that they should be empowered by information and
shared accountability expectations. Students are not passive victims;
they take an active role in making informed decisions. We describe in
our response to comments, throughout this document, how we intend to
support students and families in making informed decisions by
disseminating information that will help students better evaluate their
options.\30\
---------------------------------------------------------------------------
    \30\ See, e.g., U.S. Dep't of Educ., College Scorecard,
available at https://collegescorecard.ed.gov/; U.S. Dep't of Educ.,
College Navigator, available at https://nces.ed.gov/collegenavigator/.
---------------------------------------------------------------------------
    We disagree with commenters that the proposed regulations do not
align with the HEA or Congressional intent. Through section 455(h) of
the HEA, 20 U.S.C. 1087e(h), Congress specifically provided the
Department with the authority ``to specify in regulations which acts or
omissions of an institution of higher education a borrower may assert
as a defense to repayment of a loan made under [the Direct Loan
Program].'' The proposed regulations, and these final regulations,
represent the Department's exercise of this authority, as intended by
Congress. We believe that there must be a fair and balanced process for
the Department to evaluate whether a borrower, as a result of a
school's act or omission, may be relieved of his or her obligation to
repay a Federal student loan as contemplated by the statute. We
disagree with the commenters that our approach prioritizes schools over
students and believe the approach is justified by the Department's
obligation to balance the interests of the Federal taxpayers with its
responsibility to student borrowers under section 455(h) of the HEA.
    We believe we have reached a result in these final regulations that
strikes the best possible balance between the different interests at
hand. More details on the projected impact of these final regulations
are included in the Regulatory Impact Analysis section of this
Preamble. Further, we discuss in the sections that follow the changes
we have made in the final regulations to achieve the balance and
fairness commenters from all perspectives encouraged.
    We believe that these final regulations will increase and not lower
the value of education in the United States and do not see how these
final regulations would depress the number of students attending an
institution of higher education. These final regulations establish
clear expectations for schools in their dealings with students, and
greater certainty provides an economic incentive for schools to
flourish and provide better and more diverse opportunities for
students. Borrowers are consumers and their choices will impact which
schools are most desirable for particular careers and professions.
[[Page 49795]]
While the Department cannot regulate the motives of schools, it can,
and will, hold schools accountable for their acts and omissions.
    Borrowers who are the victims of a misrepresentation by a deceitful
institution will be able to obtain relief under these final
regulations, after the Department has had the opportunity to weigh
information and evidence from all sides, as discussed further below.
    The Department asserts that these final regulations will benefit,
not harm, all students, including Latino and African American students.
These final regulations will provide more information to students
regarding their borrower defense claims than the 2016 final regulations
and allow students to fully flesh out their claims, as the process in
these regulations more clearly provides a school with an opportunity to
provide responses and information as to a borrower's borrower defense
application, requires that the applicant receives a copy of any
response that the school submits, and clearly establishes that the
applicant has an opportunity to reply to the school's response.
    In contrast, the 2016 final regulations allow a school to submit a
response, but did not clearly afford a student the opportunity to reply
to the response.\31\ Additionally, under the 2016 final regulations, a
student has to request that the Department identify the records that
the Department considers relevant to the borrower defense to repayment
claim, and the Department will only provide the borrower ``any of the
identified records upon reasonable request of the borrower.'' \32\
---------------------------------------------------------------------------
    \31\ 34 CFR 685.206(e)(3).
    \32\ Id.
---------------------------------------------------------------------------
    These final regulations, however, guarantee that the student will
have a copy of the school's response and all the documents that the
Department considers in adjudicating the borrower defense to repayment
claim. Accordingly, these final regulations provide a more transparent
process and afford due process for all borrowers no matter where they
enroll in college and irrespective of race, religion, national origin,
gender, or any other status or category.
    For the reasons detailed throughout the preamble to these final
regulations, we determined that withdrawing the 2018 NPRM and leaving
the 2016 final regulations in place was not the best long-term
approach. The Department has decided instead to take an approach that
applies the 2016 final regulations and these final regulations to
applicable time periods. The 2016 final regulations, thus, will apply
to loans first disbursed on or after July 1, 2017 and before July 1,
2020, and these final regulations will apply to loans first disbursed
on or after July 1, 2020. We describe our changes to each provision of
those regulations in detail in the pertinent section of the preamble.
    Changes: As explained more fully below, the Department revises the
proposed regulations to allow the Secretary to extend the limitations
period when a borrower may assert a defense to repayment or may reopen
the borrower's defense to repayment application to consider evidence
that was not previously considered in two exceptional circumstances
(relating to 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 or a final decision by a duly appointed arbitrator or
arbitration panel) as described in 34 CFR 685.206(e)(7). We also add a
new paragraph (d) in Sec.  685.206 and language to Sec.  685.222 and
Appendix A to subpart B of part 685 to clarify that the 2016 final
regulations apply to loans first disbursed on or after July 1, 2017 and
before July 1, 2020. These final regulations will apply to loans first
disbursed on or after July 1, 2020.
    Comments: Some commenters expressed concern and confusion about the
structure of the 2018 NPRM, particularly the regulations the Department
used as the starting point for the preamble discussion and amendatory
language as well as the baseline used for the Regulatory Impact
Analysis. They asserted that using the pre-2016 regulations as the
basis for the amendatory language raises issues under the APA. They
also stated that using the 2019 President's Budget Request as the
baseline for the Regulatory Impact Analysis, raises issues under the
APA in part because the President's Budget Request assumed the
implementation of the 2016 final regulations.
    Discussion: We welcome the opportunity to provide additional
clarification about the structure of the 2018 NPRM and the reasons for
the structure. First, with respect to the amendatory language, the
Federal Register requires amendatory language to be drafted as
amendments to the currently effective text of the Code of Federal
Regulations.\33\ For that reason, because the effective date of the
2016 final regulations was delayed, our amendatory language in the 2018
NPRM was drafted to reflect changes to the pre-2016 regulatory text. In
the preamble, to properly fulfill our obligations under the APA, we
discussed our proposed changes as related to both the pre-2016
regulatory text and the 2016 final regulations.
---------------------------------------------------------------------------
    \33\ See 1 CFR part 21. ``Each agency that prepares a document
that is subject to codification shall draft it as an amendment to
the Code of Federal Regulations . . .'' 1 CFR 21.1.
---------------------------------------------------------------------------
    In the Regulatory Impact Analysis (RIA) section of this document,
we discuss in detail why we were required to use the President's 2019
Budget Request as the baseline for the RIA in the 2018 NPRM.
    Changes: None.
Borrower Defenses--Claims (Sec.  685.206)
Affirmative and Defensive Claims
    Comments: Many commenters, and groups of commenters, advocated for
the inclusion in the final regulations of affirmative borrower defense
claims, meaning claims asserted before a borrower has defaulted on a
Federal student loan. These commenters objected to the proposal that
would have limited the Department's consideration of borrower defense
claims to those asserted as a defense in collection proceedings. The
commenters noted that limiting the consideration of borrower defense
claims to defensive claims might encourage some borrowers to default on
their loans to become eligible to file a claim.
    Commenters representing military personnel and veterans noted that
limiting borrower defense claims to defaulted borrowers would fail to
recognize the significant risk such a limit would place on service
members, veterans, and their dependent family members. The commenters
requested clear and reasonable protections from schools with predatory
practices and misleading promises. These commenters noted that many
jobs held by service members, veterans, spouses, and their adult
children require government security clearances. Defaulting on a
student loan could result in denial or loss of clearance and,
therefore, a loss of employment. In such instances, the commenters
asserted that the proposed regulations would increase the likelihood of
devastating and, potentially, cascading consequences for military and
veteran families.
    Some commenters, who supported the inclusion of both affirmative
and defensive claims, did so with a caveat that these claims should be
combined with a requirement that the claim be supported by clear and
convincing evidence, rather than a preponderance of the evidence. One
commenter, who supported the inclusion of affirmative claims, did so
with a caveat that these
[[Page 49796]]
claims should be supported by evidence that is beyond a reasonable
doubt.
    One commenter suggested that borrowers whose loan payments are
current should be afforded priority over borrowers in default in the
adjudication process.
    In opposing the proposal to only allow consideration of defensive
claims, several commenters rejected the Department's assertion that we
did not accept affirmative borrower defense to repayment claims prior
to 2015 and alleged that the Department's explanation for proposing
that the final regulation only allow for the consideration of defensive
claims was insufficient. Another commenter who supported the inclusion
of affirmative claims provided evidence that the Department considered
borrower defense claims before the borrower was in default prior to
2015.
    A number of commenters, however, supported the proposal to consider
only defensive claims. One such commenter stated that the regulation
was intended to only address claims raised in debt collection actions.
Another commenter argued that the proposal to accept both affirmative
and defensive claims exceeds the statutory authority conferred upon the
Department by the HEA and that any such change can only be addressed by
Congressional action. This commenter stated that it shared the concern
raised by the Department in the NPRM that allowing consideration of
affirmative claims would make it relatively easy for a borrower to
apply for relief, even if the borrower had suffered no financial harm,
resulting in a significant burden on the Department and institutions to
address numerous unjustified claims. This commenter also contended that
if the Department allows affirmative claims, borrowers would have
nothing to lose by filing for loan relief.
    Discussion: In the 2018 NPRM, the Department explained that we were
seeking public comment as to whether we should only allow defensive
claims, as opposed to both affirmative and defensive claims.\34\ The
Department stated that it believed that accepting defensive claims, and
not affirmative claims, might better balance the competing interests of
the Federal taxpayer and of borrowers. The Department sought comment on
how it could continue to accept and review affirmative claims, but at
the same time discourage borrowers from submitting unjustified claims.
---------------------------------------------------------------------------
    \34\ 83 FR 37253-37254.
---------------------------------------------------------------------------
    After consideration of the public comments received in response to
the NPRM, the Department agrees that it is appropriate to accept both
affirmative and defensive claims. The Department understands the
concerns raised by the commenters who argued that allowing only
defensive claims may provide borrowers with an incentive to default,
which, in turn, would have negative consequences for the borrower. In
addition, we are concerned about the potential negative impacts on
military servicemembers, their families, and borrowers, in general,
which could result from increased instances of loan default triggered
by borrower efforts to become eligible to assert defensive claims.
    The Department acknowledges that the Department did accept
affirmative borrower defense in limited circumstances before 2015.
However, the Department's interpretation of the existing regulation has
been that it was meant to serve primarily as a means for a borrower to
assert a defense to repayment during the course of a collection
proceeding. After further review of the information submitted by
commenters and our own records, the Department acknowledges that
throughout the history of the existing borrower defense repayment
regulation, the Department has approved a small number of affirmative
borrower defense to repayment requests.
    The Department's representation of its history of approving
borrower defense to repayment loan relief in the NPRM was included as
background to our explanations and reasoned bases for two alternative
proposals. With these alternatives, we gave the public notice and
opportunity to provide feedback on whether the Department should
distinguish between affirmative and defensive borrower defense to
repayment claims.
    As intended by the APA, the Department provided sufficient notice
and the public provided comments, and the Department weighed such
comments and has decided to allow the consideration of both affirmative
claims and defensive claims in these final regulations. However, as
explained further in this preamble at Borrower Defenses--Limitations
Period for Filing a Borrower Defense Claim, we are establishing a
three-year limitations period, that begins to run when the student
leaves the school, for all defense to repayment claims under the new
standard.
    The Department continues to be concerned about the burden to the
Department and the taxpayer from a large volume of claims. However, as
explained later in this document, the Department does not believe that
a different evidentiary standard for affirmative claims versus
defensive claims is appropriate. Different evidentiary standards might
lead to inconsistency in the Department's adjudication of factually
similar borrower defense claims, but for the timing of a borrower's
application and loan status. Similarly, the Department does not agree
that priority in adjudication should be given to borrowers whose loan
payments are current over borrowers whose loans are in default. The
Department believes it is appropriate for a borrower to have his or her
claim adjudicated based upon the facts underlying his or her
application, rather than repayment status. We also believe that the
standard we adopt in these final regulations is properly calibrated to
allow borrower defense relief only where it is merited, and not to open
the door to a large volume of unjustified claims.
    The Department disagrees with the commenters who stated that the
consideration of affirmative claims is outside of the Department's
statutory authority or the purpose of the borrower defense regulations.
We stated in the NPRM that the proposal to consider only defensive
claims was within the Department's authority under section 455(h) of
the HEA.\35\ However, by such a statement the Department did not imply
that it does not have the authority to consider affirmative claims and,
in fact, by proposing that borrowers could submit affirmative claims on
loans first disbursed before the effective date of the final
regulations, clearly indicated that it does have such authority.
---------------------------------------------------------------------------
    \35\ 83 FR 37253-37254.
---------------------------------------------------------------------------
    The Department has broad statutory authority to make, promulgate,
issue, rescind, and amend regulations governing the manner of,
operations of, and governing of the applicable programs administered by
the Department and functions of the Department.\36\ Further, by
providing that the Department may regulate borrowers' assertion of
borrower defenses to repayment, section 455(h) of the HEA grants the
Department the authority to not only identify borrower causes of action
that may be recognized as defenses to repayment, but also to establish
the procedures for receipt and adjudication of borrower claims--
including the type of proceeding through which the Department may
consider such a claim. This regulatory scheme reflects the Department's
history in considering borrower defense claims, whether prior to 2015,
as pointed out by some commenters, or after 2015.
[[Page 49797]]
Accordingly, the Department does not agree that congressional action is
necessary for the Department's consideration of affirmative claims.
---------------------------------------------------------------------------
    \36\ See 20 U.S.C. 1221e-3.
---------------------------------------------------------------------------
    Changes: We are adding Sec.  685.206(e) to provide, with regard to
loans first disbursed on or after July 1, 2020, that borrowers may
submit a defense to repayment claim, both on affirmative and defensive
bases, as long as the claim is submitted within three years from the
date the borrower is no longer enrolled at the institution.
Application
    Comments: Some commenters supported the proposed regulatory
provisions which would require the borrower to specify the
misrepresentation being asserted for the defense to repayment, certify
the claim under penalty of perjury, list how much financial harm was
incurred, and acknowledge that if they receive a full discharge of the
loan, the school may refuse to provide an official transcript. These
commenters believe these requirements will reduce the number of
unsubstantiated claims.
    One commenter suggested that the application also require borrowers
to provide their grade point average (GPA) at the time of their
termination or leaving the school and to state, if they failed the
academic program, why they failed.
    One commenter suggested the Department start a process to consumer
test the application, with input from other Federal agencies, to ensure
that students of all institutional levels are able to comprehend and
complete the application.
    Several commenters objected to a proposed requirement that
borrowers making a defense to repayment claim provide personal
information, including confirmation of the ``borrower's ability to pass
a drug test, satisfy criminal history or driving record requirements,
and meet any health qualifications.'' The commenters asserted that this
would effectively require borrowers to waive their right to privacy and
treats the borrower like a criminal, not an injured party. One of these
commenters argued that these requirements are irrelevant to the
question of school misconduct and are clearly intended to dissuade
borrowers from asserting claims of fraud.
    Discussion: The Department thanks the commenters who supported the
proposed regulations pertaining to the application. We believe the
proposed regulation set forth clear borrower defense to repayment
application requirements that would allow a borrower to understand and
provide the information needed for the Department to accurately
evaluate the borrower's claim. As proposed in the NPRM, this
application requires the borrower to 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. Such a
waiver gives the borrower notice that the school may release
information from the borrower's education records to the Department.
    We do not agree that it is appropriate to require that a borrower,
submitting a borrower defense claim, include their GPA or other
information regarding their success or failure in any course or
program. The Department does not view that information as dispositive
as to whether the borrower was harmed by a misrepresentation or an
omission by the school. Including this information, however, could have
an impact on determining the harm suffered by a student as a result of
a misrepresentation. In considering the harm the student suffered as a
result of an institution's misrepresentation, the Department must
ascertain how much of that harm is the fault of the institution and how
much of it is the result of a student's choices, behaviors,
aspirations, and motivations.
    The Department does not adopt the commenter's suggestion regarding
consumer testing the borrower defense application. The Department has
significant experience developing and publishing applications similar
to the one required in these final regulations and will rely on that
experience in creating an appropriate and effective application for
this purpose. We disagree with the commenters who objected to the
proposed requirement that borrowers supply information relevant to
assessing the borrower's allegation of harm as a violation of
borrowers' privacy rights. Under the Privacy Act, an agency may
``maintain in its records only such information about an individual as
is relevant and necessary to the accomplish a purpose of the agency
required to be accomplished by statute . . .'' \37\ While the
information relevant to assessing the borrower's allegation of harm may
be private, it is also necessary for the Department to have it in order
to carry out its purposes. We will maintain the borrower's privacy,
except for the limited purpose of resolving the borrower's claim.
---------------------------------------------------------------------------
    \37\ 5 U.S.C. 552a(e)(1).
---------------------------------------------------------------------------
    As explained earlier, the HEA provides the Department with the
authority to establish regulations on all aspects of the borrower
defense to repayment process, including how relief should be provided
and determined. It is relevant to the Department's determination of
relief to require a borrower to provide a complete picture of the
financial harm caused by a school's misrepresentation, by providing
information such as: Whether the borrower failed to actively pursue
employment if he or she is a recent graduate; whether the borrower was
terminated or removed from a job position as a result of job
performance issues; or whether the borrower failed to meet other job
qualifications for reasons unrelated to the school's misrepresentation.
    With respect to the borrower's attempts to pursue employment, the
Department revised the final regulations to clarify what the Department
expects the borrower to provide as part of the application. The
borrower should provide documentation that the borrower actively
pursued employment in the field for which the borrower's education
prepared the borrower. Examples of this documentation include but are
not limited to: Job application confirmation emails; correspondence
with potential employers; registration at job fairs; enrolling with a
job recruiter; and attendance at a resume workshop. Failure to provide
such information could result in a presumption that the borrower failed
to actively pursue employment in the field. The Department would like
borrowers to have notice of what documentation the Department expects
in support of an application for a borrower defense to repayment and
what the consequences of failing to provide such documentation will be.
The Department must rely on the borrower to supply such information, as
the Department will not be aware of any attempts the borrower has made
to seek employment. Such documentation will help support the relief
that a borrower receives.
    While such information about pursuing employment may not be related
to whether a school made a misrepresentation, as defined in these final
regulations, it does relate directly to whether the borrower was
financially harmed by the institution, as required by the standard for
a borrower defense claim. Information on intervening causes of a
borrower's circumstances that cannot be said to be even related to a
borrower's education, much less the misrepresentation at issue, will be
relevant to the Department's assessment of the amount of relief to
provide to the borrower as a result of the harm that has been caused by
the misrepresentation.
    With regards to criminal history, we carefully reviewed the public
[[Page 49798]]
comments. We do not adopt the commenters' logic that such a provision
would treat borrowers like criminals, require borrowers to waive their
right to privacy, or that these questions are ``clearly intended'' to
dissuade borrowers from asserting borrower defense claims. However,
after our review, the Department decided that the inclusion of the
``criminal record'' language is contrary to the Department's priorities
and does not properly support individuals who are attempting to
transition out of the criminal justice system through higher education,
job training, or other career pathways.
    Despite this change, the Department believes that requiring
borrowers to provide a complete picture of the financial harm caused by
a school's misrepresentation--including whether unrelated factors may
have contributed to the borrower's financial circumstances--is
appropriate to help the Department satisfy its fiduciary responsibility
to taxpayers and to provide just relief for borrowers.
    Changes: The Department revised the regulations about the
documentation the borrower should provide as part of the borrower
defense to repayment application. The borrower still must provide
documentation that the borrower actively pursued employment in the
field for which the borrower's education prepared the borrower. The
Department will presume that the borrower failed to actively pursue
such employment, if the borrower fails to provide such documentation.
As explained below, the Department also is revising Sec.  685.206(e)(8)
to clarify the borrower defense to repayment application will state
that the Secretary will grant forbearance while the application is
pending and will notify the borrower of the option to decline
forbearance. The Department removes ``criminal history or'' from Sec.
685.206(e)(8)(v).
Definition of ``Borrower''
    Comments: A group of commenters recommended that the proposed
regulatory language in the 2018 NPRM at Sec.  685.206(d)(1)(i), define
``borrower'' to include the student on whose behalf a parent borrowed
Federal funds. The purpose of this inclusion is to specifically address
whether a parent borrower may raise a defense to repayment claim.
    Discussion: The Department regrets the omission of parent borrowers
from the borrower defense provisions in the 2018 NPRM. We have amended
the definition to reflect the approach taken in the 2016 final
regulations, so that a parent borrower may raise a defense to repayment
claim based on a misrepresentation or omission made to the parent or to
the student on whose behalf the parent borrowed Federal funds. In the
final regulations, Sec.  685.206(e)(1)(ii) mirrors Sec.  685.222(a)(4),
the definition applicable for loans first disbursed on or after July 1,
2017 and before July 1, 2020, which provides that the term ``borrower''
includes the student who attended the institution, any endorsers, or
the student on whose behalf a parent borrowed.
    Changes: The definition of ``borrower'' in Sec.  685.206(e)(1)(ii)
now includes both the borrower and, 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.
Definition of Direct Loan
    Comments: None.
    Discussion: The Department would like to clarify that ``Direct
Loan'' in Sec.  685.206(e) means a Direct Unsubsidized Loan, a Direct
Subsidized Loan, or a Direct PLUS Loan. With respect to both the pre-
2016 final regulations and 2016 final regulations, the Department
interprets ``Direct Loan'' to mean a Direct Unsubsidized Loan, a Direct
Subsidized Loan, or a Direct PLUS Loan in Sec. Sec.  685.206(c) and (d)
and 685.222. These final regulations clarify that ``Direct Loan''
continues to have the same meaning as in the pre-2016 final regulations
and 2016 final regulations.
    Changes: The Department expressly defines a Direct Loan in Sec.
685.206(e)(1)(i) as a Direct Unsubsidized Loan, a Direct Subsidized
Loan, or a Direct PLUS Loan.
Group Claims: Support for Revisions
    Comments: Several commenters supported the Department's proposal to
eliminate the group claim process for borrower defense claims. They
expressed concern that allowing for group claims would incentivize
attorneys and advocacy groups to file claims on behalf of a class of
students. One commenter asserted that outside actors could attempt to
monetize borrower defense claims to their own benefits, especially if
the Department were to accept group claims. However, the commenter
noted that there are options that the Department could consider to
limit this possibility as an alternative to disallowing group claims
entirely.
    Discussion: The Department thanks the commenters for their support
of the regulations that require individuals to assert borrower defense
claims. To an extent, we understand the commenters' concerns about, and
have already become aware of evidence of, outside actors attempting to
personally gain from the bad acts of institutions as well as unfounded
allegations. The evidence standard and the fact-based determination of
the borrower's harm and resulting reliance requirements in the federal
standard in these regulations for loans first disbursed after July 1,
2020, necessitates that each claim be adjudicated separately. While,
depending on the circumstances, borrower defense claims brought under
those other standards might be amenable to a group process or for
expedited processing if there are similar facts and claims among a
number of borrowers, the new federal standard envisions a more fact-
specific inquiry. As a result, the Department no longer believes that a
group process is appropriate.
    Changes: None.
Group Claims: Opposition to Revisions
    Comments: Many commenters encouraged the Department to include a
process in the final regulations for group claims. These commenters
noted that students who were at the same school at the same time, who
were subject to the same misrepresentation, could expect their claims
to be adjudicated more expeditiously, if considered as a group.
    Some commenters were not persuaded by the Department's assertion in
the 2018 NPRM that a group claim process places an extraordinary burden
on both the Department and the Federal taxpayer, given that the 2016
final defense regulations asserted that a group adjudication process
with common facts and claims would conserve the Department's
administrative resources. These commenters further noted that no undue
burden would be placed on the taxpayer so long as the Department is
holding institutions financially accountable.
    Some commenters suggested that when the Department knows that a
school engaged in misrepresentation to a group of students, debt relief
should be granted to all of them.
    The commenters further recommended that the regulation require the
Department to process any relevant and substantiated information in its
possession in the same manner as a Freedom of Information Act (FOIA)
request and make that information, to the extent permitted by law,
available to the borrower and the school.
    The commenters suggested that the Department consider significant
and plausible allegations of misrepresentation by multiple
[[Page 49799]]
borrowers sufficient impetus to launch its own investigation, the
outcome of which may be used to substantiate pending borrower defense
claims and enable such claims to move to the determination of harm
phase. They assert that the Department could use compliance
determinations by the Department, or other oversight bodies, as an
alternative to a group process that would alleviate some of the burden
associated with examining individual claims and focus such reviews on
harm to borrowers rather than institutional intent, without curtailing
due process rights for schools.
    Another commenter noted that allowing for group claims would
strengthen the usefulness of the regulation as an accountability
measure, as schools would know that efforts to defraud students could
result in large groups of students being given relief, with the
associated financial impact on the school.
    A commenter cited Federal Trade Commission v. BlueHippo Funding,
LLC, 762 F.3d 238 (2nd Cir. 2014) for the proposition that consumer
protection agencies need not show that each consumer individually
relied on a misrepresentation. Similarly, another commenter stated a
limitation on group claims will limit access to relief exclusively to
students who have the financial resources to obtain legal
representation.
    One commenter stated that a ban on group claims places undue burden
on individuals who have been defrauded where there is widespread
evidence of mistreatment.
    Other commenters who supported the inclusion of group claims noted
that, while the proposed regulations make explicit that the Department
has the authority to automatically discharge loans on behalf of a group
of defrauded borrowers, the regulations do not include guidance to
ensure that this authority is exercised by the Secretary.
    These commenters also advocated including a process in the final
regulations that would enable State attorneys general (AGs) to petition
the Department to provide automatic group loan discharges to students
based on the findings of an AG's investigation. Another commenter also
advocated for the rule to permit third parties, such as state AGs or
legal aid organizations, to file group claims when they possess
evidence of widespread misconduct.
    One commenter suggested that group discharges should include
borrower defense claimants' private loans and Federal Family Education
Loan (FFEL) Program loans.
    Discussion: After careful consideration of the comments, the
Department retains its position that it is unnecessary to provide a
process for group borrower defense claims.
    In 2016, the Department decided that a group process would conserve
the Department's administrative resources. However, the standard for a
borrower defense claim and the process that we are adopting in these
final regulations is much different from the standard and process in
the 2016 final regulations.
    Determinations under these final rules will be highly reliant upon
evidence specific to individual borrowers, which requires the
Department to reconsider its previous burden calculation. Under these
final regulations, a school engaging in misrepresentation alone will
not be sufficient for a successful claim. Relief will be granted based
upon a borrower's ability to demonstrate that institutions made
misrepresentations with knowledge of its false, misleading, or
deceptive nature or with reckless disregard and to provide evidence of
financial harm. This evidentiary determination and harm analysis
require that the Department consider each borrower claim independently
and on a case-by-case basis.
    The Department declines to accept the commenter's recommendation to
process relevant and substantiated information in the same manner as a
FOIA request. The purpose of the FOIA process is to allow the release
of information for the public. Information submitted for a borrower
defense claim is provided to the Department, and it is unclear how the
FOIA process could be applicable to the process created by these final
regulations. While the Department welcomes information from the
borrower and encourages the submission of such information, the process
outlined in these final regulations allows for sufficient access to the
required information and documentation for the concerned parties to a
claim.
    While the Department shares and understands the concerns that
commenters expressed regarding the expeditious resolution of borrower
claims, we believe it is prudent to balance the need for speedy
recovery for students against the need to properly resolve each claim
on the merits and provide relief in relation to the claimant's harm. To
make this determination, it is necessary to have a completed
application from each individual borrower, to consider information from
both the borrower and the institution, and to examine the facts and
circumstances of each borrower's individual situation.
    Additionally, the Department does not believe that the elimination
of group claims reduces the usefulness of the regulation as an
accountability measure. Schools are still subject to the consequences
of their misrepresentation and, if necessary, the Secretary retains the
discretion to establish facts regarding misrepresentation claims put
forward by a group of borrowers.
    The Department does not agree that it is too burdensome for a
borrower to submit an individual application to provide evidentiary
details in order to receive consideration for a full or partial loan
discharge or that a borrower must retain legal services in order to
file a successful claim. Considering that a student had to sign a
Master Promissory Note--a complicated legal document--as well as other
documents in order to obtain a student loan, we have determined that
the burden upon students to provide documentation and to complete an
application is appropriate. In order to properly review the borrower's
allegations and calculate the level of relief to which a student is
entitled, based on the need to balance the interests of borrowers and
taxpayers, the Department must collect information from borrowers
through an application form.
    Further, presuming reliance on the part of the students would not
properly balance the Department's responsibilities to protect students
as well as taxpayer dollars.
    We appreciate, but do not adopt, the suggestions regarding the
Department's consideration of allegations from multiple borrowers as an
impetus to launch an investigation (though certainly such allegations
could trigger an investigation) and the use of compliance
determinations, by the Department or other oversight body, as an
alternative to the group process. The Department believes that the most
appropriate and fairest method of determining if a student was subject
to a misrepresentation, relied on that misrepresentation, and was
subsequently harmed by it, is through the individual claim process in
these final regulations.
    Regarding any evidence from audits, program reviews, or
investigations, the Department may, at the Secretary's discretion,
determine if it is warranted and more efficient to establish facts
regarding claims of misrepresentation put forth by a group.
    The Department rejects the commenter's suggestion to include
regulatory language to ensure that the authority extended to the
Secretary to automatically discharge loans on behalf of a group is
exercised. Even if the
[[Page 49800]]
Department determines that it is more efficient to establish facts
regarding claims of misrepresentation put forth by a group of
borrowers, the Secretary will still need to determine that the borrower
was harmed as a result of a decision based upon a misrepresentation.
    While we reject the suggestion of a process for State AG or legal
aid organization petitions, the Secretary may determine that evidence
of widespread misconduct, obtained by State AGs or legal aid
organizations, merit a broader review of a school's actions in order to
establish facts regarding misrepresentation to a group of borrowers.
However, the Department has an obligation to taxpayers to independently
assess the strength of each borrower defense claim. Consequently, we
will not be compelled to take action at the recommendation or petition
of a State AG, especially if those allegations have not resulted in a
judgment on the merits in an impartial court of law, nor will the
Department automatically treat State AG submissions as group claims.
Instead, if a State AG has concerns about a particular institution, we
would recommend that it work with their State agencies responsible for
authorizing and regulating institutions. Those entities are a crucial
part of the regulatory triad, which includes the Department, State
authorizing agencies, and accreditors, and have the right and
responsibility to enforce applicable State laws.
    The Department does not have the authority to discharge private
student loans or FFEL loans for borrowers who assert borrower defense
to repayment claims with respect to their Direct loans. Section 455(h)
of the HEA specifically provides that a borrower may assert a borrower
defense to repayment to ``a loan made under this part,'' referring to
the Direct Loan Program. Private loans are not part of the Direct Loan
Program and thus may not be discharged under the Department's borrower
defense process by statute. Similarly, FFEL loans are made under the
FFEL Program, and not the Direct Loan Program. As a result, a FFEL loan
also cannot be discharged through the Direct Loan borrower defense
process, unless the FFEL loan has consolidated into a Direct
Consolidation Loan under 34 CFR 685.220. In that situation, the FFEL
loan would be paid off with the proceeds of the Direct Consolidation
Loan, and the borrower's Direct Consolidation Loan--as a loan made
under the Direct Loan Program--would allow the borrower to apply for
relief through the borrower defense process. Unless consolidated into a
Direct Consolidation Loan, as described in 34 CFR 685.200, Private and
FFEL loan funds are provided by lenders other than the Department and
cannot be discharged through the Direct Loan Program's regulatory or
statutory provisions that apply to the Direct Loan Program.
    The Department notes that the group process from the 2016 final
regulations, at 34 CFR 685.222(f), will still be available for loans
first disbursed on or after July 1, 2017, and before July 1, 2020.
    Changes: None.
Unsubstantiated Claims
    Comments: One commenter stated that the Department's concern
regarding the receipt of many frivolous claims is unfounded, wrong-
headed, and not supported by research or complaints from dissatisfied
consumers. Another commenter noted that in the NPRM, we stated that
there was insufficient information to know whether the fear of
frivolous claims was legitimate. The commenter also referred to the
Department's position in the preamble to the 2016 final regulations,
where we held that defense to repayment proceedings will be not be used
by borrowers to raise frivolous claims.
    Referring to consumer products research, a commenter asserted that
the Department's concern regarding frivolous claims ignores good-
government practices followed by peer agencies like the Veterans
Administration, such as publishing complaints against schools, and does
not reflect the overarching goals of the HEA.
    A group of commenters objected to the actions taken to mitigate
frivolous claims. These commenters expressed a need to balance student
protections with expectations of student responsibility, suggesting
that the rule must emphasize that students have a right to accurate,
complete, and clear information so that they can make sound decisions.
The commenters also asserted that students should not be abandoned to
the principle of caveat emptor and that the higher education community
should work with students to avoid bad choices that result in lost time
and opportunities.
    Another group of commenters expressed concern that those who are
ideologically opposed to the existence of privately owned and operated
schools may file frivolous claims as a means of harassing schools and
harming the schools' reputations, before the claims could be
adjudicated by the Department. These commenters encouraged the
Department to establish a balanced adjudication process that includes
procedural protections that provide for the quick dismissal of
frivolous or unsubstantiated claims.
    Discussion: The Department agrees with the commenters that the
defense to repayment regulations must provide student protections and
not endorse a caveat emptor approach, while encouraging fiscal
responsibility for students and the Department. As a policy matter, we
do not believe that, in practice, the 2016 final regulations will
effectively prevent unsubstantiated claims, which is why these final
regulations are drafted to build-in further deterrents.
    The Department does not possess an official definition of
``frivolous'' or ``unsubstantiated'' claims. In typical usage, however,
a frivolous claim is one with little or no weight or not worthy of
serious consideration.\38\ We use the term, here, to describe claims
provided by borrowers that allege misrepresentations that actually did
not occur, that seek discharge from private rather than Federal loans,
or that seek relief from a school not associated with any of the
borrower's current underlying loans.
---------------------------------------------------------------------------
    \38\ Webster's Dictionary defines frivolous as: ``of little
weight or importance; having no sound basis; lacking in
seriousness.'' Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/frivolous?src=search-dict-hed.
Black's Law Dictionary defines ``frivolous'' as when an answer or
plea is ``clearly insufficient on its face, and does not controvert
the material points of the opposite pleading, and is presumably
interposed for mere purposes of delay or to embarrass the
plaintiff.'' https://thelawdictionary.org/frivolous/. The Supreme
Court has held that a complaint is frivolous when it lacks ``an
arguable basis either in law or in fact.'' Neitzke v. Williams, 490
U.S. 319 (1989).
---------------------------------------------------------------------------
    Although we understand that some commenters may disagree with our
approach, the Department's policy seeks to balance the needs of
borrowers to have their claims resolved expeditiously against the needs
of the Department to resolve claims fairly and efficiently without
overburdening the Department, institutions that are operating and
serving students, or taxpayers.
    The Department has examined the issue of unsubstantiated claims and
has concluded that it remains a concern in terms of costs, burden, and
delays. Processing unsubstantiated claims would place an administrative
burden on the Department. Defending against unsubstantiated claims
would be costly to all institutions, particularly smaller institutions.
The Department has processed only a small percentage of the claims
filed thus far. Of those, around 9,000 applications have been denied as
unsubstantiated for reasons that include, but are not limited to, the
following: (1) Borrowers who attended the institution, but not during
the time
[[Page 49801]]
period that the institution made the alleged misrepresentation; (2) the
borrower submitted the claim without any supporting evidence; and (3)
on its face, the claim lacks any legal or factual basis for relief.
This high number of unsubstantiated claims, as a practical matter,
strains Department resources and delays relief to borrowers who have
meritorious claims.
    The Department finds that the comment regarding consumer products
research and borrower defense claims does not make explicit why such a
comparison is an apples-to-apples comparison. It is not apparent from
the commenter's argument that, in fact, they are.
    The Department believes that by taking seriously its dual
responsibilities to students and taxpayers, we are employing good-
government practices in accordance with our statutory and regulatory
responsibilities.
    Contrary to some commenters' suggestions, the Department believes
that the regulation appropriately emphasizes disclosure insofar as
students, who are themselves taxpayers, have a right to accurate,
complete, and clear information that will enable them to make sound
decisions.
    The Department further believes that requiring borrowers to sign an
application claim under penalty of perjury will help deter
unsubstantiated claims, as will the opportunity for institutions to
respond to such claims, including by providing relevant documents from
the student's academic and financial aid records.
    The Department reserves the ability to take action against
borrowers who perjure themselves in filing a substantially inaccurate
claim.
    We acknowledge that there is a risk that unsubstantiated claims
could be filed in large numbers to target institutions for the purpose
of damaging their reputations before the Department can adjudicate the
claims as unsubstantiated. Indeed, we are aware of firms and advocacy
groups that are engaging in such coordinated efforts against certain
institutions.
    Nevertheless, by allowing institutions to respond in the
adjudication process to all claims--substantiated and unsubstantiated--
asserted against them as part of the adjudication process, the
Department will be able to mitigate this risk for institutions and make
informed decisions on individual claims.
    Changes: None.
Retroactive Standards and Bases for Claims
    Comments: Several commenters also advocated that borrowers whose
loans were disbursed prior to July 1, 2019, should be allowed to
initiate both affirmative and defensive borrower defense claims.
    These commenters assert that this is especially important when a
claim has failed under the current State law standard. The commenters
argue that, as a matter of equity, those borrowers should be permitted
to refile a claim under the Federal standard.
    Discussion: The date of loan disbursement determines which standard
applies to the borrower defense claim. For loans first disbursed on or
after July 1, 2020, these final regulations include opportunities for
borrowers to make both affirmative and defensive claims under a Federal
standard within the three-year limitations period.
    Likewise, for loans disbursed on or after July 1, 2017 and before
July 1, 2020, borrowers may assert both affirmative and defensive
claims, but pursuant to the 2016 final regulations. Borrowers of loans
first disbursed prior to July 1, 2017, may assert a defense to
repayment under the State law standard set forth in 685.206(c). Neither
these final regulations nor the 2016 final regulations provide a
borrower whose loans were disbursed when the State law standard was in
effect the ability to refile a borrower defense claim under a later-
effective Federal standard, unless the loans were consolidated after
July 1, 2020.
    Changes: None.
Borrower Defenses--Federal Standard (Section 685.206)
    Comments: Several commenters supported the establishment of a
Federal standard for borrower defense to repayment claims, noting that
a Federal standard would provide clarity and consistency and enhance
Department officials' ability to work with schools to prioritize the
delivery of quality education to students.
    Several commenters asserted that the proposed Federal standard
makes it substantially more difficult for defrauded borrowers to assert
a claim. The commenters argue that by eliminating the State law
standard, and excluding final judgments made by Federal or State courts
against a school from the list of acceptable defenses, the Department
effectively nullifies State consumer protection laws and requires a
borrower who successfully sues their school for fraud in a State court
to continue repaying loans used to attend the school while the school
continues to reap the benefit of the borrower's Federal student aid.
    Several commenters suggested that the Department establish the
Federal standard as a floor and allow borrowers who choose to do so to
assert claims based on a State standard.
    Other commenters asserted that any Federal standard should not
limit the rights a borrower has in his or her own State. The commenters
opined that States should have the right to protect their own consumers
and ensure the quality of schools licensed to operate in their States.
Several other commenters agreed, noting that the proposed standard
would destroy the working relationship between the Federal government
and States' attorneys general by limiting their role in protecting
borrowers.
    Another commenter stated that there is no good basis for expanding
the reach of the Federal government and supplanting State laws with
Federal regulations.
    Discussion: We appreciate the support for adopting a Federal
standard and agree that a Federal standard provides consistency.
    Section 455(h) of the HEA expressly states: ``Notwithstanding any
other provision of State or Federal law, the Secretary shall specify in
regulations which acts or omissions of an institution of higher
education a borrower may assert as a defense to repayment of a loan.''
(Emphasis added). Congress did not require the Secretary to use State
law as the basis for asserting a defense to repayment of a loan.
Instead, Congress expressly required the Secretary to specify in
regulations which acts or omissions constitute a borrower defense to
repayment. Loans under title IV are a Federal asset, which means that
the Secretary must maintain the authority to make determinations about
when and how a student loan should be discharged.
    The Department disagrees now, as it did in promulgating the 2016
final regulations, that moving to a Federal standard interferes with
the ability of States to protect students. State authorizing agencies
will remain an integral part of the regulatory triad, and State AGs may
exercise their separate authority and pursue a legal process to take
action against institutions. These final regulations do not nullify,
abrogate, or derogate the authority of States to enforce their own
consumer protection laws. A borrower defense to repayment application
filed with the Department is only one of several available avenues for
potential relief to borrowers, and borrowers may choose the best avenue
of relief available to them.
[[Page 49802]]
    These final regulations continue to allow borrowers to submit the
factual findings supporting a final judgment in a State AG enforcement
action against their schools as evidence to support their borrower
defense to repayment claims. However, the Department notes that, as a
practical matter, factual findings in state AG enforcement actions
often are of limited utility to borrower defense claims because State
consumer protection laws cover broader issues than Department-backed
student loans or even the provision of educational services.
Accordingly, a judgment against an institution in an action brought by
a State AG to enforce State law may not be relevant to a title IV
defense to repayment claim. Therefore, the Department's final
regulations expressly state that certain categories of State law claims
which are enumerated in 34 CFR 685.206(e)(5)(ii)--including but not
limited to, claims for personal injury, sexual harassment, civil rights
violations, slander or defamation, property damage, or challenging
general education quality or the reasonableness of an educator's
conduct in providing educational services--are not directly and clearly
related to the making of a loan or the provision of educational
services by a school. For example, the reasonableness of an educator's
conduct in providing educational services, such as the educator's
teaching style, preparation for class, etc., is irrelevant to whether
the educator made a misrepresentation as defined in these final
regulations. When a borrower points to a final judgment in a State law
action in support of an application for borrower defense to repayment,
the Department must consider the final judgment's relevance to the
borrower defense claim.
    A Federal standard assures borrowers equitable treatment under the
law regardless of where they live or where their institutions are
located. In considering claims under the 1995 borrower defense
regulations, the Department found it unwieldy to navigate the consumer
protection laws of 50 different States. Researching and applying the
consumer protection laws of the 50 States requires significant
resources and, thus, delays the adjudication of borrower defense to
repayment claims. Further, applying disparate State law could result in
differential and inequitable treatment of similarly situated borrowers.
For instance, two borrowers who were exposed to identical
misrepresentations and suffered the same hardship could have their
borrower defense claims resolved inconsistently simply because the
borrowers reside in different States.
    We do not agree that it would be beneficial to allow borrowers to
select the State standard under which their claims would be reviewed.
Most borrowers would lack the expertise and information to make such a
choice-of-law determination. Moreover, this approach undercuts our
objective to adjudicate claims swiftly and equitably.
    Separately, we do not believe that the Department should share with
State AGs sensitive academic and financial information for borrowers
who seek individual loan discharges through borrower defense to
repayment claims, the work of State AGs may inform and advance the
Department's efforts to ensure accountability at the institution level
because of the important role State AGs play in enforcing consumer
protection laws. That being said, title IV Federal student loans are
Federal assets, backed by Federal tax dollars and governed by federal
law. As a result, the Department must work independently to fulfill its
fiduciary responsibilities to the American taxpayer.
    There is nothing in our final regulations that preempts State
consumer protection laws or diminishes the State role in consumer
protection. As explained above, States play a vital role in enforcing
consumer protection laws that hold institutions accountable outside the
realm of Federal student loans.
    Changes: The Department adopts, with changes for organization and
consistency, the Federal standard as articulated in Alternative B for
Sec.  685.206(e).
Alignment With Definition of Misrepresentation
    Comments: None.
    Discussion: The Department seeks to better align the Federal
standard for borrower defense claims with the definition of
misrepresentation. The 2018 NPRM proposed different alternatives,\39\
not all of which expressly incorporated the definition of
misrepresentation. The Department adopts language that expressly
incorporates the definition of misrepresentation in 685.206(e)(3). The
Department also expressly includes a reference to the provision of
educational services, which appears in the definition of
misrepresentation, in the Federal standard. The Department sought to
streamline the Federal standard and definition of misrepresentation and
make them parallel to each other.
---------------------------------------------------------------------------
    \39\ 83 FR 37325-28.
---------------------------------------------------------------------------
    Changes: The Department is revising the proposed regulations
creating a Federal standard for a borrower defense claim to state that
the borrower must establish by a preponderance of the evidence that the
institution at which the borrower enrolled made a misrepresentation, as
defined in 685.206(e)(3), and also expressly to reference the provision
of educational services.
Borrower Defenses--Misrepresentation
Definition of Misrepresentation and Intent as Part of the Federal
Standard
    Comments: Many commenters wrote in support of the proposed
definition of misrepresentation, noting that it is clear and focuses on
actions that are commonly accepted as dishonest. Some of these
commenters noted that the definition would separate inadvertent errors
from intentional actions by the school. Other commenters noted that the
definition of misrepresentation will help ensure that frivolous claims
will be prevented or rightly rejected. Another commenter asserted that
the Department should allow for an institution's innocent mistake and
that allowing students to discharge their loans for innocent mistakes
would create an incredible risk to schools, taxpayers, and ultimately
the workforce.
    Many other commenters objected to the definition of
misrepresentation, arguing that the requirement for intent, knowledge,
or reckless disregard was too difficult for borrowers to meet,
effectively denying access to relief to most borrowers. These
commenters asserted that such evidence would likely be available only
if a borrower had legal counsel and access to discovery tools, such as
subpoenas for documents and testimony. They also noted that
misrepresentations need not be intentional to harm students and
suggested that negligent misrepresentations be incorporated into the
definition as well.
    One commenter requested that the Department provide a more fulsome
justification for why its view of misrepresentation has changed since
the 2016 final regulations. Similarly, another commenter contended that
the Department has not provided adequate justification for its view
that misrepresentation requires intentional harm to students. One
commenter asserted that if the Department can adjudicate allegations of
fraud and misrepresentation in an administrative proceeding against a
school, then students should be able to benefit from
[[Page 49803]]
the same standard for borrower defense to repayment.
    Another commenter argued that the proposed Federal standard would
be arbitrarily difficult for borrowers to satisfy and seems designed to
keep borrowers from receiving relief available to them under the law.
This commenter asserted the Department should simplify the process and
ensure that borrowers have equitable access to relief.
    Some commenters noted that the Department in the 2018 NPRM
acknowledged that it is unlikely that a borrower would have evidence to
demonstrate that a school acted with intent to deceive, but borrowers
are more likely to be able to demonstrate reckless disregard for the
truth. The commenter recommends that, as an alternative, the regulation
allow borrowers to submit sufficient evidence to prove that a
substantial material misrepresentation was responsible for their taking
out loans, regardless of whether the misrepresentation was made with
knowledge or recklessness by the school.
    According to one commenter, the proposed definition of
misrepresentation adds a substantial amount of burden without
distinguishing among the types of misrepresentations borrowers may have
experienced. This commenter noted that the Department itself assumes
that only five percent of misrepresentations are committed without
intent, knowledge, or reckless disregard; or do not fall under the
breach of contract or final judgment components of the standard in the
2016 final regulations. The commenter opined that the Department,
through its proposed definition of misrepresentation, was attempting to
prevent borrowers who have been harmed by their institutions from
accessing relief simply because of asymmetry between borrowers and the
school about the nature of the misrepresentation.
    One commenter criticized the proposed definition of
misrepresentation for exceeding the standards under State and Federal
consumer protection laws.
    Another commenter asserted that all fifty States have a version of
consumer protection laws that prohibit certain unfair and deceptive
conduct, commonly known as ``unfair and deceptive trade acts and
practices'' (UDAP). According to this commenter, these UDAP laws are
modeled after the Federal Trade Commission Act and track the CFPB's
statutory authority. This commenter asserts that the UDAP laws address
both deception and unfairness and offer a common, stable structure, and
pedigree that the Department should adopt. This commenter asserted that
a scienter requirement is inconsistent with the state of mind
requirements in other Federal laws governing unfair and deceptive
practices. The commenter notes that, for example, the deception
standard used by the FTC does not require a showing of intent by the
party against whom a deception claim is brought. The commenter further
notes that the CFPB, uses a similar standard for determining whether an
act or practice is deceptive. According to the commenter, under both
the FTC and CFPB's standard, a practice is deceptive if, among other
things, it is likely to mislead a consumer.
    Discussion: We appreciate the commenters' support for the proposed
definition of misrepresentation. We agree that it is important to
differentiate between acts or omissions that a school made unknowingly
or inadvertently and acts or omissions that a school made with
knowledge of their false, misleading, or deceptive nature or with
reckless disregard for the truth. The Department agrees with
negotiators and commenters that it is unlikely that a borrower would
have evidence to demonstrate that an institution acted with intent to
deceive, and we are revising these final regulations to remove the
phrase ``with intent to deceive'' from the Federal standard. It is
difficult to prove what an officer's or employee's intent is, but it is
not as difficult to prove that a statement was made with knowledge of
its false, misleading, or deceptive nature or with a reckless disregard
for the truth. For example, a student may demonstrate that an officer
of the institution or employee misrepresented the actual licensure
passage rates because the employee's representations are materially
different from those included in the institution's marketing materials,
website, or other communications made to the student. The officer or
employee need not have an intent to deceive the student in making the
misrepresentation about actual licensure passage rates. The student may
use the institution's marketing materials, website, or other
communications to demonstrate that the institution's officer or
employee made the representation with knowledge of its false,
misleading, or deceptive nature or with reckless disregard for the
truth.
    To address concerns about the definition of misrepresentation and
the Federal standard, the Department is revising the Federal standard
to provide greater clarity. The Federal standard proposed in the 2018
NPRM requires borrowers to demonstrate that the institution made a
``misrepresentation of material fact, opinion, intention, or law.''
\40\ The Department realizes that it will be difficult to demonstrate a
misrepresentation of ``opinion, intention, or law'' and, thus, is
removing ``opinion, intention, or law'' from the Federal standard. It
could be very difficult to demonstrate a misrepresentation of opinion
or intention as opinions and intentions may change and do not
constitute facts that may be proved or disproved. Similarly, it would
be difficult to demonstrate that the institution made a material
misrepresentation of law as laws are subject to different
interpretations. Laws that are clearly stated and that are not subject
to different interpretations may constitute a material fact. For
example, if an institution made a material misrepresentation that these
final regulations require a pre-dispute arbitration agreement and class
action waiver, then the misrepresentation concerns a material fact.
Accordingly, the Federal standard will only require borrowers to
demonstrate a misrepresentation of a material fact.
---------------------------------------------------------------------------
    \40\ 83 FR 37325.
---------------------------------------------------------------------------
    Additionally, the Department is revising the definition of
misrepresentation to better align with the Federal standard. The
Federal standard in these final regulations requires, in part, 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) [e]nrollment or continuing
enrollment at the institution or (B) [t]he provision of educational
services for which the loan was made.'' \41\ The definition of
``misrepresentation'' proposed in the 2018 NPRM, however, requires the
statement, act, or omission of material fact to directly and clearly
relate ``to the making of a Direct Loan, or a loan repaid by a Direct
Consolidation Loan, for enrollment at the school or to the provision of
educational services for which the loan was made.'' \42\ Requiring the
statement, act, or omission to directly and clearly relate to the
making of a Direct Loan, or a loan repaid by a Direct Consolidation
Loan, does not align with the Federal standard, which requires the
misrepresentation to directly and clearly relate to enrollment or
continuing enrollment at the institution or the provision of
[[Page 49804]]
educational services for which the loan was made.
---------------------------------------------------------------------------
    \41\ Sec.  685.206(e)(2).
    \42\ 83 FR 37326.
---------------------------------------------------------------------------
    Accordingly, the Department is revising the definition of
misrepresentation to include a statement, act or omission that clearly
and directly relates to enrollment or continuing enrollment at the
institution or the provision of educational services for which the loan
was made. Of course, a misrepresentation about the making of a Direct
Loan, or a loan repaid by a Direct Consolidation Loan, will qualify as
a misrepresentation because such a misrepresentation clearly and
directly relates to enrollment or continuing enrollment at the
institution or the provision of educational services for which the loan
was made.
    The Department, however, does not wish to limit a misrepresentation
of material fact to only a statement, act, or omission that directly
and clearly relates to the making of a Direct Loan, or a loan repaid by
a Direct Consolidation Loan. As the examples of misrepresentation in
Sec.  685.206(e)(3)(i) through (xi) demonstrate, the misrepresentation
of material fact may, for example, directly and clearly relate to 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.\43\ The Federal standard already provides that
the borrower must have reasonably relied on the misrepresentation of
material fact in deciding to obtain a Direct Loan, or a loan repaid by
a Direct Consolidation Loan.
---------------------------------------------------------------------------
    \43\ Sec.  685.206(e)(3)(x).
---------------------------------------------------------------------------
    We agree with the commenters who argued that a school should not be
held liable if it committed an inadvertent mistake. Schools should work
with students when an inadvertent mistake has occurred. As explained
below, an inadvertent or innocent mistake should not, and will not, be
treated as an act or omission that is false, misleading, or deceptive
by an institution. In the preamble to the 2016 final regulations, we
took the position that institutions should be responsible for the harm
to borrowers as the result of even inadvertent or innocent mistakes.
However, as reiterated throughout this document, in these final rules
the Department is seeking to empower students by providing them with
information and encouraging them to resolve disputes directly with
schools in the first instance. Treating innocent mistakes in the same
manner as acts or omissions made with knowledge of their false,
misleading, or deceptive nature, places well-performing schools at risk
unnecessarily, potentially limiting postsecondary opportunities for
students or increasing costs. Balancing the Department's dual role to
protect Federal tax dollars with its responsibility to borrowers, the
Department is incorporating a scienter requirement into borrower
defense to repayment claims. Any claim based on misrepresentation will
require proof that the institution made the misrepresentation with
knowledge that it was false, misleading, or deceptive or that the
institution, in making the misrepresentation, acted with reckless
disregard for the truth.
    The Department does not adopt the commenter's suggestion that the
final regulations include a negligence standard. We view our definition
of misrepresentation as similar to, but not the same as, the common law
definition of fraud or fraudulent misrepresentation, which requires
that the institution or a representative of the institution make the
misrepresentation with knowledge of its false, misleading, or deceptive
nature. Such a standard is different than the failure to exercise care
that a negligence standard requires.
    Generally, courts find that a defendant committed fraud or a
fraudulent misrepresentation when each of the following elements have
been successfully satisfied: (1) A representation was made; (2) the
representation was made in reference to a material fact; (3) when made,
the defendant knew that the representation was false; (4) the
misrepresentation was made with the intent that the plaintiff rely on
it; (5) the plaintiff reasonably relied on it; and (6) the plaintiff
suffered harm as a result of the misrepresentation.\44\ These elements,
like our final regulations, create a relationship between the false
statement, reliance upon the false statement, and a resulting harm.
---------------------------------------------------------------------------
    \44\ In re APA Assessment Fee Litigation, 766 F.3d 39, 55 (D.C.
Cir. 2014); See also: Mid Atlantic Framing, LLC. v. Varnish
Construction, Inc., 117 F.Supp.3d 145, 151 (N.D.N.Y. 2015); Chow v.
Aegis Mortgage Corporation, 185 F.Supp. 914, 917 (N.D.Ill 2002);
Master-Halco, Inc. v. Scillia Dowling & Natarelli, LLC, 739
F.Supp.2d 109, 114 (D.Conn. 2010). Note: In cases involving
commercial contracts, courts have often required a further element
that the defrauded party's reliance must be reasonable. Hercules &
Co., Ltd. v. Shama Restaurant Corp., 613 A.2d 916, 923 (D.C. Cir.
1992).
---------------------------------------------------------------------------
    A plaintiff alleging negligent misrepresentation must show that:
(1) The defendant made a false statement or omitted a fact that he had
a duty to disclose; (2) it involved a material issue; and (3) the
plaintiff reasonably relied upon the false statement or omission to his
detriment.\45\ In contrast to fraudulent representation, an allegation
of negligent misrepresentation need not show that the defendant had
knowledge of the falsity of the representation or the intent to
deceive.\46\ In addition, courts have found that, to be actionable, a
negligent misrepresentation must be made as to past or existing
material facts and that predictions as to future events, or statements
as to future actions by a third party, are deemed opinions and not
actionable fraud.\47\
---------------------------------------------------------------------------
    \45\ Sundberg v. TTR Realty, 109 A.3d 1123, 1131 (D.C. 2015);
See also: Indy Lube Investments, LLC v. Wal-Mart Stores, Inc., 199
F.Supp. 2d 1114, 1122 (D.Kan. 2002); City of St. Joseph, Mo. v.
Southwestern Bell Telephone, 439 F.3d 468, 478 (8th Cir. 2006);
Redmond v. State Farm Ins. Co., 728 A.2d 1202, 1207 (D.C. 1999).
    \46\ Sundberg, 109 A.3d at 1131.
    \47\ Stevens v. JPMorgan Chase Bank, N.A., 2010 WL 329963
(N.D.Cal. 2010); See also: Newton v. Kenific Group, 62 F.Supp 3d
439, 443 (D. Md. 2015); Fabbro v. DRX Urgent Care, LLC, 616 Fed.
Appx. 485, 488 (3rd Cir. 2015) (Negligent misrepresentation claims,
regarding the expenses involved in starting a franchise, were
dismissed, in part, because: ``Predictions or promises regarding
future events . . . are necessarily approximate.'')
---------------------------------------------------------------------------
    We believe that including a negligent misrepresentation standard
into our definition would entirely alter the balance we seek to create
with these final regulations, as negligent representation may include
an inadvertent mistake. The Federal standard in these regulations goes
beyond a mere negligence standard in requiring knowledge of the false,
misleading, or deceptive nature of the representation, act, or omission
and in requiring that the institution make the statement, act, omission
with a reckless disregard for the truth. Reckless disregard often is a
requirement of intentional torts, which go beyond mere negligence.\48\
For example, reckless disregard for the truth in the context of libel
means that a publisher must act with a `` `high degree of awareness of
probable falsity,' '' \49\ as ``mere proof of failure to investigate,
without more, cannot establish reckless disregard for the truth.'' \50\
Similarly, an institution's statement, act, or omission must be made
with a high degree of awareness of probable falsity to satisfy the
requirement that the institution acted with reckless disregard for the
truth.
---------------------------------------------------------------------------
    \48\ See Harte-Hanks Commc'ns, Inc. v. Connaughton, 491 U.S. 657
(1989); Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974).
    \49\ Gertz, 418 U.S. at 332 (quoting St. Amant v. Thompson, 390
U.S. 727, 731 (1968)).
    \50\ Id. at 332.
---------------------------------------------------------------------------
    The Department has now concluded that the 2016 final regulations'
inclusion of misrepresentations that ``cannot be attributed to
institutional intent or knowledge and are the result of
[[Page 49805]]
inadvertent or innocent mistakes'' \51\ is inappropriate for these
final regulations and had the potential to result in vastly increased
administrative burden and financial risk to schools and, when the
burden proves too great, to the taxpayer. In such a case, a mere
mathematical error could lead to devastating consequences to the
institution and potentially to its current students, who will bear the
cost of forgiving prior students' loans, even though the prior students
may have decided to enroll for many reasons unrelated to the error.
---------------------------------------------------------------------------
    \51\ 81 FR 75947.
---------------------------------------------------------------------------
    We realize that the definition of misrepresentation in these final
regulations is a marked departure from the definition of ``substantial
misrepresentation'' by the school in accordance with 34 CFR part 668,
part F, that was part of the Federal standard in the 2016 final
regulations.\52\ The 2016 final regulations defined a misrepresentation
as: ``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 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 the student to make such an
endorsement or testimonial to participate in a program.'' \53\ The 2016
final regulations define a ``substantial misrepresentation'' as ``[a]ny
misrepresentation on which the person to whom it was made could
reasonably be expected to rely, or has reasonably relied, to that
person's detriment.'' \54\ In the 2016 final regulations, the
Department used the standard of ``substantial misrepresentation,''
which was interpreted to include negligent misrepresentations, to
adjudicate both borrower defense to repayment claims and also any fine,
limitation, suspension, or termination proceeding against the school to
recover any liabilities as a result of the borrower defense to
repayment claim.
---------------------------------------------------------------------------
    \52\ 34 CFR 685.222(d).
    \53\ 34 CFR 668.71(c).
    \54\ Id.
---------------------------------------------------------------------------
    Unlike these final regulations, the Department's 2016 final
regulations did not guarantee that the school would be allowed to
respond to a borrower defense to repayment claim. The Department's 2016
final regulations provide that the Department may, but is not required
to, consider a response or submission from the school.\55\ Under the
2016 final regulations, the Department may adjudicate a borrower
defense to repayment claim without any information from the school,
grant that claim under the substantial misrepresentation, breach of
contract, or judgment standards in the borrower's proceeding, and
proceed to initiate a separate proceeding against the school to recover
the amount of any relief provided to the borrower.
---------------------------------------------------------------------------
    \55\ 34 CFR 685.222(e)(3).
---------------------------------------------------------------------------
    The Department now believes that using the same standard in two
separate proceedings, one for the borrower to receive relief and the
other for the Department to recover liabilities from the school, is
inefficient and does not provide the robust due process protections
that are best for the borrower, school, and the Federal taxpayer.
Accordingly, as discussed elsewhere in these final regulations, the
Department must provide the school with notice of a borrower defense to
repayment claim and a meaningful opportunity to respond to such a
claim. The borrower also will be able to file a reply limited in scope
to the school's response and any evidence otherwise in the possession
of the Department that the Department considers.
    The Department believes a Federal standard with a different, more
stringent definition of misrepresentation better guards the interests
of all students, including an institution's future tuition-paying
students, an institution acting in good faith, and the Federal taxpayer
who, in some cases, inevitably must pay for any negligent or innocent
mistakes. The ``substantial misrepresentation'' standard in the 2016
final regulations behaves like a strict liability standard in torts
that is, generally, reserved for abnormally dangerous activities where
the activity at issue creates a foreseeable and highly significant risk
of physical harm even when reasonable care is exercised by all
actors.\56\ Although a ``substantial misrepresentation'' standard is
appropriate for proceedings against schools in which the Department
seeks to recover liabilities, guard the Federal purse, and protect
Federal taxpayers, such a low standard is not appropriate when the
Department is forgiving loans and increasing the national debt to the
detriment of Federal taxpayers.\57\ Student loan debt accounts for $1.5
trillion dollars of the national debt and is ``now the second highest
consumer debt category--behind only mortgage debt--and higher than both
credit cards and auto loans.'' \58\ Each time the Department discharges
loans, the Department increases the national debt, especially if the
Department is not able to recover the amount of discharged loans in a
proceeding against the schools.
---------------------------------------------------------------------------
    \56\ Restatement (Third) of Torts Sec.  20 (2010).
    \57\ See Federal Reserve, Consumer Credit Outstanding (Levels),
available at https://www.federalreserve.gov/releases/g19/HIST/cc_hist_memo_levels.html.
    \58\ Zack Freidman, Student Loan Debt Statistics in 2019: A $1.5
Trillion Crisis, Forbes, Feb. 25, 2019, available at https://www.forbes.com/sites/zackfriedman/2019/02/25/student-loan-debt-statistics-2019/#7577f5f3133f.
---------------------------------------------------------------------------
    We also believe that a less precise definition of misrepresentation
would unnecessarily chill productive communication between institutions
and prospective and current students. We do not want to create legal
risks that dissuade schools from putting helpful and important
information in writing or allowing other students and faculty to share
their opinions with prospective or current students. It could have a
chilling effect on academic freedom and reduce the amount of
information provided to students during academic and career counseling.
We also believe it would be improper to subject an institution, and its
current, past, and future students, to liability and reputational harm
for innocent or inadvertent misstatements.
    Prospective students benefit when schools share more information,
and more information naturally increases the risk that some of the
information may be outdated or incorrect in some way. A student is
entitled to honest dealing from the school, which means that a school
must truthfully communicate when providing information. It does not
mean, necessarily, that rapidly changing or purely subjective
information must be perfectly free from error.
    Schools that provide a high-quality education may make innocent
mistakes on highly complex or evolving issues. For example, if a school
erroneously represented State licensure eligibility requirements for a
particular profession because the school was unaware that the State
amended its eligibility requirements just a few days before the
[[Page 49806]]
school made the representation, then the school did not act with
knowledge that the representation was false. On the other hand, if the
school continued to make such an erroneous representation after
learning that the State amended the eligibility requirements, then the
school acted with knowledge that the representation was false, which
constitutes a misrepresentation under these final regulations. The
Department recognizes that an institution may self-correct inadvertent
misrepresentations through its various compliance programs and
encourages institutions to do so.
    In determining whether a misrepresentation was made, the Department
also may consider the context in which the misrepresentation is made.
For example, demanding that the borrower make enrollment or loan-
related decisions immediately, placing an unreasonable emphasis on
unfavorable consequences of delay, discouraging the borrower from
consulting an adviser, failing to respond to borrower's requests for
more information about the cost of the program and the nature of any
financial aid, or unreasonably pressuring the borrower or taking
advantage of the borrower's distress or lack of knowledge or
sophistication are circumstances that may indicate whether the school
had knowledge that its statement was false, misleading, or deceptive or
was made with a reckless disregard for the truth. These examples of
circumstances that may lead to a borrower's reasonable reliance on a
school's misrepresentation standing alone, however, do not suffice to
demonstrate that a misrepresentation occurred under these final
regulations, just as they did not under the 2016 final regulations.\59\
---------------------------------------------------------------------------
    \59\ 34 CFR 685.222(d)(2)(i) through (v).
---------------------------------------------------------------------------
    The Department disagrees that it is too difficult for borrowers to
demonstrate that a misrepresentation occurred, as borrowers may easily
provide the type of evidence, described in the Sec.  685.206(e)(3)(i)
through (xi), to substantiate a misrepresentation. This list of
evidence is non-exhaustive, as every type of evidence that could be
used to prove a misrepresentation cannot be predicted.
    For example, borrowers may provide evidence that actual licensure
passage rates, as communicated to them by their admissions counselor,
are significantly different from those included in the institution's
marketing materials, website, or other communications made to the
student. The Department amended the description of evidence that
constitutes a misrepresentation to clarify that actual institutional
selectivity rates or rankings, student admission profiles, or
institutional rankings that are significantly different from those
provided by the institution to national ranking organizations may
constitute evidence that a misrepresentation occurred, as borrowers may
rely upon misrepresentations made by an institution to a national
ranking organization. A borrower also may provide evidence of a
representation, such as marketing materials or an institutional ``fact
sheet'', regarding the total, set amount of tuition and fees that they
would be charged for the program that is significantly different in the
amount, method, or timing of payment from the actual tuition and fees
charged. Records about the amount, method, or timing of payment should
be in the borrower's possession, and the Department has further revised
its amendatory language to clarify that 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 may constitute evidence that a
misrepresentation has occurred.
    In evaluating borrower defense claims, the Department understands
that a borrower may not have saved relevant materials and records to
substantiate his or her claim. The Department also may receive
additional materials from the institution in its response to a
borrower's allegations. The Department may rely on records otherwise in
the possession of the Secretary, such as recorded calls, as long as the
Department provides both borrowers and institutions with an opportunity
to review and respond to such records. The Department encourages
borrowers to use the Department's publicly available data as evidence
to demonstrate a misrepresentation. The Department will make program-
level outcome data available to institutions and students through
Federal administrative datasets, and these data tools may help students
satisfy this standard in a manner not previously possible. For example,
a borrower may use information in the expanded College Scorecard, which
will include program-level outcomes data, to demonstrate that an
institution, in providing significantly different information than the
information in the expanded College Scorecard, committed a
misrepresentation with knowledge of its falsity or reckless disregard
for the truth.
    However, if changing economic conditions result in future students
facing markedly diminished job opportunities or earnings, the
institution would not have made a misrepresentation unless the data
reported for earlier graduates met the definition of misrepresentation.
    Another area where an alleged misrepresentation may not actually
meet the standard of a misrepresentation is job placement rate
reporting. Since at least 2011, the Department had evidence that job
placement rate determinations are highly subjective and unreliable.\60\
On March 1-2, 2011, RTI International, contractor for the Integrated
Postsecondary Education Data System (IPEDS), convened a meeting of the
IPEDS Technical Review Panel (TRP) to develop a single, valid, and
reliable definition of job placement determined that while calculating
job placement rates using a common metric would be preferable, doing so
was not possible without further study, given that States and
accreditors use many different definitions to define in-field job
placements and identify the student measurement cohort for calculating
rates. In the absence of a common methodology, the TRP recommended
institutions disclose the methodology associated with the job placement
rate reported to their accreditor or relevant state agency but advised
against posting institutional job placement rates on College Navigator.
---------------------------------------------------------------------------
    \60\ Report and Suggestions from IPEDS Technical review Panel
#34 Calculating Job Placement Rates, available at https://edsurveys.rti.org/IPEDS_TRP_DOCS/prod/documents/TRP34_Final_Action.pdf. The TRP does not report to or advise the
Department of Education.
---------------------------------------------------------------------------
    For the reasons stated above, the Department encourages accreditors
and States to adopt the use of program-level College Scorecard data to
ensure that all students have access to earnings data that more
accurately and consistently--regardless of accreditor or State--capture
program outcomes and resolve the many challenges associated with more
traditional job placement rate determinations. This change in practice,
alone, will likely reduce the potential for misrepresentations related
to job placement rate claims. Such a practice also will enable students
to provide evidence of misrepresentation because the institution's
representations may easily be compared to College Scorecard data.
    As in the 2016 final regulations, these final regulations do not
require that a defense to repayment be approved only when evidence
demonstrates that a school made a misrepresentation with
[[Page 49807]]
the intent to induce the reliance of the borrower on the
misrepresentation.\61\ The Department agrees with negotiators and
commenters that it is unlikely that a borrower would have evidence--
particularly clear and convincing evidence, as proposed in the 2018
NPRM--to demonstrate that an institution acted with intent to deceive.
The final regulations provide that a defense to repayment application
will be granted when a preponderance of the evidence shows that an
institution at which the borrower enrolled made a representation with
knowledge that the representation was false, or with reckless disregard
for the truth. Accordingly, a borrower is not required to provide
evidence that an institution acted with intent to deceive or with
intent to induce reliance. The borrower must prove by a preponderance
of the evidence that the institution's act or omission was made with
knowledge of its false, misleading, or deceptive nature or with a
reckless disregard for the truth.
---------------------------------------------------------------------------
    \61\ 83 FR 37257.
---------------------------------------------------------------------------
    We recognize that misrepresentations can be made verbally. It can
be difficult to determine whether a representative of an institution
made a verbal misrepresentation to a borrower several years after the
fact. While the Department will consider borrower defense claims in
which the only evidence is the claim by the borrower that an
institution's representative said something years prior, these
necessarily are difficult claims to adjudicate. They also carry an
inherent risk of abuse. We thus encourage borrowers to obtain and
preserve written documentation of any information--including records of
communications, marketing materials, and other writings--that they
receive from a school that they rely upon when making decisions about
their education. As a general rule, it is best for students to make
these important decisions based upon written representations and
documentation from the institution.
    Like the 2016 final regulations, the Department's proposed
misrepresentation standard covers omissions. The Department believes
that an omission of information that makes a statement false,
misleading, or deceptive can cause injury to borrowers and can serve as
the basis for a defense to repayment. For example, providing school-
specific information about the employment rate or specific earnings of
graduates in a particular field without disclosing employment and
earnings statistics compiled for that field by a Federal agency could
constitute a misrepresentation under Sec.  685.206(e)(3)(vi). Failing
to disclose state or regional data, when available, also could
constitute a misrepresentation as reflected by the new example provided
in revised Sec.  658.206(c)(3)(vi).\62\ These revisions help clarify
what the Department may consider an omission with respect to the
definition of misrepresentation.
---------------------------------------------------------------------------
    \62\ Note: As explained in the next section, below, the
Department also revised Sec.  685.206(e)(3)(vi) to include a
parenthetical that institutions using national data 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 graduates.
---------------------------------------------------------------------------
    As described in other sections of this Preamble, we have structured
these final regulations to provide an equitable process for borrowers
and institutions. The borrower and institution may review and respond
to each other's submissions. The process created by these final
regulations will assist the Department in making fair and accurate
decisions, while providing borrowers and schools with due process
protections.
    The Department believes the definition of ``substantial
misrepresentation,'' at Sec.  668.71(c), is insufficient to address the
various concerns and interests that commenters describe. As explained
above, punishing an institution for an inadvertent mistake does not
appropriately balance the Department's obligations to current and
future students or taxpayers. The Department, however, will not require
a borrower to demonstrate that the institution acted with specific
intent to deceive. The borrower must only demonstrate that the
institution's act or omission was made with knowledge of its false,
misleading, or deceptive nature or with a reckless disregard for the
truth. Additionally, the Department maintains the evidentiary standard
of preponderance of the evidence from the 2016 final regulations for
borrower defense to repayment applications. This lower evidentiary
standard appropriately addresses concerns about the borrower's ability
to demonstrate a misrepresentation occurred.
    One commenter's assertion that the Department assumes five percent
of misrepresentations are not committed with intent, knowledge, or
reckless disregard is wrong. In the 2018 NPRM, the Department's
Regulatory Impact Analysis provided: ``By itself, the proposed Federal
standard is not expected to significantly change the percent of loan
volume subject to conduct that might give rise to a borrower defense to
repayment claim. The conduct percent is assumed to be 95 percent of the
[President's Budget] 2019 baseline level.'' \63\ The commenter appears
to have assumed that the conduct percent is tied to the specific
requirement that an act or omission be made with knowledge of its
false, misleading, or deceptive nature or with a reckless disregard for
the truth. As mentioned in the Net Budget Impacts section of the RIA,
the distinction between the borrower percent and the conduct percent is
somewhat blurred. The change the commenter points out is more reflected
in the borrower percent as part of the ability of the borrower to prove
elements of their case. Given that the two rates are multiplied in
developing the estimates, we believe that the impacts of the regulation
are captured appropriately.
---------------------------------------------------------------------------
    \63\ 83 FR 37299.
---------------------------------------------------------------------------
    The commenter's misunderstanding of the Department's Regulatory
Impact Analysis informed the commenter's conclusion that the definition
of misrepresentation substantially burdens borrowers without
distinguishing among the types of misrepresentations borrowers may have
experienced. The commenter does not provide any data to support this
conclusion, and the Department's RIA does not establish this
conclusion. Contrary to the commenter's assertions, the Department's
definition of misrepresentation distinguishes among the different types
of misrepresentations borrowers may have experienced. For example, the
misrepresentation may be by act or omission. The school may have made
the misrepresentation with knowledge of its false, misleading, or
deceptive nature or with reckless disregard for the truth.
    The Department declines to adopt the UDAP standard suggested by
commenters. Both the FTC and CFPB investigate consumer complaints that
are not necessarily similar to borrower defense to repayment claims.
The Department is not bound by FTC and CFPB standards and chooses not
to adopt them.
    Additionally, the Department plays a role as a gatekeeper of
taxpayer dollars regarding loan forgiveness--a role not shared by the
FTC or CFPB. The Department is unique in that it is responsible for
both distributing and discharging loans. The FTC and CFPB do not lend
money, like the Department does, and therefore those agencies are not
responsible for protecting assets in the same manner as the Department
is.
    We disagree that the Federal standard, including the definition of
misrepresentation, should include
[[Page 49808]]
UDAP violations to ensure that borrowers are protected. As we explained
in the 2016 final regulations, we considered the available precedent
and determined that it is unclear how such principles would apply in
the borrower defense context as stand-alone standards.\64\ Such unfair
and deceptive practices are often alleged in combination with
misrepresentations and are not often addressed on their own by the
courts. With this lack of guidance, it is unclear how such principles
would apply in the borrower defense context. We would like to avoid for
all parties the burden of interpreting other Federal agencies' and
States' authorities in the borrower defense context. As a result, we
decline to adopt a standard for relief based on UDAP.
---------------------------------------------------------------------------
    \64\ 81 FR 75939-75940.
---------------------------------------------------------------------------
    Changes: The Department adopts, with some changes, the definition
of misrepresentation in the 2018 NPRM for Sec.  685.206(e)(3). As
previously noted, the Department adopts the Federal standard in
Alternative B in the 2018 NPRM and makes revisions to align the Federal
standard with the definition of misrepresentation, such as removing the
phrase ``an intent to deceive'' the phrase ``making of a Direct Loan,
or a loan repaid by a Direct Consolidation Loan'' from Sec.
685.206(e)(2).
    Additionally, the Department revised the regulations to clarify
that the list of evidence of misrepresentation in Sec.  685.206(e)(3)
is a non-exhaustive list. The Department further amended the
description of evidence that a misrepresentation may have occurred to
clarify that actual institutional selectivity rates or rankings,
student admission profiles, or institutional rankings that are
materially different from those provided by the institution to national
ranking organizations may evidence a misrepresentation. The Department
also revised its amendatory language to clarify that 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 evidences a misrepresentation
in these final regulations. The Department revised the example of
misrepresentation under Sec.  685.206(e)(3)(vi) to include the failure
to disclose appropriate State or regional data in addition to national
data for earnings in the same field as provided by an appropriate
Federal agency.
    The Department revised the Federal standard to require a borrower
to demonstrate a misrepresentation of a material fact and not a
misrepresentation of a material opinion, intention, or law.
Determination of Misrepresentation
    Comments: One commenter suggested that the borrower should still be
eligible for a defense to repayment discharge when the
misrepresentation was made by an employee acting without the school's
knowledge or against the school's direction. The commenter notes that
if a borrower was harmed by the school's employee or agent, then the
school, not the borrower, should be responsible for the harm caused.
    Several commenters sought determinations as to whether specific
examples of statements or omissions would constitute misrepresentation
under the proposed definition. These examples include: A failure to
inform a student that the school may close prior to that final decision
being made; a failure to disclose that a regulator has taken an adverse
action against the school while the matter is on appeal and not final;
a school makes a mistake without willful intent; an employee of the
school provides inaccurate or unclear information that can be tied to a
deficit in training or performance; changes that occur to the
information originally provided to the borrower, through no fault of
the school; if State or Federal governments make dramatic budgetary
reductions in financial aid that result in a reduction of aid promised
to a borrower; incorrect information regarding what financial aid is
available; changes in costs after a student enrolls; incorrect
information regarding the cost of attending the school; differences in
reporting to adhere to State, Federal, accrediting agency, and
licensing board requirements; Nursing National Council Licensure
Examination (NCLEX) passage rates; clinical facility sites utilized
during nursing school; institutions stating that a borrower can make
the national average of earnings in a particular field, even if that
average exceeds those of program graduates; typographical errors in
marketing materials produced internally or by outside entities; and
falsified data provided to an institutional ranking organization in
order to inflate the school's rankings.
    One commenter asked whether students at specific institutions would
be covered under this regulation, had this standard been in place and
given the evidence now available to the Department.
    Other commenters sought clarification on what constitutes a
deceptive practice or act or omission on the part of a school and
requested guidance from the Department regarding what policies to put
in place to ensure schools are not misleading students in any way.
These commenters also would like to know how compliance with these
policies may be enforced.
    Some commenters objected to the inclusion within the specific
examples of statements or omissions that would constitute a
misrepresentation under the proposed definition of ``availability,
amount, or nature of financial assistance.'' These commenters note that
the volatility of financial aid awards is more often attributable to a
change in the student's eligibility, rather than an independent
determination by the school.
    Another commenter objected to the inclusion within the specific
examples of statements or omissions that would constitute a
misrepresentation under the proposed definition of ``[a] representation
regarding the employability or specific earnings of graduates without
an agreement between the school and another entity for such employment
or specific evidence of past employment earnings to justify such a
representation or without citing appropriate national data for earnings
in the same field as provided by an appropriate Federal agency that
provides such data.''
    The commenter cites research that found that earnings from the
Bureau of Labor Statistics exceed the actual earnings of program
graduates in gainful employment (GE) programs in 96 percent of programs
analyzed, including in almost every one of the top 10 most common GE
occupations, even for the program graduates with the highest earnings.
    Discussion: A borrower may successfully allege a defense to
repayment based on a misrepresentation by a school's employee who acts
without the school's knowledge or against the school's direction as
long as the borrower demonstrates they reasonably relied on the
misrepresentation under the circumstances and that the employee acted
with reckless disregard for the truth. The Department will not fault a
borrower for failing to recognize that the employee is acting without
the school's knowledge or against the school's direction, unless the
circumstances clearly indicate the employee is not authorized to make
the alleged representations on behalf of the school. These
circumstances will help to determine whether the borrower reasonably
relied on the misrepresentation of material fact, as
[[Page 49809]]
required by the Federal standard in Sec.  685.206(e)(2)(i).
    For example, if an employee in the school's cafeteria who serves
food made a misrepresentation about the availability, amount, or nature
of financial assistance available to a particular student, that student
should reasonably recognize the employee is not authorized to make such
representations. The Department will take into consideration whether
the school's employee is authorized to act on behalf of the school in
determining whether to recover funds from the school.
    To address some of the commenter's concerns, the Department is
revising Sec.  685.206(e)(3)(vii) to clarify that a misrepresentation
may constitute 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.'' The Department recognizes that a
student's eligibility for financial assistance may change and will
examine the school's representation in light of the student's
eligibility at the time the school made the representation regarding
the availability, amount, or nature of any financial assistance
available to the student. The school's representation must be
materially different in availability, amount, or nature from the actual
financial assistance available to the borrower in order to constitute a
misrepresentation.
    Additionally, the Department revised the proposed definition of the
terms ``school'' and ``institution'' to align more closely with the
persons or entities who may make a misrepresentation in 34 CFR 668.71.
Accordingly, these final regulations expressly define a school or
institution to ``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.'' \65\ This definition captures the
Department's interpretation of the 2016 final regulations, as the
preamble to the 2016 final regulations indicates that schools may be
held liable for their employees' representations.\66\
---------------------------------------------------------------------------
    \65\ 34 CFR 685.206(e)(1)(iv).
    \66\ 81 FR 75952.
---------------------------------------------------------------------------
    The Department agrees that it can be difficult to differentiate
between an institution that misrepresents the truth to students as a
matter of policy and an individual employee who violates the
institution's policies to make the misrepresentation. To determine
whether an institution acted with reckless disregard for the truth, the
Department may consider the controls that an institution had in place
to prevent or detect any misrepresentations. For this reason, it is
important that the final regulations provide an opportunity for an
institution to contribute to the record. An opportunity to respond in a
proceeding is a well-established principle of due process. The
Department will determine whether a misrepresentation occurred based on
information from both the borrower and the school.
    We understand the commenters' interest in further clarification as
to whether specific circumstances may constitute a misrepresentation.
However, we do not believe it is possible or appropriate to provide an
exhaustive list of examples or a hypothetical discussion of the
analytical process the Department will undertake to ascertain whether a
specific borrower's claim meets the requirements of misrepresentation.
The determination of whether a school made a misrepresentation that
could be the basis for a borrower defense claim will be made based on
the specific facts and circumstances of each borrower defense to
repayment application. The Department will carefully examine the facts
presented in each application and cannot anticipate the unique facts of
each application.
    In response to the commenter's request for more clarity regarding
the circumstances that may constitute a misrepresentation, the
Department made a minor revision to Sec.  685.206(e)(3)(ix). In Sec.
