[Federal Register Volume 81, Number 116 (Thursday, June 16, 2016)]
[Proposed Rules]
[Pages 39330-39422]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14052]



[[Page 39329]]

Vol. 81

Thursday,

No. 116

June 16, 2016

Part II





Department of Education





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





34 CFR Parts 30, 668, 674, et al.





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

  Federal Register / Vol. 81 , No. 116 / Thursday, June 16, 2016 / 
Proposed Rules  

[[Page 39330]]


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

DEPARTMENT OF EDUCATION

34 CFR Parts 30, 668, 674, 682, 685, and 686

RIN 1840-AD19
[Docket ID ED-2015-OPE-0103]


Student Assistance General Provisions, Federal Perkins Loan 
Program, Federal Family Education Loan Program, William D. Ford Federal 
Direct Loan Program, and Teacher Education Assistance for College and 
Higher Education Grant Program

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: The Secretary proposes to amend the regulations governing the 
William D. Ford Federal Direct Loan (Direct Loan) Program to establish 
a new Federal standard and a process for determining whether a borrower 
has a defense to repayment on a loan based on an act or omission of a 
school. We propose to also amend the Direct Loan Program regulations by 
prohibiting participating schools from using certain contractual 
provisions regarding dispute resolution processes, such as mandatory 
pre-dispute arbitration agreements or class action waivers, and to 
require certain notifications and disclosures by schools regarding 
their use of arbitration. We propose to also amend the Direct Loan 
Program regulations to codify our current policy regarding the impact 
that discharges have on the 150 percent Direct Subsidized Loan Limit. 
We also propose to amend the Student Assistance General Provisions 
regulations to revise the financial responsibility standards and add 
disclosure requirements for schools. Finally, we propose to amend the 
discharge provisions in the Federal Perkins Loan (Perkins Loan), Direct 
Loan, Federal Family Education Loan (FFEL), and Teacher Education 
Assistance for College and Higher Education (TEACH) Grant programs. The 
proposed changes would provide transparency, clarity, and ease of 
administration to current and new regulations and protect students, the 
Federal government, and taxpayers against potential school liabilities 
resulting from borrower defenses.

DATES: We must receive your comments on or before August 1, 2016.

ADDRESSES: Submit your comments through the Federal eRulemaking Portal 
or via postal mail, commercial delivery, or hand delivery. We will not 
accept comments submitted by fax or by email or those submitted after 
the comment period. To ensure that we do not receive duplicate copies, 
please submit your comments only once. In addition, please include the 
Docket ID at the top of your comments.
    If you are submitting comments electronically, we strongly 
encourage you to submit any comments or attachments in Microsoft Word 
format. If you must submit a comment in Portable Document Format (PDF), 
we strongly encourage you to convert the PDF to print-to-PDF format or 
to use some other commonly used searchable text format. Please do not 
submit the PDF in a scanned format. Using a print-to-PDF format allows 
the U.S. Department of Education (the Department) to electronically 
search and copy certain portions of your submissions.
     Federal eRulemaking Portal: Go to www.regulations.gov to 
submit your comments electronically. Information on using 
Regulations.gov, including instructions for accessing agency documents, 
submitting comments, and viewing the docket, is available on the site 
under ``Help.''
     Postal Mail, Commercial Delivery, or Hand Delivery: The 
Department strongly encourages commenters to submit their comments 
electronically. However, if you mail or deliver your comments about the 
proposed regulations, address them to Jean-Didier Gaina, U.S. 
Department of Education, 400 Maryland Ave. SW., Room 6W232B, 
Washington, DC 20202.
    Privacy Note: The Department's policy is to make all comments 
received from members of the public available for public viewing in 
their entirety on the Federal eRulemaking Portal at 
www.regulations.gov. Therefore, commenters should be careful to include 
in their comments only information that they wish to make publicly 
available.

FOR FURTHER INFORMATION CONTACT: For further information related to 
borrower defenses, Barbara Hoblitzell at (202) 453-7583 or by email at: 
[email protected]. For further information related to false 
certification and closed school loan discharges, Brian Smith at (202) 
453-7440 or by email at: [email protected]. For further information 
regarding institutional accountability, John Kolotos or Greg Martin at 
(202) 453-7646 or (202) 453-7535 or by email at: [email protected] or 
[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

    The purpose of the borrower defense regulation is to protect 
student loan borrowers from misleading, deceitful, and predatory 
practices of, and failures to fulfill contractual promises by, 
institutions participating in the Department's student aid programs. 
Most postsecondary institutions provide a high-quality education that 
equips students with new knowledge and skills and prepares them for 
their careers. However, when postsecondary institutions make false and 
misleading statements to students or prospective students about school 
or career outcomes or financing needed to pay for those programs, or 
fail to fulfill specific contractual promises regarding program 
offerings or educational services, student loan borrowers may be 
eligible for discharge of their Federal loans.
    The proposed regulations would give students access to consistent, 
clear, fair, and transparent processes to seek debt relief; protect 
taxpayers by requiring that financially risky institutions are prepared 
to take responsibility for losses to the government for discharges of 
and repayments for Federal student loans; provide due process for 
students and institutions; and warn students, using plain language 
issued by the Department, about proprietary schools at which the 
typical student experiences poor loan repayment outcomes--defined in 
these proposed regulations as a proprietary school with a loan 
repayment rate that is less than or equal to zero percent, which means 
that the typical borrower has not paid down at least a dollar on his or 
her loans--so that students can make more informed enrollment and 
financing decisions.
    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. Current regulations at 
Sec.  685.206(c) governing defenses to repayment have been in place 
since 1995 but, until recently, rarely used. Those regulations specify 
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.''
    In response to the collapse of Corinthian Colleges (Corinthian) and 
the flood of borrower defense claims submitted by Corinthian students

[[Page 39331]]

stemming from the school's misconduct, the Secretary announced in June 
2015 that the Department would develop new regulations to establish a 
more accessible and consistent borrower defense standard and clarify 
and streamline the borrower defense process to protect borrowers and 
improve the Department's ability to hold schools accountable for 
actions and omissions that result in loan discharges.
    Consistent with the Secretary's commitment, we propose regulations 
that would specify the conditions and processes under which a borrower 
may assert a defense to repayment of a Direct Loan, also referred to as 
a ``borrower defense,'' based on a new Federal standard. The current 
standard allows borrowers to assert a borrower defense if a cause of 
action would have arisen under applicable state law. In contrast, the 
new Federal standard would allow a borrower to assert a borrower 
defense on the basis of a substantial misrepresentation, a breach of 
contract, or a favorable, nondefault contested judgment against the 
school for its act or omission relating to the making of the borrower's 
Direct Loan or the provision of educational services for which the loan 
was provided. The new standard would apply to loans made after the 
effective date of the proposed regulations. The proposed regulations 
would establish a process for borrowers to assert a borrower defense 
that would be implemented both for claims that fall under the existing 
standard and for later claims that fall under the new, proposed 
standard. In addition, the proposed regulations would establish the 
conditions or events upon which an institution is or may be required to 
provide to the Department financial protection, such as a letter of 
credit, to help protect students, the Federal government, and taxpayers 
against potential institutional liabilities.
    The Department also proposes a regulation that would prohibit a 
school participating in the Direct Loan Program from requiring, through 
the use of contractual provisions or other agreements, arbitration to 
resolve claims brought by a borrower against the school that could also 
form the basis of a borrower defense under the Department's 
regulations. The proposed regulations also would prohibit a school 
participating in the Direct Loan Program from obtaining agreement, 
either in an arbitration agreement or in another form, that a borrower 
waive his or her right to initiate or participate in a class action 
lawsuit regarding such claims and from requiring students to engage in 
internal institutional complaint or grievance procedures before 
contacting accrediting or government agencies with authority over the 
school regarding such claims. The proposed regulations also would 
prohibit a school participating in the Direct Loan Program from 
requiring, through the use of contractual provisions or other 
agreements, arbitration to resolve claims brought by a borrower against 
the school that could also form the basis of a borrower defense under 
the Department's regulations. The proposed regulations would also 
impose certain notification and disclosure requirements on a school 
regarding claims that are voluntarily submitted to arbitration after a 
dispute has arisen.
    Summary of the Major Provisions of This Regulatory Action: For the 
Direct Loan Program, we propose new regulations governing borrower 
defenses that would--
     Clarify that borrowers with loans first disbursed prior to 
July 1, 2017, may assert a defense to repayment under the current 
borrower defense State law standard;
     Establish a new Federal standard for borrower defenses, 
and limitation periods applicable to the claims asserted under that 
standard, for borrowers with loans first disbursed on or after July 1, 
2017;
     Establish a process for the assertion and resolution of 
borrower defense claims made by individuals;
     Establish a process for group borrower defense claims with 
respect to both open and closed schools, including the conditions under 
which the Secretary may allow a claim to proceed without receiving an 
application;
     Provide for remedial actions the Secretary may take to 
collect losses arising out of successful borrower defense claims for 
which an institution is liable; and
     Add provisions to schools' Direct Loan program 
participation agreements that, for claims that may form the basis for 
borrower defenses--
    [ssquf] Prevent schools from requiring that students first engage 
in a school's internal complaint process before contacting accrediting 
and government agencies about the complaint;
    [ssquf] Prohibit the use of mandatory pre-dispute arbitration 
agreements by schools;
    [ssquf] Prohibit the use of class action lawsuit waivers; and
    [ssquf] To the extent schools and borrowers engage in arbitration 
in a manner consistent with applicable law and regulation, require 
schools to disclose to and notify the Secretary of arbitration filings 
and awards.
    The proposed regulations would also revise the Student Assistance 
General Provisions regulations to--
     Amend the definition of a misrepresentation to include 
omissions of information and statements with a likelihood or tendency 
to mislead under the circumstances. The definition would be amended for 
misrepresentations for which the Secretary may impose a fine, or limit, 
suspend, or terminate an institution's participation in title IV, HEA 
programs. This definition is also adopted as a basis for alleging 
borrower defense claims for Direct Loans first disbursed after July 1, 
2017;
     Clarify that a limitation may include a change in an 
institution's participation status in title IV, HEA programs from fully 
certified to provisionally certified;
     Amend the financial responsibility standards to include 
actions and events that would trigger a requirement that a school 
provide financial protection, such as a letter of credit, to insure 
against future borrower defense claims and other liabilities to the 
Department;
     Require proprietary schools with a student loan repayment 
rate that is less than or equal to zero percent to provide a 
Department-issued plain language warning to prospective and enrolled 
students and place the warning on its Web site and in all promotional 
materials and advertisements; and
     Require a school to disclose on its Web site and to 
prospective and enrolled students if it is required to provide 
financial protection, such as a letter of credit, to the Department.
    The proposed regulations would also--
     Expand the types of documentation that may be used for the 
granting of a discharge based on the death of the borrower (``death 
discharge'') in the Perkins, FFEL, Direct Loan, and TEACH Grant 
programs;
     Revise the Perkins, FFEL, and Direct Loan closed school 
discharge regulations to ensure borrowers are aware of and able to 
benefit from their ability to receive the discharge;
     Expand the conditions under which a FFEL or Direct Loan 
borrower may qualify for a false certification discharge;
     Codify the Department's current policy regarding the 
impact that a discharge of a Direct Subsidized Loan has on the 150 
Percent Direct Subsidized Loan Limit; and
     Make technical corrections to other provisions in the FFEL 
and Direct Loan Program regulations and to the regulations governing 
the Secretary's debt compromise authority.

[[Page 39332]]

    Please refer to the Summary of Proposed Changes section of this 
notice of proposed rulemaking (NPRM) for more details on the major 
provisions contained in this NPRM.
    Costs and Benefits: As further detailed in the Regulatory Impact 
Analysis, the benefits of the proposed regulations include: (1) An 
updated and clarified process and the creation of a Federal standard to 
streamline the administration of the borrower defense rule and to 
increase protections for students as well as taxpayers and the Federal 
government; (2) increased financial protections for the Federal 
government and thus for taxpayers; (3) additional information to help 
students, prospective students, and their families make educated 
decisions based on information about an institution's financial 
soundness and its borrowers' loan repayment outcomes; (4) improved 
conduct of schools by holding individual institutions accountable and 
thereby deterring misconduct by other schools; (5) improved awareness 
and usage, where appropriate, of closed school and false certification 
discharges; and (6) technical changes to improve the administration of 
the title IV, HEA programs. Costs include paperwork burden associated 
with the required reporting and disclosures to ensure compliance with 
the proposed regulations, the cost to affected institutions of 
providing financial protection, and the cost to taxpayers of borrower 
defense claims that are not reimbursed by institutions.
    Invitation to Comment: We invite you to submit comments regarding 
these proposed regulations.
    To ensure that your comments have maximum effect in developing the 
final regulations, we urge you to identify clearly the specific section 
or sections of the proposed regulations that each of your comments 
addresses, and provide relevant information and data whenever possible, 
even when there is no specific solicitation of data and other 
supporting materials in the request for comment. We also urge you to 
arrange your comments in the same order as the proposed regulations. 
Please do not submit comments that are outside the scope of the 
specific proposals in this NPRM, as we are not required to respond to 
such comments.
    We invite you to assist us in complying with the specific 
requirements of Executive Orders 12866 and 13563 and their overall 
requirement of reducing regulatory burden that might result from these 
proposed regulations. Please let us know of any further ways we could 
reduce potential costs or increase potential benefits while preserving 
the effective and efficient administration of the Department's programs 
and activities.
    During and after the comment period, you may inspect all public 
comments about the proposed regulations by accessing Regulations.gov. 
You may also inspect the comments in person at 400 Maryland Ave. SW., 
Washington, DC, between 8:30 a.m. and 4:00 p.m., Washington, DC time, 
Monday through Friday of each week except Federal holidays. To schedule 
a time to inspect comments, please contact one of the persons listed 
under FOR FURTHER INFORMATION CONTACT.
    Assistance to Individuals with Disabilities in Reviewing the 
Rulemaking Record: On request, we will provide an appropriate 
accommodation or auxiliary aid to an individual with a disability who 
needs assistance to review the comments or other documents in the 
public rulemaking record for the proposed regulations. To schedule an 
appointment for this type of accommodation or auxiliary aid, please 
contact one of the persons listed under FOR FURTHER INFORMATION 
CONTACT.

Background

    The Secretary proposes to amend Sec. Sec.  30.70, 668.14, 668.41, 
668.71, 668.90, 668.93, 668.171, 668.175, 674.33, 674.61, 682.202, 
682.211, 682.402, 682.405, 682.410, 685.200, 685.205, 685.206, 685.209, 
685.212, 685.214, 685.215, 685.200, 685.220, 685.300, 685.308, and 
686.42 of title 34 of the Code of Federal Regulations (CFR), and also 
to add new Sec. Sec.  668.176, 685.222, 685.223, and 685.310 to that 
title. The regulations in 34 CFR part 30 pertain to Debt Collection. 
The regulations in 34 CFR part 668 pertain to Student Assistance 
General Provisions. The regulations in 34 CFR part 674 pertain to the 
Perkins Loan Program. The regulations in 34 CFR part 682 pertain to the 
FFEL Program. The regulations in 34 CFR part 685 pertain to the Direct 
Loan Program. The regulations in 34 CFR part 686 pertain to the TEACH 
Grant Program. We are proposing these amendments to: (1) Specify that 
the standards used to identify an act or omission of a school that 
provides the basis for a borrower defense will depend on when the 
Direct Loan was first disbursed; (2) establish a new Federal standard 
and limitation periods that the Department will use to identify an act 
or omission of an institution that constitutes a borrower defense; (3) 
establish the procedures to be used for a borrower to initiate a 
borrower defense; (4) establish the standards and certain procedures 
that the Department would use to determine the liability of an 
institution for the amount of relief arising from a borrower defense; 
(5) prohibit schools' use of mandatory pre-dispute arbitration 
agreements or class action bans to resolve disputes for claims that 
could also form the basis of borrower defense claims or require 
borrowers to waive any rights to initiate or participate in class 
actions regarding such claims; and impose certain notification and 
disclosure requirements relating to a school's use of arbitration; (6) 
establish the conditions or events upon which an institution is or may 
be required to provide to the Department financial protection, such as 
a letter of credit, to help protect the Federal government, and thus 
taxpayers, against potential institutional liabilities; (7) require a 
proprietary institution with a student loan repayment rate that is less 
than or equal to zero percent to place a Department-issued plain 
language warning on its Web site and in advertising and promotional 
materials, as well as to provide the warning to prospective and 
enrolled students; (8) require that a school disclose to prospective 
and enrolled students if it is required to provide financial protection 
to the Department; (9) expand the allowable documentation that may be 
submitted to demonstrate eligibility for a death discharge of a title 
IV, HEA loan or a TEACH Grant service obligation; (10) revise the 
closed school discharge regulations to ensure borrowers are aware of 
and able to benefit from their ability to receive the discharge; (11) 
expand the eligibility criteria for the false certification loan 
discharge; (12) make technical corrections to the regulation that 
describes the authority of the Department to compromise, or suspend or 
terminate collection of, debts; (13) make technical corrections to the 
regulations governing the Pay as You Earn (PAYE) and Revised Pay as You 
Earn (REPAYE) repayment plans; (14) allow for the consolidation of 
Nurse Faculty Loans; (15) allow borrowers to obtain a Direct 
Consolidation Loan if the borrower consolidates at least one of the 
eligible loans listed in Sec.  685.220(b); (16) clarify the conditions 
under which the capitalization of interest by FFEL Program loan holders 
is permitted; and (17) codify the conditions under which the discharge 
of a Direct Subsidized Loan will lead to the elimination or 
recalculation of a Subsidized Usage Period under the 150 Percent Direct 
Subsidized Loan Limit or the restoration of interest subsidy.

