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

Cited as:84 FR 49788
Court:Education Department
Publication Date:23 Sep 2019
Record Number:2019-19309
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.
                ---------------------------------------------------------------------------
                    \18\ 5 U.S.C. 553(d).
                ---------------------------------------------------------------------------
                    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.
                ---------------------------------------------------------------------------
                    \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.
                ---------------------------------------------------------------------------
                    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.
                ---------------------------------------------------------------------------
                    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\
                ---------------------------------------------------------------------------
                    \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\
                ---------------------------------------------------------------------------
                    \109\ See 81 FR 75973-75976.
                ---------------------------------------------------------------------------
                    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\
                ---------------------------------------------------------------------------
                    \110\ See 81 FR 75975.
                ---------------------------------------------------------------------------
                    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.
                ---------------------------------------------------------------------------
                    \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.
                ---------------------------------------------------------------------------
                    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.
                ---------------------------------------------------------------------------
                    \112\ 83 FR 37263.
                ---------------------------------------------------------------------------
                    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.
                ---------------------------------------------------------------------------
                [[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.
                ---------------------------------------------------------------------------
                    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.
                ---------------------------------------------------------------------------
                    \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.
                ---------------------------------------------------------------------------
                    \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.
                ---------------------------------------------------------------------------
                    \158\ 81 FR 31392.
                ---------------------------------------------------------------------------
                    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.
                ---------------------------------------------------------------------------
                    \159\ See: https://collegescorecard.ed.gov/.
                ---------------------------------------------------------------------------
                    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\
                ---------------------------------------------------------------------------
                    \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\
                ---------------------------------------------------------------------------
                    \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/.
                ---------------------------------------------------------------------------
                    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.
                ---------------------------------------------------------------------------
                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