685.206(e)(3)(ix), the Department added that a representation that the
institution, its courses, or programs are endorsed by ``Federal or
State agencies'' may constitute a misrepresentation if the institution
has no permission or is not otherwise authorized to make or use such an
endorsement. Institutions should not represent that their courses or
programs are endorsed by Federal or State agencies, if these agencies
have not endorsed them.
    In Sec.  685.206(e)(3)(x), the Department states that a
representation regarding the location of an institution that is
materially different from the institution's actual location at the time
of the representation could constitute a misrepresentation for borrower
defense purposes. The Department does not intend for this specific
provision to apply to institutions that relocate to a new location
after a student enrolls to comply with the new FASB standards or after
an institution's lease runs out and is not subsequently renewed. Under
the Department's definition of misrepresentation, an institution's
representation about its location must be accurate at the time when the
representation is made. If the institution makes a representation about
its location and later changes its location, then the institution
should accurately represent its change in location. We expect the
implementation of the new FASB standards will increase the number of
institutions that relocate, which should not be permitted to result in
an increase in the number of borrower defense claims based upon
misrepresentations about the school's location as long as the school's
representation about its location is accurate at the time when the
representation is made. Subject to additional material facts and
circumstances, an institution that moves to a slightly different
location, with comparable facilities and equipment, which does not
create an overly burdensome commute, will not be viewed by the
Department as having committed a misrepresentation.
    The Department acknowledges that allegations against the specific
institutions that the commenters referenced are well-known. The
discharge applications submitted by students who attended those schools
are being evaluated under the pre-2016 regulations. It is not
appropriate to speculate how those cases would be decided using a
different standard, a different process, and different evidence. The
Department does not comment on claims or matters that are pending.
    The Department's regulations provide a non-exhaustive list of
evidence that a borrower may use to demonstrate that a
misrepresentation occurred. Institutions may develop internal controls
and compliance policies based on this non-exhaustive list. Institutions
are well positioned to determine how to ensure compliance with
institutional policies promulgated to prevent and prohibit
misrepresentations to students. In these policies, institutions may
describe the consequences, including disciplinary measures, that
employees face if they make a misrepresentation.
    The Department will not determine that a school made a
misrepresentation if a student's eligibility for financial aid changed
as a result of changes in
[[Page 49810]]
Federal programs or a student's eligibility for aid. The Department,
however, is concerned that many institutions engage in strategic
dissemination of institutional aid where they provide significant first
year aid to attract a student to the institution, but do not continue
that level of support throughout the program even when the student
meets the requirements for receiving that level of support. Conduct
such as this could constitute a misrepresentation, depending on the
details of the situation.
    Similarly, the Department will not determine that an institution
made a misrepresentation for complying with differing requirements of
accreditors or States to report multiple job placement rates for a
single program, if a student, through no fault of the institution,
misunderstands which of those placement rates more accurately reflects
his or her likely outcomes. If the institution uses data that is
required by accreditors or States in its own publications and
materials, the Department encourages institutions to provide context
for a student to understand the relevance of the job placement rate or
other data required by accreditors or States. For example, institutions
with an Office of Postsecondary Education Identification Number (OPE
ID) may report job placement rates that include many campuses across
the country.
    As a result, these institutions may be required to report a rate
that is not intended to represent earnings for students who live in
parts of the country where wages are lower than average or higher than
average. The use of OPE IDs to report outcomes also may cause an
institution to appear to be located in one part of the country, even
though the campus that a student attends may be at an additional
location in another part of the country where prevailing wages differ.
Similarly, accreditors and States may define measurement cohorts
differently and may have different standards for what constitutes an
in-field job placement. Accordingly, an institution may report data
accurately based on the various definitions they are required to use,
and a student may not understand how to interpret this data. As long as
the institution does not use that data in a manner to knowingly mislead
or deceive students or with reckless disregard for the truth, the
Department will not consider the use of such data to constitute a
misrepresentation.
    An institution, however, that makes claims about guaranteed
employment or guaranteed earnings to borrowers should maintain evidence
to support those guarantees. An institution could be considered to have
made a misrepresentation if evidence of such guarantees does not
actually exist or do not apply to all students to whom the guarantee is
made.
    We appreciate the commenters' concern regarding discrepancies
between BLS and GE earnings data. To clarify, it is important to
remember that GE rates, as previously calculated, were based upon
earnings measured only a few years after a title IV participating
student graduates, while BLS measures earnings of everyone in an
occupation, including those who have years of experience and expertise.
    Thus, BLS data may more accurately represent long-term,
occupational earning potential rather than the expected earnings of an
institution's program graduates within two or three years of
graduation. Until an expanded College Scorecard provides institutions
with median program-level earnings, BLS data is the most reliable
source of Federal wage data available to help students understand
earnings for particular occupations. BLS data is helpful because a
student is generally interested in earnings over the course of a
career, and not just a few years after completion of the program.
    To address the concerns of commenters that a borrower may
misunderstand the national data, the Department also revised Sec.
685.206(e)(3)(vi) to include a parenthetical that institutions using
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 graduates. Such a
disclaimer places the national data that an institution may use in
context and will help the borrower understand that the national data
does not guarantee a specific level of income. Such a disclaimer also
will help the borrower understand that the national data may not be
representative of what a student will make in the early years of their
career or in a particular part of the country.
    Changes: The Department is revising 34 CFR 685.206(e)(3)(vi), which
provides examples of misrepresentation, to include a parenthetical that
instructs institutions to 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.
    The Department revised the example of a misrepresentation in Sec.
685.206(e)(3)(vi) regarding the availability, amount, or nature of the
financial assistance available to students to expressly state that the
representation regarding such financial assistance must be materially
different from the actual financial assistance available to the
borrower.
    In Sec.  685.206(e)(3)(ix), the Department added that a
representation that the institution, its courses, or programs are
endorsed by ``Federal or State agencies'' may constitute a
misrepresentation if the institution has no permission or is not
otherwise authorized to make or use such an endorsement.
    The Department also revised the proposed definition of the terms
``school'' and ``institution'' to align more closely with the persons
or entities who may make a misrepresentation in 34 CFR 668.71.
Borrower Defenses--Judgments and Breach of Contract
    Comments: A number of commenters supported the Department's
proposal to use State judgments, breaches of contract, and/or other
third-party information in its evaluation of, but not as an automatic
approval for, borrower defense claims.
    Several commenters urged the Department to view breaches of
contract and prior judgments as additional bases for a borrower defense
claim. One commenter noted that if colleges were in violation of other
laws, recognizing such claims would provide relief to wronged borrowers
and failure to recognize these types of claims limits a borrower's
opportunity to obtain relief.
    One commenter noted that although the preamble clarifies that
breaches of contracts or judgments may be considered as evidence of a
misrepresentation, this position should be explicitly stated in the
text of the regulation.
    One commenter suggested that the Department modify the rule to
require the Department to review any State judgments for relevant
information before requiring additional documentation from the
borrower, and that if a State judgment satisfies the Federal standard
and the school was provided an opportunity to present its evidence, the
borrower's claim should be accepted and proceed to the harm stage.
Another commenter noted that under the Department's proposal, a person
who has been determined to be a victim through a robust judicial
process at the State level is denied relief. A different commenter
indicated that individual borrowers should not be
[[Page 49811]]
required to identify illegal conduct at schools but should be able to
rely on State court determinations.
    One commenter indicated that the Department should not eliminate
breach of contract as a basis for a claim merely because the Department
did not find a sufficient number of borrowers asserting those rights in
the past as the next crisis may not look like the last one.
    Another commenter indicated that the final language should clarify
whether a breach of contract can serve as the basis for a claim if it
related directly to the educational services provided by the school.
    Discussion: The Department appreciates the commenters' support for
our proposed regulations.
    Unlike the 2016 final regulations, the Federal standard in these
final regulations does not include a breach of contract as a basis for
a borrower defense to repayment claim. The 2016 final regulations
provide that a borrower may assert a borrower defense to repayment,
``if the school the borrower received the Direct Loan to attend failed
to perform its obligations under the terms of a contract with the
student.'' \67\ The Department, however, did not identify the elements
of a breach of contract and did not define what may constitute a
contract between the school and the borrower. The Department noted in
the 2016 NPRM that ``a contract between the school and a borrower may
include an enrollment agreement and any school catalogs, bulletins,
circulars, student handbooks, or school regulations'' and cited to two
Federal cases, one of which is unpublished.\68\ The Department further
provided in the preamble of the 2016 final regulations that ``it is
unable to draw a bright line on what materials would be included as
part of a contract because that determination is necessarily a fact-
intensive determination best made on a case-by-case determination.''
\69\ The Department declined to adopt a materiality element with
respect to a breach of contract and did not define the circumstances in
which an immaterial breach may satisfy the Federal standard.\70\
Finally, the Department did not tie the breach of contract basis of the
Federal standard to State law.
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    \67\ 34 CFR 685.222(c).
    \68\ 81 FR 39341 (citing Ross v. Creighton University, 957 F.2d
410 (7th Cir. 1992) and Vurimindi, 435 F. App'x at 133 (quoting
Ross)).
    \69\ 81 FR 75944.
    \70\ Id.
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    We continue to acknowledge that a breach of contract may depend on
the unique facts of a claim, but are concerned that both borrowers and
institutions will not know how the Department determines what
constitutes a contract or a breach of contract with respect to borrower
defense to repayment claims. The Department does not publish its
decisions with respect to an individual borrower's claims and, thus,
the public will not be able to know or understand the facts or
circumstances the Department considers in accepting a breach of
contract claim that satisfies the Federal standard.
    We also are concerned that the lack of clarity with respect to
breach of contract as a basis for a borrower defense to repayment claim
will lead to uncertainty and confusion among schools and borrowers in
different states because the breach of contract basis in the 2016
Federal standard is not tied to or based on State law. For example,
contrary to the Federal case law cited in the preamble of the 2016
final regulations, the Supreme Court of Virginia expressly held that
statements in an institution's ``letters of offers of admission from
the College's Admissions Committee; correspondence, including email,
among the College's representatives and the students; and the College's
[ ] Academic Catalog'' did not constitute a contract between the school
and its students.\71\ These materials contained representations that a
female liberal arts college, which had provided an education to women
only for over 100 years, would remain single-sex.\72\ The school's
catalog even expressly stated: The school ``offers an education fully
and completely directed toward women. In a time of increasing
opportunities for women, it is essential that the undergraduate years
help the student build confidence, establish identity, and explore
opportunities for careers and for service to the society that awaits
her.'' \73\
---------------------------------------------------------------------------
    \71\ Dodge v. Trustees of Randolph-Macon College Woman's
College, 661 SE2d 801, 802-03 (Va. 2008).
    \72\ Id.
    \73\ Id. at 802.
---------------------------------------------------------------------------
    The Supreme Court of Virginia ruled that these representations did
not constitute a contract and, thus, admitting male students could not
constitute a breach of contract claim.\74\ Under the 2016 final
regulations, it is not clear whether such representations in a school's
catalog or other materials may constitute a breach of contract in
satisfaction of the Federal standard if the school then began to admit
male students subsequent to the claimant's enrollment, as the breach
need not be material in nature. Breach of contract laws vary among
States, and the breach of contract standard in the 2016 final
regulations may be in contravention of some breach of contract laws
such as the breach of contract laws in Virginia. In promulgating the
2016 final regulations, the Department expressly anticipated that
guidance may eventually be necessary to further define breach of
contract.\75\ The Department does not wish to maintain a borrower
defense regime that increases uncertainty as to what constitutes a
contract and how that contract may be breached. Instead of maintaining
a Federal standard that requires more clarification through guidance,
the Department has decided to provide more certainty and clarity
through regulations that provide a different Federal standard.
---------------------------------------------------------------------------
    \74\ Id. at 803-04.
    \75\ 81 FR 75994.
---------------------------------------------------------------------------
    Unlike the Federal standard in the 2016 final regulations, the
Federal standard in these final regulations requires a
misrepresentation of material fact upon which the borrower reasonably
relied in deciding to obtain a loan. The requirements of materiality
and reasonable reliance provide more certainty and clarity. A breach of
contract claim, unlike a claim of fraud or material misrepresentation,
does not necessarily require any reliance by the borrower.\76\ If the
borrower does not rely on a school's promise to perform a contractual
obligation, the borrower may not have suffered harm as a result of the
school's breach of contract.
---------------------------------------------------------------------------
    \76\ Compare Restatement (First) of Contracts section 312 (2018)
with Restatement (First) of Contracts sections 470-471.
---------------------------------------------------------------------------
    For example, if the school represents in its catalog that it will
publish the number of robberies in a specific geographic area in a
crime log but fails to do so, the school may have failed to perform its
obligation. Assuming arguendo that this failure constitutes a breach of
contract claim, such a breach likely will not affect the benefit the
student receives from the education. Such a breach also likely is not
material in nature. A Federal standard that requires a material
misrepresentation and reliance by a borrower provides a more accurate
gauge for any harm the student may have suffered. A more accurate gauge
of harm to the student will enable the Department to more easily
determine the amount of relief to provide in a successful borrower
defense to repayment claim.
    The Department is not eliminating breach of contract as the basis
for a claim merely because the Department did not find a sufficient
number of claims. The Department believes that a breach of contract
that directly and clearly relates to enrollment or
[[Page 49812]]
continuing enrollment or the provision of educational services may be
used as evidence in support of a borrower defense to repayment claim.
Standing alone, however, a breach of contract, will not be sufficient
to satisfy the Federal standard.
    Similarly, the Department acknowledges that if a borrower has
obtained a non-default, favorable contested judgment against the school
based on State or Federal law in a court or administrative tribunal of
competent jurisdiction, then there may circumstances when the borrower
may use such a judgment as evidence to satisfy the Federal standard in
these final regulations.
    For example, where a borrower obtains a judgment against a school
for statements it made to the borrower about licensure passage rates
for a program in which the borrower enrolled, and court found that the
school knew the statement to be false and that the borrower suffered
financial harm, the borrower may use the judgment as evidence in
support of his or her application to seek a discharge of a Direct Loan
or a loan repaid by a Direct Consolidation Loan. These regulations do
not prohibit a borrower from pursuing relief from courts or
administrative tribunals. For example, settlements negotiated by States
have included elimination of private loans, reimbursement of cash
payments, and repayment of outstanding Federal loan debt. However, the
defense to repayment provision limits relief to Federal student loan
repayment obligations and does nothing to assist students who used
cash, college savings plans, or other forms of credit to pay tuition.
    Unlike the 2016 final regulations, a judgment, standing alone, will
not necessarily automatically satisfy the Federal standard. If the
borrower has obtained a judgment against a school, then the court or
administrative tribunal very likely provided an adequate remedy to the
borrower as part of the judgment. Accordingly, the Department may not
be able to offer any additional relief.
    Even if the Department may offer further relief, the Federal
standard should not include an inherent assumption that the relief
provided by the court or administrative tribunal was insufficient.
Accepting judgments as evidence in support of borrower defense claims
allows for the Department to undertake the necessary analysis to
determine whether additional relief is warranted, but including such
judgements as an automatic basis to qualify for relief presumes more
than what is appropriate in all cases. We should not supplant the
judicial system by granting relief that a court or administrative
tribunal did not deem necessary.
    The Department chose not to use a State law standard in the 2016
final regulations because a State law standard may result in inequities
among borrowers who qualify for relief. If one State's laws are more
generous than those in another State, then two equally situated
borrowers may obtain very different results in their respective State
courts. If a judgment based on State law automatically qualifies a
borrower for a borrower defense to repayment, then inequities among
borrowers will perpetually continue. Accordingly, the Department has
determined that a judgment against the school, alone, should not
constitute the Federal standard.
    In order to ensure that both borrowers and institutions have due
process rights, these final regulations add new steps to the borrower
defense to repayment adjudication process that provides both with an
opportunity to provide evidence and respond to evidence provided by the
other party. Therefore, automatic relief under any circumstance would
be inappropriate, especially since the circumstances that resulted in a
breach of contract may or may not meet the Federal standard for
misrepresentation. As such, while a judgment or breach of contract
related to enrollment or the provision of educational services may
serve as compelling evidence to support a borrower's borrower defense
to repayment claim, the Department cannot award automatic borrower
defense relief since that would eliminate the opportunity for the
institution to respond to the borrower's claim with the Department. The
Department sufficiently explained in this Preamble that a judgment and/
or a breach of contract may be used as evidence in support of a
borrower defense to repayment claim. Changing the amendatory language
to this effect is not necessary and may mislead or confuse borrowers by
implying that a judgment or breach of contract may independently and
automatically satisfy the Federal standard. The Federal standard in
these final regulations marks a departure from the Federal standard in
the 2016 final regulations with respect to a judgment or breach of
contract, and the Department does not wish to cause confusion.
    Changes: None.
Borrower Defenses--Provision of Educational Services and Relationship
With the Loan
    Comments: Some commenters supported the Department's proposal to
exclude defense to repayment claims that are not directly related to
the provision of educational services. Some commenters also supported
the definition the Department proposed for the provision of educational
services.
    Other commenters argued that the limitation of the provision of
educational services to a borrower's program of study was
inappropriately narrow. These commenters suggested that the borrower's
claim should apply to all Federal student loans, regardless of how the
funds were spent, and to the school's pre- and post-enrollment
activities. One commenter also stated that the provision of educational
services is too narrowly defined, because schools may have made
promises about the quality of the education that fall outside of the
specific requirements of accreditors or State agencies, but that may
significantly affect the borrower's educational experience. This
commenter also asserted that the Department failed to adequately
justify its decision to limit the provision of educational services
only to those related to the borrower's program of study.
    Another commenter objected to the definition limiting
misrepresentation to circumstances where the school had withheld
something ``necessary for the completion'' of the program, as that
would leave too much room for abuse by schools.
    One commenter found it needlessly inimical to require that a
misrepresentation relate to a borrower's program of study for the
borrower to make a defense to repayment claim. The commenter argued
that the value of a degree rests in large part on the reputation of the
school and, if that reputation is tarnished or destroyed, the value of
the degree is as well.
    A group of commenters asked what ``educational resources'' means.
Additionally, they noted that accrediting agencies, State licensing
agencies, or authorizing agencies may require schools to maintain
certain licensure passage or job placement rates in their programs, but
there are not ``requirements for the completion of the student's
educational program.'' These commenters inquired whether the definition
of provision of educational services excludes borrower defenses on the
basis of misrepresentations about job placement and exam passage rates.
[[Page 49813]]
These commenters further inquired whether a particular attribute or
representation regarding transferability of credits constitutes a
``requirement for the completion of the student's educational
program.'' These commenters noted that only subparagraph (J) of
proposed Sec.  685.206(d)(5)(iv), in the 2018 NPRM, refers to
``educational resources'' and inquired whether subparagraph (J) is the
only provision that may serve as the basis of a misrepresentation
regarding the provision of educational services.
    Discussion: We thank the commenters for their support of the
proposed regulations pertaining to the provision of educational
services.
    As noted in the NPRM, the Department included a definition of
``provision of educational services'' at the request of some of the
non-Federal negotiators. The Department acknowledged that there are
well-developed bodies of State law that explain this term, and each
State may define this term differently. Accordingly, in the NPRM, we
concluded that the term ``provision of educational services'' is
subject to interpretation and proposed to define that term as ``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.'' \77\ A
misrepresentation relating to the ``provision of educational services''
thus is clearly and directly related to the borrower's program of
study.
---------------------------------------------------------------------------
    \77\ 83 FR 37254.
---------------------------------------------------------------------------
    The Department expects the school's communications and acts that
are directly or clearly related to the provision of educational
services to conform to the Federal standard set forth in these final
regulations.
    We do not believe it is appropriate to consider acts or omissions
unrelated to the making of a Direct Loan for enrollment at the school
or the provision of educational services for which the loan was made as
relevant to a borrower defense claim. For example, under the
Department's definition, an institution that advertises a winning
sports team does not make a misrepresentation for borrower defense
purposes, if in years subsequent to a borrower's enrollment the team
has less successful seasons. Similarly, an institution that advertises
certain on-campus restaurants does not make a misrepresentation for
borrower defense purposes if one or more of those restaurants closed
their on-campus locations and were no longer available to students who
purchased a campus meal plan.
    However, if, for example, an institution represented in their
college catalog that they provided highly-qualified faculty for the
business program, modern equipment, low teacher-to-student ratios, and
excellent training aids, but actually provided only one unqualified
teacher for the program--who was also the school's registrar--one
course session of forty-two students (all taking different level
courses), and only two 10-key adding machines, then, with this
combination of issues, the institution may have made a
misrepresentation that could be used as a basis for a discharge
application.\78\
---------------------------------------------------------------------------
    \78\ American Commercial Colleges, Inc. v. Davis, 821 S.W.2d
450, 452 (Tex. App. Eastland 1991).
---------------------------------------------------------------------------
    Similarly, it is likely a misrepresentation when an institution
insists in its marketing materials that its online program is
``substantially identical'' to the same course offered in the
traditional classroom setting, but only provided PowerPoint slides from
in-class courses without any accompanying lectures or videos, scanned
copies of books with cut-off information and blurred entire sentences,
and instructors that did not prepare course materials and were hardly
involved at all in any actual online instruction.\79\
---------------------------------------------------------------------------
    \79\ Bradford v. George Washington University, 249 F.Supp. 3d
325, 330 (D.D.C. 2017).
---------------------------------------------------------------------------
    The Department disagrees that it should allow a borrower's defense
to repayment application to apply to all Federal student loans,
irrespective of how the borrower spends the funds. These loans are
Federal assets, and the Federal taxpayer should not be liable for the
choices of a borrower not related to a loan for enrollment at the
school or to the provision of education services for which the loan was
made.
    A school's pre- and post-enrollment activities may support a
borrower defense to repayment application if the institution's pre- or
post-enrollment acts or omissions directly and clearly relate to the
making of a loan for enrollment or continuing enrollment at the school
or to the provision of education services for which the loan was made.
The Department revised both the regulations on the Federal standard and
the definition of misrepresentation to clarify that an institution's
act or omission that directly and clearly relates to the enrollment or
continuing enrollment at the institution may constitute grounds for a
borrower defense to repayment claim.
    Although the Department rejected similar requests by commenters in
the past, the Department accepts these requests, which non-Federal
negotiators also made during the most recent negotiated rulemaking
sessions, to clarify that the provision of educational services must
relate to the borrower's program of study. In adjudicating borrower
defense to repayment applications, the Department seeks to avoid making
inconsistent determinations. Tying the provision of educational
services to the student's program of study will result in more
consistent interpretations of the term ``provision of educational
services.'' This definition provides greater clarity as claims related
to more general concerns associated with the institution's provision of
educational services will not be considered. The Department does
consider enrollment in general education courses prior to the
borrower's selection of a major or educational service provided in
relation to a student's prior major to be included in the definition of
a program of study.
    The definition of ``provision of educational services'' is based on
educational resources as those resources provided by the institution
that are required by an institution's academic programs, its
accreditation agency or a State licensing or authorizing agency for the
completion of the student's educational program. Educational resources
may include an adequate number of faculty to fulfill the institution's
mission and goals or successful completion of a general education
component at the undergraduate level that ensures breadth of knowledge.
The Department cannot describe all the educational resources that
various accrediting agencies or State licensing or authorizing agencies
may require for completion of the student's educational program, so we
decline to provide an exhaustive list in these final regulations.
    The definition of the provision of educational services does not
categorically exclude all borrower defenses on the basis of
misrepresentations about job placement and exam passage rates. The
final regulations define a misrepresentation as directly and clearly
related to the making of a loan for enrollment at the school or to the
provision of educational services for which the loan was made.
Misrepresentations about job placement and exam passage rates may
directly or clearly be related to the making of a loan for enrollment
at the school.
    A representation regarding transferability of credits may
constitute a requirement for the completion of the student's
educational program depending on the circumstances. If the
[[Page 49814]]
school makes a statement that all credits from another school are
transferable and may be used to complete an educational program with
knowledge that few or none of the credits are transferable, then that
school likely would be considered to have made a misrepresentation as
defined in these final regulations.
    The definition of ``provision of educational services'' relates to
elements necessary for the completion of the student's educational
program, but a misrepresentation is not limited to circumstances where
the school had withheld something ``necessary for the completion'' of
the program. As explained above, a misrepresentation may be an act or
omission that directly and clearly relates to the making of a loan for
enrollment at the school.
    We disagree with the commenter who asserted that defenses to
repayment should be based on harm to a school's general reputation.
Institutions may suffer reputational damage for a number of reasons,
including, for example, poor performance of an athletic team, sexual
misconduct on the part of a member of the staff or instances when a
staff member accepts payment in exchange for boosting a student's
chances to be admitted. But reputational harm does not generally have a
widespread impact on the quality of education the students receive. An
institution's level of admissions selectivity has a significant impact
on the institution's reputation, but it would be hard to argue that it
is the fault of the institution if a borrower selected a less-selective
institution and did not benefit from the advantages of a social network
typical of an elite institution. A borrower would not be entitled to
borrower defense to repayment relief as a result of reputational
damage, although if the institution misrepresented its admissions
selectivity or admissions criteria, then the borrower may be eligible
for relief. A school's reputation is not always tied to
misrepresentations as defined for purposes of these regulations, but a
borrower's program of study remains integral to the purpose and use of
the loan.
    Changes: The Department is not making any changes to the definition
of ``provision of educational services.'' The Department is revising
the definition of ``misrepresentation'' and the Federal standard to
clarify that an institution's acts or omissions that clearly and
directly relate to enrollment or continuing enrollment at the
institution or provision of educational services for which the loan was
made may constitute grounds for a borrower defense to repayment
application.
Effective Date
    Comments: A group of commenters noted that the Department's 1995
Notice of Interpretation, 60 FR 37769, clarified that the act or
omission of a school, in order to serve as the basis for a borrower
defense, must ``directly relat[e] to the loan or to the school's
provision of educational services for which the loan was provided.''
These commenters assert that if this Notice of Interpretation is not
sufficiently clear, then the Department should apply its definition of
``provision of educational services'' in these final regulations to
existing loans instead of to loans first disbursed on or after July 1,
2019.
    Discussion: Although the Department issued a Notice of
Interpretation in 1995 to clarify that an act or omission must directly
relate to the loan or the school's provision of education services,
commenters in 2016 requested that the Department clarify that the
provision of educational services is tied to the student's program of
study. Some of the non-Federal negotiators made this same request
during the negotiated rulemaking in 2017, and the Department has
responded by providing a definition for the term ``provision of
educational services.'' For concerns discussed elsewhere in these final
regulations regarding retroactively applying definitions and standards,
the Department will only apply this definition to loans first disbursed
on or after July 1, 2020.
    Changes: These final regulations provide that the definitions of
provision of educational services and misrepresentation will apply to
loans first disbursed on or after July 1, 2020.
Borrower Defenses--Consolidation Loans
    Comments: A group of commenters contend that FFEL borrowers should
have the same rights to a borrower defense discharge as Direct Loan
borrowers and that pursuant to Sec.  455(a) of the HEA, Direct Loans
and FFEL loans are to have the same terms, conditions, and benefits.
Another commenter argued that borrower defense should be available to
FFEL borrowers without requiring consolidation or proof of any special
relationship between their schools and FFEL lenders.
    A group of commenters asserted that there are several problems with
the proposal to make consolidation a necessary prerequisite for FFEL
borrowers to access the borrower defense to repayment process.
Requiring consolidation creates another administrative obstacle for
borrowers. These commenters noted other obstacles include the
Department's proposal to preclude borrowers with new Direct Loans,
consolidated after the effective date of the rule, from asserting
defenses unless they are either in collection proceedings or within
three years from leaving the school.
    These commenters also noted that not every FFEL borrower is
eligible to consolidate into a Direct Consolidation Loan and that the
Department should change the rules to permit all FFEL borrowers to do
so. These commenters further asserted that the Department should allow
for refunds of amounts already paid on FFEL loans. They urged the
Department to give FFEL borrowers more certainty that their loans will
be discharged by committing to a pre-approval process whereby the
Department will determine FFEL borrowers' eligibility for discharge,
contingent upon consolidation, prior to requiring consolidation or
advising borrowers to consolidate to access relief.
    Another group of commenters also requested that the Department
outline what policy will apply to borrowers whose borrower defense
applications are submitted prior to the effective date of the final
rule but are not yet approved on that date, including FFEL borrowers
that have requested pre-approval of their application prior to applying
for a Direct Consolidation Loan.
    This group of commenters suggested specific amendatory language
regarding administrative forbearance for FFEL loan borrowers while the
Department makes a preliminary determination before the borrower
consolidates his or her loan(s). These commenters explained that
administrative forbearance would be more appropriate than discretionary
forbearance due to the limit imposed on discretionary forbearance. This
group of commenters also suggested early implementation of
administrative forbearance and suspension of collection activities.
    These commenters noted that the final regulations should allow
servicers to suspend collection activity while the Department makes a
preliminary determination (prior to the borrower consolidating his or
her loans) as to whether relief may be appropriate under the new
Federal standard.
    Discussion: The Department derives its authority for the borrower
defense to repayment regulations from Sec.  455(h) of the HEA, which
specifically concerns Direct Loans, not FFEL loans. The statutory
authority for the borrower defense to repayment regulations does not
allow FFEL borrowers to access the borrower defense to repayment
process unless the FFEL borrower consolidates
[[Page 49815]]
their loans into a Direct Consolidation Loan. Direct Consolidation
Loans are made under the Direct Loan Program. Generally, the Department
views a consolidation loan as a new loan, distinct from the underlying
loans that were paid in full by the proceeds of the Direct
Consolidation Loan.
    Accordingly, the Department's existing practice is to provide
relief under the Direct Loan authority if a qualifying borrower's
underlying loans have been consolidated into a Direct Consolidation
Loan under the Direct Loan Program. As a corollary, if consolidation is
being considered depending on the outcome of any preliminary analysis
of whether relief might be available under Sec.  685.206(c), relief
cannot be provided until the borrower's loans have been consolidated
into a Direct Consolidation Loan. Although commenters allege the
Department is creating administrative obstacles for borrowers, the
Department is allowing FFEL borrowers who are eligible to consolidate
their loans into a Direct Consolidation Loan to receive relief under
these regulations. This parallels, for example, how the Department
makes FFEL borrowers eligible for PSLF, which is another opportunity
limited to Direct Loan borrowers.
    FFEL Loans are governed by specific contractual rights and the
process adopted here is not designed to address those rights. We can
address potential relief under these procedures for only those FFEL
borrowers who consolidate their FFEL Loans into a Direct Consolidation
Loan. FFEL borrowers have other protections in their master promissory
note and the Department's regulations. Since 1994, and to this day, the
FFEL master promissory note states that for loans provided to pay the
tuition and charges for a school, ``any lender holding [the] loan is
subject to all the claims and defenses that [the borrower] could assert
against the school with respect to [the] loan.'' \80\ As noted in the
2016 final regulations, the Department adopted this provision from the
FTC's Holder Rule provision, and the Department's 2018 NPRM did not
propose to revise the regulation regarding this provision.
---------------------------------------------------------------------------
    \80\ 34 CFR 682.209(g).
---------------------------------------------------------------------------
    Upon further consideration, however, the Department will continue
placing the borrower's loans into administrative forbearance for Direct
Loan borrowers while a claim is pending.\81\ Interest still accrues
during administrative forbearance, and will capitalize if the claim is
not successful. The accrual of interest will deter borrowers from
submitting a borrower defense to repayment application if no
misrepresentation occurred. The Department amended these final
regulations to clarify the borrower defense to repayment application
will state that the Secretary will grant forbearance while the
application is pending and will notify the borrower of the option to
decline forbearance. Similarly, FFEL loans will be placed into
administrative forbearance and collection will cease on FFEL loans,
upon notification by the Secretary that the borrower has made a
borrower defense claim related to a FFEL loan that the borrower intends
to consolidate into the Direct Loan Program for the purpose of seeking
relief in accordance with Sec.  685.212(k).
---------------------------------------------------------------------------
    \81\ These final regulations, unlike the 2016 final regulations,
do not expressly state that a borrower who asserts a borrower
defense to repayment application will be provided with information
on availability of income-contingent repayment plans and income-
based repayment plans because this information is always available
to borrowers. Borrowers also may avail themselves of such
information on the Department's website at https://studentloans.gov/myDirectLoan/ibrInstructions.action.
---------------------------------------------------------------------------
    In the 2018 NPRM, the Department did not propose to revise
regulations in Sec.  682.220, concerning the eligibility of FFEL
borrowers to consolidate into a Direct Consolidation Loan, and
maintains that the current eligibility requirements remain appropriate.
The Department also did not propose to allow for refunds of amounts
already paid on FFEL loans, as such a proposal exceeds its authority
under section 455(h) of the HEA. The Department is limited by statute
to discharging and refunding no more than the amount of the Direct Loan
at issue, and only discharge of the remaining balance on the
consolidated loan is possible.
    Finally, the Department does not agree with the suggestion that we
revise the final regulations to create a ``pre-approval'' process to
determine FFEL borrowers' eligibility for discharge, contingent upon
consolidation. Notably, the 2016 final regulations did not include any
regulations about a ``pre-approval'' process. The preamble of the 2016
final regulations explained that the Department will provide FFEL
borrowers with a preliminary determination as to whether they would be
eligible for relief on their borrower defense claims under the Direct
Loan regulations, if they consolidated their FFEL Loans into a Direct
Consolidation Loan.\82\ However, no information was provided as to how
such a determination would be made, what would happen if additional
information made it clear that a misrepresentation did not actually
occur, or that after giving advice not to consolidate, additional
evidence makes it clear that it did. Importantly, FFEL payments cannot
be refunded. Such a preliminary determination process, however, is not
possible under these final regulations.
---------------------------------------------------------------------------
    \82\ 83 FR 75961.
---------------------------------------------------------------------------
    These final regulations create a robust process whereby borrowers
and schools have an opportunity to review each other's submissions. The
Department will not be able to provide a borrower with an accurate
preliminary determination without weighing any evidence and issues that
the school presents in its submission. Accordingly, the Department will
not include a preliminary determination process under these final
regulations.
    The Department still believes it is appropriate to determine what
standard would apply to a particular borrower's discharge application
based upon the date of the first disbursement of the Direct
Consolidation Loan. Therefore, for Direct Consolidation Loans first
disbursed on or after July 1, 2020, the standard that would be applied
to determine if a defense to repayment has been established is the
Federal standard in Sec.  685.206(e). The Department understands that
this approach may deter some borrowers who might otherwise wish to
consolidate their loans, but do not wish to be subject to the Federal
standard and associated time limits we adopt in these final
regulations. The Department believes that this concern is outweighed by
the benefits of this standard. This approach is consistent with the
longstanding treatment of consolidation loans as new loans, and we
believe it will provide additional clarity as to the standard that
applies, especially in cases where borrowers are consolidating more
than one loan. As under the existing regulations, a borrower will be
able to choose consolidation if she or he determines it is the right
option for them.
    Changes: The Department is leaving in effect the revisions and
additions to Sec. Sec.  682.211(i)(7) and 682.410(b)(6)(viii) that were
made in the 2016 final regulations.
    Accordingly, we will ask loan holders to place FFEL loans into
administrative forbearance and suspend collection upon notification by
the Secretary that the borrower has made a borrower defense claim
related to a FFEL loan that the borrower intends to consolidate into
the Direct Loan Program for the purpose of seeking relief in accordance
with Sec.  685.212(k).
[[Page 49816]]
    Additionally, the Department is revising Sec.  685.205(d)(6) to
provide that Direct loans will be placed in administrative forbearance
for the period necessary to determine the borrower's eligibility for
discharge under Sec.  685.206, which includes the borrower defense to
repayment regulations in these final regulations. The Department also
is revising Sec.  685.206(e)(8) to clarify the borrower defense to
repayment application will state that the Secretary will grant
forbearance while the application is pending, that interest will accrue
during this period and will capitalize if the claim is not successful,
and will notify the borrower of the option to decline forbearance.
    In addition, we are revising the final regulations to clarify that
the standard that applies to a borrower defense claim is determined by
the date of first disbursement of a Direct Loan or Direct Consolidation
Loan.
Borrower Defenses--Evidentiary Standard for Asserting a Borrower
Defense
Preponderance of the Evidence, Clear and Convincing Evidentiary
Standards
    Comments: There were many comments on the preponderance of the
evidence and clear and convincing evidentiary standards under
consideration by the Department. Those who supported a preponderance of
the evidence standard noted that it is the typical evidentiary standard
for most civil lawsuits. Some stated that a higher standard would make
it impossible for borrowers to prove a misrepresentation, as defined by
the proposed regulations, while others argued that a higher standard
would be out of step with consumer protection law and the Department's
other administrative proceedings. Some commenters expressed concern
that a higher standard would create new barriers to relief for
defrauded students. Other commenters pointed to the HEA's intention to
provide loan discharges based on institutional acts or omissions, which
they asserted normally would be adjudicated on a preponderance of the
evidence standard.
    One commenter noted that a heightened standard of proof is
particularly inappropriate for an administrative proceeding that does
not include discovery rights for the borrower, which would be available
to the borrower in court. This commenter noted that the vast majority
of borrowers will not have access to a lawyer.
    Other commenters opposed the clear and convincing evidence
standard. Some commenters asserted that there is no principled or
logical basis for imposing the higher standard on borrowers seeking a
loan discharge. Several commenters asserted that elevating the
evidentiary standard to clear and convincing evidence would create
substantial new barriers to relief for defrauded students, fail to
protect them against institutional misconduct, and effectively prevent
them from receiving the relief to which they are legally entitled.
Another commenter noted that the clear and convincing evidence standard
would present an extreme change.
    One commenter noted that the Department cites no support to suggest
the evidentiary standard prevents or dissuades consumers from
submitting claims. This commenter asserted that it seems likely that
most borrowers do not know what the evidentiary standard expected of
them is, would not be able to contextualize evidentiary requirements
without legal assistance, and would not change their behavior even if
they did understand the expectations for evidence. Similarly, another
commenter asked what evidence the Department considered that a
heightened evidentiary standard may be necessary to deter frivolous or
unwarranted claims for relief.
    Opponents to the preponderance of the evidence standard often
favored a clear and convincing evidence standard because it would
protect institutions and taxpayers from frivolous borrower defense
claims. Those who supported a clear and convincing evidence standard
argued that it strikes a balance between the looser preponderance of
the evidence standard and the far more stringent beyond a reasonable
doubt standard.
    One commenter generally supported the clear and convincing evidence
standard and asserted that the Department should provide the strongest
evidentiary standard possible that also is in accordance with standard
consumer protection practices.
    Some commenters expressed concern that under the preponderance of
the evidence standard, a misstatement related to any provision of
education services, no matter how small, would support a borrower
defense claim, requiring the school to repay the Department and serving
as a black mark against the school. These commenters worried that under
the lower evidentiary standard, colleges would disclaim everything
possible, disclose nothing to students, and treat them as potential
litigants.
    Many commenters agreed that a school should be held accountable for
knowingly providing false or misleading information to borrowers.
However, they caution that misrepresentation is a serious accusation
that can seriously damage a school, even if the Department determines
that the institution did not make a misrepresentation. These commenters
argue that a borrower making such a claim should be required to provide
clear and irrefutable evidence.
    Discussion: The Department appreciates the many thoughtful comments
received regarding the evidentiary standard appropriate for
adjudicating defense to repayment claims. The Department considered the
clear and convincing evidence standard because this standard is
typically the standard required by courts in adjudicating claims of
fraud.\83\
---------------------------------------------------------------------------
    \83\ See Restatement (Third) of Torts: Liab. For Econ. Harm
section 9 TD No 2(2014) (``The elements of a tort claim ordinarily
must be proven by a preponderance of the evidence, but most courts
have required clear and convincing evidence to establish some or all
of the elements of fraud.'').
---------------------------------------------------------------------------
    The Department has been persuaded, however, that for borrowers,
without legal representation or access to discovery tools, the clear
and convincing evidence standard may be too difficult to satisfy.
Therefore, we adopt a preponderance of the evidence standard for
borrower defense claims in these final regulations. We note that this
is the same evidentiary standard used in the 2016 final regulations.
    The Department's decision to engage institutions in developing a
complete record prior to adjudicating a defense to repayment claim will
ensure that decisions are made on the basis of a strong evidentiary
record. Such a record will help to protect institutions and taxpayers,
while helping students with meritorious claims compile necessary
information.
    The Department agrees that access to information may differ between
students and institutions. We also wish to emphasize to consumers that,
given the sizeable investment one makes in a college education, it is
incumbent upon students to shop wisely and get information in writing
before making a decision largely dependent upon that information. The
Department seeks to establish a policy that encourages students to
fulfill responsibilities they have in seeking information and
evaluating the accuracy and validity of that information when making a
decision as important as selecting an institution of higher education.
    The Department does not wish to create a standard so low that
students either alone, or with the help of unscrupulous third parties,
attempt to
[[Page 49817]]
induce statements that could then be misconstrued or used out of
context to relieve borrowers who otherwise received an education from
their repayment obligations.
    Borrowers should be protected against misrepresentations made by
institutions that result in financial harm to them, but at the same
time, the Department must uphold a sufficiently rigorous evidentiary
standard to ensure that the defense to repayment process does not
impose unnecessary or unjustified financial risk to institutions,
taxpayers, or future students. A borrower who makes an unsubstantiated
claim about a school with the Department incurs comparatively little
risk.
    The Department believes it has established an evidentiary standard
in these final regulations that carefully balances the need to protect
borrowers in instances where they suffered harm as a result of
misrepresentations with the need to maintain the integrity of the
student loan program. In addition, this change is appropriate so that
borrowers shop wisely, take personal responsibility for seeking the
best information available and make informed choices, and accept the
benefits of student loans with the full understanding that they,
generally, are legally obligated to repay those loans in full.
    The Department acknowledges that some commenters supported the
clear and convincing evidence standard. The Department agrees with
commenters that a school should be held accountable for knowingly
providing false or misleading information to borrowers and that a
misrepresentation is a serious accusation that can damage a school's
reputation. A clear and convincing evidence standard for borrower
defense to repayment claims may have been appropriate if the Department
adopted a different definition of misrepresentation. In these final
regulations, misrepresentation constitutes a statement, act, or
omission by an institution that is false, misleading, or deceptive and
that was made with knowledge of its false, misleading, or deceptive
nature. The Department provides a non-exhaustive list of types of
evidence that may be used to prove that an institution made a
misrepresentation.
    Changes: The Department adopts the ``preponderance of the
evidence'' standard for both affirmative and defensive claims in these
final regulations. It is appropriate to require a borrower to prove
that an institution, more likely than not, made the alleged
misrepresentation.
Multiple Standards
    Comments: One commenter objected to the proposal to use a higher
evidentiary standard for borrowers based on their repayment status--
i.e., to apply the clear and convincing standard to borrowers asserting
affirmative claims, while applying a preponderance of the evidence to
those asserting defensive claims.
    Another commenter stated that if affirmative claims are allowed,
then affirmative claims should be adjudicated under a clear and
convincing evidence standard.
    One commenter asserted that the Department should use the clear and
convincing evidence standard for both affirmative and defensive claims.
    Discussion: Although we considered applying a clear and convincing
evidentiary standard to affirmative claims, we ultimately decided to
apply the preponderance of the evidence standard to all claims, as
described above. As previously noted, the definition of
misrepresentation is more stringent than the 2016 definition and, thus,
a preponderance of the evidence standard for all claims is more
appropriate to balance the Department's interests in providing a fair,
accessible, and equitable process for both borrowers and schools.
Because a borrower is required to prove that an institution's act or
omission was made with knowledge of its false, misleading, or deceptive
nature or with a reckless disregard for the truth, there is no reason
to require a higher evidentiary standard based on the borrower's
repayment status. Applying a higher evidentiary standard to borrowers
who are not in default may encourage these borrowers to default on the
loans to receive the benefit of a lower evidentiary standard. After
weighing the various interests, the Department determined that applying
a higher evidentiary standard to affirmative claims, but not defensive
claims is not justified.
    Changes: The Department adopts the ``preponderance of the
evidence'' standard for both affirmative and defensive claims in these
final regulations.
Evidence Presented in Support of the Claim
    Comments: Some commenters contended that a borrower's affidavit or
sworn testimony should constitute sufficient evidence to support a
defense to repayment claim. These commenters argued that a borrower
would typically be unable to obtain evidence from a school to evince
recklessness or intent and requiring more than their testimony would
erect too great of a barrier to recovery.
    Some commenters suggested that a borrower should have physical
forms of evidence to show misrepresentation by the school.
    Another commenter expressed concern that if any evidence is
permitted beyond the borrower's sworn affidavit, schools could continue
to defraud borrowers by submitting false or manufactured evidence in
response to borrowers' claims.
    Discussion: The Department thanks the commenters for their
opinions, but disagrees that a borrower's affidavit or sworn testimony,
alone, is sufficient evidence to warrant a decision by the Department
that has significant financial consequences not just for borrowers, but
for institutions, current and future students, and taxpayers who
ultimately will bear the costs if there are high volumes of discharges.
Taking such an approach could increase the likelihood that future
students will bear the cost of prior students' borrower defense claims
in the form of increased tuition. Under the process adopted in these
final regulations, a borrower may submit a sworn affidavit in support
of the borrower defense application, but the institution will have an
opportunity to respond and provide its own rebuttal evidence, if any.
The borrower will have an opportunity to reply. Then the Department,
with the full benefit of all the evidence presented, will adjudicate
the claim. The Department believes that these procedures, similar to
those used at certain stages in judicial proceedings, provide
protections against frivolous affidavits.
    The Department believes that the defense to repayment regulations
can play an important role in helping borrowers become more educated
consumers, including by providing an incentive for institutions to put
all claims material to the student's enrollment decision in writing. As
more information becomes available to borrowers, they will be better
able to make informed decisions.
    Borrower defense to repayment claims may be submitted three years
after a borrower exited a program at a particular institution, and both
the borrower and the institution may have difficulty recalling the
precise language that was used or the information verbally conveyed. To
be sure, institutions that make misrepresentations should suffer harsh
consequences, but any finder of fact, including the Department as an
adjudicator of borrower defense claims, is ill-equipped, many years
after the
[[Page 49818]]
fact, to make determinations based solely on one party's statement.
Therefore, an affidavit, alone, is not sufficient evidence to
adjudicate a claim that could be worth tens, if not hundreds, of
thousands of dollars to the borrower making the affidavit.
    The Department is removing the phrase ``intent to deceive'' in the
Federal standard and will not require a borrower to demonstrate such
intent in order to establish a borrower defense claim. Instead, the
borrower must prove by a preponderance of the evidence that an
institution made a misrepresentation of material fact upon which the
borrower reasonably relied in deciding to obtain a loan that is clearly
and directly related to enrollment or continuing enrollment at the
institution or for the provision of educational services for which the
loan was made. The definition of misrepresentation also does not
expressly require the borrower to demonstrate that the institution
acted with intent to deceive. As previously stated, a misrepresentation
constitutes a statement, act, or omission that was made with knowledge
of its false, misleading, or deceptive nature or with reckless
disregard for the truth.
    As noted elsewhere in this preamble, evidence that borrowers may
present to the Department includes, but is not limited to: Web-based
advertisements or claims, direct written communications with an
institution official, information provided in the college catalog or
student handbook, the enrollment agreement between the institution and
the student, or transcripts of depositions of school officials. It is
important for students to obtain, review, and retain written materials
provided by the school; if the student is told information materially
different than the information provided in writing, the Department will
consider the evidence of the alleged verbal misrepresentation. Students
should seek a written explanation to clarify any discrepancies.
    The Department disagrees that an institution is likely to submit
fraudulent documents to the Department in response to a borrower
defense to repayment application. Institutions face grave risks for
making any falsified or misleading representation to the Department.
The Department may remove the institution from all title IV programs if
the institution submitted false or manufactured evidence in response to
a borrower's claim. Under no circumstance is a title IV participating
institution permitted to commit fraud on students or the Department.
    The Department's goal is to ensure that defrauded students have
reasonable access to financial remedies while ensuring students have
access to the information they need to be smart consumers by making
decisions based on information that a seller, vendor, or service
provider commits in writing. Students, like all consumers, should
obtain written representations in relation to any transaction in the
marketplace that presents a significant financial commitment. Borrowers
should understand the risks associated with making decisions based on
verbal promises that an institution or any other entity in the
marketplace is unable to substantiate or support in writing. Student
advocacy groups, for instance, may help student become wise consumers
on the front end, rather than successful borrower defense claimants
after the fact.
    Changes: None.
Borrower Defenses--Financial Harm
General
    Comments: Many commenters supported the Department's definition of
financial harm, noting that it clarifies what might be included and
excluded, including the non-exhaustive list of examples. Some
commenters noted that the definition appropriately addresses the
longstanding legal principle that a victim's harm should be considered
in determining a remedy. Other commenters supported the view that
opportunity costs should not be included.
    Several commenters cited protecting the financial interest of the
taxpayer as an important goal when considering financial harm,
especially if a borrower continued his or her enrollment after
realizing that a misrepresentation occurred.
    Some commenters believed that the requirement of proving financial
harm beyond the debt incurred is ``arbitrary, unsupported, and not
feasible.'' Others stated that the Department's proposed financial harm
definition is burdensome to borrowers. Commenters suggested that the
Department provide clear information, such as a checklist of examples
of financial harm from those identified in the proposed rule, and ask
borrowers to check all that apply, explaining the meaning of items in
the list, and allowing borrowers to describe other examples of
financial harm they have experienced. This commenter also suggested
that the Department eliminate asking unnecessary questions and ask
necessary questions in a way that does not deter borrowers from
applying.
    Other commenters claimed that requiring financial harm is
inconsistent with the statute and the statutory intent, citing the
statutory language of ``acts or omissions by an institution of higher
education.''
    Commenters stated that the requirement of financial harm will
result in the denial of claims where a student acquired a loan on the
basis of misrepresentations but did not suffer financial harm.
    Discussion: The Department thanks the commenters for their support
of these regulatory changes. The definition of financial harm should
provide clarity and the list of examples should also further enhance
the understanding of its meaning. The Department's list of examples of
financial harm may be found at Sec.  685.206(e)(4)(i) through (iv). The
Department believes that borrower defense relief should relate to
financial harm. The Department reminds commenters that these final
regulations provide an administrative proceeding, and broader remedies
are available to borrowers in other venues. The Department does not
wish for its borrower defense to repayment process to supplant venues
where borrowers may recover opportunity costs or other consequential or
extraordinary damages.
    Unlike courts, which may award the borrower more than the loan
amount for opportunity costs or other consequential extraordinary
damages, Section 455(h) of the HEA authorizes the Department to allow
borrowers to assert ``a defense to repayment of a [Direct Loan],'' and
to discharge outstanding amounts to be repaid on the loan. This section
further provides that ``in no event may a borrower recover from the
Secretary . . . an amount in excess of the amount the borrower has
repaid on such loan.'' \84\ Accordingly, it is improper for the
Department to allow for extraordinary damages that likely will exceed
the loan amount.
---------------------------------------------------------------------------
    \84\ 20 U.S.C. 1087e(h).
---------------------------------------------------------------------------
    Even if financial harm continues after the filing of a claim, the
Department may not provide to a borrower any amount in excess of the
payments that the borrower has made on the loan to the Secretary as the
holder of the Direct Loan. Although a borrower may be able to pursue
such remedies through other avenues, under applicable statute, a
borrower may not receive punitive damages or damages for inconvenience,
aggravation, or pain and suffering as part of a borrower defense to
repayment discharge. The 2016 final regulations similarly state that
relief to the borrower may not include ``non-pecuniary damages such as
inconvenience, aggravation, emotional distress, or punitive damages.''
\85\
---------------------------------------------------------------------------
    \85\ 34 CFR 685.222(i)(8).
---------------------------------------------------------------------------
[[Page 49819]]
    Regarding the protection of taxpayer dollars, the Department
believes that the financial harm standard is an important and necessary
deterrent to unsubstantiated claims or those generally beyond the scope
of borrower defense to repayment. Students may experience
disappointments throughout their college experience and career, such as
believing that they would have been better served by a different
institution or major. However, such disappointments are not the
institution or the taxpayer's responsibility.
    Without the link between loan relief and harm, it is likely that
many borrowers could point to a claim made by an institution about the
potential a student could realize by enrolling at the institution. For
example, institutions that advertise undergraduate research experiences
typically do not guarantee that every student will have such an
opportunity. Similarly, institutions that include the nicest dorm on
campus as part of the college tour cannot guarantee that every student
will have the opportunity to live in that dormitory. Institutions
frequently feature graduates' top outcomes on their websites, but doing
so does not suggest, or guarantee, that all students will have the same
outcomes. Many factors beyond the control of the institution will
influence outcomes.
    Contrary to the commenter's statutory interpretation, the inclusion
of financial harm in the calculation of a borrower's claim is a
reasonable interpretation of a statute that is silent on the issue. The
2016 final regulations made clear the Department's position that, even
if a misrepresentation was made by an institution, relief may not be
appropriate if the borrower did not suffer harm. The Department stated
in the 2016 final regulations that ``it is possible a borrower may be
subject to a substantial misrepresentation, but because the education
provided full or substantial value, no relief may be appropriate.''
\86\
---------------------------------------------------------------------------
    \86\ 83 FR 75975.
---------------------------------------------------------------------------
    Defense to repayment relief is not provided for a borrower who is
disappointed by the college experience or subsequent career
opportunities, or who wishes he or she had chosen a different career
pathway or a different major. Instead, defense to repayment relief is
limited to instances where a school's misrepresentation resulted in
quantifiable financial harm to the borrower. If a misrepresentation
associated with the making of a loan did not result in any such harm,
it would not qualify as a basis for a defense to repayment under these
final regulations.
    The Department disagrees with commenters who believe that showing
financial harm is overly burdensome. Although the process should be as
simple as possible for borrowers, we need to balance that concern with
the need to protect the interests of taxpayers. We believe that the
examples of financial harm evidence should be within the ability of
most applicants to show and should not substantially complicate the
process of submitting a defense to repayment application.
    Although the 2016 final regulations did not expressly include
``financial harm'' as part of a borrower defense to repayment claim,
they tied relief to a concept of financial harm. Under the 2016 final
regulations and specifically under Appendix A to subpart B of Part 685,
a borrower would not be able to receive any relief if 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 but failed to update the marketing materials to reflect
the fact that the award-winning faculty had left the school. In such
circumstances and under the 2016 final regulations, the Department
notes: ``Although the borrower reasonably relied on a misrepresentation
about the faculty in deciding to enroll at this school, she still
received the value that she expected. Therefore, no relief is
appropriate.'' \87\
---------------------------------------------------------------------------
    \87\ 34 CFR part 685, app. A.
---------------------------------------------------------------------------
    Although the borrower had a successful borrower defense to
repayment claim, the borrower did not receive any relief, which is a
waste of the borrower's time and resources. To avoid such situations,
financial harm will be an element of the borrower defense to repayment
claim under the 2020 final regulations.
    The borrower may always seek financial remedies from the
institution through the courts or arbitration proceedings, but for the
purpose of a defense to repayment claim, the Department's role is more
narrowly limited to determining whether or not the student should
retain the repayment obligation. This is why financial harm is a key
element of a defense to repayment claim.
    The Department appreciates the suggestions for development of a new
form to be used as the result of these regulations and will formally
seek such public input pursuant to the Paperwork Reduction Act
information collection process.
    Changes: None.
Factors for Assessing Financial Harm
    Comments: Several commenters argued that the Department should not
penalize schools for conditions out of their control including economic
conditions, or a borrower voluntarily choosing not to accept a job, to
pursue part-time work, or to work outside of the field for which he or
she studied.
    Several commenters indicated that it is important to balance the
financial costs to institutions of borrower defense to repayment
provisions with the need to establish an equitable recourse for
students impacted by an institution's actions. They indicated that
concern whether a school may close should not be a factor when
determining whether a student has been harmed by fraud.
    Some commenters contended that the Department should expand the
definition of financial harm to include monetary losses predominantly
due to local, regional, or national labor market conditions or
underemployment which could otherwise be used by institutions to
``quibble with'' borrowers' applications.
    Other commenters suggested revising the rule to state that
``Evidence of financial harm includes, but is not limited to, the
following circumstances'' to clarify that the list is not exhaustive
and that a borrower may raise other types of harm to establish
eligibility for relief.
    Commenters noted that it can be difficult to quantify harm and
especially challenging to distinguish among degrees of harm. Some
pointed out that the proposed rule would not account for opportunity
costs and that harm continues even after filing a claim. Some suggested
that if misrepresentation is substantiated and there is resultant harm,
the Department should grant full relief unless the harm can be shown to
be a limited or quantifiable nature.
    Several commenters objected to requiring borrowers to demonstrate
economic harm beyond taking out a loan. These commenters believe that
obtaining the loan is enough to show they are financially harmed when
the school committed a misrepresentation. One commenter suggested that
part-time work is an indication of financial harm.
    Discussion: The Department agrees that schools should not be
penalized for conditions beyond their control and believes that the
definition of financial harm adopted in these final regulations
achieves that goal. The Department is revising the definition of
financial harm to expressly state that the harm is the amount of
monetary loss that a borrower incurs as a consequence of a
[[Page 49820]]
misrepresentation. This definition further emphasizes that financial
harm is an assessment of the amount of the loan that should be
discharged. Borrowers also will have an opportunity to state in their
borrower defense to repayment application the amount of financial harm
allegedly caused by the school's misrepresentation. The borrower needs
only to demonstrate the presence of financial harm to be eligible for
relief under these final regulations,\88\ and the Department will
consider the borrower's alleged amount of financial harm as stated in
the application.
---------------------------------------------------------------------------
    \88\ 83 FR 37259-60 (``As with the 2016 final regulations,
however, the Department does not believe it is necessary for a
borrower to demonstrate a specific level of financial harm, other
than the presence of such harm, to be eligible for relief under the
proposed standard.'')
---------------------------------------------------------------------------
    Also, the Department believes that part-time work is not
necessarily evidence of financial harm and, as a result, cannot be
treated as such. A student may have very valid reasons for deciding to
work part-time that are unrelated to any consequence suffered as a
result of a misrepresentation.
    For example, a student who is a parent may decide to work part-time
to raise children, especially as daycare is costly. If a borrower
decides to work part-time, even though full-time work is available to
the borrower, then the part-time work is not evidence of financial
harm. If only part-time work is available to a borrower due to an
institution's misrepresentation and the borrower would like and is
qualified for full-time work, then part-time work may constitute
evidence of financial harm.
    Where an institution has engaged in misrepresentation that results
in financial harm to students, the final regulations the Department
implements now will provide relief to students and seek funds from
institutions without regard to the impact on the institution. At the
same time, the final regulations are designed to protect against a
systemic financial risk to institutions that are, in good faith,
providing accurate information to students.
    The Department does not propose to consider the impact on a
school's financial condition when making a determination of
misrepresentation. In the 2018 NPRM, the Department was making the
point that it cannot assume that the student is always right,
accusations against an institution are always true, or false claims
against an institution do not have serious implications for
institutions, students, and taxpayers.
    The Department maintains, as we did in the 2018 NPRM and the 2016
final regulations, that partial student loan discharge is a possible
outcome of a defense to repayment claim. Our reasoning for this
approach is discussed further in the Borrower Defenses--Relief section
of this preamble.
    The Department continues to believe that, when choosing to pursue a
particular career, students face a multitude of choices--where to live,
where to attend school, when to attend school, and how quickly to
graduate. Students are in the best position to make these decisions in
light of their own circumstances. The Department believes that students
must remain the primary decision-makers on the key points of how to
navigate these difficult factors. Students should allege the amount of
financial harm caused by the school's misrepresentation and not any
financial harm incurred as a result of the student's own choices.
    The Department does not wish to impose liability on institutions
for outcomes that are dependent upon highly variable local and national
labor market conditions, as these conditions are outside the control of
the institution. The Department is willing to clarify the type of
evidence that may demonstrate financial harm. Upon further
consideration and in response to commenter's concerns, the Department
revised the type of evidence that may demonstrate financial harm. The
2018 NPRM proposed: ``extended periods of unemployment upon graduating
from the school's programs that are unrelated to national or local
economic downturns or recessions.'' \89\ The Department realizes that
the phrases, ``extended periods'' and ``economic downturns,'' are not
defined and may be subject to different interpretations. Economists,
however, have defined what constitute an ``economic recession.'' \90\
Accordingly, the Department revised the phrase to ``periods of
unemployment upon graduating from the school's programs that are
unrelated to national or local economic recessions'' in Sec.
685.206(e)(4)(i).
---------------------------------------------------------------------------
    \89\ 83 FR 37327.
    \90\ See, e.g., Miller, David S. (2019). ``Predicting Future
Recessions,'' FEDS Notes. Washington: Board of Governors of the
Federal Reserve System, May 6, 2019, https://doi.org/10.17016/2380-7172.2338.
---------------------------------------------------------------------------
    In response to the commenters' suggestions, the final regulations
also have been revised to clarify that the list of examples is non-
exhaustive. This rule provides a non-exhaustive list of examples of
evidence of financial harm, meaning that borrowers are encouraged to
provide evidence that they believe is instructive, and the Department
will develop expertise in assessing financial harm based on this kind
of evidence.
    The Department is not including a specific methodology in this
regulation for determining financial harm, in part, because the
Department is awaiting a court ruling on at least one potential
methodology developed to assess financial harm to borrowers.\91\ The
Department disagrees that it is unreasonable to require students to
make their own assessment of financial harm, as they have the most
information about their financial situation and circumstances. Indeed,
it would be unreasonable to require the Department to assess financial
harm without any input from the student as to what financial harm the
student suffered. Students have the best records to assess and
establish other costs associated with their education such as books,
etc. Students will have the opportunity to provide whatever
documentation they would like to provide to support their allegation of
financial harm, and the Department will consider the student's
submission. The Department also will take into account the amount of
financial harm that the student alleges she or he suffered in
determining the amount of relief to award for a successful borrower
defense to repayment application. As described in the section on
relief, below, the borrower's relief may exceed the financial harm
alleged by the borrower but cannot exceed the amount of the loan and
any associated costs and fees. The Department will consider the
borrower's application, the school's response, the borrower's reply,
and any evidence otherwise in the possession of the Secretary in
awarding relief.
---------------------------------------------------------------------------
    \91\ Manriquez v. Devos, No. 18-16375 (9th Cir. argued Fed. 8,
2019).
---------------------------------------------------------------------------
    The Department rejects, outright, the commenter's suggestion that
taking out a loan is, on its own, evidence of financial harm. Under the
2016 final regulations, the Department acknowledged in example 5 in
Appendix A to subpart B of part 685 that a borrower may take out a loan
as a result of a misrepresentation of a school but will not be entitled
to recover any relief. The Department now understands that it is a
waste of both the borrower's time and resources as well as the
Department's to acknowledge that the borrower has suffered from a
misrepresentation but cannot recover any relief because there was no
financial harm. Accordingly, financial harm is an element of a borrower
defense to repayment claim in these final regulations. The financial
harm must be a consequence of an institution's misrepresentation, for
the reasons explained above.
[[Page 49821]]
    Changes: We thank the commenter for the suggestion about clarifying
what evidence constitutes financial harm. As a result of that
recommendation, we are revising the text of Sec.  685.206(e)(4) to
state that ``Evidence of financial harm includes, but is not limited
to, the following circumstances.'' One of these examples is ``extended
periods of unemployment upon graduating from the school's programs that
are unrelated to national or local economic recessions,'' and the
Department is revising ``extended periods of employment'' to ``periods
of employment'' in Sec.  685.206(e)(4)(i). Upon further consideration,
the Department determined that ``periods of unemployment'' is clearer
than ``extended periods of unemployment,'' as the period of time that
constitutes an extended period is not specified. The Department also
removed the phrase ``economic downturn'' in Sec.  685.206(e)(4)(i), as
the phrase ``economic recession'' provides greater clarity. The
Department also revised Sec.  685.206(e)(8)(v) to allow the borrower to
state the amount of financial harm in the borrower defense to repayment
application.
Submission and Analysis of Evidence
    Comments: A number of commenters supported collecting information
from the borrower, such as the specific regulations they are citing for
their defense to repayment, outlining how much financial harm they
think they suffered, and certifying the claim under penalty of perjury.
    Some commenters contended that the evidence borrowers would need to
satisfy proposed financial harm requirements would require
sophisticated analysis, including the possibility of expert testimony
from labor economists. Similarly, several commenters argued that it is
challenging to identify when students' outcomes are predominantly due
to external factors and recommended that the Department eliminate that
from the definition of financial harm.
    One commenter noted that borrowers may not know how to quantify the
harm they have suffered as a result of the misrepresentation. Many
commenters criticized the proposal to ask borrowers what the commenters
cited as invasive and inappropriate questions about drug tests, full-
time versus part-time work status, or disqualifications for a job.
These commenters noted that these are subjective and impacted by many
outside factors. Commenters were also concerned that this information
could potentially get back to the school. Another commenter stated that
the burden should fall on the school or the Department--but not the
borrower--to prove that external factors did not cause the financial
harm.
    Discussion: The Department does not believe, and has not stated,
that borrowers should be required to cite the specific regulation which
they believe the institution violated, as a typical borrower would
likely not have any knowledge of the relevant parts of Federal
regulations.
    The Department does not believe borrowers should be required to
seek legal counsel in order to submit a defense to repayment claim.
    Through these final regulations, the Department intends to create a
borrower defense process that is accessible to typical borrowers and
rests on evidence likely to be in their possession or the possession of
the school. External factors such as labor market conditions can be
assessed by the Department using available and reliable data. There is
no need for borrowers to engage labor economists or expert witnesses.
Borrower defense is an administrative determination based upon the best
available information. The Department does not believe that the
calculation of the borrower's financial harm should be discarded
because of its potential complexity. For example, in many instances,
the Department is being asked to evaluate whether job placement rates
were misrepresented to students. Given that a TRP, as discussed earlier
in the document, pointed to job placement determinations as highly
subjective and imprecise, the Department has shown its willingness to
engage in complicated and subjective determinations.
    The Secretary will determine financial harm based upon individual
earnings and circumstances; the Secretary may also consider evidence of
program-level median or mean earnings in determining the amount of
relief to which the borrower may be entitled, in addition to the
evidence provided by the individual about that individual's earnings
and circumstances, if appropriate. The Department must have some
information relating to the borrower's career experience subsequent to
enrollment at the institution. The goal is a proper resolution for each
borrower defense claim, which requires evidence not only of an
institution's alleged misrepresentations, but also of, among other
factors, the borrower's subsequent career and earnings. While the
Department has not taken this approach previously and continues to
believe that for purpose of the previous standards, information
relating to the individual's career experience may not be necessary to
provide appropriate relief, the administrative difficulties the
Department has faced in formulating an approach without such
information has led the Department to conclude that such information
will be required from borrowers for these final regulations. Without
information about the individual's unique circumstances, including
career experience, the Department has found it difficult to determine
that a particular borrower actually suffered the financial harm
necessary to be entitled to relief under the borrower defense statute.
The Department is accordingly moving to an approach that requires
individuals to provide such evidence. It is mitigating the burden of
that approach, however, by requiring borrowers to provide necessary
documentation of financial harm at the time of application. In
addition, the Department believes that other reforms in these
regulations, including the new Federal borrower defense standard,
mitigate the burdens of this approach.
    In response to the many commenters strongly opposed to the
Department asking borrowers for information such as employment status,
employment history, or other disqualifications for employment, we
believe these factors, while potentially subjective and impacted by
outside forces, provide important context when determining the proper
extent to which an institution caused financial harm or how much relief
is warranted based on the actions of the institution. These questions
are not intended, in any way, to shame borrowers, and we will maintain
the borrower's privacy, as required by applicable laws and regulations.
Through this regulatory provision, the Department is attempting to
confirm that any financial harm results from actions of the school and
not the disposition, actions, or non-education related decisions made
by the borrower. Despite the commenter's suggestions, the Department
continues to believe that the borrower is in the best position to know
certain information and that the burden on the borrower to submit a
signed statement containing information they know is appropriate.
    In response to the suggestion that the burden for certain elements
of a borrower defense claim should fall on the school or the
Department, the process outlined is for both the borrower and school to
provide the information needed for correct resolution. The process is
meant to be accessible to unrepresented borrowers, and it will not rely
on formal notions of burden shifting.
    The Department acknowledges that it is difficult to precisely
quantify
[[Page 49822]]
financial harm. We believe that the information requested by the
Department from borrowers and schools will provide a factual basis for
the Department to determine the extent of financial harm.
    Changes: None.
Equitable Resolution of Claims
    Comments: Commenters indicated that common law principles of equity
must apply and, as a result, the proposed definition of financial harm
must be rejected. According to the commenters, the common law principle
of equity requires that victims of fraud be made whole.
    These commenters stated that the Department is conflating harm and
levels of harm based on a student's individual earning ability. The
commenters explained that this analysis misuses the cause and effect of
fraud upon a student's earning potential. A student's individual
earning capacity is based upon that student's circumstances and one
student's wages should not be used in comparison to another student.
The commenters argued that the standard being used is unfair when, in
an entire program that only results in graduates having wages below the
Federal poverty line, a student that is making more than the Federal
poverty line would receive only partial discharge, if any, because that
student may be doing marginally better than his or her fellow
graduates.
    The only harm that can be measured consistently according to these
commenters is the amount of student loan debt as it is not based on
individual student circumstances, improper cause and effect analysis on
earning potential, and accounting for an entire population of graduates
that has poor outcomes.
    Discussion: The Department appreciates the commenters' concerns,
but we emphasize that the defense to repayment regulation is not meant
to replace the courts in rendering decisions about consumer fraud.
Instead, it seeks to provide students with relief from loan repayment
obligations when an institution's misrepresentations, as defined at
Sec.  685.206(e)(3), cause a student financial harm.
    The importance of harm resulting from the institution's acts or
omissions was a critical part of the 2016 final regulations \92\ and
remains a critical part of these final regulations, so that the
financial risk to borrowers, institutions, and taxpayers is properly
and fairly balanced. Were the Department to eliminate the need for a
borrower to demonstrate harm, institutions may be more reluctant to
provide information to prospective students, which could make it
harder, rather than easier, for a student to select the right
institution for them.
---------------------------------------------------------------------------
    \92\ Example 5 in Appendix A to subpart B of part 685
demonstrates that a borrower would not receive relief from the
Department unless there was financial harm.
---------------------------------------------------------------------------
    In order to assess whether a borrower is being appropriately
compensated in a successful claim, the Department must assess his or
her financial harm in context, and that context may consider earnings
relative to peers, market wages, cost of living, and other factors.
    The Department disagrees that the only measure of harm that should
be used is the amount of the student's loan debt. As discussed above,
the Department believes that financial harm is implied in the statutory
authority and necessary to the resolution of borrower claims. We
believe the definition of financial harm provides such balance to all
parties involved. If the borrower received an educational opportunity
reasonably consistent with that promised by the institution from the
institution, then the borrower should not be relieved of his or her
repayment obligations, even if some of the information provided to the
student in advance had inadvertent errors.
    Changes: None.
Borrower Defenses--Limitations Period for Filing a Borrower Defense
Claim
    Comments: Many commenters supported the Department's proposal to
limit claims to three years from the date the borrower completes his or
her education. Commenters thought a three-year limitation would be
fair, because: Evidence will still be available; recollections of the
parties will be relatively clearer; and most borrowers should know that
they have been wronged within three years. Many commenters argued that
after three years, it becomes much harder for schools to defend
themselves against claims, particularly since schools are discouraged
by regulators from keeping records for longer than three to five years
due to security and privacy concerns.
    Some commenters believe that a three-year limitations period should
relate to defensive claims as well as affirmative claims, arguing that
three years is enough time for a borrower to file a claim and that
schools should not be expected to defend themselves against a claim
made many years after the student left school.
    A commenter noted that one way to address this concern would be to
allow borrowers to file defensive claims at any time, but only hold the
school liable for five years. One commenter maintained that a three-
year period instead of a five-year period for the Department to seek
recovery against an institution would balance the Department's interest
in recovering from institutions against the institutions' reasonable
ability to predict and control their financial situation.
    Another commenter suggested that a borrower should not be able to
raise a claim if the borrower has been in default for more than three
months.
    Other commenters argued that the proposed timeline does not provide
enough time for borrowers to realize that they have been harmed, learn
about the claim process, gather supporting evidence, and file a claim.
Those commenters noted that disadvantaged borrowers may not understand
their right to seek relief, may not possess the evidence needed, or may
not be made aware that they were misled until much later.
    Some commenters argued that the Department cannot legally preclude
borrowers from defending against a demand for repayment. Multiple
commenters indicated that since there is no limitations period on
repayment, there should be no limitations period on defenses. Some
commenters opposed adding any limitation, arguing that a limitation
would likely keep the most disadvantaged borrowers from receiving
relief. One commenter noted that imposing a limitations period on
borrower defense claims would be contrary to well-established law and
inconsistent with the Department's practice with respect to other
discharge programs. The commenter further argued that such a limitation
would indiscriminately deny meritorious and frivolous claims alike.
    One commenter argued that because there is no requirement that the
student be made aware of their eligibility to file a borrower defense
claim during the statute of limitations, the opportunity to file a
claim is rendered ``effectively moot.''
    Commenters argued that the limitations period, whatever its length,
should run from discovery of the harm or misrepresentation rather than
running from the date the student is no longer enrolled at the
institution.
    Another commenter noted that the most frequent statute of
limitations for civil suits involving fraud is six years from the act.
    Several commenters raised concerns that the Department was taking
punitive measures against borrowers by requiring them to raise a
borrower defense to repayment claim within the applicable
[[Page 49823]]
timeframes set for a proceeding to collect on a loan, which could
result in a short effective limitation period of 30-65 days depending
upon the proceeding. The commenter suggested instead to use ``positive
incentives'' to encourage borrowers to file claims.
    Discussion: The Department appreciates the support for our
limitations period proposal in the 2018 NPRM. However, after careful
consideration of the comments, the Department has decided to revise the
limitation period, as stated in the 2018 NPRM, in these final
regulations.
    The Department was persuaded by the commenter who proposed that a
three-year limitations period be put in place for both affirmative and
defensive borrower defense claims. The commenter pointed out that,
under the 2018 NPRM, a borrower who went into default nearly twenty
years after graduation could, potentially, assert a defensive claim at
that time. It is very unlikely that an institution would still possess
the records needed to defend against such a claim at that time. In
fact, it would be ill-advised and very difficult for institutions to
maintain records for that entire period, especially when considering
privacy, as well as physical and digital storage considerations. It is
equally unlikely that faculty or staff would still be employed at the
same school or be able to recall the incident(s) subject to the claim.
    Therefore, the Department now believes that a three-year period for
the filing of affirmative and defensive claims with the Department,
commencing from the date when the borrower is no longer enrolled at the
school, is fair to both the borrower and the institution and strikes
the right balance between providing obtainable relief for borrowers and
allowing institutions to predict and control their financial
conditions.
    The final regulations would also entirely avoid the consequence of
a short limitations period--30-65 days--that many commenters thought
borrowers would find difficult to satisfy. The Department understands
the commenter's concerns that the timeline proposed for the filing of
defensive claims in the 2018 NPRM was insufficient, but we disagree
with the commenter who suggested that this was a punitive measure. On
the other hand, we do agree that the Department should, within certain
limits, create incentives to borrowers to file meritorious claims in a
timely manner. As a result, the Department will not be implementing the
filing deadlines for the various proceedings in which a defense
borrower defense claim may be raised, including: Tax Refund Offset
proceedings (65 days); Salary Offset proceedings for Federal employees
under 34 CFR part 31 (65 days); Wage Garnishment proceedings under
section 488A of the HEA (30 days); and Consumer Reporting proceedings
under 31 U.S.C. 3711(f) (30 days). These short limitations periods are
no longer necessary given the change in the final regulations regarding
the three-year limitations period for the filing of all claims,
including defensive claims arising as a result of a collections
proceeding.
    Notwithstanding anything in these final regulations, borrowers may
continue to maintain other legal rights that they may have in
collection proceedings. No provision in these final regulations burdens
a student's ability to seek relief outside the Department's borrower
defense claim process. Subject to applicable law, borrowers are not
deprived of a defense to, nor precluded from defending against, a
collection action for as long as the debt can be collected.
    The Department is not persuaded by the commenter's suggestion that
schools should be limited to five years of liability in a defensive
borrower defense claim or that the Department should waive the time
limit to file a claim entirely. The three-year limitations period
strikes the proper balance for records retention, the parties'
recollection of the events, and documentation requirements. Similarly,
waiving the time limit could potentially generate massive liabilities
for schools, which could create undesirable incentives for schools and
negatively impact their long-term financial stability.
    We considered the commenter's suggestion to begin the limitation
period at the discovery of harm. The Department recognizes that this
standard can be found in other bodies of law. However, we have
concluded that this suggestion would not be appropriate for an
administrative proceeding like the adjudication of a borrower defense
claim. Determining whether and when a borrower discovered or should
have discovered the misrepresentation is a difficult task that is
administratively burdensome. Such a determination is very subjective.
Such a determination also requires the Department to consider evidence
that likely will not be part of the borrower defense to repayment
application or readily available to the borrower or the institution,
especially if much time has passed between enrollment and the discovery
of the misrepresentation.
    The Department notes that while the limitations period begins at
graduation, the institution's misrepresentation was likely committed
before the borrower enrolled. Taking into account the period of the
borrower's enrollment--whether two, three, or four years--the effective
limitations period is between five and seven years. Consequently, the
limitations period is comparable to State statute of limitations
periods for civil fraud. For example, New York state law requires that
a fraud-based action must be commenced within six years of the fraud or
within two years from the time the plaintiff discovered the fraud or
could have discovered it with reasonable diligence.\93\
---------------------------------------------------------------------------
    \93\ Sargiss v. Magarelli, 12 NY3d 527, 532 (2009), quoting CPLR
213 [8] and CLPR 203 [g].
---------------------------------------------------------------------------
    Further, when compared to a civil proceeding in a court of law, the
Department does not possess the court's ability to compel parties to
produce documents, call witnesses to produce testimony, or hold formal
cross-examination. Therefore, the Department is limited in our ability
to judge claims. As a result, the opportunities afforded to civil
litigants are not all appropriately applied here. The Department has
decided to seek a balance between the need for students who are
eligible for relief to obtain it and to allow schools to be exposed to
unlimited liability. The Department also notes here, as elsewhere, that
nothing in these final regulations burdens a student's ability to seek
relief outside the borrower defense claim process.
    Throughout these final regulations, the Department has emphasized
the need for students to be engaged and informed consumers when making
determinations about their education choices. We disagree with the
commenter who stated that without notification, presumably from the
Department, of the borrower's eligibility to file a claim, the
opportunity to file a claim is ``effectively moot.'' We believe
borrowers are able to inform themselves of their options, if they feel
they have been harmed by an institution's misrepresentation.
    The three-year limitations period should be considered in the
context that the period is not tied to the date of the act or omission,
but rather from the date of that the borrower is no longer enrolled in
the institution. For the many borrowers who enroll in multi-year
programs, the Department's limitations period will be, in actual
practice, longer than even a five- or six-year limitations period that
begins to run from the time of the alleged wrong.
[[Page 49824]]
    As discussed in the 2018 NPRM, the Department believes that giving
consideration to all comments received and on current records retention
policies, which was not the subject of this rulemaking, that three
years after the date of the end of their enrollment is sufficient and
appropriate. Therefore, we believe these final regulations provide
sufficient time for borrowers to become aware of the borrower defense
process, gather evidence, and file a claim.
    The Department does not believe that, for loans first disbursed on
or after July 1, 2020, it would be beneficial for students or schools
to be subjected to different limitations periods depending upon the
rules of individual States or accreditors. The Department notes that
statutes of limitations for civil suits involving fraud vary between
States and jurisdictions. For example, the statute of limitations for
civil fraud in Louisiana is one year; \94\ three years in California;
\95\ four years in Texas; \96\ and five years in Kentucky.\97\ Such a
policy leads to inconsistent treatment of borrowers and confusion for
schools that may be subject to different rules by their States and
accreditors. The Department does not adopt the commenter's proposal to
bar a borrower, who has been in default for more than three months,
from raising a borrower defense claim. Unfortunately, the commenter did
not add any justification for the Department to consider when raising
this consideration. Even so, in an effort to treat all borrowers
equally and fairly, we believe that every borrower, regardless of
payment or non-payment status, continues to possess the ability to file
a borrower defense claim within the limitations period.
---------------------------------------------------------------------------
    \94\ La. Civ. Code art. 3492.
    \95\ Cal. Civ. Proc. Code Sec.  338 (2006).
    \96\ Tx. Civ. Prac. & Rem. Sec.  16.001(a)(4).
    \97\ Ky. Rev. Stat. Sec.  413.120(11) (2016).
---------------------------------------------------------------------------
    The Department disagrees that creating a limitations period on
filing affirmative claims is ``contrary to well-established law'' and
inconsistent with past practice. In fact, in the past, the Department
has, unwisely, embraced incongruous and inconsistent limitations
periods for borrower defense claims. For loans first disbursed on or
after July 1, 2017, the 2016 final regulations allowed for affirmative
claims based upon judgments against the school to be filed at any time,
while breaches of contract and substantial misrepresentations were
limited to ``not later than six years.'' \98\ Despite our concerns
regarding these multi-tiered limitation periods, as a matter of policy,
the Department has decided to continue these inconsistencies until July
1, 2020 due to retroactivity concerns. However, the Department looks
forward to a consistent application of a standard limitations period
for loans first disbursed on or after July 1, 2020.
---------------------------------------------------------------------------
    \98\ 34 CFR 685.222(b)-(d).
---------------------------------------------------------------------------
    Changes: For loans first disbursed on or after July 1, 2020, the
Department has established a three-year limitations period to apply to
both affirmative and defensive borrower defense claims at Sec.
685.206(e)(6).
Borrower Defenses--Records Retention for Borrower Defense Claims
    Comments: Some commenters supported different timeframes, including
four years, six years, or the record retention timeframes used by
States and accreditors. Conversely, some commenters argued for shorter
time-frames such as one or two years. Other commenters argued that
keeping records for longer than three years raises privacy concerns.
    One commenter noted that basing the three-year proposed timeframe
on the Federal records retention requirement does not take into
consideration that accrediting agencies require much longer retention
of records and that Federal records likely would not be relevant for
these claims. Another commenter indicated that the Federal records
retention requirement is a minimum retention requirement and that
institutions may hold records for longer periods. A number of
commenters requested that a records retention requirement align with
other Department records retention policies.
    Discussion: The Department thanks the commenters for pointing out
the plethora of records retention statutes that institutions,
especially those with a presence in multiple States, are subject to as
well as the added complexity of accreditor records retention
requirements.
    As discussed in the previous section, we believe that the three-
year requirement provides ample opportunity for borrowers to make a
claim as well as consistency with other Department requirements for
institutions. As stated above, the Department continues to assert that
the three-year limitations period will provide a fair opportunity for
borrowers to file claims and a fair standard for institutions who
retain thousands of pages of records. This three-year limitation period
will also provide greater certainty to schools and taxpayers, protect
student privacy, and ensure that borrower defense matters are processed
on the basis of relatively fresh recollections and with records still
available.
    Changes: None.
Borrower Defenses--Exclusions
    Comments: Many commenters supported the Department's non-exhaustive
list of exclusions of what constitutes grounds for filing a borrower
defense to repayment claim. These commenters noted that it was helpful
to explain that certain areas would not be considered as the basis for
a borrower defense to repayment claim.