Public Participation

    On August 20, 2015, we published a notice in the Federal Register 
(80 FR 50588) announcing our intent to

[[Page 39333]]

establish a negotiated rulemaking committee under section 492 of the 
HEA to develop proposed regulations for determining which acts or 
omissions of an institution of higher education (``institution'' or 
``school'') a borrower may assert as a borrower defense under the 
Direct Loan Program and the consequences of such borrower defenses for 
borrowers, institutions, and the Secretary. We also announced two 
public hearings at which interested parties could comment on the topic 
suggested by the Department and suggest additional topics for 
consideration for action by the negotiated rulemaking committee. The 
hearings were held on--
    September 10, 2015, in Washington, DC; and
    September 16, 2015, in San Francisco, CA.
    Transcripts from the public hearings are available at www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html.
    We also invited parties unable to attend a public hearing to submit 
written comments on the proposed topics and to submit other topics for 
consideration. Written comments submitted in response to the August 20, 
2015, Federal Register notice may be viewed through the Federal 
eRulemaking Portal at www.regulations.gov, within docket ID ED-2015-
OPE-0103. Instructions for finding comments are also available on the 
site under ``How to Use Regulations.gov'' in the Help section.
    On October 20, 2015, we published a notice in the Federal Register 
(80 FR 63478) requesting nominations for negotiators to serve on the 
negotiated rulemaking committee and setting a schedule for committee 
meetings.
    On December 21, 2015, we published a notice in the Federal Register 
(80 FR 79276) requesting additional nominations for negotiators to 
serve on the negotiated rulemaking committee.

Negotiated Rulemaking

    Section 492 of the HEA, 20 U.S.C. 1098a, requires the Secretary to 
obtain public involvement in the development of proposed regulations 
affecting programs authorized by title IV of the HEA. After obtaining 
extensive input and recommendations from the public, including 
individuals and representatives of groups involved in the title IV, HEA 
programs, the Secretary in most cases must subject the proposed 
regulations to a negotiated rulemaking process. If negotiators reach 
consensus on the proposed regulations, the Department agrees to publish 
without alteration a defined group of regulations on which the 
negotiators reached consensus unless the Secretary reopens the process 
or provides a written explanation to the participants stating why the 
Secretary has decided to depart from the agreement reached during 
negotiations. Further information on the negotiated rulemaking process 
can be found at: www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html.
    On October 20, 2015, the Department published a notice in the 
Federal Register (80 FR 63478) announcing its intention to establish a 
negotiated rulemaking committee to prepare proposed regulations 
governing the Federal Student Aid programs authorized under title IV of 
the HEA. The notice set forth a schedule for the committee meetings and 
requested nominations for individual negotiators to serve on the 
negotiating committee.
    The Department sought negotiators to represent the following 
groups: Students/borrowers; legal assistance organizations that 
represent students/borrowers; consumer advocacy organizations; groups 
representing U.S. military servicemembers or veteran Federal loan 
borrowers; financial aid administrators at postsecondary institutions; 
State attorneys general (AGs) and other appropriate State officials; 
State higher education executive officers; institutions of higher 
education eligible to receive Federal assistance under title III, parts 
A, B, and F, and title V of the HEA, which include Historically Black 
Colleges and Universities, Hispanic-Serving Institutions, American 
Indian Tribally Controlled Colleges and Universities, Alaska Native and 
Native Hawaiian-Serving Institutions, Predominantly Black Institutions, 
and other institutions with a substantial enrollment of needy students 
as defined in title III of the HEA; two-year public institutions of 
higher education; four-year public institutions of higher education; 
private, nonprofit institutions of higher education; private, for-
profit institutions of higher education; FFEL Program lenders and loan 
servicers; and FFEL Program guaranty agencies and guaranty agency 
servicers (including collection agencies). The Department considered 
the nominations submitted by the public and chose negotiators who would 
represent the various constituencies.
    On December 21, 2015, the Department published a notice in the 
Federal Register (80 FR 79276) requesting additional nominations for 
negotiators to serve on the negotiated rulemaking committee to 
represent constituencies that were not represented following the 
initial request for nominations. The Department sought negotiators to 
represent the following groups: State higher education executive 
officers; institutions of higher education eligible to receive Federal 
assistance under title III, parts A, B, and F, and title V of the HEA; 
two-year public institutions of higher education; private, for-profit 
institutions of higher education; and national, regional, or 
specialized accrediting agencies.
    The negotiating committee included the following members:
    Ann Bowers, for-profit college borrower, and Chris Lindstrom 
(alternate), U.S. Public Interest Research Group, representing 
students/borrowers.
    Noah Zinner, Housing and Economic Rights Advocates, and Eileen 
Connor (alternate), Project on Predatory Student Lending at Harvard Law 
School (at the time of nomination, New York Legal Assistance Group) 
representing legal assistance organizations that represent students.
    Maggie Thompson, Higher Ed, Not Debt, and Margaret Reiter 
(alternate), attorney, representing consumer advocacy organizations.
    Bernard Eskandari, Office of the Attorney General of California, 
and Mike Firestone (alternate), Commonwealth of Massachusetts Office of 
the Attorney General, representing State attorneys general and other 
appropriate State officials.
    Walter Ochinko, Veterans Education Success, Will Hubbard (first 
alternate), Student Veterans of America, and Derek Fronabarger (second 
alternate), Student Veterans of America, representing U.S. military 
servicemembers or veterans.
    Karen Solinski, Higher Learning Commission, and Dr. Michale McComis 
(alternate), Accrediting Commission of Career Schools and Colleges, 
representing accreditors.
    Becky Thompson, Washington Student Achievement Council, 
representing State higher education executive officers.
    Alyssa Dobson, Slippery Rock University, and Mark Justice 
(alternate), The George Washington University, representing financial 
aid administrators.
    Sharon Oliver, North Carolina Central University, and Emily London 
Jones (alternate), Xavier University of Louisiana, representing 
minority-serving institutions.
    Angela Johnson, Cuyahoga Community College, and Shannon Sheaff 
(alternate), Mohave Community College, representing two-year public 
institutions.
    Kay Lewis, University of Washington, and Jean McDonald Rash 
(alternate),

[[Page 39334]]

Rutgers University, representing four-year public institutions.
    Christine McGuire, Boston University, and David Sheridan 
(alternate), Columbia University, representing private, nonprofit 
institutions.
    Dennis Cariello, Hogan Marren Babbo & Rose, Ltd., and Chris DeLuca 
(alternate), DeLuca Law, representing private, for-profit institutions.
    Wanda Hall, EdFinancial Services, and Darin Katzberg (alternate), 
Nelnet, representing FFEL Program lenders and loan servicers.
    Betsy Mayotte, American Student Assistance, and Jaye O'Connell 
(alternate), Vermont Student Assistance Corporation, representing FFEL 
Program guaranty agencies and guaranty agency servicers.
    Gail McLarnon, U.S. Department of Education, representing the 
Department.
    The negotiated rulemaking committee met to develop proposed 
regulations on January 12-14, 2016, February 17-19, 2016, and March 16-
18, 2016. The Department held informational sessions by telephone for 
interested members of the committee on March 1 and March 3, 2016, to 
review the Department's loan repayment rate disclosure proposal, and on 
March 9 and March 10, 2016, at the request of a non-Federal negotiator, 
to hear from Professor Adam Zimmerman of Loyola Law School regarding 
agency class settlement processes.
    At its first meeting, the negotiating committee reached agreement 
on its protocols and proposed agenda. The protocols provided, among 
other things, that the committee would operate by consensus. Consensus 
means that there must be no dissent by any member in order for the 
committee to have reached agreement. Under the protocols, if the 
committee reached a final consensus on all issues, the Department would 
use the consensus-based language in its proposed regulations. 
Furthermore, the Department would not alter the consensus-based 
language of its proposed regulations unless the Department reopened the 
negotiated rulemaking process or provided a written explanation to the 
committee members regarding why it decided to depart from that 
language.
    During the first meeting, the negotiating committee agreed to 
negotiate an agenda of seven issues related to student financial aid. 
These seven issues were: Borrower defenses, false certification 
discharges, institutional accountability, electronic death 
certificates, consolidation of Nurse Faculty Loans, interest 
capitalization, and technical corrections to the PAYE and REPAYE plans. 
During the second meeting, the negotiating committee agreed to add two 
additional issues: Closed school discharges and a technical correction 
to the regulations that describe the authority of the Department to 
compromise, or suspend, or terminate collection of, debts. Under the 
protocols, a final consensus would have to include consensus on all 
nine issues.
    During committee meetings, the negotiators reviewed and discussed 
the Department's drafts of regulatory language and the committee 
members' alternative language and suggestions. At the final meeting on 
March 18, 2016, the committee did not reach consensus on the 
Department's proposed regulations. For that reason, and according to 
the committee's protocols, all parties who participated or were 
represented in the negotiated rulemaking, in addition to all members of 
the public, may comment freely on the proposed regulations. For more 
information on the negotiated rulemaking sessions, please visit: http://www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html.

Summary of Proposed Changes

    The proposed regulations would--
     Amend Sec.  685.206 to clarify that existing regulations 
with regard to borrower defenses apply to loans first disbursed prior 
to July 1, 2017, and that a borrower defense asserted pursuant to this 
section will be subject to the procedures in proposed Sec.  685.222(e) 
to (k);
     Amend Sec.  685.206 to remove the period of limitation on 
the Secretary's ability to recover from institutions the amount of the 
losses incurred by the Secretary on loans to which an approved borrower 
defense applies;
     Amend Sec.  685.206 to clarify that a borrower defense may 
be asserted as to an act or omission of the school that relates to the 
making of the loan or the provision of educational services that would 
give rise to a cause of action against the school under applicable 
State law;
     Add a new borrower defense section at Sec.  685.222 that 
applies to loans first disbursed on or after July 1, 2017;
     Provide in Sec.  685.222(a) that a borrower defense may be 
established if a preponderance of the evidence shows that the borrower 
has a borrower defense claim that relates to the making of the 
borrower's Direct Loan or the provision of educational services and 
meets the requirements in Sec.  685.222(b), (c), or (d);
     Provide in Sec.  685.222(a) 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;
     Define in Sec.  685.222(a) the terms ``borrower'' and 
``borrower defense'';
     Amend the definition of ``misrepresentation'' in Sec.  
668.71 to define a misleading statement as one that ``includes any 
statement that has the likelihood or tendency to mislead under the 
circumstances'' and to include ``any statement that omits information 
in such a way as to make the statement false, erroneous, or 
misleading'';
     Establish in Sec.  685.222(b), (c), and (d) a new Federal 
standard upon which a borrower defense may be based--a judgment against 
the school, a breach of contract by the school, or a substantial 
misrepresentation by the school;
     Provide in Sec.  685.222(d)(2) that in determining whether 
a school made a substantial misrepresentation, the Secretary may 
consider certain factors as to whether the reliance of a borrower on 
the misrepresentation was reasonable;
     Establish in Sec.  685.222(e) a procedure under which an 
individual borrower may assert a borrower defense;
     Provide in Sec.  685.222(f) a general description of a 
group borrower defense claim process, including the conditions under 
which the Secretary may allow a claim to proceed without receiving an 
application;
     Establish in Sec.  685.222(g) and (h) processes for 
borrower defense claims made by groups of borrowers with respect to 
closed schools and open schools, respectively;
     Specify in Sec.  685.222(i) that the relief granted to a 
borrower with an approved borrower defense is based on the facts 
underlying the borrower's claim;
     Require in Sec.  685.222(j) and (k) cooperation by the 
borrower in any borrower defense proceeding and, upon the granting of 
relief to a borrower, provide for the transfer to the Secretary of the 
borrower's right to recovery against third parties;
     Add a new paragraph (k) to Sec.  685.212 to include an 
approved borrower defense among the reasons for a discharge of a loan 
obligation, and to address borrower defense claims on Direct 
Consolidation Loans;
     Amend Sec.  685.205 to expand the circumstances under 
which the Secretary grants forbearance without requiring documentation 
from the borrower to include periods of time when a borrower defense 
has been asserted and is under review;
     Amend Sec.  685.300 to prevent schools from requiring that 
students first engage in a school's internal complaint process before 
contacting accrediting and government agencies about the

[[Page 39335]]

complaint; prohibit the use of pre-dispute mandatory arbitration 
agreements by schools; prohibit the use of class action lawsuit 
waivers; and require schools to disclose to and notify the Secretary of 
arbitration filings;
     Clarify in Sec.  685.308 that the Secretary may recover 
from the school losses from loan discharges, including losses incurred 
from approved borrower defenses;
     Amend Sec.  668.171 to include conditions and events that 
trigger a requirement that the school provide financial protection, 
such as a letter of credit. Such conditions and events include 
incurring significant amounts of liability in recent years for borrower 
defense claim losses, a school's inability to pay claims, and events 
that would compromise a school's ability to continue its participation 
in the title IV, HEA programs;
     Require in Sec.  668.41 a proprietary school with a 
student loan repayment rate that is less than or equal to zero percent 
to place a Department-issued plain language warning on its Web site and 
in advertising and promotional materials, as well as to provide the 
warning to prospective and enrolled students;
     Require in Sec.  668.41 that a school disclose to 
prospective and enrolled students if it is required to provide 
financial protection, such as a letter of credit, to the Department;
     Amend Sec.  668.175 to state the amounts of financial 
protection, such as letters of credit, required in the event of 
particular occurrences;
     Clarify in Sec.  668.90 when a hearing official must 
uphold the limitation or termination requested by the Secretary for 
disputes related to the amount of financial protection, such as a 
letter of credit, for a school's failure under the financial 
responsibility standards;
     Clarify in Sec.  668.93 that a limitation sought by the 
Secretary on a school's participation in title IV, HEA programs may 
include a change in participation from fully certified to provisionally 
certified;
     Amend Sec. Sec.  674.61, 682.402, 685.212, and 686.42 to 
allow for a death discharge of a loan or TEACH Grant service obligation 
to be granted based on an original or certified copy of a death 
certificate that is submitted electronically or sent by facsimile 
transmission, or through verification of death in an electronic Federal 
or State database that is approved for use by the Secretary;
     Amend Sec. Sec.  668.14(b), 674.33(g), 682.402(d), and 
685.214(f) to increase outreach by the Secretary and schools and make 
more information available to borrowers eligible for a closed school 
discharge so that they are aware of this option;
     Amend Sec.  685.215 to update and expand the existing 
categories of false certification discharge to include the improper 
certification of eligibility of a student who is not a high school 
graduate and false certification of a borrower's academic progress;
     Amend Sec.  682.211 to require lenders to grant a 
mandatory administrative forbearance for borrowers who have filed a 
borrower defense claim with the Secretary with the intent of seeking 
relief under Sec.  685.212(k) after consolidating into the Direct Loan 
Program;
     Update the provisions in Sec.  30.70 to reflect the 
increased debt resolution authority provided in Public Law 101-552 that 
authorizes the Department to resolve debts up to $100,000 without 
approval from the Department of Justice (DOJ) as well as other changes 
to the Department's claim resolution authority;
     Amend Sec.  685.209 by making technical corrections and 
clarifying changes to the PAYE and REPAYE repayment plan regulations;
     Amend Sec.  685.220 to allow a borrower to obtain Direct 
Consolidation Loan, if the borrower consolidates any of the eligible 
loans listed in Sec.  685.220(b); and
     Clarify in Sec. Sec.  682.202, 682.405, and 682.410 that 
guaranty agencies and FFEL Program lenders are not permitted to 
capitalize outstanding interest on FFEL loans when the borrower 
rehabilitates a defaulted FFEL loan; and
     Amend Sec.  685.200 to codify the Department's current 
practice regarding the elimination or recalculation of a subsidized 
usage period or the restoration of interest subsidy under the 150 
Percent Direct Subsidized Loan Limit when a Direct Subsidized Loan is 
discharged.

Significant Proposed Regulations

    We group major issues according to subject, with the applicable 
sections of the proposed regulations referenced in parentheses. We 
discuss other substantive issues under the sections of the proposed 
regulations to which they pertain. Generally, we do not address 
proposed regulatory provisions that are technical or otherwise minor in 
effect.