    Some of these commenters further noted that they appreciated the
Department citing factors it would not consider.
    Discussion: We appreciate commenters' support in outlining examples
of exclusions of what would not constitute the basis for a borrower
defense to repayment claim under these final regulations.
    Changes: None
    Comments: None.
    Discussion: As discussed above, the Department removed the phrase
``that directly and clearly relates to the making of a Direct Loan, or
a loan repaid by a Direct Consolidation Loan'' \99\ from the definition
of misrepresentation to better align this definition with the Federal
Standard. Both the Federal standard and the definition of
misrepresentation refer to a misrepresentation of material fact ``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.''\100\
---------------------------------------------------------------------------
    \99\ 83 FR 37326.
    \100\ Compare Sec.  685.206(e)(2) with Sec.  685.206(e)(3).
---------------------------------------------------------------------------
    To align the language in the exclusions section with the Federal
standard and the definition of misrepresentation, the Department is
removing the phrase ``a claim that is not directly and clearly related
to the making of the loan and provision of educational services by the
school'' and replacing it with the phrase ``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.'' This revision provides consistency and clarity with
respect to the Federal standard, definition of misrepresentation, and
exclusions section.
    Changes: The exclusions apply to 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 instead of to
[[Page 49825]]
a claim that is not directly and clearly related to the making of the
loan or the provision of educational services by the school. This
revision aligns the exclusions section with the Federal standard and
definition of misrepresentation.
Borrower Defenses--Adjudication Process (Sec. Sec.  685.206 and
685.212)
General
    Comments: Many commenters wrote in support of the proposed
adjudication process. They noted that the process is clear and provides
due process for all parties. These commenters also assert that as
compared with the process in the 2016 final regulations, the proposed
process strikes a fairer balance between individual responsibility and
school accountability.
    Discussion: We appreciate the support of these commenters. For the
reasons described earlier in this document, we agree that our final
rule strikes the right balance.
    Changes: We are adopting, with changes for organization and
consistency, Alternative B for paragraphs (d)(5) Introductory Text and
(d)(5)(i) and (ii) (Affirmative and Defensive) for loans first
disbursed on or after July 1, 2020.
Process
    Comments: Many commenters expressed support for the proposed
process providing an opportunity for schools to respond and provide
evidence when notified of a borrower defense to repayment claim. One
commenter who supported the proposed process noted that it would
provide a clear process for both parties and, thus, enable the
Department an opportunity to render a fair decision, hold appropriate
parties accountable, and greatly reduce abuse of the loan discharge
provision.
    One commenter expressed concern that the Department may require
additional information about the borrower's personal employment history
that is irrelevant to the allegations against a school. This commenter
further asserts that racism impacts the ability to find employment,
causing borrowers of color to appear less deserving of relief.
    Another commenter recommended that the Department employ an initial
review of a borrower's discharge application to determine whether there
is probable cause or jurisdiction to continue the investigation. The
commenter recommended that, if there is insufficient information
provided by the student or there is no jurisdiction, a form letter be
sent to the borrower on the determination that the application has been
closed with no further action by the Department. The borrower may then
file a new application that meets the Department's standards. The
commenter also recommended that the regulation be consistent and align
with Federal regulations under 34 CFR 685.206 and 668.71.
    Some commenters suggested that the Department adopt a principle
from civil litigation that pleadings from parties who are not
represented by an attorney be liberally construed. These commenters
recommend that the Department liberally construe applications from
borrowers who are not represented by an attorney.
    Another commenter asserted that requiring written submissions in
government proceedings can be an undue burden. This commenter asserts
that the Supreme Court of the United States recognized the burden of
requiring written submissions in Goldberg v. Kelley,\101\ and the
Department should recognize this burden and revise its process. This
commenter further noted that the lack of relief in the past may lead
low-income borrowers to believe that it is not worth paying attention
to the Department's notices.
---------------------------------------------------------------------------
    \101\ 397 U.S. 254 (1970).
---------------------------------------------------------------------------
    Discussion: The Department appreciates support from commenters for
our revised process. We agree that these regulations create a more
balanced and fair process. The 2016 final regulations only expressly
gave institutions the opportunity to meaningfully respond pursuant to
the group claims process, assuming the institution was not closed.\102\
The revised process affords institutions the opportunity to respond to
allegations against the institution during the adjudication process for
the borrower's claim. These regulations reduce the likelihood that the
Department and schools will be burdened by unjustified claims or that
taxpayers will bear the cost of wrongly discharged loans.
---------------------------------------------------------------------------
    \102\ 34 CFR 685.222.
---------------------------------------------------------------------------
    The Department will only request information that is or may be
relevant to the defenses that the borrower asserts. As the Department
stated in the 2016 final regulations, the kind of evidence that may
satisfy a borrower's burden will necessarily depend on the facts and
circumstances of each case.\103\
---------------------------------------------------------------------------
    \103\ 81 FR 75962.
---------------------------------------------------------------------------
    The Department does not have sufficient resources to perform a
preliminary review of all claims to assess jurisdiction or sufficiency
of information prior to performing a full review, and such a
preliminary review would unnecessarily divert resources from the timely
review of other claims. Creating such a preliminary review also would
result in giving borrowers numerous attempts to file a satisfactory
application, which could result in additional burden and backlog for
the Department's processing of claims and a delay in awarding relief to
borrowers in a timely manner. The borrower is required to submit a
completed application, which the Department will review during the
regular adjudication process. Incomplete applications will not be
accepted, and borrowers will be notified when the Department is unable
to process an incomplete application. Borrowers may submit another,
completed borrower defense to repayment application within the
limitations period. Borrowers must submit a completed application to
receive Federal student aid and also must submit a completed borrower
defense to repayment application to receive relief.
    The Department revised Sec.  685.206(e)(11)(ii) to clarify that the
Department will not issue a written decision, which is final and not
subject to further appeal, if the Department receives an incomplete
application. Instead, the Department will return the application to the
borrower and notify the borrower that the application is incomplete.
The Department, however, is not precluded, when directed by the
Secretary, from requesting more information from the borrower or the
school with respect to the borrower defense to repayment process.
    The Department is cognizant of how these final regulations will
align with other Federal regulations. The definition of
misrepresentation, at 34 CFR 685.206(e)(3), for the borrower's defense
to repayment application is purposefully different than the definition
of substantial misrepresentation in 34 CFR 668.71(c) for initiating a
proceeding or other measures against the institution. The different
definitions of misrepresentation allow the Department to act in a
financially responsible manner to protect taxpayers. The Department
will discharge a loan, in whole or in part, when a borrower
demonstrates by a preponderance of the evidence a misrepresentation
pursuant to 34 CFR 685.206(e)(3) and financial harm to the borrower;
this provision relates to loan forgiveness for borrowers. The
Department will exercise its enforcement authority against institutions
pursuant to the 34 CFR 668.71(c); this provision relates to the
[[Page 49826]]
Department's enforcement authority against schools.
    As explained in more detail above, the definition of
misrepresentation for Department enforcement actions is broader than
the definition of misrepresentation for borrower defense to repayment
claims because as the latter underpins, in part, the Department's
authority to recover liabilities, guard the Federal purse, and protect
Federal taxpayers.
    Liberally construing pleadings of persons who are not represented
by an attorney is appropriate in a court and is required pursuant to
rules governing judicial proceedings. The Department is not a court of
law and is not conducting a judicial proceeding that requires an
attorney. The Department intends to provide instructions that are easy
to understand and does not expect borrowers to provide legal arguments.
The Department need not liberally construe applications filed by
unrepresented borrowers, as doing so supposes that they are less
capable of completing an application, which the Department does not
believe is the case, however we will use our discretion and expertise,
when necessary, to determine the merits of a borrower defense to
repayment claims.
    In Goldberg v. Kelley, the Supreme Court considered whether a State
may terminate public assistance payments to a particular recipient
without affording the recipient the opportunity for an evidentiary
hearing prior to the termination.\104\ The Supreme Court stated that
the ``opportunity to be heard must be tailored to the capacities and
circumstances of those who are to be heard.'' \105\
---------------------------------------------------------------------------
    \104\ Goldberg, 397 U.S. at 255.
    \105\ Id. at 268-69.
---------------------------------------------------------------------------
    Here, we are describing a process afforded to an individual who had
the opportunity to engage in higher education, meaning their written
submissions are appropriate for students who have been admitted to
institutions of higher education as well as the institutions that they
attended. Such individuals will have received secondary education or
the equivalent of such education. With respect to Parent PLUS loans,
parents who are borrowers have experience in applying for Federal
student aid or other loans and in making other financial decisions.
Requiring written submissions should not be a substantial burden on
borrowers or institutions and allows the Department to easily keep a
record of each party's evidence and arguments. A written record also is
helpful to borrowers or institutions who may wish to later challenge
the Department's determination in court proceedings.
    Unlike the 2016 final regulations, these final regulations require
the Department to consider the borrower's application and all
applicable evidence. The borrower will receive a copy of all applicable
evidence and, thus, will know what evidence the Department relied upon
in making its determination.
    The Department encourages all borrowers to read and pay careful
attention to the Department's notices. The Department will continue to
issue such notices and will strive to make notices easy to understand
and accessible to all borrowers.
    Changes: We are adopting, with changes for organization and
consistency, the approach in Alternative B for paragraphs (d)(5)
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) of
the 2018 NPRM for loans first disbursed on or after July 1, 2020.
    The Department is revising Sec.  685.206(e)(11)(ii) to clarify that
if the Department receives a borrower defense to repayment application
that is incomplete and is within the limitations period in
685.206(e)(6) or (e)(7), it 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.
    Comments: Some commenters recommended that the Department revise
the process to consider applications for borrower defense to repayment
when the Department is already in possession of documents and evidence
relevant to the claim.
    Other commenters noted that the proposed rule indicated that if the
Secretary uses evidence in his or her possession, the school will be
able to review and respond to such evidence, but that borrowers are not
afforded the same opportunity. The commenters request that both parties
to the claim be provided an opportunity to review and respond to all
evidence under consideration in the determination of the claim. One of
these commenters noted that under some States' processes, schools and
borrowers have the opportunity to provide evidence and arguments and to
respond to each other's submissions.
    Other commenters expressed concern that the Department provides
schools, but not borrowers, an opportunity to respond to evidence at
the point in the process where the Department is determining whether to
discharge the borrower's loan.
    Discussion: The Department agrees with the commenters who
recommended that the Department may consider evidence otherwise in the
possession of the Secretary and adopts, with changes for organization
and consistency, the approach in Alternative B for Sec.  685.206(d)(5)
introductory text and (d)(5)(i) and (ii)(Affirmative and Defensive) of
the 2018 NPRM.\106\
---------------------------------------------------------------------------
    \106\ 83 FR 37326.
---------------------------------------------------------------------------
    The Department also agrees with commenters that, subject to any
applicable privacy laws, both the borrower and the institution should
be able to review the evidence in possession of the Secretary that will
be considered in the evaluation of the claim. The Department values
transparency and would like both the borrower and the institution to
have the opportunity to review evidence in possession of the Secretary
and to respond to such evidence. Accordingly, the Department is
revising the regulatory language to expressly state that if the
Secretary considers evidence otherwise in her possession, then both the
borrower and the institution may review and respond to that evidence
and submit additional evidence.
    The Department acknowledges the concern that the borrower should
have an opportunity to review and respond to the school's submission.
The Department stated in its 2018 NPRM that ``the borrower and the
school will each be afforded an opportunity to see and respond to
evidence provided by the other.'' \107\ Accordingly, the Department is
revising the final rule to provide that a borrower has the opportunity
to review the school's submission and to respond to issues raised in
that submission.
---------------------------------------------------------------------------
    \107\ 83 FR 37262.
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    Changes: The Department adopts, with changes for organization and
consistency, the approach in Alternative B for paragraphs (d)(5)
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) of
the 2018 NPRM for loans first disbursed on or after July 1, 2020, and
revises Sec.  685.206(e)(9) to expressly state that the Secretary may
consider evidence in his or her possession provided that the Secretary
permits the borrower and the institution to review and respond to this
evidence and to submit additional evidence. The Department also will
revise Sec.  685.206(e)(10) to provide that a borrower will have the
opportunity to review a school's submission and to respond to issues
raised in that submission. We also make a conforming change in Sec.
685.206(e)(11), to state that the Secretary issues a written decision
after considering ``all applicable evidence'' as opposed to specifying
that
[[Page 49827]]
such evidence would come from the borrower and the school.
Internal or Voluntary Resolution With School
    Comments: One commenter suggested that borrowers should be required
to bring their claims to the school first and provide the school with
an opportunity to clearly explain accountability and legal consequences
to the borrower if the accusation is proven to be false or unfounded.
    Another commenter who suggested we consider a Resolution Agreement
process similar to that used within the Department's Office for Civil
Rights when considering borrower defense claims. The commenter
suggested that this would reduce the burden on the Department's
resources by allowing borrowers and schools to more quickly resolve the
dispute and loan obligations prior to the Department's adjudication
process. Another commenter suggested adding a period of time during
which the borrower and school may meet to voluntarily resolve any
dispute short of commencing with a filed claim.
    A group of commenters recommended a new provision that would
require borrowers seeking to file an affirmative claim to first inform
the school of their concern and give the school time to resolve the
matter.
    One commenter suggested that, if a school is deficient, the
borrower should sue the school to recover the money to repay his
student loans.
    Discussion: The Department encourages institutions to provide an
internal dispute resolution process to resolve a borrower's claims,
including affirmative claims, before the borrower files the claim with
the Department. The benefits of such a process included that the
borrower could seek relief for cash payments, private loans, and 529
plans used to pay tuition. In such a case, should the institution
determine that it should repay some or all of a borrower's loans, these
payments will not be considered as a defaulted loan. The Department,
however, will not require the borrower to go through the institution's
internal dispute resolution process prior to filing an application with
the Department. The borrower retains options to resolve a claim, such
as a traditional court proceeding, arbitration proceeding, or State-
level administrative process, and the Department does not wish to limit
the borrower's ability to choose the best process for them. Likewise,
the Department also does not wish to impose any requirement as to which
process the borrower must go through first. Borrowers are best suited
to determine which process will be most beneficial in their personal
circumstances and will benefit from having options.
    For reasons of administrative burden and resource allocation, we do
not believe it is necessary to include an early dispute resolution
process in these final regulations, whereby the Department or another
party would mediate borrower defense disputes between a borrower and
the school, to attempt to resolve the disputes without the need for the
parties to go through the Department's full borrower defense
adjudication process.
    These final regulations do not prevent a borrower from engaging in
other, existing dispute resolution processes to resolve any claim with
an institution prior to filing an application with the Department. A
borrower and institution also may choose to resolve a claim after the
borrower files an application with the Department. The borrower may
voluntarily withdraw his or her application with the Department if the
borrower resolves a claim with the institution.
    Institutions may disclose any internal dispute resolution process
available to borrowers and explain the benefits of any such process.
Institutions also may disclose the consequences of making a false or
fraudulent allegation in the school's internal dispute resolution
process. The institution, however, should not present the consequences
of making a false or fraudulent allegation with the intent to prevent,
or in a manner that prevents, a borrower from filing a borrower defense
to repayment application with the Department.
    The Department does not prohibit a borrower from filing or require
a borrower to file a lawsuit against an institution. Borrowers may
utilize any process available to them.
    Changes: The Department adopts, with changes for organization and
consistency, the approach in Alternative B for paragraphs (d)(5)
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) of
the 2018 NPRM for loans first disbursed on or after July 1, 2020.
Role of the School in the Adjudication Process
    Comments: Some commenters expressed concern that the proposed
regulation involves schools in a manner that privileges schools with
respect to the adjudicatory process with no gesture towards fairness or
balance for the borrowers.
    One commenter recommended the Department limit the schools' roles
in the process to avoid overrepresentation of institutional interests
to the detriment of harmed borrowers. The commenter noted that
borrowers are at a distinct disadvantage, stating that while the school
maintains records on the student's time at the school, the school's
disclosures to that and other prospective or enrolled students, and
hundreds or thousands of other data points, the student is largely
reliant on his own testimony--and largely dependent on the Department
and other fact-finding agencies to seriously investigate any claims.
The commenter urges the Department to be cautious to protect the
borrower from undue pressure by the school.
    Another commenter urged the Department to make changes to ensure
the process is accessible and equitable to borrowers unrepresented by
an attorney, since the proposed process, in the commenter's view,
stacks unrepresented borrowers against represented schools, does not
allow borrowers to re-apply based on evidence not previously
considered, and will necessitate that borrowers seek guidance as to
what to include in their applications. Some commenters expressed
concern that providing documentation associated with a defense to
repayment claim to a school provides opportunities for schools to
retaliate against a borrower for filing a claim. The commenters
suggested that any act of retaliation should be viewed as evidence to
support the approval of a defense to repayment claim.
    Discussion: The Department believes that its adjudicatory process
fairly balances the interests of institutions and students. The
Department's revisions to the proposed regulations allow both the
borrower and the school the opportunity to see and respond to evidence
provided by the other. The revisions further allow both the borrower
and the school to see and respond to evidence otherwise in the
possession of the Secretary that the Secretary considers in the
adjudication of the claim. Such a process provides both borrowers and
schools with due process protections.
    It is critical that schools be provided an opportunity to respond
to claims made against them so that the Department can adjudicate
claims based on a complete record. It is incumbent upon the borrower to
provide evidence to the Secretary to establish by a preponderance of
the evidence that the school made an act or omission that qualifies as
a basis for borrower defense to repayment relief, and it is reasonable
to provide a school with the opportunity to respond to such claims.
Additionally, if institutions have unknowingly made a misrepresentation
or have an employee who has made
[[Page 49828]]
misrepresentations, the Department's notice to the institution of the
borrower's claim may help the institution implement corrective action
more quickly to ensure that other students are not impacted.
    The Department disagrees that students are largely reliant on their
own testimony to file a defense to repayment claim. The Department
urges students to make informed consumer decisions and treats students
as empowered consumers. While students should request important
information that is relevant to their enrollment decision in writing,
institutional misconduct is never excusable.
    The Department intends to publish instructions for submitting a
borrower defense application that will explain the process and provide
other relevant information to help borrowers successfully complete the
application.
    The Department acknowledges that institutions are more likely than
students to have access to paid legal counsel, but a student will not
need paid legal counsel to submit a borrower defense to repayment
application. Institutions almost always are more likely than students
to have access to paid legal counsel, but students do not need an
attorney to file a claim with the Department's Office for Civil Rights
and similarly will not need an attorney to submit a borrower defense to
repayment application. Of course, students may seek help from legal aid
clinics or take advantage of services from numerous student advocacy
groups in submitting a borrower defense to repayment application.
Additionally, institutions do not need to employ counsel to respond to
a borrower's application and may choose to have staff--for example,
staff in their Financial Student Aid office or admissions office--
submit a response to the Department. Moreover, by adopting a
preponderance of the evidence standard, the Department believes that a
student should reasonably and more easily be able to satisfy that
standard.
    To address concerns that a student may have discovered evidence
relevant to a borrower defense to repayment claim through a lawsuit or
an arbitration proceeding, the Department revised section 685.206(e)(7)
to state that the Secretary may extend the three-year limitations
period when a borrower may assert a defense to repayment under section
685.206(e)(6) or may reopen the borrower's defense to repayment
application to consider evidence that was not previously considered in
the exceptional circumstance when there is a final, non-default
judgment on the merits by a State or Federal Court that establishes
that the institution made a misrepresentation, as defined in Sec.
685.206(e)(3), or a final decision by a duly appointed arbitrator or
arbitration panel that establishes that the institution made a
misrepresentation, as defined in Sec.  685.206(e)(3). In this
exceptional circumstance, the Secretary may extend the time period when
a borrower may assert a defense to repayment or may reopen a borrower's
defense to repayment application to consider evidence that was not
previously considered.
    The Department agrees that students should not suffer retaliatory
acts by institutions that have been accused of misrepresentation, and
the Department does not tolerate retaliation. The Department may
consider evidence of any retaliatory acts by the institution in
evaluating the borrower's application. The borrower may submit evidence
of any such retaliatory acts to the Department. The Department is
revising the proposed regulations to allow the borrower to file a reply
to address the issues and evidence raised in the school's submission as
well as any evidence otherwise in the possession of the Secretary that
the Department will consider. The borrower's reply will be the final
submission, and the final regulations do not provide the school with
the opportunity to file a sur-reply. In this sense, the student will
have the final word and may report any retaliatory acts to the
Department. The Department also is not listing the types of information
that the school may receive in these final regulations as proposed in
the 2018 NPRM. The school will still receive the student's application
as well as any evidence otherwise in the possession of the Secretary
and used to adjudicate a borrower defense claim, but the language
listing the information the school will receive is unnecessary. These
revisions provide a more equitable balance and address the commenters'
concerns.
    Changes: The Department adopts, with changes for organization and
consistency, the approach in Alternative B for paragraphs (d)(5)
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive)
for loans first disbursed on or after July 1, 2020. As noted above, the
Department revised Sec.  685.206(e)(7) to provide that the Secretary
may extend the time period when a borrower may assert a defense to
repayment under Sec.  685.206(e) or may reopen the borrower's defense
to repayment application to consider evidence that was not previously
considered in two exceptional circumstances. The borrower may now file
a reply that addresses the issues and evidence raised in the school's
submission as well as any evidence otherwise in possession of the
Secretary. Additionally, the Department will no longer list the types
of information that the school may receive as proposed in Sec.
685.206(d)(8)(i) because the final regulations expressly state the
information the school will receive in Sec.  685.206(e)(10).
Timelines
    Comments: Several commenters requested the Department include
specific timeframes within which various steps of the adjudication
process would occur. Many commenters recommended a 45-day interval for
a school to respond to a borrower's claim, a 30-day interval for the
borrower to reply to the school's initial response, and an additional
15-day interval for the school to submit any new evidence as a result
of the borrower's reply. Other commenters proposed different timeframes
for a school's response, a borrower's reply, and/or the resolution of
the claim.
    Other commenters noted that the proposed process changes are
described by the Department as a means to reduce the time required to
review claims because it would discourage frivolous claims. The
commenters note that most of the currently pending claims are supported
by evidence in the Department's possession. They further assert that
the proposed process requires a review of voluminous paperwork prepared
by counsel for the school, which is likely to slow rather than expedite
the adjudication process.
    Some commenters who supported the proposed process expressed
concern that the regulation did not include specific information
regarding how final determinations would be made or timeframes for the
adjudication of claims.
    Discussion: The Department appreciates the recommendations made by
commenters but does not believe that the proposed time limits would be
appropriate in certain circumstances. For instance, the Department most
likely could not adhere to the proposed time limits if a large number
of defense to repayment claims were submitted to the Department
simultaneously, which could be the case if an outside entity organized
a particular group of students to submit claims en masse.
    The Department agrees that it is reasonable to prescribe a
timeframe for an institution's response and the borrower's reply and
intends to do so in the instructions for the defense to repayment
application and the notice to the institution. In response to these
[[Page 49829]]
comments, the Department revised Sec.  685.206(e)(16)(ii) to specify
that the Department will notify the school of the defense to repayment
application within 60 days of the date of the Department's receipt of
the borrower's application. This revision makes clear that the school
will receive the borrower's application in a timely manner.
    The Department also revised Sec.  685.206(e)(10)(i) to state that
the school's response must be submitted within a specified timeframe
included in the notice, which shall be no less than 60 days. To give
the borrower as much time as the school, the Department also revised
Sec.  685.206(e)(10)(ii) to give the borrower no less than 60 days to
submit a reply after receiving the school's response and any evidence
otherwise in the possession of the Secretary. Although commenters
suggested a timeframe less than 60 days for the school's response and
the borrower's reply, the Department would like to give both borrowers
and schools ample and equivalent time to review and respond to each
other's submissions. The Department realizes that borrowers and schools
have other matters to attend to and would like both borrowers and
schools to have sufficient time to compile records to support their
respective submissions. These timeframes also reduce the administrative
burden on the Department. Because of potential process changes over
time, the Department will provide more specific instructions in the
application and notice to institutions and students rather than in the
final regulation.
    The Department does not agree that it has all of the evidence
required to adjudicate borrower defense claims in its possession. For
example, for one college, the Department did not complete an
investigation of the documents provided by the institution, but relied
on the California Attorney General to review some of the documents and
draw conclusions. It was the California AG's conclusions, and
subsequent allegations, that prompted the Department to take action.
The Department must also assess financial harm for each pending claim
and may not immediately have all the relevant evidence necessary to
make such a determination.
    As stated in the 2018 NPRM, the Department is committed to
providing both borrowers and schools with due process and affords both
the borrower and the institution the opportunity to see and respond to
evidence provided by the other. We are revising the final regulations
to expressly afford the borrower an opportunity to file a reply to
address the issues and evidence in the school's submission as well as
any evidence otherwise in the possession of the Secretary.
    The Department's regulations at Sec.  685.206(e)(3) provide how
determinations will be made and examples of evidence of
misrepresentation. Although such a process may be longer, this approach
provides a fair and more equitable process for both borrowers and
institutions.
    Changes: The Department adopts, with changes for organization and
consistency, the approach in Alternative B for paragraphs (d)(5)
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive)
for loans first disbursed on or after July 1, 2020. The Department is
also revising at Sec.  685.206(e)(10) to allow the borrower to file a
reply to address issues and evidence in the school's submission as well
as any evidence otherwise in the possession of the Secretary.
    The Department revised Sec.  685.206(e)(16)(ii) to specify that the
Department will notify the school of the defense to repayment
application within 60 days of the date of the Department's receipt of
the borrower's application. The Department also revised Sec.
685.206(e)(10)(i) to state that the school's response must be submitted
within a specified timeframe included in the notice, which shall be no
less than 60 days.
    Comments: Some commenters sought assurance that, while a borrower's
defense to repayment claim is pending, the borrower's loans should be
placed in forbearance so that no additional financial burden accrues
while the claim is being adjudicated.
    One commenter suggested that we include a provision that would
forgive a borrower's interest accrual when the adjudication timeline is
not met by the Department. The commenter asserts that this would be a
show of good faith to borrowers, assuring them the Department will
process claims in a reasonable timeframe, and that borrowers will not
be the ones to pay the price if it does not.
    Discussion: As explained above, the Department is willing to place
claims into administrative forbearance while a claim is pending. The
Department determined that the accrual of interest while a loan is in
administrative forbearance would deter a borrower from filing an
unsubstantiated borrower defense to repayment application.
    The Department is changing the procedures to process borrower
defense to repayment applications in these regulations. As stated in
the 2016 final regulations, we are still unable to establish specific
timeframes for processing claims. Neither these final regulations nor
the 2016 final regulations set a timeline for the Department's
adjudication. Nonetheless, the Department will strive to efficiently
resolve all borrower defense to repayment applications in a timely
manner. In lieu of forgiving a borrower's interest accrual, the
Department will place the loans in administrative forbearance while the
borrower defense to repayment application is pending. As explained,
above, the Department wishes to deter borrowers from filing
unsubstantiated borrower defense to repayment claims, and interest
accrual will serve as a deterrent. Automatically placing loans in
administrative forbearance is a compromise from the Department's
position in the 2018 NPRM, proposing to require borrowers to request
administrative forbearance separately from the borrower defense to
repayment application. Automatically granting administrative
forbearance to borrowers who complete and submit a borrower defense to
repayment application is a sufficient response to the concern raised by
the commenter about interest accrual.
    Changes: The Department adopts, with changes for organization and
consistency, the approach in Alternative B for paragraphs (d)(5)
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive)
for loans first disbursed on or after July 1, 2020. The Department is
amending Sec.  685.205(e)(6) for loans to be placed in administrative
forbearance for the period necessary to determine the borrower's
eligibility for discharge under Sec.  685.206, which includes the
borrower defense to repayment regulations in these final regulations.
Appeals
    Comments: Several commenters advocated for the inclusion of an
appeals process for schools when a borrower defense to repayment claim
is approved by the Department and for borrowers when a claim is denied.
These commenters argued that, under the proposed regulations, a school
seeking review of an approved borrower defense to repayment claim would
be required to appeal their case in Federal court and create too high a
bar for both borrowers and schools. The commenters assert that a non-
appealable decision by the Department is an affront to the basic
elements of due process rights of schools accused of misrepresentation
by former students.
    One commenter requested an appeal be specifically permitted when
new
[[Page 49830]]
evidence comes to light. This commenter noted that, in a rule that
requires borrowers to demonstrate intent, knowledge, or reckless
disregard to meet the Federal standard for loan discharge, evidence is
likely to come from State and Federal investigations spurred by
borrower complaints, and with the extremely limited filing deadline
that had been proposed, the taxpayer risk of that reconsideration is
minimal.
    Some commenters expressed general concern that the adjudicatory
process does not allow borrowers to reapply based on new evidence.
These commenters inquired whether borrowers who have received denials
will be permitted to submit new applications with new evidence. These
commenters suggested that to the extent the Department denies borrower
defense applications for failure to state a claim, the Department
should notify the borrower of the reason for the denial in writing and
should allow for reconsideration if a new application with new evidence
is submitted.
    Another commenter asserted that it is unjust to provide schools,
and not students, greater due process rights, including the ability to
appeal a Department's decision.
    Discussion: The Department does not believe it is necessary add an
appeals process to the adjudication process, nor does due process
require an appeal. The Department provides both the borrower and the
school the opportunity to see and respond to evidence provided by the
other, which its current procedures for adjudicating borrower defense
to repayment claims do not require. Additionally, the Department is
providing both borrowers and institutions an opportunity to review and
respond to evidence otherwise in possession of the Secretary that is
used to adjudicate the claim.
    It is incumbent upon borrowers and schools to provide as much
information as possible when making or responding to a borrower defense
claim, and these final regulations provide a fair and equitable process
for both parties. A party may challenge the Department's decision
through a judicial proceeding, and courts are required to liberally
construe pleadings of a party who is not represented by an attorney.
Additionally, the Department is not the only avenue of relief for a
borrower; the borrower may pursue relief through his or her State
consumer protection agency or avail himself or herself of other
consumer protection tools.
    Although the Department does not allow borrowers to submit an
appeal, reapply, or request reconsideration of the application, the
Department made certain revisions to address concerns about newly
discovered evidence. As stated above, the Department revised Sec.
685.206(e)(7) to state that the Secretary may extend the time period
when a borrower may assert a defense to repayment under Sec.
685.206(e) or may reopen the borrower's defense to repayment
application to consider evidence that was not previously considered in
the exceptional circumstance when there is a final, contested, non-
default judgment on the merits by a State or Federal Court that
establishes that the institution made a misrepresentation, as defined
in Sec.  685.206(e)(3), or a final decision by a duly appointed
arbitrator or arbitration panel that establishes that the institution
made a misrepresentation, as defined in Sec.  685.206(e)(3).
    This exceptional circumstance allows the borrower to reapply and
provide newly discovered evidence to the Department for consideration.
Additionally, as explained in the section regarding pre-dispute
arbitration agreements, the limitations period will be tolled for the
time period beginning on the date that a written request for
arbitration is filed, by either the student or the institution, and
concluding on the date the arbitrator submits in writing, a final
decision, final award, or other final determination to the parties.
Tolling the limitations period for such a pre-dispute arbitration
arrangement between the school and the borrower will allow the borrower
to discover evidence that may potentially be used in a borrower defense
to repayment application and also provide the school with the
opportunity to resolve the claim without cost to the taxpayer. Finally,
the Department is providing a more robust borrower defense to repayment
process in allowing both borrowers and schools to view and respond to
each other's submissions. This robust process will make it less likely
that there will be newly discovered evidence.
    As stated above, the Department does not have sufficient resources
to perform a review of claims to assess whether the borrower failed to
state a claim and to allow for reconsideration if a second application
with new evidence is submitted. Such a process will unnecessarily
divert resources from the timely review of other claims. Such a process
also will result in giving borrowers countless attempts to file a
satisfactory application. The borrower is required to submit a
completed application, which the Department will review during the
regular adjudication process.
    The Department's process also does not provide schools with an
appeal. The Department may choose to initiate a proceeding to require a
school whose act or omission resulted in a successful borrower defense
to repayment to pay the Department the amount of the loan to which the
defense applies. The recovery proceeding, which would be conducted in
accordance with 34 CFR part 668 subpart G, is not an appeal.
    Changes: The Department adopts, with changes for organization and
consistency, the approach in Alternative B for paragraphs (d)(5)
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive)
for loans first disbursed on or after July 1, 2020. As noted above, the
Department revised Sec.  685.206(e)(7) to provide that the Secretary
may extend the time period when a borrower may assert a defense to
repayment under section 685.206(e) or may reopen the borrower's defense
to repayment application to consider evidence that was not previously
considered in two exceptional circumstances. The Department is revising
Sec.  685.206(e)(10) to provide that a borrower will have the
opportunity to review a school's submission and to respond to issues
raised in that submission. The proposed regulations also are further
revised to give the borrower an opportunity to file a reply that
addresses the issues and evidence raised in the school's submission as
well as any evidence otherwise in possession of the Secretary.
Independence of Hearing Officials and Administrative Proceeding
    Comments: Some commenters suggested that the Department use
Administrative Law Judges (ALJs) to review and make determinations on
borrower defense to repayment claims. These commenters argued that ALJs
are legal professionals and would provide a level of assurance to all
parties that the process is fair. Some commenters also argued that
administrative review by ALJs instead of a review by Department staff
will insulate schools from any political bias and asserted that the
Department's staff varies based on the President's administration.
    One commenter recommended that an ALJ make the determination on a
claim, and that the parties be permitted to appeal this determination
within a specified time. This commenter would require the Department to
issue the determination on appeal in a manner consistent with the
publication of decisions from the Department's Office of Hearings and
Appeals (OHA). Neither party would be able to appeal the determination
to the Secretary.
[[Page 49831]]
    Other commenters expressed concern that the adjudication process
creates a conflict of interest within the Department, since the
Department would be responsible for advocating on behalf of borrowers
and determining the outcome of the case. These commenters urged the
Department to ensure the independence of decision makers involved in
borrower relief determinations.
    Discussion: We believe that, under the 2016 final regulations, the
Department held too much power in that the Secretary could both
initiate group claims and adjudicate appeals of those claims, and the
institution, assuming the institution did not close, would have a
limited opportunity to respond to the Department's allegations in the
group claim process. Under these final regulations, only a borrower may
initiate a claim, and both the borrower and the institution always have
the opportunity to provide evidence to support their positions. Because
the Secretary is required to provide to borrowers and institutions any
additional evidence in their possession and that is used to adjudicate
a claim, there is a greater level of transparency in the adjudication
process.
    In contrast to the 2016 final regulations, these final regulations
do not provide a process for the Secretary to initiate a claim. Section
455(h) of the HEA expressly states that the ``Secretary shall specify
in regulations which acts or omissions of an institution of higher
education a borrower may assert as a defense to repayment of a loan
made under this part.'' (emphasis added) We believe the better reading
of Section 455(h) of the HEA is for the Department to adjudicate only
borrower-initiated defense to repayment claims. We believe this will
result in the adjudication of such claims being more balanced and less
influenced by changes in Department policy.
    Through these final regulations, the Department is providing a fair
and equitable process that does not require OHA or ALJs for the
determination of a borrower defense to repayment claim. The Department
has learned through processing tens of thousands of defense to
repayment claims that there are not sufficient resources to subject
each claim to an overly-extensive administrative procedure, burdening
students and delaying the timely adjudication of claims. The Department
believes that including the OHA in the process of adjudicating claims
would create a regulatory process that is more costly for the
Department to administer and could create the false impression that the
claim or the determination are subject to a hearing and appeal, which
is not the case.
    The Department appreciates the suggestion regarding the
incorporation of an administrative law judge in the borrower defense
process, but we have determined, as above, that this would
unnecessarily complicate, make more expensive, and create confusion
about the availability of a hearing and appeal.
    The commenter's inclusion of an ALJ would not change the
Department's calculation of not including an appeals process in these
final regulations, as explained in the previous section.
    The Department does not advocate on behalf of the borrower or the
school. The Department is a neutral arbiter and will consider the
evidence submitted by both the borrower and the institution.
Additionally, the Department will provide both the borrower and the
school with any evidence otherwise in the possession of the Secretary,
and both parties will have an opportunity to respond to such evidence.
    Changes: The Department adopts, with changes for organization and
consistency, the approach in Alternative B for paragraphs (d)(5)
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive)
for loans first disbursed on or after July 1, 2020.
Borrower Defenses--Relief (Sec.  685.206)
General
    Comments: One commenter suggested amendments to the proposed
regulations to require that, in the case of an approved borrower
defense to repayment, the Secretary reverse an affected loan's default
status and reinstate the borrower's eligibility for title IV aid, and
update reports to consumer reporting agencies to which the Secretary
had previously made adverse credit reports regarding the loan. The
commenter noted that proposed regulations provide that the Secretary
may take such actions and stated that regardless of whether both
affirmative and defensive claims are allowed, the Secretary should
always reverse an affected loan's default status and any adverse credit
reports as well as recalculate a borrower's eligibility period for
which the borrower may receive Federal subsidized student loans.
    Discussion: The Department's practice has been, and currently is,
that if the Department had previously made adverse credit reports to
consumer reporting agencies regarding a Federal student loan that is
the subject of an approved borrower defense application, the Department
will take the appropriate steps to update those credit reports.
Similarly, it is the Department's practice that, if appropriate, the
necessary steps will be taken to reinstate the borrower's eligibility
for title IV aid.
    The Department revised the regulations to expressly provide that
the relief awarded to a borrower will include updating 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. Additionally,
the Department is revising the regulations to reference that as part of
any further relief the borrower may receive, the Department will
eliminate or recalculate the subsidized usage period that is associated
with the loan or loans discharged, pursuant to 34 CFR
685.200(f)(4)(iii). The Department did not rescind the revisions made
to 34 CFR 685.200 through the 2016 final regulations. The Department
also is clarifying that the list of further relief a borrower may
receive is an exclusive list.\108\
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    \108\ The exclusive list of further relief is located at Sec.
685.206(e)(12)(ii). Further relief includes one or both of the
following, if applicable: (1) Determining that the borrower is not
in default on the loan and is eligible to receive assistance under
title IV; and (2) eliminating or recalculating the subsidized usage
period that is associated with the loan or loans discharged pursuant
to Sec.  685.200(f)(4)(iii).
---------------------------------------------------------------------------
    However, such steps may not be applicable for all approved borrower
defense applicants. For example, we do not anticipate that all approved
borrower defense applicants will have been subject to adverse credit
reporting as a result of a defaulted Federal student loan. Similarly,
not all approved borrower defense applicants will need a determination
that they are not in default on their loans because there may be
borrowers who are not in a default status and who apply for borrower
defense discharges.
    We also do not believe it is appropriate to expressly require in
the final regulations that the Secretary recalculate a borrower's
eligibility period for which the borrower may receive Federal
subsidized student loans. Not all borrowers may have received
subsidized Federal student loans, so such an action would not be
relevant to all borrowers. Further, the changes made to Sec.
685.200(f) (2017) by the 2016 final regulations, which are now
effective, require that the Department recalculate the period for which
the borrower may receive Federal subsidized student loans if a borrower
receives a borrower defense to repayment discharge and sets forth the
specific conditions for when the recalculation may occur. As a result,
we
[[Page 49832]]
believe it is appropriate to designate the recalculation of a
borrower's subsidized Federal student loan eligibility period as
further relief that may be provided by the Secretary if a borrower
defense to repayment application is approved.
    For clarity only, we have moved the phrase ``reimbursing the
borrower for amounts paid toward the loan voluntarily or through
enforced collection'' from the list of potentially applicable further
relief in Sec.  685.206(e)(12)(ii) to the section on borrower defense
relief in Sec.  685.206(e)(12)(i). If applicable, this item would be
part of borrower defense relief itself, so the Department believes
including it in the list of further relief could be confusing.
    Changes: As noted above, we moved ``reimbursing the borrower for
amounts paid toward the loan voluntarily or through enforced
collection'' from the list of potentially applicable further relief in
Sec.  685.206(e)(12)(ii) to the paragraph describing borrower defense
relief in Sec.  685.206(e)(12)(i). Additionally, the Department revised
the regulations to note that ``relief'' and not ``further relief''
includes updating credit 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 in Sec.  685.206(e)(12)(i). The Department revised
Sec.  685.206(e)(12)(ii)(B), which concerns further relief, to
reference 34 CFR 685.200(f)(4)(iii), which address subsidized usage
periods. Finally, the Department revised Sec.  685.206(e)(12)(ii) to
clarify that the list of ``further relief'' is an exclusive list.
Partial Discharges
    Comments: Several commenters supported the Department's position
that a partial loan discharge as relief for an approved borrower
defense application would be warranted in some circumstances. One such
commenter stated that that the proposed process would provide fair
compensation to borrowers and tiers of relief to compensate borrowers
as necessary. Another commenter asserted that the proposed approach, in
allowing for partial relief, would provide the Department with
flexibility in providing borrowers with relief. This commenter
expressed support for a tiered method of relief that had been developed
by the Department in 2017 based upon a comparison of earnings between a
borrower defense claimant to earnings of graduates in a similar
program. The commenter also supported adopting this methodology for
calculating partial relief for the purposes of this regulation. One
commenter asserted that relief should be based on the degree of harm
suffered by a borrower.
    Several commenters, in support of the provision of partial relief,
suggested that partial relief should be limited to the amount of
tuition paid with the Federal student loan and not include funds
received for living expenses. One such commenter stated that relief
should not be capped at the total cost of a student's attendance at the
school, as opposed to the total amount of tuition and fees. This
commenter asserted institutions should not be held responsible for
portions of a Direct Loan, up to the full cost of attendance, including
the student's living expenses, because schools are unable to limit the
amount of Direct Loans students may choose to take out to support their
living expenses under the Department's regulations. This commenter also
argued that the nexus between a school's act or omission, underlying a
borrower defense to repayment, is more attenuated than the nexus
between the act or omission and the tuition and fees charged by the
institution. This commenter stated that it is difficult to see how a
claim based on an act or omission relating to the provision of
educational services, as required under the proposed regulations, could
be connected to a Direct Loan used to pay for living expenses given
that the amount of such a loan is controlled by the Department's loan
limits and the student's decisions.
    Many commenters advocated full relief, in the form of a complete
discharge of a borrower's remaining Direct Loan balance and a refund of
payments made, for borrowers who demonstrate that they qualify for
borrower defense to repayment relief. Some of these commenters
supported full relief for approved applications in each instance, and
others supported establishing a presumption of full relief.
    Many commenters argued that any effort to determine a partial loan
discharge amount would lead to the inconsistent treatment of borrowers;
be subjective, costly, time-consuming, and difficult to administer; add
to the burden on the Department; and unnecessarily delay the
Department's provision of borrower defense relief. One group of
commenters stated that a calculation of partial relief based upon a
borrower's degree of harm suffered would be speculative because most
students would not have enrolled had the school made truthful
representations. One commenter stated that full relief should be
provided, given the profit the Department receives from the student
loan program.
    Generally, some of the commenters who objected to the Department's
position that a partial loan discharge would be warranted in some
circumstances argued that borrowers who had demonstrated
misrepresentation by their school would have been harmed in many ways
and incurred financial harm, and non-financial harms, beyond the
obligation to repay a Federal student loan. As a result, even full
relief from the Department through the borrower defense process would
be insufficient to remedy students' injuries.
    One group of commenters asserted that under State unfair and
deceptive practices laws that have traditionally been the primary basis
for borrower defense claims, all such types of direct and consequential
damages and pecuniary as well as emotional harms may provide a basis
for relief. According to these commenters, such relief may include
relief exceeding the amount paid for the service or good.
    Several commenters suggested that the Department adopt an approach
similar to that used by enforcement agencies and financial regulators
when consumers have been fraudulently induced to take on other types of
consumer debt. Those other regulators, stated one of the commenters,
seek to unwind the transaction and put borrowers in the same position
they would have been absent fraud. This commenter stated that partial
relief in accordance with an unspecified methodology on the basis of
the value provided by the services received would be difficult to
determine and deviates from the approach used by financial regulators.
    In arguing for a full relief approach, several commenters stated
that allowing partial relief would establish a presumption that the
education provided by a school that has been found culpable of
wrongdoing has some value to the borrower. These commenters stated that
the provision of partial relief would reduce the Department's incentive
to ensure it is properly monitoring schools to prevent misconduct and
harm both borrowers and taxpayers.
    Commenters urged the Department to abandon its proposal to provide
partial relief stating that the Department spent three years trying to
develop a methodology to calculate partial discharges and have been
unsuccessful in devising a fair and consistent way to do so. These
commenters suggested that, consistent with closed school and false
certification loan discharges, the
[[Page 49833]]
borrowers should receive full discharges of the Federal student loans
associated with their defense to repayment claim. One group of such
commenters disagreed with the Department's rationale in the NPRM for
why full relief is justified for the false certification and closed
school processes, but not for the borrower defense process. These
commenters asserted the Department's rationale that the false
certification and closed school discharge processes are straightforward
as compared to the borrower defense process. This group of commenters
also stated that if the Department is unwilling to provide full relief
for all approved borrower defense claims, the Department should
simplify the relief process and ensure that borrowers receive
consistent relief, such as by establishing a presumption of full
relief. Where full relief is not warranted, the commenters suggested
that the Department be required to explain in writing the basis for its
decision and provide the borrower with an opportunity to respond.
    One group of commenters asserted that it was incumbent upon the
Department to clearly delineate the conditions borrowers would need to
meet in order to receive partial or full relief. The commenters noted
that, given the burden the Department proposed to impose upon borrowers
to assert a successful claim, providing full relief for the borrower
and recovering those funds from the school remains the appropriate
action for the Department to pursue. The commenters further asserted
that there are a number of reasons to doubt the Department's ability to
make fair and accurate determinations of the degree of financial harm
suffered by each individual borrower, and stated that any such
determination would need to account for a wide range of factors that
could include the borrower's education and employment history, the
regional unemployment rates both overall and in the borrower's career
field, and numerous other circumstances that directly impact an
individual's earnings potential. The commenters asserted that, even if
these factors could be reliably measured and some income gain
determined to exist, that gain would then need to be measured against
the expenditures the borrower put towards his or her program. The
commenters noted that, as evidence of the inherent complexity of this
method, the proposed rule referenced the serious difficulties the
Department faced in attempting to create a formula to address this, and
resultantly, does not include a proposed formula. The commenters also
referenced the Department's claim of the associated administrative
burden imposed by reviewing the tens of thousands of borrower defense
claims that have been asserted in recent years and noted that, setting
aside the significant challenges inherent in attempting to make these
determinations at all, that doing so on the scale considered would
greatly increase the time and difficulty involved in processing each
claim, adding enormously to the burden on the Department and further
delaying the expeditious review of claims.
    Another commenter expressed confusion as to why the borrower's
financial circumstances would be considered in determining the amount
of relief to which he was entitled. The commenter agrees that a
borrower's choice not to pursue a field related to their course of
study at a school or periods of unemployment due to regional economic
circumstances should not be a basis for relief, but was concerned that
the language offered in the proposed regulation would create
inequitable outcomes for borrowers who experienced the same
misrepresentations, but had more successful outcomes than others. The
commenter asserts that a borrower's relief in the case of proven
misrepresentation should in no way be based on whether the borrower was
savvy enough to pursue a different field, transfer schools, live in a
more economically advantageous region, or be simply more fortunate than
other borrowers. The commenter recommends that a borrower should have
to show harm to receive a loan discharge, and that the measure of that
harm should in no way be linked to an individual's life choices or
circumstances, but instead on the harm that resulted from the
fraudulent activities of the school.
    Commenters asked whether the Department could approve a borrower
defense discharge and subsequently determine that the amount of
financial relief to be provided would be zero. The commenters also
asked whether borrower defense claims could be made on the basis of
misrepresentations about job placement, exam passage rates, and the
transferability of credits.
    One commenter stated that if a borrower has been harmed, or will
clearly suffer harm, as a result of a school's misrepresentation, full
relief should be provided. This commenter asserted that partial relief
should be provided only in very limited cases where the value of the
harm is directly related to the misrepresentation.
    One commenter expressed concerns about tax implications and credit
reporting for partial relief awards. The commenter stated that while a
rescission of a transaction may not result in taxable income for
borrowers as a ``purchase price adjustment'' and lead to the deletion
of the related tradeline from a borrower's credit report, the
Department's proposed rule would not offer borrowers such protections.
    One commenter requested the Department more clearly articulate how
partial relief would be applied in the case of a defensive claim
asserted as to a defaulted loan. Specifically, this commenter asked
whether the Department would strike the borrower's record of default
and if the borrower would be obligated to pay for collection costs on
the partial relief provided.
    Discussion: The Department appreciates the support of commenters
regarding its proposal to provide for partial loan relief, if
warranted, in these final regulations, which is consistent with the
existing regulation at 34 CFR 685.222(i). As we stated in 2016, given
the Department's responsibility to protect the interests of Federal
taxpayers as well as borrowers, we do not believe that full relief is
appropriate for all approved borrower defense claims, nor do we believe
that it is appropriate to establish a presumption of full relief.\109\
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    \109\ See 81 FR 75973-75976.
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    We acknowledge that an approach that allows the Department to make
determinations of partial relief may be more administratively
burdensome and time-consuming because it involves a more complicated
analysis than an approach that assumes full relief. However, given the
taxpayer and borrower interests at issue, as well as those of current
and future students who will bear the cost of an institution's
repayment of the claim to the Department, we continue to believe that
an approach that provides the Department with the flexibility to
provide partial relief, if warranted, strikes an appropriate balance
between these interests.
    The Department agrees that not every borrower who experiences a
misrepresentation suffers the same amount or types of harm, for a
variety of reasons including those listed by commenters. However, since
the degree of financial harm suffered is critical to the determination
of defense to repayment relief for the reasons explained above, the
Department must take this into consideration when awarding relief. It
is impossible to know whether all borrowers who attended the same
institution experienced the same misrepresentation, relied on that
[[Page 49834]]
information to make the same decision(s), or were harmed by the
misrepresentation in the same way or to the same degree.
    As the Department explains in one of the examples for how relief
may be determined for substantial misrepresentation borrower defense
claims in Appendix A corresponding to section 685.222 of the 2016 final
regulations, a borrower would not be eligible for defense to repayment
relief even if an institution was proven to have misrepresented the
truth, if the student still received an education of value. For
example, presume a prestigious law school misstated its full-time
employment rate six months after graduation by 20 percent, but the
borrower graduated, obtained and maintained employment as an attorney,
and has above average earnings; and the school has maintained its
strong reputation. In this case, the Department may determine,
notwithstanding other evidence, that the institution made a
misrepresentation related to the making of a Direct Loan for enrollment
at the school; however, given the facts of this hypothetical, the
Department could also determine that the borrower was not harmed by the
misstatement of the placement rates.
    It is possible that a successful borrower defense claim could be
based upon evidence of an institutional misrepresentation of job
placement rates, exam passage rates, the transferability of credits, or
other similar factors, if it is related to the making of a Direct Loan
for enrollment at the school.
    Although we are now adopting a new misrepresentation standard for
loans first disbursed on or after July 1, 2020 that does not
incorporate Appendix A from the 2016 final regulations, the same
principle of educational value from that example applies.
    We disagree that such an approach would be subjective and lead to
the inconsistent treatment of borrowers. As we stated in 2016,
administrative agency tribunals and State and Federal courts commonly
make relief determinations, and the proposed process provides
Department employees reviewing borrower defense applications with the
same discretion that triers-of-fact in other fora have.\110\
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    \110\ See 81 FR 75975.
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    Nor do we believe that a determination of partial relief, if
warranted, under the proposed regulations would be speculative. Under
Sec.  685.206(e)(8), a borrower would be required to state the amount
of financial harm that they claim to have resulted from the school's
action and to supply any supporting relevant evidence. Given that
applicants will provide information regarding the amount of their
financial harm, the Department believes that it will be able to make
relief determinations in a reasonable manner and has retained this
requirement in these final regulations.
    Upon further consideration, the Department revised Sec.
685.206(e)(12)(i) to clarify that the amount of relief that a borrower
receives may exceed the amount of financial harm, as defined Sec.
685.206(e)(4), that the borrower alleges in the application pursuant to
Sec.  685.206(e)(8)(v) but cannot exceed the amount of the loan and any
associated costs and fees. The Department realizes that the school's
response and any evidence otherwise in the possession of the Secretary
may reveal that a borrower's allegation of financial harm is too low.
    Accordingly, the Department revised Sec.  685.206(e)(12)(i) to
expressly note that in awarding relief, the Secretary shall consider
the borrower's application, as described in 685.206(e)(8), which
includes any payments received by the borrower and the financial harm
alleged by the borrower, as well as the school's response, the
borrower's reply, and any evidence otherwise in the possession of the
Secretary, as described in Sec.  685.206(e)(10). The Department did not
intend to limit its award of relief to the financial harm that the
borrower alleges. The Department also did not intend to limit its
ability to award relief to consideration of the financial harm that the
borrower alleges.
    We acknowledge that borrowers subjected to the same
misrepresentation may suffer differing degrees of financial harm.
However, given the Department's interests as explained above, we do not
believe it is inequitable to provide each borrower defense applicant
with a meritorious claim with relief that may account for the
borrower's degree of harm or injury and is in accord with the approach
taken by the courts under common law.
    The Department disagrees that a full relief approach should be
taken because of any profit made by the Federal government on the
Federal student aid programs. The Department is responsible for the
interests of all Federal taxpayers whose taxes fund the Federal student
aid programs, and as stated above, the Department believes an approach
that balances those interests with those of borrowers seeking borrower
defense relief is best served by taking an approach to relief that
would allow for partial relief, if warranted, whether the loan program
proves profitable or not.
    While we understand that some enforcement agencies and/or financial
regulators may seek ``full relief'' for consumers under Federal or
State consumer protection law, as pointed out by some commenters, such
agencies are not directly responsible, as the Department is, for the
administration of a Federal benefit program funded by Federal taxpayer
dollars. We also understand that under some State consumer protection
laws, consumers may be able to receive similar relief. However, we do
not believe such an approach is appropriate for the borrower defense
process given the Department's responsibility to Federal taxpayers. The
Department does not possess the authority to authorize relief beyond
the monetary value of the loan made to the borrower. We note that
nothing in Department's regulations precludes borrowers, who are
unsatisfied with the amount of relief they receive, from seeking such
relief directly from their schools through the Federal or State court
systems under Federal or State consumer protection law.
    We decline at this time to include a specific relief methodology
for borrower defense claims asserted under the misrepresentation
standard for loans first disbursed on or after July 1, 2020, or to
include further conceptual examples such as those in appendix A to 34
CFR 668, part 685. While the Department will continue to consider the
borrower's cost of attendance and the value of the education provided
by the school for borrower defense claims asserted under the
substantial misrepresentation standard for loans first disbursed on or
after July 1, 2017, and before July 1, 2020, we believe that the
proposed regulation appropriately provides the Department with the
flexibility to determine the appropriate measure of relief that should
be provided to a borrower defense applicant for claims asserted as to
loans first disbursed on or after July 1, 2020.
    As the Department's standard for borrower defense claims asserted
after July 1, 2020, requires borrowers to demonstrate financial harm
and state the amount of that harm, the Department believes that it will
be able to make appropriate relief determinations in consideration of
the borrower's degree of financial harm based upon the specific
circumstances established by borrower defense applicants.
    The Department will make its own determination of financial harm,
as defined in Sec.  685.206(e)(4), based on the information in the
borrower's
[[Page 49835]]
application, the school's response, the borrower's reply, and any
evidence otherwise in the possession of the Secretary that was provided
to both the school and the borrower. The Department revised the final
regulations to reflect that the Department makes a determination of
financial harm and will award relief equivalent to the financial harm
incurred by the borrower. As explained above, the Department's award of
relief may exceed the financial harm alleged by the borrower in the
borrower defense to repayment application. The Department's award of
relief, however, may not exceed the Department's own determination of
financial harm.
    ``Financial harm'' is defined in Sec.  685.206(e)(4), in part, as
the amount of monetary loss that a borrower incurs as a consequence of
a misrepresentation, as defined in Sec.  685.206(e)(3). Financial harm,
thus, will always be related to an alleged misrepresentation. For
example, an alleged misrepresentation may include a significant
difference between the earnings the institution represented to the
borrower that he or she would be likely to earn after graduation and
the borrower's actual post-graduation earnings or aggregate earnings
reported by the Department for the program in which the borrower was
enrolled. Pursuant to the definition of financial harm in Sec.
685.206(e)(4), the Department will determine how much relief to award
by considering the amount of monetary loss that a borrower incurs as a
consequence of a misrepresentation and the factors outlined in 34 CFR
685.206(e)(4)(i) through (iv): Periods of unemployment after graduation
unrelated to national or local economic recessions, significant
differences in cost of attendance from what the borrower was led to
believe, the borrower's inability to secure employment after being
promised employment, and inability to complete the program because of a
significant reduction in offerings.
    The Department would like to be transparent about relief
determinations and has revised the regulations to expressly state the
Department will specify the relief determination in the written
decision and publish decision letters with personally identifiable
information redacted.\111\ Accordingly, the borrower and school will
know how the Department calculated the relief to the borrower.
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    \111\ Note: It is possible that particular programs and/or
schools are so small, even including the school or program's name
could be too revealing. We will consider an exception in these types
of circumstances.
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    Unlike the 2016 final regulations, these final regulations do not
expressly state that the Department will advise the borrower that there
may be tax implications as a consequence of any relief the borrower
receives. Such an express provision is not necessary because the
Department intends to inform the borrower at the outset of the borrower
defense to repayment process that there may be tax implications, likely
by posting such information on the Department's website. The
Department, however, cannot provide tax advice, as the tax implications
will vary depending on an individual borrower's circumstances and does
not wish to mislead borrowers in this regard.
    We disagree that the proposed regulation allowing for partial
relief, if warranted, would reduce the Department's incentive to
monitor schools' wrongdoing. The Department actively monitors schools
for their compliance with the Department's regulations as part of its
regular operations and will continue to do so, regardless of the amount
of borrower defense relief provided to borrowers.
    With regard to the possible tax implications and credit reporting
for partial relief awards, the Department does not have the authority
to determine how a full or partial loan discharge may be addressed for
tax purposes. If a borrower receives a partial loan discharge, then the
Department will update reports to consumer reporting agencies to which
the Secretary previously made adverse credit reports. The Department
has revised 34 CFR 685.206(e)(12)(1) to expressly include updating
reports to consumer reporting agencies as part of the ``relief'' that
the borrower will receive and not ``further relief'' that a borrower
may receive.
    We maintain our position from the NPRM \112\ and the 2016 final
regulations that the amount of relief awarded to a borrower during the
defense to repayment process would be reduced by any amounts that the
borrower received from other sources based on a claim by the borrower
that relates to the same loan and the same misrepresentation by the
school as the defense to repayment. To clarify that position, we are
incorporating language from Sec.  685.222(i)(8) on that point into
Sec.  685.206(e)(12) of these final regulations.
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    \112\ 83 FR 37263.
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    After careful consideration of the comments, our internal
determination processes, and our ability to rely on the data available
to us, we do not support the proposal to reduce the amount of relief by
the amount of credit balances received by the borrower. The Department
now agrees with the commenters who suggested that, in a situation where
the borrower is granted full relief, the portion of the loan that can
be forgiven should not be limited to the portion borrowed to pay direct
costs to the institution. The Department will carefully consider the
amount of monetary loss that a borrower incurs as a consequence of a
misrepresentation.
    The currently existing regulations, at 34 CFR 685.222(i)(2)(i),
provide that for claims brought under the substantial misrepresentation
standard, as stated in 685.222(d)(1), as to loans first issued on or
after July 1, 2017, the Department factors in the borrower's cost of
attendance (COA) to attend the school, as well as the value of the
borrower's education. In the preamble to those regulations, we
justified factoring the student's COA into determinations of relief by
explaining, in part, that the COA reflects the amount the borrower was
willing to pay to attend the school based upon the information provided
by the school and the Federal student loan programs were designed to
support both tuition and fees and living expenses. We also noted that
we did not believe that an institution's liability should be limited to
the loan amount the institution received, because that amount does not
represent the full Federal loan cost to a student for the time spent at
the institution.
    We adopt the currently existing regulation's rationale here. While
it is true that a student may not have taken out some Federal student
loans for living expenses absent his or her attendance at the school,
the student nonetheless received the proceeds of that loan to attend
the school. The nexus between any act or omission underlying a valid
borrower defense to repayment claim and a student's total COA while
enrolled is sufficiently strong to necessitate full relief, where
appropriate.
    As a result, in these final regulations, we will not exclude credit
balances from the relief calculation as to loans first disbursed on or
after July 1, 2020. Relief will not be limited to those portions of a
Direct Loan that are directly received by the institution. The portions
of the loan that generated credit balances will be included in defense
to repayment loan discharges. Additionally, treating students who lived
on-campus differently than those who decided, for whatever personal
reasons, to live off-campus would create disparate outcomes between
these two populations of students that would be difficult for the
Department to justify.
[[Page 49836]]
    Because a borrower must make a defense to repayment claim within
three years of exiting the institution, the Department does not believe
that the loan discharge or collections should be limited to the amount
of payments a borrower has made during that or any other period of
time. Debt relief is based on the total debt associated with the
enrollment during which the misrepresentation occurred, plus
accumulated interest.
    Because the Department is no longer differentiating between
affirmative and defensive claims, we do not believe it is necessary to
develop different protocols for assessing harm in either case.
    Changes: The Department revised Sec.  685.206(e)(8)(v) to allow the
borrower to state the amount of financial harm in the borrower defense
to repayment application. The Department will specify the relief
determination in the written decision as provided in 34 CFR
685.206(e)(11)(iii). The Department also is revising the language in
Sec.  685.206(e)(8)(vi) with respect to the borrower defense
application, and Sec.  685.206(e)(10) with respect to a school's
submission of evidence.
    The Department revised Sec.  685.206(e)(12)(i) to clarify that the
amount of relief that a borrower receives may exceed the amount of
financial harm, as defined in Sec.  685.206(e)(4), that the borrower
alleges in the application pursuant to Sec.  685.206(e)(8)(v) but
cannot exceed the amount of the loan and any associated costs and fees.
The Department further revised Sec.  685.206(e)(12) to expressly note
that in awarding relief, the Secretary shall consider the borrower's
application, as described in Sec.  685.206(e)(8), which includes any
payments received by the borrower and the financial harm alleged by the
borrower, as well as the school's response, the borrower's reply, and
any evidence otherwise in the possession of the Secretary, as described
in Sec.  685.206(e)(10). The Department also revised the final
regulations in Sec.  685.206(e)(12)(i) to reflect that the Department
makes a determination of financial harm and will award relief
equivalent to the financial harm incurred by the borrower.
    The Department revised 34 CFR 685.206(e)(12)(i) to expressly
include updating reports to consumer reporting agencies as part of the
``relief'' and not ``further relief'' that a borrower will receive.
    Also, for clarity, we have added to Sec.  685.206(e)(12) the
language included in Sec.  685.222(i)(8) of the 2016 final regulations,
regarding a borrower's relief not exceeding the amount of the loan and
any associated fees, and being reduced by other forms of recovery
related to the borrower defense.
    Comments: Several commenters noted that the Department requested
public comment on potential calculations for partial relief but did not
include a proposal for how the Department envisions partial relief
might be calculated. These commenters recommended that the Department
propose a methodology in regulation and obtain public comment on the
proposal. One group of these commenters asserted that a failure to
include a proposal for calculating partial relief in the proposed
regulations is a violation of the notice and comment requirements of
the Administrative Procedure Act.
    Discussion: The Department disagrees that it should or is required
to publish an internal methodology for partial discharge for borrower
defense in the Federal Register and seek notice and comment. As noted
by the commenter, the Department sought public comment on potential
methods for calculating relief in the NPRM. After considering the
comments received, the Department believes that given the many factors
involved in making a borrower defense determination, from those
relating to the availability of data, the specific facts of any
individual claim, as well as the evolution of the types of claims that
are being filed, it is appropriate that the Department maintain
discretion and flexibility to make relief determinations on a case-by-
case basis as appropriate to the individual circumstances of a
particular claim.
    The Department also disagrees that it was required to include a
proposal for a partial relief methodology in the 2018 NPRM. In the 2018
NPRM, the Department sought public comment on methods for calculating
partial relief. And, after reviewing related comments, the Department
is declining to adopt any one uniform methodology in these final
regulations. These actions are in compliance with the Administrative
Procedure Act's notice and comment requirements.
    Changes: None.
    Comments: One commenter expressed appreciation for the clear
statement in proposed 34 CFR 685.206(d)(12)(iii) regarding the
borrower's right to pursue relief for any portion of a claim exceeding
the discharged amount or any other claims arising from unrelated
matters. However, the commenter requested additional clarity in
proposed 34 CFR 685.206(d)(12)(i), as the commenter stated that if only
partial relief is granted to the borrower, any amounts granted outside
of the Federal borrower defense to repayment process should first be
credited toward loan amounts that are still owed by the borrower. The
commenter asserted that a borrower's obligation to repay discharged
amounts should be reinstated as a result of non-Federal relief only if
full relief had been granted in the Federal process, or when non-
Federal relief exceeds the remaining portion of a borrower's loan after
partial relief has been provided.
    Several commenters asked the Department to clarify whether
financial aid awards related to private student loans, veterans'
benefits, or other losses separate from those related to Federal
student loans (e.g., educational expenses paid out-of-pocket, tuition
payment plans, loss of state grant eligibility, and payment for
childcare or transportation) should not be used to offset the discharge
of Federal student loans.
    Discussion: The Department thanks the commenter for its support for
the clarification in proposed 34 CFR 685.206(d)(12)(iii) that a
borrower is not limited or foreclosed from pursuing legal and equitable
relief under applicable law for recovery of any portion of a claim
exceeding that the borrower has assigned to the Secretary or any claims
unrelated to the borrower defense to repayment. This provision is
similar to the existing provision in 34 CFR 685.222(k)(3) (2017), and
the Department does not consider this a change in its position.
    The Department does not agree that it is appropriate to reinstate
an approved borrower defense applicant's obligation to repay on the
loan when the borrower has received a recovery from another source
based on the same borrower defense claim, only when the borrower has
either received full relief from the Department or has received a
recovery that exceeds the remaining portion the borrower's Federal
loan, if the borrower received a partial borrower defense discharge.
The proposal echoes the language in the Department's existing
regulation at 34 CFR 685.222(k)(1) and also does not represent a change
in the Department's existing policy. This rule is intended to prevent a
double recovery for the same injury at the expense of the taxpayer. As
provided in the NPRM, because the borrower defense process relates to
the borrower's receipt of a Federal loan, we would reinstate the
borrower's obligation to repay on the loan based on the amount received
from another source only if the Secretary determines that the recovery
from the other source also relates to the Federal loan that is the
subject of the borrower defense. Recoveries related to private loans
and veterans' benefits, for
[[Page 49837]]
example, would not lead to a reinstatement of the borrower's obligation
to repay the Federal loan.
    Changes: None.
Withholding Transcripts
    Comments: One group of commenters supported the position that a
school has the ability to withhold an official transcript from a
borrower who receives a total discharge of his Federal student loan.
These commenters assert that this has always been the case in instances
where the borrower was provided a loan discharge through the false
certification, closed school, or borrower defense to repayment
provisions.
    Many commenters strongly opposed the Department's assertion that
schools have the ability to withhold transcripts of borrowers who
receive loan discharges. The commenters concluded that schools have a
moral obligation to maintain and provide students access to their
academic records, especially in the case of education disruption due to
institutional misrepresentation or unforeseen closure.
    One commenter noted that it is unclear why, or whether, a school
would have the right to withhold transcripts of a student who does not
owe a debt to the school or to the Federal Government. This commenter
further notes that bankruptcy case law specifically prohibits the
withholding of academic transcripts after a borrower has his student
loan debt discharged; the Family Educational Rights and Privacy Act
(FERPA) requires that students be granted access to at least unofficial
transcripts; and that policies pertaining to withholding transcripts
are also a matter of State law and institutional policy, not Federal
law or regulation, such that the Department's prohibition may be in
violation of these laws and policies. The commenter also opined that
including this warning in regulation appears to be a threat intended to
deter borrowers from filing claims. The commenter asserts that this
warning is unlikely to deter frivolous claims since the consequences do
not apply to claimants whose loans are not discharged in full. The
commenter recommends that the Department should not imply borrowers who
receive discharges should not have access to their transcripts when the
Department is not aware of the school's policy and has no authority to
establish such a requirement.
    Another commenter noted that the allowing schools to withhold
transcripts is a retaliatory directive to schools to further harm
borrowers who have cleared every hurdle to prove that they have been
defrauded.
    Discussion: The Department appreciates the commenters who pointed
out that the 2018 NPRM simply acknowledges current practice, which
allows institutions to establish their own policies regarding the
provision of official transcripts to students. The Department agrees
that as a result of FERPA regulations, an institution is obligated to
make student's academic record available to him or her. However, FERPA
does not require an institution to send a borrower a copy of that
record or to provide an official transcript.
    The Department is not requiring institutions to withhold
transcripts. We emphasize the need for institutions to adhere to
applicable State laws and policies that may prohibit them from
withholding transcripts. To make this clear, we are revising the
regulations to state that 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.
    The Department is aware that students who are provided loan relief
through bankruptcy may still be able to obtain transcripts. A
significant difference, however, is that the institution is not asked
to reimburse the Department for any loans taken by the student in the
case of a borrower's subsequent bankruptcy. But the Department will
seek recovery from the institution for successful borrower defense
claims. However, for those borrowers applying for borrower defense
relief that are not also petitioning for bankruptcy, the Department
believes it is appropriate to generally inform borrowers through an
acknowledgement in the borrower defense application that a school may
withhold an official transcript, if allowed or not prohibited by other
applicable law, in the event that the borrower receives full relief.
Such a provision will help inform borrowers of the possibility that the
institution may refuse to verify or provide an official transcript, if
allowed or not prohibited by other applicable law.
    The Department is not suggesting that an institution should
withhold a borrower's official transcript or that an institution's
right to withhold an official transcript is a retaliatory act.
Borrowers, however, should understand that by receiving a full loan
discharge, there is a possibility that they may not receive an official
transcript. Understanding this possibility will inform a borrower's
decision whether to assert that the education they obtained was
actually of no value. The higher education community consistently makes
the case that higher education has inherent value beyond that which can
be measured in job placements and earnings. The Department agrees with
that position, which is why we believe that it would be the rare
student who received no value whatsoever from the educational
experience. In such rare cases, the borrower would have little use for
an official transcript from the institution, such as for the purpose of
transferring credits or using the credentials earned while in
attendance at such an institution.
    Changes: We revised the language from proposed Sec.
685.206(d)(3)(vi), now in Sec.  685.206(e)(8)(vi), to state that 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. As previously stated, the Department also is
revising the language in Sec.  685.206(e)(8)(vi) with respect to the
borrower defense application and Sec.  685.206(e)(10) with respect to a
school's submission of evidence.
Transfer to Secretary of Borrower's Right of Recovery Against Third
Parties
    Comments: None.
    Discussion: Like the 2016 final regulations, these final
regulations provide that upon granting any relief to a borrower, the
borrower transfers to the Secretary the borrower's right of recovery
against third parties.\113\ Unlike the 2016 final regulations, these
regulations refer to ``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''
\114\ because ``provision of educational services'' is a defined term;
the 2016 final regulations instead reference the contract for
educational services. The 2016 final regulations note such a transfer
or rights from the borrower to the Secretary for the right to recover
against third parties includes any ``private fund,'' and these final
regulations clarify that the transfer applies to any private fund,
including the portion of a public fund that represents funds received
from a private party.
---------------------------------------------------------------------------
    \113\ Compare 34 CFR 685.222(k) with 34 CFR 685.206(e)(15).
    \114\ 34 CFR 685.206(e)(15)(i).
---------------------------------------------------------------------------
    Changes: None.
[[Page 49838]]
Borrower Defenses--Recovery From Schools (Sec. Sec.  685.206 and
685.308)
Institutional Liability Cap
    Comments: Several commenters suggested that the Department's
recovery from institutions for losses related to the provision of
relief to borrowers for borrower defense applications be subject to a
maximum limit. One commenter suggested that such institutional
liability for a borrower defense claim be capped at some reasonable
level and suggested the amount the borrower had paid on the loan during
the first three years. Another commenter suggested that the maximum
limit should be the amount paid by the student during the first five
years from the student's last day of enrollment at the institution.
This commenter asserted that without such a limit, borrower defense
applicants would be able to bring claims at any point during the
repayment of the loan, which could be beyond the document retention
period for the relevant documents and affect the school's ability to
defend itself.
    Discussion: The Department does not agree that there should be a
cap on institutional liability for relief granted for an approved
borrower defense application. The Department has an obligation to
protect the interests of the Federal taxpayer and borrowers. As a
result, the Department believes it is appropriate to require an
institution to pay the amount of relief provided in the borrower
defense process based upon the institution's act or omission. In the
separate recovery proceeding against the institution brought under 34
CFR part 668, subpart H, the institution will have the opportunity to
dispute the amount of the liability.
    We also do not agree that schools will be limited in their defense
against a borrower defense relief liability to the Department without a
maximum liability limit or a change to the proposed time limit on the
Department's ability to recover from the school. The new requirements
will apply to borrower defense relief granted as to loans first
disbursed on or after July 1, 2020. We believe that schools will adjust
their business practices to maintain documents for students with loans
first disbursed on or after July 1, 2020, in anticipation of borrower
defense claims from those students.
    Changes: None.
Limitations Period for Recovering Funds From Schools
    Comments: One group of commenters offered support for the
Department's proposal for a five-year limitations period for the
Department's ability to recover funds from schools in the event of a
loan discharge as a result of an approved borrower defense application
and requested we include a definition of ``actual notice.''
    One commenter objected to the five-year limitations period and
suggested that the recovery period should be aligned with the three-
year record retention requirement.
    Another commenter supported the establishment of a time limit for
the Secretary to initiate an action to collect from the school the
amount of any loans discharged for a successful borrower defense to
repayment claim, but recommended that this limit be consistent with the
standard civil statute of limitations of six years.
    One commenter suggested that the Department maintain the language
in the 2016 final rules (in 34 CFR 685.206 and 685.222 (2017)) allowing
the Department to recover from a school the amount of borrower defense
relief awarded by the Department, within the later of three years from
the end of the last award year that the student-applicant attended the
institution or the limitation period that would apply to the cause of
action or standard that the borrower defense claim is based, or at any
time notice of the borrower defense claim is received during those
periods. This commenter stated that the Department's proposal to have a
three-year time limit from the last award year the student was enrolled
in the institution for such actions related to loans first disbursed
before July 1, 2019, is contrary to the Department's stated goal of
protecting taxpayers. This commenter also stated that the Department's
proposed five-year time limit from the time of the borrower defense
adjudication for loans first issued on or after July 1, 2019, was a
strong proposal.
    Another group of commenters also cited the approach in the 2016
final regulations, which the commenters implied echoes State law
concepts such as tolling and discovery to statutes of limitation and
asked why the Department has proposed rescinding such provisions. These
commenters asserted that the 2016 final regulations seem to allow the
Department to recoup more money from institutions and lessen taxpayer
liability and were concerned about the budget impact of the proposal.
These commenters also asked why the Department's proposal for a five-
year limitation period for recovery actions based upon borrower defense
relief granted for loans first disbursed on or after July 1, 2019,
should not also apply to actions based upon loans first disbursed
before July 1, 2019.
    Discussion: The Department appreciates the comments in support of
the five-year limitations period for the Department to initiate a
proceeding against a school. The final regulations provide that such a
proceeding will not be initiated more than five years after the date of
the final determination included in the written decision referenced in
Sec.  685.206(e)(11), and the school will receive a copy of the written
decision pursuant to Sec.  685.206(e)(11) for its records. The written
decision will provide adequate notice of when the five-year period
begins for schools.
    The Department believes that since an institution will be provided
the opportunity to respond to the borrower's defense to repayment claim
in the course of the borrower defense adjudication process, and that
claim must be made within three years after the student leaves the
institution, the institution will be made aware of the need to retain
records relevant to its defense for a borrower defense to repayment
claim and adjust its business practices accordingly. As a result, the
Department does not agree that a longer time limit, such as six years,
for a recovery proceeding is necessary. As explained in the 2018 NPRM,
one reason for the recovery action limitation period to be three years
is to align with the document retention requirements under the
Department's regulations. We acknowledge that schools will retain
records once aware of a need due to potential liability from borrower
defense applications. The three-year document retention period is one,
among other justifications, for the limitations period.
    Further, the Department has decided not to align with the typical
statute of limitations in civil statutes because that period of time is
based on when the alleged act occurred. For a student enrolled in a
bachelor's or graduate program, the student may not have had the
opportunity to complete the program within that time period, and
therefore may not understand that the institution made
misrepresentations during the admissions process or enrollment period.
Therefore, the Department is using established timeframes that are
based on when the student left the institution rather than when the
alleged act or omission occurred. The Department believes that a
borrower should have three years subsequent to leaving an institution
during which time he or she can submit a defense to repayment
application.
    The Department believes it is similarly appropriate to establish a
timeframe during which it can initiate a
[[Page 49839]]
collection claim against an institution. The Department believes that
the proposed timeframe establishes clear expectations for schools that
will provide them with some certainty for their planning and
operational needs and will also allow the Department to meet its
responsibility to Federal taxpayers. The process by which the
Department initiates a collection action against an institution is
separate from the process by which the Department adjudicates a defense
to repayment claim. Although the Department does not anticipate that it
would typically take that long to initiate collection actions, the
Department needs sufficient time to initiate that process. The
Department believes that five years is ample time to complete that
process and collect from the school the amount of the loan discharged.
    The amount the Department may collect from the institution is
limited to the amount of loan forgiveness granted as part of the
defense to repayment determination. Even if it takes five years for the
Department to initiate that collection, the amount collected will be
limited to the amount of loan forgiveness awarded by the Department at
the time of the claim adjudication. The Department will inform the
institution at the same time it notifies the borrower of the outcome of
the adjudication process.
    For the reasons stated above, we are taking a different approach
for recovery actions for borrower defense relief based upon loans first
issued on or after July 1, 2020. Upon further consideration, the
Department has also decided to retain the recovery process time limits
and requirements in the 2016 final regulations, at 34 CFR 685.206 and
685.222 (2017), for loans first disbursed before July 1, 2020. As these
provisions are currently effective, we do not believe this approach
will disadvantage schools that have already made adjustments in their
document retention policies and procedures in anticipation of these
recovery provisions.
    The Department also wanted to assure that a school will receive
timely notice of a borrower's allegations in a borrower defense to
repayment application and is revising these regulations to state the
Department will notify the school within 60 days of the date of the
Department's receipt of the borrower's application. Such timely
notification will place the school on notice to preserve any records
relevant to the borrower defense to repayment application and begin to
prepare its response.
    As was the case in the NPRM, these final regulations expressly
state that the Department may initiate a proceeding against
provisionally certified institutions to recover the amount of the loan
to which the defense applies in accordance with 34 CFR part 668,
subpart G. Such a provision is consistent with 34 CFR part 668, subpart
G, as provisionally certified institutions are participating
institutions as defined in 34 CFR 668.2 and receive title IV, Federal
Student Aid.
    Changes: We have revised 34 CFR 685.206 to reflect that the
borrower defense standard, adjudication process, and recovery
proceedings are tied to the date of first disbursement of the Direct
Loan or Direct Consolidation Loan. We also clarified that the five-year
limitations period on Departmental recovery actions against schools is
applicable for borrower defense claims asserted as to loans first
disbursed on or after July 1, 2020. The Department also revised 34 CFR
685.206(e)(16)(ii) to state the Department will notify the school
within 60 days of the date of the Department's receipt of the
borrower's application.
    Comments: None.
    Discussion: The Department proposed in the 2018 NPRM to promulgate
a regulation that the school must repay the Secretary the amount of the
loan which has been discharged and amounts refunded to a borrower for
payments made by the borrower to the Secretary, unless the school
demonstrates that the Secretary's decision to approve the defense to
repayment application was clearly erroneous. Upon further
consideration, this amendatory language does not align well with 34 CFR
part 668, subpart G, which provides the rules and procedures for the
Department to initiate a recovery proceeding against a school.
Additionally, the Department stated in the preamble of the 2018 NPRM:
``The burden of proof rests with the Department, and the school has an
opportunity to appeal the decision of the hearing official to the
Secretary.'' \115\ A clearly erroneous standard is inconsistent with
the Department's intention and statement that the burden of proof lies
with the Department. Accordingly, the Department is withdrawing this
proposed regulation.
---------------------------------------------------------------------------
    \115\ 83 FR 37263.
---------------------------------------------------------------------------
    Changes: The Department withdraws the proposed regulation that the
school must demonstrate the Secretary's decision to approve the defense
to repayment application was clearly erroneous.
Pre-Dispute Arbitration Agreements, Class Action Waivers, and Internal
Dispute Processes (Sec. Sec.  668.41 and 685.304)
Legal Authority and Basis for Regulating Class Action Waivers and
Arbitration Agreements
    Comments: A group of commenters argued that the HEA grants the
Department legal authority and wide discretion to place conditions upon
the receipt of title IV funding by participating schools, including
restricting or prohibiting the use of pre-dispute arbitration
agreements or class action waivers.
    A number of commenters challenged the assertion in the 2018 NPRM
that the 2016 final regulations' limitations on the use of mandatory
arbitration and class action waivers were not consistent with law.
These commenters disagreed with the Department's citation to the
Supreme Court's decision in Epic Systems Corp. v. Lewis, 138 S. Ct.
1612 (2018) and the reference to a congressional resolution
disapproving a rule published by the CFPB that would have regulated
certain pre-dispute arbitration agreements. These commenters argued
that neither the Supreme Court decision, nor Congress' action, has any
bearing on the authority of the Department to include contractual
conditions relating to arbitration as part of a program participation
agreement or contract. In addition, the commenters noted that Congress
did not take any action to disapprove the 2016 final regulations.
    Discussion: The Department agrees with the commenters who argued
that the HEA grants the Department legal authority and wide discretion
to place conditions upon the receipt of title IV funds. That authority
includes restricting, prohibiting, and, importantly, encouraging the
use of pre-dispute arbitration agreements and class action waivers.
    The Department respectfully disagrees with the commenters'
assertion that the 2018 NPRM's reliance on the Epic Systems decision
and the congressional resolution disapproving the CFPB rule were
invalid. The Department cited Epic Systems because it is consistent
with precedential decisions in Federal court in favor of establishing
``a liberal federal policy favoring arbitration agreements'' \116\ and
decisions against prohibitions on class action waivers.\117\ Together,
these three cases stand for the
[[Page 49840]]
proposition that, absent a contrary congressional mandate, Federal
policy favors arbitration agreements.
---------------------------------------------------------------------------
    \116\ CompuCredit Corp. v. Greenwood, 565 U.S. 95, 98 (2012).
    \117\ AT&T Mobility, LLC v. Concepcion, 563 U.S. 333, 347-51
(2011).
---------------------------------------------------------------------------
    Given the Court's precedents, Congress' resolution disapproving the
CFPB's rule, and our reweighing of the benefits and costs regarding
pre-dispute arbitration clauses and class action waivers, the
Department has decided to bring its policies to align more closely with
the ``liberal federal policy favoring arbitration agreements.'' The HEA
provides the authority and discretion for the Department to make that
policy shift. It is our view, as explained in the 2018 NPRM, that
arbitration agreements and class action waivers, when coupled with
student protections promoting informed decision making, preserve
reasonable transparency, and cooperative dispute resolution potential
that is positive for both students and institutions.
    Changes: None.
General Support for Class Action Waivers, Pre-Dispute Arbitration
Agreements, and Internal Dispute Processes
    Comments: Many commenters expressed support for the regulations
pertaining to the use of pre-dispute arbitration agreements, class
action waivers, and internal dispute processes. These commenters
frequently noted that arbitration and internal dispute processes can
provide a path to resolution that is reasonable and fair to both the
student and the school, while reducing potential costs to taxpayers.
These commenters also underscored the importance of ensuring students
were properly informed of their options and given the necessary
information regarding how to proceed.
    A group of commenters who wrote in support of the proposed
regulations also suggested a change to the regulatory language to
distinguish between schools that use such pre-dispute arbitration
agreements and waivers for use of recreational facilities or parking
lots or similar non-enrollment activities and those that require such
agreements as a condition of enrollment.
    Discussion: The Department appreciates the support for the proposed
regulations from many of the commenters. The Department agrees that it
is very important that students are properly informed of their options
and given the necessary information regarding how to proceed. We also
appreciate the detailed comments and suggestions on the proposed rules
relating to mandatory arbitration and class action waivers.
    We agree with the commenters who argued that arbitration may
provide a method for borrowers and schools to address a student's
concerns without the significant expense and time commitment that are
common to court litigation. It is well established that alternative
dispute resolution (ADR) processes like arbitration are more likely to
result in savings to the parties, without reducing the parties'
satisfaction with the result.\118\
---------------------------------------------------------------------------
    \118\ Hensler, Deborah R., ``Court-Ordered Arbitration: An
Alternative View,'' University of Chicago Legal Forum, Volume 1990,
Issue 1, Article 12, https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1074&context=uclf.
---------------------------------------------------------------------------
    We also agree with the commenters who suggested that allowing
arbitration will better ensure that the school, rather than the
taxpayer, will bear the cost of the school's actions. As a result, a
decision in favor of the student would be the school's responsibility.
In addition, depending on the particular circumstances of a claim, a
student potentially could be awarded greater relief, including refunds
of cash payments, when appropriate, as a result of an arbitration
decision in the student's favor.
    With regard to the regulatory distinction for schools that use pre-
dispute arbitration agreements and waivers for the use of recreational
facilities, parking lots, or other similar activities, the Department
agrees with the commenter that the regulations should distinguish
between schools that use pre-dispute arbitration agreements as a
condition of enrollment and those that do not. The Department makes
this distinction because the regulated type of agreements have a clear
relationship with the educational services provided by the institution.
The Department also believes that a change reflecting the commenter's
suggestion would improve consistency between Sec. Sec.  668.41 and
685.304.
    Section 668.41(h)(1) limits arbitration disclosure requirements to
cases where agreements are used as a condition of enrollment. The
commenter recommended duplicating that language in Sec.  685.304,
specifically in Sec.  685.304(a)(6)(xiii), (xiv), and (xv) replacing
``if the school'' with ``if, as a condition of enrollment, the
school.'' Inclusion of the commenter's suggested language would make it
clearer in Sec.  685.304 that the agreements are related exclusively to
enrollment agreements.
    On the other hand, the Department's proposed language does include
``to pursue as a condition of enrollment'' in Sec.
685.304(a)(6)(xiii); ``to enroll in the institution'' in Sec.
685.304(a)(6)(xiv); and ``to enroll in the institution'' in Sec.
685.304(a)(6)(xv). We believe deleting those phrases and replacing them
with the suggested language would be clearer and provide consistency
between Sec. Sec.  668.41 and 685.304. In addition, although not
specifically raised by a commenter, we add language to clarify that our
changes to the entrance counseling requirements apply for loans
disbursed on or after July 1, 2020. This clarifying change is
consistent with the approach we are taking throughout these final
regulations.
    Changes: The Department adopts the changes suggested by the
commenter to replace ``if the school'' with ``if, as a condition of
enrollment, the school'' in Sec.  685.304(a)(6)(xiii), (xiv), and (xv),
and deleting the previously included references to enrollment in those
sections. In addition, we are adding the phrase ``For loans first
disbursed on or after July 1, 2020'' to the beginning of Sec.
685.304(a)(6)(xiii), (xiv), and (xv).
General Opposition to Class Action Waivers and Pre-Dispute Arbitration
Agreements
    Comments: Many commenters expressed opposition to the regulations
pertaining to the use of pre-dispute arbitration agreements and class
action waivers. Many commenters argued that permitting participating
institutions to use mandatory pre-dispute arbitration agreements and
class action waivers, as part of an enrollment or other agreement,
denies students their rights, including their constitutional right, to
be heard in court. They further asserted that class action restrictions
prevent students from working together to assert their legal rights and
helps institutions ``avoid liability.'' One commenter asserted that a
student does not hold the bargaining power to reject a forced
arbitration clause.
    Commenters stated that the Department's claim that arbitrations are
more efficient and less adversarial than traditional court proceedings
was ``highly dubious.''
    Other commenters argued that unscrupulous schools have used
mandatory arbitration, class action waiver, and internal dispute
resolution provisions to discourage borrowers from raising their claims
and hide evidence of illegal school conduct from the public, the result
of which has been an unfair shifting of the burden of the cost of
illegal conduct from schools to students and taxpayers.
    A group of commenters disputed the Department's assertion that
allowing schools to mandate that students sign pre-dispute arbitration
agreements and class action waivers, or agree to engage internal
dispute processes, helps to provide a path for borrowers to seek
remedies from schools before filing a
[[Page 49841]]
borrower defense claim. These commenters argued that allowing schools
to require students to sign such agreements or agree to such processes
limits borrowers' options in seeking redress, limits their ability to
gather the types of evidence needed to support borrower defense claims,
and provides protection to schools that act against the interests of
their students. These commenters noted that there is usually no or very
limited discovery during arbitration, and a student cannot discover
documents detrimental to the school.
    Another group of commenters stated that students would be at a
distinct legal disadvantage against potentially large for-profit school
chains that can afford high-quality legal counsel. The commenters
referenced research that shows these agreements are typically used by
organizations where there was already a significant power imbalance in
favor of the employer or school. They further noted that the Economic
Policy Institute has found that the use of mandatory arbitration among
employers is much more common in low-wage workplaces and in industries
that are disproportionately female and minority. Other commenters
echoed these points, adding that class action waivers effectively
ensure that the most economically disadvantaged will face a legal
challenge skewed to the advantage of schools and deprive the Department
of a vehicle that would expose the most fraudulent schools.
    A commenter representing student veterans noted that veterans have
a substantial interest in being able to submit complaints to Federal
regulators, so that they can adequately highlight gaps or abusive
practices in the market related to misrepresentations or fraud by
colleges and universities and financial products, such as student
loans. The commenter noted that enforcement agencies have historically
relied on consumer complaints like these to bring actions against
schools.
    Another commenter representing veterans suggested that the
regulations be amended to provide students the right to: (1) Choose to
arbitrate claims once a dispute arises, and (2) exercise their
constitutional right to adjudicate claims before impartial judges and
juries. The commenter further suggested the Department revise the
proposed regulations to include a provision from the 2016 final
regulations that prohibits a school from ``compel[ing] any student to
pursue a complaint based on a borrower defense claim through an
internal dispute process before the student presents the complaint to
an accrediting agency or government entity authorized to hear the
complaint.''
    One commenter noted that the U.S. Department of Defense has raised
alarm about the dangers of arbitration, noting in a 2006 report that
``loan contracts to Servicemembers should not include mandatory
arbitration clauses or . . . require the Servicemember to waive his or
her right of recourse, such as the right to participate in a plaintiff
class [action lawsuit].'' \119\
---------------------------------------------------------------------------
    \119\ Department of Defense, ``Report on Predatory Lending
Practices Directed at Members of the Armed Forces and Their
Dependents,'' August 9, 2006, http://archive.defense.gov/pubs/pdfs/Report_to_Congress_final.pdf.
---------------------------------------------------------------------------
    Another commenter expressed concern that schools requiring pre-
dispute arbitration agreements as a condition of enrollment would not
be held accountable to a Federal agency.
    One commenter suggested that the Department ban the use of Federal
funds for schools mandating use of arbitration or class action waiver
agreements.
    Several other commenters suggested that the Department did not
sufficiently justify in the NPRM this change in policy. One commenter
noted the Department previously stated that ``[h]ad students been able
to bring class actions against'' certain specific institutions ``it is
reasonable to expect that other schools would have been motivated to
change their practices to avoid facing the risk of similar suits.''
\120\
---------------------------------------------------------------------------
    \120\ 81 FR 39383.
---------------------------------------------------------------------------
    Discussion: The Department understands the concerns expressed by
commenters regarding the arbitration provisions of these final
regulations. The Department has weighed the commenters' expressed
concerns against the potential benefits of arbitration and believes
that the best approach is to ensure a regulatory framework that
requires that students have sufficient notice of whether the school
mandates arbitration and to allow the student to decide whether to
enroll at that institution or another.
    The Department values the ability of students to make informed,
freely chosen decisions regarding how they spend their education
dollars, time, and efforts. This includes students, who may be
concerned about the fairness of such a process. The Department is
endeavoring to protect all students, including by ensuring those who
are concerned about the fairness of such a process have the power to
reject a forced arbitration clause by taking their financial aid
dollars to institutions that do not mandate internal dispute processes,
arbitrations, or bar class actions. As with any major life or financial
decision the students will make, it is best for students to approach
the choice with as much information as possible and conduct a unique-
to-them, cost-benefit analysis on their own terms, weighing what is
important to them and what they are willing to accept. These final
regulations require that institutions play their part in keeping their
potential students informed.
    The Department does not believe that class action waivers and pre-
dispute arbitration agreements are inherently ``unfair,'' as the
commenters suggest, nor are the benefits relied upon by the Department
in the 2018 NPRM ``highly dubious.'' Similarly, the use of mandatory
arbitration among employers with certain worker populations does not
``effectively ensure'' that students, including minorities and females,
will face a legal challenge skewed against them. It is true that
arbitration proceedings do not have the same extensive discovery
procedures provided for in traditional litigation in court. However, as
cited by the American Bar Association, arbitration provides significant
advantages over a court proceeding, including: Party control over the
process; typically lower cost and shorter resolution time; flexible
process; confidentiality and privacy controls; awards that are fair,
final, and enforceable; qualified arbitrators with specialized
knowledge and experience; and broad user satisfaction.\121\ Further, in
2012, the ABA found that the median length of time from the filing of
an arbitration demand to the final award in domestic, commercial cases
was just 7.9 months, whereas the filing-to-disposition time in the U.S.
District Court for the Southern District of New York was 33.2 months
and 40.8 months in the Second Circuit Court of Appeals.\122\
Arbitration does, in fact, help ``provide a path'' for borrowers to
acquire relief in an efficient, cost-effective, and quicker manner than
traditional litigation.
---------------------------------------------------------------------------
    \121\ Sussman, Edna, and John Wilkinson, ``Benefits of
Arbitration for Commercial Disputes,'' American Bar Association,
March 2012, https://www.americanbar.org/content/dam/aba/publications/dispute_resolution_magazine/March_2012_Sussman_Wilkinson_March_5.authcheckdam.pdf.
    \122\ Sussman and Wilkinson, https://www.americanbar.org/content/dam/aba/publications/dispute_resolution_magazine/March_2012_Sussman_Wilkinson_March_5.authcheckdam.pdf.
---------------------------------------------------------------------------
    Contrary to the commenter's assertions, mandatory arbitration
clauses and class action waivers do not help institutions ``avoid
liability,'' but instead provide more speedy recovery and potentially
greater relief to students impacted by the institutions' alleged
[[Page 49842]]
conduct, as determined by an experienced legal professional as fact-
finder. Rather than discouraging borrowers from raising claims and, as
a result, hiding illegal conduct, arbitration provides a more cost-
effective and accessible conflict resolution path than traditional
court proceedings. Neither arbitration agreements nor class action
waivers limit borrowers' options for redress in reporting a complaint
about an institution to the Department, an accreditor, or any other
governmental entity (including the CFPB, with respect to student
loans). Therefore, even in the case of a mandatory arbitration
agreement, the Department can still learn about illegal actions on the
part of an institution.
    Institutions will continue to be held accountable to the Department
because the student can still file a borrower defense claim with the
Department, even if the borrower receives an unfavorable arbitration
decision, as the borrower submits a borrower defense to repayment claim
with the Department, not the school, and the Department adjudicates the
claim in accordance with its own regulatory requirements.
    We have revised the regulations at Sec.  668.41(h)(1)(i) to
require, in schools' plain language disclosures regarding their pre-
dispute arbitration agreements and/or class action agreements required
as a condition of enrollment, a statement that the school cannot
require students to limit, relinquish, or waiver their ability to
pursue filing a borrower defense claim, pursuant to Sec.  685.206(e) at
any time. The Department agrees that a student must always be allowed
to voice concerns or register complaints with the Department, if the
borrower's allegations meet the criteria for such a claim.
Unequivocally, arbitrator determinations are not binding on the
Department.
    The Department rejects the commenter's suggestion that it ban the
use of Federal funds for schools that mandate arbitration and class
action waivers. As discussed, Federal policy favors arbitration, and
the Department is not convinced by the commenter's arguments to deviate
here from that policy. The Department rejects the suggestion in the
2016 NPRM that class actions against certain institutions would have
motivated other institutions to change their practices. In fact, it is
possible that many institutions changed their approach in light of
allegations made against those certain institutions, including those
made by attorneys general, regardless of whether students had been able
to bring class actions. Under those specific circumstances cited in the
2016 NPRM, the State of California found that the institution
misrepresented job placement rates and the transferability of credits
to students, advertised programs that were not offered, and failed to
disclose a relationship with a preferred student loan lender.\123\
Further, the Department focuses its efforts on appropriately regulating
the ``good actors,'' not necessarily overcorrecting or hyper-regulating
the entire sector to address outlier instances of institutional
misconduct.
---------------------------------------------------------------------------
    \123\ Final Judgment, State of California v. Corinthian
Colleges, Inc., et. al., No. CGC-13-534793 (Superior Court of
California, County of San Francisco). Note: In 2018, the California
Attorney General announced a settlement with Balboa Student Loan
Trust providing debt relief for students who took out private loans
to attend Corinthian Colleges. Final Judgment and Permanent
Injunction, State of California v. Balboa Student Loan Trust, No.
BC-709870 (Superior Court of California, County of Los Angeles).
---------------------------------------------------------------------------
    With respect to the Economic Policy Institute study cited by one
commenter and the other commenters who echoed the concerns highlighted
in the study, if the Department's final regulations would put students
at a ``distinct legal disadvantage'' against schools that ``can afford
high quality legal counsel,'' it is difficult to understand how this
same concern would not apply to a complex, expensive court proceeding.
Arbitration may frequently go further than a traditional trial in
leveling out the practical, real-world legal disadvantages between the
institution and the student.
    The Department does not adopt the suggestion by the commenter
representing student veterans. We would like to thank the commenter for
bringing to our attention the Department of Defense's 2006 Report.
However, that report draws its conclusions from concerns regarding
predatory lending practices, including payday loans, car title loans,
tax refund anticipations loans, and unsecured loans focused on the
military and rent-to-own.\124\ As a result, we do not believe that the
conclusions that the report reaches are applicable in the context of
these final regulations. Further, these final regulations do not
require a borrower to ``waive his or her right of recourse.'' As stated
repeatedly, under these final regulations, borrowers, including student
veterans, who meet the eligibility requirements maintain the right to
file with the Department claims for loan discharges arising from
borrower defense to repayment, false certification, and closed schools.
    The Department also continues to believe that the regulatory triad
provides sufficient opportunities to review an institution, conduct
oversight, and sanction an institution appropriately. Student
complaints will continue to alert members of the triad to engage in
oversight reviews.
    Changes: The final regulations at Sec.  668.41(h)(1)(i) have been
revised to require, in schools' plain language disclosures regarding
their pre-dispute arbitration agreements and/or class action waivers
required as a condition of enrollment, a statement that a school
cannot, in any way, require students to limit, relinquish, or waive
their ability to pursue filing a borrower defense claim, pursuant to
Sec.  685.206(e), at any time.
Arbitration Agreements
    Comments: Since most arbitration proceedings and results are
confidential, several commenters noted that the regulatory change could
enable a lack of transparency from schools by allowing fraudulent
practices to continue even after students discovered and challenged
them.
    Another commenter noted that most students enter into a pre-dispute
arbitration agreement before any harm occurs. As a result, these
students are not able to make an informed choice about whether to
surrender legal rights and remedies.
    Another group of commenters recommended that the Department
definitively state in the regulations that no arbitration agreement may
abrogate a borrower's right to file a Federal borrower defense to
repayment claim, and that the borrower may initiate such a claim.
Moreover, they suggested that the time a borrower commits to an
arbitration process should toll the time limit for filing a discharge
claim.
    One commenter asserted that arbitrators have a pecuniary incentive
to rule in favor of a corporation. This commenter noted that
arbitrators are paid based on the volume of cases and hours spent per
case. Arbitrators thus have a strong financial incentive to rule in
favor of the party on whom they depend for additional cases. This
commenter further asserted that arbitration can cost more in
``upfront'' fees, as much as 3,009 percent more, than litigation. To
support this point, the commenter relied upon two American Arbitration
Association (AAA) studies, the CFPB's 2015 ``Arbitration Study: Report
to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer
Protection Act,'' and a Public Citizen study entitled ``The Costs of
Arbitration.'' \125\
---------------------------------------------------------------------------
    \125\ American Arbitration Association, ``Consumer Arbitration
Rules,'' January 1, 2016, https://www.adr.org/sites/default/files/Consumer%20Rules.pdf; and ``Commercial Arbitration Rules and
Mediation Procedures,'' July 1, 2016 https://www.adr.org/sites/default/files/Commercial%20Rules.pdf; Arbitration Study: Report to
Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer
Protection Act section 1028(a), CFPB, Appendix A at 43 (2015),
available at http://files.consumerfinance.gov/f/201503_cfpb_arbitration-studyreport-to-congress-2015.pdf; Public
Citizen, ``The Costs of Arbitration,'' p. 2, April 2002, available
at https://www.citizen.org/documents/ACF110A.PDF.
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[[Page 49843]]
    Another commenter noted that arbitration does not usually allow for
an appeal. According to this commenter, the Federal Arbitration Act
allows the losing party 90 days to appeal an arbitration award on
narrow grounds, and a court essentially vacates an arbitration award
for a ``manifest disregard of the law.''
    One commenter further suggested that the likely result of an
arbitration may conflict with cohort default rate restrictions. The
commenter noted that the 2018 NPRM states that ``[a]rbitration may . .
. allow borrowers to obtain greater relief than they would in a
consumer class action case where attorneys often benefit most.'' The
commenter asserts that, if the Department believes this is the case,
the practice may run counter to other regulations that prevent schools
from ``[making] a payment to prevent a borrower's default on a loan''
for purposes of calculating the cohort default rate.
    Discussion: The Department appreciates the commenters' concerns
regarding the allowance of pre-dispute arbitration agreements in the
final regulations and the effect of those agreements on transparency.
    In making this policy determination, the Department considered many
factors, including the commenter's concern about transparency. Our
primary motivation for this policy change is to provide borrowers, who
believe they have been wronged, an opportunity to obtain relief in the
quickest, most efficient, most cost-effective, and most accessible
manner possible. The Department acknowledges that arbitration
proceedings are not public forums in the same way as traditional court
proceedings.
    However, those public hearings, while transparent, have serious
drawbacks: Prohibitive costs, time delays, access for laypersons, among
many others. Litigation can also have a serious negative impact on an
institution's reputation, even when ultimately the court rules in the
institution's favor. In our weighing of these factors, the Department
has chosen to emphasize speedy relief and accessibility.
    We also note that if the borrower is unsatisfied--due to the
confidential nature of the arbitration proceeding or for any other
reason--the final regulations do not preclude the borrower from
pursuing other avenues for relief which they may find to be more
transparent.
    An eligible borrower may file a borrower defense to repayment claim
regardless of any decision against a borrower in an arbitration
proceeding and, under revised Sec.  668.41(h)(1)(i), a school cannot
require students to limit, relinquish, or waiver their ability to
pursue filing a borrower defense claim. The Department acknowledges
that the borrower may file a borrower defense to repayment application
with the Department at the same as initiating the arbitration
proceeding with the school.
    Regarding arbitration awards conflicting with cohort default rate
restrictions, payment to the student would not violate the prohibition
on an institution making a payment, even if the borrower would have
otherwise defaulted on the loan. If a school loses in arbitration,
making a payment to a student as a result, that payment would be made
to resolve a student's complaint with the school, whether through
settlement or an order from the arbitrator. Additionally, the
Department believes that institutions should be allowed to repay a
student's loan if, for example, during the first year of study it
becomes clear to the institution that the student cannot benefit from
the education provided. In such circumstances, the Department does not
wish to discourage the institution from repaying the student's loans.
    As discussed elsewhere in this document, the Department believes
that, in reweighing the issues and subsequent legal developments, these
final regulations provide students with information that they need to
empower themselves to understand the legal rights and available
remedies they are giving up, even before a dispute arises. Upon
extensive review, the Department finds that it is a much more desirable
policy to incentivize informed customers to make rational decisions
that they think are best for them. The Department will not dictate to
students what they ought to want. Mandatory arbitration clauses permit
relatively inexpensive and expeditious resolution of customer
grievances. Considering the burdens attending litigation, arbitration
adjudicates claims relatively quickly, cheaply, and, concurrently,
gives the ``customers'' what they want. The underlying, well-considered
justification for all this is that Department has elected not to
substitute its own subjective and paternalistic judgment in place of
the student's own wishes about their legal rights and remedies.
    Neither an arbitration agreement nor an arbitrator's decision can
abrogate a borrower's right to file a borrower defense claim. The
Department notes that students who are not satisfied with the
arbitrator's determination are still free to file a borrower defense
claim with the Department. We have incorporated a provision, in Sec.
668.41(h)(1), that states that an institution's disclosure to students,
where an explanation of class-action waivers and mandatory pre-dispute
arbitration agreements is provided, must include a statement that the
borrower need not participate in any internal dispute resolution
processes prior to filing a borrower defense claim.
    The Department strongly disagrees with the commenter's statement
that an arbitrator's pecuniary interests would taint the arbitration
proceeding. The Department notes that a failure to disclose facts that
a reasonable person would consider likely to affect the impartiality of
the arbitrator would be a violation of the Arbitrator's Code of Ethics
as well as a violation of the Uniform Arbitration Act (Revised).\126\
The Code of Ethics for Arbitrators in Commercial Disputes provides that
an arbitrator should: (1) Uphold the integrity and fairness of the
arbitration process; (2) disclose any interest or relationship, arising
at any time, likely to affect the impartiality, or which might create
an appearance of partiality or bias; (3) avoid impropriety or the
appearance of impropriety in communicating with the parties or their
counsel; (4) conduct the proceedings fairly and diligently; (5) make
decisions in a just, independent, and deliberate manner; and (6) be
faithful to the relationship of trust and confidentiality inherent in
the office.\127\
---------------------------------------------------------------------------
    \126\ ``The Code of Ethics for Arbitrators in Commercial
Disputes,'' American Arbitration Association, Effective March 1,
2004, https://www.adr.org/sites/default/files/document_repository/Commercial_Code_of_Ethics_for_Arbitrators_2010_10_14.pdf; Uniform
Arbitration Act (Revised), National Conference of Commissioners on
Uniform State Laws, 2000, https://www.uniformlaws.org/viewdocument/final-act-1?CommunityKey=a0ad71d6-085f-4648-857a-e9e893ae2736&tab=librarydocuments; Note: The Uniform Arbitration Act
has been adopted in 35 jurisdictions and 14 jurisdictions have
adopted substantially similar legislation.
    \127\ American Arbitration Association, https://www.adr.org/sites/default/files/document_repository/Commercial_Code_of_Ethics_for_Arbitrators_2010_10_14.pdf.
---------------------------------------------------------------------------
    Further, this commenter asserted that arbitration costs more in
``upfront'' fees than litigation. Neither AAA study cited by the
commenter supports this proposition. The CFPB study is the
[[Page 49844]]
precise document that the Department relied upon, in part, in the 2016
final regulations' rationale for the pre-dispute arbitration and class
action waiver provisions. Congress's resolution disapproving the CFPB
final rule could be read to reaffirm the strong Federal policy in
support of arbitration. As a result, we have followed Congress'
direction in not following the CFPB's final rule's concepts in these
regulations.
    The commenter relies on a 2002 Public Citizen study for the
statistic that total arbitration costs incurred by a plaintiff's use of
the AAA could increase by as much as 3,009 percent as compared with
filing that same claim in court.\128\ This claim relies upon a
comparison between the costs of initiating a lawsuit in court to the
fees potentially charged to a plaintiff for initiating an arbitration.
The study compares court filing fees in the Circuit Court of Cook
County to fees charged by the AAA. Although it is true that court
filing fees are lower than arbitration initialization fees, this
calculation does not take into account the additional potential costs
related to litigation, including attorney's fees and costs associated
with the discovery process, fees charges by expert witnesses, travel
expenses, and other miscellaneous costs.\129\
---------------------------------------------------------------------------
    \128\ Public Citizen, ``The Costs of Arbitration,'' https://www.citizen.org/documents/ACF110A.PDF.
    \129\ See, e.g., Epic Systems Corp. v. Lewis, 138 S.Ct. 1612,
1621 (2018) (referring to the Federal Arbitration Act (FAA), 9
U.S.C. 2, and citing Scherk v. Alberto-Culver Co., 417 U.S. 506, 511
(1974)) (``[I]n Congress's judgment arbitration had more to offer
than courts [once] recognized--not least the promise of quicker,
more informal, and often cheaper resolutions for everyone
involved.'') (emphasis added). Notably, ``the virtues Congress
originally saw in arbitration, its speed and simplicity and
inexpensiveness'' should not, in the Supreme Court's view, ``be
shorn away;'' as a corollary, ``arbitration [ought not to] look[ ]
like the litigation'' the FAA ``displace[d].'' Epic Systems, 138
S.Ct. at 1623 (emphasis added); see also AT&T Mobility LLC v.
Concepcion, 563 U.S. 333, 347, 348 (2011). Note: It could be argued
that the calculation in the study does not take into account the
many other additional potential costs of both litigation and
arbitration. Regardless the cost, however, it is incontrovertible
that Congress has found to favor arbitration.
---------------------------------------------------------------------------
    For example, the current filing fee to initiate a civil action in
the Circuit Court of Cook County, Illinois is $368.\130\ However, for
most individuals, filing a civil action usually requires them to obtain
legal services or representation, which adds significantly to the
cost.\131\ Under the commercial arbitration rules of the AAA, the
current initial filing fee for a claim of less than $75,000 is
$925.\132\ Admittedly, that number is higher than the court filing fee,
without counting attorney's fees. However, it is a far cry from the
3,009 percent cited by the commenter. Consequently, in reality, the
problems the commenter describes are not nearly as stark as advertised.
---------------------------------------------------------------------------
    \130\ Clerk of the Court, Cook County, ``Court Fees and Costs
705 ILCS 105/27.2a,'' Effective January 1, 2017, http://www.cookcountyclerkofcourt.org/Forms/pdf_files/CCG0603.pdf.
    \131\ See: Paula Hannaford-Agor, ``Measuring the Cost of Civil
Litigation: Findings from a Survey of Trial Lawyers,'' Voir Dire,
Spring 2013, https://www.ncsc.org/~/media/Files/PDF/
Services%20and%20Experts/Areas%20of%20expertise/Civil%20Justice/
Measuring-cost-civil-litigation.ashx.
    \132\ American Arbitration Association, ``Commercial Arbitration
Rules and Mediation Procedures: Administrative Fee Schedules,'' May
1, 2018, https://www.adr.org/sites/default/files/Commercial_Arbitration_Fee_Schedule_1.pdf.
---------------------------------------------------------------------------
    The Department disagrees with this same commenter's assertion that
``individual rights'' would be curtailed by an arbitration's ``severely
limited right to appeal.'' The Department notes that no constitutional
right to appeal exists in a civil proceeding. In addition, a borrower
has the right to file a borrower defense to repayment claim
irrespective of the arbitrator's determination and still may have an
avenue for relief through the Department's process.
    A commenter suggested tolling the limitations period for a borrower
defense claim for the time period in which the student and the
institution are in active arbitration proceedings. The Department finds
this suggestion reasonable and believes it may incentivize institutions
to more quickly resolve arbitrations--providing relief to wronged
borrowers more quickly--and not drag out proceedings in order to
consume the current limitations period.
    As a result, we adopt changes to the final regulations to toll the
limitations period beginning on the date that the student files a
request for arbitration and ending when the arbitrator submits a final
determination to the parties.
    Changes: We have added language to Sec.  668.41(h)(1) to specify
that schools must, in their plain language disclosures, state that
borrowers do not need to participate in an arbitration proceeding or
any internal dispute resolution process offered by the institution
prior to filing a borrower defense to repayment application with the
Department. This plain language disclosure must also state that any
arbitration, required by a pre-dispute arbitration agreement, pauses
the limitations period for filing a borrower defense to repayment
application for the length of time that the arbitration proceeding is
under way.
    The Department also includes language in Sec.  685.206(e)(6)(i) to
state that, for loans first disbursed on or after July 1, 2020, the
limitations period will be tolled for the time period beginning on the
date that a written request for arbitration, in connection with a pre-
dispute arbitration agreement, is filed, by either the student or the
institution, and concluding on the date the arbitrator submits, in
writing, a final decision, final award, or other final determination,
to the parties.
Class Action Waivers
    Comments: One commenter noted that class actions are an important
part of resolving disputes in cases of widespread damages, especially
in cases where individual damages may not be substantial or when
individuals may not have the resources to seek representation for their
complaints.
    A group of commenters stated that the preamble to the 2018 NPRM did
not adequately explain why class action waivers should be allowed, and
did not reassure the public that such a waiver cannot affect a
borrower's ability to file a claim or to use a class action lawsuit to
help support a claim of misrepresentation. They asserted that class
action lawsuits may also serve to alert the Department that a pattern
of misrepresentation may be present.
    Discussion: The Department appreciates the comments regarding the
use of class action waivers. The commenter's concern regarding an
individual's ability to acquire representation is mitigated by the
Department's proposal to allow students and schools to employ internal
dispute resolution options, where legal representation is not
necessary, before the filing of a borrower defense claim. Further, as
stated in an earlier section, nothing in these final regulations
burdens a student's ability to file a borrower defense to repayment
application, or any claim with a government agency, even after an
arbitrator submits a finding against the student's claim.
    We appreciate the commenter's concerns regarding transparency and
alerting the Department to potential institutional wrongdoing. In the
discussion regarding arbitration and class action waivers in the 2018
NPRM, the Department explained the benefits of our position, including
allowing borrowers to obtain greater relief, reducing the expense of
litigation for both students and institutions, and easing the burden on
the U.S. court system.\133\ We are concerned that the adjudication of
class action lawsuits benefit the wrong individuals, that is,
[[Page 49845]]
lawyers and not wronged students.\134\ For these reasons, the
Department has concluded that allowing class action waivers would
benefit both institutions and students by fast-tracking dispute
resolutions in a lower cost and more efficient.
---------------------------------------------------------------------------
    \133\ 83 FR 37245.
    \134\ For more information on this topic, see: James R. Copland,
et al., ``Trial Lawyers, Inc. 2016,'' Manhattan Institute, https://media4.manhattan-institute.org/sites/default/files/TLI-0116.pdf.
---------------------------------------------------------------------------
    Changes: None.
Plain Language Disclosures
    Comments: Several commenters who supported the proposed regulations
requested that we develop standardized information that schools can
provide to students regarding pre-dispute arbitration and class
actions. The commenters suggest that this would ensure that all schools
provide students with the same or similar plain language information.
    One commenter suggested a number of specific changes to the
disclosure requirements, including the creation of common disclosures.
The commenter recommended that the Department work in consultation with
the CFPB to develop and consumer-test common, plain-language
disclosures about arbitration clauses and class action waivers that
would be supplemented with specific information from the school about
its own processes. The commenter suggested that the disclosures should,
at a minimum, note that pre-dispute arbitration clauses and class
action waivers are not required at all schools of higher education and
clearly state that students will not be able to exercise their right to
sue their school if they have concerns about their academic experience
at the school. The commenter also suggested that the Department ensure
the disclosures made by schools are prominent and readily available to
current and prospective students. The commenter recommended that the
Department require that disclosures be listed on all pages of the
school's website that include information about admissions, tuition, or
financial aid; post the disclosure on the homepage itself, rather than
on a sub-page, with the headline portion of the disclosure in an easily
readable, prominent format; and enforce the disclosure requirements as
part of its regular audit and program review processes.
    This commenter also expressed concern that the regulations would
not require schools to submit fulsome information about arbitration
proceedings at the school. If such a requirement is not included in the
final regulations, the commenter recommended the Department instead
require that schools submit basic details on at least a quarterly basis
that would allow the Department to know if further investigation may be
necessary. Specifically, the commenter suggested that we should require
schools to report the total number of arbitration proceedings on
borrower defense-related topics conducted during the previous quarter
and provide a high-level summary of each such proceeding, including the
nature of the complaint and its resolution (including whether the
student completed the arbitration proceeding; whether the student is
still enrolled in the school, has graduated, or has withdrawn; and the
dollar amount or other forms of relief awarded to the student in each).
    Commenters expressed concern that disclosures fail to change the
fact that students must accept the schools' harmful contract terms or
not attend the school. They asserted that students are unlikely to
appreciate the rights they are giving up. Commenters argued that
disclosures are ``ineffective'' and that an ``information only''
approach was not sufficient.
    Another commenter noted that requiring schools to make disclosures
not just on their websites, but also ``in their marketing materials,''
is not a requirement that is included in the actual regulatory language
that the Department proposed.
    Discussion: The Department appreciates the many suggestions and
recommendations from commenters about elements to include in disclosure
materials, potential consultation partners, location of disclosures on
institutional websites, as well as reported items, frequency, and
submission requirements.
    The Department believes that government does not know what is best
for a particular student, nor can bureaucrats in Washington know what
is better for a student than the student knows for herself. The
Department does not believe that students who enroll at institutions
that use arbitration agreements and class action waivers are forced to
attend those institutions or are unaware that other postsecondary
options--some of which do not require such agreements--are available.
    As explained in the 2018 NPRM, we are rescinding Sec.  685.300(g)
and (h)--which required schools to submit arbitral and judicial records
to the Department--in an effort, in part, to reduce the administrative
burden both on institutions and on the Department. Notably, these
provisions required a significant amount of paperwork to be submitted
to the Department, and we no longer believe that the value of these
submissions outweighs the costs and burdens associated with them.
Additionally, the Department is concerned about the long-term viability
of these provisions and the deleterious effects that they may have.
Publicizing arbitral documents would upend the arbitration process and
could lead to institutions being less open during arbitration
proceedings. On the other hand, publicizing these documents would
potentially subject institutions to continuous liability for conduct
that it has long since corrected--an outcome the Department wishes to
avoid. The provisions also would require the Department to constantly
monitor these submissions and would create an onerous, unnecessary
administration burden for the Department when it should be dedicating
its resources in this area to the adjudication of borrower defense to
repayment claims.
    Similarly, the Department understands the commenter's suggestion
that developing standardized information for schools to provide to
students regarding pre-dispute arbitration and class action waivers
would be helpful. However, the Department believes that any language
developed by the Department, or any standardized form, would not
sufficiently respond to each institution's unique circumstances or
reflect a school's particular interests or approach, and therefore
could interfere with the Department's goal of allowing borrowers as
well as institutions to select the appropriate dispute resolution
process.
    The Department agrees that any disclosures should be easy to find
and provided in clear, easy-to-understand, plain language. In the final
regulations, at Sec.  668.41(h)(1), we have added language directing
institutions to include plain language disclosures in 12-point font, or
the equivalent on their mobile platforms, on their admissions
information web page and in the admissions section of the institution's
catalogue. We believe these specified locations and manner for posting
the information balance the need for notification without becoming
overly burdensome.
    As discussed in the previous section, the Department rejects the
assertion that students are unable to appreciate the rights they are
giving up and the rights they are gaining. The Department believes that
students, when armed with information, should have the right and
opportunity to select an institution or program that will best meet
their needs, whatever those needs may be. In
[[Page 49846]]
addition, the Department believes that these final regulations help
achieve that aim. We believe that the more detailed disclosure items in
entrance counseling requirements in Sec.  685.304, in concert with the
plain language disclosures in Sec.  668.41, will work well to provide
students with the information they need to become more informed about
the choices they are making, both before and after they enroll in a
school.
    The final regulations were revised to expressly provide that all
disclosures must be in 12-point font on the institution's admissions
information web page and in the admissions section of the institution's
catalogue. The Department erred on the side of specifying where the
disclosures should be placed to provide greater clarity and certainty
in these final regulations.
    Changes: The Department revised Sec.  668.41(h)(1) to expressly
state where the institution must include the requisite disclosures.
Entrance Counseling
    Comments: Some commenters who supported the disclosure requirement
for schools that require their students to sign pre-dispute arbitration
agreements or class action waivers objected to the requirement to
include this information in entrance counseling. These commenters
asserted that including the information in entrance counseling would
not provide any additional value.
    One commenter recommended that the Department require schools to
verify that students who obtained loan counseling through an
interactive tool also receive an arbitration/class action waiver
disclosure through a separate avenue. The commenter suggested the
Department should require that schools obtain the student's signature
to verify that the student received and read the loan counseling
materials. This commenter further suggested that, since it already has
an experiment in progress on loan counseling, the Department should
also consider the lessons learned from participating schools to
continually improve these requirements, and assess whether any of the
participating schools have arbitration clauses or class action waivers
to evaluate those schools' outcomes specifically and separately from
the overall treatment group.
    One commenter asserted that counseling will not remedy their
concern about unequal bargaining power between the student and the
institution. The commenter argued that the Department's disclosure
requirements are inadequate because the proposed rule does not address
the qualifications to serve as a counselor and does not specify the
method of counseling.
    Discussion: The Department appreciates the suggestions from
commenters regarding the regulatory provision that institutions that
require students to sign pre-dispute arbitration agreements or class
action waivers as a condition of enrollment include information in the
borrower's entrance counseling regarding the school's internal dispute
and arbitration processes. We believe that students should receive
entrance counseling on the school's internal dispute and arbitration
processes. While we regard the inclusion of this counseling as a best
practice, we will not require it through regulation. The Department
will not require schools to verify that students received arbitration
or class action waiver counseling through a separate tool or to obtain
a student's signature to verify that the student received and read the
counseling materials. We believe that the commenter's suggested options
could prove too burdensome for institutions and the Department and that
this level of monitoring would not necessarily be helpful or cost-
effective.
    In addition, the Department has no current plans to assess schools
that employ arbitration clauses or class action waivers specifically or
separately in any Department experimental site. The Department will
take into account any lessons learned from ongoing experimental site
projects and incorporate them into future rulemaking efforts, as
appropriate.
    The Department disagrees with the commenter's objection that
including information regarding pre-dispute arbitration agreements or
class action waivers in entrance counseling would not provide any
additional value to the students. We believe that the value added for
students, especially at Sec.  685.304(a)(6)(xiv) and (xv), is keeping
them informed about the agreements they are becoming a party to and
about the internal dispute resolution options afforded to them by the
school.
    The Department did not propose the additional counseling
requirements to remedy concerns about the relative bargaining power
between the institution and the borrower, but rather to help borrowers
have the information they need about pre-dispute arbitration agreements
and class action waivers. The Department believes, first and foremost,
that providing disclosure information to students is in their best
interests and will empower students to make informed decisions about
their academic choices. We believe that the requirement in Sec.
685.304(a)(5) that an individual with expertise in the title IV
programs is reasonably available shortly after the counseling to answer
questions, addresses some of the commenter's concerns about employee
qualifications.
    Changes: None.
Closed School Discharges (Sec.  685.214)
Option To Accept a Teach-Out Opportunity or Apply for Closed School
Discharge
    Comments: While sharing the Department's desire to encourage closed
and closing schools to implement teach-out plans for their students,
many commenters believed that borrowers enrolled at closed or closing
schools should have the option to accept a teach-out plan or apply for
a closed school discharge.
    Another commenter stated that there are many reasons a student
would opt for a discharge rather than a teach-out, including: The low
quality of education provided previously; a preference not to continue;
the teach-out school has a poor reputation; or the same program is
available at a local community college or other institution.
    Discussion: After considering the commenters' arguments, the
Department now agrees that students should have the option to pursue a
closed school loan discharge by submitting an application, transfer to
another institution, or accept the teach-out plan offered by their
institution, which may include a teach-out plan offered by the closing
institution or a plan from a teach-out partner.
    If the orderly closure or the teach-out plan has been approved by
the school's accrediting agency and, if applicable, the school's State
authorizing agency, once a student accepts a teach-out plan offered by
the institution or its partner, the student would not be eligible for a
closed school loan discharge unless the school fails to materially
adhere to the terms of the teach-out plan or agreement with the
student.
    Changes: In light of the commenter's suggestions, proposed Sec.
685.214(c)(1)(ii) (now Sec.  685.214(c)(2)(ii)) has been revised as
follows: ``Certify that the borrower (or the student on whose behalf
the parent borrowed) has not accepted the opportunity to complete, or
is not continuing in, the program of study or a comparable program
through either 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.''
[[Page 49847]]
Automatic Closed School Discharges
    Comments: A number of commenters, who opposed granting automatic
closed school discharges, stated that the practice is not good for the
school, the government, or the taxpayer.
    Several commenters supported providing automatic closed school
discharges to borrowers without requiring an application, as was
provided for in the 2016 final regulations. Under the 2016 final
regulations, the Department would automatically discharge a borrower's
loans if the borrower does not re-enroll in another school or transfer
their credits within three years of their school's closure. These
commenters believed that not including the automatic discharge
provision in our proposed regulations after the rule had been in effect
would adversely affect students already navigating the complicated
school closure process. One commenter expressed the view that, without
the automatic loan discharge, borrowers will find it almost impossible
to have their loans discharged.
    A group of commenters requested information regarding how the
Department's regulatory impact analysis of its proposed rescission of
the automatic closed-school discharge provision of the 2016 final
regulations took into account the actual application rate of eligible
students under current closed-school discharge provisions.
    One commenter recommended that students that attended schools that
have been found to have engaged in fraud or misrepresentation and fined
by the Federal government should have a right to an automatic discharge
going back at least five years from the closing of the school.
    One commenter noted that the Department provided three
justifications for its decision not to include an automatic discharge
provision in the NPRM. In this commenter's view, none of the
justifications are sufficient under the APA for this policy change.
    Another commenter noted that automatic discharges would help to
address the disparities that are especially detrimental to borrowers of
a specific minority group and hinder their ability to obtain relief
through the court system or through administrative proceedings.
    Other commenters expressed the view that, in the absence of quality
information or direction, rescinding the automatic discharge provisions
severely limits the ability of borrowers to find a pathway to relief.
    Some commenters noted that the Department stated that one of the
reasons that automatic discharges might be detrimental to borrowers is
that schools may withhold transcripts from borrowers who receive
automatic closed school discharges. The commenters argued that this is
an unsubstantiated assertion, not backed up by evidence.
    One commenter stated that the Department has used flawed reasoning
in stating that an unknowing borrower granted an automatic closed
school discharge may lose the ability to obtain an official copy of
their transcript. According to this commenter, the Department's
reasoning is flawed because: Relevant case law demonstrates that
withholding transcripts is unconstitutional at public colleges; such
withholding could violate State law property rights; the change is
unsubstantiated by any evidence of customary practice; and the
Department neglected to consider less arbitrary actions to ameliorate
the stated concerns.
    Discussion: The Department believes that providing automatic closed
school discharges to borrowers runs counter to the goals of these final
regulations, which include encouraging students at closed or closing
schools to complete their educational programs, either through an
approved teach-out plan, or through the transfer of credits separate
from a teach-out.
    The Department does not agree that we do not provide quality
information and direction to students who are enrolled in a closed or
closing school. The Department takes its responsibility to keep
students at a closed or closing school well-informed seriously, as do
State authorizing bodies and accreditors, and we direct the commenter
to the FSA website, where we have posted an explanation of the criteria
for a closed school loan discharge, a description of the discharge
process and the proper steps to take, answers to the most frequently
asked questions, fact sheets on closed or closing institutions,
schedules for live webinars presented by FSA, information on transfer
fairs, and more. While the Department encourages schools to post the
``Loan Discharge Application: School Closure'' form on their
institutional website,\135\ as discussed in more detail below, we are
rescinding Sec.  668.14(b)(32), which requires closing institutions
provide information about closed school discharge opportunities to
their students, because it is the Department's, not the school's,
burden to provide this information to students.
---------------------------------------------------------------------------
    \135\ ``Loan Discharge Application: School Closure,'' https://ifap.ed.gov/dpcletters/attachments/GEN1418AttachLoanDischargeAppSchoolClosure.pdf.
---------------------------------------------------------------------------
    We do not agree that without an automatic discharge it would be
almost impossible for a borrower to qualify for a closed school
discharge. The application process for a closed school discharge is not
overly burdensome or difficult to navigate, and it is generally not
difficult for the Department to make determinations of borrower
eligibility for closed school discharges based on the announcement date
and enrollment information regarding the borrower.
    We also do not agree with the proposal that automatic closed-school
discharges be available with a look-back period of five years. We
believe that five years is too long, even in the case of a school
against which the Department has assessed liabilities. We believe that
a five-year period would include many students who left the school for
reasons completely unrelated to the school's closure or the quality of
instruction provided. If a closed school engaged in misrepresentation
or other fraudulent practices, and the borrower was enrolled outside
the window of eligibility for a closed school discharge, the
appropriate remedy for the borrower is to apply for a borrower defense
discharge. Also, under exceptional circumstances, the Secretary retains
the right to extend the closed school loan discharge period.
    In the NPRM, the Department articulated its reasons for not
including in these final regulations provisions for automatic closed
school discharges, which were not part of our regulations prior to
2016.\136\ The Department continues to believe that the closed school
loan discharge application is the most accurate and fairest method to
initiate the discharge process and make initial determinations on the
potential claim.
---------------------------------------------------------------------------
    \136\ 83 FR 37267-37268.
---------------------------------------------------------------------------
    Additionally, as discussed in the 2016 final regulations and the
2018 NPRM, the Department evaluated the potential impact of the
automatic discharge provision using a data set of borrowers from
schools that closed between 2008 and 2011 so re-enrollment could be
evaluated. This accounted for those that filed for a closed school
discharge in the window since their school's closure.
    Significantly, under the APA, an agency ``must show that there are
good reasons for the new policy,'' but it need not show that ``the
reasons for the new policy are better than the reasons for the old
one.'' \137\ As detailed again
[[Page 49848]]
throughout this section, the Department does not believe that including
automatic closed school discharges in the regulations is the best
approach when considering all of the relevant factors. The Department
believes that it is incumbent upon the borrower to make the decision as
to whether it is in his or her best interest to retain the credits
earned at the closed school or receive a closed school loan discharge.
---------------------------------------------------------------------------
    \137\ FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515
(2009).
---------------------------------------------------------------------------
    While there may be disagreement about whether automatic closed
school loan discharge is better for borrowers than closed school loan
discharges provided to students who apply for such a benefit, the
Department has met the required legal standard for proposing and making
this change. Given that automatic closed school loan discharges did not
exist in our regulations until recently, we do not believe that this
provision has become such an integral part of the program that it
cannot function, and students cannot be served, without inclusion of an
automatic discharge provision. As stated in the NPRM, the Department
continues to believe that it is not overly burdensome for borrowers to
apply for a closed school loan discharge, and that they should retain
the choice of whether to apply.
    The final regulations make no distinctions between borrowers based
on race. We do not believe that the provisions of the final regulations
will penalize any one racial group over another, as all borrowers will
be subject to the same requirements.
    Closed school discharge requests are rarely adjudicated through the
court system and rarely require borrowers to participate in
administrative proceedings. In most cases, to apply for a closed school
discharge, an eligible borrower is only required to complete the closed
school discharge application form and submit it to the Department.
    The Department is neither requiring nor encouraging institutions to
withhold a transcript in the event of a closed school loan discharge,
the Department notes that institutions may have the authority, subject
to certain State laws, to develop policies and outline circumstances
under which a student may be denied an official transcript.\138\ A
student's right to a transcript under certain laws does not necessarily
entitle that student to an official transcript.
---------------------------------------------------------------------------
    \138\ Note: The Department discusses the issues regarding the
withholding of transcripts in more detail in the ``Relief'' section
of these Final Regulations.
---------------------------------------------------------------------------
    However, the possibility of a school withholding transcripts was
only cited as one reason not to provide for automatic closed school
discharges. As noted above, granting automatic closed school discharges
may be detrimental to schools and taxpayers since borrowers would not
be required to state that they do not intend to transfer their credits
to another institution to complete their program. Students could
intentionally delay reenrollment at a new institution for three years
in order to retain the credits already completed, but eliminate the
debt associated with earning those credits. There are large costs to
institutions and taxpayers when students retain the right to transfer
their credits and also receive a closed school loan discharge. The
Department wishes to emphasize to all borrowers that taking student
loans has significant associated consequences, and that all borrowers
who take loans should do so with the understanding that they are
expected to repay their loans.
    Finally, given that there may be tax implications or other negative
effects on the borrower, while some borrowers may appreciate an
automatic discharge provision, we believe that closed school loan
discharges should only be available by application. Some borrowers may
be satisfied with the education they received prior to the school's
closure and may have left the school in order to meet certain family or
work obligations, but wish to transfer those credits in the future in
order to complete their program at another institution.
    Changes: We are revising Sec.  685.214(c)(3)(ii) to specify that
the automatic closed school discharge provision will apply for schools
that closed on or after November 1, 2013 and before July 1, 2020.
Extending the Window To Qualify From 120 Days to 180 Days
    Comments: Several commenters supported extending the window of time
during which a student must have withdrawn prior to a school's closure
to receive a closed school discharge to 180 days. However, some
commenters believed that the additional changes proposed by the
Department eliminate any benefit of this change. One commenter viewed
it as an ``empty gesture,'' and noted that the Secretary already has
the authority to extend the window to 180 days under exceptional
circumstances.
    Some commenters supportive of the expansion recommended that the
window be increased to at least one year.
    A number of commenters requested data that the Department
considered in assessing the impact of extending the eligibility period
from 120 to 180 days.
    Other commenters opposed the proposed expansion. These commenters
believed that closed school discharge claims should be based on why the
student decided to withdraw from the closing school, not when. One
commenter believed that allowing borrowers to qualify for closed school
discharges based on when they withdrew from the school and not why they
withdrew is inconsistent with the statute. In these commenters' views,
the statute expressly ties a student's eligibility for a closed school
loan discharge to the school's closure. These commenters noted that if
a borrower withdrew from a school for personal reasons it may be
documented in the school records and they argued that since these
students left the institution for reasons unrelated to the school's
closure they should not qualify for the discharge. Another commenter
opposed to the expansion noted that extending the window creates
increased liability for taxpayers to forgive the loans of students
whose withdrawal was unrelated to the closure, such as personal
circumstances or academic dismissal.
    Another commenter stated that if a borrower withdraws before the
school closes, the borrower has not suffered any loss due to the
school's closure.
    A commenter, who is opposed to the expansion, noted that 20 U.S.C.
1087(c), the statute that authorizes closed school loan discharges,
specifies that a borrower is eligible for a closed school loan
discharge only if he or she ``is unable to complete the program in
which [he or she] is enrolled due to the closure of the institution.''
This commenter claimed that the statute required a causal connection
between the student's inability to complete the program and the closure
of the institution. The commenter contended that the Department's
current regulations conflict with section 1087(c) because the
regulations allow a borrower to obtain a closed school loan discharge
based on when the student withdrew and without regard to the reason for
the withdrawal. The commenter noted that a borrower could apply for a
closed school discharge even if the borrower voluntarily withdrew
before the closure decision had been announced or even made. The
commenter asserted that, by expanding the loan discharge window, the
Department would likely see an increase in the frequency with which
closed school discharges are granted.
    One commenter noted that if the Department extends the window to
180 days, conforming changes would need to be made in associated
regulations.
[[Page 49849]]
    Discussion: The Department thanks the commenters that supported
extending the closed school discharge window to 180 days.
    Although some commenters believed that other changes reduce the
importance of the extension, we expect that more borrowers will qualify
for closed school discharges as a result of the extension, and we
believe this is an important benefit. While it is accurate that the
Secretary already has the authority to extend the window, borrowers at
closing schools cannot know in advance whether an extension will be
provided. Specifying the window of 180 days in the regulations allows
more borrowers to make better informed decisions regarding whether to
continue attending the school while also allowing them to benefit from
the intended purpose of the regulations, without the need for a
determination as to whether exceptional circumstances exist.
    The Department relied on its experience, as well as information
from others involved in school closures, when proposing to extend the
eligibility period for a closed school discharge. The Department has
received numerous requests from state attorneys general, members of
Congress, and former students and employees from closed schools to
extend the look-back period beyond 120 days when a school closes.
Together, this information validates the Department's belief that the
longer period is needed.
    In the event that a closing institution is engaging in a teach-out
plan in which it provides the teach-out services directly, the 180-day
look-back period will begin on the actual date of the campus closure.
However, students who elect a closed school loan discharge at the
beginning of the teach-out period remain eligible for a closed school
loan discharge under the exceptional circumstances provision, if the
teach-out is longer than 180 days. A student should not feel compelled
to continue enrollment at an institution after the announcement of a
teach-out simply to be sure that he or she is enrolled less than 180
days prior to the date of closure.
    We do not agree with the recommendation to extend the window to a
full year. The purpose of the 180-day window is to provide borrowers
access to a closed school discharge even if they choose to leave a
school that is clearly showing signs of a loss of quality or
institutional instability 180 days prior to closing.
    Based on our experience in handling closed school situations, we
believe that 180 days provides an appropriate period to assume that a
student has left the school due to a loss of quality. However, if we
determined that a school experienced deteriorating educational quality
for a longer period before it finally closed, the Secretary could use
her authority, as referenced above, to increase the window of
eligibility for a closed school discharge. We have made this
exceptional circumstance explicit in the final regulations.
    We do not agree with the commenters who contended that the
Department should make a determination as to why the borrower withdrew
and not grant closed school discharges to borrowers who withdrew for
personal reasons prior to the school closing. We do not believe that
the statute requires a determination of the motives of a borrower for
leaving a school to establish the borrower's eligibility for a closed
school discharge. Moreover, the Department could not accurately make
such determinations. Personal reasons, by their very nature, are
individualized. They are not likely to be documented in a consistent,
reliable manner and it is not always clear what factors ultimately lead
anyone to take action.
    We disagree with some commenters' analysis of the requirements in
20 U.S.C. 1087(c). The HEA provides that a borrower may receive a
closed school discharge if the borrower ``is unable to complete the
program in which the student is enrolled due to the closure of the
institution'' (sections 454(g)(1) and 437(c)(1)), but does not
establish a period prior to the closure of the school during which a
borrower may withdraw and still qualify for a closed school discharge.
The Department has long interpreted the statute to allow discharge for
students who withdrew a short time before a school closure, in
recognition that a precipitous closure may be preceded by degradation
in academic quality or student services. These final regulations are in
line with the Department's previous interpretations.
    The Department disagrees with the commenter who stated that a
borrower who withdraws from a school that is on the verge of closing
has not suffered any loss due to the school's closure. As noted, a
closing school's educational environment may deteriorate, especially as
the remaining student population contracts. A borrower who withdraws
from a school prior to the actual closure date due to deteriorating
conditions has suffered a loss, whether monetary, time, or other
hardship. When the borrower enrolled in the school, they had every
reason to expect the school to remain in existence for the duration of
their education program. Had the borrower known that the school would
close before they completed the educational program, the borrower would
most likely have enrolled at a different school.
    Although the expansion of the window to 180 days may result in
greater costs to taxpayers, we believe that any increased cost is more
than offset by the benefit that it provides to borrowers who, through
no fault of their own, find that they have incurred education debt for
attendance at a school that is closing. In addition, the 180-day period
covers any gaps between the spring and fall semesters, since the
previous 120-day period could put students in a position of exceeding
that window simply for not enrolling in summer classes. We believe that
the totality of these regulations will encourage borrowers at closed or
closing schools to complete their education program through teach-outs,
rather than to take the closed school discharge. This is the
Department's preferred policy because it incentivizes and prioritizes
educational attainment.
    Changes: Because we are extending the window to 180 days,
applicable to loans first disbursed on or after July 1, 2020, we are
adding a new Sec.  685.214(g) and have made conforming changes to Sec.
685.214(f)(1).
Exceptional Circumstances
    Comments: Several commenters recommended that the Department retain
the existing list of exceptional circumstances under which it can
expand the eligibility window. These commenters believed that the
Department should not tie its own hands and foreclose its future
ability to assist students dealing with an abrupt school closure.
    One commenter noted that the Department provided no rationale for
the change, except in the case of the reference to a loss of
accreditation. The commenter stated that there was no analysis of how
this provision would interact with State laws. The commenter also
believed that the proposed language on accreditation was unnecessarily
detailed and could accidentally exclude some circumstances, such as
voluntary withdrawal from accreditation without closure. The commenter
believed that the elimination of the example of the institution's
discontinuation of the majority of its programs would encourage
institutions to keep open one small program to avoid paying for closed
school discharges.
    Another commenter stated that the existing extenuating circumstance
language provides clear indicators that help to determine what would
rise to
[[Page 49850]]
the level of an exceptional circumstance. The commenter noted that the
regulation is already structured as a non-exhaustive list and stated
that the Department provided no justification for removing some of the
items from the list. This commenter also recommended, in addition to
restoring the list of exceptional circumstances that is in the current
regulations, that the Department add the institution's loss of title IV
eligibility to the list of exceptional circumstances. The commenter
stated that, much like the loss of accreditation, the loss of Federal
financial aid eligibility indicates a severe circumstance outside of
closure that can severely affect a student's ability to attend the
institution.
    Another commenter stated that, if the Department intends to make
these types of changes, it must make clear to the public that it is
doing so and must also provide a good reason for the change.
    Another commenter supported the proposal to narrow the list of the
exceptional circumstances under which the Department can expand the
window beyond 180 days.
    Discussion: We thank the commenter who supported narrowing the list
of exceptional circumstances.
    The Department appreciates the opportunity to clarify our reasoning
for the changes proposed in the NPRM to the non-exhaustive list of
exceptional circumstances for extending the closed school discharge
window. The Department proposed removing the reference in the existing
list of extenuating circumstances to a school discontinuing the
majority of its academic programs because closed school discharges are
based on a school closing, not on the school discontinuing some
academic programs, but continuing to offer others. We proposed removing
the reference to findings by a State or Federal government agency that
the institution violated State or Federal law because such violations
do not necessarily lead to closure or have any bearing on why a school
has closed.
    The proposed revisions to the language regarding accreditation and
State authorization were intended to provide more clarity and useful
detail to these examples. The accreditation example does not address
the situation of a school voluntarily withdrawing from accreditation
because we do not believe that situation occurs frequently enough to
warrant a mention in this list.
    Upon further consideration, we agree with the recommendation made
by the commenter to add the loss of title IV eligibility as an
exceptional circumstance. The Department adopts the commenter's
reasoning that the loss of Federal financial aid eligibility in
conjunction with an impending school closure indicates a severe
circumstance that can severely affect a student's ability to attend the
institution.
    The Department included an exceptional circumstance where the
teach-out of the student's educational program exceeds the 180-day look
back period. The Department seeks to avoid the perverse outcome of
requiring a student to enroll in a longer-than-180-days teach-out that
they did not want, in order to reach the 180-day look back date.
    As noted above, the list remains non-exhaustive, so removing these
items does not tie the hands of the Secretary in future situations in
the event of a school closure. We believe that the list provides
sufficient indicators for future determinations of when ``exceptional
circumstances'' occur.
    Changes: The non-exclusive list of exceptional circumstances in
Sec.  685.214(c)(1)(i)(B) (now redesignated Sec.  685.214(c)(2)(i)(B))
has been revised to include: ``the revocation or withdrawal by an
accrediting agency of the school's institutional accreditation; the
revocation or withdrawal by the State authorization or licensing
authority of the school's authorization or license to operate or to
award academic credentials in the State; the termination by the
Department of the school's participation in a title IV, HEA program; or
the teach-out of the student's educational program exceeds the 180-day
look-back period for a closed school loan discharge.''
Imposition of Retroactive Requirements
    Comments: A group of commenters contended that the teach-out
proposal would impermissibly impose retroactive requirements on current
and past borrowers. These commenters noted that there is no time limit
on when a borrower may submit a closed school discharge claim and
argued that it would be legally impermissible to apply the new
requirements to loans made before the effective date of the
regulations. These commenters also noted that the Department has
notified current borrowers of the existing requirement and argued that
there is no legal basis to change those requirements for those
borrowers. These commenters also contended that the retroactivity issue
is particularly applicable to the FFEL program in which no new loans
have been made since 2010.
    Discussion: We appreciate the commenters' concerns. We agree that
the changes to the closed school discharge regulations, including those
pertaining to teach-outs, should not apply to current loans. The NPRM
did not specify an effective date for those changes, but we acknowledge
that our proposal caused some confusion by including changes to the
FFEL regulations in this area. The changes to the closed school
discharge regulations will apply only to new loans made after the
effective date of these regulations: July 1, 2020. Since no new loans
are being made under the FFEL or Perkins Loan programs and the
outstanding loans in those programs will not be affected by these
changes, we are not making changes to those program regulations in this
area.
    Changes: We have revised Sec.  685.214(c) and (f) and added a new
paragraph (g) to specify that the changes being made to the closed
school discharge regulation applies only to loans first disbursed on or
after July 1, 2020. We also are not making the revisions we proposed in
the NPRM to the FFEL (Sec.  682.402) and Perkins (Sec.  674.33) closed
school discharge regulations.
Teach-Out Plans, Orderly Closures, and Transfer of Credits
    Comments: Several commenters supported the proposed change to the
regulations that would require borrowers applying for a closed school
discharge to certify that the school did not provide the borrower an
opportunity to complete their program of study through a teach-out plan
approved by the school's accrediting agency and, if applicable, the
school's State authorizing agency.
    Many commenters also expressed strong support for the proposed
revisions to the closed school discharge regulations that would provide
that a borrower would qualify for a closed school discharge if a school
failed to meet the material terms of the teach-out plan approved by the
school's accrediting agency and, if applicable, the school's State
authorizing agency, such that the borrower was unable to complete the
program of study in which they were enrolled.
    Some commenters expressed concerns that accreditation agency
standards for teach-out agreements are not uniform.
    One commenter noted that this proposal would encourage schools to
follow their State or accreditor's teach-out process. This commenter
stated that students, and taxpayers alike, are best protected from
financial harm when schools provide the best path for students to
complete their program of study rather than abruptly closing their
doors.
    Another commenter noted that the proposed regulations would provide
a
[[Page 49851]]
strong incentive for schools to provide students with an opportunity to
complete their program through an approved teach-out that takes place
at the closing institution or at another school. Another commenter
suggested that without the teach-out ``safe harbor'' rule, borrowers
would be encouraged to submit fraudulent closed school discharge
claims. This commenter argued that schools that are closing make a
considerable commitment to teach out their students and that since the
borrower will have an opportunity to leave the school with their
planned credential, there is no need for a loan discharge in these
cases.
    One commenter supported the proposal to require borrowers applying
for a closed school discharge to certify that the school did not
provide the borrower with an opportunity to complete their program of
study, regardless of whether the student took advantage of the teach-
out. This commenter recommended that the Department obtain information
on approved teach-out plans from accreditors and State authorizing
agencies and use this information to deny discharges to students who
attended those schools, instead of relying on self-certification.
    One commenter argued that the proposed regulations would create an
incentive for the orderly teach out of a school that is planning to
close, thus offering an important protection for students, taxpayers,
and schools.
    Another commenter argued in support of the proposed regulations
that the Department should not penalize a school that creates a teach-
out program to help current students finish a program of study. In this
commenter's view, if a school puts in the effort to establish a teach-
out agreement, it shows that the school ultimately has their students'
best interests at heart by giving them the opportunity to complete
their program of study.
    Another commenter noted that the proposed changes would be
consistent with existing regulations, which do not allow students who
transferred credits from a closed school to another school and who
finished the program elsewhere to qualify for a closed school loan
discharge.
    Another commenter stated that the proposed regulations are
consistent with the statutory requirements in 20 U.S.C. 1087(c), the
section of the statute that authorizes closed school loan discharges,
if the borrower ``is unable to complete the program in which [he or
she] is enrolled due to the closure of the institution.'' In this
commenter's view, the statute demands a causal connection between the
student's inability to complete the program of study and the
institution's closure. A student's failure to complete must be ``due
to'' the closure.
    Several commenters contended that in a fully approved teach-out
plan, faculty and staff often go above and beyond to serve students
through completion of their program. These commenters argued that this
considerable commitment by the school toward its students, and the fact
the student will leave with his or her planned credential, means there
is no need for a loan discharge in these cases.
    Several commenters opposed the proposed changes to the closed
school loan discharge provisions, as well. While one of these
commenters agreed that more schools should offer teach-out plans, the
commenter also stated that the quality of teach-out plans varies widely
and the process for determining an acceptable teach-out plan lacks
rigor and consistency. The commenter contended that the Department
acknowledged this inconsistency and lack of quality in its announcement
that it intended to start a negotiated rulemaking process concerning
teach-out plans. The commenter also noted that, for some students,
completing the credential through a teach-out plan may be undesirable.
    Many commenters stated that students who attended a closed school
have a right to have their debt cancelled, even if the closed school
offers an option to enroll at another school or location. The
commenters stated that borrowers at closed schools should not be forced
to transfer to another school.
    One commenter recommended maintaining the current policy on closed
school discharges, or, alternatively, establishing standards for degree
program comparability in teach outs. The commenter recommended that the
regulations specify such factors as program length, costs and aid,
programmatic accreditation, and quality to determine program
comparability.
    One commenter stated that the proposed changes would close the
window on many adult learners that do not have the money to transfer to
another program.
    One commenter opposed to the proposed changes to the closed school
discharge requirements relating to teach outs stated that students may
be wary of a teach-out option if it is being provided by a school that
is about to close. These students may be uncertain of the value of
participating in the teach-out, compared to the value of starting fresh
elsewhere.
    One commenter stated that the proposed regulations ignore the fact
that a teach-out program may not meet a student's needs, or may not
properly match their program of study, or may be at a school that isn't
realistic for a student to attend. As another commenter noted, there
are any number of reasons a student will choose a particular
educational program. Some of those reasons may be related to the
school's location and class schedule, or other factors relevant to that
student's unique situation. In addition, there is no guarantee that the
teach-out program is a high-quality program. The commenter noted that
the student may be jumping from one bad program to another at the
behest of the failing institution.
    Another commenter opposed to the proposed changes argued that under
the proposed regulations borrowers would be treated differently in
different States, as States and accreditors must approve teach-out
plans. The commenter believed that this is inconsistent with the
rationale used in the NPRM for adopting a single Federal evidentiary
standard for borrower defense claims. The commenter noted that
accrediting agencies and States have complex and conflicting policies,
which would result in inconsistent results based on geography, quality,
and other factors. The commenter noted that the proposed regulations
assume that teach outs are always the best option, but expressed the
view that this may not be true in all cases, especially at the
beginning of a long program. The commenter noted that there may be
problems with teach outs such as exclusions, potential additional cost,
geographic proximity, record keeping and transcripts, and transfer of
student aid. The commenter noted that teach outs are non-binding and
institutions may renege on them, and teach-out agreements may conflict
with State laws, such as those regarding tuition recovery funds. As
noted by another commenter, a teach out might involve travel or other
constraints that make it impractical for some students. The commenter
recommended that the Department take into consideration that students
choose programs for reasons other than academics, such as compatibility
with work or family obligations.
    Another commenter expressed the view that the proposed regulations
would eliminate the path to loan discharge when there is a teach out
available, regardless of whether the opportunity was accessible, in the
same mode of instruction, or of comparable quality, and would encourage
predatory institutions to submit sub-par teach-out opportunities.
[[Page 49852]]
    Another commenter took issue with the statement in the NPRM that
``borrowers may be better served by completing their programs . . .
than by having their loans forgiven.'' The commenter stated that the
Department provided no evidence to support that assertion. In the
commenter's view, this type of decision-making does not qualify as a
``good reason'' under the APA for changing the closed school discharge
eligibility requirements.
    Another commenter opposed the proposed changes to the closed school
discharge regulations to deny loan discharges to those who were offered
a teach-out--even if they did not complete it. The commenter stated
that the statutory language creating closed school discharges indicates
that Congress intended to make the discharges available to all students
in a program. Specifically, 20 U.S.C. 1087(c) reads that ``if a
borrower . . . is unable to complete the program in which such student
is enrolled due to the closure of the institution . . . then the
Secretary shall discharge the borrower's liability on the loan.'' The
statutory language does not refer to completing another, substantially
similar, program; nor does it refer to a program offered by another
institution, in another modality, or in another location. In the
commenter's view, the Department's proposal to deny discharges to
anyone who had the opportunity to complete a program is a subversion of
congressional intent and the plain reading of the legislative text.
    The commenter also noted that the Department's proposed changes run
counter to its own longstanding interpretation that the statute
permitting closed school loan discharges applies to all borrowers from
the institution. While teach-out plans are required from closing
institutions, the Department has previously recognized that a teach-out
may not be what a student signed up for, and may differ in key ways
from the original program. To respect students' choices and ensure they
are able to make the choice that's right for them, the regulations have
allowed students to either transfer their credits (or accept a teach-
out) or to receive a loan discharge.
    The commenter expressed the view that the Department is proposing
to eliminate that choice in an attempt to reduce liabilities for
closing institutions. The commenter noted that the Department expects
this provision, along with the elimination of automatic discharges, to
reduce closed school discharges by 65 percent.
    The commenter noted several problems with teach-out plans in the
current system: In teach-out arrangements, students are not always able
to transfer all of their credits or pick up their programs exactly
where they left off at the closing institution; some teach-out plans
offer only impractical or sub-par options for students; accrediting
agency policies relating to teach-out agreements differ across
agencies, particularly where teach-out agreements are concerned; none
of the accrediting agencies expressly require in their standards that
institutions arrange teach outs in the same modality as the original
program; it can be difficult to find teach-out arrangements for some
niche programs, so some students may fall through the cracks in
establishing teach-out agreements; and few accreditors list standards
beyond geography, costs, and program type that they consider in
approving or rejecting proposed teach-out arrangements, although some
regional accreditors require that teach-outs be offered by institutions
with regional accreditation only.
    The commenter expressed the view that the result of the proposed
regulations would be to create a strong incentive for institutions to
establish teach-out agreements, without much consideration for the
quality of the teach out or how well it will serve the students
affected by the institution's closure.
    The commenter also noted that State policies vary widely on school
closures. The Department provided no discussion on the question of when
State authorizers require institutions to get their sign-off on teach-
out plans.
    The commenter stated that one State's efforts to require teach-out
plans from institutions and ensure other protections are in place
before colleges close received push-back from institutions of higher
education, and that organizations representing States have said they
are not aware of other States requiring these provisions.
    Commenters requested the reason behind why the Department stated
that accreditors will only approve adequate teach-out plans. In
addition, the commenter requested clarification as to whether the
Department would foreclose closed-school discharges to students who
were offered an online-only teach out. The commenter asked what
percentage of schools that closed in the past five years offered a
teach-out plan and whether the Department has considered the impact of
the proposed regulations in relation to this information. The commenter
also requested whether the Department would allow a borrower to
establish eligibility for a closed school discharge when the borrower's
individual circumstances precluded them from completing their program
of study through the teach-out.
    The commenter stated that some accreditors require teach-out plans
prior to a school closing if the school is in financial straits.
However, such teach-out plans may only offer an initial suggestion of
which institutions the closing college might reach an agreement with--
not a signed contract with those institutions. Such a plan does not
constitute a formal agreement with another institution to take over in
the event that the institution cannot or will not teach out its own
students. Furthermore, it does not mean the teach-out will be executed
according to the plan in the event of actual closure.
    The commenter suggested that, if the Department retains this
proposal, teach-out agreements would be a more appropriate measure than
teach-out plans for institutions not remaining open long enough to
teach out their own students, since the plans may be outdated or
uncertain. The commenter also recommended that the Department should
require that the teach-out be the same in its implementation as it was
in the accreditor's approval of the plan, ensuring that the letter of
the plan is followed through, since the documents on file with the
accreditor may not always comport with on-the-ground realities.
    Finally, the commenter proposed that, if the Department does not
revise these proposed regulations, the Department clarify that they
only apply to schools closing after the effective date of the
regulations, July 1, 2020.
    Another commenter recommended that the proposed ``teach out''
changes only apply for those closing schools whose graduates
consistently find careers in their fields of study. In this commenter's
view, letting a school continue to provide education that is not going
to be applicable to the borrower's career goals is a waste of the
borrower's time and money, and he or she should be permitted to file
for full discharge of the loans.
    Another commenter noted that there are times where the approved
teach-out schools are out-of-State, the ``teach-out'' school is at risk
of closing, the other school has a poor reputation, or the school with
the approved teach-out is too far away from the closing school.
    Discussion: The Department agrees with commenters that teach-out
plan requirements are not uniform among accreditors and we, through the
recent negotiated rulemaking effort, are taking steps to improve and
modernize the requirements relating to teach-out plans and to better
coordinate information
[[Page 49853]]
between the Department and accreditors.
    We acknowledge that even a well-planned and well-executed teach out
may not be ideal for every student. Issues such as modality, location,
and compatibility with work and family situations may make it difficult
for a student in an education program to participate in a teach-out
offered by a closing or closed school. Therefore, the Department has
revised its proposal to allow a student to choose either the teach-out
or the closed school discharge. These final regulations do not
disqualify a borrower who has declined to participate in a teach out
from receiving a closed school discharge. However, to avoid
circumstances where students complete their program and apply for
discharge, the borrower is required to certify that they did not
complete the program of study, or a comparable program, through a
teach-out at another school or by transferring academic credits or
hours earned at the closed school to another school.
    The Department does not have the authority to regulate the quality
of academic instruction, nor does it have the authority to regulate
each detail of teach-out plans or agreements. We do, however, work
together as a member of the regulatory triad and believe that the
accreditor will approve plans that will serve students appropriately in
the event of a closure. The Department can hold accreditors accountable
for ensuring that teach-out plans provide acceptable options and
opportunities for students.
    The Department does not believe that an online only teach-out is an
equivalent option, if the original program was not taught exclusively
via distance education. While we believe this could be an available
option that may be suitable for some students, it is insufficient for
this to be the only teach-out option to be offered to students
currently enrolled in ground-based programs. Similarly, it is not
sufficient for a teach-out plan to include only ground-based courses in
the event that it is an online institution that is engaged in a teach-
out.
    The Department does not generally require schools to submit teach-
out plans to us since accreditors and State authorizing bodies are
charged with reviewing and approving teach-out plans. However, the
Department reserves the right to review any teach-out plan that has
been approved by the institution's accreditor and State authorizing
body.
    Under these final regulations, the Department allows the borrower
to choose between the teach-out (or transfer) and the closed school
discharge. As stated elsewhere, we believe that in many instances, and
in particular among students close to the end of their program, the
student may be best served by completing their academic program at the
closing institution or a teach-out partner institution. For students
with less than 25 percent of the program remaining to complete, a
teach-out that takes place at the closing institution may offer the
most rapid and cost-effective route to degree completion. Moreover,
while accreditors generally require a student to complete at least 25
percent of their program at an institution that awards a credential,
many accreditors waive the 25 percent rule for students who are
enrolled in a formal teach-out agreement with another institution.
    One commenter challenged the Department's assertion that borrowers
may be better served by completing their programs than by having their
loans forgiven. We stand by this assertion. In our view, obtaining the
education credential that the borrower wanted to pursue is generally
preferable to foregoing credential completion or being required to
start a program over at another institution. Disruptions in a student's
time in school can have devastating consequences and, too often, lead
to the student abandoning their educational pursuit.\139\ It is better
to create a path for students to finish their degree, certificate, or
program, rather than create perverse incentives to stop their
schooling, with only a plan for an indeterminate, future starting date.
---------------------------------------------------------------------------
    \139\ See: Park, Toby J., ``Working Hard for the Degree: An
Event History Analysis of the Impact of Working While Simultaneously
Enrolled,'' April 2012, Presented at the American Educational
Research Association's Annual Conference, Vancouver, BC, available
at: https://www.insidehighered.com/sites/default/server_files/files/PARK_WORKING.pdf.
---------------------------------------------------------------------------
    Our goal is not to reduce the number of closed school discharges
awarded through these regulations or reduce the liability for closing
institutions, as one commenter suggested. Rather, it is to provide
students enrolled at a closing or closed school as many options as
possible for completing their program. The Department seeks to
encourage institutions to provide approved teach-out offerings rather
than closing precipitously.
    Regarding the commenters' other concerns about teach-out plans, we
believe that the revised language in these final regulations,
consistent with the Department's long-standing interpretation of 20
U.S.C. 1087(c), addresses those concerns. Since borrowers will have a
choice of participating in the teach out or receiving a closed school
discharge, a borrower who believes, due to the closure of the
institution, that the teach out offered by the school will not meet his
or her needs, may decline the teach out and still qualify for a closed
school discharge.
    Changes: We have revised our proposed changes (now reflected in
Sec.  685.214(c)(2)(ii)) to specify that a borrower is eligible for a
closed school discharge if the borrower opts not to accept the
opportunity to complete the borrower's program of study pursuant to a
teach-out plan or agreement, as approved by the school's accrediting
agency and, if applicable, the school's State authorizing agency. As
discussed above, we are no longer making changes to the regulations
regarding FFEL or Perkins loans, so parallel changes are no longer
necessary to Sec.  674.33 or Sec.  682.402.
Departmental Review of Guaranty Agency Denial of a Closed School
Discharge Request
    Comments: Commenters supported allowing a borrower the opportunity
for the Department to review a closed school discharge claim, which was
denied by the guaranty agency, to provide a more complete review of the
claim for the closed school discharge. One commenter suggested that
this secondary review process would result in greater uniformity of the
processing of closed school discharge applications. Another commenter
provided detailed proposed regulatory language in support of this
change.
    Discussion: We thank the commenters for their support for the
proposed changes in the NPRM and their suggestions. However, since no
new loans are being made under the FFEL program, plus the facts that
the outstanding FFEL loans will not be affected by these changes and
that the changes proposed regarding Departmental review of guaranty
agencies' denials were also included in the 2016 regulations, we will
not be making changes to the FFEL program regulations in this area.
    Changes: None.
Additional Recommendations
    Comments: One commenter recommended that, before granting a closed
school discharge, the Department notify the school about the proposed
discharge, the basis for the proposed discharge, and provide the school
with a copy of the application and supporting documentation submitted
to the Department. Under this proposal, the
[[Page 49854]]
school would have 60 days to submit a response and information to the
Secretary addressing the closed school discharge claim. The commenter
also suggested that the Department should provide the borrower with a
copy of any response and information submitted by the school. Another
commenter also suggested that the school have an opportunity to provide
information to the Department that might affect the decision of whether
to grant a closed school discharge. A third commenter stated that the
Department would not be able to make an accurate closed school
discharge determination without information from by the school.
    Discussion: The Department disagrees with the commenters' proposal.
The determining factors that establish a borrower's eligibility for a
closed school discharge are limited to whether the borrower was in
attendance at the school at the time it closed or withdrew within the
applicable number of days of the date the school closed, and the
borrower did not complete his or her program or a comparable program at
another institution. For most borrowers in these situations, the
Department already has information about the school's closure date and
has access to information about whether the borrower was in attendance
or had recently withdrawn. The Department has made decisions on these
claims for more than 20 years without having a formal submission
process for additional information from the school, and we do not have
any evidence that those decisions were incorrect. Accordingly, we do
not believe that we need to establish a process for schools to review
the borrower's information and respond.
    Changes: None.
    Comments: One commenter noted that the 2016 final regulations
established requirements that closing institutions provide information
about closed school discharge opportunities to their students. The
commenter recommended that the Department include these requirements in
these regulations, citing the concerns the Department raised in the
2016 final regulations that potentially eligible borrowers may be
unaware of their possible eligibility for closed school discharges
because of a lack of outreach and information about available relief.
    Discussion: The Department appreciates the commenter's concerns
regarding the removal of the requirements included in Sec.
668.14(b)(32). As stated above in the Automatic Closed School
Discharges section, the Department provides information on our website
to students regarding the closed school loan discharge process,
frequently asked questions, fact sheets, webinars, and transfer fairs.
    The Department is rescinding Sec.  668.14(b)(32) because we
concluded that it is the Department's, not the school's, responsibility
to provide this information to students. The Department believes that
the borrower will have the best access to accurate, up-to-date and
complete information by obtaining it from the Department's website, or
the websites of accreditors and state authorizing bodies. Unlike
institutional websites that may cease to operate when a school closes,
the Department's website will continue to provide students with updated
information.
    Even so, we encourage schools to post the Department's closed
school loan discharge application on their institutional website and to
direct their students to the FSA website for further information.
    Changes: None.
    Comments: One commenter had specific concerns about the timeframe
for appeal of closed school loan discharge determinations, whether
appeal is an option for non-defaulted borrowers, and capitalization of
interest. The commenter also raised concerns about PLUS loans and
closed school discharges as they pertain to PLUS loans. The commenter
recommended we specify that the reference to a borrower making a
monetary claim with a third party refers to both the student and the
parent in the case of a parent PLUS loan.
    One commenter expressed a concern that the proposed closed school
regulations would allow even the most financially unstable institutions
on the brink of closure to continue benefitting from Federal student
aid.
    One commenter expressed the view that the final regulations should
clarify that students are not eligible for closed school discharge when
their college merges with another college, changes locations, or
undergoes a change in ownership or a change in control. The commenter
cited one example of a case in which a college was engaged in internal
restructuring that required a change in OPEID numbers. According to the
commenter, the school was required to offer students a closed school
discharge despite offering the same program to students under the new
OPEID number. In this commenter's view, the Department should clarify
that internal restructurings do not result in a closed school
discharge.
    One commenter recommended that the Department look closely at
borrower defense claims regarding institutions that have recently
closed. The commenter asserts that many of these claims are closed
school discharge claims disguised as borrower defense claims.
    One commenter recommended that the Department designate the closed
school discharge regulations for early implementation to incentivize
institutions that are currently considering institutional or location
closures to provide a teach-out for their students.
    One commenter stated that if a school goes ``out of business'' or
goes bankrupt, the former students should have reduced loan repayment
obligations, especially for loans made by the school.