Borrower Defenses (Sec. Sec.  668.71, 685.205, 685.206, and 685.222)

    Background: The proposed regulations address several topics related 
to the administration of title IV, HEA student aid programs and 
benefits and options for borrowers. The Department first implemented 
borrower defense regulations for the Direct Loan Program in the 1995-
1996 academic year to protect borrowers. The Department's original 
intent was for this rule to be in place for the 1995-1996 academic 
year, and then to develop a more extensive rule for both the Direct 
Loan and FFEL Loan programs through negotiated rulemaking in the 
following year.
    However, based on the recommendation of non-Federal negotiators in 
the spring of 1995, the Secretary decided not to develop further 
regulations for the Direct Loan and FFEL programs. 60 FR 37768. As a 
result, the regulations have not been updated in two decades to 
establish appropriate processes or other necessary information to allow 
borrowers to effectively utilize their options under the borrower 
defense regulation.
    In May 2015, Corinthian, a publicly traded company operating 
numerous postsecondary schools that enrolled over 70,000 students at 
more than 100 campuses nationwide, filed for bankruptcy. Corinthian 
collapsed under deteriorating financial conditions and while subject to 
multiple State and Federal investigations, one of which resulted in a 
finding by the Department that the college had misrepresented its job 
placement rates. Upon the closure of Corinthian, which included Everest 
Institute, Wyotech, and Heald College, the Department received 
thousands of claims for student loan relief from Corinthian students.
    The Department is committed to ensuring that students harmed by 
Corinthian's fraudulent practices receive the relief to which they are 
entitled under the current closed school and borrower defense 
regulations. The Department appointed a Special Master in June 2015 to 
create and oversee a process to provide debt relief for these 
Corinthian borrowers who applied for Federal student loan discharges 
based on claims against Corinthian.
    The current borrower defense regulation, which has existed since 
1995 but has rarely been used, requires a borrower to demonstrate that 
a school's acts or omissions would give rise to a cause of action under 
``applicable State law.'' The regulation is silent on the process a 
borrower follows to assert a borrower defense claim.
    The landscape of higher education has changed significantly over 
the past 20 years. The role of distance education in the higher 
education sector has grown substantially. In the 1999-2000 academic 
year, about eight percent of students were enrolled in at least one 
distance education course; by the 2007-2008 academic year, that number 
had

[[Page 39336]]

grown to 20 percent.\1\ Recent IPEDS data indicate that in the fall of 
2013, 26.4 percent of students at degree-granting, title IV-
participating institutions were enrolled in at least one distance 
education class.\2\ Much of this growth occurred within and coincided 
with the growth of the proprietary higher education sector. In the fall 
of 1995, degree-granting, for-profit institutions enrolled 
approximately 240,000 students. In the fall of 2014, degree-granting, 
for-profit schools enrolled over 1.5 million students.\3\ These changes 
to the higher education industry have allowed students to enroll in 
colleges based in other States and jurisdictions with relative ease.
---------------------------------------------------------------------------

    \1\ Learning at a Distance: Undergraduate Enrollment in Distance 
Education Courses and Degree Programs (http://nces.ed.gov/pubs2012/2012154.pdf).
    \2\ 2014 Digest of Education Statistics: Table 311.15: Number 
and percentage of students enrolled in degree-granting postsecondary 
institutions, by distance education participation, location of 
student, level of enrollment, and control and level of institution: 
Fall 2012 and fall 2013.
    \3\ 2015 Digest of Education Statistics: Table 303.10: Total 
fall enrollment in degree-granting postsecondary institutions, by 
attendance status, sex of student, and control of institution: 
Selected years, 1947 through 2025--http://nces.ed.gov/programs/digest/d14/tables/dt14_303.10.asp?current=yes.
---------------------------------------------------------------------------

    These changes have had an impact on the Department's ability to 
apply its borrower defense regulations. The current borrower defense 
regulations do not identify which State's law is considered 
``applicable'' State law on which the borrower's claim can be based.\4\ 
Generally, the regulation was assumed to refer to the laws of the State 
in which the institution was located; we had little occasion to address 
differences in protection for borrowers in States that offer little 
protection from school misconduct or borrowers who reside in one State 
but are enrolled via distance education in a program based in another 
State. Some States have extended their rules to protect these students, 
while others have not. As a result of the difficulties in application 
and interpretation of the current State law standard, as well as the 
lack of clarity surrounding the procedures that apply for borrower 
defense, the Department took additional steps to improve the borrower 
defense claim process.
---------------------------------------------------------------------------

    \4\ In the few instances in which claims have been recognized 
under current regulations, borrowers and the school were typically 
located in the same State.
---------------------------------------------------------------------------

    In a Federal Register notice published on October 20, 2015 (80 FR 
63478), the Department announced its intent to establish a negotiated 
rulemaking committee to develop proposed regulations that establish, 
among other items, the criteria that the Department will use to 
identify acts or omissions of an institution that constitute, for 
borrowers of Federal Direct Loans, a borrower defense, including a 
Federal standard, the procedures to be used for a borrower to establish 
a borrower defense, and the standards and procedures that the 
Department will use to determine the liability of the institution for 
losses arising from approved borrower defenses.
    We propose to create a new Sec.  685.222, and amend Sec. Sec.  
668.71, 685.205, and 685.206, to establish, effective July 1, 2017, a 
new Federal standard for borrower defenses, new limitation periods for 
asserting borrower defenses, and processes for the assertion and 
resolution of borrower defense claims. In the following sections, we 
describe in more detail these proposed changes and other clarifying 
changes proposed to improve the borrower defense process.

Borrower Defenses--General (Sec.  685.222(a))

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution of 
higher education a borrower may assert as a defense to repayment of a 
Direct Loan.
    Section 487 of the HEA provides that the Secretary can take 
enforcement action against an institution participating in the title 
IV, HEA programs that substantially misrepresents the nature of the 
institution's education program, its financial charges, or the 
employability of its graduates.
    Current Regulations: Section 685.206(c) establishes the conditions 
under which a Direct Loan borrower may assert a borrower defense, the 
relief afforded by the Secretary in the event the borrower's claim is 
successful, and the Secretary's authority to recover from the school 
any loss that results from a successful borrower defense. Specifically, 
Sec.  685.206(c) provides that a borrower defense may be asserted based 
upon any act or omission of the school that would give rise to a cause 
of action against the school under applicable State law. The current 
regulations in Sec.  685.206(c) are described in more detail under 
``Borrower Responsibilities and Defenses (34 CFR 685.206).''
    Proposed Regulations: Proposed Sec.  685.222(a) would provide that 
borrower defense claims asserted by a borrower for Direct Loans first 
disbursed before July 1, 2017, are considered by the Secretary in 
accordance with the provisions of Sec.  685.206(c), while borrower 
defense claims asserted by a borrower for Direct Loans first disbursed 
on or after July 1, 2017, will be considered by the Secretary in 
accordance with the provisions of Sec.  685.222.
    For borrower defense claims asserted by a borrower for Direct Loans 
first disbursed on or after July 1, 2017, proposed Sec.  685.222 would 
establish a new Federal standard and new limitation periods. Proposed 
Sec.  685.222 would also establish a process for the assertion and 
resolution of all borrower defense claims--both those made under Sec.  
685.206(c) for Direct Loans first disbursed prior to July 1, 2017, and 
for those made under proposed Sec.  685.222. We describe the proposed 
regulations relating to the new Federal standard and new limitation 
periods under ``Federal Standard and Limitation Periods (34 CFR 
685.222(b), (c), and (d) and 34 CFR 668.71),'' and the borrower defense 
claim process under ``Process for Individual Borrowers (34 CFR 
685.222(e)),'' ``Group Process for Borrower Defenses--General (34 CFR 
685.222(f)),'' ``Group Process for Borrower Defenses--Closed School (34 
CFR 685.222(g)),'' and ``Group Process for Borrower Defense Claims--
Open School (34 CFR 685.222(h)).''
    For borrower defense claims asserted by a borrower for Direct Loans 
first disbursed on or after July 1, 2017, proposed Sec.  685.222(a)(2) 
would provide that a preponderance of the evidence must show that the 
borrower has a borrower defense that relates to the making of the 
borrower's Direct Loan or the provision of educational services by the 
school to the student and that meets the requirements under Sec.  
685.222(b), (c), or (d), which are described in detail under ''Federal 
Standard and Limitation Periods (34 CFR 685.222(b), (c), and (d) and 34 
CFR 668.71).''
    Section 685.222(a)(3) would clarify that a violation by the school 
of an eligibility or compliance requirement in the HEA or its 
implementing regulations is not a basis for a borrower defense unless 
that conduct would by itself, and without regard to the fact that the 
conduct violated an HEA requirement, give rise to a cause of action 
against the school under either applicable State law or under the new 
Federal standard, whichever is applicable depending on the first 
disbursement date of the Direct Loan in question.
    Proposed Sec.  685.222(a)(4) would define ``borrower'' and 
``borrower defense.'' Under the proposed definitions, ``borrower'' 
would mean the borrower and, in the case of a Direct PLUS Loan, the 
student and any endorsers. Under proposed Sec.  685.222(a)(5), 
``borrower defense'' would include one or both of

[[Page 39337]]

the following: a defense to repayment of amounts owed to the Secretary 
on a Direct Loan, in whole or in part; and a right to recover amounts 
previously collected by the Secretary on the Direct Loan, in whole or 
in part.
    If the borrower asserts both a borrower defense under Sec.  685.222 
and any other objection to an action of the Secretary with regard to 
the Direct Loan at issue (such as a claim for a closed school discharge 
or false certification discharge), the Secretary would notify the 
borrower of the order in which the Secretary considers the borrower 
defense and any other objections. The order in which the Secretary will 
consider objections, including borrower defense, would be determined by 
the Secretary as appropriate under the circumstances.
    Reasons: We propose to establish in Sec.  685.222 a new Federal 
standard and new limitation periods for borrower defense claims 
asserted with respect to loans first disbursed after the expected 
effective date of these proposed regulations--July 1, 2017--as well as 
a process for the assertion and resolution of all borrower defense 
claims, both those made under proposed Sec.  685.206(c) and those made 
under proposed Sec.  685.222. The Department believes that the proposed 
changes could reduce the number of borrowers who are struggling to meet 
their student loan obligations. During the public comment periods of 
the negotiated rulemaking sessions, many public commenters who were 
borrowers mentioned that they believed that they had been defrauded by 
their institutions of higher education and were unable to pay their 
student loans or obtain debt relief under the current regulations. For 
instance, many of these borrowers stated that they had relied upon the 
misrepresentation by their school as to employment outcomes, but later 
found out that they were unable to secure employment as had been 
represented to them before their enrollment.
    We discuss more specifically our reasons for adopting a new Federal 
standard and limitation periods under the discussion of ``Federal 
Standard and Limitation Periods (34 CFR 685.222(b), (c), and (d) and 34 
CFR 668.71).'' We discuss our reasons for establishing a borrower 
defense claim process under ``Process for Individual Borrowers (34 CFR 
685.222(e),'' ``Group Process for Borrower Defenses--General (34 CFR 
685.222(f),'' ``Group Process for Borrower Defenses--Closed School (34 
CFR 685.222(g),'' and ``Group Process for Borrower Defense Claims--Open 
School (23 CFR 685.222(h).'' We explain why the borrower defense 
regulations apply only to the Direct Loan Program under ``Discharge of 
a Loan Obligation (Sec.  685.212).''
    Proposed Sec.  685.222(a) would establish provisions of general 
applicability for borrower defense claims. As noted above, we would 
clarify in paragraphs (a) and (b) of that section that borrower defense 
claims for loans disbursed before July 1, 2017, are made under Sec.  
685.206(c) and that borrower defense claims for loans disbursed on or 
after July 1, 2017, are made under proposed Sec.  685.222. Although 
proposed Sec.  685.206(c) also would specify that it applies to 
borrower defense claims for loans disbursed before July 1, 2017, we 
believe that also stating the general framework in Sec.  685.222 would 
help eliminate any confusion as to which standard applies.
    In proposed Sec.  685.222(a)(2) and (5), we would establish the 
basic elements of borrower defense claims for loans disbursed on or 
after July 1, 2017. Specifically, proposed Sec.  685.222(a)(2) and (5) 
would require that a borrower defense claim:
     Is supported by a preponderance of the evidence;
     Relates to the making of the borrower's Direct Loan or the 
provision of educational services; and
     Meets the requirements under paragraph (b), (c), or (d) of 
the section.
    In addition, proposed Sec.  685.222(a)(2) would clarify that a 
claim may be brought by a borrower to discharge amounts owed to the 
Secretary on a Direct Loan, in whole or in part, or to recover amounts 
previously collected by the Secretary on the Direct Loan, in whole or 
in part, or both.
    A claim is supported by a ``preponderance of the evidence'' if 
there is sufficient evidence produced to persuade the decision maker 
that it is more likely than not that something happened or did not 
happen as claimed. In practice, the decision maker in a borrower 
defense proceeding would measure the value, or weight, of the evidence 
(including attestations, testimony, documents, and physical evidence) 
produced to prove that the borrower defense claim as alleged is true. 
We believe this evidentiary standard is appropriate as it is the 
typical standard in most civil proceedings. Additionally, the 
Department uses a preponderance of the evidence standard in other 
processes regarding borrower debt issues. See 34 CFR 34.14(b), (c) 
(administrative wage garnishment); 34 CFR 31.7(e) (Federal salary 
offset). We believe that this evidentiary standard strikes a balance 
between ensuring that borrowers who have been harmed are not subject to 
an overly burdensome evidentiary standard and protecting the Federal 
government, taxpayers, and institutions from unsubstantiated claims. We 
discuss the types of evidence that may be presented in support of a 
claim under ``Process for Individual Borrowers (34 CFR 685.222(e)).''
    Proposed Sec.  685.222 would clarify that, whether a borrower 
defense is brought under the standard described in Sec.  685.206(c) or 
the standards in proposed Sec.  685.222(b), (c), and (d), the 
Department's position is that it will acknowledge a borrower defense 
asserted under the regulations ``only if the cause of action directly 
relates to the loan or to the school's provision of educational 
services for which the loan was provided.'' 60 FR 37768, 37769. Such 
claims may include, for example, fraud in the making of the Direct Loan 
in the course of student recruitment or a failure to provide 
educational services. In some circumstances, this may include post-
enrollment services like career advising or placement services. The 
Department does not recognize as a defense against repayment of the 
loan a cause of action that is not directly related to the loan or to 
the provision of educational services, such as personal injury tort 
claims or actions based on allegations of sexual or racial harassment. 
Id. The proposed language is consistent with this longstanding position 
and is also reflected in similar proposed language for Sec.  
685.206(c). Non-Federal negotiators also requested clarification on 
whether borrower defenses may be asserted as to tort claims asserting 
that educational institutions and their employees breached their duty 
to educate students adequately (otherwise known as ``educational 
malpractice''), or to issues relating to academic and disciplinary 
disputes. Courts that have considered claims characterized as 
educational malpractice have generally concluded that State law does 
not recognize such claims.\5\ The Department does not intend in these 
regulations to create a different legal standard, and for existing 
loans would apply that same principle under Sec.  685.206(c), and would 
maintain that same position in applying the standards proposed in Sec.  
685.222. Claims relating to the quality of a student's education or 
matters regarding academic and disciplinary disputes within the

[[Page 39338]]

judgment and discretion of a school are outside the scope of the 
borrower defense regulations. The Department recognizes, however, that 
in certain circumstances, such as where a school may make specific 
misrepresentations about its facilities, financial charges, programs, 
or employability of its graduates, such misrepresentations may function 
as the basis of a borrower defense as opposed to being a claim 
regarding educational quality.\6\ Additionally, a breach of contract 
borrower defense may be raised where a school has failed to deliver 
specific obligations, such as programs and services, it has committed 
to by contract. The Department also notes that the limitations of the 
scope of the borrower defense regulations should not be taken to 
represent any view that other issues are not properly the concern of 
the Department as well as other Federal agencies, State authorizers and 
other State agencies, accreditors, and the courts.
---------------------------------------------------------------------------

    \5\ See Bell v. Board of Educ. of City of West Haven, 55 Conn. 
App. 400, 739 A.2d 321, 139 Ed. Law Rep. 538 (1999), noting that the 
vast majority of courts have refused to recognize a cause of action 
for educational malpractice; Sain v. Cedar Rapids Cmty. Sch. Dist., 
626 NW.2d 115, 121 (Iowa 2001) (Educational malpractice almost 
universally rejected as a cause of action).
    \6\ See, e.g., Sain v. Cedar Rapids Cmty. Sch. Dist., 626 NW.2d 
115, 121 (Iowa 2001), recognizing that tort of negligent 
misrepresentation applicable in education context.
---------------------------------------------------------------------------

    With regard to the other required elements of a borrower defense 
claim, we discuss our reason for requiring a borrower defense to meet 
the requirements under paragraphs (b), (c), and (d) of proposed Sec.  
685.222 under ``Federal Standard and Limitation Periods (34 CFR 
685.222(b), (c), and (d) and 34 CFR 668.71).''
    Proposed Sec.  685.222(a)(3) would set forth the Department's 
longstanding position that an act or omission by the school that 
violates an eligibility or compliance requirement in the HEA or its 
implementing regulations does not necessarily affect the enforceability 
of a Federal student loan obtained to attend the school, and is not, 
therefore, automatically a basis for a borrower defense.\7\ The HEA 
vests the Department with the sole authority to determine and apply the 
appropriate sanction for HEA violations. A school's act or omission 
that violates the HEA may, of course, give rise to a cause of action 
under other law, and that cause of action may also independently 
constitute a borrower defense claim under Sec.  685.206(c) or proposed 
Sec.  685.222. For example, advertising that makes untruthful 
statements about placement rates violates section 487(a)(8) of the HEA, 
but may also give rise to a cause of action under common law based on 
misrepresentation \8\ or constitute a substantial misrepresentation 
under the new Federal standard and, therefore, constitute a basis for a 
borrower defense claim.
---------------------------------------------------------------------------

    \7\ As stated by the Department in 1993:
    [The Department] considers the loss of institutional eligibility 
to affect directly only the liability of the institution for Federal 
subsidies and reinsurance paid on those loans. . . . [T]he borrower 
retains all the rights with respect to loan repayment that are 
contained in the terms of the loan agreements, and [the Department] 
does not suggest that these loans, whether held by the institution 
or the lender, are legally unenforceable merely because they were 
made after the effective date of the loss of institutional 
eligibility.
    58 FR 13337. Armstrong v. Accrediting Council for Continuing 
Educ. & Training, Inc., 168 F.3d 1362, 1369 (D.C. Cir. 1999), 
opinion amended on denial of reh'g, 177 F.3d 1036 (D.C. Cir. 1999) 
(rejecting claim of mistake of fact regarding institutional 
accreditation as grounds for rescinding loan agreements).
    \8\ See, e.g., Moy v. Adelphi Inst., Inc., 866 F. Supp. 696, 706 
(E.D.N.Y. 1994) (upholding claim of common law misrepresentation 
based on false statements regarding placement rates.)
---------------------------------------------------------------------------

    In proposed Sec.  685.222(a)(4), we propose to define ``borrower'' 
to provide clarity and to include all parties who may be responsible 
for repaying the Secretary for a Direct Loan to which a borrower 
defense claim relates or who are otherwise harmed.
    In proposed Sec.  685.222(a)(5), ``borrower defense'' is defined to 
include one or both of the following: A defense to repayment of amounts 
owed to the Secretary on a Direct Loan, in whole or in part; and a 
right to recover amounts previously collected by the Secretary on the 
Direct Loan, in whole or in part. Currently, the existing regulation 
for borrower defense at Sec.  685.206(c) allows for reimbursement of 
amounts paid towards a loan as possible further relief, in addition to 
a discharge of any remaining loan obligation, for approved borrower 
defenses. The Department believes that the proposed definition will 
more accurately capture borrowers' requests for and the Secretary's 
ability to offer relief through the borrower defense process--for both 
a discharge of any remaining loan obligation and for reimbursement of 
amounts paid to the Secretary for the loan that is the subject of an 
approved borrower defense.