    One commenter noted that under both the current and proposed
regulations, the Department is required to identify any Direct Loan or
Perkins Loan borrower ``who appears to have been enrolled at the school
on the school closure date or to have withdrawn not more than 120 days
prior to the closure date'' and to ``mail the borrower a closed school
discharge application and an explanation of the qualifications and
procedures for obtaining a discharge.'' FFEL regulations similarly
require guaranty agencies, upon the Department's determination that a
school has closed, to identify potentially eligible borrowers and mail
them a discharge application with instructions and eligibility
criteria. This commenter asserts that the Department has not fulfilled
its duty to provide notices and application forms to all potentially
eligible borrowers, and that many borrowers whose schools have closed
remain unaware of their eligibility. The commenter contends that
applying the proposed changes to the closed school discharge
regulations to such borrowers would unfairly harm them by making many
of them newly ineligible to discharge their loans without ever having
received notice of their eligibility.
    Discussion: The Department does not believe that it is necessary to
create an appeal process for borrowers making claims for closed school
discharges. In most cases, closed school discharge decisions are based
solely on whether the borrower was attending the school when it closed
or shortly before and did the borrower choose to complete their program
through a teach-out or transfer of credits. If the borrower's claim is
denied but they have additional supporting information they can always
submit a new claim and still receive full relief. Thus, there is no
reason for a new formal appeal process.
    We do not share the commenter's concern that the rules relating to
Parent
[[Page 49855]]
PLUS loan borrowers are unclear. We believe that our current language
makes it clear that Parent PLUS loan borrowers must satisfy the same
requirements for a discharge as student borrowers except that the
Department considers the date the student stopped attending the school
and whether the student completed their program of study.
    We disagree that the final regulations would have any impact on a
school's eligibility to participate in the student financial aid
programs. If a school stops offering educational programs, it loses its
eligibility to participate in the title IV student financial aid
programs for other reasons. However, if a school closes one location
and otherwise keeps offering educational programs, the continuing
locations would remain eligible to participate. Depending upon how far
the closing or closed campus is from the remaining campuses of the
institution, or in the case of a campus relocation, the distance
between the old and new location, the State or the accreditor may make
a determination of whether this would be classified as a school
closure. For example, in some states a new or continuing campus must be
within a certain travel distance of the closing or moving campus, or
must be on the same mass transit line, in order for the move to a new
campus or merger with an existing campus to not be classified as a
school closure.
    The Department has not proposed modifying the definition of
``closed school.'' Generally speaking, the merger of campuses, changes
in campus location changes of ownership would be not be considered
closed schools and students enrolled at those institutions would not
generally be eligible for closed school loan discharge.
    We do not believe that a school's closure or bankruptcy should
automatically reduce its' former students' loan repayment obligations.
If those students qualify for a closed school discharge, or have a
borrower defense to repayment, they can apply for that relief
individually. The Department has no authority to determine whether or
not a student remains obligated to repay private loans, including those
issued by the institution, in the event that an institution closes.
    If a borrower at a school that has closed may qualify for either a
closed school discharge or a borrower defense discharge, we encourage
the borrower to apply for a closed school discharge. The closed school
discharge application process is generally less burdensome than the
borrower defense application process since in the case of the closed
school, the evidence of the closure is clear and apparent. We do not
believe there is a strong incentive for a borrower who may qualify for
a closed school discharge to apply for a borrower defense discharge
instead.
    The Department thanks the commenter for the suggestion regarding
early implementation of the closed school discharge regulatory
provisions. We reviewed the provisions and our procedures to determine
if early implementation was possible. As a result, we are limiting our
early implementation of these final regulations to those expressly
listed in the ``Implementation Date of These Regulations'' section at
the beginning of this document.
    Changes: None.
    Comments: None.
    Discussion: In the discharge procedures for loans first disbursed
on or after July 1, 2020, the Department makes a technical amendment in
Sec.  685.214(g)(6) to state that if the borrower does not qualify for
a closed school discharge, the Department resumes collection. This
technical amendment reflects the Department's longstanding practice to
resume collection if a borrower's closed school discharge application
is denied.
    Changes: The Department makes a technical amendment to Sec.
685.214(g)(6) to state that if the borrower does not qualify for a
closed school discharge, the Department resumes collection.
False Certification Discharges
Application Process
    Comments: One commenter recommended that the Department remove the
new requirement that a borrower submit a ``completed'' application in
order to obtain a false certification loan discharge, and that we
instead retain the language in the 2016 final regulations that required
a borrower to submit an application in order to qualify for a false
certification discharge. Another commenter agreed with the
recommendation to remove ``completed,'' at least until the false
certification discharge application is tested and revised to reduce
inadvertent borrower errors. The commenter believed that by requiring a
completed application within 60 days of suspending collections, the
Department, guaranty agencies, and servicers would lack the discretion
to notify the borrower regarding inadvertent errors and allow the
borrower additional time to submit a corrected application while
collection remains suspended.
    One commenter recommended that the Department provide a school with
written notice that a student has filed a discharge application and
give the school the opportunity to respond. Another commenter also
supported this proposal and urged the Department to provide the
institution with a copy of the application and supporting information
and afford the school a reasonable period of time to respond, such as
60 days. Under this proposal, the student would be provided a copy of
the school's response and supporting documentation.
    One commenter expressed the view that the proposed regulatory
changes related to false certification discharges will result in
borrower confusion about their false certification discharge
applications. The commenter objected to the Department's proposal to
remove language included in the 2016 final regulations that would
require the Secretary to issue a decision that explains the reasons for
any adverse determination on the application, describe the evidence on
which the decision was made, and provide the borrower, upon request,
copies of the evidence. The 2016 final regulations also provide that
the Secretary considers any response and additional information from
the borrower and notifies the borrower whether the determination has
changed. In the commenter's view, this language would offer borrowers
an opportunity to respond and submit additional evidence that could
prove critical both to the approval of a borrower's application and to
the Department's oversight of institutional misconduct.
    Discussion: These final regulations require the borrower to submit
a ``completed'' application because an incomplete application--such as
an application without a signature or an application with missing
information--does not provide all the information necessary for the
Department, guaranty agency, or servicer to make a decision on the
claim, which will result in the application being returned to the
borrower as incomplete. Therefore, we will retain the term
``completed'' in the final regulations.
    Requiring the borrower to submit a ``completed'' application in the
regulations does not preclude the Department from contacting the
borrower and asking the borrower to provide the missing information.
Additionally, we believe sixty days from the day that the Secretary
suspended collection efforts is a reasonable period of time for a
borrower to complete the application, and for any necessary follow-up
communication between the borrower and the Department.
    We disagree with the commenters' proposal that the Department give
a
[[Page 49856]]
school an opportunity to respond to the borrower's false certification
discharge application. The information and documentation that the
Department routinely collects through the false certification discharge
application process is typically sufficient for the Department to make
a determination of eligibility. Further, while information is generally
not required from the school, the Department has the discretion to
contact the school to request additional information. In addition to
any relevant information that a school may provide in response to a
request from the Department, the final regulations provide that the
Secretary may determine whether to grant a request for discharge by
reviewing the application in light of information available from the
Secretary's records and from other sources, including, but not limited
to, the school, guaranty agencies, State authorities, and relevant
accrediting associations. In other words, the Secretary has the
discretion to review all necessary and relevant information to make a
determination about a discharge based on false certification under
these final regulations. We believe this approach strikes the right
balance between thoughtful use of government resources and facilitating
a full and fair process, by providing secretarial discretion and not
requiring the Department to conduct unnecessary mandatory steps.
    We do not believe that these final regulations will result in
confusion to borrowers about their false certification discharge
applications. Both the proposed and final regulations expressly state
that the false certification discharge application will explain the
qualifications and procedure for obtaining a discharge.
    Information on eligibility for a false certification discharge will
be provided to borrowers on the false certification discharge form and
other forms, and we will provide updated information on our websites.
Additionally, these final regulations provide in Sec.  685.215(f)(5)
that 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, and resumes
collection.
    We do not believe that it is necessary to provide a formal appeal
process for a borrower to dispute a denial of a false certification
discharge application. Due process does not require an appeal in this
context. We provide additional avenues for a borrower to dispute a
denial of a loan discharge through such means as contacting the FSA
Ombudsman Group.\140\ Currently, the Ombudsman Group works with
borrowers and their loan holders to attempt to resolve disputes over
matters such as discharge decisions. This process continues to be
effective and the Ombudsman Group is engaged in a continuing process to
improve their responsiveness to borrowers.\141\ Given the considerable
time and resources involved in formal appeal processes and the
efficiency of the Ombudsman Group, we have decided not to include a
formal process in the final regulations. With regard to (1) providing
information to borrowers with regard to ``false certification''
discharge and (2) a formal appeal, we believe our regulatory approach
strikes the right balance between thoughtful use of government
resources and facilitating a full and fair process, by not adding
additional, unnecessary mandatory steps.
---------------------------------------------------------------------------
    \140\ See: https://studentaid.ed.gov/sa/repay-loans/disputes/prepare.
    \141\ In the Report of the Federal Student Aid Ombudsman, the
Ombudsman Group reported that customer satisfaction survey results
were ``not as high as desired,'' but had improved from FY 2016.
(See: FSA Fiscal Year 2018 Annual Report, https://www2.ed.gov/about/reports/annual/2018report/fsa-report.pdf, at pg. 100-101.) The
Ombudsman noted, however, that they attributed the customer rating
to individuals expressing dissatisfaction because they expected the
Ombudsman to act as their advocate, desired an outcome that falls
outside law and regulations, or based their satisfaction on the
outcome achieved rather than the service provided.
---------------------------------------------------------------------------
    Changes: None.
False Certification of a Borrower Without a High School Diploma or
Equivalent
    Comments: Several commenters supported the proposal to amend the
eligibility criteria for false certification loan discharges to specify
that, in cases when a borrower could not provide the school an official
high school transcript or diploma but provided an attestation that the
borrower was a high school graduate, the borrower would not qualify for
a false certification discharge based on not having a high school
diploma. These commenters agreed that a student attestation of high
school graduation should be a bar to a false certification discharge.
Many commenters expressed the view that if a student lies about earning
a high school diploma for the purpose of applying for Federal student
loans, the school should not be held responsible. One commenter noted
that this proposal would provide a useful protection for schools
serving populations for which providing a diploma can be difficult,
such as non-traditional students who are unable to access their
transcripts due to the length of time since high school graduation.
Another commenter made the point that institutions and taxpayers should
not be accountable for the fraudulent behavior of borrowers.
    One commenter supportive of the proposal suggested additional
language that, in the commenter's' view, would better reflect the
intent of the regulatory change. The commenter recommended language
specifying that a borrower does not qualify for a false certification
discharge if the borrower falsely attested to the school in writing and
under penalty of perjury that the borrower had a high school diploma or
completed high school through home schooling.
    One commenter, supportive of the proposal to deny a false
certification loan discharge to students who deceived the school about
the students' high school completion status, expressed concern that the
parameters described in Sec.  685.215(c)(1)(ii) are convoluted and may
be difficult to manage at an open access institution such as most
community colleges and vocational schools. Institutions often rely on
the students' self-certification of high school completion, such as
through the information submitted by the student in the FAFSA, which
would fail the requirement described in proposed Sec.
685.215(c)(1)(ii)(A). This commenter proposed revising Sec.
685.215(c)(1)(ii) to provide that a borrower would not qualify for a
false certification discharge under Sec.  685.215(c)(1) if the borrower
submitted a written attestation, including certification through the
FAFSA, that the borrower had a high school diploma or its recognized
equivalent.
    One commenter agreed with the proposal, but noted that if the
borrower reported not having a high school diploma or its equivalent
upon admission to the school and the school certified the student's
eligibility for Federal student aid, the school should be held liable
for the funds that were provided to the student. As another commenter
noted, although schools may rely on information in the FAFSA when
certifying borrower eligibility, it is also the school's responsibility
to resolve conflicting information. The commenter suggested including
language that establishes an exception to this rule in cases where the
school had information that indicates that the student's information is
inaccurate.
    Other commenters stated that, in some cases, a false attestation by
a student is the result of a deliberate effort by a school. These
commenters believed that students who have been induced to misrepresent
their eligibility as a result of institutional efforts or practices
should be entitled to relief under the regulations. Other commenters
[[Page 49857]]
expressed the view that the proposal may lead to schools rushing
students through the attestation forms and, thus, may incentivize fraud
on the part of schools. One commenter asserted that students will be
counseled by schools to sign the attestation and stated that at least
one accrediting agency forbids such attestations. The commenter
recommended that a separate process be put in place for students who
are unable to obtain their high school diplomas or transcripts due to
natural disasters.
    A group of commenters expressed the view that the attestation
provision will enable predatory schools to defraud both students and
taxpayers, while denying relief to borrowers. This group believed that
the proposal conflicts with the broad statutory mandate to grant false
certification discharges and raises serious due process concerns by
creating a blanket restriction that denies false certification
discharges whenever a school produces an attestation of high school
status presumably signed by the borrower without consideration of facts
or evidence. These commenters also noted that the FSA Handbook allows
schools to accept alternative documentation of high school graduation
status if a student cannot provide official documentation to verify
high school completion status and, thus, an avenue already exists for
the limited number of borrowers who cannot obtain their official high
school transcripts to qualify for Federal student financial aid. These
commenters asserted that the attestation exception is unnecessary and
does not provide any benefit to borrowers.
    Additionally, these commenters contended that the attestation
exception would deprive borrowers of due process rights. According to
these commenters, the proposed rule assumes the validity of a
borrower's attestation and forecloses a borrower's ability to present
evidence that he or she did not knowingly sign a false attestation.
These commenters provided examples of signatures obtained through
duress, misrepresentation, or deceitful and illegal business practices.
In the view of these commenters, the regulations would provide a road
map for abuse by predatory schools, that would only need to produce an
attestation form--no matter how dubiously obtained--to insulate
themselves from Departmental oversight and to bar any remedy for
borrowers.
    A group of commenters stated that it would be improperly
retroactive for the Department to apply the attestation exception to
all Perkins and Direct Loan borrowers, rather than to loans disbursed
after the effective date of the regulations.
    This group also opposed the Department's use of the disbursement
date of the loan rather than the origination date to indicate when a
borrower was falsely certified. These commenters argued that the use of
disbursement date conflicts with the plain language of the HEA, which
requires an institution to certify an individual's eligibility to
borrow before it ``receives'' financial aid through a disbursement.
These commenters stated that, while a school may admit a high school
senior who is not yet eligible for student financial aid, it may not
certify eligibility of that student until the student has obtained his
or her high school diploma or GED. In the view of these commenters,
allowing schools to certify for aid upon disbursement will incentivize
schools to falsely certify high school seniors who subsequently do not
graduate to continue receiving revenue. According to these commenters,
the proposal would essentially allow a school to ``provisionally''
certify a borrower's eligibility and encourage fraud.
    Discussion: We thank the commenters who supported our proposal. We
also thank the commenter who pointed out that, while schools may rely
on information provided on the FAFSA to certify eligibility for student
financial aid, schools also have an obligation to resolve discrepant
information. If the school has evidence that a borrower has falsely
certified his or her high school graduation status, the school may not
certify the borrower's eligibility for title IV funds, regardless of
the information provided by the student in the FAFSA. While these
regulations would prevent a borrower who falsely certified high school
graduation status from receiving a false certification discharge,
nothing in these final regulations relieves a school of its obligation
to ensure that it certifies only eligible borrowers for Federal student
aid under title IV.
    The Department may always conduct a program review and make
findings against a school that unlawfully certifies eligible borrowers
for Federal student aid under title IV, and the Department may recover
liabilities against such schools under 34 CFR part 668, subpart G.
These final regulations, unlike the 2016 final regulations, place the
burden on the borrowers and not the schools to certify eligibility for
Federal student aid for purposes of a false certification discharge.
Schools must rely upon the information that a borrower provides about a
high school diploma or alternative eligibility requirements and cannot
issue subpoenas to compel the production of records that will
demonstrate the student has a high school diploma or its equivalent.
Even if discrepant information exists, borrowers who submitted to the
school a written attestation, under penalty of perjury, that they had a
high school diploma, should not receive a false certification discharge
if the borrower was untruthful in attesting that he or she had earned a
high school diploma. Federal taxpayers should not pay for a borrower's
misrepresentation of eligibility requirements for Federal student aid
with respect to a high school diploma or its equivalent. In the event
that a borrower was encouraged or coerced to sign an untrue attestation
regarding his or her high school graduation status, the borrower would
be entitled to relief under the borrower defense to repayment
regulations, not the false certification loan discharge regulations.
    The Department appreciates the suggestion to revise the regulatory
language with respect to borrowers who completed high school through
home schooling. We believe that proposed Sec.  685.215(c)(1)(ii)(A)
(Sec.  685.215(e)(1)(ii)(A) of these final regulations), which
expressly includes borrowers who were home schooled adequately
addresses students who received an education through homeschooling.
    Although commenters provided some examples of schools that may have
deliberately encouraged borrowers to falsely certify their high school
graduation status, or rushed borrowers through the process of signing
attestation forms, we are not aware of data that shows this is
widespread. Additionally, the commenter misinterprets what the
Accrediting Commission of Career Schools and Colleges (ACCSC) states in
its ``Standards of Accreditation.'' Whereas the commenter stated that
ACCSC ``forbids'' the use of attestations, in fact, the Standards state
that ACCSC does not consider a self-certification to be documentation,
not that the usage of such attestations is forbidden.\142\ It would be
detrimental to the school, and to the school's reputation, to
systematically and intentionally enroll and award aid to ineligible
students, who did not graduate from a high school or who do not meet
the alternative eligibility criteria.
---------------------------------------------------------------------------
    \142\ ACCSC, ``Standards of Accreditation,'' July 1, 2018,
http://www.accsc.org/UploadedDocuments/1967/ACCSC-Standards-of-Accreditation-and-Bylaws-07118.pdf.
---------------------------------------------------------------------------
    If a school knows that the borrower did not have a high school
diploma or
[[Page 49858]]
has not met the alternative eligibility requirements and represents to
the borrower that the borrower should submit a written attestation,
under penalty of perjury that the borrower had a high school diploma,
then the school has committed a misrepresentation that constitutes
grounds for a borrower defense to repayment claim. The Department will
continue to hold schools accountable for misrepresentations made to a
borrower under Sec.  685.206, and the Department may initiate a
proceeding against a school for a substantial misrepresentation by an
institution under Sec.  668.71. These enforcement mechanisms provide
safeguards against fraudulent practices by schools.
    The Department agrees with the commenter that 34 CFR
685.215(c)(1)(ii), as proposed in the 2018 NPRM, does not permit a
student's certification of high school graduation status on the FAFSA
to qualify as the written attestation, under penalty of perjury, that
the borrower had a high school diploma. A form separate from the FAFSA
will better signify the consequences and importance of such a written
attestation, under penalty of perjury, to the borrower. The Department
will provide a model language for such a written attestation that
schools may choose to use.
    The Department acknowledges that the FSA Handbook provides a list
of documentation other than a high school diploma that may be used by a
borrower to demonstrate eligibility for receiving Federal student aid
under title IV. For example, a student who has a General Educational
Development (GED) certificate is eligible to receive financial
assistance under title IV.\143\ A borrower who meets alternative
eligibility requirements does not need to submit to the school a
written attestation, under penalty of perjury, that the borrower had a
high school diploma. The Department's final regulations recognize that
there are alternative eligibility requirements and expressly reference
these alternative eligibility requirements in 34 CFR 685.215(e)(1)(i).
---------------------------------------------------------------------------
    \143\ Federal Student Aid Handbook, AVG-90 (2017-18).
---------------------------------------------------------------------------
    We agree that the alternative eligibility requirements may benefit
some borrowers, but some borrowers cannot satisfy these alternative
eligibility requirements. If a borrower went to high school 40 years
ago and lost his or her diploma, he or she may not be able to readily
satisfy the alternative eligibility requirements. These final
regulations afford such a borrower an avenue to nonetheless qualify to
receive Federal student aid.
    Similarly, these final regulations provide an avenue for students
who lost their high school diplomas as the result of a natural disaster
to qualify to receive Federal financial aid. The Department
acknowledges that such students also may qualify for Federal financial
aid through the alternative eligibility requirements.\144\ Accordingly,
the Department does not need to create a separate process for survivors
of natural disasters.
---------------------------------------------------------------------------
    \144\ Federal Student Aid Handbook, ``School-Determined
Requirements,'' May 2018, Pg. 1-10, https://ifap.ed.gov/fsahandbook/attachments/1819FSAHbkVol1Ch1.pdf.
---------------------------------------------------------------------------
    These final regulations provide borrowers with due process.
Procedural due process requires notice and an opportunity to be heard.
These regulations give borrowers notice that if they falsely or
fraudulently submit to the school a written attestation, under penalty
of perjury, that they had a high school diploma, then they will not
qualify for a false certification discharge. The Federal false
certification discharge application provides the borrower with an
opportunity to be heard. Accordingly, these final regulations satisfy
due process. However, in the event that the borrower was coerced into
signing such an attestation as a result of a school's
misrepresentation, the borrower would likely qualify for relief under
the borrower defense to repayment regulations.
    These final regulations provide that a borrower does not qualify
for a false certification discharge under Sec.  685.215(e)(1) if the
borrower was unable to provide the school with an official transcript
or an official copy of the borrower's high school diploma and submitted
to the school a written attestation, under penalty of perjury, that the
borrower had a high school diploma. If the school forges the borrower's
signature on such an attestation, then the borrower did not submit this
written attestation to the school and would qualify for a false
certification discharge.
    Additionally, if the school signs the borrower's name on the loan
application or promissory note without the borrower's authorization,
then the borrower may still qualify for a false certification discharge
under Sec.  685.215(a)(1)(iii). These final regulations continue to
include forged signatures on a loan application or promissory note as
an adequate basis for a false certification student loan discharge.
    The Department in its 2018 NPRM proposed rescinding the provision
in the 2016 final regulations that if the Secretary determines that the
borrower does not qualify for a false certification discharge, the
Secretary will notify the borrower in writing of its determination on
the request for a false certification discharge and the reasons for the
determination.\145\ In response to comments that raised due process
concerns, the Department will no longer rescind this provision for the
discharge procedures that apply to loans first disbursed on or after
July 1, 2020, and includes this provision in the final regulations as
Sec.  685.215(f)(5). If the Secretary determines that a borrower does
not qualify for a discharge, then under Sec.  685.215(f)(5), the
Secretary notifies the borrower in writing of that determination and
the reasons for that determination, and resumes collection. The
Department has always resumed collection of the loan after the
Department denied a false certification discharge and is adding the
phrase ``and resumes collection'' in Sec.  685.215(f)(5) as a technical
amendment to provide clarity.
---------------------------------------------------------------------------
    \145\ 83 FR 37251.
---------------------------------------------------------------------------
    We understand the commenter's concern about retroactive application
of the regulatory changes. The regulations regarding false
certification will apply to loans first disbursed on or after July 1,
2020, and will not apply retroactively. We have revised these final
false certification regulations only to apply to new borrowers in the
Direct Loan program. False certification discharges are not available
in the Perkins Loan program; therefore, these regulations will not
affect those borrowers. We also are not making changes to the false
certification discharge requirements for the FFEL program.
    The Department disagrees that using the disbursement date of the
loan rather than the origination date for purposes of false
certification discharge contradicts the HEA. As noted in the 2018 NPRM,
the Department acknowledged the concerns of the negotiator who noted
that a borrower may be a senior in high school with the intention of
graduating when that borrower applies for assistance under title IV.
The Department recognizes that under section 484(a)(1) of the HEA and
34 CFR 668.32(b), a student is not eligible to receive assistance under
title IV if the student is enrolled in an elementary or secondary
school. Section 437(c) of the HEA provides the authority for a false
certification discharge, and such a discharge applies only to a
``borrower
[[Page 49859]]
who received . . . a loan made, insured, or guaranteed under this
part.'' A borrower will not be eligible for the discharge unless the
borrower received the loan. Moreover, a school may realize that a
borrower provided the school with false or discrepant information for
eligibility of title IV assistance after the origination date of the
loan but before the loan is disbursed, and the school may revoke its
certification of eligibility for that borrower prior to disbursement of
the loan. Accordingly, the date of disbursement of the loan aligns with
the HEA and serves as a better gauge to determine eligibility for a
false certification discharge. As noted above, the Department has
various enforcement mechanisms to address fraud by a school, and a
school is not permitted to falsely certify a borrower's eligibility to
receive assistance under title IV.
    Changes: We have revised our proposed changes to Sec.  685.215 to
clarify that they apply only to loans disbursed on or after July 1,
2020. Additionally, in the discharge procedures for loans first
disbursed on or after July 1, 2020, the Department is not rescinding
the provisions in the 2016 final regulations that provide that the
Secretary will notify the borrower in writing of its determination on
the request for a false certification discharge and the reasons for the
determination, if the Secretary determines that the borrower does not
qualify for a false certification discharge.\146\ The Department
includes this provision in these final regulations as Sec.
685.215(f)(5). If the Secretary determines that a borrower does not
qualify for a discharge, then under Sec.  685.215(f)(5), the Secretary
notifies the borrower in writing of that determination and the reasons
for that determination, and resumes collection. The Department has
always resumed collection of the loan after the Department denied a
false certification discharge and is adding the phrase ``and resumes
collection'' in Sec.  685.215(f)(5) as a technical amendment.
---------------------------------------------------------------------------
    \146\ 83 FR 37251.
---------------------------------------------------------------------------
Additional False Certification Discharge Recommendations
    Comments: Two commenters recommended that the Department retain
language on automatic false certification discharges for Satisfactory
Academic Progress (SAP) violations in the 2016 final regulations. One
of these commenters noted that program reviews would not address the
purpose of the SAP language in the 2016 final regulations, which was to
permit loan discharges for the affected borrowers when the Department
finds evidence of falsification of SAP. The commenter stated that while
investigations, audits, and reviews of institutional policies and
practices are necessary to uncover evidence of such falsification, and
to ensure that the institution is held accountable, the borrower should
not be held responsible for repaying the loan.
    Discussion: We do not believe that it is appropriate to have a
specific provision in the regulations providing for a false
certification discharge based on falsification of SAP. Existing Sec.
685.215(c)(8) (2016) already provides that the Department may discharge
a borrower's Direct Loan by reason of false certification without an
application from the borrower if the Secretary determines, based on
information in the Secretary's possession, that the borrower qualifies
for a discharge, and Sec.  685.215(e)(7), will also include such a
provision. This regulation gives the Secretary broad discretion in
discharging a loan without an application from the borrower based on
information in the Secretary's possession. Accordingly, this regulation
does not preclude the Secretary from considering evidence in her
possession that the school falsified the SAP progress of its students
as part of the Secretary's decision to discharge a loan.
    However, we do not think it is appropriate for the regulation to
specifically include Satisfactory Academic Process as information the
Secretary would consider, and we do not include that language for loans
first disbursed on or after July 1, 2020. Evaluation of an
institution's implementation of their SAP policy is part of an FSA
program review, and thus, the Department has a mechanism in place to
identify inappropriate activities in implementing an institution's SAP
policy. SAP determinations are subject to the internal policies of the
school, and it would be difficult to determine if a school violated its
own SAP policies in the context of, and in conjunction with, reviewing
a false certification discharge application. The Department does not
wish to single out and elevate evidence that the school has falsified
the SAP of its students above other information in the Secretary's
possession that she may use to discharge all or part of a loan without
a Federal false certification application from the borrower.
    Additionally, we do not have evidence that falsification of SAP is
widespread. As we stated in the 2016 final regulations, schools have a
great deal of flexibility both in determining and in implementing SAP
standards. There are a number of exceptions under which a borrower who
fails to meet SAP can continue to receive title IV aid. Borrowers who
are in danger of losing title IV eligibility due to a failure to meet
SAP standards often request reconsideration of the SAP determination.
Schools typically work with borrowers in good faith to attempt to
resolve the situation without cutting off the borrower's access to
title IV assistance.
    We do not believe that a school should be penalized for legitimate
attempts to help a student who is not meeting SAP standards, nor do we
believe a student who has successfully appealed a SAP determination
should be able to use that initial SAP determination to obtain a false
certification discharge on his or her student loans. However, a student
may use a misrepresentation about SAP to successfully allege a borrower
defense to repayment under 34 CFR 685.206(e), assuming the student
satisfies the other elements of a borrower defense to repayment claim.
For these reasons, it is not necessary to expressly state that the
information the Secretary may consider includes evidence that the
school has falsified the SAP of its students.
    Changes: None.
    Comments: None.
    Discussion: A disqualifying condition or condition that precludes a
borrower from meeting State requirements for employment was a basis for
a false certification discharge prior to the 2016 final regulations and
remains a basis for a false certification discharge. In the 2016 final
regulations, the Department added language in 34 CFR 685.215(c)(2) to
require a borrower to state in the application for a false
certification discharge that the borrower 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. The Department in its 2018 NPRM noted that ``the changes in
the 2016 final regulations did not alter the operation of the existing
regulation as to disqualifying conditions in any meaningful way, and as
a result does not propose such added language in these regulations.''
\147\ The Department would like to further note that its past guidance
previously discouraged schools from requesting or relying upon a
borrower's criminal record.\148\ Some
[[Page 49860]]
State and Federal laws also may discourage or prevent schools from
requesting information about a student's physical or mental health
condition, age, or criminal record.\149\ If schools do not have
knowledge of the disqualifying condition that precludes the student
from meeting State requirements for employment in the occupation for
which the training program supported by the loan was intended, then
schools cannot falsely certify a student's eligibility for Federal
student aid under title IV. Accordingly, a borrower's statement that
the borrower has a disqualifying condition, standing alone, will not
qualify a borrower for a false certification discharge under 34 CFR
685.215(a)(1)(iv).
---------------------------------------------------------------------------
    \147\ 83 FR 37270.
    \148\ U.S. Dep't of Educ., Beyond the Box: Increasing Access to
Education for Justice-Involved Individuals (May 9, 2016), available
at https://www2.ed.gov/documents/beyond-the-box/guidance.pdf.
    \149\ See e.g., Wash. Rev. Code section 28B.160.020 (2018).
---------------------------------------------------------------------------
    Changes: None.
Financial Responsibility, Subpart L of the General Provisions
Regulations
Section 668.171, Triggering Events
    Comments: Numerous commenters wrote that the Department should
strengthen the mandatory triggers. They urged the Department to
strengthen the financial responsibility portion of the proposed rules
by reinstating the full list of triggers provided in the 2016 final
rules or by adding additional triggers. Commenters reasoned that, in
order to protect taxpayer dollars, the Department should strengthen
school accountability by increasing the number of early warnings of an
institution's coming financial difficulties. A commenter stated that
the Department needs ``to develop more effective ways to identify
events or conditions that signal impending financial problems.'' \150\
Without that, the commenters concluded the Department would not truly
be able to anticipate potential taxpayer liabilities and obtain
financial protection prior to incurring those liabilities.
---------------------------------------------------------------------------
    \150\ 81 FR 39361. (emphasis in comment).
---------------------------------------------------------------------------
    The commenters believed that the mandatory and discretionary
triggering events in Sec.  668.171(c) and (d) were inadequate, too
narrow and less predictive, or late in detecting misconduct by
institutions compared to the triggering events in the 2016 final
regulations. The commenters argued that by eliminating or weakening
several of the 2016 triggering events, or making those triggering
events discretionary, the Department has made it easier for an
institution to continue to operate, or operate without consequences or
accountability, in cases when the institution would likely close or
incur significant liabilities.
    As a result, the commenters reasoned that the Department would be
less likely to obtain financial protection, or obtain it on a timely
basis, leaving taxpayers to bear the costs. In addition, some of these
commenters noted that the Department's Office of the Inspector General
issued a report \151\ stating, in part, that (1) the Department would
receive important, timely information from institutions experiencing
the triggering events in the 2016 final regulations that would improve
the Department's processes for identifying institutions at risk of
unexpected or abrupt closure, and (2) enforcement of the regulations
would also improve the Department's processes for mitigating potential
harm to students and taxpayers by obtaining financial protection based
on broader and more current information than institutions provide in
their financial statements.
---------------------------------------------------------------------------
    \151\ ED-OIG/I13K0002, available at https://www2.ed.gov/about/offices/list/oig/auditreports/fy2017/a09q0001.pdf.
---------------------------------------------------------------------------
    Many commenters supported the mandatory and discretionary
triggering events proposed in the 2018 NPRM, noting that they focus on
known, quantifiable, or material actions. As such, some of these
commenters believed the triggering events are an improvement over those
in the 2016 final regulations that could have exacerbated the financial
condition of an institution with minor and temporary financial issues
or required an evaluation of the impact that undefined regulatory
standards (i.e., high drop-out rates, significant fluctuations in title
IV funding) would have on an institution's financial condition.
    Other commenters were concerned that the proposed triggering events
exceed the Department's authority, arguing that the triggers include
factors that are not grounded in accounting principles and do not
account for an institution's total financial circumstances as required
under section 498(c) of the HEA. Along the same lines, a few commenters
were concerned that some of the triggering events were overly broad and
poorly calibrated to identify situations when an institution is unable
to meet its obligations and asked the Department to consider whether
the triggers are necessary.
    Some commenters believed that the Department should apply the
mandatory and discretionary triggers equally across all institutions.
In addition, the commenters noted that proprietary institutions must
already comply with the provisions that a school must receive at least
10 percent of its revenue from sources other than title IV, HEA program
funds (also known as the ``90/10'' requirement). In addition, all
institutions must meet the requirements for a passing composite score
and cohort default rates and argued that the Department should not
create new requirements for these provisions exclusively for
proprietary institutions.
    Discussion: The Department disagrees with the comments that the
proposed triggering events will diminish our oversight
responsibilities. These regulations do not change the approach the
Department currently uses to identify and react contemporaneously to
actions or events that have a material adverse effect on the financial
condition or viability of an institution.
    The 2016 final regulations include as triggers (1) events whose
consequences are uncertain (e.g., estimating the likely outcome and
dollar value of a pending lawsuit or pending defense to repayment
claims, or evaluating the effects of fluctuations in title IV funding
levels), (2) events more suited to accreditor action or increased
oversight by the Department (e.g., unspecified State violations that
may have no bearing on an institution's financial condition or ability
to operate in the State), and (3) results of a yet-undefined test
(e.g., a financial stress test) that would be akin to the current
financial responsibility standards and potentially inconsistent with
the current composite score methodology. The Department acknowledges
that the composite score methodology should be updated through future
rulemaking. In these final regulations, we adopt mandatory triggering
events whose consequences are known, material, and quantifiable (e.g.,
the actual liabilities incurred from lawsuits) and objectively assessed
through the composite score methodology or whose consequences pose a
severe and imminent risk (e.g., SEC or stock exchange actions) to the
Federal interest that warrants financial protection.
    Additionally, based upon our review of the comments, the Department
has decided to revise the proposed triggers in these final regulations.
First, the Department has decided not to rescind the high annual drop-
out rates trigger in the 2016 final regulations. Despite our previous
concerns about whether a threshold has ever been established for this
trigger and whether it is an event more suited to action by an
accreditor, we have reconsidered this position, in part based on a
comment pointing out that Congress has identified drop-out rates as an
area of such significant
[[Page 49861]]
concern that a high rate should be factored into the Department's
selection of institutions for program reviews.
    However, we do not adopt this commenter's logic regarding
significant fluctuations in Pell Grants or loan volume. While
statutorily appropriate for a program review, we believe that
additional financial oversight, in the form of a discretionary trigger,
would be ill-suited to fluctuations in loan volume and Pell grant
amounts. First, significant fluctuations in loan volume year-over-year
more readily stem from events that do not indicate financial
instability, such as through institutional mergers, which the
Department has reason to believe will continue if not increase in the
future.\152\ Next, the Department is concerned that linking Pell Grant
fluctuations to a discretionary trigger would harm low-income students
and discourage institutions from serving students who rely on Pell
Grants. Finally, fluctuations in Pell Grants and loan volume may be
inversely related to national economic conditions--such as a recession
leading to newly unemployed workers seeking additional training or
education--rather than the financial health of an institution.
---------------------------------------------------------------------------
    \152\ Kellie Woodhouse, ``Closures to Triple,'' Inside Higher
Ed, September 28, 2015, https://www.insidehighered.com/news/2015/09/28/moodys-predicts-college-closures-triple-2017; Clayton M.
Christensen and Michael B. Horn, ``Innovation Imperative: Change
Everything,'' The New York Times, November 1, 2013, https://www.nytimes.com/2013/11/03/education/edlife/online-education-as-an-agent-of-transformation.html; Abigail Hess, ``Harvard Business
School Professor: Half of American Colleges Will Be Bankrupt in 10
to 15 Years,'' CNBC, August 30, 2018, https://www.cnbc.com/2018/08/30/hbs-prof-says-half-of-us-colleges-will-be-bankrupt-in-10-to-15-years.html.
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    Second, the Department closely considered comments regarding
whether our proposed triggers were strong enough to identify early
warning signs of financial difficulty and whether the Department could
properly and quickly identify events or conditions that signaled
impending financial problems. As more fully explained below, the
Department continues to believe that our proposed triggers provide
necessary protections and are sensitive to early warning signs.
However, the Department takes its responsibility as stewards of
taxpayer funds seriously and, as a result, is responsive to community
concerns regarding whether our oversight of those funds is
insufficient.
    Based upon numerous comments that we should strengthen the
financial responsibility regime, as well as our general duty to
taxpayers, the Department has decided that when two or more unresolved
discretionary triggers occur at an institution within the same fiscal
year, those unresolved discretionary triggers will convert into a
mandatory triggering event, meaning that they will result in a
determination that the institution is not able to meet its financial or
administrative obligations.
    Institutions will already have notice of, and be subject to, the
discretionary triggering events in Sec.  668.171(d). The Department has
determined that two or more unresolved discretionary triggers may be
indicators of near-term financial danger that leads to the conclusion
that an institution is unable to meet its financial or administrative
obligations. This regulatory change strengthens authority the Secretary
already possesses, at Sec.  668.171(d), by empowering the Department to
act when an institution exhibits a pattern of problematic behavior.
    We believe the elevation of multiple discretionary triggers, that
are unresolved and occur in the same fiscal year, to mandatory triggers
strengthens the Department's ability to enforce its financial
responsibility requirements. Institutions that exhibit behavior that is
likely to have a material adverse effect on the financial condition of
the institution require the Department to respond to protect taxpayer
and student interests.
    Despite these changes, our review of the comments does not lead us
to the conclusion that the Department should adopt the 2016 triggers in
their entirety. Through these triggers, the Department balances its
interest in taxpayer protection with institutional stability. In
particular, the Department seeks to avoid a repeat of prior instances
in which the Department sought a letter of credit from an institution
that it triggered a precipitous closure, harmed a large number of
students who were unable to complete their program of study, and
required taxpayers to pay an even greater cost in the form of closed
school discharges. We also seek to avoid the use of triggers, such as
pending, unsubstantiated claims for borrower relief discharge and non-
final judgements, that do not provide an opportunity for due process,
invite abuse, and have already resulted in high numbers of
unsubstantiated claims. The triggers have also proven unduly burdensome
for institutions that were required to report all litigation, even
allegations unrelated to claims for borrower defense relief. We view
the triggers in these final regulations as providing a sound and more
objective basis than the 2016 triggers for determining whether an
institution is financially responsible.
    Contrary to the presumption by the commenters that the 2016
triggers would have identified more financially troubled institutions,
we note that (1) the potential liabilities arising from pending
lawsuits or borrower defense claims is far from certain both in timing
and in amount, and estimating those liabilities for the purpose of
recalculating the composite score is problematic and could
inappropriately affect institutions for several years (see the
discussion under heading ``Mandatory and Discretionary Triggering
Events.''), and (2) reclassifying some the triggers as discretionary
will still provide review to identify actions or events that may have a
material adverse impact on institutions. In addition, while we agree
with the OIG report that information provided by the triggering events
will better enable the Department to exercise its oversight
responsibilities, we disagree with the notion raised by the commenters
that the triggering events outlined in the 2018 NPRM will dilute the
Department's ability to do so. To the contrary, we believe the approach
adopted in these final regulations, together with the revisions
explained above, will identify those institutions whose post-trigger
financial condition actually warrants financial protection, rather than
applying triggers that presumptively result in institutions having to
provide financial protection and unduly precipitate coordinated legal
action against an institution that trigger financial protections that
could have devastating--and in many cases unwarranted--financial and
reputational impacts on the institution.
    With regard to the comments that the triggers exceed the
Department's authority, we note that section 498(c) of the HEA directs
the Secretary to determine whether the institution ``is able . . . to
meet all of its financial obligations, including (but not limited to)
refunds of institutional charges and repayments to the Secretary for
liabilities and debts incurred in programs administered by the
Secretary.'' \153\ The statute uses the present tense to direct the
Secretary to assess the ability of the institution to meet current
obligations. These regulations satisfy that directive by requiring that
the assessment is performed contemporaneously with the occurrence of a
triggering event. The use of these triggers for interim evaluations, in
addition to the composite score calculated from the annual audited
financial statements, using the financial responsibility ratios, takes
into
[[Page 49862]]
consideration the total financial circumstances of the institution on
an ongoing basis.
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    \153\ 20 U.S.C. 1099c(c)(1).
---------------------------------------------------------------------------
    We disagree with the comment that some of the triggering events are
overly broad and poorly calibrated. As discussed in this section and
under the heading ``Mandatory and Discretionary Triggering Events,''
the Department recalibrated the triggers from the 2016 final regulation
to more narrowly focus on actions or events that have or may have a
direct adverse impact and eliminated the triggers from that final
regulation that were speculative or not associated directly with making
a financial responsibility determination.
    In response to the comments that the triggering events should apply
equally to all institutions, the commenters appear to suggest that the
Department somehow change or extend existing statutory requirements
(e.g., impose the 90/10 trigger on all institutions) or not consider
other agency provisions that apply only to certain institutions (e.g.,
SEC and exchange requirements for publicly traded institutions).
    The Department lacks the authority to apply certain statutory
requirements to other institutions and cannot ignore for the sake of
uniformity the risks associated with, or the consequences of, an
institution that fails to comply with such requirements. With regard to
the objections for establishing triggers for provisions that already
have associated sanctions (90/10 and CDR), it is the consequence of
those sanctions that we are attempting to mitigate by obtaining
financial protection. An institution that fails 90/10 for one year, or
has a cohort default rate of 30 percent or more for two consecutive
years, is one year away from possibly losing all or most of its title
IV eligibility as well as its ability to continue to operate is a going
concern. In that event, the financial protection obtained as a result
of these triggering events would cover some of the debts and
liabilities that would otherwise be shouldered by taxpayers. However,
the Department agrees that in instances in which the HEA does not
designate a specific trigger for a specific type or class of
institution, the Department will not use its regulatory power to create
new requirements or sanctions that apply to some but not all
institutions.
    Changes: The Department revises Sec.  668.171 to include a new
paragraph at Sec.  668.171(d)(5) to read: ``As calculated by the
Secretary, the institution has high annual dropout rates; or''.
Proposed Sec.  668.171(d)(5) is now redesignated Sec.  668.171(d)(6).
Additionally, the Department adds paragraph Sec.  668.171(c)(3) to
state that, for the period described in Sec.  668.171(c)(1), when the
institution is subject to two or more discretionary triggering events,
as defined in Sec.  68.171(d), those events become mandatory triggering
events, unless a triggering event is resolved before any subsequent
event(s) occurs.
    Comments: Some commenters were concerned that the proposed
framework of mandatory and discretionary triggering events does not
clearly specify how the Department will manage multiple triggering
events or specify whether a recalculated composite score is used only
for determining that an event has a material adverse effect on an
institution or whether the recalculated score represents a new,
official composite score. Similarly, other commenters requested that
the Department explain how it will apply, handle, determine, or view
specific instances surrounding a triggering event and, for
discretionary triggering events, how the Department will determine
whether an event has a material adverse effect on an institution.
    Other commenters noted that the NPRM appears to obligate the
Department to recalculate the composite score every time a triggering
event is reported. The commenters suggested that the Department reserve
the right to forgo a recalculation if the reported liability is deemed
immaterial.
    The commenters argued that an institution should not be required to
report every liability arising from a judicial or administrative
action, without regard to the amount or resulting implications, and the
Department would not need to perform a recalculation for every reported
liability. To address these issues, the commenters suggested that the
Secretary establish a minimum percentage or dollar value above which an
institution would be required to notify the Department and the
Department would recalculate the composite score. For example, a
judicial or administrative action resulting in a liability under
$10,000 would not require reporting or recalculating the composite
score and would reduce burden on institutions and the Department.
    Discussion: Based on the actual liability or loss incurred by an
institution from a triggering event, the Department recalculates the
institution's composite score to determine whether any additional
action is needed. As was the case in the 2016 final regulations, if the
institution's recalculated score is 1.0 or higher, no additional action
is needed, and there is no change in the institution's official
composite score.
    For example, assume that an institution's official composite is
1.8, but as a result of a triggering event, its recalculated score is
1.4. The institution's official composite score remains at 1.8, even
though a score of 1.4 would in the normal course require the
institution to participate in the title IV, HEA programs under the zone
alternative in 34 CFR 668.175(c). Under the trigger provisions, an
institution with a recalculated score in the zone would not be required
to provide a letter of credit, nor would it be subject to any of the
zone provisions.
    On the other hand, if the institution's recalculated composite
score was a failing score of less than 1.0 (e.g., a score of 0.7), that
score becomes the institution's official composite score and remains
the composite score unless modified by a subsequent triggering event or
until the Department calculates a new official composite score based on
the institution's annual audited financial statements for that fiscal
year. In this case, with a failing score of 0.7, the institution would
be required to participate in, and be subject to the provisions of, the
letter of credit or provisional certification alternatives under 34 CFR
668.175(c) or (f).
    The Department has determined that there is a greater risk to
taxpayers when an institution has a failing composite score. As was the
case with the 2016 final regulations, the Department will only take
action based on interim adjustments that result in a failing composite
score. The official composite score is based on an institution's annual
audited financial statements. The interim adjustments are made based on
triggering events that occurred after the end of the institution's
fiscal year. These adjustments will show up in a subsequent year and be
reflected in the audited financial statements for that year. The
official composite score needs to be based only on the institution's
audited information. The adjustments that are made to a composite score
subsequent to the most recently accepted audited financial statements
are designed to protect the Department, students, and taxpayers.
    Given that a recalculated score does not affect an institution's
official composite score, unless it is a failing score less than 1.0,
we believe it is unnecessary to establish a materiality threshold below
which a triggering event is not reported, as suggested by the
commenters. A settlement, final judgment, or federal or state final
determination resulting in a liability of $10,000 may be material for
an institution whose financial condition is already precarious, but a
$10 million liability may not have a material impact on a financially
healthy institution.
[[Page 49863]]
    To objectively assess whether a liability is material to a specific
institution, we rely on the composite score methodology. Regardless of
whether an institution is on the cusp of failing the composite score or
has a high composite score, the relevant issue is whether the liability
that must be reported results in a failing recalculated score.
    We believe that liabilities arising from minor settlements, final
judgments, and final determinations by a Federal or State agency are
not likely to create variability in composite scores that could have
negative implications, particularly with oversight entities that use or
rely on the composite score, because composite scores will only be
changed if the recalculated scores are failing. In the cases where the
recalculated scores are failing, we believe that the cognizant
oversight entities should be interested in those outcomes.
    On its own, it is important for the Department to know that an
institution has incurred liabilities arising from settlements, final
judgments, and final determinations by Federal or State agencies.
Although the amount of each liability arising from such instances may
be a minor amount, the cumulative effect of numerous settlements, final
judgments, and final Federal or State agency determinations could
damage the institution's financial stability. The threshold that the
Department has established is any amount that causes the institution to
have a failing composite score, and the only way the Department can
determine if an institution has reached this threshold, is by requiring
the institution to report the liabilities referenced in paragraph
(c)(1)(i)(A).
    Regarding the comments about the burden associated with reporting
all incurred liabilities, we considered this burden in establishing the
reporting process in these final regulations and believe it adequately
balances the burden on schools with the Department's ability to obtain
necessary information. In addition, we discuss more details of the
reporting requirements under the heading ``Reporting Requirements,
Sec.  668.161(f)'' below.
    With respect to how the Department will manage and evaluate a
triggering event or handle multiple events, we believe it is not
appropriate or feasible to detail the Department's internal review
process in these final regulations. The outcome for any failing
composite score recalculation will be available to the reporting
institution. To the extent that the Department establishes procedures
for institutions to report and respond to the triggering events or
develops guidelines regarding how we intend to evaluate certain
triggering events, the Department will make that information available
to institutions.
    Generally, the mandatory triggers reflect actions or events whose
consequences are realized immediately, such as a liability incurred
through a final judgment after a judicial action or through a final
administrative action by a Federal or State agency, a withdrawal of
owner's equity that reduces resources available to the institution to
meet current needs, or an SEC or exchange violation that diminishes the
institution's ability to raise capital or signals financial distress.
For a mandatory trigger whose consequences can be quantified (a
monetary liability incurred by the institution or withdrawal of owner's
equity), a failing recalculated score (less than 1.0) evidences an
adverse material effect. For the other mandatory triggers (SEC and
exchange violations), given the nature and gravity of those events, we
presume they will have an adverse material effect on the institution's
financial condition. In either case, the burden falls on the
institution to demonstrate otherwise at the time it notifies the
Department that the event has occurred.
    On the other hand, discretionary triggers generally reflect actions
or events whose consequences are less immediate and less certain. For a
discretionary trigger, the Department will need to show that the event
is likely to have a material adverse effect on the institution's
financial condition or jeopardize the institution's ability to continue
to operate as a going concern.\154\ The Department will consider in its
review any additional information provided by the institution at the
time it reports that event.
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    \154\ Note: In the 2016 final regulations, we established that
for the discretionary triggers, an institution does not meet its
financial or administrative obligations if the Secretary
demonstrates that the trigger was ``reasonably likely to have a
material adverse effect on the financial condition, business, or
results of operations of the institution,'' and included a non-
exhaustive list of discretionary triggers. 34 CFR 668.171(g) (2017).
In contrast, in the 2018 proposed regulations, we characterized the
Secretary's burden as determining if any of the listed events ``is
likely to have a material adverse effect on the financial condition
of the institution . . .'' This phrasing is a technical change for
clarity and as a result, we are retaining this phrasing in the final
regulations. However, we include a finite list of discretionary
trigger events, to provide more certainty to institutions and to
facilitate the Department's ability to administer the regulations.
---------------------------------------------------------------------------
    Changes: None.
    Comments: One commenter criticized the Department's rulemaking with
respect to financial responsibility, claiming that the Department has
not analyzed data on the existing financial protection held by the
Department to assess the degree to which it may fall short of
institutional liabilities, or provided the public with information
necessary to establish the extent to which the Department's current
policies and practices meet the statutory requirement that the
Department ensure institutions of higher education are financially
responsible. The commenter submitted a FOIA request related to this
topic and stated that the request is now the subject of ongoing
litigation.
    In addition, the commenter contended that the Department failed to
provide information during the rulemaking process regarding how it sets
the amount of a required LOC. While acknowledging the Department's
longstanding regulations that establish a floor for the amount of the
LOC at 10 percent of the amount of an institution's prior year title IV
funding, the commenter admonished the Department for failing to (1)
consider whether to increase the amount of LOC floor in the proposed
regulations in light of revoking the automatic triggers and (2) provide
any information on the methodology the Department uses to set the
amount of an LOC.
    As a result, the commenter said the Department had not provided the
necessary information to say whether it is adequately protecting
taxpayers from significant liabilities. The commenter also asserted
that the Department cannot engage in a reasoned negotiated rulemaking
and cannot provide a fulsome opportunity to comment as required by both
the HEA and the APA, without first analyzing the information the
commenter had requested.
    Other commenters contended that the Department is not adequately
identifying risks from institutions noting that the majority of the
letters of credit (LOC) obtained by the Department came from
institutions with failing composite scores, but only a few LOCs stemmed
from significant concerns or events like those envisioned by the 2016
triggers.
    Discussion: First, we note that the sufficiency of the Department's
response to any individual FOIA request is beyond the scope of this
rulemaking and decline to comment on conclusions drawn about the
response or the ongoing litigation.
    With respect to the other aspects of the comment, the commenter
appears to be confusing LOCs obtained for different purposes. The
financial protection triggers in these and the 2016 final regulations
were designed to help
[[Page 49864]]
identify conditions or events that were likely to have a forward-
looking impact on an institution's financial stability. The 2016 final
regulations were not in effect at the time of the 2018 NPRM and the
negotiated rulemaking that preceded it, so no triggers were in place at
the time. Prior to the 2016 final regulations becoming effective, the
Department's regulations primarily authorized requiring a LOC from an
institution for failing to satisfy the standards of financial
responsibility based on its annual audited financial statements, or
during a change of institutional control, or more recently in the event
that an institution files for receivership.
    We do not believe that an analysis of LOCs obtained under the
preexisting regulations based solely on information contained in
audited financial statements would have facilitated fulsome comment and
participation about how best to calibrate forward-looking financial
responsibility triggers because the actions or events relating to the
triggers may not be evident, or otherwise disclosed, in those
statements. The Department must walk a fine line between protecting
taxpayers against sizeable unreimbursed losses through borrower defense
loan and closed school loan discharges, and forcing the closure by
establishing LOC requirements that themselves push the institution in
unreasonable financial duress.
    In addition, we did not propose in the 2018 NPRM to remove the
concept of automatic triggers altogether. We proposed modifying or
removing some of the triggers, referred to in the 2018 NPRM and in
these final regulations as ``mandatory'' instead of ``automatic,'' but
the concept that certain events trigger a requirement for financial
protection, absent a compelling response from an institution that the
triggering event does not and will not have a material adverse effect
on its financial condition, was not removed from the proposed or these
final regulations. In the 2018 NPRM and these final regulations, we set
forth a reasoned basis for the way we propose to structure the
automatic/mandatory and discretionary triggers, including why and how
that structure differs from the 2016 final regulations. This basis
includes our analysis of the rationales specified in the 2016 final
regulations and the reasons for why our weighing of facts and
circumstances results in a different approach.\155\
---------------------------------------------------------------------------
    \155\ See e.g., 83 FR 37272.
---------------------------------------------------------------------------
    The analysis of the triggers we incorporate into these final
regulations is detailed elsewhere in this section. In summary, both at
negotiated rulemaking and through the 2018 NPRM comment process, the
public had sufficient information for a fulsome opportunity to comment
and participate in the discussion about financial protection triggers.
    With regard to how the Department establishes the amount of a LOC,
as the commenter noted, the amount is, and has historically been, set
initially at 10 percent of the total amount of the prior year's title
IV funds received by an institution. We have always had the discretion
to require a LOC greater than 10 percent, but established in the 2016
final regulations under Sec.  668.175(f)(4), that the amount of a LOC
may be any amount over 10 percent that the Department demonstrates is
sufficient to cover estimated losses. However, in the 2018 NPRM we did
not propose, and do not adopt in these final regulations, the approach
in the 2016 final regulations that specifically tied any increase in
the LOC over 10 percent to the amount needed to cover estimated losses.
While that approach may be appropriate in some cases, we believe the
Secretary should have, and historically has had, the flexibility to
establish the amount of the LOC on a case by case basis, as may be
warranted by the specific facts of each case.
    With respect to the comment about increasing the LOC floor, if the
commenter is suggesting that by providing larger LOCs, institutions
that are not subject to the removed triggers would mitigate the risk to
taxpayers from institutions that were previously subject to those
triggers, that arrangement implies the existence of a shared risk pool
from which the Department could tap to cover liabilities from any
institution. A LOC is specific to an institution and cannot be used to
cover the liabilities of any other institution. Consequently,
increasing the LOC floor would not have the effect the commenter
intended, but perversely result in inappropriately increasing the LOCs
of unaffected institutions.
    Changes: None.
Mandatory and Discretionary Triggering Events
Section 668.171(c)(1), Actual Liabilities From Defense to Repayment
Discharges and Final Judgments or Determinations
    Comments: Some commenters believed that the 2016 final regulations
unfairly penalized an institution based upon unfounded or frivolous
accusations in pending lawsuits that, once settled or adjudicated,
could result in no material financial impact on the institution. These
and other commenters agreed with the proposal in the 2018 NPRM to hold
an institution accountable for the actual amount of liabilities from
settlements, final judgments, or final Federal or State agency
determinations.
    Similarly, other commenters believed that the proposal to use the
actual liabilities incurred by an institution in recalculating its
composite score corrected a significant flaw in the 2016 final
regulations that could have triggered a reassessment of an
institution's financial responsibility based on alleged or contingent
claims that may never come to pass.
    Other commenters believed that the current triggers for pending
lawsuits and defense to repayment claims under Sec.  668.171(c)(1)(i)
and (ii) and (g)(7) and (8) should be retained to better protect
students and taxpayers.
    Discussion: We have determined that the 2016 final regulations
enumerated certain triggering events that may not serve as accurate
indicators of an institution's financial condition. To reduce the
burden on institutions in reporting the triggering events and mitigate
the possibility that institutions would improperly be required to
provide financial protection as a consequence of those events, while
balancing the need to protect the Federal interests, it is our
objective in these regulations to establish triggers that are more
targeted and more consistently identify financially troubled
institutions.
    For example, under existing Sec.  668.171(c)(1)(i)(B) and
(c)(1)(ii) (2017), an institution is not financially responsible if the
liabilities from pending lawsuits brought by State or Federal
authorities, or generally by other parties, result in a recalculated
composite score of less than 1.0, as provided under Sec.  668.171(c)(2)
(2017). To perform this calculation, we value the potential liability
from a pending suit as the amount demanded by the suing party or the
amount of all of the institution's tuition and fee revenue for the
period at issue in the litigation. However, we recognize as a
commonsense matter that some lawsuits may demand unrealistic amounts of
money at the outset of the proceedings, yet may ultimately be resolved
for significantly lower amounts or no liability. Because the amount of
the potential liability from pending suits or borrower defense-related
claims, however it is determined, is treated as if it were paid in
recalculating an institution's composite score, the institution could
be required unnecessarily to provide a letter of credit or other
financial protection not
[[Page 49865]]
only in the year the suit is brought, or that claims are made, but also
for any subsequent years in which the suit or claims remain pending.
This result places a significant burden on the institution for lawsuits
that ultimately may not have a material adverse effect on its financial
condition and viability.
    Further, in the brief time since implementing the 2016 final
regulations, the Department has encountered a significant
administrative burden and difficulty in monitoring institutions'
reports of pending litigation, determining whether such litigation
meets the requirements of the 2016 final regulations, and valuing such
suits, many of which have not led to a failure of financial
responsibility due to a recalculated composite score of less than 1.0.
    We reaffirm our position in the preamble to the 2016 final
regulations that the Department has the authority to review lawsuits
pending against an institution. However, in view of the burden on
institutions and the difficulty of accurately valuing the potential
liability of pending suits, in these regulations, we have instead
determined that the mere existence of a lawsuit against an institution
should not qualify as a triggering event and decline to include pending
suits, whether brought by a Federal or State entity, or by another
party, as automatic or mandatory triggers, as was the case in the 2016
final regulations.
    Likewise, valuing the amount of pending borrower defense claims
under existing Sec.  668.171(g)(7) and (8) (2017), depends in part on
factors such as whether the claims stem from similarly situated
borrowers (e.g., claims arising for the same reasons), the timing of
the valuation (e.g., the valuation may occur after a few claims are
filed or the Department may look at a pool of claims filed during a
specified time period), and whether the Department re-values the
remaining pending claims in a pool after it has adjudicated some of the
claims.
    As estimates, these valuations could create false-positive outcomes
(i.e., inaccurately valuing borrower defense claims could result in an
otherwise financially responsible institution inappropriately providing
financial protection) and would impose a significant burden on the
Department to monitor and analyze the potential impact of unanalyzed
borrower defense claims. Similarly, outside groups could be encouraged
to manipulate borrowers to file unjustified borrower defense claims, or
could do so on behalf of borrowers, simply to create a financial
trigger that will negatively impact the institution, even if the
borrower defense claims are ultimately found to have no merit. As a
result, we did not propose adopting either of the discretionary
triggers related to pending or potential borrower defense claims in the
2018 NPRM and do not incorporate them into these final regulations.
    In sum, valuing the liability accurately and objectively is
critical in assessing, through the composite score calculation, whether
lawsuits or claims have an adverse impact on the financial condition of
an institution that justifies requiring the institution to secure a
letter of credit or other financial protection. We believe that
valuation is best done by using the actual amount of the liability
incurred by the institution and would appropriately balance the
Department's administrative burden in monitoring an institution's
financial condition and safeguard the taxpayers' interest in the
Federal student aid programs.
    We also accordingly rescind the reporting requirements in the 2016
final regulations related to pending lawsuits. Instead, we require an
institution to notify the Department no later than 10 days after it
incurs a liability arising from a settlement, a final judgement arising
from a judicial action, or a final determination arising from an
administrative proceeding initiated by a Federal or State entity. We
note that in the preamble to 2018 NPRM,\156\ the Department proposed as
triggering events a liability arising from (1) borrower defense to
repayment discharges granted by the Secretary or (2) a final judgment
or determination from an administrative or judicial action or
proceeding initiated by a Federal or State entity. We clarify in these
regulations that a judgment or determination becomes final when the
institution does not appeal, or has exhausted its appeals, of that
judgement or determination. In addition, we note that the Department
initiates an administrative action whenever it seeks reimbursement for
a liability arising from borrower defense to repayment discharges and
that action results in a final determination. Consequently, we have
incorporated the proposed borrower defense trigger as part of the
general trigger for liabilities from final determinations under Sec.
668.171(c)(1)(i)(A). Finally, in the 2016 Final Regulations, the
trigger, in Sec.  668.171(c)(1)(i), specifically identified liabilities
incurred by an institution from settlements. Although settlements were
not likewise identified in the 2018 NPRM, we intended to account for
that outcome in proposed Sec.  668.171(c)(1)(i)(B). To avoid confusion,
we clarify in these regulations that settlements are part of that
trigger.
---------------------------------------------------------------------------
    \156\ 83 FR 37271.
---------------------------------------------------------------------------
    In the 2018 NPRM, the Department proposed that a liability from a
final judgment or determination arising from an administrative or
judicial action or proceeding should constitute a mandatory trigger.
The Department is revising Sec.  668.171(c)(1)(i)(A) to more
specifically describe the type of administrative or judicial action or
proceeding that gives rise to the trigger. As previously noted, an
administrative or judicial proceeding must be initiated by a Federal or
State entity. With respect to an administrative action or proceeding
initiated by a Federal or State entity, the Department further
specifies that the determination must be made only after an institution
had notice and an opportunity to submit its position before a hearing
official because the institution should receive due process protections
in any such administrative action or proceeding initiated by a Federal
or State entity.
    Changes: We are revising Sec.  668.171(c)(1) to provide that
liabilities incurred by an institution include those arising from a
settlement, final judgment, or final determination from an
administrative or judicial action or proceeding initiated by a Federal
or State entity. In addition, we establish that a judgment or
determination becomes final when the institution does not appeal or has
exhausted its appeals of that judgment or determination.
Section 668.171(d)(1), Accrediting Agency Actions
    Comments: Many commenters supported the proposed accrediting agency
trigger in Sec.  668.171(d)(1) of the 2018 NPRM and the Department's
willingness to work with an institution and its accreditor to determine
whether an event has or will have a material adverse effect on the
institution. The commenters agreed that a show cause order that would
lead to the withdrawal, revocation, or suspension of an institution's
accreditation was an appropriate discretionary triggering event. Some
commenters suggested that in addition to a show cause order, the
trigger should apply to instances where an accrediting agency places an
institution on probation or similar status. Other commenters believed
that the accrediting agency trigger should be mandatory instead of
discretionary.
    Some commenters urged the Department to retain the accrediting
agency trigger in current Sec.  668.171(c)(1)(iii) where an institution
[[Page 49866]]
is not financially responsible if it is required by its accrediting
agency to submit a teach-out plan.
    Discussion: We agree with commenters that the trigger should be
revised to include the phrase ``probation or similar status'' as that
action by an accrediting agency may have the same effect as a show
cause order. Instead of presuming the action will have a materially
adverse effect, as a discretionary trigger, we would first obtain
information about why the accrediting agency issued the show cause
order or placed the institution on a probationary status, and the time
within which the agency requires or allows the institution to come into
compliance with its standards. The Department would then determine
whether the accrediting agency action will likely have an adverse
effect on the institution's financial condition depending on the nature
or severity of the violations that precipitated that action and the
compliance timeframe.
    Under the trigger in current Sec.  668.171(c)(1)(iii), where an
institution notifies the Department whenever its accrediting agency
requires a teach-out plan for a reason described in Sec.  602.24(c)(1)
that could result in the institution closing or closing one or more of
its locations, the Department recalculates the institution's composite
score based on the loss of title IV funds received by students
attending the closed location during its most recently completed fiscal
year, and by reducing the expenses associated with providing programs
to those students.
    While the Department can determine the amount of the title IV funds
received by students in those programs, and that amount could serve as
a reasonable proxy for lost revenue, determining the reduction in
expenses associated with not providing the programs is less certain.
    Under current appendix C, the associated expense allowance is
calculated by dividing the Cost of Goods Sold by the Operating Income
and multiplying that result by the amount of title IV funds received by
students at the affected location. However, the level of detail needed
to accurately derive the expenses associated with providing a program,
particularly at a location of the institution, is typically not
contained or disclosed in an institution's audited financial
statements. While the Cost of Goods Sold approximates those expenses at
the parent level, it does not reflect all of them, and attempting to
more accurately associate expenses at the location level would require
additional, unaudited information from the institution.
    As noted in the discussion for pending lawsuits and borrower
defense claims, incorrectly valuing the amount used in recalculating
the composite score may result in imposing unnecessary financial
burdens on an institution that, in this case, could cause the
institution to forgo providing or executing a teach-out.
    Changes: We are revising Sec.  668.171(d)(1)(iv) to include the
phrase ``probation order or similar action.''
Section 668.171(c)(1)(i)(B), Withdrawal of Owner's Equity
    Comments: Commenters generally supported the mandatory trigger
relating to the withdrawal of owner's equity.
    One commenter believed that in recalculating the composite score
for a withdrawal of owner's equity, the Department should, in addition
to decreasing modified equity by the amount of the withdrawal, also
adjust the equity ratio by decreasing total assets.
    Discussion: The purpose of this trigger, is to identify instances
where the withdrawal or use of resources would likely cause an
institution whose financial condition is already precarious (i.e., an
institution with a composite of less than 1.5) to fail the composite
score standard. For this purpose, total assets in the equity ratio
would not be reduced by any transaction associated with capital
distributions or related party receivables. For capital distributions,
the initial accounting transaction recorded in the institution's
financial records would increase liabilities and reduce equity.
Consequently, there would be no reduction in assets for these
transactions.
    The 2016 final regulations were not clear on what the Department
meant by withdrawal of owner's equity. Withdrawal of owner's equity
includes distributions of capital and related party transactions for
the purposes of this trigger. In these regulations, we distinguish
between two types of capital distributions--the equivalent of wages in
a sole proprietorship or partnership, and dividends or return of
capital.
    Under the 2018 NPRM, a sole proprietorship or partnership would be
required to report every distribution of the equivalent of wages.
However, in view of the comments relating to the need for, and burden
associated with, reporting the occurrence of the triggering events, we
establish in these regulations that, in accordance with procedures
established by the Secretary, an affected institution must report no
later than 10 days after it is informed that its composite score is
below a 1.5, the total amount of wage equivalent distributions it made
during the fiscal year associated with that composite score. As long as
the institution does not make wage-equivalent distributions in excess
of 150 percent of that amount during its current fiscal year and for
six months into its subsequent fiscal year, we will not require the
institution to report any of those distributions for that 18-month
period.
    However, if the institution makes wage-equivalent distributions in
excess of 150 percent of the reported amount at any time during the 18-
month period, the institution must report the amount of each of those
distributions within 10 days, and the Department will recalculate the
institution's composite score based on the cumulative amount of the
actual distributions. Because a proprietary institution may submit its
financial statement audits to the Department up to six months after the
end of its fiscal year, the Department will not know the actual amount
of wage-equivalent distributions the institution made during its most
recently completed fiscal year until we receive those audits.
    In addition, like other triggers, we account for the occurrence of
events that are not yet reflected in an institution's financial
statement audits. Therefore, the 18-month period consists of the 12
months in the institution's current fiscal year plus the six months of
its subsequent fiscal year that transpire before the institution
submits its financial statement audits. The Department believes this
approach will reduce, or eliminate entirely, the burden that most
institutions would have incurred under the 2018 NPRM, while at the same
time providing the Department the means to assess the actions of those
institutions that are most likely to fail the composite score standard
because of this trigger.
    With regard to distributions of dividends or return of capital, an
institution must report the amount of any dividend once declared, and
the amount of any return of capital once approved, no later than 10
days after the respective event occurs. The Department will use that
amount to recalculate the institution's composite score.
    While we recognize that related party receivables do not impact
equity, per se, any increase in those receivables reduces the liquid
assets available to an institution to meet its financial obligations.
    Therefore, in keeping with the purpose of this trigger, except for
transfers between entities in an affiliated group as provided under
Sec.  668.171(c), an institution must report
[[Page 49867]]
any increases in the amount of related party receivables that occur
during its fiscal year, regardless of whether those receivables are
secured or unsecured. The Department will use the reported amount to
recalculate the composite score.
    Changes: We have revised Sec.  668.171(c)(1)(i)(B) to include
capital distributions that are the equivalent of wages in a sole
proprietorship or partnership as an example of an event under the
trigger. We also revised Sec.  668.171(f)(1)(ii)(A) to provide that for
distributions akin to wages, an affected institution must report the
total amount of wage-equivalent distributions that it made during its
prior fiscal year and is not required to report any wage-equivalent
distributions that it makes during its current fiscal year or the first
six months of its subsequent fiscal year, if the total amount of those
distributions does not exceed 150 percent of the amount reported by the
institution. We have also changed the regulation to require that the
institution report such wage-equivalent distributions, if applicable,
no later than 10 days after the date the Secretary notifies the
institution that its composite score is less than 1.5.
    We have clarified in Sec.  668.171(c)(1)(i)(B) that a dividend or a
return of capital may be an event under the trigger. We similarly
clarify in Sec.  668.171(f)(1)(B), that a distribution of dividends, or
a return of capital, must be reported no later than 10 days after the
dividends are declared, or the return of capital is approved. In
addition, we establish that an institution must report a related party
receivable no later than 10 days after it occurs.
Section 668.171(c)(2), SEC and Exchange Violations
    Comments: One commenter contended that the mandatory trigger with
respect to the SEC does not provide a valid correlation with respect to
an institution's ability to satisfy its financial obligations. The
commenter noted that the correlation that ED identified in the 2018
NPRM is misplaced. This commenter asserted that the SEC may delist the
stock of an institution as a result of concerns about governance that
are not indicative of a publicly-traded institution's financial health.
Similarly, the failure of an institution to file a report does not
necessarily reflect that the institution is unable to meet its
financial or administrative obligations as the report may have been
filed late for reasons unrelated to the institution's financial
condition or administrative obligations. For these reasons, the
commenter encouraged the Secretary to avoid classifying the SEC and
exchange actions as mandatory triggering events and proposed a
different mandatory trigger.
    Discussion: After careful consideration of the comments, we have
decided to keep the mandatory triggers for publicly traded
institutions.
    The commenter raises a valid concern that the failure of an
institution to file a report does not necessarily reflect that the
institution is unable to meet its financial or administrative
obligations, as the filing may have been filed late for reasons
unrelated to the institution's financial condition. This is
particularly true where a company files the late report within a
relatively short time after the original or extended due date and is
late only with respect to a single report. Filing late could also be
due to unforeseen circumstances such as the individual required to sign
the report is unavailable, an unpredictable circumstance with an
institution's auditors, or the need to address a financial restatement
done for technical reasons.
    We do not adopt the commenter's suggestions regarding Sec.
668.171(c)(B)(2)(i) and (c)(B)(2)(ii). The commenters are correct that
a delisting does not necessarily mean that an institution has financial
problems, but it could mean that it does. Even more concerning,
delisting could be a prelude to bankruptcy. These actions are likely to
impair an institution's ability to raise capital and that potential
consequence calls into question the viability of the institution.
    We also note that the SEC and stock exchange violations triggers
existed in the 2016 final regulations, at Sec.  668.171(e) (2017).
Under those regulations, a warning by the SEC that it may suspend
trading on the institution's stock would render the institution not
financially responsible. By limiting, in these regulations, the trigger
to SEC orders as opposed to warnings, the trigger is more specifically
tailored to identify institutions with a high likelihood of financial
difficulties. The exchange action component of the trigger in these
regulations is similarly more tailored than the 2016 final regulations.
Under the 2016 final regulations, an institution would not be
financially responsible if the exchange on which the institution's
stock is traded notifies the institution that it is not in compliance
with exchange requirements or the institution's stock is delisted.
Under these regulations, the Department will limit its determination
that an institution is not financially responsible to those situations
where the institution's stock has actually been delisted.
    We note that the occurrence of a mandatory triggering event does
not automatically precipitate financial protection, as alluded to by
the commenter in requesting the trigger to be reclassified.
    As a mandatory trigger, the burden is on the institution to
demonstrate, at the time it reports an SEC or exchange action, that the
action does not or will not have an adverse material effect on its
financial condition or ability to continue operations as a going
concern, and a favorable demonstration would obviate the need for
financial protection. We see no utility in reclassifying this trigger
as discretionary because it is reasonable for the Department to rely on
the expertise of the SEC or exchange about actions stemming from
violations of their requirements that may have an immediate and severe
impact on the institution--the responsibility is rightly on the
institution to demonstrate the contrary to the Department.
    Changes: None.
Section 668.171(d)(4) and (6), 90/10 Revenue and Cohort Default Rate
(CDR) Triggering Events
    Comments: Some commenters believe that the cohort default rate
(CDR) and 90/10 triggers are unrelated to an institution's financial
stability and should be removed. Other commenters urged the Department
to classify both of these events as mandatory instead of discretionary
triggers. Along the same lines, another commenter believed that the
statutory requirements governing the loss of title IV eligibility
stemming from a 90/10 or cohort default rate failure do not require or
allow the Department to consider alternative remedies or mitigating
circumstances. The commenter asserted that there was no reasonable
basis on which the Department could determine that no risk exists when
institutions fail the 90/10 or CDR triggers, and, therefore, it would
be arbitrary for the Department to determine on a case-by-case basis
which of the failing institutions that would be required to provide
financial protection. To ensure that the Department upholds the
statutory requirements for 90/10 and CDR, and financial responsibility
in the event of closure, the commenter urged the Department to classify
the failure of both events as mandatory triggers.
    Discussion: We disagree that the triggers are unrelated to an
institution's financial stability. As discussed previously under the
heading ``Triggering Events, General,'' if either of these triggering
events occur, an
[[Page 49868]]
institution may be one year away from losing all or most of its
eligibility to participate in the title IV programs. That loss would
likely have a significant adverse impact on the institution's financial
condition or its ability to continue as a going concern, and either
outcome may warrant financial protection.
    The current regulations require an institution that fails 90/10 or
whose cohort default rates are more than 30 percent for two consecutive
years to provide a letter of credit or other financial protection to
the Department. However, rather than presuming that financial
protection is required, we believe it is more appropriate to reclassify
these triggers as discretionary triggers to allow the Department to
review the institution's efforts to remedy or mitigate the causes for
its 90/10 or CDR failure or to assess the extent to which there were
anomalous or mitigating circumstances precipitating these triggering
events, before determining whether financial protection for the
Department in the form of a LOC is warranted. Part of that review is
evaluating the institution's response to the triggering event to
determine whether a subsequent failure is likely to occur, based on
actions the institution is taking to mitigate its dependence on title
IV funds, the extent to which a loss of title IV funds (from either 90/
10 or CDR failure) will affect its financial condition or ability to
continue as a going concern, or whether the institution has challenged
or appealed one or more of its default rates.
    Contrary to the assertion made by the commenter, this case-by-case
review forms the basis needed for the Department to proceed under these
regulations with issuing a determination regarding whether the
institution is financially responsible. We wish to clarify that the
Department's review or consideration of circumstances relating to
whether a 90/10 or CDR failure affects an institution's financial
responsibility has no bearing on how the statutory requirements are
applied or the consequences of those requirements.
    Changes: None.
Section 668.171(d)(2), Violations of Loan Agreements
    Comments: Some commenters were concerned with the amount of
discretion the Department has in situations where a creditor has
affirmatively determined that a loan or credit is not at risk and
suggested that the Department qualify the trigger so it does not apply
in cases where the violation is waived by the creditor. Other
commenters argued that an institution should have ample time to remedy
a situation with a creditor before reporting it to the Department. On
the other hand, some commenters questioned why this was a discretionary
trigger or a trigger at all, noting the requirement that an institution
be current in its debt payments currently serves as a baseline standard
for determining whether an institution is financially responsible and
the Department did not provide any evidence, analysis, or examples of
existing loan violations that would not constitute a threat to the
overall financial health of an institution.
    Discussion: A violation of a loan agreement is a discretionary
trigger under the existing regulations, and we continue to believe that
this trigger will assist the Department in fulfilling its objective of
identifying and acting on signs of financial distress. With regard to
the comments on whether the Department should exempt the reporting of a
loan violation in cases where the creditor waives the violation or
provide some time for an institution to remedy a loan violation before
it reports the violation, we believe that all violations are
potentially significant and must be reported, regardless of whether
they are waived or remedied. In cases where the creditor waives a
violation without imposing new requirements or restrictions, the
institution simply reports that outcome. Although we decline to define
the waiver as a cure for the violation, we typically would accept the
waiver if it was obtained promptly by the institution during the then-
current fiscal year. Institutions that violate a debt provision without
obtaining a waiver are also at risk that the total debt may be called
by the creditor. We are concerned about allowing time for an
institution to remedy a loan violation because that defeats or lessens
the utility of allowing the Department to act contemporaneously in
response to potentially significant issues.
    With respect to the comment that instead of establishing a
discretionary trigger, the Department should retain as a ``baseline
standard'' the requirement that an institution is current in its debt
payments, we note that the trigger for loan violations is currently
discretionary and the proposed provisions for this trigger are the same
as they are in the current regulations under 668.171(g)(6). The
baseline standard the commenters refer to was part of regulations that
were in effect before the 2016 final regulations.
    Nevertheless, the commenters incorrectly presumed that the
``baseline standard'' is somehow more robust or better than the trigger
on loan violations. To the contrary, under the ``baseline'' the
Department would not be aware that an institution violated a loan
agreement unless: (1) It was identified in a footnote to the
institution's audited financial statements, which are submitted to the
Department six to nine months after the institution's fiscal year; or
(2) the institution failed to make a payment under a loan obligation
for 120 days and the creditor filed suit to recover its funds. As a
discretionary trigger, the Department will be aware of a loan violation
within 10 days of when the creditor notifies the institution,
regardless of whether the creditor filed suit, and can assess
contemporaneously the consequences of that violation.
    Changes: None.
Section 668.171(d)(3), State Licensing or Authorization
    Comments: Some commenters argued that the current State licensing
or authorization trigger under Sec.  668.171(g)(2) (2017) is too broad
because it requires an institution to report any violation of State
requirements and concluded that it could have the unintended
consequence of requiring an institution to close precipitously. The
commenters believed that the proposed trigger takes a more precise
approach by requiring an institution to report only those violations
that could lead to the institution losing its licensing or
authorization.
    On the other hand, a few commenters believed it was critical for
the Department to get information on all State actions and review those
actions on a case-by-case basis to determine whether financial
protection should be required.
    Other commenters suggested revising the trigger to state that ``the
institution is notified by a State licensing or authorization agency
that its license or authorization to operate has been or is likely to
be withdrawn or terminated for failing to meet one of the agency's
requirements.'' The commenters note that State authorizing entities
often include boilerplate language in notices of noncompliance that
indicates that if the noncompliance is not remedied, authorization can
be lost. The commenters believed that under proposed language, a notice
that included a single instance of immaterial noncompliance would still
have to be reported if the State included that boilerplate language.
    Other commenters asserted that the Department should define ``state
licensing or authorizing agency'' to only
[[Page 49869]]
refer to the primary State agency responsible for State authorization,
not specialized State agencies, such as boards of nursing.
    Discussion: Under the 2016 final regulations, at Sec.
668.171(g)(2), the Department requires institutions to report any
citation by a State licensing or authorizing agency for failing State
or agency requirements. As we stated in the 2018 NPRM, we believe that
a more targeted approach is appropriate for these regulations to better
identify State or agency actions that are likely to have an adverse
financial impact on institutions and to reduce reporting burden on
institutions and burden on the Department in reviewing citations. We
see little benefit in requiring an institution to report, and for the
Department to review, violations of State or agency requirements that
have no bearing on the institution's ability to operate and offer
programs in the State. Doing so may provide some insight for program
review risk assessments, but would not have a material adverse effect
on an institution's ability to operate. A notice from the State
contemplating the termination of an institution's authorization or
licensure, which could result in the institution closing or
discontinuing programs, satisfies that purpose without imposing
unnecessary burdens on the institution or the Department.
    While we appreciate the commenters' language suggestions, the
Department must be able to react to any State licensing or authorizing
agency actions that are required to be reported, regardless of whether
those actions are qualified or prefaced by boilerplate language. If the
Department allows an institution to determine that a termination notice
from the State licensing or authorizing agency stems from immaterial
noncompliance, as suggested by the commenter, there is a potential that
significant actions might not be reported if they were misunderstood or
mischaracterized by the institution as being immaterial. In cases where
an institution believes that the State or agency action is not
material, it may provide an explanation to that effect when it reports
that action to the Department.
    With regard to the suggestion that the Department define the term
``State licensing or authorizing agency'' to be the only cognizant
entity, we believe that narrowing the meaning of the term to exclude
other State agencies, such as boards of nursing, would inappropriately
weaken the effectiveness of trigger, particularly in cases where
programs are licensed by those other agencies or boards.
    Changes: None.
Reporting Requirements, Sec.  668.161(f)
    Comments: Many commenters appreciated that the Department proposed
to allow institutions to provide an explanation or information
pertaining to a triggering event at the time that event is reported and
then again in response to a determination made by the Department.
    Some commenters suggested that an institution should be allowed 30
days, instead of 10 days, to report a triggering event. These
commenters argued that various offices within an institution might be
involved and have contemporaneous knowledge of a triggering event, but
individuals dealing with an unrelated agency action, such as
renegotiated debt, are unlikely to be cognizant of the Department's
reporting deadline.
    Discussion: The Department will not adopt the commenters' proposal.
First, we note that under the existing regulations, institutions also
have a 10-day reporting window from the date of each of the triggering
events, except for the 90/10 trigger (which is also the case in these
regulations). As a result, we believe that institutions will have
appropriate processes and procedures in place by the time these
regulations are effective to allow for timely reporting.
    Second, there are a limited number of triggering events, not all of
which apply to every institution, and institutions should delegate
authority to one or more individuals to identify triggering events and
ensure that reporting deadlines are met. The 10-day reporting deadline
is needed to alert the Department timely of triggering events that may
have serious consequences for institutions, students, and taxpayers,
and for the Department to take timely action to mitigate the impact of
those consequences.
    Third, if, as the commenter asserts, the individuals in various
campus offices that are responsible for actions related to a triggering
event would not be aware of the reporting deadline, the institution has
an obligation to make sure that its staff understand triggering events
and the reporting deadlines associated with those triggers.
    Changes: None.
Section 668.172, Financial Ratios
Procedural Concerns Regarding the Financial Responsibility Subcommittee
    Comments: A commenter noted that the formation of the Financial
Responsibility Subcommittee, which consisted of negotiators and
individuals selected by the Department who were not negotiators,
departed from typical practice where the negotiators initiate the
formation of a subcommittee comprised of negotiators during the
negotiations. The commenter contended that because subcommittee members
were not seated on the full committee and the subcommittee meetings
were not open to the public, there was not a fulsome discussion of the
issues by the full committee.
    The commenter asserted that the Department seemed to have
acknowledged that the closed-door sessions were inappropriate by
announcing that the sessions for two future subcommittees would be
livestreamed. In addition, the commenter was concerned that the
Department seated an individual with pecuniary interests in financial
responsibility as both a negotiator and a subcommittee member but did
not acknowledge that the individual was from an institution that had an
active issue with the Department on subcommittee matters. The commenter
asserted that because the individual's institution would receive
favorable treatment under the proposed regulations, this apparent
conflict of interest should have been avoided, or clearly identified
prior to start of the rulemaking. In short, the commenter argued that
the Department did not follow the appropriate procedures under the APA,
and other requirements, in promulgating the proposed changes to the
composite score, and that the Department should withdraw those changes.
    Discussion: Neither the APA nor the HEA stipulates the precise
procedures the Department must use when conducting negotiated
rulemaking, and the Department has the discretion to use different
procedures to fit the contours of different negotiated rulemakings.
Thus, the fact that the Department's approach to establishing the
subcommittee differed from past practice is not indicative of
impropriety or insufficiency.
    In this case, the Department knew prior to commencement of
negotiations that, in order to facilitate full public participation on
applicable financial accounting and reporting standards promulgated by
the Financial Accounting Standards Board, subcommittee members with
specific expertise in these matters would be needed. For this reason,
in the Federal Register notice of intent to establish negotiated
rulemaking committees, we specifically sought the participation of
individuals with certain knowledge. As in the past, following its
meetings, the subcommittee presented its recommendations to the main
[[Page 49870]]
negotiated rulemaking committee for a final vote. The evolution of the
Department's practices in subsequent negotiated rulemakings reflects
its efforts to best provide for negotiation of the complex issues at
hand, but does not reduce, or call into question, the legal sufficiency
of past practices.
    Generally, every institution with a representative has an interest
in the outcomes of regulations that govern their participation in the
Federal student aid programs. For the representative that participated
on the subcommittee, the institution met the financial responsibility
requirements for prior years by providing a letter of credit while
raising, along with other institutions, an objection as to the
Department's calculation of its composite score. There was no
unresolved issue concerning this institution's compliance with existing
Department requirements related to the calculation of its composite
score, and no conflict of interest with respect to the participation by
that institution's representative both on the committee and in the
subcommittee.
    Changes: None.
Section 668.91, Initial and Final Decisions
    Comments: None.
    Discussion: As discussed in the 2018 NPRM, the Department's
proposed regulations would update the regulations to reflect the
language in proposed 668.175 and generally represent technical changes
to the 2016 final regulations to track the actions and events in
proposed Sec.  668.171. In addition, after further review, we have
determined that an insurer would likely be unable or unwilling to
provide a statement that an institution is covered for the full or
partial amount of a liability arising from a triggering event in Sec.
668.171, as required under the 2016 Final Regulations and the 2018
NPRM. Therefore, we are revising Sec.  668.91(a)(3)(iii)(A) to provide
that an institution may demonstrate that it has insurance that will
cover the risk posed by the triggering event by presenting the
Department with a copy of the insurance policy that makes clear the
institution's coverage. Finally, we clarify that an institution may
demonstrate for a mandatory or discretionary triggering event that the
amount of the letter of credit or other financial protection demanded
by the Department is not warranted for a reason described in Sec.
668.91(a)(3)(iii)(A).
    Changes: We are revising Sec.  668.91(a)(3)(iii)(A) to clarify that
it applies to mandatory and discretionary triggering events and provide
than an institution may provide a copy of its insurance policy
demonstrating that it has insurance to cover or partially cover the
trigger-associated risk.
Section 668.172(c), Excluded Items, Termination of the Perkins Loan
Program
    Comments: Commenters noted that, as result of terminating the
Perkins Loan Program, some institutions may elect to liquidate their
portfolios and assign all loans to the Department for servicing. The
commenters believed that a liquidation decision can result in a one-
time loss that a non-profit institution will likely display separately
or as a non-operating loss on its financial statements (``Statement of
Activities'').
    Although the commenters asked the Department to clarify how it will
treat Perkins Loan Program liquidation losses, they argued than an
institution should not be penalized for the dissolution of the Perkins
Loan Program and, thus, recommended that the Department consider non-
operating losses related to a Perkins liquidation to be infrequent and
unusual in nature and, therefore, excluded from the calculation of the
composite score.
    Discussion: The liquidation of the Perkins Loan portfolio would
normally not result in a loss to an institution. Generally, a loss
would only occur if the institution had to purchase loans that were not
acceptable for assignment. The Department does not believe that the
administration of title IV, HEA programs should be excluded from the
composite score computation. The liquidation of the Perkins Loan
portfolio would result in removal of the receivables by assignment to
the Department. The cash would be returned to the Department or be
released from restriction, which would not result in a loss, and only
loans that are not acceptable for assignment would result in any loss
to the institution, because it would be required to purchase the loans
and those losses should be reflected in the composite score.
    Changes: None.
Section 668.172(d), Leases
    Comments: Many commenters supported the proposal that the
Department could calculate a composite score for an institution under
the new requirements issued by the Financial Accounting Standards Board
(FASB ASU 2016-02, ASC 842 (Leases)), and at the institution's request,
a second composite score that excludes the lease liabilities and right
to use assets that the institution is otherwise required to report
under these new requirements.
    Although many commenters appreciated the Department's recognition
of the complexity and impact of the FASB changes, they encouraged the
Department to guarantee that it would calculate the two composite
scores for a minimum of six years, without regard to whether the
methodology is updated through rulemaking, to provide stability and
ensure that institutions have time to adjust operations.
    Other commenters urged the Department to simply calculate the two
composite scores until the methodology is updated.
    Some commenters argued that since the Department did not propose
any consequences for an institution that fails one of the two composite
scores and offered no justification for permitting all operating leases
to be excluded, even those entered into after the rule takes effect,
the Department should eliminate, or at least shorten, the transition
period and align the FASB implementation timeline to the effective date
of the regulations. However, during any transition period the
Department may offer, the commenters urged the Department to hold
accountable any institution that fails either of the two composite
scores. Specifically, any institution with a failing composite score
under the new FASB requirements should be placed on heightened cash
monitoring, be required to provide timely financial reporting, and/or
be required to provide financial protection.
    Commenters also wrote that the Department should eliminate, or at
least shorten, the transition period and align the FASB implementation
timeline to the effective date of the regulations. However, during any
transition period offered, the commenters urged the Department to hold
any institution accountable that fails either of the two composite
scores by placing the institution on heightened cash monitoring,
requiring timely financial reporting, and/or compelling financial
protection.
    Other commenters noted that the proposed transition for leases
differed from the Subcommittee recommendation that the six-year
transition applied only to operating leases in effect during the
initial reporting period following the effective date of these
regulations. The commenters stated that since 2010, all institutions
should have known FASB was preparing to change the lease standards.
    Another commenter objected to the transition period for leases
arguing that the Department had provided no data to
[[Page 49871]]
support this approach or rationale for why a six-year period was
appropriate.
    Discussion: In view of the comments regarding the length, or
application, of the transition period, the use of two composite scores,
and the need to align the FASB implementation timeline to these
regulations, we conclude that it is reasonable for the Department to
calculate one composite score for an institution by grandfathering in
leases entered into prior to December 15, 2018 (pre-implementation
leases) and applying Accounting Standards Update (ASU) 2016-02,
Accounting Standards Codification (ASC) 842 (Leases) to any leases
entered into on or after that date (post-implementation leases).
    The Department will grandfather in leases if the institution
provides adequate information to the Department in the Supplemental
Schedule and a note in, or on the face of, the audited financial
statements on the leases it entered into prior to December 15, 2018 and
will treat those leases as they have been treated prior to the
requirements of ASU 2016-02. That is, the amount of any right of use
asset and associated liability will be removed from the balance sheet
or statement of financial position. Because the value of leases entered
into prior to December 15, 2018, can only decrease, any increase in the
value of leases will be considered a new lease and ASU 2016-02
requirements will apply to those leases. Any leases entered into on or
after December 15, 2018, will be treated as required under ASU 2016-02.
    In establishing this approach, the Department considered three
factors: That FASB changes an accounting standard when it recognizes
that the standard is obsolete or no longer addresses the economic
reality that it seeks to address; that an institution made business
decisions prior to the requirements of ASU 2016-02; and that changes to
the standards for leases could have a detrimental impact on an
institution's composite score even in cases where the underlying
financial condition of the institution may not have changed.
    The Department believes that calculating the composite score by
grandfathering in existing leases and applying the FASB standards to
new leases strikes an appropriate balance between these factors.
    While the subcommittee specified a transition period during which
the Department would allow leases in existence as of the effective date
of the regulations to be treated the way leases were treated prior to
the requirements of ASU 2016-02, doing so would mitigate but not
eliminate the impact on all institutions for business decisions they
made prior to the requirements of ASU 2016-02. In addition, the
Department could not identify an empirical basis to support a six-year
timeframe, as opposed to a different timeframe, and therefore could not
include the six-year period in this final rule.
    Rather than a time-limited transition period, the Department
believes it is reasonable to grandfather in existing leases by
establishing in these regulations that leases entered into prior to
December 15, 2018 are treated as they would have been treated prior to
ASU 2016-02 until the balance of those leases is zero. Because an
institution is required to value the right-of-use assets and associated
liabilities based on whether it will exercise options and other lease
clauses in existence as of the effective date of ASU 2016-02, any
leases entered into prior to December 15, 2018, and treated as they
would have been prior to ASU 2016-02 for the composite score, cannot
increase and would only decrease over time to zero.
    The Department establishes December 15, 2018, as the effective date
for new leases because that is the first effective date of ASU 2016-02
for public entities for fiscal years beginning after December 15, 2018.
The Department recognizes that not all institutions will be required to
implement ASU 2016-02 for fiscal years beginning after December 15,
2018, but in an effort to treat all institutions fairly, the Department
will apply the first required implementation date to all institutions.
    Changes: We are revising 668.172(d) to provide that the Secretary
accounts for operating leases by applying the new FASB standards to all
leases the institution has entered into on or after December 15, 2018
(post-implementation leases), as specified in the Supplemental
Schedule, and treating leases the institution entered into prior to
December 15, 2018 (pre-implementation leases), as they would have been
treated prior to the new FASB requirements. An institution must provide
information about all leases on the Supplemental Schedule, and in a
note, or on the face of its audited financial statements. In addition,
any adjustments, such as any options exercised by the institution to
extend the life of a pre-implementation lease, are accounted for as
post-implementation leases.
Section 668.172, Appendix A and B
Format
    Comments: Some commenters found the Appendices confusing and
difficult to read, suggesting that a consistently formatted layout with
proper labeling is needed to improve usability. In addition, the
commenters noted that in Section 3 of Appendix B, the Department
mistakenly labeled some of the components of the ratios and their
corresponding line numbers and in Appendix B, Section 1, and that the
value of property, plant, and equipment (PP&E) is net of depreciation,
not appreciation.
    A few commenters suggested that the formula for expendable net
assets begin with ``total net assets'' instead of the proposed
construction of ``net assets without donor restrictions + net assets
with donor restrictions'' to alleviate the potential misinterpretation
about the sub-groupings of ``net assets with donor restrictions.''
    Discussion: We appreciate the comments that identified errors in
the Appendices, and we will correct those errors. With regard to using
``Total net assets'' as opposed to ``Net assets with donor restrictions
plus Net assets without donor restrictions'' to arrive at Expendable
net assets, the commenters did not explain how any misinterpretations
could occur. Because Net assets with donor restrictions and Net assets
without donor restrictions are taken directly from the face of the
Statement of Financial Position, it is unclear to us how these numbers
can be misinterpreted.
    Changes: Appendix A and B are revised to correct the labels and
line numbers noted by the commenters, and to otherwise improve
usability and clarity.
Long-Term Debt
    Comments: Some commenters disagreed with the proposal that if an
institution wishes to include debt obtained for long-term purposes in
total debt, the institution must disclose in its financial statements
that the debt, including long-term lines of credit, exceeds twelve
months and was used to fund capitalized assets. Under that proposal,
the debt disclosure must include the issue date, term, nature of
capitalized amounts, and amounts capitalized. Otherwise, the Department
would exclude from debt obtained for long-term purposes the amount of
any other debt, including long-term lines of credit used to fund
operations, in calculating the numerator of the Primary Reserve Ratio.
    One commenter believed that a corresponding change needs to be made
to Total Assets that would allow any cash balances, or assets related
to the excluded borrowing, to also be excluded. The commenter argued
that without this change, the composite
[[Page 49872]]
score would be unbalanced and would unfairly penalize an institution
that utilizes debt to finance capital improvements, ongoing operations,
and growth opportunities.
    Discussion: The Department believes that a long-term debt
disclosure is needed because it provides the information necessary to
ensure that the primary reserve ratio is calculated accurately for all
institutions and helps to identify and guard against those institutions
that attempt to manipulate their composite scores. Long-term debt up to
the value of Property, Plant and Equipment (PP&E) is treated favorably
in the composite score calculation because that debt is intended to
reflect investments by an institution in those items.
    The Department disagrees that any adjustment to total assets needs
to be made, as total assets are not an element of the primary reserve
ratio. The issue of debt obtained for long-term purposes is central
only to the primary reserve ratio and for determining the appropriate
amount of debt obtained for long-term purposes that is related and
limited to PP&E under that ratio. The Department is establishing how to
determine the correct amount of debt obtained for long-term purposes
for calculating the primary reserve ratio.
    Changes: None.
    Comments: Some commenters stated that the proposed treatment of
long-term debt in the 2018 NPRM was not discussed, or discussed
thoroughly enough, by the Subcommittee or the main negotiating
Committee and should be withdrawn.
    Other commenters noted that the discussions with the Subcommittee
centered on closing a loophole on the use of long-term lines of credit
that some institutions manipulated to increase their composite scores.
To this end, the Subcommittee recommended that long-term lines of
credit may be used to calculate adjusted equity or expendable net
assets if the lines of credit are identified separately in the
Supplemental Schedule with accompanying information specifying the
issue date, term, nature of capitalized amounts, and amounts
capitalized.
    The commenters argued that instead of adopting the Subcommittee's
recommendation, the Department's proposal fundamentally changes the
definition of all debt obtained for long-term purposes, effectively
repealing the guidance provided in Dear Colleague Letter (DCL) GEN-03-
08.
    Some commenters suggested that the Department phase-in or create a
transition period before requiring institutions to link long-term debt
to the acquisition of PP&E. The commenters noted that some institutions
have large investments in old and newly constructed buildings and hold
long-term debt that directly or indirectly relates to brick and mortar.
These commenters asserted that it can be challenging for institutions
to show a direct relationship between issues of debt within all debt
obtained for long-term purposes and capitalized asset acquisitions. The
commenters identified a variety of factors that make this difficult,
including institutional longevity, contributions that support PP&E
payment and payout timing, variability in build, renovation, and
maintenance schedules as well as debt consolidations, restructurings,
and refinancing over decades.
    Discussion: The discussions in the subcommittee centered around the
abuse of long-term lines of credit and manipulation of the composite
score in general. Based on those discussions and in developing these
regulations, the Department determined that long-term notes payable
should not be treated differently from long-term lines of credit.
    Both can be used for the purpose of purchasing PP&E, including
construction-in-progress (CIP), both can be used to fund investments or
operations, and both can be used to manipulate the composite score if
the purpose and use of the debt is not known. The Department's goal, as
discussed in the Subcommittee meetings, is to limit or eliminate
instances where institutions report long-term debt to manipulate their
composite scores, and to include long-term debt related to PP&E and
construction in progress (CIP) to compute an accurate composite score.
The Department sees no reason to have different requirements for
different types of debt. We believe the best approach is for all debt
to be treated the same, except for short-term debt obtained for CIP
which can be considered debt obtained for long-term purposes up to the
amount of the CIP.
    These regulations effectively repeal DCL GEN-03-08. Typically, no
amount of PP&E would be included in a primary reserve ratio. However,
at the time the financial responsibility regulations were originally
developed, the community expressed concerns that institutions would be
discouraged from investing in PP&E. To mitigate that concern, the
Department provided in the regulations that long-term debt up to the
amount of PP&E an institution reported would be added to the numerator
of the primary reserve ratio, effectively crediting the institution for
the long-term debt associated with a portion of the PP&E that had
properly been subtracted from the numerator of the primary reserve
ratio.
    Over time, there has been significant manipulation of the composite
score in reliance on DCL GEN-03-08, where the reported long-term debt
was not associated with investments into an institution's PP&E and CIP.
We believe that reverting back to the original intent of adding debt
obtained for long-term purposes to the numerator of the primary reserve
ratio is the proper approach because it results in a more accurate
portrayal of an institution's financial health.
    The Department agrees with the commenters that some type of phase-
in or transition is appropriate to account for institutions that do not
have the records to, or otherwise cannot, associate debt to PP&E
acquired in the past under the guidance provided in DCL GEN-03-08.
    In these regulations, we revise the calculation of the primary
reserve ratio with regard to the amount of long-term debt that is
included in debt obtained for long-term purposes and used as an offset
to PP&E, including CIP and right-of-use assets. Specifically, we will
consider the PP&E that an institution had prior to the effective date
of these regulations (pre-implementation) and the additional PP&E it
has acquired after that date (post-implementation). For this
discussion, qualified debt refers to any post-implementation debt
obtained for long-term purposes that is directly associated with PP&E
acquired with that debt. Any debt obtained for long-term purposes post-
implementation must be qualified debt.
    Since institutions were not required under DCL GEN-03-08 to
associate debt obtained for long-term purposes with capitalized assets
and may not have the accounting records pre-implementation to associate
debt with specific PP&E, in determining the amount of pre-
implementation PP&E that is included in the primary reserve ratio, the
Department will use the lesser of (1) the PP&E minus depreciation/
amortization or other reductions, or (2) the qualified debt obtained
for long-term purposes minus any payments or other reductions, as the
amount of debt obtained for long-term purposes.
    The basis for the pre-implementation PP&E and qualified debt will
be the amounts reported in the institution's most recently accepted
financial statement submitted to the Department prior to the effective
date of these regulations. An institution must adjust the amount of
pre-implementation debt by any payments or other reductions
[[Page 49873]]
and must also adjust the pre-implementation PP&E by any depreciation/
amortization or other reductions in subsequent years.
    Post-implementation debt is the amount of debt that an institution
used to obtain PP&E since the end of the fiscal year of its most
recently accepted financial statement submission to the Department
prior to the effective date of these regulations less any payments or
other reductions. An institution must adjust post-implementation debt
by any debt obtained and associated with PP&E in subsequent years by
any payments or other reductions. Similarly, the institution must also
adjust post-implementation PP&E by any PP&E obtained in subsequent
years and any depreciation/amortization or other reductions in
subsequent years. Any refinancing or renegotiated debt cannot increase
the amount of debt associated with previously purchased PP&E. No pre-
implementation debt required to be disclosed can increase. For each
debt to be considered for the composite score, the individual debts
must be disclosed as described below.
    The Department is revising the reporting on long-term debt to
require that an institution must, in a note to its financial
statements, clearly identify for each debt to be considered in the
composite score for pre- and post-implementation long-term debt and
PP&E net of depreciation or amortization and the amount of CIP and the
related debt.
    An institution must also disclose in a note to its financial
statements, for each pre- and post-implementation debt, the terms of
its notes and lines of credit that include the beginning balance,
actual payments and repayment schedules, ending balance, and any other
changes in its debt including lines of credit.
    Changes: We are revising the definition of debt obtained for long-
term purposes in Section 1 of Appendices A and B to reflect the amount
of pre- and post-implementation long-term debt that can be included in
the primary reserve ratio. The definition also provides that any amount
of pre- and post-implementation debt obtained for long-term purposes
that an institution wishes to be considered for the primary reserve
ratio must be clearly presented or disclosed in the financial
statements. We have also modified Section 3 of appendices A and B to
show how the definition of qualified debt obtained for long-term
purposes will be presented or disclosed by institutions.
    Comments: Some commenters believed that access to a long-term line
of credit reflects an institution's ability to access credit in the
open market and argued that the institution should not be penalized for
having access to credit unless it needs to post collateral to gain
access to this credit. In addition, the commenters believed that long-
term debt should be specifically tied to PP&E acquisitions in order to
be added back in the computation of adjusted equity.
    While long-term debt can be used specifically for PP&E
acquisitions, the commenters noted that some institutions use cash to
pay for PP&E acquisitions and decide later to obtain long-term debt in
a future year using the assets purchased as collateral. The commenters
asked whether this practice creates a disconnect if the assets are not
acquired in the same year as the occurrence of the debt. In addition,
if the long-term debt is secured by PP&E, the commenters questioned why
it matters if the debt was specifically for the purchase of those
assets. These commenters, and others, believed that the proposed
changes relating to long-term debt should be removed and discussed as
part of a broader negotiated rulemaking for the composite score.
    Another commenter stated that the primary reserve ratio is intended
to measure liquidity and argued that the acquisition of long-term debt
that is immediately accessible (like a line of credit) is conclusive
evidence of liquidity up to the amount of line. Therefore, the
commenter reasoned that it does not matter whether the institution uses
the funds from that line of credit for property, plant and equipment or
anything else. The commenter posited that an institution should not
have to draw down on the line of credit to get the benefit afforded
long-term debt in the primary reserve ratio. As support for this
position, the commenter cited a study.\157\
---------------------------------------------------------------------------
    \157\ Filippo Ippolito and Ander Perez, Credit Lines: The Other
Side of Corporate Liquidity, Barcelona Graduate School of Economics,
March 2012, available at: https://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/618.pdf.
---------------------------------------------------------------------------
    Discussion: The Department disagrees that an institution would be
penalized for having access to credit. The question before the
Department was the appropriate amount to use in the composite score
calculation for debt obtained for long-term purposes. To the extent
that the proceeds from a long-term line of credit were used to purchase
PP&E and the amount used is still outstanding at the end of the
institution's fiscal year, that amount is included in determining the
amount of debt obtained for long-term purposes. Where PP&E is used as
collateral for obtaining debt, that debt would not count as debt
obtained for long-term purposes unless it is used to purchase other
PP&E.
    With regard to using cash to purchase PP&E, for the purposes of
debt obtained for long-term purposes used in the primary reserve ratio,
there is no long-term debt associated with those assets. When an
institution later uses the PP&E as collateral, there is still no long-
term debt associated with the purchase of those assets. Additionally,
none of the debt obtained would count toward the primary reserve ratio
unless the proceeds from the borrowing were used to purchase PP&E.
    There is a difference in long-term debt being used to purchase PP&E
and PP&E being used to secure long-term debt. For example, a long-term
line of credit may be used to purchase furniture. There is no security
interest by the creditor in the furniture, but the long-term line of
credit was used to purchase PP&E and the amounts from the line of
credit used to purchase the furniture that are still outstanding at the
end of the institution's fiscal year would be considered debt obtained
for long-term purposes. Conversely, an institution secures a loan using
a building as collateral for the loan and then uses the proceeds to pay
salaries and taxes. In this case, there is no debt obtained for long-
term purposes because the proceeds of the loan were not used for the
purchase of PP&E, a long-term purpose.
    The Department does not agree that the issues surrounding long-term
debt need to be part of a broader negotiated rulemaking for the
composite score because the approach established in these regulations
does not penalize institutions for decisions made prior to this
regulation. We are grandfathering in existing long-term debt as
reported under DCL GEN-03-08 and requiring only that new long-term debt
must be associated with and used for PP&E.
    The study cited by the commenter specifically states, ``Credit
lines have a predetermined maturity. This implies that any drawn amount
has to be repaid before the credit line matures, thus limiting the use
of lines of credit for example for long term investments.'' The authors
also state that lines of credit ``are normally issued with a stated
purpose which restricts their possible uses.'' The primary reserve
ratio, as a measure of liquidity, would normally not include any PP&E
and no amount of debt obtained for long-term purposes would normally be
added back to the numerator in determining Adjusted Equity or
Expendable Net Assets. The original recommendation from the KPMG study
which formed the basis for the Department's current financial
[[Page 49874]]
responsibility regulations excluded net PP&E from the Primary Reserve
Ratio and had no provision for adding back debt obtained for long-term
purposes. Regarding net PP&E and the Primary Reserve Ratio the KPMG
study provided the following: ``The logic for excluding net investment
in plant (net of accumulated depreciation) is twofold. First, plant
assets are sunk costs to be used in future years by an institution to
fulfill its mission. Plant assets will not normally be sold to produce
cash since they will presumably be needed to support ongoing programs.
In some instances, there is a lack of ready market to turn the assets
into cash, even if they are not needed for operations. Second,
excluding net plant assets is necessary to obtain a reasonable measure
of liquid equity available to the institution on relatively short
notice.''
(Methodology for Regulatory Test of Financial Responsibility Using
Financial Ratios--December 1997)
    In response to comments from the community that this treatment
would influence institutions not to invest in PP&E, the Department
provided that to the extent debt obtained for long-term purposes was
used for PP&E, the Department would add such amounts back to Adjusted
Equity or Expendable Net Assets up to the total amount of PP&E to
encourage institutions to reinvest in themselves. To the extent that a
long-term line of credit is allowed to be used for, and is used, for
the purchase of PP&E, although there are limits to the use of lines of
credit for long-term investments, that amount will be added back to
Adjusted Equity or Expendable Net Assets as provided for in the
regulations.
    While a line of credit does provide resources for an institution to
use to meet its needs prior to being drawn on, it is not reflected in
the institution's financial statements. When a line of credit is drawn
on, it is reflected as a liability in the financial statements. At the
point that a line of credit is drawn on, that amount becomes a drain on
other liquid resources of the institution. The mere existence of a line
of credit is not proof of liquidity. If the line of credit is
exhausted, there is no liquidity associated with that line of credit.
An option for the Department given the manipulation of the Composite
Score through the use of debt obtained for long-term purposes would
have been to return to the original KPMG methodology and the way
Primary Reserve Ratios are normally calculated in the financial
community by excluding Net PP&E from Adjusted Equity or Expendable Net
Assets and not adding back any debt obtained for long-term purposes
associated with the Net PP&E. The Department wants to encourage
institutions to reinvest in themselves, but also wants to curb
manipulation of the composite score. The Department believes that its
approach to debt obtained for long-term purposes accomplishes both
goals.
    Changes: None.
    Comments: A few commenters believed the Department should consider
any long-term debt obtained by an institution for the primary reserve
ratio.
    Discussion: The Department does not agree with the commenter's
proposal. As discussed more thoroughly in the preamble to the NPRM, the
Department's Office of Inspector General and the Government
Accountability Office have both identified the use of long-term debt as
one of the primary means of manipulating the composite score and these
regulations are intended to reduce or eliminate that manipulation.
    Changes: None.
Appendix A and B, Related Parties
    Comments: For non-profit institutions, some commenters suggested
that related party contributions receivables from board members should
be included in secured related party receivables if there is no
``business relationship'' with board members.
    Discussion: The commenters are asking the Department to change the
regulatory requirements for related party transactions under 34 CFR
668.23(d). The requirements under those regulations were not included
in the notice announcing the formation of the Subcommittee and, thus,
are beyond the scope of these regulations.
    Changes: None.
Appendix A and B, Construction in Progress
    Comments: One commenter disagreed that CIP should be included as
PP&E in the computation of adjusted equity unless the corresponding
debt associated with the CIP is also included. The commenter argued
that if the corresponding debt is not included, this could create a
significant issue if the construction loan is deemed to be a short-term
line of credit. While the construction loan is specifically for the
building project, the commenter believed that a short-term line of
credit would be excluded as debt in the primary reserve ratio since it
is not considered to be long-term, and only when the construction loan
is termed-out as permanent long-term financing upon the project's
completion would the debt be included in the primary reserve ratio. The
commenter argued that this disconnect could cause a composite score
issue for an institution that has a significant multi-year building
project. In addition, the commenter stated the CIP is not placed in-
service until the project is completed and, therefore, not usable by
the institution.
    For these reasons, the commenter recommended that the composite
score continue to exclude construction-in-progress assets until they
are completed and placed in service as PP&E.
    Discussion: To the extent that an institution is using short-term
financing for CIP and clearly shows in the notes to the financial
statements the amount of short-term financing that is directly related
to CIP, it would be appropriate to include that amount as debt obtained
for long-term purposes because the Department considers construction
projects to serve a long-term purpose for the institution. The
Department agrees that CIP has not been placed in service. However, CIP
is not an expendable asset and most closely resembles PP&E; therefore,
the Department is including it and its associated debt in the primary
reserve ratio.
    Changes: We are revising the Appendices to reflect that short-term
financing for CIP will be considered debt obtained for long-term
purposes up to the value of CIP and only to the extent that the short-
term financing is directly related to the CIP.
Appendix A and B, Net Pension Liability
    Comments: One commenter noted that the primary reserve ratio treats
the net pension liability as short-term, which reduces the net assets
available for short-term obligations. As a result, the commenter argues
that her specific institution cannot achieve a composite score higher
than a 1.4, which over time triggers the requirement that the
institution provide a letter of credit to the Department. The commenter
urged the Department to eliminate the net pension liability from the
calculation of the primary reserve ratio and treat it instead as a
long-term liability.
    Discussion: The commenter is mistaken--the Department has never
made a distinction between short-term and long-term pension
liabilities.
    Changes: None.
Appendix A and B, Supplemental Schedule and Financial Statement
Disclosures
    Comments: Some commenters believed that to satisfy the reporting
[[Page 49875]]
requirements in these regulations and avoid conflicts with GAAP, any
additional information the Department seeks about leases, long-term
lines of credit, related-party receivables, split-interest gifts, or
other items should be provided in the Supplemental Schedule rather than
in the notes to the financial statements. The commenters argued that
because the Supplemental Schedule identifies all the financial elements
needed to calculate the composite score, and those elements are cross-
referenced to the financial statements and reviewed by the
institution's auditor in relation to the financial statements as a
whole, there is no need to alter GAAP. Consequently, the commenters
recommend that the Department remove the proposed additional disclosure
requirements in the financial statements.
    Other commenters believed that including the Supplemental Schedule
as part of an institution submission to the Department should eliminate
any differences between the composite score calculated by the
institution and the score calculated by the Department. To further
minimize any differences, the commenters recommended that the
Supplemental Schedule include the elements used to calculate the pre-
ASU 2016-02 composite score so that the Department has both
calculations at the time of the institution's submission.
    Discussion: Under section 498(c)(5) of the HEA, the Department must
use the audited financial statements of an institution to determine
whether it is financially responsible. As the commenters note, the
Supplemental Schedule is not part of the audited financial statements
but any notes to the financial statements are part of the audited
financial statements. Consequently, the Department cannot rely on the
information contained in the Supplemental Schedule as the commenters
suggest.
    In addition, we do not believe that the notes to the financial
statements required under these regulations alter GAAP because the
Department is not requiring that the information needed to calculate
the composite score must be provided in the notes to the financial
statements. Rather, it is up to an institution to determine the level
of aggregation or disaggregation it uses in preparing its financial
statements. Therefore, a note will need to be included only when the
required information is not readily identifiable in any other part of
the audited financial statements.
    We agree with the suggestion that the Department revise the
Supplemental Schedule to include the elements needed to calculate the
composite score for leases, but note that an institution is not
required to include or report to the Department any composite score
that it chooses to calculate based on the Supplemental Schedule.
    Changes: We are revising the Supplemental Schedules to identify the
elements relating to leases that are needed to calculate the composite
scores.
Financial Protection--Sec.  668.175(h)
    Comments: Many commenters supported the Department's efforts to
expand the types of financial protection that an institution may
provide.
    One commenter argued that the Department did not comply with
applicable law to support the provision in Sec.  668.175(h)(1) that it
would publish in the Federal Register other acceptable forms of surety
or financial protection. The commenter stated that this provision is
nothing more than a proposal to make a future proposal on unspecified
future action and, thus, should be withdrawn.
    Another commenter objected to this provision arguing that it allows
the Department to concoct any new kind of financial protection with no
standards or requirements in place to ensure that it serves its purpose
of paying for liabilities and debts that would otherwise be incurred by
taxpayers. The commenter concluded that because the Department failed
to demonstrate that there is a specific need for this flexibility and
provided no restrictions to ensure that alternatives would be on par
with a letter of credit, this provision should be removed.
    Discussion: The Department disagrees with the contention that its
proposal to publish in the Federal Register other acceptable forms of
surety or financial protection does not comply with the law. Announcing
our intent to accept such form of surety would not change the substance
of these final regulations, as it would merely provide an additional
method by which institutions could comply with the rule. In addition,
the Department would not concoct a form of financial protection that
offers no financial protection. As discussed in the NPRM (83 FR 37263)
and the 2016 final regulations (81 FR 76008), we understand that
obtaining irrevocable letters of credit can be costly, but are not
aware of other surety instruments that that would provide the
Department with same the level of financial protection or ready access
to funds. However, if surety instruments become available that are more
affordable to institutions but offer the same benefits to the
Department, we wish to retain the flexibility to consider accepting
those instruments in the future.
    Changes: None.
    Comments: None.
    Discussion: In the 2016 final regulations, we revised 668.175 to
provide that an institution that fails to meet the financial
responsibility standards as a result of the new triggering events in
Sec.  668.171(c)-(g), as opposed to just as a result of Sec.
668.171(b), may begin or continue to participate in the title IV, HEA
programs through the alternate standards set forth in Sec.  668.175.
The 2016 final regulations also established under Sec.
668.175(h)(2017) that if the institution did not provide a letter of
credit within 45 days of the Secretary's request, the Department would
offset the amount of the title IV, HEA program funds the institution is
eligible to receive in a manner that ensured that, over a nine-month
period, the total amount of offset would equal the amount of financial
protection the institution was requested to provide. For the
regulations proposed in the 2018 NPRM, and in these final regulations,
we adopt the same concept, but with technical changes to track the new
triggers in Sec.  668.171(c) and (d). We also amend Sec.  668.175(h) to
incorporate the possibility of additional types of financial protection
in the future, to be identified in a Federal Register notice, allow for
cash as an alternative form of financial protection, and modify the
nine-month set-off period to be six to twelve months. As we explained
in the preamble of the 2018 NPRM, these changes were made to provide
the Department with flexibility to assess what time period might be
appropriate as an off-set period and to accommodate the possibility of
future financial instruments or surety products that may satisfy the
Department's requests for financial protection.
    In addition, we codify current practice in these regulations that
the Department may use a letter of credit or other financial protection
provided by an institution to cover costs other than title IV, HEA
program liabilities. Under current practice, we notify an institution
that the Department may use the letter of credit or other protection to
pay, or cover costs, for refunds of institutional or non-institutional
charges, teach-outs, or fines, penalties, or liabilities arising from
the institution's participation in the title IV, HEA programs.
    Changes: We are revising Sec.  668.175(h) to provide that under
procedures established by the Secretary or as part of an agreement with
an institution, the Secretary may use the funds from a letter of credit
or other financial protection to satisfy the debts,
[[Page 49876]]
liabilities, or reimbursable costs owed to the Secretary that are not
otherwise paid directly by the institution including costs associated
with teach-outs as allowed by the Department.
Section 668.41(h) and (i), Loan Repayment Rate and Financial Protection
Disclosures
    Comments: Some commenters believed that establishing early warning
triggering events that require an institution to provide disclosures to
students and financial protection to the Department, as promulgated in
the 2016 final regulations, would offer critical information to
students and help protect taxpayers from financial risk.
    Some of these commenters argued that removing disclosures to
students runs counter to the Department's stated goal of enabling
students to make informed decisions on the front-end of college
enrollment. For these reasons, the commenters urged the Department to
maintain the disclosure requirements in the 2016 final regulations.
    Similarly, other commenters believed that providing disclosures to
students about institutions that are required to submit letters of
credit to the Department, or after consumer testing, disclosures
relating to triggering events, is important for alerting current and
prospective students as well as the general public about potential
financial problems at those institutions.
    Some of these commenters stated that rather than presuming that
prospective students would not understand letters of credit or the
triggering events, as discussed in the preamble to the 2018 NPRM, the
Department should leave those presumptions aside and require the
disclosures. Other commenters likened the situation where a student
does not understand the calculation of the debt to earnings rate but
benefits nonetheless from the information that it provides about a
program's quality to the letter of credit disclosure providing greater
knowledge about the financial condition of the institution.
    With regard to the disclosure associated with the loan repayment
rate for proprietary institutions, some commenters agreed with the
Department's proposal to rescind that disclosure, but other commenters
cited research or analysis that they alleged supported maintaining the
disclosure. Some of these commenters contend that a recent research
paper found that almost 50 percent of the borrowers who attend
proprietary institutions default on their loans within five years of
entering repayment and that another paper shows that the relatively
poor outcomes of students at for-profit institutions remain even after
controlling for differences in family income, age, race, academic
preparation, and other factors. Other commenters cited research showing
that, among for-profit institutions, there were almost no schools with
repayment rates above 20 percent. In addition, some commenters noted
that in the preamble to the NPRM, the Department argued that repayment
rates reflect financial circumstances and not educational quality, but
did not cite any research, analysis, or data to support that claim.
These commenters believed that repayment rates are a critical measure
for safeguarding $130 billion in Federal aid and supported that belief
by citing various reports raising concerns over rising default and
delinquency rates and linking repayment outcomes to other metrics of
educational outcomes. Other commenters argued that the focus on
proprietary institutions is justified and cited research from the
Brookings Institution, showing that among non-degree certificate
students, those in for-profit programs earned less per year than their
counterparts at public institutions despite taking out more in loans.
Another commenter voiced similar concerns for proprietary institutions
in New York, noting particularly that only seven percent of students
enroll at those institutions but account for one in four New Yorkers
who default on their loans within three years of entering repayment.
    Discussion: We note that the loan repayment rate warning and
financial protection disclosures were discussed during the Gainful
Employment (GE) negotiated rulemaking and associated NPRM along with
GE-related disclosures. However, we are including these disclosures in
these final regulations because they were part of the 2016 final
regulations we are proposing to revise.
    In the 2016 final regulations, we explained that we were requiring
repayment rate disclosures that relied upon a repayment rate
calculation based on the data provided to the Department by
institutions through the GE regulations and on the repayment
calculation in those regulations. However, on July 1, 2019, the
Department published a final rule that rescinds those
requirements.\158\ As a result, providing the same repayment rate
disclosure as required in the 2016 final regulations is no longer
feasible and we do not maintain this disclosure in these final
regulations.
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    \158\ 81 FR 31392.
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    As a general matter, we consider repayment rates to be an important
factor students and their families may consider when choosing an
institution and the Department intends to continue to make comparable
information about repayment rates, as well as other information, for
all institutions publicly available on the Department's College
Scorecard website.\159\ This information is a useful resource because
it includes repayment rate information, not only for proprietary
institutions, but also for nonprofit and public institutions of higher
education.
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    \159\ See: https://collegescorecard.ed.gov/.
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    We believe that any benefit that a student may derive from knowing
the loan repayment rate for a proprietary institution is negated by not
knowing the comparable loan repayment rate at a non-profit or public
institution, because the student may rely on the limited repayment rate
information available and end up enrolling at an institution whose
repayment rate is the same or even worse than the proprietary
institution.
    With respect to the financial protection disclosures, we
acknowledge that some prospective students may find this information
helpful, but on balance, we believe that the disclosures, if viewed
without proper context, could tarnish the reputation of an institution
that otherwise satisfies title IV provisions, and thus jeopardize or
diminish the credential, or employment or career opportunities, of
enrolled students and prior graduates.
    Changes: None.
Guaranty Agency (GA) Collection Fees (Sec. Sec.  682.202(b)(1),
682.405(b)(4)(ii), 682.410(b)(2) and (4))
    Comments: Some commenters supported the proposed changes in
Sec. Sec.  682.202(b)(1), 682.405(b)(4)(ii), and 682.410(b)(4),
providing that a guaranty agency may not capitalize unpaid interest
after a defaulted FFEL Loan has been rehabilitated, and that a lender
may not capitalize unpaid interest when purchasing a rehabilitated FFEL
Loan.
    One commenter proposed that the Department retain in Sec.
682.402(e)(6)(iii) a provision of the 2016 final regulations that
deleted a reference to a guaranty agency capitalizing interest.
    One commenter strongly opposed the changes to Sec.  682.410(b)(2),
asserting that section 484F of the HEA explicitly permits a guarantor
to charge a borrower who enters into a rehabilitation agreement
reasonable collection costs up to 16 percent. The commenter further
asserted that section 484A(b) of the HEA provides that a defaulted
borrower must pay reasonable collection costs and that there are no
exceptions
[[Page 49877]]
under which the borrower is not required to pay such costs. The
commenter argued that the regulatory change raises equal protection
concerns because it ties the Rehabilitation Fee to a 60-day interval
that does not have any discernable or rational relationship to
borrowers, guarantors, default, or anything else related to loan
rehabilitation.
    The commenter further asserted that the regulation creates due
process concerns because it calls for the elimination of a statutorily-
conferred right to payment that is often guarantors' only real
compensation for fulfilling their fiduciary obligation to the
Department and helping borrowers rehabilitate defaulted loans. The
commenter expressed concern that the regulatory change could create
perverse incentives and harm borrowers, the federal government, and
taxpayers by inhibiting creative outreach tactics that have proven
successful bringing defaulted borrowers back into repayment. This
commenter also drew a distinction between a defaulted borrower entering
into an ``acceptable repayment plan'' and a defaulted borrower entering
into a Rehabilitation Agreement. This commenter noted that it is a
common practice for guarantors to dispense with per-payment collection
fees when borrowers enter an acceptable repayment plan within 60 days
of receiving a default notice, even though they are required to do so.
They reiterate that loan rehabilitation is a unique process that is
defined and mandated by the HEA and controlled by detailed regulations.
    Discussion: We thank the commenters who are supportive of the
proposed revisions of the guaranty agency collection fee regulatory
provisions. We will retain the 2016 final regulations, which are
currently effective, with respect to Sec. Sec.  682.202(b)(1), 682.405,
and 682.410(b)(4) because the 2016 final regulations effectively
accomplish the same policy objective as the proposed amendatory
language in the 2018 NPRM.
    We agree with the comment about 34 CFR 682.402(e)(6)(iii) and
retain the change made in the 2016 final regulations to remove the
sentence regarding capitalization of interest.
    We disagree with the commenter who raised legal objections to the
Department's proposed regulation. The changes in Sec.  682.410(b)(2)
are consistent with the regulatory interpretation and position that the
Department outlined in Dear Colleague Letter (DCL) GEN-15-14 (July 10,
2015). We withdrew that DCL to allow for public comment on a regulatory
change rather than rely solely on our interpretation of existing
regulations.
    The Department has considered the commenter's objections but
believes that the proposed change is consistent with the HEA and the
existing regulations. We note that the United States Court of Appeals
for the Seventh Circuit accepted the Department's statutory and
regulatory interpretation in Bible v. United Student Aid Funds,
Inc.\160\
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    \160\ 799 F.3d. 633 (7th Cir. 2015).
---------------------------------------------------------------------------
    Section 484A(a) of the HEA provides that defaulted borrowers
``shall be required to pay, in addition to other charges specified in
this subchapter . . . reasonable collection costs.'' Section 428F(a) of
the HEA requires the guarantor to offer the borrower an opportunity to
have a defaulted loan ``rehabilitated,'' and the default status cured,
by making nine timely payments over 10 consecutive months, after which
the loan may be sold to a FFEL Program lender or assigned to the
Department, and the record of default as reported by the guarantor is
removed from the borrower's credit history. Under the HEA and the
Department's regulations, the installment amounts payable under a
rehabilitation agreement must be ``reasonable and affordable based on
the borrower's total financial circumstances.''
    The regulations direct the guarantor to charge the borrower
``reasonable'' collection costs incurred to collect the loan.\161\
Generally, the charges cannot exceed the lesser of the amount the
borrower would be charged as calculated under 34 CFR 30.60 or the
amount the Department would charge if the Department held the loan.
Before the guarantor reports the default to a credit bureau or assesses
collection costs against a borrower, the guarantor must provide the
borrower written notice that explains the nature of the debt, and the
borrower's right to request an independent administrative review of the
enforceability or past-due status of the loan and to enter into a
repayment agreement for the debt on terms satisfactory to the
guarantor.\162\
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    \161\ 34 CFR 682.410(b)(2).
    \162\ 34 CFR 682.410(b)(5)(ii).
---------------------------------------------------------------------------
    Thus, the regulations direct the guaranty agency to charge the
borrower collection costs, but only after the guaranty agency provides
the borrower the opportunity to dispute the debt, to review the
objection, and to agree to repay the debt on terms satisfactory to the
guarantor. If the borrower agrees within that initial period to repay
the debt under terms satisfactory to the guarantor and consistent with
the requirements, the borrower cannot be charged collection costs at
any time thereafter unless the borrower later fails to honor that
agreement.
    We also disagree with the commenter's suggestion that the
imposition of collection costs is intended to compensate the guaranty
agencies and provide them an incentive to offer loan rehabilitation. A
guaranty agency is permitted to charge the borrower for the reasonable
collection costs it incurs in collecting on loans. It is not reasonable
for the guaranty agency to charge collection costs for collection
activities it does not need to take because the borrower entered into
and met the requirements of a loan rehabilitation agreement. Collection
costs are not intended to be a funding source for guaranty agencies or
an incentive for them to offer a statutorily required opportunity to
borrowers.
    Changes: The Department retains the 2016 regulations, which are
currently effective, with respect to Sec. Sec.  682.202(b)(1), 682.405,
and 682.410(b)(4) because the 2016 final regulations effectively
accomplish the same policy objective as the proposed amendatory
language in the 2018 NPRM. The Department will proceed to revise Sec.
682.410(b)(2) as proposed in the 2018 NPRM.
    The Department also retains the change made in Sec.
682.402(e)(6)(iii) as a result of the 2016 final regulations.
    Comments: A group of commenters stated that the preamble to the
2018 NPRM specified that collection costs are not assessed if the
borrower enters into a repayment agreement with the guaranty agency
within 60 days from ``receipt'' of the initial notice, while the
regulatory language was less specific about when the 60-day time period
would commence. These commenters requested a change to the regulatory
language to make clear that the 60-day period begins when the guaranty
agency ``sends'' the initial notice described in paragraph (b)(6)(ii),
since this is the only date that can be determined by the guaranty
agency.
    Discussion: We agree with the commenters who noted that that it is
appropriate that the 60-day period be determined from the date the
guaranty agency sends the notice to the borrower, because the guaranty
agency cannot reasonably establish when a borrower receives the notice.
    Changes: We have modified Sec.  682.410(b)(2)(i) by replacing the
word ``following'' with ``after the guaranty agency sends''.
[[Page 49878]]
Subsidized Usage Period and Interest Accrual (Sec.  685.200)
    Comments: A group of commenters wrote in support of the regulations
that provide a recalculation of the subsidized usage period and
restoration of subsidies when any discharge occurs. They noted that
this action assures that harmed borrowers are made more completely
whole.
    Discussion: We thank the commenters for their support of the
proposed revisions to the regulations governing subsidized usage
periods and interest accrual. The Department is not rescinding the
revisions that the 2016 final regulations made to Sec.  685.200, which
concerns the subsidized usage period and interest accrual.
Additionally, the borrower defense to repayment provisions in these
final regulations expressly state that further relief may include
eliminating or recalculating the subsidized usage period that is
associated with the loan or loans discharged, pursuant to Sec.
685.200(f)(4)(iii).
    Changes: The changes proposed to Sec.  685.200 in the 2018 NPRM
were effectuated by the 2016 final regulations, so no additional
changes are necessary at this point. The Department revised Sec.
685.206(e)(12)(ii)(B), which describes the relief that a borrower may
receive, to expressly reference Sec.  685.200(f)(4)(iii), which
addresses the subsidized usage period.
Regulatory Impact Analysis (RIA)
    Under Executive Order 12866, the Office of Management and Budget
(OMB) determines whether this regulatory action is ``significant'' and,
therefore, subject to the requirements of the Executive Order and
subject to review by the Office of Management and Budget (OMB). Section
3(f) of Executive Order 12866 defines a ``significant regulatory
action'' as an action likely to result in a rule that may--
    (1) Have an annual effect on the economy of $100 million or more,
or adversely affect a sector of the economy, productivity, competition,
jobs, the environment, public health or safety, or State, local, or
tribal governments or communities in a material way (also referred to
as an ``economically significant'' rule);
    (2) Create serious inconsistency or otherwise interfere with an
action taken or planned by another agency;
    (3) Materially alter the budgetary impacts of entitlement grants,
user fees, or loan programs or the rights and obligations of recipients
thereof; or
    (4) Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles stated in the
Executive Order.
    This final regulatory action will have an annual effect on the
economy of more than $100 million because changes to borrower defense
to repayment and closed school discharge provisions impact transfers
among borrowers, institutions, and the Federal Government and changes
to paperwork requirements increase costs. Therefore, this final action
is ``economically significant'' and subject to review by OMB under
section 3(f)(1) of Executive Order 12866. Notwithstanding this
determination, we have assessed the potential costs and benefits of
this final regulatory action and have determined that the benefits
justify the costs.
    Under Executive Order 13771, for each new regulation that the
Department proposes for notice and comment or otherwise promulgates
that is a significant regulatory action under Executive Order 12866 and
that imposes total costs greater than zero, it must identify two
deregulatory actions. For FY 2019, no regulations exceeding the
agency's total incremental cost allowance will be permitted, unless
required by law or approved in writing by the Director of OMB. Much of
the effect of these final regulations involves reducing transfers
between the Federal Government and affected borrowers, but, as
described in the Paperwork Reduction Act section, we expect annualized
burden reductions of approximately $4.7 million when discounted to 2016
dollars as required by Executive Order 13771. These final regulations
are a deregulatory action under Executive Order 13771 and therefore the
two-for-one requirements of Executive Order 13771 do not apply.
    We have also reviewed these regulations under Executive Order
13563, which supplements and explicitly reaffirms the principles,
structures, and definitions governing regulatory review established in
Executive Order 12866. To the extent permitted by law, Executive Order
13563 requires that an agency--
    (1) Propose or adopt regulations only on a reasoned determination
that their benefits justify their costs (recognizing that some benefits
and costs are difficult to quantify);
    (2) Tailor its regulations to impose the least burden on society,
consistent with obtaining regulatory objectives and taking into
account--among other things and to the extent practicable--the costs of
cumulative regulations;
    (3) In choosing among alternative regulatory approaches, select
those approaches that maximize net benefits (including potential
economic, environmental, public health and safety, and other
advantages; distributive impacts; and equity);
    (4) To the extent feasible, specify performance objectives, rather
than the behavior or manner of compliance a regulated entity must
adopt; and
    (5) Identify and assess available alternatives to direct
regulation, including economic incentives--such as user fees or
marketable permits--to encourage the desired behavior, or provide
information that enables the public to make choices.
    Executive Order 13563 also requires an agency ``to use the best
available techniques to quantify anticipated present and future
benefits and costs as accurately as possible.'' The Office of
Information and Regulatory Affairs of OMB has emphasized that these
techniques may include ``identifying changing future compliance costs
that might result from technological innovation or anticipated
behavioral changes.''
    We are issuing these final regulations only on a reasoned
determination that their benefits justify their costs.
    Consistent with these Executive Orders, we assessed all costs and
benefits of available regulatory alternatives, including the
alternative of not regulating. Our reasoned bases for rulemaking
include the non-quantified benefits of our chosen regulatory approach
and the negative effects of not regulating in this manner. The
information in this RIA measures the effect of these policy decisions
on stakeholders and the Federal government as required by and in
accordance with Executive Orders 12866 and 13563.\163\ Based on the
analysis that follows, the Department believes that these final
regulations are consistent with the principles in Executive Orders
12866 and 13563.
---------------------------------------------------------------------------
    \163\ Although the Department may designate certain classes of
scientific, financial, and statistical information as influential
under its Guidelines, the Department does not designate the
information in this Regulatory Impact Analysis as influential and
provides this information to comply with Executive Orders 12866 and
13563. U.S. Dep't of Educ., Information Quality Guidelines (Oct. 17,
2005), available at https://www2.ed.gov/policy/gen/guid/iq/iqg.html.
---------------------------------------------------------------------------
    We also have determined that this regulatory action does not unduly
interfere with State, local, and tribal governments in the exercise of
their governmental functions. State, local, and tribal governments will
be able to continue to take actions to protect borrowers at
institutions of higher education, and these final regulations do not
interfere with other government's actions. As explained in the
preamble, actions taken by State Attorneys General
[[Page 49879]]
may provide evidence for borrowers to use in making claims, but nothing
in the regulations requires or limits such investigations or other
state government action.
    As required by OMB circular A-4, we compare the final regulations
to the current regulations, which are the 2016 final regulations. In
this regulatory impact analysis, we discuss the need for regulatory
action, the potential costs and benefits, net budget impacts,
assumptions, limitations, and data sources, as well as the regulatory
alternatives we considered.
    As further detailed in the Net Budget Impacts section, this final
regulatory action is expected to have an annual effect on the economy
of approximately $550 million in transfers among borrowers,
institutions, and the Federal Government related to defense to
repayment and closed school discharges, as well as $1.15 million in
costs to comply with paperwork requirements. This economic estimate was
produced by comparing the proposed regulation to the current regulation
under the President's Budget 2020 baseline (PB2020) budget estimates.
The required Accounting Statement is included in the Net Budget Impacts
section.
    Elsewhere, under the Paperwork Reduction Act of 1995, we identify
and explain burdens specifically associated with the information
collection requirements included in this regulation.
    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).
1. Need for Regulatory Action
    These final regulations address a significant increase in burden
resulting from the vast increase in borrower defense claims since 2015.
These final regulations reduce this burden in a number of ways, as
discussed further in the Costs, Benefits, and Transfers section of this
RIA.
    Although the borrower defense to repayment regulations have
provided an option for borrower relief since 1995, in 2015, the number
of borrower defense to repayment claims increased dramatically when
certain institutions filed for bankruptcy. Students enrolled at those
campuses and those who had left the institution within 120 days of its
closure were eligible for a closed school loan discharge. The
Department decided to also provide student loan discharge to additional
borrowers who did not qualify for a closed school loan discharge, but
could qualify under the defense to repayment regulation (34 CFR
685.206(c)). The Department encouraged impacted borrowers to submit
defense to repayment claims, which it agreed to consider for all
institutional-related loans. This resulted in a significant increase in
claim volume compared to the prior years: 7,152 claims received by
September 30, 2015; 82,612 claims received by September 30, 2016,
165,880 applications received by June 30, 2018; 200,630 applications
received by September 30, 2018; 218,366 applications by December 31,
2018; 239,937 by March 31, 2019.
    This growth significantly expanded the potential cost to the
Federal budget.
    In addition, provisions in the 2016 final regulations enable the
Secretary to initiate defense to repayment claims on behalf of entire
classes of borrowers. Initiating the group discharge process is
extremely burdensome on the Department and results in inefficiency and
delays for individual borrowers. It also has the potential of providing
loan forgiveness to borrowers who were not subject to a
misrepresentation, did not make a decision based on the
misrepresentation, or did not suffer financial harm as a result of
their decision. The 2016 final regulations impose onerous
administrative burdens on the Department. Indeed, the Department must:
Identify the members of the group; determine that there are common
facts and claims that apply to borrowers; designate a Department
official to present the group's claim in a fact-finding process;
provide each member of the group with notice that allows the borrower
to opt out of the proceeding; if the school is still open, notify the
school of the basis of the group's borrower defense, the initiation of
the fact-finding process, and of any procedure by which the school may
request records and respond; and bear the burden of proving that the
claim is valid.\164\ This process is cumbersome and does not provide an
efficient approach.
---------------------------------------------------------------------------
    \164\ 34 CFR 685.222(g) and (h); U.S. Dep't of Educ., Student
Assistance General Provisions, Final Regulations, 81 FR 75926, 75955
(Nov. 1, 2016).
---------------------------------------------------------------------------
    The group discharge process, which we are not including in these
final regulations for loans first disbursed on or after July 1, 2020,
may otherwise create large and unnecessary liabilities for taxpayer
funds. To make a determination as to a borrower defense to repayment
claim under these final regulations, it is necessary to have a
completed application from each individual borrower, to consider
information from both the borrower and the institution, and to examine
the facts and circumstances of each borrower's individual situation.
Presuming borrowers' reliance on a school's misrepresentation would not
properly balance the Department's responsibilities to protect students
as well as taxpayer dollars. Schools are still subject to the
consequences of their misrepresentations under this standard and, if
necessary, the Secretary retains the discretion to establish facts
regarding misrepresentation claims put forward by a group of borrowers.
    These final regulations also eliminate the pre-dispute arbitration
and class action waiver ban in the 2016 final regulations, reflecting
the Department's position that arbitration can be a beneficial process
for students and recent court decisions holding that such bans violate
the Federal Arbitration Act (FAA).\165\ Instead, the final regulations
favor disclosure and transparency by requiring schools relying upon
mandatory pre-dispute arbitration agreements to provide plain language
about the meaning of the restriction and the process for accessing
arbitration. With the clear disclosures on institutions' admissions
information web page, in the admissions section of the institution's
catalogue, and discussion in entrance counseling, the Department
believes students can make informed decisions about enrolling at
institutions that require such pre-dispute mandatory arbitration
agreements versus those that do not. The final regulations also
eliminate requirements for institutions to submit arbitration
documentation to the Department.
---------------------------------------------------------------------------
    \165\ Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018).
---------------------------------------------------------------------------
    The increased number of school closures in recent years has
prompted the Department to review regulations related to closed schools
and make changes to them. Under the 2016 final regulations, students
who are enrolled at institutions that close, as well as those who left
the institution no more than 120 days prior to the closure, are
entitled to a closed school loan discharge, provided that the student
does not transfer credits from the closed school and complete the
program at another institution. To allow more borrowers to make better
informed decisions regarding whether to continue attending the school
while also allowing them to benefit from the intended purpose of the
regulations without the need for a determination as to whether
exceptional circumstances exist, the Department extends the closed
school discharge window for Direct Loan borrowers from 120 days to 180
days
[[Page 49880]]
prior to the school's closure. In these final regulations, a borrower
would qualify for a closed school discharge as long as the borrower did
not transfer to complete their program, or accept the opportunity to
complete his or her program through an orderly teach-out at the closing
school or through a partnership with another school. Borrowers who
choose the option of participating in a teach-out would not qualify for
a closed school discharge, unless the closing institution or other
institution conducting the teach-out failed to meet the material terms
of the closing institution's teach-out plan, such that the borrower was
unable to complete the program of study in which the borrower was
enrolled. This mirrors the existing regulations that disallow students
who transferred credits from the closed school to another school, or
who finished the program elsewhere, to qualify for the closed school
loan discharge.
    These regulations also revise the current regulations providing for
automatic closed school loan discharge for eligible Direct Loan
borrowers who do not re-enroll in another title IV-eligible institution
within three years of their school's closure to apply to schools that
closed on or after November 1, 2013, and before July 1, 2020. This is
in line with the Department's preference for opt-in requirements rather
than opt-out requirements, such as in the case of Trial Enrollment
Periods. (https://ifap.ed.gov/dpcletters/GEN1112.html).
    The automatic closed school discharge provision also increases the
cost to the taxpayer, including for borrowers who are not seeking
relief, because default provisions typically capture a much larger
population than opt-in provisions. For this and the other reasons
articulated in the preamble, the final regulations require borrowers to
submit an application to receive a closed school loan discharge.
    The final regulations also update the Department's regulations
regarding false certification loan discharges. Under these final
regulations, if a student does not obtain or provide the school with an
official high school transcript, but attests in writing under penalty
of perjury that he or she has completed a high school degree, the
borrower may receive title IV financial aid, but will not then be
eligible for a false certification discharge if the borrower had
misstated the truth in signing the attestation.
    These final regulations also address several provisions related to
determining the financial responsibility of institutions and requiring
letter of credit or other financial protection in the event that the
school's financial health is threatened. The Financial Accounting
Standards Board (FASB) recently issued updated accounting standards
that change the way that leases are reported in financial statements
and thus considered by the Department in determining whether an
institution is financially responsible. To align with these new
standards and current practice, these regulations update the definition
of terms used in 34 CFR part 668, subpart L, appendices A and B, which
are used to calculate an institution's composite score. The Department
intends to recalibrate the composite score methodology to better align
it with FASB standards in a future rulemaking, but in the meantime,
these regulations mitigate the impact of changes in the accounting
standards and accounting practice by updating the definition of terms
and not penalizing institutions for business decisions they made
regarding leases or long-term debt.
    In addition, the final regulations adjust the financial
responsibility requirements to account for certain triggering events
that occur between audit cycles. As in the 2016 final rule, instead of
relying solely on information contained in an institution's audited
financial statements, which are submitted to the Department six to nine
months after the end of the institution's fiscal year, we will continue
to determine at the time that certain events occur whether those events
have a material adverse effect on the institution's financial
condition. In cases where the Department determines that an event poses
a material adverse risk, this approach will enable us to address that
risk quickly by taking the steps necessary to protect the Federal
interest.
    These final regulations take a similar approach to the 2016 final
regulations which are currently in effect, but here we focus on known
and quantifiable debts or liabilities. For example, instead of relying
on speculative liabilities stemming from pending lawsuits or defense to
repayment claims, under these final regulations, only actual
liabilities incurred from lawsuits or defense to repayment discharges
could trigger surety requirements. As explained in the preamble, we are
revising some of the triggering events for which surety may be required
if the potential consequences of those events pose a severe and
imminent risk to the Federal interest (for example, SEC or stock
exchange actions).
    We have also revised or reclassified some of the triggering events,
such as high cohort default rates, State agency violations, and
accrediting agency actions, that could have a material adverse effect
on an institution's operations or its ability to continue operating.
These final regulations direct the Department to fully consider the
circumstances surrounding those events before making a determination
that the institution is not financially responsible. In that regard,
these final regulations do not contain certain mandatory triggering
events that were included in the 2016 final regulations because the
cost and burden of seeking surety is significant. In many cases the
2016 final regulations specified speculative events as triggering
events such as pending litigation or pending defense to repayment
claims, that can in many cases be resolved with no or minimal financial
impact on the institution. As discussed in the preamble, these final
regulations also do not include as a mandatory triggering event the
results of a financial stress test, which was included in the 2016
final regulations without an explanation of what that stress test would
be and on what empirical basis it would be developed.
2. Summary of Comments and Changes From the NPRM
    Changes from the NPRM generally fall into two categories: borrower
defense claims and closed school discharges. Table 1 expands further
upon these changes.
[[Page 49881]]
                     Table 1--Summary of Key Changes in the Final Regulations From the NPRM
----------------------------------------------------------------------------------------------------------------
           Provision                      Regulation section                Description of change from NPRM
----------------------------------------------------------------------------------------------------------------
Defense to repayment...........  685.206(e)(2)......................  Establishes a preponderance of the
                                                                       evidence standard with requirements for
                                                                       reasonable reliance and financial harm.
                                                                       Establishes that borrowers may submit an
                                                                       application, regardless of the status of
                                                                       their loans.
Borrower Defense Period of       685.206(e)(6)......................  Places a three-year limitation on borrower
 limitation.                                                           defense claims relating to loans first
                                                                       disbursed on or after July 1, 2020. For
                                                                       borrowers subject to a pre-dispute
                                                                       arbitration agreement, arbitration
                                                                       suspends the comments of the three-year
                                                                       limitations period from the time
                                                                       arbitration is requested until the final
                                                                       outcome. Exceptions also possible for
                                                                       consideration of new evidence when a
                                                                       final arbitration ruling or a final,
                                                                       contested, non-default judgment on the
                                                                       merits by a State or Federal Court that
                                                                       establishes that the institution made a
                                                                       misrepresentation.
Borrower defenses--Adjudication  685.206(e)(9)(ii) and (10).........  Permits the Secretary to consider evidence
 Process.                                                              in her possession provided that the
                                                                       Secretary permits the borrower and the
                                                                       institution to review and respond to this
                                                                       evidence and to submit additional
                                                                       evidence. Establishes that a borrower
                                                                       will have the opportunity to review a
                                                                       school's submission and to respond to
                                                                       issues raised in that submission.
Borrower defense partial relief  685.206(e)(4)......................  Clarifies that the Secretary shall
 for approved claims.                                                  estimate the financial harm experienced
                                                                       by the borrower.
Defense to Repayment--Role of    685.206(e)(10).....................  Clarifies what evidence constitutes
 the School in the Adjudication                                        financial harm.
 Process.
Process for asserting or         682.402, 685.212...................  Establishes an application process for
 requesting a discharge.                                               borrower defense claims, suspension of
                                                                       collection during processing of said
                                                                       claim, adjudication of borrower defense
                                                                       claims, notification requirements post-
                                                                       adjudication. Clarifies that borrower
                                                                       defense standards and Departmental
                                                                       process apply to loans repaid by a Direct
                                                                       Consolidation Loan.
Borrower Defenses--Adjudication  685.206, 685.212...................  Revises the circumstances when the
 Process.                                                              Secretary may extend the time period when
                                                                       a borrower may assert a defense to
                                                                       repayment or may reopen the borrower's
                                                                       defense to repayment application to
                                                                       consider evidence that was not previously
                                                                       considered. Automatically grants
                                                                       forbearance on the loan for which a
                                                                       borrower defense to repayment has been
                                                                       asserted, if the borrower is not in
                                                                       default on the loan, unless the borrower
                                                                       declines such forbearance.
Closed school discharges.......  685.214............................  Changes the eligibility criteria to
                                                                       exclude borrowers who continue their
                                                                       education through a teach-out or by
                                                                       transferring credits, as opposed to those
                                                                       who have been offered a teach-out by a
                                                                       closing school.
Closed school discharges.......  674.33 and 682.402.................  No longer making closed school discharge
                                                                       changes to FFEL or Perkins regulations.
Financial Responsibility.......  668.171, 668.172, 668.175..........  Revised provision related to withdrawal of
                                                                       owner's equity and the treatment of
                                                                       capital distributions equivalent to
                                                                       wages. Included new discretionary trigger
                                                                       for institutions with high annual dropout
                                                                       rates. Revised treatment of discretionary
                                                                       triggers so that when the institution is
                                                                       subject to two or more discretionary
                                                                       triggering events in the period between
                                                                       composite score calculations, those
                                                                       events become mandatory triggering events
                                                                       unless a triggering event is cured before
                                                                       the subsequent event occurs. Leases
                                                                       entered into on or after December 15,
                                                                       2018, will be treated as required under
                                                                       ASU 2016-02 while those entered before
                                                                       then will be grandfathered. Please see
                                                                       Table 2 for further description of
                                                                       financial responsibility triggers.
----------------------------------------------------------------------------------------------------------------
    Additionally, after further consideration, we are keeping many of
the regulatory changes that were included in the 2016 final
regulations. Some of the revisions the Department proposed in the 2018
NPRM were essentially the same as or similar to the revisions made in
the 2016 final regulations, which are currently in effect. The
Department is not rescinding or further amending the following
regulations in title 34 of the Code of Federal Regulations, even to the
extent we proposed changes to those regulations in the 2018 NPRM:
Sec. Sec.  668.94, 682.202(b)--guaranty agency collection fees,
Sec. Sec.  682.211(i)(7), 682.405(b)(4)(ii), 682.410(b)(4) and
(b)(6)(viii), and 685.200--subsidized usage period and interest
accrual.
    Comments: Some commenters assert that the proposed regulations
would limit the circumstances in which a borrower may seek loan
cancellation based on school misconduct to ``defensive,'' post-default
administrative collection proceedings, and that this is demonstrated by
its incorporation into the Department's analysis. The NPRM identifies
the 2016 final regulations as the baseline for the impact analysis in
its three options. The commenters argue that the option of using the
1995 regulations as a more lenient option is invalid because it is the
same as the baseline with respect to the Department's acceptance of
affirmative claims. Likewise, the Department's option of limiting
consideration of borrower defenses to repayment to post-default
collection proceedings would be a change not only from the 2016 final
regulations, but from the pre-2016 practice as well. As a result, the
commenter claims it represents a new scenario. The commenters assert
that these inaccuracies undermine the compliance of this NPRM with
Executive Orders 12866 and 13563.
    Another commenter asserted that using the 2016 final regulations as
a baseline for the impact analysis is problematic because the
Department's conclusion that borrowers will benefit from increased
transparency with respect to the required disclosures is contingent
upon a regulatory environment in which pre-dispute arbitration
agreements and class action waivers are permitted, but not subject to
[[Page 49882]]
robust disclosures. Additionally, this commenter notes that the
Department is not ``assuming a budgetary impact resulting from
prepayments attributable to the possible availability of funds from
judgments or settlement of claims related to Federal student loans.''
\166\ This commenter contends this assumption does not support the
Department's assertion that borrower may recover more from schools in
arbitration than through a lawsuit.
---------------------------------------------------------------------------
    \166\ 83 FR 37299.
---------------------------------------------------------------------------
    Discussion: We thank the commenters for their submissions on the
types of claims the Department should accept. Upon further
consideration, the Department changed its position on the posture
(i.e., defensive and affirmative) from which borrowers may submit
borrower defense to repayment applications. Affirmative claims are
permitted in these final regulations, and that is reflected in the
Regulatory Impact Analysis. These regulations include a three-year
limitations period for both affirmative and defensive claims. These
regulations also promulgate a different Federal standard than the 2016
final regulations. The limitations period and Federal standard in these
regulations limit the circumstances in which a borrower's loan may be
cancelled with respect to a defensive claim during a post-default
administrative collection proceeding.
    We disagree with commenters who state that we used the wrong
baseline or were inconsistent in our application of the baseline. The
Regulatory Impact Analysis, per OMB Circular A-4, is required to
compare to the world without the proposed regulations, which would be
the 2016 final regulations. This baseline is clearly stated in the
Regulatory Alternatives Considered section and in various sections
throughout the analysis. Further, the Department computed various
impact scenarios and discussed other regulatory options that were
considered. With respect to the discussion of pre-dispute arbitration
agreements in the Costs, Benefits and Transfers section of this RIA,
the Department does describe the change compared to the 2016 final
regulations but also points out the benefits of the required
disclosures. Accordingly, the Department believes it is in compliance
with Executive Orders 12866 and 13563.
    Changes: None.
    Comments: A commenter stated that methods by which the Department
estimates lifetime default rates under Alternative A overestimate the
share of borrowers who could raise a defensive claim under this rule,
even if strategic defaults would occur. The commenter also noted that
borrowers with defensive claims would only be able to file a claim
during the timeframe governing a collections action and only after that
action has been initiated--but those actions are not universally
applied, nor are those timeframes well understood by borrowers.
Further, the Department received numerous comments recommending that
defense to repayment be made available to all borrowers, including
those in regular repayment status, default and collections. According
to these commenters, in all cases of collection proceedings,
administrative hurdles such as filing claims within the timeframe for
filing an affirmative defense will disproportionately affect borrowers
with valid claims, as those borrowers are unlikely to be notified of
their rights under the proposed rules, causing them financial harm. In
order to avoid this, commenters suggested that the Department should
examine data on the initiation of collection processes to determine for
how many borrowers per year it initiates debt collection proceedings
like those described in Alternative A; reduce the share of defensive
claims to parallel the share the defaulters per year placed in those
proceedings with an opportunity to challenge its initiation; and
consider whether a small inflation is appropriate to account for
borrowers who default strictly to file a claim. In the final
regulations, commenters suggested that the Department should detail the
revision it makes to these numbers and publish those data to better
inform stakeholders of the underlying information informing the budget
estimates.
    Discussion: The Department appreciates the commenter's concern that
the defensive claims percentage overstates the share of borrowers who
would be able to file a claim. The suggestions about analysis based on
the share of defaulters in collections proceedings who present a
defense are appreciated, but the Department did not have that data
available and the changes to the final regulations make that analysis
less relevant to the final regulations we adopt here. The final
regulations do allow those in all repayment statuses to apply for a
borrower defense discharge. If we did reduce the defensive claims
percentage as the commenter suggests, we know the transfers from the
Federal government to affected borrowers would be reduced, as shown in
the sensitivity analyses presented in the 2018 NPRM and in these final
regulations. As discussed in the Net Budget Impact section, the
defensive claims percentage has been replaced by the Allowable Claims
percentage based on the number of claims filed within the three-year
timeframe applicable under these final regulations.
    As detailed in the preamble section on Affirmative and Defensive
Claims, the Department agreed with commenters that it is appropriate to
accept both affirmative and defensive claims and this approach balances
concerns about incentivizing strategic defaults, effects on borrowers,
and administrative burden on the Department.
    As described in the Borrower Defenses--Limitations Period for
Filing a Borrower Defense Claim section of the preamble, the Department
has determined that a three-year limitations period for both
affirmative and defensive claims is appropriate. In order to mitigate
the risk that borrowers with a valid claim will not be notified of
their rights in time to file a borrower defense to repayment
application, the final regulations provide that the Secretary may
extend the time period for filing a borrower defense to repayment if
there is 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 Sec.  685.206(e)(3). The Secretary also
may extend the limitations period for a final decision by a duly
appointed arbitrator or arbitration panel that establishes the
institution made a misrepresentation as defined in Sec.  685.206(e)(3).
    Changes: The Department revised Sec.  685.206(e)(7) to provide for
the circumstances in which the Secretary may extend the limitations
period to file a borrower defense to repayment application.
    Comments: One commenter cites Executive Order 12291 which requires
both that agencies describe potential benefits of the rule, including
any beneficial effects that cannot be quantified in monetary terms,
identify those likely to receive the benefits, and ensure that the
potential benefits to society for the regulation outweigh the potential
costs to society. In order to accomplish this, the commenter asserted
the Department should add several components to the regulatory impact
analysis of these final regulations, including: Quantifying the total
share of loan volume and the total share of borrowers affected by
institutional misconduct that meets the standard it expects will
receive relief on their loans; detailing the average share of relief it
expects borrowers in each
[[Page 49883]]
sector to receive; and conducting a quantitative analysis that directly
compares the benefits under this rule against the costs (particularly
to borrowers), to create a true cost-benefit analysis. The commenters
said that the RIA also needs to address the non-monetary component of
the benefit-cost analysis, and one component of this analysis should be
the fairness of the rule to borrowers. For example, the Department
indicates that some borrowers who should be eligible for claims based
on the misconduct of their institutions will be unable to have their
loans discharged due to the way the Department has designed the
process.
    Discussion: First, we note that Executive Order 12291 was revoked
by Executive Order 12866 on September 30, 1993, though E.O. 12866
contains similar provisions as 12291 for these purposes. The monetized
estimates in the Regulatory Impact Analysis are based on the budget
estimates, which can be found in the Net Budget Impacts section. The
assumptions described there are based on a percent of loan volume and,
like the 2016 final regulations, do not specify a number or percent of
borrowers affected as the share of loan volume affected could be
reached under a range of scenarios and involve many borrowers with
relatively small balances or a mix of borrowers with higher balances.
Other impacts, including expected burdens and benefits are discussed in
the Costs, Benefits, and Transfers and Paperwork Reduction Act of 1995
sections. The Department believes its NPRM and these final regulations
are in compliance with Executive Order 12866.
    The Department addresses the cost-benefit analysis of these
regulations extensively in the preamble. The Department explains why
the Federal standard in these final regulations is more appropriate
than the Federal standard in the 2016 final regulations and also how
the adjudication process provides more robust due process protections
for both borrowers and schools. These final regulations provide a fair
process for borrowers while also protecting a Federal asset and
safeguarding the interests of the Federal taxpayers.
    Changes: None.
    Comments: Some commenters argued that an estimated tax burden
between $2 billion and $40+ billion over ten years is of such a large
range that it indicates the Department is unsure of the tax burden that
these regulations will have. In fact, some commenters suggested that
the Department withdraw the NPRM and resubmit it with an accurately
stated baseline and budget impact scenarios, and allow the public
additional time to comment on the proposed regulation.
    Discussion: We disagree with the commenters who state that the
regulations would result in between $2 and $40 billion increased burden
on taxpayers. The range presented by the commenter refers to the 2016
NPRM,\167\ and that range was narrowed for the 2016 final regulations.
The Department has always acknowledged uncertainty in its borrower
defense estimates, as reflected in the additional scenarios presented
in the Net Budget Impacts section of this RIA. Further, the Accounting
Statement contained in the NPRM shows a savings to taxpayer funds of
$619.2 million annually. The final regulations revise this estimate to
$549.7 million.
---------------------------------------------------------------------------
    \167\ 81 FR 39394. Net Budget Impact section of NPRM published
June 16, 2016 presented a number of scenarios with a range of
impacts between $1.997 to $42.698 billion.
---------------------------------------------------------------------------
    Changes: None.
    Comments: One commenter noted that the Department should clarify
the assumptions in each component of the net budget impact, i.e.,
determine the degree to which the Department accounted for data on
collections proceedings within the default rates it examined for the
defensive applications percent to account for the share of defaulted
borrowers who experienced a given collection proceeding in a year and
the narrow timeframe (30-65 days) in which borrowers will have to file
a defense to repayment claim. Also, commenters asked that the
Department clarify how the RIA accounts for the elimination of a group
process; how it evaluates the evidence requirements associated with
demonstrating how a misrepresentation meets the standard of having been
made with reckless disregard or intent; and how it accounts for
recoveries of discharged funds through a proceeding with the
institution as opposed to the financial protection triggers. To do
this, commenters suggested that the Department could conduct additional
sensitivity analyses to show how each aspect of the proposed rule
interacts with the remainder of the rule, and the implications
estimates. Current sensitivity analyses do not test all of these items;
and neither the sensitivity analyses nor the alternative scenarios
account for how a group process would alter the benefits to borrowers
under this rule. The commenters also stated that the Department should
clarify that the net budget impact, not the annualized figures
presented in the classification of expenditures, is the primary budget
estimate and clarify the total impact it expects this rule to have on
borrowers.
    Discussion: The Department thanks the commenters for identifying an
area of the analysis that may have been unclear. The Department has
clarified the impacts of eliminating the borrower defense to repayment
group discharge process in the Costs, Benefits, and Transfers and
Regulatory Alternatives Considered sections. The Department also notes
that the Federal standard and the definition of misrepresentation no
longer require intent, as discussed in the ``Federal Standard'' and
``Misrepresentation'' sections of the Preamble. Requests for additional
sensitivity analysis and clarifications about the budget assumptions
are addressed within the Net Budget Impacts section of this RIA.
    Changes: Additional discussion and sensitivity runs regarding
borrower defense estimates were added to the Net Budget Impacts
section.
    Comments: One commenter stated that because the two large
institutions that closed used forced arbitration, the Department does
not have the data on offsetting funds so it cannot account for the
reduced likelihood that injured students will recover any damages when
their only option for bringing a claim is in arbitration. The
Department's statements about students' likely recovery also do not
show that those few students who do prevail in arbitration are more
likely to obtain greater awards. At a minimum, the commenters asserted
that the Department must contend with available evidence regarding
these students' experiences in arbitration, which show that arbitration
does not provide meaningful relief. They also said that the Department
should justify the assertion that lawsuits are any less likely to have
merit than arbitration demands.
    Discussion: This commenter erroneously assumed that allowing
institutions to use pre-dispute arbitration agreements prevents
borrowers from accessing the Department's borrower defense to repayment
process. A borrower's only option is not arbitration if a borrower
signs a pre-dispute arbitration agreement. Under these final
regulations, even if a borrower signs an agreement for pre-dispute
arbitration, the borrower has access to the Department's borrower
defense to repayment process. The borrower may file a borrower defense
to repayment application before the arbitration begins, during the
arbitration, or after the arbitration as long as the borrower
[[Page 49884]]
otherwise meets the requirements for submitting a borrower defense to
repayment application under these final regulations. Additionally,
these final regulations suspend the commencement of the limitations
period for submitting a borrower defense to repayment application for
the time period beginning on the date that a written request for
arbitration is filed and concluding on the date the arbitrator submits,
in writing, a final decision, final award, or other final determination
to the parties.
    The Department disagrees that what occurred at certain institutions
should determine the Department's policy regarding pre-dispute
arbitration agreements. What occurred at one or two schools does not
bind the Department's policy determinations and is not indicative of
what occurs at schools throughout the country.
    The Department has not asserted that lawsuits are less likely to
have merit than arbitration demands or that borrowers who do prevail in
arbitration will, in all cases, receive greater awards. The Department
has asserted that arbitration may be more accessible to borrowers since
it does not require legal counsel and can be carried out more quickly
than a legal process that may drag on for years.\168\ Even if
arbitration does not provide meaningful relief, borrowers may still
submit a borrower defense to repayment application and obtain
additional relief.
---------------------------------------------------------------------------
    \168\ 83 FR 37265.
---------------------------------------------------------------------------
    The Department has clarified the impacts of mandatory, pre-dispute
arbitration relative to borrower defense to repayment in the Costs,
Benefits, and Transfers section. Specifically, the Department's
analysis now centers around the strong public policy preference in
favor of arbitration as set forth in statute and in Supreme Court
jurisprudence. As explained at length in the Preamble, arbitration
provides significant advantages over traditional litigation in court,
including: Party control over the process; typically lower cost and
shorter resolution time; flexible process; confidentiality and privacy
controls; awards that are fair, final, and enforceable; qualified
arbitrators with specialized knowledge and experience; and broad user
satisfaction. Requests for clarification about what is accounted for in
the budget estimates are addressed in the Net Budget Impact section of
this RIA.
    Changes: None.
    Comments: One commenter expressed concerns that inconsistent
standards were used throughout the NPRM with regard to comparison with
the pre-2016 regulations and 2016 final regulations. The commenter
asserted that this inconsistency of positions, inconsistent use of
existing data, and inconsistent reliance on different regulations are
indicative of arbitrary decision making. They also asserted that the
Department did not provide a strong rationale for the assertion that
the small number of claims data from prior to 2015 are acceptable to
guide policy, yet the more recent experience with larger numbers of
claims is not, specifically in terms breach of contract. Furthermore,
the commenter stated that the Department provided no empirical evidence
that an easy claims process may result in borrowers filing claims due
to dissatisfaction as opposed to misrepresentation, but dismisses data
as useful evidence to guide decision making.
    This commenter asserts that the Department has not conducted any
data analysis on existing claims to indicate the share of claims that
were defensive or affirmative. This commenter also requests that the
Department address concerns raised by the Project on Predatory Student
Lending,\169\ demonstrating that the Department has accepted
affirmative claims since at least 2000. Additionally, this commenter
asserts that the Department has not provided a reasoned explanation for
the elimination of a group claims process. The commenter contends that
the Department provides no evidence for or analysis of the claim that
the group discharge process may create large and unnecessary
liabilities for taxpayer funds.
---------------------------------------------------------------------------
    \169\ https://predatorystudentlending.org/press-releases/department-educations-borrower-defense-includes-fundamental-lie-documents-show-press-release/.