Federal Standard and Limitation Periods (Sec.  685.222(b), (c), and (d) 
and Sec.  668.71)

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution of 
higher education a borrower may assert as a defense to repayment of a 
Direct Loan.
    Section 487 of the HEA provides that institutions participating in 
the title IV, HEA programs shall not engage in substantial 
misrepresentation of the nature of the institution's education program, 
its financial charges, or the employability of its graduates.
    Current Regulations: Section 685.206(c) provides that a borrower 
defense may be asserted based upon any act or omission of the school 
that would give rise to a cause of action against the school under 
applicable State law. The current regulations in Sec.  685.206(c) are 
described in more detail under ``Borrower Responsibilities and Defenses 
(34 CFR 685.206).''
    Subpart F of the Student Assistance General Provisions establishes 
the types of activities that may constitute substantial 
misrepresentation by an institution and defines ``misrepresentation'' 
and ``substantial misrepresentation.'' ``Misrepresentation'' is defined 
in proposed Sec.  668.71(c) as a false, erroneous, or misleading 
statement that an eligible institution, one of its representatives, or 
any eligible 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, a member of the public, an accrediting agency, a State agency, 
or the Secretary. Under the proposed regulations, we would clarify that 
a misleading statement also includes any statement that has the 
likelihood or tendency to deceive. A statement is any communication 
made in writing, visually, orally, or through other means. 
``Misrepresentation'' also 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.
    ``Substantial misrepresentation,'' also defined in Sec.  668.71(c), 
means ``any 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.''
    Proposed Regulations: Proposed Sec.  685.222(b), (c), and (d) would 
establish a new Federal standard for a borrower defense.
    Proposed Sec.  685.222(b) would provide that if a borrower has 
submitted for consideration a nondefault, favorable contested judgment 
against the school based on State or Federal law from a court or 
administrative tribunal of competent jurisdiction for relief, the 
judgment might serve as a basis for a borrower defense. This would 
apply regardless of whether the judgment was obtained by the borrower 
as an individual or member of a class, or was obtained by a State 
attorney general (State AG) or other governmental

[[Page 39339]]

agency. Judgments that could form the basis of a borrower defense under 
this section would not be limited to causes of action based on breach 
of contract or a substantial misrepresentation under Sec.  685.222(c) 
or (d), respectively. Rather, they could also be based on other causes 
of action under State or Federal law, provided that the claim relates 
to the making of the borrower's Direct Loan for enrollment at the 
school, or the provision of educational services for which the loan was 
provided. There would be no time limitation on a borrower's ability to 
assert a borrower defense based on such a judgment.
    Proposed Sec.  685.222(c) would define the conditions under which a 
breach of contract might be the basis for a borrower defense and 
specify the limitation period for recovering payments previously made 
on the loan in connection with such a claim. Under proposed Sec.  
685.222(c), a borrower would have a borrower defense if the school that 
the borrower received a Direct Loan to attend failed to perform its 
obligations under the terms of a contract with the student. A borrower 
would be permitted to assert, at any time, a claim based on breach of 
contract as a defense to repayment of the amount still outstanding on 
the loan. A borrower would be permitted to assert that same claim as 
grounds for recovery of amounts previously collected by the Secretary 
not later than six years after the breach by the school of its contract 
with the student.
    Proposed Sec.  685.222(d) would establish the conditions under 
which a substantial misrepresentation might serve as the basis for a 
borrower defense, and the limitation period for recovering payments 
previously made on the loan. Under proposed Sec.  685.222(d), a 
borrower would have a borrower defense if the school or any of its 
representatives, or any institution, organization, or person with whom 
the school has an agreement to provide educational programs, or to 
provide marketing, advertising, recruiting, or admissions services, 
made a substantial misrepresentation that the borrower reasonably 
relied on when the borrower decided to attend, or to continue 
attending, the school. ``Substantial misrepresentation'' would have the 
definition set forth in subpart F, as amended by these proposed 
regulations. The proposed regulations would modify the definition of 
misrepresentation in Sec.  668.71(c) to replace the word ``deceive'' 
with ``mislead under the circumstances.'' The definition would also be 
expanded to specify that a misrepresentation includes any statement 
that omits information in such a way as to make the statement false, 
erroneous, or misleading.
    Section 685.222(d) would also establish that a borrower may assert, 
at any time, a defense to repayment for amounts still owed on the loan 
to the Secretary, but may assert a right to recover funds previously 
collected by the Secretary no later than six years after the borrower 
discovers, or reasonably could have discovered, the information 
constituting the substantial misrepresentation.
    The definition of ``substantial misrepresentation'' would require a 
borrower to have reasonably relied on a misrepresentation to his or her 
detriment. Under proposed Sec.  685.222(d), in determining whether a 
borrower's reliance on a misrepresentation was reasonable, the decision 
maker, whether a designated Department official or hearing official, as 
described in detail under ``Process for Individual Borrowers (34 CFR 
685.222(e)),'' ``Group Process for Borrower Defenses--General (34 CFR 
685.222(f)),'' ``Group Process for Borrower Defenses--Closed School (34 
CFR 685.222(g)),'' and ``Group Process for Borrower Defense Claims--
Open School (34 CFR 685.222(h)),'' could consider, among other things, 
if the school or its representatives or other specified parties engaged 
in conduct such as:
     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, a 
family member, or other resources;
     Failing to respond to the borrower's requests for more 
information, including about the cost of the program and the nature of 
any financial aid; or
     Otherwise taking advantage of the borrower's distress or 
lack of knowledge or sophistication.
    Reasons: The current borrower defense standard in Sec.  685.206(c) 
is wholly dependent upon State law and, as a result, may provide uneven 
relief to students affected by the same bad practices but who attended 
schools in different States; a Federal standard would help to ensure 
fair and equitable treatment of all borrowers. Moreover, the reliance 
upon State law presents a significant burden for borrowers who are 
making a threshold determination as to whether they may have a claim 
and for Department officials who must determine the applicability and 
interpretation of laws that may vary from one State to another.
    In crafting the Federal standard, the Department sought to 
incorporate not only the substantial misrepresentation regulation (34 
CFR 668 subpart F), but also other causes of action upon which students 
had based complaints against schools in court cases. For example, the 
Federal standard maintains the borrower's ability to bring forward a 
claim based on a judgment determined by a court or administrative 
tribunal applying either State or Federal law. We also noted that a 
common claim that students had raised in lawsuits against postsecondary 
schools was breach of contract.\9\ These bases for a borrower defense 
would ensure that the Federal standard provides effective relief 
opportunities for borrowers, and efficient administration of the 
process by which the Department and borrowers interpret and apply the 
standard, resulting in more timely resolution for all parties involved. 
However, we do not believe it would be appropriate to adopt a standard 
that would make the fact that the conduct violates an HEA requirement 
an automatic ground for a borrower defense, whether that claim is 
asserted directly or indirectly based on State law. Such conduct, to 
the extent it injures borrowers through substantial misrepresentation 
or a breach of contract, would already be covered by the proposed 
Federal standard. Moreover, it is not clear that any other such conduct 
forms an appropriate basis for loan discharge. Similarly, non-Federal 
negotiators suggested that the Department provide that all causes of 
action under State law constitute a basis for borrower defense. As 
explained previously, we believe that an approach based on State law 
would present a significant burden for borrowers and Department 
officials to determine the applicability and interpretation of States' 
laws and would increase the risk of uneven relief for similarly 
situated borrowers; therefore, we decline to adopt such a standard.
---------------------------------------------------------------------------

    \9\ See, e.g., Vurimindi v. Fuqua Sch. of Bus., 435 F. App'x 
129, 133 (3d Cir. 2011); Chenari v. George Washington Univ., No. CV 
14-0929 (ABJ), 2016 WL 1170922 (D.D.C. Mar. 23, 2016).
---------------------------------------------------------------------------

    Non-Federal negotiators also proposed other bases for borrower 
defense, such as deceptive, unfair, or abusive conduct. We carefully 
considered such suggestions and decided that they were not appropriate 
for the borrower defense regulations. The Department believes it would 
face significant challenges in determining which cases of such conduct 
warrant relief. A wide variety of conduct can be considered deceptive, 
unfair, or abusive, under both State and Federal law, and 
characterizing particular conduct as falling under such standards would

[[Page 39340]]

require the Department to engage in a nuanced application of complex 
legal doctrines that vary across jurisdictions and that often have not 
been subject to a degree of judicial development sufficient to make 
their application to the borrower defense context clear. Furthermore, 
some of the significant sources of law regarding such conduct would not 
easily transfer to the borrower defense context. Federal and State law 
empowers government agencies to pursue relief for deceptive and unfair 
conduct.\10\ In exercising this authority, Federal and State agencies 
are charged with gathering facts about particular practices, and 
weighing appropriate policy considerations to determine whether the 
practice warrants the exercise of their authority under these laws. The 
borrower defense regulations, on the other hand, are directed 
necessarily toward claims by individuals, which should not be subject 
to public policy considerations. Nonetheless, we agree with the 
negotiators that deceptive, unfair, or abusive practices that may not 
otherwise constitute a misrepresentation under the proposed definition 
should be taken into consideration when we are evaluating a borrower 
defense claim. See ``Substantial misrepresentation: Reasonable 
reliance'' in this section for a discussion of how we propose to 
consider such conduct for the purpose of a borrower defense claim based 
on a substantial misrepresentation.
---------------------------------------------------------------------------

    \10\ See, e.g., 12 U.S.C. 5531, 15 U.S.C. 43 (authorities used 
or referenced, respectively, by the Consumer Financial Protection 
Bureau (CFPB) and State agencies, and the Federal Trade Commission 
(FTC)). For deceptive and unfair practices, the CFPB has stated that 
its standards are informed by the standards for the same terms as 
used by the FTC. See CFPB Bulletin 2013-7, ``Prohibition of Unfair, 
Deceptive, or Abusive Acts or Practices in the Collection of 
Consumer Debts,'' (Jul. 10, 2013).
---------------------------------------------------------------------------

    The Department's substantial misrepresentation regulations (34 CFR 
part 668 subpart F) were informed by the FTC's policy guidelines on 
deception, and we believe they are more tailored to, and suitable for, 
use in the borrower defense context. The Department proposes that in 
the borrower defense context, certain factors addressing specific 
problematic conduct may be considered to determine whether a 
misrepresentation has been relied upon to a borrower's detriment, thus 
making the misrepresentation ``substantial'' under the proposed 
regulation. With regard to unfair and abusive conduct, 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. Such 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. Moreover, many of the 
borrower defenses the Department has addressed or is considering have 
involved misrepresentations by schools, such as in the case of 
Corinthian. The Department believes that its proposed standard as 
described below will address much of the behavior arising in the 
borrower defense context. We believe that the standard that we are 
proposing appropriately addresses the Department's interests in 
accurately identifying and providing relief to borrowers for misconduct 
by schools; providing clear standards for borrowers, schools, and the 
Department to use in resolving claims; and avoiding for all parties the 
burden of interpreting other Federal agencies' and States' authorities 
in the borrower defense context.
    As a result, the Department declines to adopt standards for relief 
based on unfair and abusive conduct. However, we note that actions 
against institutions may be taken, and borrowers may have avenues of 
relief outside of the Department, under other Federal or State statutes 
based on unfair and abusive conduct, which may result in State or 
Federal court judgments. Because the Department does not adopt the 
unfair and abusive conduct as a Federal borrower defense standards 
unless reduced to a contested judgment against the school under 
proposed Sec.  685.222(b), the Department does not consider its own 
findings and determinations in the borrower defense context for the 
proposed standards in Sec.  685.222 to be dispositive or controlling 
for actions brought by any other Federal or any State agency in the 
exercise of their power under the statutes on which they rely. We 
intend that, to the extent that borrowers fail to establish a claim 
under the regulations proposed here, such a determination does not 
affect the ability of another agency to obtain relief under a different 
standard that the agency is authorized to apply.
    We note that the Department commonly uses the term ``hearing 
official'' in its regulations, such as 34 CFR subparts G and H 
(proceedings for limitation, suspension, termination and fines, and 
appeal procedures for audit determinations and program review 
determinations). The hearing officials referred to in the proposed 
regulations would make decisions and determinations independent of the 
Department official described in proposed Sec.  685.222(e) to (h). 
Although here we use the term ``Department official'' to describe the 
individual who reviews and decides an individual borrower defense claim 
pursuant to Sec.  685.222(e), for the group processes described in 
proposed Sec.  685.222(g) and (h), we use the term ``Department 
official'' to describe the individual who performs a very different 
role. In the group process, the ``Department official'' is the 
individual who would initiate the group borrower defense process and 
who would present evidence and respond to any argument for the group 
borrower defense claimants. The decision would then be made by the 
hearing official, who is independent of the Department official who 
asserts the claims, and that decision would be based on the merits of 
the borrower defense claim as described in the proposed regulations, 
and not upon other considerations.

Judgment Against a School

    As discussed, the Department is declining to adopt a standard based 
on applicable State law for loans first disbursed after July 1, 2017, 
due, in part, to the burden to borrowers and Department officials in 
interpreting and applying States' laws. While we believe that the 
proposed standards will capture much of the behavior that can and 
should be recognized as the basis for borrower defenses, it is possible 
that some State laws may offer borrowers important protections that do 
not fall within the scope of the Department's Federal standard. To 
account for the situations in which this is the case, the proposed 
regulations would provide, as a basis for a borrower defense, 
nondefault, contested judgments obtained against a school based on any 
State or Federal law, whether obtained in a court or administrative 
tribunal of competent jurisdiction. Under the proposed regulations, a 
borrower may use such a judgment as the basis for a borrower defense if 
the borrower was personally affected by the judgment, that is, the 
borrower was a party to the case in which the judgment was entered, 
either individually or as a member of a class that obtained the 
judgment in a class action lawsuit. As with all the borrower defense 
standards, to support a borrower defense claim, the judgment would be 
required to pertain to the making of a Direct Loan or the provision of 
educational services to the borrower. We believe that the proposed 
standard would allow for recognition of State law and other Federal law 
causes of action, but would also reduce the burden on the Department 
and borrowers of having to make

[[Page 39341]]

determinations on the applicability and interpretation of those laws.
    We also propose that a judgment obtained by a governmental agency, 
such as a State AG or a Federal agency, that a borrower can show 
relates to the making of the borrower's Direct Loan or the provision of 
educational services to the borrower, may also serve as a basis for a 
borrower defense under the standard, whether the judgment is obtained 
in court or in an administrative tribunal. Governmental agencies may 
not specifically join individual constituents as parties to a lawsuit; 
however, any resulting judgment may result in determinations that an 
act or omission of a school was in violation of State or Federal law 
and thus be the basis of a borrower defense for an individual within 
the group identified as injured by the conduct for which the government 
agency brought suit.
    In considering a borrower defense claim, for either an individual 
borrower under proposed Sec.  685.222(e) for individually-filed 
applications or for a group of borrowers under proposed Sec.  
685.222(f),(g), and (h), based upon a favorable judgment obtained in 
court or an administrative tribunal, the Department will consider the 
relief to which that judgment entitles the borrower based upon the 
judgment's findings regarding the school's liability under the state or 
Federal law at issue, whether or not the form and amount of relief was 
prescribed as part of the favorable judgment. Depending on the facts 
and circumstances of the judgment, the Department may determine relief 
as described in proposed Sec.  685.222(i).\11\ The Department will also 
consider to what degree the claimant has already received relief as an 
outcome of the judgment at issue, if any.
---------------------------------------------------------------------------

    \11\ For example, the judgment may be one obtained by an 
enforcement agency and may not identify or require any individual as 
a party for whom particular relief is required; the judgment may 
simply provide injunctive relief, barring a particular practice as 
violating applicable law, but not addressing or requiring any relief 
for individuals; or the judgment may find liability, but also 
determine that the affirmative claim is time-barred.
---------------------------------------------------------------------------

    The Department is aware that many court cases may not result in 
contested, nondefault judgments, for reasons such as settlement. 
However, we are proposing to limit the basis for a borrower defense 
under Sec.  685.222(b) to nondefault, contested judgments in courts or 
administrative tribunals. The Department is seeking to establish a 
process that results in accurate determinations of borrower defenses 
after a careful consideration of evidence. We are proposing to consider 
decisions made by courts and administrative tribunals, as the decision-
making process in those forums similarly involves a consideration of 
evidence from all parties and the decision is one that has been made on 
the merits of the claim. By limiting this standard to nondefault, 
contested judgments, we would reduce or eliminate the need for the 
Department to evaluate the merit of borrower claims based on State law 
by including only those judgments that are in fact the product of 
litigation in which both claimant and school challenged the contentions 
of the opponent and a tribunal decided the case on the merits. The 
standard would echo the principle of res judicata, whereby parties are 
bound by a judgment entered by a court of competent jurisdiction and 
may not challenge that judgment either before that tribunal or before a 
different tribunal. Default judgments generally do not involve the same 
level of factual and evidentiary evaluation, or provide a decision on 
the merits resulting from a contested hearing where all parties have 
had an opportunity to present evidence and arguments. Similarly, 
settlements do not require a decision maker to reach a decision after 
an evaluation of the evidence. As a result, we propose that judgments 
may form the basis of a borrower defense only if they are nondefault, 
contested judgments rendered by a court or administrative tribunal of 
competent jurisdiction.
    Although other court orders that do not rise to the level of a 
contested, nondefault judgment (e.g., settlement or motion to dismiss 
orders) may not be used to satisfy the proposed judgment standard for 
borrower defense claims, the Department welcomes the submission of and 
will consider any such orders, other court filings, admissions of fact 
or liability, or other evidence used in such a court proceeding as 
evidence in the borrower defense process under the other proposed 
standards. The Department would also welcome the submission of and will 
consider any arbitration filings, orders, and decisions for 
consideration in the borrower defense process. Similarly, we recognize 
that a party to a suit or administrative proceeding may be barred from 
disputing a factual finding or issue decided in that proceeding if that 
fact or issue were to arise in a different case, even if the ruling on 
the fact or issue was not a final judgment on the merits resulting from 
a contested proceeding that meets the standard we propose here. We 
propose to take such findings and rulings on such specific facts and 
issues into account, and give them appropriate weight if principles of 
collateral estoppel would bar the school from disputing the matter.

Breach of Contract

    In developing a new Federal borrower defense standard, we recognize 
that students enter into enrollment agreements and other contracts with 
the school to provide educational services and that borrowers have, 
over the years, asserted claims for relief against schools for losses 
arising from a breach of those contracts.\12\ We therefore propose to 
include a separate ground for relief, based on a breach by the school 
of the contract with the borrower, because such claims may not 
necessarily fall within the scope of the substantial misrepresentation 
component of the Federal standard.
---------------------------------------------------------------------------

    \12\ See, e.g., Vurimindi v. Fuqua Sch. of Bus., 435 F. App'x 
129 (3d Cir. 2011).
---------------------------------------------------------------------------

    The terms of a contract between the school and a borrower will 
largely depend on the circumstances of each claim. For example, a 
contract between the school and a borrower may include an enrollment 
agreement and any school catalogs, bulletins, circulars, student 
handbooks, or school regulations.\13\
---------------------------------------------------------------------------

    \13\ In Ross v. Creighton University, 957 F.2d 410 (7th Cir. 
1992), in describing the limits of a contract action brought by a 
student against a school, the court stated that there is `` `no 
dissent' '' from the proposition that `` `catalogues, bulletins, 
circulars, and regulations of the institution made available to the 
matriculant' '' become part of the contract. See 957 F.2d at 416 
(citations omitted). See also Vurimindi, 435 F. App'x at 133 
(quoting Ross).
---------------------------------------------------------------------------

    A non-Federal negotiator requested that we limit the standard to 
material breaches of contract.\14\ The Department anticipates that it 
may receive borrower defense claims regarding breaches of contract that 
may not be considered to be material breaches that would have warranted 
a cancellation of the contract between the borrower and the school. For 
example, a breach of contract may pertain to a school's failure to 
fulfill a specific contractual promise to provide certain training or 
courses, but the school may have otherwise performed its other 
obligations under its contract with the borrower. The Department is 
comfortable with its ability to grant relief commensurate to the injury 
to a borrower alleged under the breach of contract standard, which may 
constitute full relief or partial relief with respect to a borrower's 
Direct Loan. The Department's proposed methods for determining relief, 
which would require a consideration of available evidence

[[Page 39342]]

and arguments by a Department official or a hearing official, as 
applicable, are discussed in more detail under ``Borrower Relief (34 
CFR 685.222(i) and Appendix A).''
---------------------------------------------------------------------------

    \14\ See Modern Law of Contracts Sec.  11:1 (quoting Andersen, A 
New Look at Material Breach in the Law of Contracts, 21 UC Davis L. 
Rev. 1073 (1988)) (``[M]ateriality is best understood in terms of 
the specific purpose of the cancellation remedy that material breach 
entails.'')
---------------------------------------------------------------------------

    The non-Federal negotiator also requested that we exclude claims 
for educational malpractice or claims regarding schools' academic 
standards. As explained earlier in this discussion, we decline to 
impose a materiality requirement, but would consider the circumstances 
underlying a breach of contract borrower defense and award relief that 
is commensurate with the injury to the borrower. We also explain under 
``Borrower Defenses--General (Sec.  685.222(a))''))'' that the 
Department does not consider claims relating to educational malpractice 
or academic disputes to be within the scope of the proposed borrower 
defense regulations.

Substantial Misrepresentation

    The proposed Federal standard for borrower defense based upon a 
substantial misrepresentation is predicated on existing regulations in 
the Student Assistance General Provisions (34 CFR 668 subpart F) that 
address misrepresentation. These existing regulations provide a clear 
framework regarding the acts or omissions that would constitute 
misrepresentations as they relate to the nature of educational 
programs, the nature of financial charges, and the employability of 
graduates.
    Under proposed Sec.  685.222(d), to establish a borrower defense 
based on a substantial misrepresentation, a borrower must demonstrate 
that (1) there was a misrepresentation by the college made to the 
borrower, (2) the borrower reasonably relied on that substantial 
misrepresentation when he or she decided to attend, or to continue 
attending, the school, and (3) that reliance resulted in a detriment to 
the borrower.

Substantial Misrepresentation: Misrepresentation

    We have proposed to revise the definition of ``misrepresentation'' 
in Sec.  668.71 to provide clarity and specificity, as it is important 
that the definition of ``misrepresentation,'' whether for the 
Department's enforcement purposes or in the borrower defense context, 
capture the full scope of acts and omissions that may result in a 
borrower being misled about the provision of educational services or 
making of a Direct Loan.
    Specifically, we propose to replace the word ``deceive'' with 
``mislead under the circumstances.'' In some contexts the word 
``deceive'' implies knowledge or intent on the part of the school, 
which is not a required element in a case of misrepresentation. 
Although we stated that the Department ``considers a variety of 
factors, including whether the misrepresentation was intentional or 
inadvertent'' in the preamble to the final rule for subpart F, 75 FR 
66915, we believe that this proposed change would more clearly reflect 
the Department's intent that a misrepresentation does not require 
knowledge or intent on the part of the school. A non-Federal negotiator 
at the negotiated rulemaking requested that specific intent be 
considered as an element of misrepresentation. As the Department 
explained in the preamble to the final rule for subpart F, 75 FR 66914, 
while the Department declines to include a specific intent element, the 
Department has always operated within a rule of reasonableness and has 
not pursued sanctions without evaluating the available evidence in 
extenuation and mitigation as well as in aggravation. Whether using the 
definitions in subpart F for the Department's enforcement purposes or 
for evaluating a borrower defense claim, we intend to continue to 
consider the circumstances surrounding any misrepresentation before 
determining an appropriate response. That said, the general rule is 
that an institution is responsible for the harm to borrowers caused by 
its misrepresentations, even if such misrepresentations cannot be 
attributed to institutional intent. We believe this is more reasonable 
and fair than having the borrower (or the Department) bear the cost of 
such injuries. It is also reflective of the consumer protection laws of 
many States.
    We also propose to add to the definition of ``misrepresentation'' a 
sentence addressing omissions, which would read, ``Misrepresentation 
includes any statement that omits information in such a way as to make 
the statement false, erroneous, or misleading.'' Some non-Federal 
negotiators were concerned about the use of the word ``information'' as 
opposed to ``facts.'' These non-Federal negotiators were concerned that 
the use of the word ``facts'' might imply a higher standard than would 
be required for a borrower to prove a substantial misrepresentation had 
occurred. Another non-Federal negotiator believed that a 
misrepresentation of ``facts'' more accurately described what should be 
required. Although we believe that the two words are effectively 
synonymous, we propose to use the word ``information,'' as this change 
was endorsed by most of the non-Federal negotiators.
    Non-Federal negotiators requested that the Department clarify what 
is meant by ``misleading under the circumstances,'' as used in the 
proposed definition of ``misrepresentation.'' One non-Federal 
negotiator asked whether the term ``under the circumstances'' was a 
reference to the use of the term by the Federal Trade Commission (FTC). 
In the 1983 FTC Policy Statement on Deception, the FTC clarified that, 
for a representation, omission, or practice to be deceptive, it must be 
likely to mislead reasonable consumers under the circumstances.\15\ The 
FTC looks at the totality of the practice when determining how a 
reasonable recipient of the information would respond. If a 
representation is targeted to a specific audience, then the FTC 
determines the effect of the practice on a reasonable member of that 
group. We believe it is appropriate that, in reviewing a borrower 
defense claim based on a substantial misrepresentation, we similarly 
consider the totality of circumstances in which the statement or 
omission occurs, including the specific group at which a statement or 
omission was targeted, to determine whether the statement or omission 
was misleading under the circumstances. A statement made to a certain 
target group of students may not lead to reliance and injury; however, 
when the statement is made to a different target group that may not be 
the case.
---------------------------------------------------------------------------

    \15\ FTC Policy Statement on Deception, 103 F.T.C. 110, 174 
(1984) (appended to Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)), 
available at www.ftc.gov/bcp/policystmt/ad-decept.htm.
---------------------------------------------------------------------------

    Moreover, we propose to include the language ``under the 
circumstances'' to clarify that, to constitute a substantial 
misrepresentation, the misleading statement or omission must have been 
made in a situation where the borrower or student should have been able 
to rely upon the school to provide accurate information. For example, 
if a student is speaking with a course instructor about her 
difficulties paying tuition and the course instructor advises her to 
meet with the financial aid office because ``there are scholarships 
available,'' that circumstance would most likely not create an 
expectation that the course instructor is assuring the student that she 
will receive a scholarship. However, if a student is speaking with a 
financial aid advisor and asks if she will receive scholarships to help 
cover the cost of her education and the financial aid advisor says, 
``Yes. Most of our students receive scholarships,'' that statement may 
be considered misleading under the

[[Page 39343]]

circumstances, given that the speaker is someone whose professional 
role is to provide students with guidance pertaining to student aid.

Substantial Misrepresentation: Reasonable Reliance

    Although the definition of ``substantial misrepresentation'' in 
Sec.  668.71 requires that the borrower reasonably relied on the 
misrepresentation, or could reasonably be expected to rely, proposed 
Sec.  685.222(d) would require there to have been actual reasonable 
reliance. Section 668.71 refers to the Department's enforcement 
authority to impose fines, or limit, suspend, or terminate a school's 
participation in title IV, HEA programs. As an enforcement body acting 
in the public interest, the Department believes that it is appropriate 
for the Department to be able to stop misrepresentations even before 
any persons are misled, and thus to act upon misrepresentations that 
``could have been reasonably relied upon'' by a person. However, 
borrower defenses relate to injuries to individual borrowers. Unlike 
the Department's interest in public enforcement of its regulations and 
laws, an individual borrower's interest in bringing a borrower defense 
is predicated upon the harm to the borrower. We also believe that an 
actual reliance requirement will protect the Federal Government, 
taxpayers, and institutions from unsubstantiated claims. As a result, 
we believe that it is appropriate to require that the evidence show 
that the misrepresentation at issue influenced the borrower, or led to 
the borrower's reliance on the misrepresentation, to the borrower's 
detriment. We note, however, that a rebuttable presumption of 
reasonable reliance may arise in claims brought for a group of 
borrowers, as we discuss in detail under ``Group Process for Borrower 
Defenses--General (34 CFR 685.222(f)).''
    Generally, reasonable reliance refers to what a prudent person 
would believe and act upon if told something by another person. 
Moreover, reasonable reliance considers the representation or statement 
from the viewpoint of the audience the message is intended to reach--in 
this case, prospective or continuing students. Thus, in assessing 
whether a substantial misrepresentation has occurred, the Department 
would consider the facts of the case in the context of the audience.
    As discussed, the standard requires not just that a borrower has 
relied upon a misrepresentation to the borrower's detriment, but also 
requires that the reliance be reasonable. As discussed in the 
introduction to this ``Reasons'' section, non-Federal negotiators 
representing students and borrowers, consumer advocacy organizations, 
and legal assistance organizations that represent students and 
borrowers, advocated that the Federal standard include a provision for 
abusive practices on the part of a school, particularly as they relate 
to high pressure or aggressive sales tactics. We agree that there has 
been evidence of such conduct on the part of some schools, but believe 
it would be difficult to develop clear, consistent standards as to when 
such conduct, in the absence of any misrepresentation by the school, 
should give rise to a right of relief from the loans taken out to 
attend the school. However, we also believe that such high pressure or 
aggressive sales tactics may make borrowers more likely to rely upon a 
misrepresentation. As a result, we have determined that reliance on a 
misrepresentation may be appropriately viewed as more reasonable when 
the misrepresentation is made in the context of certain circumstances, 
including those that may be considered to be high pressure or 
aggressive sales tactics.
    To address these concerns, in proposed Sec.  685.222(d) we include 
a non-exhaustive list of examples of factors that, if present in 
conjunction with a misrepresentation on the part of the school, would 
likely elevate that misrepresentation to a substantial 
misrepresentation. However, as proposed by the Department, the factors 
by themselves would not necessarily mandate a finding of substantial 
misrepresentation, nor would the absence of any of the factors defeat a 
borrower defense based on substantial misrepresentation. It may be 
entirely reasonable for a borrower to rely on a misrepresentation 
without any of these factors present. Rather, as proposed, the factors 
would be non-exhaustive examples of conduct that could be considered in 
a determination of whether a borrower's reliance on a misrepresentation 
was reasonable, even if such reliance would not have been reasonable in 
the absence of such conduct, thus making the misrepresentation 
substantial.
    Specifically, we looked at the borrower defenses before the 
Department and comments from non-Federal negotiators regarding issues 
such as schools making insistent demands of students to make 
commitments to enroll and the borrowers' lack of information and 
resources. As a result, we propose that a misrepresentation, when 
coupled with conduct that affects a borrower's understanding of his or 
her decision-making timeframe, such as demanding that the borrower make 
enrollment or loan-related decisions immediately or placing an 
unreasonable emphasis on unfavorable consequences of delay, may lead a 
borrower to reasonably rely upon the misrepresentation and, thus, 
elevate the misrepresentation to a substantial misrepresentation for 
the purposes of asserting a borrower defense. Similarly, conduct that 
affects a borrower's information-gathering regarding the risks and 
potential benefits of his or her decision, such as discouraging a 
borrower from consulting an advisor, a family member, or other 
resources or failing to respond to a borrower's reasonable requests for 
information, may lead a borrower to reasonably rely upon the 
misrepresentation for the purposes of asserting a substantial 
misrepresentation as a borrower defense. We also recognize that school 
conduct that takes advantage of the borrower's distress or lack of 
knowledge or sophistication may also elevate the misrepresentation to a 
substantial misrepresentation, by way of affecting a borrower's 
reasonable reliance on a misrepresentation, for the purposes of 
borrower defense. For example, a school may be found to have made 
statements that would not have been misleading to a borrower of average 
English ability; however, when made to a borrower with limited English 
proficiency in a way that takes advantage of the borrower's lack of 
knowledge or sophistication, the circumstances may warrant a borrower 
defense under the standard.
    As noted above, a non-Federal negotiator requested that the 
Department use a ``justifiable'' reliance standard. While a reasonable 
reliance standard looks to whether a reasonably prudent person would be 
justified in his or her reliance and may be measured against the 
behavior of other persons, the justifiable reliance standard is 
measured by reference to the plaintiff's capabilities and 
knowledge.\16\ As discussed, the proposed standard would allow 
consideration of practices that would impact a specific borrower's 
understanding and reliance upon a misrepresentation in a way that would 
reference the borrower's understanding and knowledge. However, the 
Department believes that it is appropriate for the proposed standard to