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    Discussion: We disagree with the commenters who state that the
standards we applied in the Regulatory Impact Analysis were
inconsistent. The Regulatory Impact Analysis, per OMB Circular A-4,
requires the agency compare impacts of the proposed regulation to the
world without the proposed regulations, which in this case would have
been the 2016 final regulations. This baseline is clearly stated in the
Alternatives Considered section and in various sections throughout the
analysis. Further, the Department analyzed data from its Borrower
Defense database and made them available during the negotiating
sessions.\170\ Although 22 percent of claims had been completed as of
November 2017 (29,780/135,050), they were not a representative sample
of the universe of all claims. The data in 2017 was skewed because so
many of the claims were from a very small number of institutions. This
remains the case today. For that reason, the Department's data were
insufficient for use in decision-making relative to claim outcomes.
---------------------------------------------------------------------------
    \170\ www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefensedataanalysis11118.docx.
---------------------------------------------------------------------------
    Additionally, it is reasonable to conclude that borrowers are more
likely to submit a borrower defense to repayment claim if the standard
governing these claims is lower. The commenter acknowledges that there
have been a larger number of borrower defense to repayment
applications. The great volume of borrower defense to repayment
applications submitted under the 2016 final regulations, which provides
a more lenient standard than these final regulations, may indicate that
borrowers are more likely to submit a borrower defense to repayment
claim if the standard governing these claims is lower. While the
Department has not yet processed all of the filed claims, of the total
number of applications reviewed so far, over 9,000 applications have
been denied, for reasons that include: Borrowers who attended the
institution, but not during the time period of the institution's
misrepresentation; claims submitted without evidence; and claims that
were made without any basis for relief.
    The Department agrees with commenters regarding the affirmative
claims received prior to 2015. We intend to update the Borrower Defense
Database to include older records not received through an application.
    The Department acknowledges that it accepted affirmative claims in
the past. An analysis on the number of claims that were affirmative or
defensive or of the correlation between an affirmative claim and a
finding against the borrower is not necessary as the Department will
continue to allow both affirmative and defensive claims to be filed. As
discussed earlier in the preamble to these final regulations, the
Department is adopting the approach in both instances of Alternative B
from its proposed regulatory text for loans first disbursed on or after
July 1, 2020, which will allow for both affirmative and defensive
claims, and those changes are reflected in the Regulatory Impact
Analysis.
    The Department's reasoned explanation for eliminating the group
claims process is in the relevant sections of the preamble.
    Changes: Changes regarding the Department's decision to accept both
affirmative and defensive claims are reflected in the assumptions used
for
[[Page 49885]]
the Net Budget Impact section of this analysis.
    Comments: Some commenters expressed concern that the proposed
regulations would lead to costly and frivolous lawsuits at the expense
of taxpayers, while doing little to help students by comparison.
Another commenter stated that the NPRM provided no evidence of students
who, under current borrower defense rules, asserted a defense to
repayment simply because they regretted their educational choices. One
the other hand, another commenter felt that the proposed regulations
would save taxpayers several billions of dollars from false claims over
the next decade, while also providing necessary accountability in the
system to prevent fraud.
    Discussion: The Department appreciates the support of the commenter
who asserts that these final regulations will result in a significant
savings to Federal taxpayers.
    The Department's decision to accept both affirmative and defensive
borrower defense to repayment applications may reduce lawsuits between
borrowers and institutions. More borrowers will be able to file defense
to repayment applications than if the Department accepted only
defensive claims. The school has an opportunity to respond to the
borrower's allegations, and the borrower also has an opportunity to
address the issues and evidence raised in the school's response. The
Department's borrower defense to repayment process is more accessible
and less costly than litigation for a borrower who seeks relief.
Through the Department's process, the borrower will receive any
evidence the school may have against the borrower's allegations and
will be better able to assess whether to pursue litigation if they are
unsatisfied with the result of their borrower defense to repayment
claim. The Department has clarified the impacts of lawsuits relative to
borrower defense to repayment and also its assumptions regarding
borrower motivation in the Costs, Benefits, and Transfers section.
    Additionally, in the 2018 NPRM, the Department did not assert that
borrowers are seeking a defense to repayment because they regret their
educational choices. The Department stated: ``The Department has an
obligation to enforce the Master Promissory Note, which makes clear the
students are not relieved of their repayment obligations if they later
regret the choices they made.'' \171\ The Department does not weigh the
motives of students who file a borrower defense to repayment
application. The Department is implementing regulations that will more
rigorously enforce the terms and conditions in the Master Promissory
Note.
---------------------------------------------------------------------------
    \171\ 83 FR 37243.
---------------------------------------------------------------------------
    Changes: As noted in the Net Budget Impacts section, we have
revised the assumptions to include affirmative as well as defensive
claims.
    Comments: One commenter expressed concern that the proposed
regulations would narrow the standards under which claims would be
adjudicated. The reduction of claims that result would not be the
result of changes in institutional behavior due to disincentives to
misbehave, but rather from process changes imposed on borrowers.
Commenters also suggested that defensive claims would provide greater
advantages to students in a collections proceeding than a student who
has continued to pay her loan since the student in repayment would not
be able to seek relief through defense to repayment.
    Discussion: Based upon the Department's revised position relative
to which borrowers may submit borrower defense to repayment
applications, the period of limitation, and the revised evidentiary
standard, we increased our estimate of the percent of loan volume
subject to a potential claim as compared to the NPRM, as reflected in
the Allowable Claims percentage in Table 3 compared to the Defensive
Claims percentage in Table 5 of the NPRM. We do still expect that the
annual number will be less than that anticipated under the 2016 final
regulations. The Department believes its final regulations protect
borrowers, whether in default or not, from institutional
misrepresentation while holding institutions accountable for their
actions.
    The Department discusses why its Federal standard and adjudication
process are appropriate and will sufficiently address institutional
misconduct in the preamble and more specifically in the Federal
Standard and Adjudication Process sections of the Preamble.
    We agree with the commenter that borrowers who are in default and
are filing defensive claims should not have greater advantages than
borrowers who have been paying off their loans and who are making
affirmative claims. Accordingly, these final regulations provide the
same limitations period of three years for both affirmative and
defensive claims in Sec.  685.206(e)(6).
    Changes: As discussed above, we made revisions to the Allowable
Claims percentage in Table 3, as compared to the Defensive Claims
percentage in Table 5 of the NPRM. Additionally, the Department revised
Sec.  685.206(e)(6) to provide a three-year limitations period for both
affirmative and defensive claims.
    Comments: Another commenter noted that the Department needs to
account for the costs to students and justify how the regulations will
improve conduct of schools by holding individual institutions
accountable and thereby deterring misconduct by other schools. Another
commenter stated that the Department does not indicate what economic
analysis justifies placing on students the burden of showing schools'
intentional deception. Another commenter mentioned that the
Department's estimates in the net budget impact do not contain the
potential for significant institutional liabilities, as the proposed
regulations have fewer financial protection triggers, resulting in
lower levels of recovery. Accordingly, the Department's assumption that
these proposed regulations will have the same deterrent effect is
impractical and unreasonable.
    Through other departmental actions unrelated to this rule, the
commenter stated it is likely that the frequency of unlawful conduct
will actually increase.
    An additional commenter stated that assumptions underlying this
forecast that students could be left with ``narrowed educational
options as a result of unwarranted school closures'' appear without
basis in fact or reason. The commenter asserts that not only would
putting primary responsibility for purveying accurate information on
schools be no more of a burden than is normally expected of any honest
commercial enterprise, but it would improve overall free market
competition by enabling honest schools to flourish in a reliably
transparent marketplace at the expense of the dishonest ones.
Commenters asserted that the Department needs to show why it would be
too burdensome on schools' potential productivity to require them to
take the precautions needed to assure their provision of accurate
information to prospective students and why students should be expected
to be efficient and effective evaluators of the accuracy of schools'
promotional efforts.
    Discussion: We disagree with commenters who state that we did not
account for costs to borrowers. These are covered in the Costs,
Benefits, and Transfers, Net Budget Impacts, and Paperwork Reduction
Act of 1995 sections. Further, in response to comments, the final
regulations revise our proposed borrower defense to repayment standard,
which now
[[Page 49886]]
requires an application and a preponderance of the evidence showing the
borrower relied upon the misrepresentation of the school and that the
reliance resulted in financial harm to the borrower. The standard in
these final regulations does not require students to prove schools'
intent to deceive. We agree with commenters that all institutions
should bear the burden of their misrepresentations, which is why the
Department intends to recoup its losses from institutions due to
borrower defense discharges. Despite the commenter's concern, the
financial triggers we have included in the final regulations are better
calibrated to link the triggering events to a precise and accurate
picture of an institution's financial health. The pattern and maximum
rate of recoveries is reduced from the PB2020 baseline, but the
recovery rate remains significant and will reduce help offset borrower
defense discharges.
    The comments about the specific budget assumptions and the
potential deterrent effect of the regulations are addressed in the Net
Budget Impacts section of this RIA.
    Other Departmental actions unrelated to this rule are not at issue
in promulgating these final regulations. The commenter is welcome to
submit comments in response to other proposed regulations if the
commenter believes that the Department's other actions will somehow
increase unlawful conduct. While it is true that the Department's
regulations may have interactive effects, the Department does not agree
that the proposed changes to the accreditation regulations described in
the NPRM published June 12, 2019, will lead to a substantial increase
in conduct that could generate borrower defense claims. Even if an
influx of bad actors were to occur and go unchecked as suggested by the
commenter, we believe the range of outcomes described in the Net Budget
Impact sensitivity runs capture the potential effects.
    The Department agrees with commenters that institutions should be
held accountable for making a misrepresentation, as defined in these
final regulations. The Department does not believe that it is too
burdensome for institutions to provide accurate information to their
students. Borrowers have choices in the education marketplace, and
these final regulations seek to eliminate, prevent, and address
unlawful conduct. The Department explains why its Federal standard, the
definition of misrepresentation, and the adjudication process
adequately address unlawful conduct in the applicable sections of the
preamble.
    Changes: None.
    Comments: One commenter mentioned that lifting the ban on pre-
dispute arbitration clauses, class action waivers, and internal dispute
processes and deleting provisions that would require reporting on the
number of arbitrations and judicial proceedings, award sizes, and
status of students would allow institutions to limit the flow of
information regarding abuses, misrepresentations, and fraudulent
activity. The resulting delay of information would add costs to the
taxpayer and burden to borrowers. In fact, another commenter opines
that the Department does not state key costs and overstates relative
benefits of rescinding the 2016 provisions restricting funds to schools
that use forced arbitration and class-action waivers and replacing them
with an ``information-only'' approach. Although the NPRM claims that
borrowers will benefit due to transparency, the data would be helpful
to law enforcement and future student loan borrowers.
    Another commenter contends that the Department has no support for
the assertion that permitting forced arbitration will reduce the cost
impact of unjustified lawsuits. This commenter also contends that the
Department does not acknowledge one of the benefits of the 2016 final
regulations in deterring misconduct of schools and recommends that the
Department assess the reduction in deterrence as a cost.
    Discussion: The Department supports the use of internal dispute
resolution processes as a way for disputes to be resolved
expeditiously, which was not prohibited by the 2016 final regulations.
An internal dispute resolution process is often a vehicle for a
borrower to receive relief directly from an institution, in a cost-
effective and timely manner. The use of an internal dispute resolution
process can be a vehicle for potential resolution, without placing the
burden on the Department to adjudicate.
    The Department also reminds the commenters that borrowers who have
entered into a pre-dispute arbitration agreement or endorsed a class
action waiver may still avail themselves of the borrower defense to
repayment process offered in these final regulations. Indeed, the
Department will toll the limitations period for filing a borrower
defense to repayment application until the final arbitration award is
entered. As previously stated, the borrower, however, may file a
borrower defense to repayment application before the arbitration
proceeding, during the proceeding, or after the proceeding. The
Department does not wish to create a burden in requiring institutions
to report the number of arbitrations and judicial proceedings, award
sizes, and various other matters. As detailed in the Paperwork
Reduction Act discussion of Section 685.300, these changes are
estimated to reduce burden by 179,362 hours and $6.56 million annually.
    Additionally, the final regulations on financial responsibility
standards do require institutions to report the occurrence of risk
events that may have a material impact on their financial stability or
ability to operate.
    The Department does not assert that arbitration will reduce the
cost impact of unjustified lawsuits only but instead that arbitration
generally eases burdens on the overtaxed U.S. court system.\172\ The
section on ``Pre-Dispute Arbitration Agreements, Class Action Waivers
and Internal Dispute Processes'' in the preamble provides a more
fulsome justification for the Department's policy determinations.
---------------------------------------------------------------------------
    \172\ 83 FR 37265.
---------------------------------------------------------------------------
    Finally, the Department believes that these final regulations also
deter unlawful conduct by an institution, and the commenter does not
provide any evidence to support the assumption that these final
regulations will not do so. Accordingly, the Department will not assess
the reduction in deterrence as a cost. However, in response to the
commenter's points about reduced deterrence, the Department added a
sensitivity scenario assuming no deterrent effect on institutional
conduct in the Net Budget Impacts section of this RIA.
    Changes: As mentioned above, we added a sensitivity scenario
assuming no deterrent effect on institutional conduct in the Net Budget
Impacts section of this RIA.
    Comments: One commenter noted that the Department's analysis of
benefits to borrowers makes unsupported assertions regarding the
advantages of arbitration relative to litigation in court. The
commenter said that available evidence in the higher education context
does not support the Department's predictions. Another commenter stated
that the NPRM provides no explanation for decreasing the estimate of
students at proprietary schools that would be impacted by arbitration
clauses from 66 percent to 50 percent. The impact of both in costs to
students and to the number of students directly affected needs to be
reevaluated.
    Discussion: We thank the commenters who provided counter-analysis
on mandatory arbitration clauses. We disagree with commenters who state
the budget estimate is poorly explained; a
[[Page 49887]]
specific estimate for students affected by the provision identified by
the commenter is not included in either the 2016 budget estimate or the
NPRM budget estimate. We believe the commenter is referring to the
Paperwork Reduction Act burden calculation that in the 2016 final rule
that assumed 66 percent of students would receive the notices required
in Sec.  685.300(e) or (f).\173\ No specific basis was described for
the 66 percent. In the NPRM published July 31, 2018, the Department
used the percent of students who use the Department's online entrance
counseling as a basis for its assumption that 50 percent of students
would be affected by pre-dispute arbitration agreements.\174\
Additional detail about the burden calculation is provided in the
Paperwork Reduction Act discussion related to arbitration disclosures.
---------------------------------------------------------------------------
    \173\ 81 FR 76067. See burden calculation for Sec.  685.300(e)
and (f).
    \174\ 83 FR 37306. See burden calculation for Sec.  658.304.
---------------------------------------------------------------------------
    The Department's reasons for allowing borrowers and schools to
enter into a pre-dispute arbitration agreement and class action
waivers, and the benefits of this policy are explained more fully in
the ``Pre-dispute Arbitration Agreements, Class Action Waivers and
Internal Dispute Processes'' section in the Preamble.
    Changes: No change necessary.
    Comment: One commenter noted that the Department's definition of
small businesses under the Regulatory Flexibility Act does not make
sufficient use of Department data, defines a small institution in an
arbitrary manner, and that this definition is not in line with the
definition used by the Small Business Administration. The commenter
asserted that the Department should rely on the IPEDS finance survey to
identify institutions with less than $7 million in annual revenue. The
commenter stated that the Department should consider the typical size
of nonprofit institutions in evaluating whether they qualify as
dominant in their fields by calculating the median for four-year and
less-than-four-year nonprofits. They also said that this definition
would be more responsive going forward, by reflecting potential changes
in the education marketplace through adjustments to the median in
future calculations. For public institutions, the commenter said the
Department should explain why it chose to measure them based on student
enrollment, when the proposed regulations noted that public
institutions are usually determined to be small organizations based on
the population size overseen by their operating government. If a
justification cannot be made for Department's determinations, the
commenter said it should revert to the definition it has historically
used until it can work with institutions of higher education to find a
more accurate threshold.
    Discussion: We disagree with the commenter who stated that the
Department's reasons for proposing a definition of small institutions
are unclear. While the Department did use the IPEDS finance survey to
identify proprietary institutions that were considered small for
previous regulations including the 2016 final regulations, we believe
the enrollment-based definition provides a better standard that can be
applied consistently across types of institutions. As we stated in the
NPRM, the Department does not have data to apply the Small Business
Administration's definition for institutions; specifically, we do not
have data to identify which private nonprofit institutions are dominant
in their field nor do we have data on the governing body for public
institutions. We disagree with commenters who suggest that a
``typical'' size of nonprofit institutions should be used to determine
whether the institution is dominant in its field. Further, we disagree
with the commenter's suggestion to use median (50th percentile)
enrollment as the threshold for identifying small institutions; no
evidence presented by the commenter suggests that the bottom 50 percent
of institutions are small. In fact, selecting a percentile threshold
without an analytical basis for selection of that threshold would be an
unsupported conclusion.
    We disagree with the commenter who stated that the definition of
small institutions proposed by the Department was arbitrary and
capricious. As stated in the NPRM, the definition was based upon IPEDS
data from 2016, and we used statistical clustering techniques to
identify the smallest enrollment groups. Specifically, coverage of and
correlations between revenue, title IV volume, FTE enrollment, and
number of students enrolled were evaluated for all institutions that
responded to the 2016 IPEDS survey. Because this definition should work
for all institutions, and not just title IV participating institutions,
title IV funds were rejected as a variable to measure size. Further,
research found that revenue had poor coverage and was not well
correlated with enrollment in the public and private nonprofit sectors,
so it was also rejected as a variable to measure size. Department data
do have good coverage, for all institutions, in enrollment data.
Therefore, enrollment data were selected as the variable to measure
size. Additionally, data were grouped into two-year and four-year
institutions based on visual differences in data distribution.
    We used a k-means model to identify optimal numbers of clusters by
determining local maxima in the pseudo F statistic (SAS Support, Usage
Note 22540, available at: support.sas.com/kb/22/540.html and SAS
Community, Tip: K-means clustering in SAS--comparing PROC FASTCLUS and
PROC HPCLUS, available at: https://communities.sas.com/t5/SAS-Communities-Library/Tip-K-means-clustering-in-SAS-comparing-PROC-FASTCLUS-and-PROC/ta-p/221369). We then used a centroid method to
identify clusters (SAS Institute Inc, 2008, Introduction to Clustering
Procedures: SAS/STAT[supreg] 9.2 User's Guide, Cary, NC: SAS Institute
Inc. available at: support.sas.com/documentation/cdl/en/statugclustering/61759/PDF/default/statugclustering.pdf) and confirmed
visually. The smallest cluster of four (0-505) was used for the two-
year institutions' definition, and the two smallest clusters of six (0-
425 and 425-1015) were used for the four-year institutions' definition.
The thresholds were rounded to the nearest 100 for simplicity and to
allow for annual variation. Further, the results were deemed sufficient
by visual inspection for each control (public, private, and
proprietary). Finally, the four-year definition further confirms the
existing IPEDS definition for a small institution.
    Changes: None.
    Comments: One commenter stated that given policy changes in the
proposed regulations, the Department assumes too high a recovery rate
from institutions. This commenter contends that the assumptions should
be revisited and the percentage for recovery should be reduced. They
also note that the proposed regulations include fewer financial
protections than what the Department laid out in the 2016 final
regulations, many of which were early-warning indicators. The commenter
asserted that the financial triggers included in the proposed
regulations are much less predictive of problems and will apply to very
few colleges than those included in the 2016 final regulations. They
also asserted that these triggering events constitute such significant
evidence of concern that it may well be too late to prevent further
damage and liabilities for taxpayers will likely not provide enough
financial protection to explain the difference between the recovery
percentages
[[Page 49888]]
estimated in the 2016 final regulations and those included in the 2018
NPRM. Accordingly, the commenter said that use of the triggers will not
increase the effectiveness of financial protection over time. Thus,
they said there is little reason to believe the share of borrower
defense discharges recovered from institutions will increase over time
at all; it may even decrease, since some of these events will likely
lead to the closure of the school and the removal of the riskiest
institutions from the marketplace.
    Discussion: The Department appreciates the commenter's detailed
comments about the recovery rate assumption and addresses the comment
in the Net Budget Impacts section of this RIA. The top recovery rate in
the main scenario was reduced to 20 percent. Additionally, the
sensitivity run related to recovery rates and the no-recovery scenario
described after Table 4 are designed to reflect the possibility that
recoveries will be lower than anticipated in the main estimate, and the
Department believes this is appropriate to address the concerns raised
by the commenter about the level of recoveries.
    Changes: Recovery rate assumption updated as described in Net
Budget Impacts section.ne.
3. Costs, Benefits, and Transfers
    These final regulations will affect all parties participating in
the title IV, HEA programs. In the following sections, the Department
discusses the effects these proposed regulations may have on borrowers,
institutions, guaranty agencies, and the Federal government.
3.1. Borrowers
    These final regulations would affect borrowers through borrower
defense to repayment applications, closed school discharges, false
certification discharges, loan rehabilitation, and institutional
disclosures. Borrowers may benefit from an ability to appeal to the
Secretary if a guaranty agency denies their closed school discharge
application, from lower tuition and increased campus stability
associated with longer leases, and from a more generous ``look back''
period with regard to closed school loan discharges.
    In response to comments, the Department will provide the
opportunity to seek loan relief through borrower defense to repayment
to all borrowers, regardless of that borrower's repayment status. Some
borrowers may incur burden to review institutional disclosures on
mandatory arbitration and class action waivers or complete applications
for loan discharges, and there could be additional burden to borrowers
who would otherwise, through no affirmative action on their part, be
included in a class-action proceeding.
3.1.1. Borrower Defenses
    Upon further consideration and in response to comments, the
Department will provide the opportunity to seek loan relief through
borrower defense to repayment to all borrowers, regardless of that
borrower's repayment status. However, the Federal defense to repayment
standard for loans first disbursed on or after July 1, 2020, includes
certain limits and conditions to prevent frivolous or stale claims,
including a three-year period within which to apply after exiting the
institution and a requirement that borrowers demonstrate both reliance
and harm. The Department estimates this change will result in more
applications relative to the NPRM, but fewer than that expected under
the 2016 final regulations. Borrowers are more likely to have their
borrower defense to repayment applications processed and decided more
quickly if the Department has a smaller volume of claims.
    Relative to the 2016 regulations, the final regulations do not
include a group claim process because the evidence standard and the
fact-based determination of the borrower's harm that the Department is
requiring in these final regulations necessitates that each claim be
adjudicated separately to determine the borrower's reliance on the
institution's alleged misrepresentation. The definition of
misrepresentation in these final regulations would make borrowers who
may have been included in the group determination that cannot prove
individual reliance and harm ineligible for borrower defense loan
discharges.
    When borrower defense to repayment discharge applications are
successful, dollars are transferred from the Federal government to
borrowers because borrowers are relieved of an obligation to pay the
government for the loans being discharged. As further detailed in the
Net Budget Impacts section, the Department estimates that annualized
transfers from the Federal Government to affected borrowers, partially
reimbursed by institutions, would be reduced by $512.5 million. This is
based on the difference in cashflows associated with loan discharges
when these final regulations are compared to the 2016 final regulations
as estimated in the President's Budget 2020 baseline and discounted at
7 percent. To the extent borrowers with successful defense to repayment
claims have subsidized loans, the elimination or recalculation of the
borrowers' subsidized usage periods could relieve them of their
responsibility for accrued interest and make them eligible for
additional subsidized loans.
    A defense to repayment discharge is one remedy available to
students, among other available avenues for relief. Students harmed by
institutional misrepresentations continue to have the right to seek
relief directly from the institution through arbitration, lawsuits in
State court, or other available means. Borrowers would possibly receive
quicker and more generous financial remedies from institutions through
these means since schools may be more motivated to make students whole
through the arbitration process in order to avoid defense to repayment
claims. The 2016 final regulations prohibited mandatory pre-dispute
arbitration agreements, and while institutions may have continued to
provide voluntary arbitration, schools may not have made it obvious to
students how to avail themselves of arbitration opportunities. The
final regulations do not prohibit institutions from including mandatory
pre-dispute arbitration clauses and class action waivers in enrollment
agreements, but require institutions to provide the borrower with
information about the meaning of mandatory arbitration clauses, class
action waivers, and how to use the arbitration process in the event of
a complaint against the institution. The benefit of arbitration is that
it is more accessible and less costly to students and institutions than
litigation. For borrowers who seek relief from a court, there may be
additional advantages since courts can award damages beyond the loan
value, which the Department cannot do; although, this could be offset
by the expense in both time and dollars of a lawsuit. In addition,
borrowers who seek relief through arbitration may also be awarded
repayment of tuition charges that were paid in cash or through other
forms of credit, which the Department cannot do.
3.1.2. Closed School Discharges
    Some borrowers may be impacted by the changes to the closed school
discharge regulations. These final regulations would, for a loan first
disbursed on or after July 1, 2020, extend the window for a Direct Loan
borrower's eligibility for a closed school discharge from 120 to 180
days from the date the school closed. Under the final regulations, a
borrower whose school closed would qualify for a closed school
discharge unless the borrower accepted a teach-out opportunity approved
by the institution's accrediting agency and, if
[[Page 49889]]
applicable, the institution's State authorizing agency; unless the
school failed to meet the material terms of the teach-out plan approved
by the school's accrediting agency and, if applicable, the school's
State authorizing agency, such that borrower was unable to complete the
program of study in which the borrower was enrolled. The final
regulations also provide that borrowers who transfer their credits to
another institution would not be eligible for a closed school
discharge. These final regulations also revise the provision in the
2016 Direct Loan regulations that provides for an automatic closed
school discharge without an application for students that did not
receive a closed school discharge or re-enroll at a title IV
participating institution within three years of a school's closure to
apply to schools that closed on or after November 1, 2013 and before
July 1, 2020. While the automatic discharge would have benefitted some
students who no longer would need to submit an application to receive
relief, it may have disadvantaged students who wish to continue their
education at a later time or provide proof of credit completion to
future employers. There could also be tax implications associated with
closed school loan discharges, and borrowers should be aware of those
implications and given the opportunity to make a decision according to
their needs and priorities.
    The expansion of the eligibility period for a closed school
discharge will increase the number of students eligible under this
provision and encourage institutions to provide opportunities for
students to complete their programs in the event that a school plans to
close. The reduced availability of closed school discharges because of
the elimination of the three-year automatic discharge for schools that
close on or after July 1, 2020 may reduce debt relief for students. As
further detailed in the Net Budget Impacts section, the Department
estimates that annualized closed school discharge transfers from the
Federal Government to affected borrowers would be reduced by $37.2
million. This is based on the difference in cashflows associated with
loan discharges when the final regulations are compared to the 2016
final regulations as estimated in the President's Budget 2020 baseline
(PB2020) and discounted at 7 percent.
    The Department's accreditation standards \175\ require accreditors
to approve teach-out plans at institutions under certain circumstances,
which emphasizes the importance of these plans to ensuring that
students have a chance to complete their program should their school
close. Teach-out plans that would require extended commuting time for
students or that do not cover the same academic programs as the closing
institution likely would not be approved by accreditors. In addition,
an institution whose financial position is so degraded that it could
not provide adequate instructional or support services would similarly
likely not have their teach-out plan approved. In the case of the
precipitous closures of certain institutions in 2015 and 2016, it is
possible that enabling those institutions to offer teach-out plans to
their current students--including by arranging teach-outs plans
delivered by other institutions or under the oversight of a qualified
third party--could have benefited students and saved hundreds of
millions of dollars of taxpayer funds.
---------------------------------------------------------------------------
    \175\ 34 CFR 602.24(c).
---------------------------------------------------------------------------
    Large numbers of small, private non-profit colleges could close in
the next 10 years, which could significantly increase the number of
borrowers applying for closed school discharges if these institutions
are not encouraged to provide high quality teach-out options to their
students.\176\ For example, Mt. Ida College announced \177\ that it
would close at the end of the Spring 2018 semester and while the
institution had considered entering into a teach-out arrangement with
another institution, this did not materialize. While there may be other
institutions that have accepted credits earned at Mt. Ida, due to the
distance between Mt. Ida and other campuses, it may be impractical for
the student to attend another institution.\178\ A proper teach-out plan
may have allowed more students to complete their program. The
requirement of accreditors to approve such options ensures protection
for borrowers to ensure that a teach-out plan provides an accessible
and high-quality option for students to complete the program.
---------------------------------------------------------------------------
    \176\ www.insidehighered.com/news/2017/11/13/spate-recent-college-closures-has-some-seeking-long-predicted-consolidation-taking.
    \177\ www.insidehighered.com/news/2018/04/09/mount-ida-after-trying-merger-will-shut-down.
    \178\ www.insidehighered.com/news/2018/04/23/when-college-goes-under-everyone-suffers-mount-idas-faculty-feels-particular-sense.
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3.1.3. False Certification Discharges
    Some borrowers may be impacted by the changes to the false
certification discharge regulations, although this provision of the
final regulations simply updates the regulations to codify current
practice required as a result of the removal of the ability to benefit
option as a pathway to eligibility for title IV aid. In the past, a
student unable to obtain a high school diploma could still receive
title IV funds if he or she could demonstrate that he or she could
benefit from a college education.
    With that pathway eliminated by a statutory change, prospective
students unable to obtain their high school transcripts when applying
for admission to a postsecondary institution would be allowed to
certify to their institutions that they graduated from high school or
completed a home school program and qualify for Federal financial aid.
At the same time, it will disallow students who misrepresent the truth
in signing such an attestation from subsequently seeking a false
certification discharge. Although the Department has not seen an
increase in false certification discharges as a result of the
elimination of the ability to benefit option, given the increased
awareness of various loan discharge programs, the Department believes
it is prudent to set forth in regulation that if a student falsely
attests to having received a high school diploma, the student would not
be eligible for a false certification discharge. Codifying this
practice will not have a significant impact, but will ensure that
students who completed high school but are unable to obtain an official
diploma or transcript will retain the opportunity to participate in
postsecondary education. The Department does not believe that there are
significant numbers of students who are unable to obtain an official
transcript or diploma, but recent experiences related to working with
institutions following natural disasters demonstrates that this
alternative for those unable to obtain an official transcript is
important.
3.1.4. Institutional Disclosures of Mandatory Arbitration Requirements
and Class Action Waivers
    Borrowers, students, and their families would benefit from
increased transparency from institutions' disclosures of mandatory
arbitration clauses and class action lawsuit waivers in their
enrollment agreements. Under the final regulations, institutions would
be required to disclose that their enrollment agreements contain class
action waivers and mandatory pre-dispute arbitration clauses.
Institutions would be required to make these disclosures to students,
prospective students, and the public on institutions' websites and in
the admission's section of their catalogue. Further, borrowers would be
notified of these during entrance counselling. As further discussed in
the Paperwork Reduction Act section, we estimate there is 5 minutes of
burden to 342,407 borrowers
[[Page 49890]]
annually at $16.30 \179\ per hour to review these notifications during
entrance counseling, for an annual burden of $446,506.
---------------------------------------------------------------------------
    \179\ Students' hourly rate estimated using BLS for Sales and
Related Workers, All Other, available at: www.bls.gov/oes/2017/may/oes_nat.htm#41-9099.
---------------------------------------------------------------------------
    As institutions began preparing to implement the 2016 final
regulations, some eliminated both mandatory and voluntary arbitration
provisions to be sure they would be in compliance with the letter and
spirit of the regulations. Under the newly finalized regulations,
institutions would be able to include these provisions in their
enrollment agreements. The effect will be to allow schools to require
borrowers to redress their grievances through a quicker and less costly
process, which we believe will benefit both the institution and the
borrower by introducing the judgment of an impartial third party, but
at a lower cost and burden than litigation. Arbitration may be in the
best interest of the student because it could negate the need to hire
legal counsel and result in adjudication of a claim more quickly than
in a lawsuit or the Department's 2016 borrower defense claim
adjudication process. Mandatory arbitration also reduces the cost
impact of unjustified lawsuits to institutions and to future students,
since litigation costs may be ultimately passed on to current and
future students through tuition and fees. As discussed in more depth in
the preamble, arbitration also increases the likelihood that damages
will be paid directly to students, rather than used to pay legal fees.
    However, with the removal of the requirement to report certain
arbitration information to the Department, if more disputes are
resolved in arbitration there may be less feedback to the Department,
the public and prospective students about potential issues at
institutions. This may extend the period that misrepresentation by
institutions may go undetected, potentially exposing more borrowers and
increasing taxpayer exposure to potential claims.
3.2. Institutions
    Institutions will be impacted by the final regulations in the areas
of borrower defenses, closed school discharges, false certification
discharges, FASB accounting standards, financial responsibility
standards, and information disclosure. The benefits to institutions
include a decrease in the number of reimbursement requests resulting
from Department-decided loan discharges based on borrower defenses,
closed school, and false certification; an increased involvement in the
borrower defense adjudication process; the ability to continue to
receive the benefit from the cost savings associated with existing
longer-term leases and reduced relocation costs until such time as the
composite score methodology can be updated through future negotiated
rulemaking; and the ability to incorporate arbitration and class action
waivers in enrollment agreements. Institutions may incur costs from
increased arbitration and internal dispute resolution processes,
providing teach-out plans in the event of a planned school closure, and
compliance with required disclosure and reporting requirements.
3.2.1. Borrower Defenses
    Many institutions, those that do not have a significant number of
claims filed against them would not incur additional burden as a result
of the final regulatory changes in the borrower defense to repayment
regulations. Those institutions against which claims are filed will be
given the opportunity to provide evidence to the Department during
claim adjudication. Further, these final regulations include a three-
year period of limitations, which aligns with institutions' records
retention requirements. We further estimate that successful defense to
repayment applications under the Federal standard and process will
affect only a small proportion of institutions. The Department expects
that the changes in these regulations would result in fewer successful
defense to repayment applications as compared to the 2016 final
regulations, and therefore fewer discharges of loans. Therefore, the
Department expects to request fewer repayment transfers from
institutions to cover discharges of borrowers' loans. Under the main
budget estimate explained further in the Net Budget Impacts section,
the Department estimates an annual reduction of reimbursements of
borrower defense claims from institutions to the government of $153.4
million under the seven percent discount rate.
    However, the Department believes that by requiring institutions
that utilize mandatory arbitration clauses and class action waivers to
provide plain language disclosures along with additional information at
entrance counseling, more students may utilize arbitration to settle
disputes. As a result, institutions may have increased costs related to
increased use of internal dispute processes; although, the Department
was unable to monetize those costs as it has limited information about
the procedures used in different institutions and the associated costs.
3.2.2. Closed School Discharges
    A small percentage of institutions close annually, with 630
closures at the 8-digit OPEID branch level in 2018. Some institutions
provide teach-out opportunities to enable students to complete their
programs and others leaving students to navigate the closure on their
own, resulting in their eligibility for closed school loan discharges.
The final regulations expand the eligibility window for students with
Direct loans first disbursed on or after July 1, 2020, who left the
institution but are still eligible to receive closed school loan
discharges from 120 to 180 days. The final regulations also clarify
that a borrower who accepts a teach-out plan would not qualify for a
closed school discharge, unless the institution failed to meet the
material terms of the teach-out plan, such that the borrower was unable
to complete the program of study in which the borrower was enrolled.
    The Department has worked with a number of schools that have
successfully completed teach-out plans. As additional schools close in
the future, the Department wants to encourage them to offer orderly
teach-outs rather than close without making arrangements to protect
their students. We believe the final regulations will encourage
institutions to provide teach-out opportunities, despite their
potential high cost, if doing so would reduce the total liability that
could result from having to reimburse the Secretary for losses due to
closed school discharges. Title IV-granting institutions are required
by their accreditors \180\ to have an approved teach-out plan on file
and to update that plan with more specific information in the event
that the institution is financially distressed, is in danger of losing
accreditation or State authorization, or is considering a voluntary
teach-out for other reasons. Accreditors, and in some cases, State
authorizing agencies, must approve teach-out plans and carefully
monitor teach-out activities. Students who opt to participate in an
approved teach-out plan and who are provided that opportunity as
outlined in the plan will not be eligible for a closed school loan
discharge under this provision. As in the current regulation, students
who transfer their credits will also not be eligible for a closed
school discharge.
---------------------------------------------------------------------------
    \180\ 34 CFR 602.24(c).
---------------------------------------------------------------------------
    The Department is revising the regulatory provision that provides
automatic closed school discharges for Direct Loan borrowers who do not
complete their program within three years after the school closed to
apply to
[[Page 49891]]
schools that closed on or after November 1, 2013 and before July 1,
2020. This is expected to reduce closed school discharges and the
potential institutional liability associated with them.
3.2.3. False Certification Discharges
    A small percentage of institutions are affected by false
certification discharges annually. The final regulations would permit
institutions to obtain a written assurance from prospective students
who completed high school but are unable to obtain their high school
transcripts when applying for admission and Federal financial aid,
without exposing themselves to financial liabilities should those
students misrepresent the truth in their attestations. To ensure that
the unintended consequence of this policy change is not an increase in
the frequency or cost of false certification discharges, the Department
believes it is necessary to specify that a student who misrepresents
his or her high school completion status under penalty of perjury
cannot then receive a false certification loan discharge due to non-
completion of high school or a home school program. The final
regulations will protect institutions as they seek to serve students
who are pursuing postsecondary education but cannot obtain an official
diploma or transcript. We believe this final regulation will not have a
significant impact on institutions because the Department receives very
few false certification discharge requests and, as discussed further in
the Net Budget Impacts section, the Department does not include any
false certification discharge recoupment transfers in its estimate.
3.2.4. Financial Responsibility Standards
    Both the 2016 final regulations and these final regulations include
conditions under which institutions would have to provide a letter of
credit or other form of financial protection in order to continue to
participate in the title IV, HEA programs. The following table compares
the financial responsibility triggers established by the 2016 final
regulations and in these final regulations. Mandatory events or actions
automatically result in a determination that the institution is not
financially responsible and trigger a request for a letter of credit or
other financial protection from the institution, whereas discretionary
events or actions give the Secretary the discretion to make that
determination at the time the event or action may occur. In a change
from the NPRM, if an institution is subject to two discretionary events
within the period between calculation of composite scores, the events
will be treated as mandatory events unless a triggering event is
resolved before any subsequent event(s) occurs. These final regulations
also keep high annual dropout rates as a discretionary trigger, as was
the case in the 2016 final rule, with the specific threshold to be
determined in the future.
                                   Table 2--Financial Responsibility Triggers
----------------------------------------------------------------------------------------------------------------
   Financial responsibility trigger        2016 regulation          Final regulation          Change summary
----------------------------------------------------------------------------------------------------------------
                         Mandatory Actions or Events: Recalculated Composite Score swww.bls.gov/ooh/management/postsecondary-education-administrators.thm.
---------------------------------------------------------------------------
    FASB is a standard-setting body that establishes generally accepted
accounting principles and the Department requires that institutions
participating in the title IV, HEA programs file audited financial
statements annually, with the audits performed under FASB standards.
Therefore, financial statements will begin to contain elements that are
either new or reported differently, including long-term lease
liabilities. This topic was not addressed in the 2016 final
regulations, but was included in the 2018 NPRM.
    Changes in the definition of terms used under the financial
responsibility standards will align the regulations with current
practice and FASB standards.\182\ However, the new FASB lease standard
could negatively affect or cause an institution to fail the composite
score and the Department has no mechanism to make a timely adjustment
to the composite score calculation to accommodate this change. The
Department also has no data to understand what the impact of this
change will be on institutional composite scores. Therefore, the
Department must obtain audited financial statements prepared in
accordance with FASB standards, and will calculate one composite score
for an institution by grandfathering in leases entered into prior to
December 15, 2018 (pre-implementation leases) and applying the new
standard to any leases entered into on or after that date (post-
implementation leases).
---------------------------------------------------------------------------
    \182\ www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805317350.
---------------------------------------------------------------------------
    The Department may use the data it will collect under the final
regulations to conduct analyses that might inform future rulemaking to
update the composite score methodology. As explained further in the
Paperwork Reduction Act of 1995 section, 1,896 proprietary institutions
and 1,799 private institutions will each need 1 hour annually to
prepare a
[[Page 49893]]
Supplemental Schedule to post along with their annual audit ((1,896 +
1,799) x 1 hour x $44.41). This will result in an additional annual
burden of $164,095. The Department is not yet receiving these data on
institutions' financial statements, so it is unable to quantify
anticipated changes.
3.2.5. Enrollment Agreements
    The final regulations would permit institutions to include
mandatory arbitration clauses and class action waivers in enrollment
agreements they have with students receiving title IV financial aid.
These provisions were prohibited by the 2016 regulations. The recent
Supreme Court decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612
(2018) held that arbitration clauses in employment contracts must be
enforced by the courts as written, in essence confirming the right of
private parties to sign contracts that compel arbitration and waive
class action rights. Institutions may benefit from arbitration in that
it is a faster and less expensive way to resolve disputes, while
reducing reputational effects; however, they may incur costs resulting
from an increased use of arbitration under the final regulations.
3.2.6. Institutional Disclosures
    Some institutions will incur costs under the proposed disclosure
requirements. Institutions that include mandatory pre-dispute
arbitration clauses or class action waivers in their enrollment
agreements would be required to make certain disclosures. As further
explained in the Paperwork Reduction Act of 1995 section, the
Department estimates the burden for making these disclosures would
affect 944 proprietary institutions for a total of 4,720 hours
annually. Using an hourly rate of $44.41,\183\ we estimate the costs
incurred by this regulatory change would be $209,615. Also as discussed
in the Paperwork Reduction Act of 1995 section, we estimate these same
institutions would be required to include this information to borrowers
during entrance counseling, for a further burden of 3 hours each
annually, totaling $125,769 annually (944 * 3 * 44.41). Therefore, we
estimate the total burden for disclosures would be $335,384 annually
($209,615 + $125,769).
---------------------------------------------------------------------------
    \183\ Hourly wage data uses the Bureau of Labor Statistics,
available at www.bls.gov/ooh/management/postsecondary-education-administrators.thm.
---------------------------------------------------------------------------
3.3. Guaranty Agencies
    In the 2018 NPRM, the Department estimated one-time costs of
$14,922 and annual costs of $3,286 for systems updates and reporting
related to borrowers eligible for closed school discharges and for
forwarding escalated review requests to the Secretary. As noted in the
preamble discussion of Departmental Review of Guaranty Agency Denial of
Closed School Discharge Requests, these provisions are currently in
effect from the 2016 Final Rule and are not included in these final
regulations. Therefore, the estimated costs from the NPRM are not
included in this Regulatory Impact Analysis. The Department does not
have data on interest capitalization and collection costs for
rehabilitated loans to estimate the impact of the changes in the final
regulations.
3.4. Federal Government
    These final regulations would affect the Federal government's
administration of the title IV, HEA programs. The Federal government
would benefit in several ways, including reductions in student loan
discharge transfers, reduced administrative burden, and increased
access to data. The Federal government would incur costs to update its
IT systems to implement the changes. The changes to the financial
responsibility triggers may reduce recoveries relative to the 2016
final rule. The Department believes that it has retained many of the
key triggers, but, as noted in the Net Budget Impacts section, these
changes could increase the costs to taxpayers.
3.4.1. Borrower Defenses
    The final regulations permit borrowers to submit claims to the
Department regardless of loan status but impose a statute of
limitations. It is more likely that the cost of misrepresentation would
be incurred by institutions committing the act or omission than the
taxpayer, because the Department would recoup defense to repayment
discharge transfers from institutions. Further, because the Department
estimates it will receive fewer borrower defense applications under the
final regulations than under the 2016 regulations, the Department
expects a reduction in administrative burden.
3.4.2. Loan Discharges
    Under the final regulations, the Department would expect to process
and award fewer closed school and potentially fewer false certification
loan discharges than it would have under the 2016 regulations. To the
extent defense to repayment, closed school, and false certification
loan discharges are not reimbursed by institutions, Federal Government
resources that could have been used for other purposes will be
transferred to affected borrowers. As further detailed in the Net
Budget Impacts section, the Department estimates that annualized
transfers from the Federal government to affected borrowers, partially
reimbursed by institutions, would be reduced by $512.5 million for
borrower defenses and $37.2 million for closed school discharges with
reductions in reimbursement from institutions of $153.4 million
annually. This is based on the difference in cashflows associated with
loan discharges when the final regulation is compared to the
President's Budget 2020 baseline (PB2020) and discounted at 7 percent.
    The Department has also determined that it is the appropriate party
to provide affected students with a closed school discharge application
and a written disclosure describing the benefits and consequences of a
closed school discharge. When institutions were expected to fill this
role, the estimated burden was approximately $70,000. As the Department
already is in contact with affected students and has the relevant
materials, we do not expect a significant increase in administrative
burden after some initial set up costs.
3.4.3. Financial Responsibility Standards
    The Department will benefit from receiving updated financial
statements consistent with FASB standards and therefore would have data
necessary for developing updated composite score regulations through
future rulemaking. The financial responsibility disclosures will enable
the Department to receive the information necessary to calculate the
composite score.
    The Department would incur one-time costs for modifying eZ-Audit
and other systems to collect the data needed to calculate composite
scores under the new FASB reporting requirements and other systems to
collect financial responsibility disclosures. The Department has not
yet conducted the Independent Government Cost Estimate (IGCE) to
determine the costs for making these system changes. However, the
Department has not yet developed its internal process for implementing
the final regulations, which may necessitate a software modification or
individually-generated calculations; consequently, it is unable to
estimate the change in administrative burden. Therefore, the Department
is unable to estimate its burden for implementing the regulatory
changes in the financial responsibility provisions.
[[Page 49894]]
4. Net Budget Impacts
    These final regulations are estimated to have a net Federal budget
impact over the 2020-2029 loan cohorts of $-11.075 billion in the
primary estimate scenario, including $-9.812 billion for changes to the
defense to repayment provisions and $-1.262 billion for changes related
to closed school discharges. A cohort reflects all loans originated in
a given fiscal year. Consistent with the requirements of the Credit
Reform Act of 1990, budget cost estimates for the student loan programs
reflect the estimated net present value of all future non-
administrative Federal costs associated with a cohort of loans. Several
comments were received about the assumptions for the budget estimate
presented in the NPRM and those are addressed in the Discussion portion
of this Net Budget Impact section.
    The Net Budget Impact compare these regulations to the 2016 final
regulations as estimate in the 2020 President's Budget baseline
(PB2020). This baseline assumed that the borrower defense regulations
published by the Department on November 1, 2016, would go into effect
and utilized the primary estimate scenario,\184\ described in the final
rule published February 14, 2018.\185\ The primary difference with the
PB2019 baseline was the effective date and the cohorts subject to the
Federal standard established by the 2016 final rule with cohorts 2017
to 2019 being subject to the 2016 Federal standard in the PB2020
baseline. Several commenters objected to the use of the PB2019 baseline
as the basis for the budget estimate in the NPRM and the discrepancy
with the framing of the regulation in comparison to the 1995 regulation
in other sections of the NPRM and believed it could violate the APA.
The Department maintains that the most recent budget baseline, now
PB2020, is the appropriate baseline for estimating the net budget
impact of these final regulations. In the absence of these regulations,
the 2016 final regulations would go into effect and that is reflected
in the PB2020 baseline. We believe this comparison is appropriate and
accurately captures that these final regulations are expected to reduce
the amount of claims paid to students by the Federal government and
reduce the institutional liability for reimbursing those claims.
---------------------------------------------------------------------------
    \184\ See 81 FR 76057 published November 1, 2016, available at
ifap.ed.gov/fregisters/attachments/FR110116.pdf.
    \185\ See 83 FR 6468, available at www.gpo.gov/fdsys/pkg/FR-2018-02-14/pdf/2018-03090.pdf.
---------------------------------------------------------------------------
    The final regulatory provisions with the greatest impact on the
Federal budget are those related to the discharge of borrowers' loans.
Borrowers may pursue closed school, false certification, or defense to
repayment discharges. The precise allocation across the types of
discharges will depend on the borrower's eligibility and ease of
pursuing the different discharges, and we recognize that some
applications may be fluid in classification between defense to
repayment and the other discharges, particularly closed school. In this
analysis, we assign any estimated effects from defense to repayment
applications to the defense to repayment estimate and the remaining
effects associated with eligibility and process changes related to
closed school discharges to the closed school discharge estimate.
4.1. Defense to Repayment Discharges
    As noted previously, the Department had to incorporate the changes
to the defense to repayment provisions related to the 2016 final
regulations into its ongoing budget estimates, and changes described
here are evaluated against that baseline. In our main estimate, based
on the assumptions described in Table 3, we present our best estimate
of the impact of the changes to the defense to repayment provisions in
the final regulation.
4.1.1. Assumptions and Estimation Process
    The net present value of the reduced stream of cash flows compared
to what the Department would have expected from a particular cohort,
risk group, and loan type generates the expected cost of the proposed
regulations. We applied an assumed level of school misconduct,
allowable claims, defense to repayment applications success, and
recoveries from institutions (respectively labeled as Conduct Percent,
Allowable Applications Percent, Borrower Percent, and Recovery Percent
in Table [3]) to loan volume estimates to generate the estimated net
number of borrower defense applications for each cohort, loan type, and
sector. Table [3] presents the assumptions for the main budget estimate
with the budget estimate for each scenario presented in Table [4]. We
also estimated the impact if the Department received no recoveries from
institutions, the results of which are discussed after Table 4.
    The model can be described as follows: To generate gross claims
(gc), loan volumes (lv) by sector were multiplied by the Conduct
Percent (cp), the Allowable Applications Percent (aap) and the Borrower
Percent (bp); to generate net claims (nc) processed in the Student Loan
Model, gross claims were then multiplied by the Recovery Percent (rp).
That is, gc = (lv * cp * aap * bp) and nc = gc - (gc * rp). The Conduct
Percent represents the share of loan volume estimated to be affected by
institutional behavior resulting in a defense to repayment application.
The Borrower Percent captures the percent of loan volume associated
with approved defense to repayment applications, with factors such as
an individual claims process, proof of reliance and financial harm
requirement being key determinants of the reduced level compared to the
PB2020 baseline. The Recovery Percent estimates the percent of gross
claims reimbursed by institutions. The Allowable Applications Percent
replaces the Defensive Claims Percent from the NPRM and captures the
share of applications estimated to be made within the 3-year timeframe
for borrowers in all repayment statuses to apply for defense to
repayment. The numbers in Table 3 are the percentages applied for the
main estimate and PB2020 baseline scenarios for each assumption for
cohorts 2020-2029.
                                        Table 3--Assumptions for Main Budget Estimate Compared to PB2020 Baseline
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          PB2020 baseline                                   Final rule
                         Cohort                          -----------------------------------------------------------------------------------------------
                                                                Pub            Priv            Prop             Pub            Priv            Prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Conduct Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
[[Page 49895]]

2023....................................................             1.3             1.3             8.4            1.24            1.24            7.98
2024....................................................             1.2             1.2               8            1.14            1.14             7.6
2025....................................................             1.2             1.2             7.8            1.14            1.14            7.41
2026....................................................             1.1             1.1             7.7            1.05            1.05            7.32
2027....................................................             1.1             1.1             7.7            1.05            1.05            7.32
2028....................................................             1.1             1.1             7.7            1.05            1.05            7.32
2029....................................................             1.1             1.1             7.7            1.05            1.05            7.32
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Allowable Applications Percent (Not in PB2020 Baseline)
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Cohorts.............................................  ..............  ..............  ..............              70              70              70
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Borrower Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
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....................................................              50              50              65            5.25            5.25             7.5
2028....................................................              50              50              65            5.25            5.25             7.5
2029....................................................              50              50              65            5.25            5.25             7.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Recovery Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
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....................................................              75            37.4            37.4              75              20              20
2028....................................................              75            37.4            37.4              75              20              20
2029....................................................              75            37.4            37.4              75              20              20
--------------------------------------------------------------------------------------------------------------------------------------------------------
    As in previous estimates, the recovery percentage reflects the fact
that public institutions are not subject to the changes in the
financial responsibility triggers because of their presumed backing by
their respective States, which has never depended upon or been linked
to a specific provision of any borrower defense regulation. Therefore,
the PB2020 baseline and main recovery scenarios are the same for public
institutions and set at a high level to reflect the Department's
confidence in recovering amounts from the expected low number of claims
against public institutions. The decrease in the recovery percentage
assumption for private and proprietary institutions compared to the
PB2020 baseline reflects the removal or modification of some financial
responsibility triggers as described in Table 2. We do not specify how
many institutions are represented in the estimate as the assumptions
are based on loan volumes and the scenario could represent a
substantial number of institutions engaging in acts giving rise to
defense to repayment applications or could represent a small number of
institutions with significant loan volume subject to a large number of
applications. According to Federal Student Aid data center loan volume
reports, the five largest proprietary institutions in loan volume
received 25.7 percent of Direct Loans disbursed in the proprietary
sector in award year 2017-18 and the 50 largest proprietary
institutions represent 70.7 percent of Direct Loans disbursed in that
same time period.\186\ We were conservative in our estimates of the
share of volume captured in the conduct percentage and the number of
applications submitted in the Allowable Applications percentage as we
did not want to underestimate costs associated with changes to the
borrower defense regulations. Due to the similarities between the
conduct covered by the standard in the proposed regulations and the
standard in the 2016 final regulations, as described in the Discussion
segment, the Conduct Percent did not change from the PB2020 Baseline as
much as the Borrower Percent. Changes to the definition of
misrepresentation to require reasonable reliance and a materiality
threshold, as further described in the Analysis of Comments and
Changes--Evidentiary Standard for Asserting a Borrower Defense section
of this preamble are reflected in the changes to the Borrower Percent
as part of the likelihood of the borrower succeeding with their defense
to repayment. As recent loan cohorts progress further in their
repayment cycles, if future data indicate that the percent of volume
affected by conduct that meets the standard that would give rise to
defense to repayment applications differs from current estimates, that
difference will be reflected in future baseline re-estimates.
---------------------------------------------------------------------------
    \186\ Federal Student Aid, Student Aid Data: Title IV Program
Volume by School Direct Loan Program AY2015-16, Q4, available at
studentaid.ed.gov/sa/about/data-center/student/title-iv accessed
August 22, 2016.
---------------------------------------------------------------------------
[[Page 49896]]
4.1.2. Discussion
    The Department has some additional experience with processing
defense to repayment applications and data on the approximately 230,000
applications received since 2015, but while this information has helped
inform these estimates, it does not eliminate the uncertainty about
institutional and borrower response to the final regulations. As noted
earlier, given the limited number of applications that the Department
has adjudicated, both in number and sector of institutions that are
represented in this number, our data may not reflect the final results
of the Department's review and approval process.
    As a result of comments received and the Department's continued
internal deliberations, a number of changes were made from the proposed
regulation in the NPRM published July 31, 2018. Several commenters
suggested allowing affirmative claims, expanding the timeframe for
borrowers to make claims, and not requiring student borrowers to prove
an institution's intent to mislead them. A number of commenters
expressed concern that the Department's alternative in the proposed
rule, which would provide relief to borrowers in a collection
proceeding, could encourage students to engage in strategic defaults
and would give preferential treatment to borrowers in default as
compared to those in repayment. The Department agrees with these
concerns and therefore is removing the references to affirmative or
defensive claims. Instead, these final regulations provide a borrower--
regardless of whether that borrower is in repayment, forbearance,
deferment, default, or collection--an opportunity to submit a borrower
defense to repayment application for loan forgiveness. Other commenters
expressed concern that affirmative claims could lead to an increase in
frivolous claims, which could increase the cost of responding to these
claims on the part of the institution and the Department. In order to
reduce the number of unjustified claims, the Department has included in
these final regulations that borrowers must prove reasonable reliance
on the institution's misrepresentation, that the misrepresentation
caused financial harm to the borrower, and that the borrower submitted
a borrower defense to repayment application three years from the date
of graduation or withdrawal from the institution. The Department
believes that a borrower would know within three years of departing the
institution whether the institution had made a misrepresentation to the
borrower and caused the borrower financial harm. This three-year period
also aligns with the Department's records retention policies, which is
important since the final regulation seeks to enable the Department to
review a complete record, including the institution's response to the
student's allegations of misrepresentation. That change is reflected in
the Allowable Applications Percent and would likely reduce the
estimated savings from the proposed regulations in the NPRM, although
the precise outcome depends upon the balance between the 3-year
timeframe for filing and removing the limitation to defensive claims
only. Although some commenters supported the use of a preponderance of
evidence standard in adjudicating claims, others commented that given
the tendency for institutional misrepresentations to be referred to as
fraud, the Department's standard should more closely align with that
required by most states in adjudicating claims of consumer fraud. The
Department has decided to retain the preponderance of evidence standard
to provide a reasonable opportunity for a borrower to seek and receive
student loan relief. Therefore, more borrowers, including those not in
default or collections, will have an opportunity to prove their defense
to repayment application should be approved, but the borrowers will
have to prove more elements of misrepresentation including materiality,
with the budget effects of the two changes going in opposite
directions. Nothing in this regulation interferes with other rights of
the borrower, including during a collections procedure, to assert
equitable defenses, such as equitable recoupment. By itself, the
Federal standard is not expected to significantly change the percent of
loan volume subject to conduct that might give rise to a borrower
defense claim. The changes in the misrepresentation definition and
removal of the breach of contract claims will have some downward
effect, so the conduct percent is assumed to be 95 percent of the
PB2020 baseline level.
    In addition, some commenters addressed specific aspects of the
Department's assumptions and budget estimate or provided additional
information for the Department to consider. These comments are
addressed below in the discussion relevant to the specific assumptions.
    As has been estimated previously, we are incorporating a deterrent
effect of the borrower defense to repayment provisions on institutional
behavior as is reflected in the decrease in the conduct percent in
Table [3]. One commenter challenged the inclusion of a deterrent effect
as unreasonable because several of the mechanisms that would act as a
deterrent under the 2016 rule would not be included in these final
regulations. The commenter argued that the prohibition of pre-dispute
arbitration and increased financial responsibility triggers in the 2016
rule would result in higher liabilities and increased transparency with
respect to institutional misrepresentation and form a basis for a
deterrent effect on institutional conduct in the 2016 rule. According
to the commenter, allowing pre-dispute mandatory arbitration and the
reduced applications and resulting liabilities reduces the reputational
risk to institutions and makes the inclusion of a deterrent effect
unreasonable. This commenter also asserts that there will likely be an
increase in the percentage of unlawful conduct due to the elimination
of the gainful employment rule in addition to these final regulations.
The Department acknowledges that the financial responsibility triggers
have changed and the mechanisms to influence institutional conduct are
different under these final regulations, but we still believe that the
potential liability, political risk, and some reputational risk will
continue to have some deterrent effect. We recognize that the timing or
extent of this effect may vary from that under the 2016 rule and have
developed an alternative scenario with no deterrent effect in the
additional scenarios presented in Table 4 to capture the possibility
raised by the commenter that institutions will not modify their
behavior. A commenter also questioned the recovery percentage applied
given the changes in the financial protection triggers compared to the
2016 rule. In particular, the commenter pointed to the increased
timeframe for recovery and the increased number of more predictive
financial responsibility triggers in the 2016 rule as reasons for
higher recovery rates that increased over time from about 25 percent to
37 percent. The Department appreciates the comment and agrees with the
commenter that the changes in the timeframe for recovery and changes in
the triggers in the final regulations will reduce the percentage of
gross claims recovered from institutions, as was reflected in the
reduced recovery percentage in the NPRM of 16 percent to 25 percent
compared to the PB2020 baseline of 28 to 37 percent. As there is
limited information about recoveries related to borrower defense claims
currently being processed, the exact percentage that will be recovered
is uncertain, as it was for the 2016 final regulations, and the
[[Page 49897]]
Department and the commenter disagree on the extent to which recoveries
will be reduced by the timeframe and the changes in triggers that the
Department supports for the reasons detailed in the Analysis of
Comments and Changes related to the Financial Responsibility
provisions. These final regulations also revise the treatment of
discretionary events so that they are treated as mandatory events if
multiple events occur in the period between the calculation of
composite scores, unless a triggering event is resolved before
subsequent events occur. The discretionary trigger related to high
dropout rates was also included after being removed in the NPRM. We
believe these changes support the recovery level the Department has
assumed for its estimates. Additionally, the sensitivity run related to
recovery rates and the no-recovery scenario described after Table 4 are
designed to reflect the possibility that recoveries will be lower than
anticipated in the main estimate, and the Department believes this is
appropriate to address the concerns raised by the commenter about the
level of recoveries. Upon consideration, the Department does agree that
the ramp-up in recovery rates is likely aggressive compared to the 2016
final regulations which included triggering events at earlier stages
that the Department now considers an overreach. The ramp-up in
recoveries has been modified to reflect this reconsideration, as
demonstrated in Table 3.
    Overall, we expect that the changes in the final regulations that
will reduce the anticipated number of borrower defense applications are
related more to changes in the process, not due to changes in the type
of conduct on the part of an institution that would result in a
successful defense, as demonstrated by the 95 percent overlap compared
to the PB2020 baseline.
    The final regulations modify the framework in which borrower
defense to repayment applications are submitted in response to certain
collection activities initiated by the Department, specifically
administrative wage garnishment, Treasury offset, credit bureau default
reporting, and Federal salary offset. As has always been the case,
borrowers will be able to seek relief from their institutions in State
or Federal courts or from State or Federal agencies, or through
arbitration, but defense to repayment applications through the
Department will be reserved to applications made in the first three
years after the borrower leaves the institution. In the estimate for
the NPRM, the Department used the assumed default rates by student loan
model risk group to estimate the percent of loan volume associated with
borrowers who, over the life of the loan, might be in a position to
raise a defense to repayment. As the final regulations allow
applications within three years of leaving an institution, the
Department looked at existing borrower defense claims by time to
submission from the date the borrower completed or exited the program.
Approximately 30 percent of existing claims were submitted within 3-
years or less. The Department anticipates that this share will increase
when borrowers have the incentive to file within the 3-year timeframe
established by the final regulations. Therefore, we used the
approximately 67 percent of existing claims filed within 5 years as the
basis for the 70 percent assumed for the Allowable Applications Percent
in Table [3] to capture the potential effect of this incentive.
    Several process changes contribute to the reduction in the Borrower
Percent compared to the PB2020 baseline assumption. A separate
assumption for the allowable applications provision was explicitly
included so it could be varied in sensitivity runs or in response to
comments. Specifically, the final regulations modify the definition of
misrepresentation. This requires borrowers to prove reliance upon the
misrepresentation and the financial harm they experienced. Another
significant factor is the emphasis on determinations of individual
applications and the lack of an explicit process for aggregating like
applications. The Department will be able to group like applications
against an institution for more efficient processing, but, even if
there is a finding that covers multiple borrowers, relief will be
determined on an individual basis and be related to the level of
financial harm proven by the borrower. Together, these changes could
require more effort on the part of individual borrowers to submit a
borrower defense application, which is reflected in the change in the
Borrower Percent assumption.
    The net budget impact of the emphasis on other avenues for relief
is complicated by the potential for amounts received in lawsuits,
arbitration, or agency actions to reduce the amount borrowers would be
eligible to receive through a defense to repayment filing. While it
would be prudent for borrowers to use any funds received with respect
to the Federal loans in such proceedings to pay off the loans, there is
no mechanism in the proposed regulations to require this. This offset
of funds received in other actions was also a feature in the 2016 final
regulations, but the majority of applications processed did not have
offsetting funds to consider due to the precipitous closure of two
large institutions. Accordingly, we are not assuming a budgetary impact
resulting from prepayments attributable to the possible availability of
funds from judgments or settlement of claims related to Federal student
loans. Another factor that could affect the number of defense
applications presented is the role of State Attorneys General or State
agencies in pursuing actions or settlements with institutions about
which they receive complaints. The level of attention paid to this area
of consumer protection could alert borrowers in a position to apply for
a defense to repayment and result in a different number of applications
than the Department anticipates. Evidence developed in such proceedings
could be used by borrowers to support their individual applications.
However, unlike in the 2016 final regulations, final judgments on the
merits of such lawsuits or other allegations made by State Attorneys
General will not provide an automatic basis for a successful borrower
defense application, further contributing to the reduction of the
assumed borrower percent.
    The Department has used data available on defense to repayment
applications, associated loan volumes, Departmental expertise, the
discussions at negotiated rulemaking, information about past
investigations into the type of institutional acts or omissions that
would give rise to defense to repayment applications, and decisions of
the Department to create new sanctions and apply them to institutions
thus instigating precipitous closures to develop the main estimate and
sensitivity scenarios that we believe will capture the range of net
budget impacts associated with the defense to repayment regulations.
4.1.3. Additional Scenarios
    The Department recognizes the uncertainty associated with the
factors contributing to the main budget assumption presented in Table
3. For example, allowing institutions to present evidence may result in
fewer unjustified findings of misrepresentation that lead to an
adjudicated claim. We have not included the impact of this potential
evidence in our calculations as we have no basis for determining the
impact that an institutional defense will have on the adjudication of
applications. The uncertainty in the defense to repayment estimate,
given the unknown level of future school conduct that could give
[[Page 49898]]
rise to claims; institutions' reaction to the regulations to eliminate
such activities; the impact of allowing institutions to present
evidence in response to borrowers' applications; the expansion of
College Scorecard data to include program level outcomes, potentially
reducing the opportunity for misrepresentation by providing information
on outcomes on a common basis; the extent of full versus partial relief
granted; the level of State activity are reflected in additional
analyses that demonstrate the effect of changes in the specific
assumption being tested. Some commenters suggested additional runs that
would single out individual aspects of the assumptions like the
individual versus group processing of claims, a factor the commenter
correctly points out is a major contributor to the reduction in the
borrower percentage. However, the borrower defense assumptions have
never been specified by individual components and the data to do so is
limited, so the sensitivity runs are designed to capture the effect of
changes in the assumptions, whatever the combination of factors that
may cause the change. The Department believes this is appropriate and
avoids a false sense of precision about the effect of changes to
specific components of the assumptions.
    The Department designed the following scenarios to isolate the
assumption being evaluated and adjust it in the direction that would
increase costs, increasing the Allowable Applications or Borrower
Percent and decreasing the recovery percent. The first scenario the
Department considered is that the Allowable Applications Percent will
increase by 15 percent (AAP15). This could occur if economic conditions
or strategic behavior by borrowers increase defaults or more borrowers
than anticipated file applications within the 3-year window. In the
second scenario the Department increased the Borrower Percent by 25
percent (Bor25) to reflect the possibility that outreach, model
applications, or other efforts by students may increase the percent of
loan volume associated with successful defense to repayment
applications. As the gross borrower defense claims are generated by
multiplying the estimated volumes by the Conduct Percent, Allowable
Applications Percent, and the Borrower Percent, the scenarios capture
the impact of a 15 percent or 25 percent change in any one of those
assumptions. The Recovery Percentage is applied to the gross claims to
generate the net claims, so the RECS scenario reduces recoveries by
approximately 40 percent to demonstrate the impact of that assumption.
We also included the combined scenario that includes those changes
together as they may likely occur simultaneously. In response to
commenter concerns about the potential absence of a deterrent effect on
institutional behavior, we have added a scenario that keeps the highest
level of the conduct percentage across all cohorts in the No Deter
scenario. The final scenario (Bor50) takes a different approach and
recognizes that the borrower percent changed significantly from the
2016 final rule. As we have discussed throughout the Net Budget Impact
section, the impact associated with the changes made in these final
regulations is speculative, so this run assumes a 50 percent reduction
in the borrower percent from the 2016 final rule assumptions that are
in the PB2020 budget baseline. This would reflect a scenario where many
borrowers who may have been brought in through a group claim submit
applications and are able to provide the information to support their
application. The net budget impacts of the various additional scenarios
compared to the PB2020 baseline range from $-7.97 billion to $-9.70
billion and are presented in Table 4.
   Table 4--Budget Estimates for Additional Borrower Defense Scenarios
------------------------------------------------------------------------
                                                             Estimated
                                                             costs for
                                                           cohorts 2020-
                        Scenario                           2029 (outlays
                                                             in $mns)

------------------------------------------------------------------------
Main Estimate...........................................         $-9,812
AAP15...................................................          -9,699
Bor25...................................................          -9,656
Recs40..................................................          -9,690
No deterrence...........................................          -9,567
Combined................................................          -9,047
Bor50...................................................          -7,972
------------------------------------------------------------------------
    The transfers among the Federal government, affected borrowers, and
institutions associated with each scenario above are included in Table
5, with the difference in amounts transferred to borrowers and received
from institutions generating the budget impact in Table 3. The amounts
in Table 4 assume the Federal Government will recover from institutions
some portion of amounts discharged. In the absence of any recovery from
institutions, taxpayers would bear the full cost of approved defense to
repayment applications. For the primary budget estimate, the annualized
costs with no recovery are approximately $498 million at a 3 percent
discount rate and $512.5 million at a 7 percent discount rate. This
potential increase in costs demonstrates the effect that recoveries
from institutions have on the net budget impact of the final defense to
repayment regulations.
4.2. Closed School Discharges
    In addition to the provisions previously discussed, the final
regulations also would make two changes to the closed school discharge
process that are expected to have an estimated net budget impact of -
$1.2621 billion, of which -$187 million is a modification to past
cohorts related to the elimination of the automatic three-year
discharge for schools that close on or after July 1, 2020. The combined
effect of the elimination of the three-year automatic discharge and the
expansion of the eligibility window to 180 days for Direct Loan
borrowers is -$1,075 million for cohorts 2020-2029. In the NPRM
version, students offered a teach-out opportunity approved by the
institution's accrediting agency and State authorizing agency were not
eligible for a closed school discharge. In the final regulations,
students are eligible to receive a closed school loan discharge unless
they transfer their credits, or participate in an approved teach-out
plan. Once a borrower chooses to participate in an approved teach-out
plan, they are no longer eligible for a closed school loan discharge
unless the institution fails to materially meet the requirements of the
approved teach-out plan. As with the estimates related to the borrower
defense to repayment provisions, the net budget impact estimates for
the closed school discharge provisions are developed from the PB2020
budget baseline that accounted for the delayed implementation of the
2016 final regulations and assumed the 2016 final regulations would
take effect on July 1, 2019.
    As described in the regulation, the standard path to such a
discharge will require borrowers to submit an application. The savings
from eliminating the three-year automatic closed school discharge
provisions offset the costs of expanding the eligibility window to 180
days for cohorts 2020-2029. The precise interaction between the two
effects is uncertain as outreach and better information for borrowers
about the closed school loan discharge process may increase the rate of
borrowers who submit applications. In estimating the effect of the 2016
final regulations, the Department looked at all Direct Loan
[[Page 49899]]
borrowers at schools that closed from 2008-2011 to see the percentage
of loan volume associated with borrowers that had not received a closed
school discharge and had no NSLDS record of title-IV aided enrollment
in the three years following their school's closure and found it was
approximately double the amount of those who received a discharge. This
could be because the students received a teach-out or transferred
credits and completed their program without additional title IV aid, or
it could be that the students did not apply for the discharge because
of a lack of awareness or other reasons. Whatever the reason, in
estimating the potential cost of the 3-year automatic discharge
provision in the PB2020 baseline, the Department applied this increase
to the closed school discharge rate. For these final regulations, we
have reversed the increase attributed to the 3-year automatic
discharge.
    The volume of additional discharges that might result from the
expansion of the window is also difficult to predict. The Department
analyzed borrowers who were enrolled within 180 days of the closure
date for institutions that closed between July 1, 2011 and February 13,
2018 and found that borrowers who withdrew within the 121 to 180-day
time frame would increase loan volumes eligible for discharge by
approximately nine percent. However, it is possible that some borrowers
who complete their programs in that window or the current 120-day
window for eligibility would choose to withdraw and pursue a closed
school loan discharge instead of completing the program if the school
closure is known in advance. The likelihood of this is unclear as it
might depend on the relative length of the program, the time the
borrower has remaining in the program, and the borrower's perception of
the value of the credential versus the burden of starting the program
over again as compared to the prospect of debt relief. Further, if the
student knows that the school plans to close, it is likely because the
school has implemented a teach-out plan, which would negate the
borrower's ability to claim a closed school discharge if borrower
accepts the teach-out. For these reasons, the Department did not adjust
for this strategic withdrawal factor in estimating the impact of the
expansion of the eligibility window.
    The incentives in the final regulations with respect to teach-outs
are similar to the existing regulations for both institutions and
borrowers, so the Department has reversed the 65 percent reduction in
the baseline closed school discharges estimated in the NPRM, reducing
the overall savings estimated for the closed school discharge
provision. As is demonstrated by the estimated net savings from the
closed school discharge changes, the removal of the three-year
automatic discharge provisions is still expected to reduce the
anticipated closed school discharge claims significantly more than the
expansion of the window to 180 days increases them.
4.3. Other Provisions
    The final regulations will also make a number of changes that are
not estimated to have a significant net budget impact including changes
to the financial responsibility standards and treatment of leases,
false certification discharges, guaranty agency collection fees and
capitalization, and the calculation of the borrower's subsidized usage
period process. The false certification discharge changes update the
regulations to reflect current practices. The proposed regulations
would also make borrowers who provide a written attestation of high
school completion in place of an earned but unavailable high school
diploma ineligible for a false certification discharge. In FY2017,
false certification discharges totaled approximately $7 million. As
before, we do not expect a significant change in false certification
discharge claims that would result in a significant budget impact from
this change in terms or use of an application that has been available
at least ten years in place of a sworn statement. False certification
discharges may decrease due to the ineligibility of borrowers who
submit a written attestation in place of a high school diploma, but
given the low level of false certification discharges in the baseline,
even if a large share were eliminated, it would not have a significant
net budget impact. Therefore, we do not estimate an increase in false
certification discharge claims or their associated discharge value.
    Some borrowers may be eligible for additional subsidized loans and
no longer be responsible for accrued interest on their subsidized loans
as a result of their subsidized usage period being eliminated or
recalculated because of a closed school, false certification, unpaid
refund, or defense to repayment discharge. As in the 2016 final
regulations, we believe the institutions primarily affected by the 150
percent subsidized usage regulation are not those expected to generate
many of the applicable discharges, so this reflection of current
practice is not expected to have a significant budget impact.
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 (see Table 5). This table
provides our best estimate of the changes in annual monetized transfers
as a result of these proposed regulations. The amounts presented in the
Accounting Statement are generated by discounting the change in
cashflows related to borrower discharges for cohorts 2020 to 2029 from
the PB2020 baseline at 7 percent and 3 percent and annualizing them.
This is a different calculation than the one used to generate the
subsidy cost reflected in the net budget impact, which is focused on
summarizing costs at the cohort level. As the life of a cohort is
estimated to last 40 years, the discounting does have a significant
effect on the impact of the difference in cashflows in the outyears.
Expenditures are classified as transfers from the Federal Government to
affected student loan borrowers.
 Table 5--Accounting Statement: Classification of Estimated Expenditures
                              [In millions]
------------------------------------------------------------------------
                                                     Benefits
                Category                 -------------------------------
                                                7%              3%
------------------------------------------------------------------------
Disclosure to borrowers about use of
 mandatory pre-dispute arbitration
 clauses and potential increase in
 settlements between borrowers and
 institutions...........................          Not Quantified
------------------------------------------------------------------------
Reduced administrative burden related to
 processing defense to repayment
 applications...........................          Not Quantified
------------------------------------------------------------------------
[[Page 49900]]

Cost reductions associated with                   -$6.01          -$6.02
 paperwork compliance requirements......
------------------------------------------------------------------------
                Category                               Costs
------------------------------------------------------------------------
Changes in Department's systems to
 collect relevant information and
 calculate revised composite score......          Not Quantified
------------------------------------------------------------------------

                                                     Transfers
                Category                 -------------------------------
                                                7%              3%
------------------------------------------------------------------------
Reduced defense to repayment discharges          $-512.5         $-498.0
 from the Federal Government to affected
 borrowers (partially borne by affected
 institutions, via reimbursements.......
Reduced reimbursements of borrower                -153.4          -149.0
 defense claims from affected
 institutions to affected student
 borrowers, via the Federal government..
Reduced closed school discharges from              -37.2           -40.6
 the Federal Government to affected
 borrowers..............................
------------------------------------------------------------------------
    Previous Accounting Statements by the Department, including for the
2016 final regulations, presented a number that was the average cost
for a single cohort. If calculated in that manner, the reduced
transfers for defense to repayment from the Federal government to
affected borrowers would be $-1,377.0 billion, reimbursements would be
reduced $-414.08 million, and closed school discharge transfers would
be reduced $-140.61 million at a 7 percent discount rate.
6. Regulatory Alternatives Considered
    In response to comments received and the Department's further
internal consideration of these final regulations, the Department
reviewed and considered various changes to the final regulations
detailed in this document. The changes made in response to comments are
described in the Analysis of Comments and Changes section of this
preamble. We summarize below the major proposals that we considered but
which we ultimately declined to implement in these regulations.
    In particular, the Department extensively reviewed the financial
responsibility provisions and related disclosures and arbitration
provisions of these final regulations. In developing these final
regulations, the Department considered the budgetary impact,
administrative burden, and effectiveness of the options it considered.
                                       Table 6--Comparison of Alternatives
----------------------------------------------------------------------------------------------------------------
              Topic                    Baseline          Alternatives          Proposal              Final
----------------------------------------------------------------------------------------------------------------
Borrower Defense claims accepted  Affirmative and     Defensive only,     Defensive only....  Claims from any
                                   defensive.          Affirmative and                         borrower within
                                                       defensive,                              three years after
                                                       Affirmative and                         leaving the
                                                       defensive with a                        institution,
                                                       limitation period.                      regardless of the
                                                                                               borrower's
                                                                                               repayment status,
                                                                                               with some
                                                                                               extension for
                                                                                               those who are
                                                                                               involved in
                                                                                               arbitration
                                                                                               hearings.
Party that adjudicates borrower   Department........  Department, State   Department........  Department.
 defense claims.                                       court or arbiter.
Standard for borrower defense     Federal Standard..  State laws,         Federal standard..  Federal standard.
 claims.                                               Federal standard.
Borrower defense application      Application.......  Submit judgment     Select borrower     Application.
 process.                                              from state court    defense in
                                                       or similar using    response to wage
                                                       application,        garnishment or
                                                       Submit sworn        similar actions.
                                                       attestation or
                                                       application,
                                                       select borrower
                                                       defense in
                                                       response to wage
                                                       garnishment or
                                                       similar actions,
                                                       and Application.
Loans associated with BD claims.  Forbearance during  Forbearance during  Forbearance not     Forbearance during
                                   adjudication and    adjudication        necessary.          adjudication and
                                   interest accrues.   process and                             interest accrues.
                                                       interest accrues,
                                                       forbearance not
                                                       necessary.
Closed school discharge           120 days..........  120, 150, and 180   180 days..........  180 days.
 eligibility window.                                   days.
Closed school discharge           Borrower completed  Borrower completed  School offered a    Borrower completed
 exclusions.                       teach-out or        teach-out or        teach-out plan.     teach-out or
                                   transferred         transferred                             transferred
                                   credits.            credits; School                         credits.
                                                       offered a teach-
                                                       out plan.
[[Page 49901]]

Composite score calculation and   No FASB updates...  No changes until    Higher of current   Current leases
 timeline.                                             full negotiation    or FASB-updated     grandfathered;
                                                       of composite        score forever.      FASB applies on
                                                       score; no grace                         renewal.
                                                       period or phase-
                                                       in for FASB
                                                       updates; higher
                                                       of current or
                                                       FASB-updated
                                                       score forever;
                                                       and higher of
                                                       current or FASB-
                                                       updated score for
                                                       6 years, then
                                                       FASB-updated
                                                       score.
Financial responsibility          Reporting that      New reporting that  New reporting that  New reporting that
 triggers.                         automatically       may result in       may result in       may result in
                                   results in surety   surety request,     surety request.     surety request.
                                   request.            new reporting
                                                       that
                                                       automatically
                                                       results in surety
                                                       request.
Notification of mandatory         Prohibits           On website, during  Notification of     Notification of
 arbitration and class action      mandatory           entrance and exit   students on         students on
 waivers.                          arbitration         counseling, and     website and         website and
                                   clauses and class   annually by email   entrance            during entrance
                                   action waivers.     to students; no     counseling.         counseling.
                                                       required
                                                       notification
                                                       beyond the
                                                       enrollment
                                                       agreement;
                                                       notification of
                                                       students on
                                                       website and
                                                       during entrance
                                                       counseling.
----------------------------------------------------------------------------------------------------------------
6.2. Summary of Final Regulations
    The final regulations amend the baseline regulations to update
composite score calculations to comply with new FASB standards, but
provide a grandfathering period for existing leases; require
institutions to disclose fewer adverse events to the Department;
require notification regarding mandatory pre-dispute arbitration
clauses or agreements or class-action prohibitions; expand the closed
school discharge eligibility period; modify the conditions under which
a Direct Loan borrower may qualify for false certification and closed
school discharges; eliminate the automatic closed school discharge for
schools that closed on or after July 1, 2020; revise the Federal
standard for borrower defense claims for loans disbursed on or after
July 1, 2020; eliminate the borrower defense group application
provision for loans disbursed on or after July 1, 2020; and request
evidence from institutions prior to completing adjudication of any
borrower defense claims. Finally, there are changes to the regulations
collection costs charged by guaranty agencies.
6.3. Discussion of Alternatives
    The Department considered a broad range of provisions relative to
borrower defenses to repayment. One option would require borrowers to
submit a judgment from a Federal or State court or arbitration panel to
qualify for a defense to repayment discharge, which would not include a
process for the Department to adjudicate claims because claimants would
already have obtained a decision from a court or arbitrator at the
State level. This alternative would place an increased burden on
borrowers if they decide to hire a lawyer in order to present their
claims to a State court or incur costs associated with an arbitration
proceeding. Moreover, because consumer protection laws vary by State, a
borrower filing a claim in one State may be subject to different
criteria compared to a borrower filing a defense to repayment claim in
another State. It may also be unclear as to which State serves as the
relevant jurisdiction for a given borrower. A second option would be to
rescind the 2016 regulations on borrower defenses and go back to the
1995 regulations. In this alternative the Department would accept only
defensive borrower defense claims to repayment applications or
attestations and adjudicate them, applying a State law standard. Under
this alternative, borrowers could elect to have loans placed in
forbearance while their claims are adjudicated.
    The Department considered keeping the closed school discharge
eligibility window at 120 days or expanding it to 150 or 180 days.
Further, one option excludes students whose institutions offer them a
teach-out plan from such a discharge, while another option excludes
borrowers who complete a teach-out or transfer credits. One alternative
considered for the false certification discharge provisions included
rescission of the technical changes in the 2016 final regulations.
    Relative to pre-dispute arbitration and class-action waiver
policies, alternatives included requiring an institution to notify
current and potential students on its website, at entrance and exit
counselling for all title IV borrowers, and annually to all enrolled
students by email; and requiring no notification beyond the enrollment
agreement.
    Lastly, alternatives were considered related to financial
responsibility. One option would implement revisions to FASB standards
in the calculation of an institution's composite score without a
transition period and would prevent an institution from appealing the
composite score calculation while others provided for a transition
period or made no changes at all. Whether the Department would require
(automatically, discretionarily, or at all) that the institution
automatically provide a surety in the event that a financial
responsibility risk event occurs was considered.
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.
This certification was revised from the NPRM
[[Page 49902]]
based upon public comment to improve its clarity.