[[Page 39344]]

consider the perspective of not only the borrower, but of similarly 
situated borrowers, especially to the extent it is composed of other 
Direct Loan borrowers or potential Direct Loan borrowers who may be 
subject to the same misrepresentations by the school. As discussed 
under ``Group Process for Borrower Defenses--General (34 CFR 
685.222(f)),'' ``Group Process for Borrower Defenses--Closed School (34 
CFR 685.222(g)),'' and ``Group Process for Borrower Defense Claims--
Open School (34 CFR 685.222(h)),'' in addition to proposing this 
regulation to provide relief for individual borrowers who have filed 
applications for relief, the borrower defense regulation also proposes 
that the Department may initiate a process for determinations as to 
both a school's liability and as to borrower defenses for a group of 
borrowers, which may include those who have not applied for relief. As 
discussed under ``Group Process for Borrower Defenses--General (34 CFR 
685.222(f)),'' the Department anticipates that such proceedings, in 
which Secretary may recover from the school the amount of losses from 
granting borrower defense relief, will have a significant deterrent 
effect on the school and promote compliance among other schools in a 
way that will benefit other borrowers. By considering both the 
individual borrower's perspective and the perspective of similarly 
situated borrowers at the institution, we believe the Department 
official or hearing official, as applicable, would be able to determine 
an amount of relief that is fair to the borrower and protect the 
Department's general interest in other Direct Loan borrowers who have 
also attended the school and who may have been subject to the same 
misrepresentations.
---------------------------------------------------------------------------

    \16\ See Restatement (Third) of Torts: Liab. for Econ. Harm 
Sec.  11 TD No 2 (2014)(``[R]easonableness is measured against 
community standards of behavior. Justifiable reliance has a 
personalized character. It is measured by reference to the 
plaintiff's capabilities and knowledge; a plaintiff's sophistication 
may affect a court's judgments about what dangers were fairly 
considered obvious.'').
---------------------------------------------------------------------------

    The non-Federal negotiator also requested that we limit the 
standard to material misrepresentations. It is the Department's 
understanding that under Federal deceptive conduct prohibitions, a 
misrepresentation must be material for deception to occur. In this 
context, material misrepresentation involves information important to 
consumers, likely to affect the consumer's choice or conduct regarding 
a product or service.\17\ The Department believes that a materiality 
element is not required in either the proposed amendments to the 
definition for the Department's enforcement authority under Sec.  
668.71 or as this definition is adopted for the purposes of the 
proposed Federal standard under Sec.  685.222(d). In the context of the 
Department's enforcement authority, the Department previously declined 
in 2010 to adopt a materiality component, stating that the regulatory 
definition of ``substantial misrepresentation'' is ``clear and can be 
easily used to evaluate alleged violations of the regulations.'' 75 FR 
66916.
---------------------------------------------------------------------------

    \17\ See, e.g., F.T.C. Policy Statement on Deception, 103 F.T.C. 
at 182; see also Restatement (Second) of Torts Sec.  538 (1977) 
(``The matter is material if (a) a reasonable man would attach 
importance to its existence or nonexistence in determining his 
choice of action in the transaction in question; or (b) the maker of 
the representation knows or has reason to know that its recipient 
regards or is likely to regard the matter as important in 
determining his choice of action, although a reasonable man would 
not so regard it.'').
---------------------------------------------------------------------------

    In adopting the definition of ``substantial misrepresentation'' for 
the purposes of borrower defense, the Department similarly believes 
that the definition is clear and can be easily used to evaluate 
borrower defenses. Moreover, a substantial misrepresentation in the 
borrower defense context incorporates similar concepts to materiality. 
Under proposed Sec.  685.222(d), the borrower must show that he or she 
``reasonably relied'' upon the misrepresentation at issue. As discussed 
above, generally materiality refers to whether the information in 
question was information to which a reasonable person would attach 
importance to, in making the decision at issue. Similarly, in 
determining whether the borrower reasonably relied on the 
misrepresentation, the Department would consider whether the 
misrepresentation related to information to which the borrower would 
reasonably attach importance in making the decision to enroll or 
continue enrollment at the school. As a result, the Department 
considers it unnecessary to add an explicit materiality element to the 
definition of ``substantial misrepresentation,'' for the purposes of 
claims under the borrower defense regulations.

Substantial Misrepresentation: The Borrower's Detriment

    The definition of ``substantial misrepresentation,'' for the 
purpose of proposed Sec.  685.222(d), would require that the borrower 
reasonably relied on the misrepresentation to the borrower's detriment. 
As noted previously, the proposed borrower defense regulations are 
intended to provide relief for individual borrowers for schools' 
wrongful conduct that led in a meaningful way to harm or injury to the 
borrower based upon the borrower's specific circumstances. We believe 
that a demonstration of detriment or injury to the borrower will 
protect the Federal government, taxpayers, and institutions from 
unsubstantiated claims. As a result, we believe that it is appropriate 
to require that a preponderance of the evidence demonstrate the 
misrepresentation at issue influenced the borrower, or led to the 
borrower's reliance on the misrepresentation, to the borrower's 
detriment.

Limitation Periods

    For each of the bases for a borrower defense under the proposed 
Federal standard, the Department considered whether there should be a 
limitation on the time period during which borrower defense claims may 
be brought and, if so, what the limitation period should be. Because 
the availability of evidence for a borrower defense that is based on a 
judgment in a court or administrative tribunal is not a concern, as the 
only evidence required is the judgment itself, we propose no limitation 
period under proposed Sec.  685.222(b) for those claims. However, for 
the bases for a borrower defense in proposed Sec.  685.222(c) and (d), 
we believe a limitation period is appropriate. A limitation period for 
borrower defense claims based on a breach of contract or substantial 
misrepresentation, by encouraging borrowers to assert borrower defense 
claims while memories and evidence are fresh, would make the claim 
resolution process more reliable.
    When considering a limitation period that would provide for a 
reasonable amount of time during which a borrower might submit a claim, 
we also recognized that common law generally allows a debtor to assert 
claims from the same transaction as the loan at any time as a defense 
to repayment of the loan, but requires a debtor to assert any claim for 
recovery of payments already made within the deadlines that would apply 
had the debtor brought suit on the claim. Consistent with that 
generally applicable principle, we propose here that no limitation 
period would apply to borrower defense claims asserted under proposed 
Sec.  685.222(c) or (d) as defenses to repayment of any outstanding 
loan obligation. To select an appropriate limit on the period during 
which a claim for recovery may be made, we looked to the existing 
limitation periods under State and Federal law for similar claims. With 
regard to a borrower defense claim based on a substantial 
misrepresentation, we considered, among other things, limitation 
periods applicable to consumer protection and fraud claims, as those 
claims often address misleading or deceptive conduct and are, thus, 
analogous to claims based on a substantial misrepresentation.
    The Department's research indicates that six years is one of the 
breach of

[[Page 39345]]

contract limitation periods most commonly used by States, as well as 
the limitation period applicable to non-tort claims against the United 
States, 28 U.S.C. 2401(a).
    Because many non-Federal negotiators' discussions of school 
misconduct included discussions of fraud, the Department also 
considered existing limitation periods for fraud. Although limitation 
periods under State consumer protection laws vary, our research 
indicates that three years is one of the most common limitation periods 
used by the States.
    For claims for recovery of payments already made that are based on 
breach of contract, we propose a six-year limitation period that would 
begin upon the breach of contract. For claims for recovery of payments 
already made that are based on a substantial misrepresentation, we also 
propose six years as the limitation period, but the period would begin 
when a borrower discovers or should have reasonably discovered the 
facts that constitute the misrepresentation. Although six years is 
longer than the period afforded under many State laws for fraud and 
consumer protection, other States do provide a six-year limitation 
period for similar claims, and the Department believes a six-year 
period would provide sufficient time for a borrower to gather evidence 
related to a substantial misrepresentation.
    The non-Federal negotiators representing consumer advocates, legal 
assistance organizations, and State AGs suggested that no limitation 
period should apply to defenses to repayment of remaining amounts owed 
on a debt, under the legal principle of recoupment (asserting a claim 
as a defense to repayment). As noted earlier, we propose to adopt this 
position. Later, some non-Federal negotiators suggested that, 
notwithstanding the distinction under State and Federal law between 
recoupment and asserting a claim for an affirmative recovery of amounts 
previously paid, the Department should apply no limitation period to 
affirmative claims for recovery. In support of this position, they 
cited the Department's ability to collect on a Direct Loan until it is 
paid in full or discharged. Other non-Federal negotiators, however, 
expressed concerns about having no limitation period for borrower 
defense claims, stating that such an approach would result in 
significant difficulties for a school in responding to allegations due 
to a lack of documentary evidence and witnesses and would subject 
schools to broader liability than under the current borrower defense 
standard based upon State law under Sec.  685.206(c).
    After careful consideration of the legal principles cited by the 
negotiators, we do not believe there is justification to depart from 
the requirements that Federal and State courts generally apply to 
affirmative claims to recover amounts already collected on a debt. We 
believe the proposed limitation periods are appropriate for the reasons 
stated above, regarding existing periods of limitation in State and 
Federal law and the Department's interest in the reliability of the 
claim resolution process. However, we seek comment on whether the 
Department should adopt different limitation periods for borrower 
defense claims under Sec.  685.222(c) and (d), and, if so, what the 
limitation periods should be, what the supporting rationale for those 
periods would be, and why those other limitation periods would meet the 
objectives outlined in this section.
    Non-Federal negotiators asked the Department to clarify, with 
respect to the substantial misrepresentation limitation period, when a 
borrower would be deemed to have discovered, or when a borrower should 
have reasonably discovered, the facts constituting a substantial 
misrepresentation. For example, a borrower may learn of a substantial 
misrepresentation upon discussion with other students or borrowers, or 
it may be deemed that a borrower should have reasonably known of the 
facts underlying a substantial misrepresentation if facts concerning 
the misrepresentation are published in nationwide news articles. 
However, the borrower must demonstrate when the borrower discovered the 
facts underlying the specific substantial misrepresentation forming the 
basis of the borrower defense. For example, knowledge of one particular 
problem at a school would not necessarily give notice of other, 
unrelated problems. Thus, student warnings issued for gainful 
employment programs under 34 CFR 668.410 or relating to repayment rate 
under proposed Sec.  668.41(h), or the disclosure of proposed financial 
protections, such as a letter of credit, under proposed Sec.  
668.41(i), would warn students about whether a program could close 
soon, the repayment outcomes of borrowers at the school, or the 
school's financial risk, but would not put students on notice of 
misrepresentations by the school of matters other than earnings and 
debt of graduates or financial soundness.
    To demonstrate that the borrower is asserting a borrower defense 
within six years of discovery of the facts on which the claim is based, 
the borrower should explain in the borrower defense application how he 
or she learned of the substantial misrepresentation and include any 
applicable documents or other information demonstrating the source of 
the knowledge. Again, we note that, under the proposed regulations, the 
borrower may assert a claim based on substantial misrepresentation 
solely for discharge of the remaining amount owed on the Direct Loan at 
any time.

Process for Individual Borrowers (Sec.  685.222(e))

    Statute: Section 455 of the HEA sets forth the terms and conditions 
of Direct Loan Program loans.
    Current Regulations: Section 685.206(c) states that borrowers have 
the right to assert borrower defenses, but does not establish any 
process for doing so.
    Proposed Regulations: Proposed Sec.  685.222(e) would establish the 
process for an individual borrower to bring a borrower defense. 
Proposed Sec.  685.222(e)(1) would describe the steps an individual 
borrower must take to initiate a borrower defense claim. First, an 
individual borrower would submit an application to the Secretary, on a 
form approved by the Secretary. In the application, the borrower would 
certify that he or she received the proceeds of a loan to attend a 
school; would have the opportunity to provide evidence that supports 
the borrower defense; and would indicate whether he or she has made a 
claim with respect to the information underlying the borrower defense 
with any third party, and, if so, the amount of any payment received by 
the borrower or credited to the borrower's loan obligation. The 
borrower would also be required to provide any other information or 
supporting documentation reasonably requested by the Secretary. The 
Secretary would provide notice of the borrower's application for a 
borrower defense to the school at issue.
    Proposed Sec.  685.222(e)(2) would describe the treatment of 
defaulted and nondefaulted borrowers upon the Secretary's receipt of 
the borrower defense claim. If the borrower is not in default on the 
loan for which a borrower defense has been asserted, the Secretary 
would grant an administrative forbearance, notify the borrower of the 
option to decline the forbearance and to continue making payments on 
the loan, and provide the borrower with information about the 
availability of the income-contingent repayment plans under Sec.  
685.209 and the income-based repayment plan under Sec.  685.221. If the 
borrower is in default on the loan for which a borrower defense has 
been asserted, the Secretary would suspend collection activity on the 
loan until the

[[Page 39346]]

Secretary issues a decision on the borrower's claim; notify the 
borrower of the suspension of collection activity and explain that 
collection activity will resume if the Secretary determines that the 
borrower does not qualify for a full discharge; and notify the borrower 
of the option to continue making payments under a rehabilitation 
agreement or other repayment agreement on the defaulted loan.
    To process the claim, the Secretary would designate a Department 
official to review the borrower's application to determine whether the 
application states a basis for a borrower defense, and would resolve 
the claim through a fact-finding process conducted by the Department 
official. As part of the fact-finding process, the Department official 
would consider any evidence or argument presented by the borrower and 
would also consider any additional information, including Department 
records, any response or submissions from the school, and any 
additional information or argument that may be obtained by the 
Department official. The Department official would identify to the 
borrower, and may identify to the school, the records he or she 
considers relevant to the borrower defense. The Secretary provides any 
of the identified records upon reasonable request to either the school 
or the borrower.
    At the conclusion of the proposed fact-finding process, the 
Department official would issue a written decision. The decision of the 
Department official would be final as to the merits of the claim and 
any relief that may be warranted on the claim. If the Department 
official approves the borrower defense, the Department official would 
notify the borrower in writing of that determination and of the relief 
provided as determined under Sec.  685.222(i) or, if the Department 
official denies the borrower defense in full or in part, the Department 
official would notify the borrower of the reasons for the denial, the 
evidence that was relied upon, the portion of the loan that is due and 
payable to the Secretary, whether the Secretary will reimburse any 
amounts previously collected, and would inform the borrower that if any 
balance remains on the loan, the loan will return to its status prior 
to the borrower's application. The Secretary would also inform the 
borrower of the opportunity to request reconsideration of the claim 
based on new evidence not previously provided or identified as relied 
upon in the final decision.
    Under proposed Sec.  685.222(e)(5)(ii), the Secretary could reopen 
a borrower defense application at any time to consider evidence that 
was not considered in making the previous decision. The Secretary could 
also consolidate individual applications that have common facts and 
claims and resolve such borrower defenses as a group through the group 
processes described under ``Group Process for Borrower Defenses--
General (34 CFR 685.222(f)),'' ``Group Process for Borrower Defenses--
Closed School (34 CFR 685.222(g)),'' and ``Group Process for Borrower 
Defense Claims--Open School 34 CFR 685.222(h)).''
    Finally, the Secretary could initiate a separate proceeding to 
collect from the school the amount of relief resulting from a borrower 
defense.
    Reasons: The current regulations for borrower defense do not 
provide a process for claims. Since Corinthian's 2015 bankruptcy, the 
Department has received a number of borrower defense claims from 
individuals outside of the Federal loan relief process initiated by the 
Department for Corinthian students in response to the bankruptcy. The 
lack of guidance has led to confusion for borrowers and inconsistency 
in the types and format of information submitted for such requests. To 
ease the Department's administrative burden in reviewing such requests 
and the burden of borrowers making borrower defense claims, we propose 
Sec.  685.222(e) to establish clear guidelines for individuals who wish 
to submit a borrower defense claim.
    Many of the non-Federal negotiators at the negotiated rulemaking 
sessions emphasized the advantages of deciding claims on a group basis 
wherever possible. In response to these arguments, the proposed 
regulations would permit the Secretary to consolidate individual claims 
that present common facts and claims pertaining to the same school and 
resolve those claims through the group processes described under 
``Group Process for Borrower Defenses--General (34 CFR 685.222(f)),'' 
``Group Process for Borrower Defenses--Closed School (34 CFR 
685.222(g)),'' and ``Group Process for Borrower Defense Claims--Open 
School (34 CFR 685.222(h)).''
    To standardize the form of the requests and facilitate the 
Department's efficient review, under the proposed process, the 
Department would create an easy-to-use claim form for borrower defense 
for use by individual borrowers to provide information regarding the 
borrower's Direct Loan and evidence the borrower may have in support of 
his or her claim, or such other information that the Department may 
reasonably decide is necessary. In addition, the application would 
require the borrower to indicate if he or she has submitted a claim to, 
and received money from, entities aside from the Department for the 
same alleged harm underlying the borrower defense claim. We believe 
requesting such information is important to make clear to borrowers the 
information the Department needs from them, to ensure the fairness of 
the discharge process, and to protect Federal taxpayers by prohibiting 
borrowers from collecting relief from multiple parties for the same 
claim. If the borrower should choose to be represented by counsel, the 
Department would work directly with such a representative, upon receipt 
of the borrower's consent.
    One non-Federal negotiator requested that the Department clarify 
what evidence might be considered by the Department official, or 
hearing official, in the group processes discussed under ``Group 
Process for Borrower Defenses--General (34 CFR 685.222(f)),'' ``Group 
Process for Borrower Defenses--Closed School (34 CFR 685.222(g)),'' and 
``Group Process for Borrower Defense Claims--Open School (34 CFR 
685.222(h)),'' when adjudicating a claim for borrower defense. Evidence 
that a borrower could submit as part of the application may include, 
but would not be limited to: The borrower's own statement or 
declaration regarding the claim, statements of any other persons that 
the borrower believes support the claim, and copies of any documents 
that may be relevant to the borrower's claim. These documents may 
include, for example, copies of the enrollment agreement with the 
school, school catalogs, bulletins, letters or other communications, 
Web page print-outs, circulars, advertisements, or news articles. In 
addition to written materials, documents may also include any media by 
which information can be preserved, such as videos or recordings. For 
applications filed by an individual, a Department official may also 
contact the borrower to obtain more information and such oral 
statements may also be evidence that would be considered in the 
borrower defense process. The Department official may also consider 
other information that the Department has in its possession, such as 
information obtained from the school or otherwise obtained by the 
Department or third parties (e.g., accreditors, government agencies). 
The kind of evidence that will be needed and available to determine the 
validity of the borrower's claim will vary from case to case and will 
depend on the specific circumstances of each borrower's claim.
    The Department also proposes in Sec.  685.222(e)(7) that the 
Secretary may initiate a separate proceeding to collect

[[Page 39347]]

from the school the amount of relief resulting from a borrower defense 
determined under Sec.  685.222(e). As proposed, the Secretary may 
initiate a proceeding to recover against the school, but may also 
determine that a separate proceeding will not be initiated. For 
example, the Secretary may decide not to initiate such a proceeding due 
to evidentiary constraints. The Department intends that the proposed 
fact-finding process used for an individual borrower defense claim 
would be separate and distinct from the Department's efforts to recover 
from schools any losses arising from a borrower defense. The final 
decision would determine the amount of relief to be awarded, which in 
turn would determine the amount of losses to the Secretary that the 
Department can then collect from the school. However, the Department's 
proposed regulation would not condition borrower relief awarded in this 
proceeding on whether the Secretary has the actual ability to recover 
those losses from the school. Rather, the Department will provide 
relief to the borrower according to the final decision of this process, 
and the Department's action to recover losses from the school will 
follow in a separate proceeding.

Group Process for Borrower Defenses--General (Sec.  685.222(f))

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution of 
higher education a borrower may assert as a defense to repayment of a 
Direct Loan.
    Section 487 of the HEA provides that institutions participating in 
the title IV, HEA programs shall not engage in substantial 
misrepresentation of the nature of the institution's education program, 
its financial charges, or the employability of its graduates.
    Current Regulations: Section 685.206(c) states that borrowers have 
the right to assert borrower defenses, but does not establish any 
process for doing so.
    Proposed Regulations: Proposed Sec.  685.222(f) would provide a 
framework for the borrower defense group process, including 
descriptions of the circumstances under which borrower defense claims 
asserted by or with regard to a group could be considered and the 
process the Department would follow for borrower defenses for a group.
    Generally, we propose that the Secretary would initiate a review of 
borrower defense claims asserted by or with regard to a group. This 
would occur when, upon consideration of factors including, but not 
limited to, the existence of common facts and claims among borrowers 
that are known to the Secretary, fiscal impact, and the promotion of 
compliance by the school or other title IV, HEA program participants, 
the Secretary determines it is appropriate to initiate a process to 
determine whether a group of borrowers has a common borrower defense.
    The proposed regulations would also provide for members of the 
group to be identified by the Secretary from individually filed 
applications or from any other source of information. Moreover, if the 
Secretary determines that common facts and claims exist that apply to 
borrowers who have not filed an application, the Secretary could 
include such borrowers in the group.
    Once a group of borrowers with common facts and claims has been 
identified, under Sec.  685.222(f)(2)(i), the Secretary would designate 
a Department official to present the group's common borrower defense 
claim in the fact-finding process described in Sec.  685.222(g) or (h) 
of this section, as applicable, and would provide each identified 
member of the group with notice that allows the borrower to opt out of 
the proceeding. The Secretary would notify the school, as practicable, 
of the basis of the group's borrower defense, the initiation of the 
fact-finding process, any procedure by which to request records, and 
how the school should respond.
    For a group of borrowers with common facts and claims for which the 
Secretary determines there may be a borrower defense on the basis of a 
substantial misrepresentation that was widely disseminated, there would 
be a rebuttable presumption that all of the members of the group 
reasonably relied on the misrepresentation.
    Reasons: In response to requests by non-Federal negotiators 
representing students and borrowers, consumer advocacy organizations, 
and legal assistance organizations, we propose to establish a group 
claim process that is designed to be simple, accessible, and fair, and 
to promote greater efficiency and expediency in the resolution of 
borrower defense claims.
    The Secretary would determine whether a group process should be 
initiated after consideration of relevant factors. We expect that the 
Secretary would initiate a group process only where there are common 
facts and claims among the borrowers. These common facts and claims may 
emerge, for example, from the Department's analysis of individual 
borrower defense claims; the identification by the Secretary of factors 
that indicate a school has engaged in substantial misrepresentation 
that has potentially impacted a group of borrowers; the Department's 
receipt of a judgment possibly affecting a group of borrowers in the 
same way; the Department's identification of a breach of contract that 
may affect a group of borrowers; or, for loans first disbursed before 
July 1, 2017, the Department's knowledge of a violation of State law 
relating to the making of Direct Loans or provision of education 
services affecting a group of borrowers. Evidence for any of these 
determinations might come from submissions to the Department by 
claimants, State AGs or other officials, or advocates for claimants, as 
well as from the Department's investigations.
    We also propose that if the Secretary determines that there are 
common facts and claims that may affect numerous borrowers, the 
Secretary may include in the group those borrowers whom we can identify 
from Department records who are likely to have experienced conduct 
involving common facts as those who have filed, and who could be 
expected to have similar claims, even if those we identify have not 
filed a borrower defense application. The Department believes that 
including such borrowers would allow for faster relief for a broader 
group of borrowers than if the process is limited to just those who 
file applications for relief.
    In proposed Sec.  685.222(f), we specify that, in determining 
whether to initiate a group process, the Secretary may also consider 
other factors. These factors include items such as the fiscal impact of 
considering claims only in individual instances and the significant 
amount of administrative resources required to consider such claims one 
by one, the promotion of compliance by pursuing recovery from the 
schools in aggregated amounts that may affect a school's interests, and 
the deterrent effect such actions can be expected to have on both the 
individual school and similarly situated schools. Although the 
Department intends to carefully weigh the above factors in deciding 
whether to initiate a group process--which we anticipate will have more 
formal processes and procedures, involvement by the school, and 
commitment of administrative resources by the Department--the 
Department's consideration of such factors for the initiation of a 
group process would not prevent individual borrowers from obtaining 
determinations. Individual borrowers would be able to continue to seek 
relief and obtain determinations as described in proposed Sec.  
685.222(e), and could also opt out of a group process as described in 
proposed Sec.  685.222(f)(2) at

[[Page 39348]]

the outset and utilize the process in Sec.  685.222(e).
    We believe the Secretary is best positioned to make a determination 
as to whether a group process is appropriate since the Secretary is 
likely to have the most information regarding the circumstances that 
warrant use of a group process. However, non-Federal negotiators 
requested that State AGs and legal assistance organizations be allowed 
to request that the Secretary initiate a group process and to make 
submissions in those processes, and that the Secretary be required to 
issue written responses to such requests and submissions. The 
Department always welcomes cooperation and input from other Federal and 
State enforcement entities, as well as legal assistance organizations 
and advocacy groups. In our experience, such cooperation is more 
effective when it is conducted through informal communication and 
contact. Accordingly, we have not incorporated a provision regarding 
written responses from the Secretary, but plan to create a point of 
contact for State AGs to allow for active channels of communication on 
borrower defense issues, and reiterate that we welcome a continuation 
of cooperation and communication with other interested groups and 
parties. As indicated above, the Department is also fully ready to 
receive and make use of evidence and input from other stakeholders, 
including advocates and State and Federal agencies.
    In response to negotiator concerns, the proposed group process is 
designed to ensure that the school has an opportunity for a full and 
fair opportunity to be heard regarding claims. We propose that, when 
the Secretary determines that the group claim process is appropriate, 
the Department would assume responsibility for presenting the group's 
claims in the administrative proceeding against the school. Because the 
administrative proceeding will determine both the validity of the 
borrowers' claims and the liability of the school to the Department, 
the Department believes that it is the appropriate party to present the 
claims. Additionally, by undertaking this role, the Department intends 
to reduce the likelihood that third parties, such as debt 
``counselors'' or collection companies, are able to prey upon borrowers 
unfamiliar with the borrower defense process by promoting their 
services to arrange relief, and to lessen the legal costs and 
administrative burden to borrowers in the process.
    In response to negotiator concerns, we have proposed that a 
borrower could opt out of a group borrower defense claim action, and 
instead submit an individual application. This would allow the 
individual to make his or her own case (with or without legal 
representation), giving the individual the same right to control the 
assertion of the individual's claim as would be available in a class 
action. Fed. R. Civ. Proc. 23(c). A determination made in the 
administrative proceeding on the group claim would be given substantial 
weight in any subsequent evaluation of the individual claim of a 
borrower who ``opted out'' of the group process.
    Finally, for a group of borrowers with common facts and claims for 
which the Secretary determines there may be a borrower defense on the 
basis of a substantial misrepresentation that was widely disseminated, 
there would be a rebuttable presumption that all of the members of the 
group to which the representation was made reasonably relied on the 
misrepresentation. If a representation that is reasonably likely to 
induce a recipient to act is made to a broad audience, we consider it 
logical to presume that those audience members did in fact rely on that 
representation. We believe there is a rational nexus between the 
publication of the misrepresentation and the likelihood of reliance by 
the audience such that we propose to adopt a rebuttable presumption 
that all members of the group did in fact so rely.\18\ This rebuttable 
presumption would shift the burden to the school, requiring the school 
to demonstrate that individuals in the identified group did not in fact 
rely on the misrepresentation at issue.
---------------------------------------------------------------------------

    \18\ Case law requires no more than such a rational nexus:
    . . . [A]dministrative agencies may establish presumptions, ``as 
long as there is a rational nexus between the proven facts and the 
presumed facts.'' Cole v. U.S. Dep't of Agric., 33 F.3d 1263, 1267 
(11th Cir. 1994); Sec'y of Labor v. Keystone Coal Mining Corp., 151 
F.3d 1096, 1100-01 (D.C. Cir. 1998) (stating that presumptions are 
permissible ``if there is `a sound and rational connection between 
the proved and inferred facts' '') (quoting Chem. Mfrs. Ass'n v. 
Dep't of Transp., 105 F.3d 702, 705 (D.C. Cir. 1997)). ``Appellants 
bear `the heavy burden of demonstrating that there is no rational 
connection between the fact proved and the ultimate fact to be 
presumed.' '' USX Corp., 395 F.3d at 170 (quoting Cole, 33 F.3d at 
1267).
    U.S. Steel Corp. v. Astrue, 495 F.3d 1272, 1284 (11th Cir. 
2007).
---------------------------------------------------------------------------

Group Process for Borrower Defenses--Closed School (Sec.  685.222(g))

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution of 
higher education a borrower may assert as a defense to repayment of a 
Direct Loan.
    Current Regulations: Section 685.206(c) states that borrowers may 
assert borrower defenses, but does not establish any process for doing 
so.
    Proposed Regulations: Section 685.222(g) of the proposed 
regulations would establish a process for review and determination of 
borrower defense claims for groups identified by the Secretary for 
which the claims relate to Direct Loans to attend a school that has 
closed and has provided no financial protection currently available to 
the Secretary from which to recover any losses based on borrower 
defense claims, and for which there is no appropriate entity from which 
the Secretary can otherwise practicably recover such losses.
    Under proposed Sec.  685.222(g)(1), a hearing official would review 
the Department official's basis for identifying the group and resolve 
the claim through a fact-finding process. As part of that process, the 
hearing official would consider any evidence and argument presented by 
the Department official on behalf of the group and, as necessary to 
determine any claims at issue, on behalf of individual members of the 
group. The hearing official would consider any additional information 
the Department official considers necessary, including any Department 
records or response from the school or a person affiliated with the 
school as described in Sec.  668.174(b) as reported to the Department 
or as recorded in the Department's records, if practicable. As 
discussed under ``Borrower Relief (34 CFR 685.222(i) and Appendix A),'' 
the hearing official may also request information as described in Sec.  
685.222(i)(1).
    The hearing official would issue a written decision determining the 
merits of the group borrower defense claim. If the hearing official 
approves the borrower defense, that decision would notify the members 
of the group of that determination and of the relief provided on the 
basis of the borrower defense claim. If the hearing official denies the 
borrower defense in full or in part, that decision would state the 
reasons for the denial, the evidence that was relied upon, the portion 
of the loans that are due and payable to the Secretary, and whether 
reimbursement of amounts previously collected is granted, and would 
inform the borrowers that if any balance remains on their respective 
loans, the loans will return to their statuses prior to the group 
process. The Secretary would provide copies of the written decision to 
the members of the group, and, as practicable, to the school.
    Similar to the individual claim process, the hearing official's 
decision

[[Page 39349]]

would be final as to the merits of the group borrower defense and any 
relief that may be granted on the group borrower defense. However, if 
relief for the group was denied in full or in part, an individual 
borrower would be able to request that the Secretary reconsider the 
borrower defense upon the identification of new evidence in support of 
the borrower's individual borrower defense claim as described in 
proposed Sec.  685.222(e)(5)(i). Additionally, the proposed regulation 
provides that the Secretary may also reopen a borrower defense 
application at any time to consider evidence that was not considered in 
making the previous decision.
    Reasons: When a group borrower defense is asserted with respect to 
Direct Loans to attend a school that has closed and has provided no 
financial protection currently available to the Secretary from which to 
recover any losses based on borrower defense claims, and for which 
there is no appropriate entity such as a corporate owner of a school 
from which the Secretary can otherwise practicably recover such 
losses,\19\ the proposed regulations on the process for resolving the 
claim would focus on the arguments and evidence that may be brought by 
the Department official before a hearing official.
---------------------------------------------------------------------------

    \19\ In some instances, the Department may consider a school 
owned by a corporate parent to be financially responsible based on 
an evaluation of the consolidated balance sheets of the school, the 
parent corporation, and affiliated subsidiaries. 34 CFR 
668.23(d)(2). If the school is considered to be financially 
responsible only based on the assets of the consolidated entities, 
the Department requires the parent corporation to execute the 
Program Participation Agreement by which the school participates.
---------------------------------------------------------------------------

    We expect that the fact-finding process in this case would occur 
after a school has liquidated its assets and, thus, would not typically 
involve the school. The evidence and records used to make a 
determination would be largely composed of the common facts and claims 
that served as the basis for forming the group.
    While this group borrower defense process would not typically 
involve the school, a hearing official would still preside over the 
fact-finding process to ensure that the decision is based on a sound 
and thorough evaluation of the merits of the claim. The hearing 
official would consider the arguments and evidence presented by the 
designated Department official and, as discussed under ``Borrower 
Relief (34 CFR 685.222(i) and Appendix A),'' may also request 
information under proposed Sec.  685.222(i)(1).