    Comments: The Small Business Association Office of Advocacy
expressed concern that the Department has certified that the proposed
rule will not have a significant economic impact on a substantial
number of small entities without providing a sufficient factual basis
for the certification as required by the Regulatory Flexibility Act.
The commenter stated that, at a minimum, the factual basis should
include: (1) Identification of the regulated small entities based on
the North American Industry Classification System; (2) the estimated
number of regulated small entities; (3) a description of the economic
impact of the rule on small entities; and (4) an explanation of why
either the number of small entities is not substantial or the economic
impact is not significant under the RFA. They noted that the
Department's estimated costs are assumed to be the same for large and
small entities, which the commenter objected to on the basis that small
institutions have reduced economies of scale. The commenter objected to
the Department's statement that potential economic impacts would be
minimal and entirely beneficial to small institutions, and claimed the
Department lacked data to support the statement. The commenter
suggested that the Department should analyze significant alternatives,
including: An early claim resolution process to minimize the potential
cost of borrower defense claims; allowing borrowers to bring
affirmative claims against institutions up to three years after the
date of graduation; and applying a clear and convincing evidentiary
standard.
    The commenter also points out that, currently, the Department
requires institutions to maintain student data for three years after a
student's graduation, but if a borrower may bring a claim at any point
in repayment, schools must maintain student data for decades.
Nevertheless, the record contains no information on how high this cost
could be. The commenter expressed concern that the need to maintain
student data will impose significant liability on small institutions
for cybersecurity and student privacy. The commenter stated that these
costs to smaller institutions should be analyzed, and recommended that
the Department publish for public comment either a supplemental
certification with a valid factual basis or an Initial Regulatory
Flexibility Analysis (IRFA) before proceeding with this rulemaking.
    Discussion: We disagree that the Department did not provide
sufficient factual basis for the Regulatory Flexibility Act
certification. Specifically, the Department proposed in the Federal
Register and requested comment on a definition of small institutions
that it is capable of computing using its own data (see: SBA Office of
Advocacy, August 2017, A Guide for Government Agencies: How to Comply
with the Regulatory Flexibility Act, p. 15, available at: www.sba.gov/sites/default/files/advocacy/How-to-Comply-with-the-RFA-WEB.pdf). We
have revised our certification to increase clarity and to account for
changes in the final regulations, including a three-year period of
limitations on borrower defense to repayment applications, including
affirmative claims, from the date the borrower is no longer enrolled at
the institution. Finally, the Department defines significant economic
impact as a burden or cost to small institutions, and its estimates
build upon those from the Net Budget Impacts and Paperwork Reduction
Act of 1995 sections. As compared to the PB2020 baseline that assumed
implementation of the 2016 final rule, the impacts of the borrower
defense changes are benefits or reduced recoupments, and zero dollars
are estimated as impacts of closed school and false certification
discharges. Compliance costs for changes to financial responsibility
reporting of risk events, disclosure of forced arbitration clauses is
minimal. Specifically, the annual costs per entity were estimated at
$178 to $266 and $489 the first year with $133 in subsequent years,
respectively. Further, the two latter costs only occur at institutions
that either have documented risks to their financial responsibility or
that are proactively choosing to require mandatory pre-dispute
arbitration agreements or class action waivers. While economies of
scale may exist for larger institutions, the Department does not have
information on the cost differential between types of institutions. The
Department does not assume different costs for small institutions,
especially for data storage for which additional options are being
developed on a regular basis.
    As to proposed alternatives, the Department notes that claim
resolution can occur between borrowers and institutions freely without
the Department's involvement, via mediation or arbitration, or through
other avenues if the parties so choose. These final regulations permit
claims within a three-year limitation period with limited exceptions
for borrowers engage in proceedings that would involve the institution
and therefore indefinite records retention will not be required.
Additionally, for reasons discussed at greater length above, the final
rule adopts a preponderance of the evidence standard.
    Changes: Added information about percent of small proprietary
institutions under $7 million threshold previously used by the
Department for informational purposes.
    This rule directly affects all public nonprofit and proprietary
institutions participating in title IV programs relative to the
proposed financial responsibility provisions; it also affects a small
proportion of institutions participating in title IV programs in each
sector relative to the loan discharge requirements. As found in the
Paperwork Reduction Act of 1995 section, there are currently 5,868
institutions participating in title IV programs, of which 1,799 are
private nonprofit and 1,896 are proprietary. Table 6 presents an
estimated number and percent of small institutions using the
Department's enrollment based definition for small institution. This
definition applies equally across control categories and defines a
small institution as one with under 500 FTE for 2-yr or less
institutions, and 1,000 FTE for 4-year institutions.
[[Page 49903]]
                          Table 6--Small Institutions Under Enrollment-Based Definition
----------------------------------------------------------------------------------------------------------------
                 Level                            Type                 Small           Total          Percent
----------------------------------------------------------------------------------------------------------------
2-year................................  Public..................             342           1,240              28
2-year................................  Private.................             219             259              85
2-year................................  Proprietary.............           2,147           2,463              87
4-year................................  Public..................              64             759               8
4-year................................  Private.................             799           1,672              48
4-year................................  Proprietary.............             425             558              76
                                                                 -----------------------------------------------
    Total.............................  ........................           3,996           6,951              57
----------------------------------------------------------------------------------------------------------------
    In previous regulations, the Department used the small business
definitions based on tax status that defined ``non-profit
institutions'' as ``small organizations'' if they are independently
owned and operated and not dominant in their field of operation, or as
``small entities'' if they are institutions controlled by governmental
entities with populations below 50,000. Compared to those definitions
of small institutions which resulted in the Department considering all
private nonprofit institutions as small and no public institutions as
small, we think the enrollment-based approach establishes a reasonable
framework applicable to all postsecondary institutions. 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
four-year and 90 percent of two-year or less proprietary institutions
would be considered small. The enrollment-based definition captures a
similar share of proprietary institutions will having the benefit of
allowing comparison to other types of institutions on a consistent
basis.
    Table 7 summarizes the summarizes number of institutions affected
by these final regulations.
  Table 7--Estimated Count of Small Institutions Affected by the Final
                               Regulations
------------------------------------------------------------------------
                                               Small
                                           institutions   As % of  small
                                             affected       institutions
------------------------------------------------------------------------
Borrower Defense........................             355               9
Closed School...........................              57               1
False Certification.....................             183               5
Composite Score.........................           2,565              64
Composite Score Recalculation:
  Risk Event Reporting..................             641              16
  Mandatory.............................             417              10
Arbitration Disclosure..................             806              20
------------------------------------------------------------------------
    The Department has determined that the negative economic impact on
small entities affected by the regulations will not be significant. As
further explained in the Net Budget Impacts section, the Department
estimates a reduction in recoupment due to borrower defense provisions
and zero change in recoupment for closed school and false certification
provisions. As further explained in the Paperwork Reduction Act of 1995
section, compliance costs associated with the financial responsibility
reporting and disclosure requirement changes are minimal and occur only
at institutions that either have documented risks to their financial
responsibility or that require pre-dispute mandatory arbitration
agreements or class-action waivers. Table 8 captures estimated
compliance costs per entity and across small institutions.
                                Table 8--Compliance Costs for Small Institutions
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Compliance area                                                   Small
                                                           institutions
                                                               affected     Cost range per
                                                                              institution
                                                          Estimated overall
                                                             cost range
----------------------------------------------------------------------------------------------------------------
Financial responsibility reporting.....................             417   $            $266   $        $110,922
                                                                          1                   7
                                                                          7                   4
                                                                          8                   ,
                                                                                              2
                                                                                              2
                                                                                              6
Mandatory arbitration disclosure.......................             806               * 489   1         394,134
                                                                          1                   0
                                                                          3                   7
                                                                          3                   ,
                                                                                              1
                                                                                              9
                                                                                              8
----------------------------------------------------------------------------------------------------------------
    Accordingly, the Secretary hereby certifies that these regulations
will not have a significant economic impact on a substantial number of
small entities.
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.
[[Page 49904]]
    Sections 668.41, 668.171, appendices A & B to part 668, subpart L,
and Sec. Sec.  685.206, 685.214, 685.215, and 685.304 of these final
regulations contain information collection requirements. Additionally,
burden assessed in Sec. Sec.  668.14, 668.41, 668.172, 674.33, 682.402,
and 685.300 from the 2016 final regulations and 2018 NPRM is being
removed based on these final regulations. 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 these final regulations, we have displayed the control numbers
assigned by OMB to any information collection requirements proposed in
the NPRM and adopted in the final regulations.
Section 668.14 Program Participation Agreement
    Requirement: In the 2016 final regulations, Sec.  668.14(b)(32)
required that an institution, as part of the program participation
agreement, provide all enrolled students with a closed school discharge
application and a written disclosure describing the benefits and
consequences of a closed school discharge after the Department
initiated any action to terminate the participation of the school or
any occurrence of events specified in Sec.  668.14(b)(31) requiring the
institution submit a teach out plan. The Department has since
determined that it is the Department's, not the school's,
responsibility to provide this information to students, and we are
rescinding this regulatory requirement.
    Burden Calculation: The Department removes the associated burden of
1,953 hours under the OMB Control Number 1845-0022 and will remove the
hours on or after the effective date of the regulations.
                      Student Assistance General Provisions--OMB Control Number: 1845-0022
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $36.55
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                     from 2016
                                                                                                    Final Rule
----------------------------------------------------------------------------------------------------------------
Private.........................................              -8          -1,912            -340        $-12,427
Proprietary.....................................             -38          -9,082          -1,613         -58,955
                                                 ---------------------------------------------------------------
    Total.......................................             -46         -10,994          -1,953         -71,382
----------------------------------------------------------------------------------------------------------------
Section 668.41 Reporting and Disclosure of Information
    Requirements: Under the final changes in Sec. [thinsp]668.41(h), an
institution that uses pre-dispute arbitration agreements and/or class
action waivers will be required to disclose that information in a
written plain language disclosure available to enrolled and prospective
students, and the public. The regulatory language also prescribes the
font size and location of the information on its website on the same
page where admissions information is made available as well as in the
admissions section of the institution's catalog.
    This replaces the previous ``Loan repayment warning for proprietary
institutions'' regulatory text from the 2016 final regulations.
    Burden Calculation: There will be burden on schools to make
additional disclosures of the institution's use of a pre-dispute
arbitration agreement and/or class action waiver to students,
prospective students, and the public under this final regulation. Based
on informal conversations held with proprietary institutions during
negotiated rulemaking and conferences, the Department believes such
agreements are currently used primarily by proprietary institutions. Of
the 1,888 proprietary institutions participating in the title IV, HEA
programs, we estimate that 50 percent or 944 will use a pre-dispute
arbitration agreement and/or class action waiver and will provide the
required information electronically. We anticipate that it will take an
average of 5 hours to develop, program, and post the required
information to the websites where admission and tuition and fees
information is made available. The estimated burden would be 4,720
hours (944 x 5 hours) under OMB Control Number 1845-0004.
        Student Assistance General Provisions--Student Right To Know (SRK)--OMB Control Number: 1845-0004
----------------------------------------------------------------------------------------------------------------
                                                                                                   Cost  $44.41
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                     from 2018
                                                                                                       NPRM
----------------------------------------------------------------------------------------------------------------
Proprietary.....................................             944             944           4,720        $209,615
                                                 ---------------------------------------------------------------
    Total.......................................             944             944           4,720         209,615
----------------------------------------------------------------------------------------------------------------
    Due to these final regulatory text changes in 668.41(h), the
previous burden assessed under the 2016 final regulations will be
removed upon the effective date of these regulations. 5,346 hours will
be deleted from OMB Control Number 1845-0004 on or after the effective
date of the regulations.
[[Page 49905]]
        Student Assistance General Provisions--Student Right to Know (SRK)--OMB Control Number: 1845-0004
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $36.55
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                     from 2016
                                                                                                    Final Rule
----------------------------------------------------------------------------------------------------------------
Proprietary.....................................            -972          -1,949          -5,346       $-195,396
                                                 ---------------------------------------------------------------
    Total.......................................            -972          -1,949          -5,346        -195,396
----------------------------------------------------------------------------------------------------------------
Section 668.171 General
    Requirements: Under the final Sec.  668.171(f), in accordance with
procedures to be established by the Secretary, an institution will
notify the Secretary of any action or event described in the specified
number of days after the action or event occurred. In the notice to the
Secretary or in the institution's preliminary response, the institution
may show that certain of the actions or events are not material or that
the actions or events are resolved.
    Burden Calculation: There will be burden on institutions to provide
the notice to the Secretary when one of the actions or events occurs.
We estimate that an institution will take two hours per action to
prepare the appropriate notice and to provide it to the Secretary. We
estimate that 180 private institutions may have two events annually to
report for a total burden of 720 hours (180 institutions x 2 events x 2
hours). We estimate that 379 proprietary institutions may have three
events annually to report for a total burden of 2,274 hours (379
institutions x 3 events x 2 hours). This total burden of 2,994 hours
will be assessed under OMB Control Number 1845-0022.
                      Student Assistance General Provisions--OMB Control Number: 1845-0022
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $44.41
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                  from 2018 NPRM
----------------------------------------------------------------------------------------------------------------
Private.........................................             180             360             720         $31,975
Proprietary.....................................             379           1,137           2,274         100,988
                                                 ---------------------------------------------------------------
    Total.......................................             559           1,497           2,994         132,963
----------------------------------------------------------------------------------------------------------------
Section 668.172 Financial Ratios
    Requirements: The proposed changes to Sec.  [thinsp]668.172(d) from
the NPRM have been deleted from these final regulations.
    Burden Calculation: The proposed burden is being deleted from the
Information Collection Request that was filed with the NPRM. There is
no longer an estimated increase in burden of 232 hours based on changes
to Sec.  668.172 under the OMB Control Number 1845-0022.
                      Student Assistance General Provisions--OMB Control Number: 1845-0022
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $44.41
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                  from 2018 NPRM
----------------------------------------------------------------------------------------------------------------
Private.........................................            -450            -450            -113         $-5,018
Proprietary.....................................            -474            -474            -119          -5,285
                                                 ---------------------------------------------------------------
    Total.......................................            -924            -924            -232         -10,303
----------------------------------------------------------------------------------------------------------------
Appendix A and B for Section 668--Subpart L--Financial Responsibility
    Requirements: Under final Section 2 for appendix A and B,
proprietary and private institutions will be required to submit a
Supplemental Schedule as part of their audited financial statements.
With the update from the FASB, some elements needed to calculate the
composite score will no longer be readily available in the audited
financial statements, particularly for private institutions. With the
updates to the Supplemental Schedule to reference the financial
statements, this issue will be addressed in a convenient and
transparent manner for both the schools and the Department by showing
how the composite score is calculated.
    Burden Calculation: There will be burden on institutions to provide
the Supplemental Schedule to the Department. During the negotiations,
the members of the negotiated rulemaking subcommittee indicated that
they believed that as the information will be readily available upon
completion of the required audit the burden would be minimal. We
estimate that it will take each proprietary and private institution one
hour to prepare the Supplemental Schedule and have it made available
for posting along with the annual audit. We estimate that 1,799 private
schools will require 1 hour of burden to prepare the Supplemental
Schedule and have it made available for posting along with the annual
audit for a total burden of 1,799 hours (1,799
[[Page 49906]]
institutions x 1 hour). We estimate that 1,888 proprietary schools will
require 1 hour of burden to prepare the Supplemental Schedule and have
it made available for posting along with the annual audit for a total
burden of 1,888 hours (1,888 institutions x 1 hour). This total burden
of 3,695 hours will be assessed under OMB Control Number 1845-0022.
    The total additional burden under OMB Control Number 1845-0022 will
be 6,921 hours.
                      Student Assistance General Provisions--OMB Control Number: 1845-0022
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $44.41
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                  from 2018 NPRM
----------------------------------------------------------------------------------------------------------------
Private.........................................           1,799           1,799           1,799         $79,894
Proprietary.....................................           1,896           1,896           1,896          84,201
                                                 ---------------------------------------------------------------
    Total.......................................           3,695           3,695           3,695         164,095
----------------------------------------------------------------------------------------------------------------
Section 682.402 Death, Disability, Closed School, False Certification,
Unpaid Refunds, and Bankruptcy Payments
    Requirements: The proposed changes to Sec.  [thinsp]682.402
regarding the requirement that a guaranty agency provide information to
a borrower about how to request a review of the guaranty agency's
denial of a closed school discharge from the Secretary from the NPRM
are not included in the final regulations.
    Burden Calculation: The proposed burden is being deleted from the
Information Collection Request that was filed with the NPRM. There is
no longer an estimated increase in burden of 410 hours based on the
changes to Sec.  682.402(d)(6)(ii)(F) under OMB Control Number 1845-
0020.
                Federal Family Education Loan Program Regulations--OMB Control Number: 1845-0020
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $44.41
                                                                                                        per
        Institution type guaranty agency            Respondent       Responses     Burden hours     institution
                                                                                                  from 2018 NPRM
----------------------------------------------------------------------------------------------------------------
Private.........................................             -11             -89            -188         $-8,349
Public..........................................             -13            -105            -222          -9,859
                                                 ---------------------------------------------------------------
    Total.......................................             -24            -194            -410         -18,208
----------------------------------------------------------------------------------------------------------------
Section 685.206 Borrower Responsibilities and Defenses
    Requirements: Under final Sec.  [thinsp]685.206(e), a defense to
repayment discharge claim on a Direct Loan disbursed after July 1,
2020, will be evaluated under the Federal standard using an application
approved by the Secretary. Under final Sec.  [thinsp]685.206(e), a
defense to repayment must be submitted within three years from the date
the student is no longer enrolled at the institution.
    Burden Calculation: We believe that the burden will be associated
with the new form that the borrower receives that accompanies the
notice of action from the Department. The new form will be completed
and made available for comment through a full public clearance package
before being made available for use.
Section 685.214 Closed School Discharge
    Requirements: Under final Sec.  685.214(c), the number of days that
a borrower must have withdrawn from a closed school to qualify for a
closed school discharge will be extended from 120 days to 180 days, for
loans first disbursed on or after July 1, 2020. Additionally, if a
closed school provided a borrower an opportunity to complete his or her
academic program through a teach-out plan approved by the school's
accrediting agency and, if applicable, the school's State authorizing
agency, the borrower will not qualify for a closed school discharge.
The final regulation further provides that the Secretary may extend
that 180 days further if there is a determination that exceptional
circumstances justify an extension.
    Burden Calculation: The extension from 120 days to 180 days for
withdrawal prior to the closing of the school will require an update to
the current closed school discharge application form with OMB Control
Number 1845-0058. We do not believe that the language update will
change the amount of time currently assessed for the borrower to
complete the form from those which has already been approved. The form
update will be completed and made available for comment through a full
public clearance package before being made available for use by the
effective date of the regulations.
Section 685.215 Discharge for False Certification of Student
Eligibility or Unauthorized Payment
    Requirements: Under final Sec.  [thinsp]685.215, the application
requirements for false certification discharges will be amended to
reflect the current practice of requiring a borrower to apply for the
discharge using a Federal application form instead of a sworn
statement. The final regulations also will remove the term ``ability to
benefit'' to reflect changes to the HEA. Under the final regulatory
changes, a Direct Loan borrower will not qualify for a false
certification discharge based on not having a high school diploma in
cases when the borrower did not obtain an official transcript or
diploma from the high school, and the borrower provided an attestation
to the institution that the borrower was a high school graduate.
[[Page 49907]]
    Burden Calculation: The clarification to require the submission of
a Federal application to receive a discharge and updating of the form
to remove ``ability to benefit'' language will require an update to the
current false certification application form with OMB Control Number
1845-0058. We do not believe that the language update will change the
amount of time currently assessed for the borrower to complete the
form, nor an increase in the number of borrowers who may qualify, to
complete the form from those that have already been approved. The form
update will be completed and made available for comment through a full
public clearance package before being made available for use by the
effective date of the regulations.
Section 685.300 Agreements Between an Eligible School and the Secretary
for Participation in the Direct Loan Program
    Requirements: Under final Sec.  [thinsp]685.300, paragraphs (d)
through (i) finalized in the 2016 final regulations covering borrower
defense claims in an internal dispute process, class action bans, pre-
dispute arbitration agreements, submission of arbitral records,
submission of judicial records, and definitions are removed from the
regulations.
    Burden Calculation: Due to these final regulatory text changes, the
previous burden assessed under paragraphs (e) through (h) in the 2016
final regulation will be removed upon the effective date of these
regulations. 179,362 hours will be deleted from OMB Control Number
1845-0143 on or after the effective date of these regulations.
 Agreements Between and Eligible School and the Secretary To Participate in the Direct Loan Program--OMB Control
                                                Number: 1845-0143
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $36.55
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                     from 2016
                                                                                                    Final rule
----------------------------------------------------------------------------------------------------------------
Proprietary.....................................          -1,959      -1,010,519        -179,362     $-6,555,681
                                                 ---------------------------------------------------------------
    Total.......................................          -1,959      -1,010,519        -179,362      -6,555,681
----------------------------------------------------------------------------------------------------------------
Section 685.304 Counseling Borrowers
    Requirements: Under final Sec.  [thinsp]685.304 there are changes
to the requirements to counsel Federal student loan borrowers prior to
making the first disbursement of a Federal student loan (entrance
counseling). Institutions that use pre-dispute arbitration agreements
and/or class action waivers will be required to include in mandatory
entrance counseling plain-language information about the institution's
process for initiating arbitration and dispute resolution, including
who the borrower may contact regarding a dispute related to educational
services for which the loan was made. Institutions that require
borrowers to accept a pre-dispute arbitration agreement and/or class
action waiver will be required to provide information in writing to the
student borrower about the plain language meaning of the agreement,
when it would apply, how to enter into the process, and who to contact
with questions.
    Burden Calculation: We believe there will be burden on the
institutions to create any institution specific pre-dispute arbitration
agreement and/or class action waivers and provide that information in
addition to complying with the current entrance counseling
requirements. Of the 1,888 participating proprietary institutions, we
estimate that 50 percent or 944 institutions will need to create
additional entrance counseling information regarding the use of the
pre-dispute arbitration agreement and/or class action waivers to
provide to their student borrowers. We anticipate that it will take an
average of 3 hours to adapt the information provided in Sec.
[thinsp]668.41 as a part of the required entrance counseling, to
identify staff who will be able to answer additional questions, and to
obtain evidence indicating the provision of the material for a total of
2,832 hours (944 x 3 hours).
    Additionally, we believe that there will be minimum additional
burden for borrowers to review the information when completing the
required entrance counseling and provide the required evidence that the
borrowers received the information. In calendar year 2017, 684,813
Direct Loan borrower completed entrance counseling using the
Department's on-line entrance counseling. Assuming the same 50 percent
of borrowers attend a school that uses pre-dispute arbitration
agreements and/or class action waivers will require five minutes to
review the material and provide evidence of receipt of the information,
we estimate a total of 27,393 hours of additional burden (342,407
borrowers time .08 (5 minutes) = 27,393 hours). There will be a total
increase in 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;
                Institution type                    Respondent       Responses     Burden hours     $16.30 per
                                                                                                    individual
                                                                                                     from 2018
                                                                                                       NPRM
----------------------------------------------------------------------------------------------------------------
Proprietary.....................................             944             944           2,832        $125,769
Individual......................................         342,407         342,407          27,393         446,506
                                                 ---------------------------------------------------------------
    Total.......................................         343,351         343,351          30,225         572,275
----------------------------------------------------------------------------------------------------------------
[[Page 49908]]
    Consistent with the discussions above, the following chart
describes the sections of the final 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 burden for institutions,
lenders, guaranty agencies and students, using wage data developed
using Bureau of Labor Statistics data, available at https://www.bls.gov/ooh/management/postsecondary-education-administrators.htm
is $1,078,948 for all positive entries as shown in the chart below.
With the deletion of certain regulations, there will be a corresponding
savings of $-6,850,970 upon the effective date of these regulations.
This cost is based on an estimated hourly rate of $44.41 for
institutions, lenders, and guaranty agencies and $16.30 for students
unless otherwise noted in the table.
----------------------------------------------------------------------------------------------------------------
                                                                            OMB control No.
                                                                             and estimated
    Regulatory  section                 Information collection             burden (change in    Estimated costs
                                                                                burden)
----------------------------------------------------------------------------------------------------------------
Sec.   [thinsp]668.14......  In the 2016 final regulations, Sec.          1845-0022; -1,953.  $-71,382. This
                              668.14(b)(32) required that an               The Department      amount was based
                              institution, as part of the program          will remove the     on the 2016 cost
                              participation agreement, provide all         hours on or after   of 36.55/hr for
                              enrolled students with a closed school       the effective       institutions.
                              discharge application and a written          date of the
                              disclosure describing the benefits and       regulations.
                              consequences of a closed school discharge
                              under certain circumstance. The Department
                              has since determined that it is the
                              Department's, not the school's,
                              responsibility to provide this information
                              to students, and we are rescinding this
                              regulatory requirement.
Sec.   [thinsp]668.41......  Under the final regulatory language in Sec.  1845-0004; +4,720   $209,615.
                                668.41(h) institutions that use pre-       hours.
                              dispute arbitration agreements and/or
                              class action waivers will be required to
                              disclose that information in a plain
                              language disclosure available to enrolled
                              and prospective students, and the public
                              on its website where admissions and
                              tuition and fees information is made
                              available.
                             Additionally due to the changes in the       The Department      $-195,396. This
                              final regulatory text for Sec.               will remove the     amount was based
                              668.41(h), the burden of 5,346 hour          hours on or after   on the 2016 cost
                              previously assessed in the 2016 final        the effective       of 36.55/hr for
                              regulations will be deleted from this        date of the         institutions.
                              information collection upon the effective    regulations. -
                              date of this regulatory package.             5,346 hours.
Sec.   [thinsp]668.171.....  Under the final regulatory language in Sec.  1845-0022; +2,994   $132,964.
                                668.171(f) in accordance with procedures   hours.
                              to be established by the Secretary, an
                              institution will notify the Secretary of
                              any action or event described in the
                              specified number of days after the action
                              or event occurs. In the notice to the
                              Secretary or in the institution's
                              response, the institution may show that
                              certain of the actions or events are not
                              material or that the actions or events are
                              resolved.
Sec.   [thinsp]668.172.....  The proposed changes to Sec.                 1845-0022; -232     $-10,303.
                              [thinsp]668.172(d) from the NPRM have been   hours.
                              deleted from the Final rule.
Appendix A & B of 668        Under final Section 2 for appendix A and B,  1845-0022; +3,695   $164,095.
 subpart L.                   proprietary and private institutions will    hours.
                              be required to submit a Supplemental
                              Schedule as part of their audited
                              financial statements. With the update from
                              the Financial Standards Accounting Board
                              (FASB) some elements needed to calculate
                              the composite score will no longer be
                              readily available in the audited financial
                              statements, particularly for private
                              institutions. With the updates to the
                              Supplemental Schedule to reference the
                              financial statements, this issue will be
                              addressed in a convenient and transparent
                              manner for both the institutions and the
                              Department by showing how the composite
                              score is calculated.
Sec.   682.402.............  The final regulations no longer incorporate  1845-0020; -410     -$18,208.
                              the proposed change requiring guaranty       hours.
                              agencies to provide information to a
                              borrower about how to request a review of
                              an agency's denial of a closed school
                              discharge from the Secretary. This removes
                              the proposed burden.
Sec.   [thinsp]685.206.....  Under final Sec.   [thinsp]685.206(e), a     A new collection    $0.
                              borrower defense claim related to a direct   will be filed
                              loan disbursed after July 1, 2020 will be    closer to the
                              evaluated under the Federal standard.        implementation of
                              Under final Sec.   [thinsp]685.206(e), a     this requirement;
                              borrower defense must be submitted within    +0 hours.
                              three years from the date the borrower is
                              no longer enrolled at the institution.
Sec.   [thinsp]685.214.....  Under the final regulations, the number of   1845-0058; +0       $0.
                              days that a borrower may have withdrawn      hours.
                              from a closed institution to qualify for a
                              closed school discharge will be extended
                              from 120 days to 180 days for loans first
                              disbursed after July 1, 2020. The final
                              language further allows that the Secretary
                              may extend that 180 days further if there
                              is a determination that exceptional
                              circumstances justify an extension.
[[Page 49909]]

Sec.   [thinsp]685.215.....  Under the final regulatory language in Sec.  1845-0058; +0       $0.
                                [thinsp]685.215, the application           hours.
                              requirements for false certification
                              discharges are amended to reflect the
                              current practice of requiring a borrower
                              to apply for the discharge using a
                              completed application form instead of a
                              sworn statement. The final regulatory
                              language removed the use of term ``ability
                              to benefit'' to bring the definition in
                              line with the current HEA language. Under
                              final regulatory language, a Direct Loan
                              borrower will not qualify for a false
                              certification discharge based on not
                              having a high school diploma provide that
                              in cases when they did not obtain an
                              official transcript or diploma from the
                              high school, and the borrower provided an
                              attestation to the institution that the
                              borrower was a high school graduate. The
                              attestation will have to be provided under
                              penalty of perjury.
Sec.   [thinsp]685.300.....  Under final Sec.   [thinsp]685.300 previous  1845-0143; -        $-6,555,681. This
                              paragraphs (d) through (i) which covered     179,362. The        amount was based
                              borrower defense claims in an internal       Department will     on the 2016 cost
                              dispute process, class action bans, pre-     remove the hours    of 36.55/hr for
                              dispute arbitration agreements, submission   on or after the     institutions.
                              of arbitral records, submission of           effective date of
                              judicial records, and definitions are        the regulations.
                              removed from regulation.
Sec.   [thinsp]685.304.....  Under final Sec.   [thinsp]685.304 there     1845-0021; +30,225  Total: $572,275.
                              are changes to the requirements to counsel   hours (2,832        Inst. 125,769;
                              Federal student loan borrowers prior to      institutions        Indiv. 446,506.
                              making the first disbursement of a Federal   +27,393
                              student loan. Institutions that use pre-     individual hours).
                              dispute arbitration agreements and/or
                              class action waivers include in the
                              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 loan
                              was made. Institutions that require a pre-
                              dispute arbitration agreement and/or class
                              action waiver will be required to review
                              with the student borrower the agreement
                              and when it will apply, how to enter into
                              the process and who to contact with
                              questions.
----------------------------------------------------------------------------------------------------------------
Collections of Information
    The total burden hours and change in burden hours associated with
each OMB Control number affected by the regulations as of the effective
date of the regulations are as follows:
----------------------------------------------------------------------------------------------------------------
                                                                              Total proposed    Proposed change
                                Control No.                                    burden hours     in burden hours
----------------------------------------------------------------------------------------------------------------
1845-0004.................................................................             23,390               -626
1845-0020.................................................................          8,249,520               -410
1845-0021.................................................................            739,746            +30,225
1845-0022.................................................................          2,286,015             +4,504
1845-0143.................................................................                  0           -179,362
                                                                           -------------------------------------
    Total.................................................................         11,298,671           -145,669
----------------------------------------------------------------------------------------------------------------
    Accessible Format: Individuals with disabilities can obtain this
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audiotape, or compact disc) on request to the person listed under FOR
FURTHER INFORMATION CONTACT.
    Electronic Access to This Document: The official version of this
document is the document published in the Federal Register. You may
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by the Department.
List of Subjects
34 CFR Part 668
    Administrative practice and procedure, Colleges and universities,
Consumer protection, Grant programs--education, Incorporation by
reference, Loan programs--education, Reporting and recordkeeping
requirements, Selective Service System, Student aid, Vocational
education.
34 CFR Parts 682 and 685
    Administrative practice and procedure, Colleges and universities,
Loan programs--education, Reporting and recordkeeping requirements,
Student aid, Vocational education.
    Dated: September 3, 2019.
Betsy DeVos,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary of
Education amends parts 668, 682, and 685, of title 34 of the Code of
Federal Regulations as follows:
PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS
0
1. The authority citation for part 668 is revised to read as follows:
[[Page 49910]]
    Authority:  20 U.S.C. 1001-1003, 1070g, 1085, 1088, 1091, 1092,
1094, 1099c, 1099c-1, 1221-3, 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 Pub. L. 95-452, 92 Stat. 1101-1109.
    Section 668.172 also issued under 20 U.S.C. 1094 and 1099c and
section 4 of Pub. L. 95-452, 92 Stat. 1101-1109.
    Section 668.175 also issued under 20 U.S.C. 1094 and 1099c.
Sec.  668.14  [Amended]
0
2. Section 668.14 is amended:
0
a. In paragraph (b)(30)(ii)(C), by adding the word ``and'' after ``by
the institution;'';
0
b. In paragraph (b)(31)(v), by removing ``; and'' and adding a period
in its place;
0
c. Removing paragraph (b)(32); and
0
d. Removing the parenthetical authority citation at the end of the
section.
0
3. Section 668.41 is amended:
0
a. In paragraph (a), in the definition of ``Undergraduate students,''
by adding the words ``at or'' before ``below'', and adding the word
``level'' after ``baccalaureate'';
0
b. In paragraph (c)(2) introductory text, by removing ``or (g)'' and
adding in its place ``(g), or (h)'';
0
c. By revising paragraph (h); and
0
d. By removing paragraph (i) and the parenthetical authority citation
at the end of the section.
    The revision reads as follows:
Sec.  668.41  Reporting and disclosure of information.
* * * * *
    (h) Enrolled students, prospective students, and the public--
disclosure of an institution's use of pre-dispute arbitration
agreements and/or class action waivers as a condition of enrollment for
students receiving title IV Federal student aid. (1)(i) An institution
of higher education that requires students receiving title IV Federal
student aid to accept or agree to a pre-dispute arbitration agreement
and/or a class action waiver as a condition of enrollment must make
available to enrolled students, prospective students, and the public, a
written (electronic) plain language disclosure of those conditions of
enrollment. This plain language disclosure also must state that: The
school cannot require the borrower to participate in arbitration or any
internal dispute resolution process offered by the institution prior to
filing a borrower defense to repayment application with the Department
pursuant to Sec.  685.206(e); the school cannot, in any way, require
students to limit, relinquish, or waive their ability to pursue filing
a borrower defense claim, pursuant to Sec.  685.206(e) at any time; and
any arbitration, required by a pre-dispute arbitration agreement, tolls
the limitations period for filing a borrower defense to repayment
application pursuant to Sec.  685.206(e)(6)(ii).
    (ii) All statements in the plain language disclosure must be in 12-
point font on the institution's admissions information web page and in
the admissions section of the institution's catalogue. The institution
may not rely solely on an intranet website for the purpose of providing
this notice to prospective students or the public.
    (2) For the purposes of this paragraph (h), the following
definitions apply:
    (i) Class action means a lawsuit or an arbitration proceeding in
which one or more parties seeks class treatment pursuant to Federal
Rule of Civil Procedure 23 or any State process analogous to Federal
Rule of Civil Procedure 23.
    (ii) Class action waiver means any agreement or part of an
agreement, regardless of its form or structure, between a school, or a
party acting on behalf of a school, and a student that relates to the
making of a Direct Loan or the provision of educational services for
which the student received title IV funding and prevents an individual
from filing or participating in a class action that pertains to those
services.
    (iii) Pre-dispute arbitration agreement means any agreement or part
of an agreement, regardless of its form or structure, between a school,
or a party acting on behalf of a school, and a student requiring
arbitration of any future dispute between the parties relating to the
making of a Direct Loan or provision of educational services for which
the student received title IV funding.
* * * * *
0
4. Section 668.91 is amended by revising paragraph (a)(3) and removing
the parenthetical authority citation.
    The revisions read as follows:
Sec.  668.91  Initial and final decisions.
    (a) * * *
    (3) Notwithstanding the provisions of paragraph (a)(2) of this
section--
    (i) If, in a termination action against an institution, the hearing
official finds that the institution has violated the provisions of
Sec.  668.14(b)(18), the hearing official also finds that termination
of the institution's participation is warranted;
    (ii) If, in a termination action against a third-party servicer,
the hearing official finds that the servicer has violated the
provisions of Sec.  668.14(b)(18), the hearing official also finds that
termination of the institution's participation or servicer's
eligibility is warranted;
    (iii) In an action brought against an institution or third-party
servicer that involves its failure to provide a letter of credit, or
other financial protection under Sec.  668.15 or Sec.  668.171(c) or
(d), the hearing official finds that the amount of the letter of credit
or other financial protection established by the Secretary under Sec.
668.175 is appropriate, unless the institution demonstrates that the
amount was not warranted because--
    (A) For financial protection demanded based on events or conditions
described in Sec.  668.171(c) or (d), the events or conditions no
longer exist, have been resolved, or the institution demonstrates that
it has insurance that will cover all potential debts and liabilities
that arise from the triggering event or condition. The institution can
demonstrate it has insurance that covers risk by presenting the
Department with a copy of the insurance policy that makes clear the
institution's coverage;
    (B) For financial protection demanded based on the grounds
identified in Sec.  668.171(d), the action or event does not and will
not have a material adverse effect on the financial condition,
business, or results of operations of the institution;
    (C) The institution has proffered alternative financial protection
that provides students and the Department adequate protection against
losses resulting from the risks identified by the Secretary. Adequate
protection may consist of one or more of the following--
    (1) An agreement with the Secretary that a portion of the funds due
to the institution under a reimbursement or heightened cash monitoring
funding arrangement will be temporarily withheld in such amounts as
will meet, no later than the end of a six to 12 month period, the
amount of the required financial protection demanded; or
    (2) Other form of financial protection specified by the Secretary
in a notice published in the Federal Register.
    (iv) In a termination action taken against an institution or third-
party servicer based on the grounds that the institution or servicer
failed to comply with the requirements of Sec.  668.23(c)(3), if the
hearing official finds that the
[[Page 49911]]
institution or servicer failed to meet those requirements, the hearing
official finds that the termination is warranted;
    (v)(A) In a termination action against an institution based on the
grounds that the institution is not financially responsible under Sec.
668.15(c)(1), the hearing official finds that the termination is
warranted unless the institution demonstrates that all applicable
conditions described in Sec.  668.15(d)(4) have been met; and
    (B) In a termination or limitation action against an institution
based on the grounds that the institution is not financially
responsible--
    (1) Upon proof of the conditions in Sec.  668.174(a), the hearing
official finds that the limitation or termination is warranted unless
the institution demonstrates that all the conditions in Sec.
668.175(h)(2) have been met; and
    (2) Upon proof of the conditions in Sec.  668.174(b)(1), the
hearing official finds that the limitation or termination is warranted
unless the institution demonstrates that all applicable conditions
described in Sec.  668.174(b)(2) or Sec.  668.175(h)(2) have been met.
* * * * *
0
5. Section 668.171 is revised to read as follows:
Sec.  668.171  General.
    (a) Purpose. To begin and to continue to participate in any title
IV, HEA program, an institution must demonstrate to the Secretary that
it is financially responsible under the standards established in this
subpart. As provided under section 498(c)(1) of the HEA, the Secretary
determines whether an institution is financially responsible based on
the institution's ability to--
    (1) Provide the services described in its official publications and
statements;
    (2) Meet all of its financial obligations; and
    (3) Provide the administrative resources necessary to comply with
title IV, HEA program requirements.
    (b) General standards of financial responsibility. Except as
provided under paragraphs (c), (d), and (h) of this section, the
Secretary considers an institution to be financially responsible if the
Secretary determines that--
    (1) The institution's Equity, Primary Reserve, and Net Income
ratios yield a composite score of at least 1.5, as provided under Sec.
668.172 and appendices A and B to this subpart;
    (2) The institution has sufficient cash reserves to make required
returns of unearned title IV, HEA program funds, as provided under
Sec.  668.173;
    (3) The institution is able to meet all of its financial
obligations and provide the administrative resources necessary to
comply with title IV, HEA program requirements. An institution is not
deemed able to meet its financial or administrative obligations if--
    (i) It fails to make refunds under its refund policy or return
title IV, HEA program funds for which it is responsible under Sec.
668.22;
    (ii) It fails to make repayments to the Secretary for any debt or
liability arising from the institution's participation in the title IV,
HEA programs; or
    (iii) It is subject to an action or event described in paragraph
(c) of this section (mandatory triggering events), or an action or
event that the Secretary determines is likely to have a material
adverse effect on the financial condition of the institution under
paragraph (d) of this section (discretionary triggering events); and
    (4) The institution or persons affiliated with the institution are
not subject to a condition of past performance under Sec.  668.174(a)
or (b).
    (c) Mandatory triggering events. An institution is not able to meet
its financial or administrative obligations under paragraph (b)(3)(iii)
of this section if--
    (1) After the end of the fiscal year for which the Secretary has
most recently calculated an institution's composite score, one or more
of the following occurs:
    (i)(A) The institution incurs a liability from a settlement, final
judgment, or final determination arising from an administrative or
judicial action or proceeding initiated by a Federal or State entity. A
determination arising from an administrative action or proceeding
initiated by a Federal or State entity means the determination was made
only after an institution had notice and an opportunity to submit its
position before a hearing official. A final determination arising from
an administrative action or proceeding initiated by a Federal entity
includes a final determination arising from any administrative action
or proceeding initiated by the Secretary. For purposes of this section,
the liability is the amount stated in the final judgment or final
determination. A judgment or determination becomes final when the
institution does not appeal or when the judgment or determination is
not subject to further appeal; or
    (B) For a proprietary institution whose composite score is less
than 1.5, there is a withdrawal of owner's equity from the institution
by any means (e.g., a capital distribution that is the equivalent of
wages in a sole proprietorship or partnership, a distribution of
dividends or return of capital, or a related party receivable), unless
the withdrawal is a transfer to an entity included in the affiliated
entity group on whose basis the institution's composite score was
calculated; and
    (ii) As a result of that liability or withdrawal, the institution's
recalculated composite score is less than 1.0, as determined by the
Secretary under paragraph (e) of this section.
    (2) For a publicly traded institution--
    (i) The U.S. Securities and Exchange Commission (SEC) issues an
order suspending or revoking the registration of the institution's
securities pursuant to Section 12(j) of the Securities and Exchange Act
of 1934 (the ``Exchange Act'') or suspends trading of the institution's
securities on any national securities exchange pursuant to Section
12(k) of the Exchange Act; or
    (ii) The national securities exchange on which the institution's
securities are traded notifies the institution that it is not in
compliance with the exchange's listing requirements and, as a result,
the institution's securities are delisted, either voluntarily or
involuntarily, pursuant to the rules of the relevant national
securities exchange.
    (iii) The SEC is not in timely receipt of a required report and did
not issue an extension to file the report.
    (3) For the period described in (c)(1) of this section, when the
institution is subject to two or more discretionary triggering events,
as defined in paragraph (d) of this section, those events become
mandatory triggering events, unless a triggering event is resolved
before any subsequent event(s) occurs.
    (d) Discretionary triggering events. The Secretary may determine
that an institution is not able to meet its financial or administrative
obligations under paragraph (b)(3)(iii) of this section if any of the
following events is likely to have a material adverse effect on the
financial condition of the institution--
    (1) The accrediting agency for the institution issued an order,
such as a show cause order or similar action, that, if not satisfied,
could result in the withdrawal, revocation or suspension of
institutional accreditation for failing to meet one or more of the
agency's standards;
    (2)(i) The institution violated a provision or requirement in a
security or loan agreement with a creditor; and
    (ii) As provided under the terms of that security or loan
agreement, a monetary or nonmonetary default or delinquency event
occurs, or other events occur, that trigger or enable the creditor to
require or impose on the
[[Page 49912]]
institution, an increase in collateral, a change in contractual
obligations, an increase in interest rates or payments, or other
sanctions, penalties, or fees;
    (3) The institution's State licensing or authorizing agency
notified the institution that it has violated a State licensing or
authorizing agency requirement and that the agency intends to withdraw
or terminate the institution's licensure or authorization if the
institution does not take the steps necessary to come into compliance
with that requirement;
    (4) For its most recently completed fiscal year, a proprietary
institution did not receive at least 10 percent of its revenue from
sources other than title IV, HEA program funds, as provided under Sec.
668.28(c);
    (5) As calculated by the Secretary, the institution has high annual
dropout rates; or
    (6) The institution's two most recent official cohort default rates
are 30 percent or greater, as determined under subpart N of this part,
unless--
    (i) The institution files a challenge, request for adjustment, or
appeal under that subpart with respect to its rates for one or both of
those fiscal years; and
    (ii) That challenge, request, or appeal remains pending, results in
reducing below 30 percent the official cohort default rate for either
or both of those years, or precludes the rates from either or both
years from resulting in a loss of eligibility or provisional
certification.
    (e) Recalculating the composite score. The Secretary recalculates
an institution's most recent composite score by recognizing the actual
amount of the liability, or cumulative liabilities, incurred by an
institution under paragraph (c)(1)(i)(A) of this section as an expense
or accounting for the actual withdrawal, or cumulative withdrawals, of
owner's equity under paragraph (c)(1)(i)(B) of this section as a
reduction in equity, and accounts for that expense or withdrawal by--
    (1) For liabilities incurred by a proprietary institution--
    (i) For the primary reserve ratio, increasing expenses and
decreasing adjusted equity by that amount;
    (ii) For the equity ratio, decreasing modified equity by that
amount; and
    (iii) For the net income ratio, decreasing income before taxes by
that amount;
    (2) For liabilities incurred by a non-profit institution--
    (i) For the primary reserve ratio, increasing expenses and
decreasing expendable net assets by that amount;
    (ii) For the equity ratio, decreasing modified net assets by that
amount; and
    (iii) For the net income ratio, decreasing change in net assets
without donor restrictions by that amount; and
    (3) For the amount of owner's equity withdrawn from a proprietary
institution--
    (i) For the primary reserve ratio, decreasing adjusted equity by
that amount; and
    (ii) For the equity ratio, decreasing modified equity by that
amount.
    (f) Reporting requirements. (1) In accordance with procedures
established by the Secretary, an institution must notify the Secretary
of the following actions or events--
    (i) For a liability incurred under paragraph (c)(1)(i)(A) of this
section, no later than 10 days after the date of written notification
to the institution of the final judgment or final determination;
    (ii) For a withdrawal of owner's equity described in paragraph
(c)(1)(i)(B) of this section--
    (A) For a capital distribution that is the equivalent of wages in a
sole proprietorship or partnership, no later than 10 days after the
date the Secretary notifies the institution that its composite score is
less than 1.5. In response to that notice, the institution must report
the total amount of the wage-equivalent distributions it made during
its prior fiscal year and any distributions that were made to pay any
taxes related to the operation of the institution. During its current
fiscal year and the first six months of its subsequent fiscal year (18-
month period), the institution is not required to report any
distributions to the Secretary, provided that the institution does not
make wage-equivalent distributions that exceed 150 percent of the total
amount of wage-equivalent distributions it made during its prior fiscal
year, less any distributions that were made to pay any taxes related to
the operation of the institution. However, if the institution makes
wage-equivalent distributions that exceed 150 percent of the total
amount of wage-equivalent distributions it made during its prior fiscal
year less any distributions that were made to pay any taxes related to
the operation of the institution at any time during the 18-month
period, it must report each of those distributions no later than 10
days after they are made, and the Secretary recalculates the
institution's composite score based on the cumulative amount of the
distributions made at that time;
    (B) For a distribution of dividends or return of capital, no later
than 10 days after the dividends are declared or the amount of return
of capital is approved; or
    (C) For a related party receivable, not later than 10 days after
that receivable occurs;
    (iii) For the provisions relating to a publicly traded institution
under paragraph (c)(2) of this section, no later than 10 days after the
date that--
    (A) The SEC issues an order suspending or revoking the registration
of the institution's securities pursuant to Section 12(j) of the
Exchange Act or suspends trading of the institution's securities on any
national securities exchange pursuant to Section 12(k) of the Exchange
Act; or
    (B) The national securities exchange on which the institution's
securities are traded involuntarily delists its securities, or the
institution voluntarily delists its securities, pursuant to the rules
of the relevant national securities exchange;
    (iv) For an action under paragraph (d)(1) of this section, 10 days
after the date on which the institution is notified by its accrediting
agency of that action;
    (v) For the loan agreement provisions in paragraph (d)(2) of this
section, 10 days after a loan violation occurs, the creditor waives the
violation, or the creditor imposes sanctions or penalties in exchange
or as a result of granting the waiver;
    (vi) For a State agency notice relating to terminating an
institution's licensure or authorization under paragraph (d)(3) of this
section, 10 days after the date on which the institution receives that
notice; and
    (vii) For the non-title IV revenue provision in paragraph (d)(4) of
this section, no later than 45 days after the end of the institution's
fiscal year, as provided in Sec.  668.28(c)(3).
    (2) The Secretary may take an administrative action under paragraph
(i) of this section against an institution, or determine that the
institution is not financially responsible, if it fails to provide
timely notice to the Secretary as provided under paragraph (f)(1) of
this section, or fails to respond, within the timeframe specified by
the Secretary, to any determination made, or request for information,
by the Secretary under paragraph (f)(3) of this section.
    (3)(i) In its notice to the Secretary under this paragraph, or in
its response to a preliminary determination by the Secretary that the
institution is not financially responsible because of a triggering
event under paragraph (c) or (d) of this section, in accordance with
procedures established by the Secretary, the institution may--
    (A) Demonstrate that the reported withdrawal of owner's equity
under paragraph (c)(1)(i)(B) of this section was used exclusively to
meet tax liabilities
[[Page 49913]]
of the institution or its owners for income derived from the
institution;
    (B) Show that the creditor waived a violation of a loan agreement
under paragraph (d)(2) of this section. However, if the creditor
imposes additional constraints or requirements as a condition of
waiving the violation, or imposes penalties or requirements under
paragraph (d)(2)(ii) of this section, the institution must identify and
describe those penalties, constraints, or requirements and demonstrate
that complying with those actions will not adversely affect the
institution's ability to meet its financial obligations;
    (C) Show that the triggering event has been resolved, or
demonstrate that the institution has insurance that will cover all or
part of the liabilities that arise under paragraph (c)(1)(i)(A) of this
section; or
    (D) Explain or provide information about the conditions or
circumstances that precipitated a triggering event under paragraph (c)
or (d) of this section that demonstrates that the triggering event has
not or will not have a material adverse effect on the institution.
    (ii) The Secretary will consider the information provided by the
institution in determining whether to issue a final determination that
the institution is not financially responsible.
    (g) Public institutions. (1) The Secretary considers a domestic
public institution to be financially responsible if the institution--
    (i)(A) Notifies the Secretary that it is designated as a public
institution by the State, local, or municipal government entity, tribal
authority, or other government entity that has the legal authority to
make that designation; and
    (B) Provides a letter from an official of that State or other
government entity confirming that the institution is a public
institution; and
    (ii) Is not subject to a condition of past performance under Sec.
668.174.
    (2) The Secretary considers a foreign public institution to be
financially responsible if the institution--
    (i)(A) Notifies the Secretary that it is designated as a public
institution by the country or other government entity that has the
legal authority to make that designation; and
    (B) Provides documentation from an official of that country or
other government entity confirming that the institution is a public
institution and is backed by the full faith and credit of the country
or other government entity; and
    (ii) Is not subject to a condition of past performance under Sec.
668.174.
    (h) Audit opinions and disclosures. Even if an institution
satisfies all of the general standards of financial responsibility
under paragraph (b) of this section, the Secretary does not consider
the institution to be financially responsible if, in the institution's
audited financial statements, the opinion expressed by the auditor was
an adverse, qualified, or disclaimed opinion, or the financial
statements contain a disclosure in the notes to the financial
statements that there is substantial doubt about the institution's
ability to continue as a going concern as required by accounting
standards, unless the Secretary determines that a qualified or
disclaimed opinion does not have a significant bearing on the
institution's financial condition, or that the substantial doubt about
the institution's ability to continue as going concern has been
alleviated.
    (i) Administrative actions. If the Secretary determines that an
institution is not financially responsible under the standards and
provisions of this section or under an alternative standard in Sec.
668.175, or the institution does not submit its financial and
compliance audits by the date and in the manner required under Sec.
668.23, the Secretary may--
    (1) Initiate an action under subpart G of this part to fine the
institution, or limit, suspend, or terminate the institution's
participation in the title IV, HEA programs; or
    (2) For an institution that is provisionally certified, take an
action against the institution under the procedures established in
Sec.  668.13(d).
0
6. Section 668.172 is amended by:
0
a. Adding paragraphs (d) and (e).
0
b. Removing the parenthetical authority citation.
    The additions read as follows:
Sec.  668.172  Financial ratios.
* * * * *
    (d) Accounting for operating leases. The Secretary accounts for
operating leases by--
    (1) Applying FASB Accounting Standards Update (ASU) 2016-02, Leases
(Topic 842) to all leases the institution has entered into on or after
December 15, 2018 (post-implementation operating/financing leases), as
specified in the Supplemental Schedule (see Section 2 of Appendix A to
this subpart and Section 2 of Appendix B to this subpart);
    (2) Treating leases the institution entered into prior to December
15, 2018 (pre-implementation operating/financing leases), as they would
have been treated prior to the requirements of ASU 2016-02, as long as
the institution provides information about those leases on the
Supplemental Schedule and a note in, or on the face of, its audited
financial statements; and
    (3) Accounting for any adjustments, such as any options exercised
by the institution to extend the life of a pre-implementation
operating/finance lease, as post-implementation operating/finance
leases.
    (e) Incorporation by Reference. (1) The material required in this
section is incorporated by reference into this section with the
approval of the Director of the Federal Register under 5 U.S.C. 552(a)
and 1 CFR part 51. All approved material is available for inspection at
U.S. Department of Education, Office of the General Counsel, 202-401-
6000, and is available from the sources indicated below. It is also
available for inspection at the National Archives and Records
Administration (NARA). For information on the availability of this
material at NARA, email [email protected] or go to
www.archives.gov/federal-register/cfr/ibr-locations.html.
    (2) Financial Accounting Standards Board (FASB), 401 Merritt 7,
P.O. Box 5116, Norwalk, CT 06856-5116, (203) 847-0700, www.fasb.org.
    (i) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842),
(February 2016).
    (ii) [Reserved]
* * * * *
0
7. Section 668.175 is amended by revising paragraphs (a) through (c),
(f) and (h) and removing the parenthetical authority citation.
    The revisions read as follows:
Sec.  668.175  Alternative standards and requirements.
    (a) General. An institution that is not financially responsible
under the general standards and provisions in Sec.  668.171, may begin
or continue to participate in the title IV, HEA programs by qualifying
under an alternate standard set forth in this section.
    (b) Letter of Credit or surety alternative for new institutions. A
new institution that is not financially responsible solely because the
Secretary determines that its composite score is less than 1.5,
qualifies as a financially responsible institution by submitting an
irrevocable letter of credit that is acceptable and payable to the
Secretary, or providing other surety described under paragraph
(h)(2)(i) of this section, for an amount equal to at least one-half of
the amount of title IV, HEA program funds that the Secretary determines
the institution will receive during its initial year of participation.
A new institution is an institution that seeks to participate for the
first time in the title IV, HEA programs.
[[Page 49914]]
    (c) Financial protection alternative for participating
institutions. A participating institution that is not financially
responsible either because it does not satisfy one or more of the
standards of financial responsibility under Sec.  668.171(b), (c), or
(d), or because of an audit opinion or going concern disclosure
described under Sec.  668.171(h), qualifies as a financially
responsible institution by submitting an irrevocable letter of credit
that is acceptable and payable to the Secretary, or providing other
financial protection described under paragraph (h) of this section, for
an amount determined by the Secretary that is not less than one-half of
the title IV, HEA program funds received by the institution during its
most recently completed fiscal year, except that this requirement does
not apply to a public institution.
* * * * *
    (f) Provisional certification alternative. (1) The Secretary may
permit an institution that is not financially responsible to
participate in the title IV, HEA programs under a provisional
certification for no more than three consecutive years if--
    (i) The institution is not financially responsible because it does
not satisfy the general standards under Sec.  668.171(b), its
recalculated composite score under Sec.  668.171(e) is less than 1.0,
it is subject to an action or event under Sec.  668.171(c), or an
action or event under paragraph (d) that has an adverse material effect
on the institution as determined by the Secretary, or because of an
audit opinion or going concern disclosure described in Sec.
668.171(h); or
    (ii) The institution is not financially responsible because of a
condition of past performance, as provided under Sec.  668.174(a), and
the institution demonstrates to the Secretary that it has satisfied or
resolved that condition; and
    (2) Under this alternative, the institution must--
    (i) Provide to the Secretary an irrevocable letter of credit that
is acceptable and payable to the Secretary, or provide other financial
protection described under paragraph (h) of this section, for an amount
determined by the Secretary that is not less than 10 percent of the
title IV, HEA program funds received by the institution during its most
recently completed fiscal year, except that this requirement does not
apply to a public institution that the Secretary determines is backed
by the full faith and credit of the State;
    (ii) Demonstrate that it was current on its debt payments and has
met all of its financial obligations, as required under Sec.
668.171(b)(3), for its two most recent fiscal years; and
    (iii) Comply with the provisions under the zone alternative, as
provided under paragraph (d)(2) and (3) of this section.
    (3) If at the end of the period for which the Secretary
provisionally certified the institution, the institution is still not
financially responsible, the Secretary may again permit the institution
to participate under a provisional certification but the Secretary--
    (i) May require the institution, or one or more persons or entities
that exercise substantial control over the institution, as determined
under Sec.  668.174(b)(1) and (c), or both, to provide to the Secretary
financial guarantees for an amount determined by the Secretary to be
sufficient to satisfy any potential liabilities that may arise from the
institution's participation in the title IV, HEA programs;
    (ii) May require one or more of the persons or entities that
exercise substantial control over the institution, as determined under
Sec.  668.174(b)(1) and (c), to be jointly or severally liable for any
liabilities that may arise from the institution's participation in the
title IV, HEA programs; and
    (iii) May require the institution to provide, or continue to
provide, the financial protection resulting from an event described in
Sec.  668.171(c) and (d) until the institution meets the requirements
of paragraph (f)(4) of this section.
    (4) The Secretary maintains the full amount of financial protection
provided by the institution under this section until the Secretary
first determines that the institution has--
    (i) A composite score of 1.0 or greater based on a review of the
audited financial statements for the fiscal year in which all
liabilities from any event described in Sec.  668.171(c) or (d) on
which financial protection was required; or
    (ii) A recalculated composite score of 1.0 or greater, and any
event or condition described in Sec.  668.171(c) or (d) has ceased to
exist.
* * * * *
    (h) Financial protection. (1) In accordance with procedures
established by the Secretary or as part of an agreement with an
institution under this section, the Secretary may use the funds from
that financial protection to satisfy the debts, liabilities, or
reimbursable costs, including costs associated with teach-outs as
allowed by the Department, owed to the Secretary that are not otherwise
paid directly by the institution.
    (2) In lieu of submitting a letter of credit for the amount
required by the Secretary under this section, the Secretary may permit
an institution to--
    (i) Provide the amount required in the form of other surety or
financial protection that the Secretary specifies in a document
published in the Federal Register;
    (ii) Provide cash for the amount required; or
    (iii) Enter into an arrangement under which the Secretary offsets
the amount of title IV, HEA program funds that an institution has
earned in a manner that ensures that, no later than the end of a six to
twelve-month period selected by the Secretary, the amount offset equals
the amount of financial protection the institution is required to
provide. The Secretary provides to the institution any funds not used
for the purposes described in paragraph (h)(1) of this section during
the period covered by the agreement, or provides the institution any
remaining funds if the institution subsequently submits other financial
protection for the amount originally required.
* * * * *
0
8. Appendix A to subpart L of part 668 is revised to read as follows:
Appendix A to Subpart L of Part 668--Ratio Methodology for Propriety
Institutions
BILLING CODE 4001-01-P
[[Page 49915]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.000
 [GRAPHIC] [TIFF OMITTED] TR23SE19.001
[[Page 49916]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.002
[[Page 49917]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.003
[[Page 49918]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.004
[GRAPHIC] [TIFF OMITTED] TR23SE19.005
[[Page 49919]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.006
0
9. Appendix B to Subpart L of part 668 is revised to read as follows:
Appendix B to Subpart L of Part 668--Ratio Methodology for Private Non-
Profit Institutions
[GRAPHIC] [TIFF OMITTED] TR23SE19.007
[[Page 49920]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.008
[GRAPHIC] [TIFF OMITTED] TR23SE19.009
[[Page 49921]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.010
[[Page 49922]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.011
[[Page 49923]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.012
[[Page 49924]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.013
[GRAPHIC] [TIFF OMITTED] TR23SE19.014
[[Page 49925]]
[GRAPHIC] [TIFF OMITTED] TR23SE19.015
[GRAPHIC] [TIFF OMITTED] TR23SE19.016
BILLING CODE 4000-01-C
[[Page 49926]]
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM
0
10. The authority citation for part 682 is revised to read as follows:
    Authority: 20 U.S.C. 1071-1087-4, unless otherwise noted.
    Section 682.410 also issued under 20 U.S.C. 1078, 1078-1, 1078-
2, 1078-3, 1080a, 1082, 1087, 1091a, and 1099.
0
11. Section 682.410 is amended by revising paragraph (b)(2) and
removing the parenthetical authority citation at the end of the
section.
    The revision reads as follows:
Sec.  682.410  Fiscal, administrative, and enforcement requirements.
* * * * *
    (b) * * *
    (2) Collection charges. (i) Whether or not provided for in the
borrower's promissory note and subject to any limitation on the amount
of those costs in that note, the guaranty agency may charge a borrower
an amount equal to the reasonable costs incurred by the agency in
collecting a loan on which the agency has paid a default or bankruptcy
claim unless, within the 60-day period after the guaranty agency sends
the initial notice described in paragraph (b)(6)(ii) of this section,
the borrower enters into an acceptable repayment agreement, including a
rehabilitation agreement, and honors that agreement, in which case the
guaranty agency must not charge a borrower any collection costs.
    (ii) An acceptable repayment agreement may include an agreement
described in Sec.  682.200(b) (Satisfactory repayment arrangement),
Sec.  682.405, or paragraph (b)(5)(ii)(D) of this section. An
acceptable repayment agreement constitutes a repayment arrangement or
agreement on repayment terms satisfactory to the guaranty agency, under
this section.
    (iii) The costs under this paragraph (b)(2) include, but are not
limited to, all attorneys' fees, collection agency charges, and court
costs. Except as provided in Sec. Sec.  682.401(b)(18)(i) and
682.405(b)(1)(vi)(B), the amount charged a borrower must equal the
lesser of--
    (A) The amount the same borrower would be charged for the cost of
collection under the formula in 34 CFR 30.60; or
    (B) The amount the same borrower would be charged for the cost of
collection if the loan was held by the U.S. Department of Education.
* * * * *
PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM
0
12. The authority citation for part 685 is revised to read as follows:
    Authority: 20 U.S.C. 1070g, 1087a, et seq., unless otherwise
noted.
    Section 685.205 also issued under 20 U.S.C. 1087a et seq.
    Section 685.206 also issued under 20 U.S.C. 1087a et seq.
    Section 685.212 also issued under 20 U.S.C. 1087a et seq.; 28
U.S.C. 2401.
    Section 685.214 also issued under 20 U.S.C. 1087a et seq.
    Section 685.215 also issued under 20 U.S.C. 1087a et seq.
    Section 685.222 also issued under 20 U.S.C. 1087a et seq.; 28
U.S.C. 2401; 31 U.S.C. 3702.
    Section 685.300 also issued under 20 U.S.C. 1087a et seq., 1094.
    Section 685.304 also issued under 20 U.S.C. 1087a et seq.
    Section 685.308 also issued under 20 U.S.C. 1087a et seq.
Sec.  685.205  [Amended]
0
13. Section 685.205 is amended:
0
a. In paragraph (b)(6)(i), by removing the citation ``Sec.
685.206(c)'' and adding, in its place, the citation ``Sec.  685.206(c),
(d) and (e)''; and
0
b. By removing the parenthetical authority citation at the end of the
section.
0
14. Section 685.206 is amended:
0
a. In paragraph (c), by revising the subject heading;
0
b. By adding paragraphs (d) through (e); and
0
c. Removing the parenthetical authority citation at the end of the
section.
    The revision and additions read as follows:
Sec.  685.206  Borrower responsibilities and defenses.
* * * * *
    (c) Borrower defense to repayment for loans first disbursed prior
to July 1, 2017. * * *
* * * * *
    (d) Borrower defense to repayment for loans first disbursed on or
after July 1, 2017, and before July 1, 2020. For borrower defense to
repayment for loans first disbursed on or after July 1, 2017, and
before July 1, 2020, a borrower asserts and the Secretary considers a
borrower defense in accordance with Sec.  685.222.
    (e) Borrower defense to repayment for loans first disbursed on or
after July 1, 2020. This paragraph (e) applies to borrower defense to
repayment for loans first disbursed on or after July 1, 2020.
    (1) Definitions. For the purposes of this paragraph (e), the
following definitions apply:
    (i) A ``Direct Loan'' 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'' 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'' 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'' 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. For a Direct Loan or Direct Consolidation Loan first disbursed on
or after July 1, 2020, 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
[[Page 49927]]
    (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 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. Financial harm is the amount of monetary loss
that a borrower incurs as a consequence of a misrepresentation, as
defined in Sec.  685.206(e)(3). 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--
    (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
[[Page 49928]]
    (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 and tolling of the limitations period for
arbitration proceedings. (i) A borrower must assert a defense to
repayment under this paragraph (e) within three years from the date the
student is no longer enrolled at the institution. A borrower may only
assert a defense to repayment under this paragraph (e) within the
timeframes set forth in Sec.  685.206(e)(6)(i) and (ii) and (e)(7).
    (ii) For pre-dispute arbitration agreements, as defined in Sec.
668.41(h)(2)(iii), the limitations period will be tolled for the time
period beginning on the date that a written request for arbitration is
filed, by either the student or the institution, and concluding on the
date the arbitrator submits, in writing, a final decision, final award,
or other final determination, to the parties.
    (7) Extension of limitation periods and reopening of applications.
For loans first disbursed on or after July 1, 2020, 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 Sec.  685.206(e)(3); or
    (ii) A final decision by a duly appointed arbitrator or arbitration
panel that establishes that the institution made a misrepresentation,
as defined in Sec.  685.206(e)(3).
    (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 paragraph
(b)(6)(i) of this section, 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. (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, the order in which the Secretary will consider
objections, including a borrower defense to repayment, 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. (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
[[Page 49929]]
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. (i) After considering the borrower's
application and all applicable evidence, the Secretary issues a written
decision--
    (A) Notifying the borrower and the school of the decision on the
borrower defense to repayment;
    (B) Providing the reasons for the decision; and
    (C) Informing the borrower and the school of the relief, if any,
that the borrower will receive, consistent with paragraph (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
Sec.  685.206(e)(6) or (7), 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. (i) If the Secretary
grants the borrower's request 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 may exceed the amount of
financial harm, as defined in Sec.  685.206(e)(4), that the borrower
alleges in the application pursuant to Sec.  685.206(e)(8)(v). 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 Sec.  685.206(e)(3). 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. In awarding relief, the
Secretary considers the borrower's application, as described in Sec.
685.206(e)(8), which includes information about any payments received
by the borrower and the financial harm alleged by the borrower. In
awarding relief, 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 Sec.  685.206(e)(10). 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.
    (ii) The Secretary affords the borrower such further relief as the
Secretary determines is appropriate under the circumstances. Further
relief may include one or both of the following, if applicable:
    (A) Determining that the borrower is not in default on the loan and
is eligible to receive assistance under title IV of the Act and
    (B) Eliminating or recalculating the subsidized usage period that
is associated with the loan or loans discharged pursuant to Sec.
685.200(f)(4)(iii).
    (13) Finality of borrower defense to repayment decisions. 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. The Secretary may revoke any
relief granted to a borrower under this section who refuses to
cooperate with the Secretary in any proceeding under paragraph (e) of
this section or under 34 CFR 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; 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. (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. (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 34 CFR part 668,
subpart G. This paragraph (e)(16) would also be applicable for
provisionally certified institutions.
    (ii) The Secretary will not initiate such a proceeding more than
five years after the date of the final determination included in the
written decision referenced in paragraph (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
15. Section 685.212 is amended by revising paragraph (k) and removing
the parenthetical authority citation at the end of the section.
[[Page 49930]]
    The revision reads as follows:
Sec.  685.212  Discharge of a loan obligation.
* * * * *
    (k) Borrower defenses. (1) If a borrower defense is approved under
Sec.  685.206(c) or under Sec.  685.206(d) and Sec.  685.222--
    (i) The Secretary discharges the obligation of the borrower in
whole or in part in accordance with the procedures in Sec. Sec.
685.206(c) and 685.222, respectively; and
    (ii) The Secretary returns to the borrower payments made by the
borrower or otherwise recovered on the loan that exceed the amount owed
on that portion of the loan not discharged, if the borrower asserted
the claim not later than--
    (A) For a claim subject to Sec.  685.206(c), the limitation period
under applicable law to the claim on which relief was granted; or
    (B) For a claim subject to Sec.  685.222, the limitation period in
Sec.  685.222(b), (c), or (d), as applicable.
    (2) In the case of a Direct Consolidation Loan, a borrower may
assert a borrower defense under Sec.  685.206(c) or Sec.  685.222 with
respect to 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 that was repaid by the Direct
Consolidation Loan.
    (i) The Secretary considers a borrower defense claim asserted on a
Direct Consolidation Loan by determining--
    (A) Whether the act or omission of the school with regard to the
loan described in this paragraph (k)(2), other than a Direct
Subsidized, Unsubsidized, or PLUS Loan, constitutes a borrower defense
under Sec.  685.206(c), for a Direct Consolidation Loan made before
July 1, 2017, or under Sec.  685.222, for a Direct Consolidation Loan
made on or after July 1, 2017, and before July 1, 2020; or
    (B) Whether the act or omission of the school with regard to a
Direct Subsidized, Unsubsidized, or PLUS Loan made on after July 1,
2017, and before July 1, 2020, that was paid off by the Direct
Consolidation Loan, constitutes a borrower defense under Sec.  685.222.
    (ii) If the borrower defense is approved, the Secretary discharges
the appropriate portion of the Direct Consolidation Loan.
    (iii) The Secretary returns to the borrower payments made by the
borrower or otherwise recovered on the Direct Consolidation Loan that
exceed the amount owed on that portion of the Direct Consolidation Loan
not discharged, if the borrower asserted the claim not later than--
    (A) For a claim asserted under Sec.  685.206(c), the limitation
period under the law applicable to the claim on which relief was
granted; or
    (B) For a claim asserted under Sec.  685.222, the limitation period
in Sec.  685.222(b), (c), or (d), as applicable.
    (iv) The Secretary returns to the borrower a payment made by the
borrower or otherwise recovered on the loan described in this paragraph
(k)(2) only if--
    (A) The payment was made directly to the Secretary on the loan; and
    (B) The borrower proves that the loan to which the payment was
credited was not legally enforceable under applicable law in the amount
for which that payment was applied.
    (3) If a borrower's application for a discharge of a loan based on
a borrower defense is approved under Sec.  685.206(e), the Secretary
discharges the obligation of the borrower, in whole or in part, in
accordance with the procedures described in Sec.  685.206(e).
* * * * *
0
16. Section 685.214 is amended:
0
a. In paragraph (c)(1) introductory text, by removing the word ``In''
at the beginning of the paragraph and adding in its place ``For loans
first disbursed before July 1, 2020, in'';
0
b. By redesignating paragraph (c)(2) as paragraph (c)(3);
0
c. By adding new paragraph (c)(2);
0
d. In newly redesignated paragraph (c)(3)(ii), by adding ``and before
July 1, 2020,'' after ``on or after November 1, 2013,'';
0
e. By adding introductory text to paragraph (f);
0
f. By adding paragraph (g); and
0
g. By removing the parenthetical authority citation at the end of the
section.
    The additions read as follows:
Sec.  685.214  Closed school discharge.
* * * * *
    (c) * * *
    (2) For loans first disbursed on or after July 1, 2020, in order to
qualify for discharge of a loan under this section, a borrower must
submit to the Secretary a completed application, and the factual
assertions in the application must be true and made by the borrower
under penalty of perjury. The application explains the procedures and
eligibility criteria for obtaining a discharge and requires the
borrower to--
    (i) Certify that the borrower (or the student on whose behalf a
parent borrowed)--
    (A) Received the proceeds of a loan, in whole or in part, on or
after July 1, 2020 to attend a school;
    (B) Did not complete the program of study at that school because
the school closed on the date that the student was enrolled, or the
student withdrew from the school not more than 180 calendar days before
the date that the school closed. The Secretary may extend the 180-day
period if the Secretary determines that exceptional circumstances
related to a school's closing justify an extension. Exceptional
circumstances for this purpose may include, but are not limited to: The
revocation or withdrawal by an accrediting agency of the school's
institutional accreditation; revocation or withdrawal by the State
authorization or licensing authority to operate or to award academic
credentials in the State; the termination by the Department of the
school's participation in a title IV, HEA program; the teach-out of the
student's educational program exceeds the 180-day look-back period for
a closed school loan discharge; or 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 or a comparable program; and
    (C) Did not complete the program of study or a comparable program
through a teach-out at another school or by transferring academic
credits or hours earned at the closed school to another school;
    (ii) Certify that the borrower (or the student on whose behalf the
parent borrowed) has not accepted the opportunity to complete, or is
not continuing in, the program of study or a comparable program through
either 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.
* * * * *
    (f) Discharge procedures. The discharge procedures in this
paragraph (f) apply to loans first disbursed before July 1, 2020.
* * * * *
    (g) Discharge procedures. The discharge procedures in this
paragraph (g) apply to loans first disbursed on or after July 1, 2020.
[[Page 49931]]
    (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 (c) of this section within 60 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. The Secretary may capitalize
any interest accrued and not paid during that period.
    (5) 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.
    (6) 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, and resumes collection.
* * * * *
0
17. Section 685.215 is amended:
0
a. In paragraph (a)(1) introductory text, by removing the word ``The''
at the beginning of the paragraph and adding in its place ``For loans
first disbursed before July 1, 2020, the'';
0
b. In paragraph (a)(1)(ii) introductory text, by removing the word
``Certified'' and adding in its place ``For loans first disbursed
before July 1, 2020, certified'';
0
c. In paragraph (a)(1)(iv), removing the word ``or'' at the end of the
paragraph;
0
d. Removing the period at the end of paragraph (a)(v) and adding in its
place ``; or'';
0
e. Adding paragraph (a)(1)(vi);
0
f. Revising paragraph (c) introductory text;
0
g. Adding introductory text to paragraph (d);
0
h. Adding paragraphs (e) and (f); and
0
i. Removing the parenthetical authority citation at the end of the
section.
    The revisions and additions read as follows:
Sec.  685.215  Discharge for false certification of student eligibility
or unauthorized payment.
    (a) * * *
    (1) * * *
    (vi) For loans first disbursed on or after July 1, 2020, certified
eligibility for a Direct Loan for a student who did not have a high
school diploma or its recognized equivalent and did not meet the
alternative eligibility requirements described in 34 CFR part 668 and
section 484(d) of the Act applicable at the time of disbursement.
* * * * *
    (c) Borrower qualification for discharge. This paragraph (c)
applies to loans first disbursed before July 1, 2020. 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 paragraph (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.
* * * * *
    (d) Discharge procedures. This paragraph (d) applies to loans first
disbursed before July 1, 2020.
* * * * *
    (e) Borrower qualification for discharge. This paragraph (e)
applies to loans first disbursed on or after July 1, 2020. In order 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, and the factual assertions in the application must be true
and made under penalty of perjury. In the application, the borrower
must demonstrate to the satisfaction of the Secretary that the
requirements in paragraphs (e)(1) through (6) of this section have been
met.
    (1) High School diploma or equivalent. (i) In the case of a
borrower requesting a discharge based on not having had a high school
diploma and not having met the alternative eligibility requirements,
the borrower must certify that the borrower (or the student on whose
behalf a parent borrowed)--
    (A) Received a disbursement of a loan, in whole or in part, on or
after January 1, 1986, to attend a school; and
    (B) Received a Direct Loan at that school and did not have a high
school diploma or its recognized equivalent and did not meet the
alternative to graduation from high school eligibility requirements
described in 34 CFR part 668 and section 484(d) of the Act applicable
at the time of disbursement.
    (ii) A borrower does not qualify for a false certification
discharge under this paragraph (e)(1) if--
    (A) The borrower was unable to provide the school with an official
transcript or an official copy of the borrower's high school diploma or
the borrower was home schooled and has no official transcript or high
school diploma; and
    (B) As an alternative to an official transcript or official copy of
the borrower's high school diploma, the borrower submitted to the
school a written attestation, under penalty of perjury, that the
borrower had a high school diploma.
    (2) 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--
    (i) State that he or she did not sign the document in question or
authorize the school to do so; and
    (ii) Provide five different specimens of his or her signature, two
of which must be within one year before or after the date of the
contested signature.
    (3) 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 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;
    (ii) Provide five different specimens of his or her signature, two
of which must be within one year before or after the date of the
contested signature; and
[[Page 49932]]
    (iii) 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.
    (4) Identity theft. (i) 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--
    (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;
    (C) Provide a copy of a local, State, or Federal court verdict or
judgment that conclusively determines that the individual who is named
as the borrower of the loan was the victim of a crime of identity
theft; and
    (D) If the judicial determination of the crime does not expressly
state that the loan was obtained as a result of the crime of identity
theft, provide--
    (1) Authentic specimens of the signature of the individual, as
provided in paragraph (e)(2)(ii) of this section, or of other means of
identification of the individual, as applicable, corresponding to the
means of identification falsely used to obtain the loan; and
    (2) A statement of facts that demonstrate, to the satisfaction of
the Secretary, that eligibility for the loan in question was falsely
certified as a result of the crime of identity theft committed against
that individual.
    (ii)(A) 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.
    (B) Identifying information includes, but is not limited to--
    (1) 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;
    (2) Unique biometric data, such as fingerprints, voiceprint, retina
or iris image, or unique physical representation;
    (3) Unique electronic identification number, address, or routing
code; or
    (4) Telecommunication identifying information or access device (as
defined in 18 U.S.C. 1029(e)).
    (5) Claim to third party. The borrower must state whether the
borrower (or student) has made a claim with respect to the school's
false certification or unauthorized payment 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.
    (6) Cooperation with Secretary. The borrower must state that the
borrower (or student)--
    (i) 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
    (ii) Agrees to cooperate with the Secretary in enforcement actions
as described in Sec.  685.214(d) and to transfer any right to recovery
against a third party to the Secretary as described in Sec.
685.214(e).
    (7) Discharge without an application. The Secretary discharges all
or part of a loan as appropriate under this section without an
application from the borrower if the Secretary determines, based on
information in the Secretary's possession, that the borrower qualifies
for a discharge.
    (f) Discharge procedures. This paragraph (f) applies to loans first
disbursed on or after July 1, 2020.
    (1) If the Secretary determines that a borrower's Direct Loan may
be eligible for a discharge under this section, the Secretary provides
the borrower the application described in paragraph (e) of this
section, which explains the qualifications and procedures for obtaining
a discharge. The Secretary also promptly suspends any efforts to
collect from the borrower on any affected loan. The Secretary may
continue to receive borrower payments.
    (2) If the borrower fails to submit a completed application within
60 days of the date the Secretary suspended collection efforts, the
Secretary resumes collection and grants forbearance of principal and
interest for the period in which collection activity was suspended. The
Secretary may capitalize any interest accrued and not paid during that
period.
    (3) If the borrower submits a completed application, the Secretary
determines whether to grant a request for discharge under this section
by reviewing the application in light of information available from the
Secretary's records and from other sources, including, but not limited
to, the school, guaranty agencies, State authorities, and relevant
accrediting associations.
    (4) 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.
    (5) 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, and resumes
collection.
* * * * *
0
18. Section 685.222 is amended:
0
a. By revising the section heading;
0
b. In paragraph (a)(2), by adding the words ``and before July 1,
2020,'' after the words ``after July 1, 2017,'';
0
c. In paragraph (b), by adding the words ``under this section'' after
the words ``The borrower has a borrower defense'';
0
d. In paragraph (c), by adding the words ``under this section'' after
the words ``The borrower has a borrower defense'';
0
e. In paragraph (d)(1), by adding the words ``under this section''
after the words ``A borrower has a borrower defense'';
0
f. In paragraph (e)(2) introductory text, by adding the words ``under
this section'' after the words ``Upon receipt of a borrower's
application'';
0
g. In paragraph (e)(3) introductory text, by adding the words
``submitted under this section'' after the words ``review the
borrower's application'';
0
h. In paragraph (e)(3)(ii), by removing the word ``Upon'' and adding in
its place the words, ``For borrower defense applications under this
section, upon'';
0
i. In paragraph (e)(4) introductory text, by adding the words ``under
this section'' after the words ``fact-finding process'';
0
j. In paragraph (e)(5) introductory text, by adding the words ``under
this section'' after the words ``Department official'';
0
k. In paragraph (f)(1) introductory text, by adding the words ``under
this section'' after the words ``has a borrower defense'';
0
l. In paragraph (g) introductory text, by adding the words ``under this
section'' after the words ``for which the borrower defense'';
0
m. In paragraph (h) introductory text, by adding the words ``under this
section'' after the words ``for which the borrower defense''; and
0
n. By removing the parenthetical authority citation at the end of the
section.
[[Page 49933]]
    The revision reads as follows:
Sec.  685.222  Borrower defenses and procedures for loans first
disbursed on or after July 1, 2017, and before July 1, 2020, and
procedures for loans first disbursed prior to July 1, 2017.
* * * * *
Appendix A to Subpart B of Part 685 [Amended]
0
19. Appendix A to subpart B of part 685 is amended by removing the word
``The'' at the beginning of the introductory text and adding in its
place the words ``As provided in 34 CFR 685.222(i)(4), the''.
0
20. Section 685.300 is amended by:
0
a. Revising paragraph (b)(8);
0
b. Removing paragraph (b)(11);
0
c. Removing ``and'' after ``any benefits associated with such a loan;''
from paragraph (b)(10);
0
d. Redesignating paragraph (b)(12) as paragraph (b)(11);
0
e. Adding ``; and'' after ``the purposes of Part D of the Act'' in
newly redesignated paragraph (b)(11);
0
f. Adding a new paragraph (b)(12);
0
g. Removing paragraphs (d) through (i); and
0
h. Removing the parenthetical authority citation at the end of the
section.
    The revision and addition read as follows:
Sec.  685.300  Agreements between an eligible school and the Secretary
for participation in the Direct Loan Program.
* * * * *
    (b) * * *
    (8) Accept responsibility and financial liability stemming from its
failure to perform its functions pursuant to the agreement;
* * * * *
    (12) 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, and 685.222.
* * * * *
0
21. Section 685.304 is amended by:
0
a. Adding paragraphs (a)(3)(iii)(A) and (B);
0
b. Revising paragraph (a)(5);
0
c. Removing the word ``and'' after the words ``conditions of the
loan;'' in paragraph (a)(6)(xii);
0
d. Redesignating paragraph (a)(6)(xiii) as paragraph (a)(6)(xvi) and
adding new paragraph (a)(6)(xiii) and paragraphs (a)(6)(xiv) and (xv);
and
0
e. Removing the parenthetical authority citation at the end of the
section.
    The additions and revision read as follows:
Sec.  685.304  Counseling borrowers.
    (a) * * *
    (3) * * *
    (iii) * * *
    (A) Online or by inte