Group Process for Borrower Defense Claims--Open School (Sec.  
685.222(h))

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution of 
higher education a borrower may assert as a defense to repayment of a 
Direct Loan.
    Current Regulations: Section 685.206(c) states that borrowers may 
assert borrower defenses, but does not establish any process for doing 
so.
    Proposed Regulations: Proposed Sec.  685.222(h) would establish the 
following process for groups identified by the Secretary for which the 
borrower defense is asserted with respect to Direct Loans to attend an 
open school.
    A hearing official would resolve the borrower defense and determine 
any liability of the school through a fact-finding process. As part of 
the process, the hearing official would consider any evidence and 
argument presented by the school and the Department official on behalf 
of the group and, as necessary, evidence presented on behalf of 
individual group members. As discussed under ``Borrower Relief (34 CFR 
685.222(i) and Appendix A),'' the hearing official may also request 
information as described in Sec.  685.222(i)(1).
    The hearing official would issue a written decision, regardless of 
the outcome of the group borrower defense. If the hearing official 
approved the borrower defense, that decision would describe the basis 
for the determination, notify the members of the group of the relief 
provided on the basis of the borrower defense, and notify the school of 
any liability to the Secretary for the amounts discharged and 
reimbursed.
    If the hearing official denied the borrower defense in full or in 
part, the written decision would state the reasons for the denial, the 
evidence that was relied upon, the portion of the loans that are due 
and payable to the Secretary, whether reimbursement of amounts 
previously collected is granted, and would inform the borrowers that 
their loans--in the amounts determined to be enforceable obligations--
will return to their statuses prior to the group borrower defense 
process. It also would notify the school of any liability to the 
Secretary for any amounts discharged. The Secretary would provide 
copies of the written decision to the members of the group, the 
Department official, and the school.
    The hearing official's decision would become final as to the merits 
of the group borrower defense claim and any relief that may be granted 
within 30 days after the decision is issued and received by the 
Department official and the school unless, within that 30-day period, 
the school or the Department official appeals the decision to the 
Secretary. A decision of the hearing official would not take effect 
pending the appeal. The Secretary would render a final decision 
following consideration of any appeal.
    After a final decision has been issued, if relief for the group has 
been denied in full or in part, a borrower may file an individual claim 
for relief for amounts not discharged in the group process. In 
addition, the Secretary may reopen a borrower defense application at 
any time to consider evidence that was not considered in making the 
previous decision, as discussed above.
    The Secretary would collect from the school any amount of relief 
granted by the Secretary for the borrowers' approved borrower defense. 
Relief may include discharge of some or all accrued interest, and the 
loss to the government in those instances will include that discharged 
interest.
    Reasons: The group borrower defense process involving an open 
school would be structured to provide substantive and procedural due 
process protections to both the borrowers and the school. By having a 
Department official present the group's borrower defense claims, the 
Department seeks to lessen, if not eliminate, the need for borrowers to 
retain counsel in order to pursue relief and remove potential 
difficulties that navigating the borrower defense process could present 
for borrowers. As proposed, schools would have the opportunity to raise 
arguments and evidence, including any defenses, in the proceeding. 
Additionally, as discussed under ``Borrower Relief (34 CFR 685.222(i) 
and Appendix A),'' the hearing official may also independently request 
information as described in Sec.  685.222(i)(1).
    The open school process would also provide for an appeal to the 
Secretary of the hearing official's decision, by either the school or 
the Department official. The proposed regulations would allow 
individual members of the group to request reconsideration of their 
individual claims upon the presentation of new evidence in the event 
the group claim is not successful.
    Non-Federal negotiators requested clarification as to whether a 
hearing official's determination of borrower relief in the open school 
process would be contingent upon the Department's ability to recover 
its losses from granting such relief from the school. The final 
decision of the hearing official, or of the Secretary upon appeal, 
would determine the amount of relief to be

[[Page 39350]]

awarded, which in turn would determine the amount of losses to the 
Secretary that the Department can then collect from the school under 
proposed Sec.  685.222(h)(5). However, while the final decision will 
include a determination as to a school's liability for the conduct in 
question, the Department intends that determinations of borrower relief 
will be independent of, and not contingent upon, determinations of 
school liability that will lead to the Department's ability to recover 
the losses it incurs from granting such relief.

Borrower Relief (Sec.  685.222(i) and Appendix A)

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution of 
higher education a borrower may assert as a defense to repayment of a 
Direct Loan.
    Current Regulations: Section 685.206(c) states that, in the event 
of a successful borrower defense claim against repayment, the Secretary 
would notify the borrower that he or she is relieved of the obligation 
to repay all or part of the loan and associated costs and fees, and 
also affords the borrower further appropriate relief. This further 
relief may include, but is not limited to, reimbursement for amounts 
paid toward the loan voluntarily or through enforced collection, a 
determination that the borrower is not in default and is eligible to 
receive title IV, HEA program aid, and updating reports to consumer 
reporting agencies.
    Proposed Regulations: Proposed Sec.  685.222(i)(1) describes the 
proposed process by which a borrower's relief would be determined when 
a borrower defense claim is approved under the procedures in Sec.  
685.222(e), (g), or (h). The Department official or--for group claims, 
the hearing official--charged with adjudicating the claim would 
determine the appropriate method for calculating, and amount of, relief 
arising out of the facts underlying the borrower's claim, based upon 
the information gathered by, or presented to and considered by, the 
official. The amount of relief may include a discharge of all amounts 
owed to the Secretary on the loan at issue and may include the recovery 
of amounts previously collected by the Secretary on the loan, or some 
lesser amount. The official would consider the availability of 
information required for a method of calculation and could use one or 
more of the methods described in Appendix A to the proposed 
regulations, or some other method determined by the official. For group 
claims, the official could consider information from a sample of 
borrowers in the group.
    The designated Department official would notify the borrower of the 
relief determination and the potential for tax implications and would 
provide the borrower an opportunity to opt out of group relief, if 
applicable.
    Consistent with the determination of relief, the Secretary would 
discharge the borrower's obligation to repay all or part of the loan 
and associated costs and fees that the borrower would otherwise be 
obligated to pay and, if applicable, would reimburse the borrower for 
amounts paid to the Secretary toward the loan voluntarily or through 
enforced collection.\20\
---------------------------------------------------------------------------

    \20\ Reimbursement includes only the actual gross amount paid, 
including any amount used to defray collection costs, but does not 
include interest on the amount paid.
    ``Under the long-standing `no-interest rule,' sovereign immunity 
shields the U.S. government from interest charges for which it would 
otherwise be liable, unless it explicitly waives that immunity[.]'' 
Sandstrom v. Principi, 358 F.3d 1376, 1379 (Fed. Cir. 2004).
    DMS Imaging, Inc. v. United States, 123 Fed. Cl. 645, 660 
(2015). There is no waiver of that immunity in the HEA.
---------------------------------------------------------------------------

    The Secretary or the hearing official, as applicable, would afford 
the borrower such further relief as the Secretary or the hearing 
official determines is appropriate under the circumstances. That relief 
would include, but not be limited to, determining that the borrower is 
not in default on the loan and is eligible to receive assistance under 
title IV of the HEA, and updating reports to consumer reporting 
agencies to which the Secretary previously made adverse credit reports 
with regard to the borrower's Direct Loan.
    The total amount of the relief granted with respect to a borrower 
defense cannot exceed the amount of the loan and any associated costs 
and fees, and would be reduced by the amount of any refund, 
reimbursement, indemnification, restitution, compensatory damages, 
settlement, debt forgiveness, discharge, cancellation, compromise, or 
any other benefit received by, or on behalf of, the borrower that was 
related to the borrower defense. The relief to the borrower may not 
include non-pecuniary damages such as inconvenience, aggravation, 
emotional distress, or punitive damages.
    Appendix A describes some of the methods the Secretary could employ 
to calculate relief if the requested relief for a borrower defense is 
approved in full or in part. The amount of relief may include a 
cancellation of the outstanding balance on the loan at issue, or some 
lesser amount, and may include the recovery of amounts previously 
collected by the Secretary on the portion of the loan determined to be 
not enforceable against the borrower as a result of the borrower's 
claim, taking into account any limiting factors such as applicable 
limitation periods or statutes of limitation. The methods described 
include the following:
    [ssquf] The difference between what the borrower paid and what a 
reasonable borrower would have paid had the school made an accurate 
representation as to the issue that was the subject of the substantial 
misrepresentation underlying the borrower defense claim;
    [ssquf] The difference between the amount of financial charges the 
borrower could have reasonably believed the school was charging, and 
the actual amount of financial charges made by the school, for claims 
regarding the cost of a borrower's program of study; and
    [ssquf] The total amount of the borrower's economic loss, less the 
value of the benefit, if any, of the education obtained by the 
borrower. Economic loss, for the purposes of this section, may be no 
greater than the amount of the cost of attendance. The value of the 
benefit of the education may include transferable credits obtained by 
the borrower,, and, for gainful employment programs, qualifying 
placement in an occupation within the Standard Occupational 
Classification (SOC) code for which the training was provided, provided 
that the borrower's earnings meet the expected salary for the program's 
designated occupation(s) or field, as determined using an earnings 
benchmark for that occupation. The Department official or hearing 
official will consider any evidence indicating that no identifiable 
benefit of the education was received by the student.
    The Secretary may also calculate the borrower's relief on the basis 
of such other measures as the Secretary may determine.
    Reasons: The proposed regulations provide for the determination of 
relief commensurate with the borrower's injury stemming from the act or 
omission of the school asserted in the borrower defense claim. While 
some borrower defenses may merit a discharge of the full amount of the 
Direct Loan, other claimants may prove an injury in an amount less than 
that full amount. After considering relevant facts and data, the 
Department official or the hearing official, as applicable, would 
determine an amount of relief that is fair to the borrower. This 
approach would compensate borrowers fairly for the harm they suffered 
while protecting the fiscal interests of the Federal government.

[[Page 39351]]

    Proposed Sec.  685.222(i)(5) would provide that the relief provided 
to a borrower under Sec.  685.206(c) or Sec.  685.222 may not exceed 
the amount of the Direct Loan and associated costs and fees. The 
Department's ability to provide relief for borrowers is predicated upon 
the existence of the borrower's Direct Loan, and the Department's 
ability to provide relief for a borrower on a Direct Loan is limited to 
the extent of the Department's authority to take action on such a loan. 
Section 455(h) of the HEA, 20 U.S.C. 1087e(h), gives the Department the 
authority to allow borrowers to assert ``a defense to repayment of a 
[Direct Loan],'' and discharge outstanding amounts to be repaid on the 
loan. However, section 455(h) also 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.'' As a result, the 
Department may not reimburse a borrower for amounts in excess of the 
payments that the borrower has made on the loan to the Secretary as the 
holder of the Direct Loan. Additionally, proposed Sec.  685.222(i)(5) 
would reduce a borrower's amount of relief from the borrower defense 
process by any amounts that the borrower obtained pursuant to such 
other sources for reasons discussed under ``Process for Individual 
Borrowers (34 CFR 685.222(e)).'' The rule is intended to prevent a 
double recovery for the same injury at the expense of the taxpayer. 
Because the borrower defense process relates to the borrower's receipt 
of a Federal loan, we would reduce the amount of a borrower's relief 
from the borrower defense process by the amount received from such 
other sources only if the relief from the other sources also relates to 
the Federal loan that is the subject of the borrower defense.
    Additionally, proposed Sec.  685.222(i)(5) would also clarify that 
a borrower may not receive non-pecuniary damages such as damages for 
inconvenience, aggravation, emotional distress, or punitive damages. We 
recognize that, in certain civil lawsuits, plaintiffs may be awarded 
such damages by a court. However, such damages are not easily 
calculable and may be highly subjective. The Department believes that 
excluding non-pecuniary damages from relief under this rule would help 
produce more consistent and fair results for borrowers.
    Subject to these limitations, the Department's proposal would 
require that the designated Department official, or hearing official, 
as applicable, determine the appropriate method for calculating the 
relief to the borrower and the amount of such relief, whether relief to 
the borrower was approved in full or in part. Determinations on 
borrower defenses may vary widely, depending on the underlying basis of 
the claim and circumstances alleged, as well as the level of injury 
suffered by or detriment to the borrower. For example, for a borrower 
defense claim brought for a breach of a discrete contractual term such 
as a school's failure to provide some specific service, the borrower's 
injury may be more appropriately calculated in consideration of the 
value of that service and may not warrant a full discharge of the 
borrower's loan and full reimbursement of payments on the loan made to 
the Secretary. For example, if the school contractually promised to 
provide tutoring services, but failed to provide such services, then 
the borrower would receive the cost of such tutoring services as relief 
under the proposed method.
    We also recognize that the feasibility of any particular method of 
calculation may be limited due to a lack of available information 
required for such a method. Information regarding tuition prices among 
comparable programs in a specific geographic region may not be 
available or suitable for use in the calculation of relief for an 
individual borrower's claim, but may in certain circumstances be 
available and relevant for the calculation of relief for a group of 
borrowers. To permit the Department official or the hearing official, 
as applicable, to determine the appropriate method of calculation and 
to determine relief, the proposed regulations would provide that the 
official may request information for such purposes. Additionally, the 
proposed regulations would require the official to consider what 
information may be feasibly obtained in selecting a method of 
calculation and in making requests for information.
    For determinations of relief for a group of borrowers pursuant to 
Sec.  685.222(g) and (h), the Department also believes it is 
appropriate to allow the hearing official to consider evidence from a 
sample of borrowers from the group. The proposed group claim processes 
are designed to facilitate the efficient adjudication of borrower 
defenses with common facts and claims. We believe that allowing a 
calculation of relief based upon information from a sample of borrowers 
would facilitate this goal. However, the hearing official would 
consider in each case the feasibility of using a sample, and the method 
of determining the sample, in determining the appropriate method for 
calculating relief.
    In proposed Sec.  685.222(i)(1), the Department also cross-
references proposed Appendix A to subpart B of part 685, which lists 
specific methods by which a borrower's relief may be calculated. 
Appendix A notes that the amount of the borrower's relief may include a 
discharge of all amounts owed to the Secretary on the loan at issue, or 
a lesser amount, and may include the recovery of amounts previously 
collected by the Secretary on the loan. The Department recognizes that 
the choice and use of any method listed in Appendix A may vary 
depending on the availability of information and underlying facts and 
claims for the borrower defense, as noted in paragraph (i)(1), and also 
notes that the designated Department official or hearing official, as 
applicable, may use another method that is not listed to calculate 
relief. However, the Department proposes the methods in Appendix A as 
possible methodologies for a designated Department official or hearing 
official, as applicable, to consider in determining calculations for 
relief.
    The first proposed method in Appendix A applies in the case of a 
substantial misrepresentation and looks to the difference between what 
was actually paid by a borrower in reliance on a misrepresentation, and 
what the borrower would have paid if the borrower had been given an 
accurate understanding of the subject of the substantial 
misrepresentation. The item at issue in the substantial 
misrepresentation could include the total cost of attendance at a 
school, or could pertain to a specific service related to the making of 
the borrower's Direct Loan or the provision of educational services for 
which the loan was provided. In some situations, as when the borrower 
receives education that proves to be worthless, a substantial 
misrepresentation may warrant full relief, without further analysis. 
However, in other situations, the Department believes it may be 
appropriate to determine a borrower's relief by restoring to the 
borrower the value of what he or she paid for, but did not receive. We 
believe that such an approach is consistent with the Department's 
interest in providing relief to borrowers for the harm they suffered 
while protecting the Federal taxpayer and the interests of the Direct 
Loan Program.
    The second proposed method in Appendix A looks to the difference 
between the amount of financial charges a borrower reasonably believed 
that a school was charging, and the actual amount of charges made by 
the school regarding the cost of a borrower's

[[Page 39352]]

program of study. For example, if a school misrepresented the amount of 
a participation fee or the costs of books for a specific class, under 
this method, the borrower would be entitled to the difference between 
what the borrower reasonably thought the charges were as represented by 
the school, and the actual costs of such items. To the extent that a 
borrower did, for example, participate in such an experience or did 
receive the books, we believe that such an approach balances the 
borrower's interest in paying actual costs with the Department's 
interest in protecting the Federal taxpayer.
    The third proposed method in Appendix A is based on the concept 
that, if circumstances warrant, a borrower may be entitled to receive 
the total amount of his or her economic loss. Economic loss may not be 
greater than the borrower's cost of attendance, which is a term defined 
in section 472 of the HEA, 20 U.S.C. 1087ll. Pursuant to section 472, a 
borrower may obtain Federal financial aid up to the cost of attendance 
at a school and may use that aid only for expenses related to 
attendance, which include costs such as tuition and fees; allowances 
for books, supplies, transportation, and miscellaneous personal 
expenses; allowances for room and board; and allowances for dependent 
care for students with dependents, among others. The Department has 
stated that it will recognize borrower defenses only if they are 
directly related to the making of a Direct Loan or to the school's 
provision of educational services for which the loan was provided. 60 
FR 37768, 37769. Section 484(a)(4)(A) of the HEA requires the borrower 
to commit to use title IV, HEA funds received only to pay expenses 
incurred to attend the school. By clarifying that a borrower's relief 
under the proposed method may be no greater than the borrower's cost of 
attendance at the school, the proposed approach would avoid the 
difficulty of attempting to track which particular expense the borrower 
paid with the loan proceeds, as opposed to those paid with grant funds 
or personal funds. It would do so by including only those costs that 
Congress considered to be costs that all title IV, HEA applicants would 
incur and warrant Federal consideration and support. The third proposed 
method would also note that the relief measured will be reduced by the 
value of the benefit, if any, of the education. We recognize that under 
some circumstances, a borrower's education will be deemed to have no 
value, and thus the borrower's relief would be measured by the 
borrower's total economic loss, subject to the limit that the 
borrower's relief can only be approved up to the amount of the 
borrower's Direct Loan. The proposed method explicitly states that the 
Department official, or hearing official, will consider any evidence 
that no benefit was received by the student. However, in other 
circumstances, we believe it will be appropriate for a designated 
Department official or hearing official, as applicable, to consider the 
value provided by the education, as determined by the official. For 
example, if a borrower obtained transferrable credits, then the 
borrower can use those credits towards the completion of his or her 
education at another school, thus reducing his or her cost of 
attendance at that other institution. However, if transferability of 
those credits is limited due to the school's accreditation or for other 
reasons, then the hearing official or designated Department official 
may consider such factors and assign due value to the credits. 
Similarly, for gainful employment programs, where the explicit purpose 
of such programs is to train students for specific vocations, the 
Department believes it could be appropriate to consider whether the 
borrower obtained qualifying placement with earnings commensurate with 
the expected earnings for the occupation or field for which the 
borrower obtained his or her training. The expected salary would be 
determined using an earnings benchmark for that occupation. Although 
the proposed method would note transferable credits and qualifying 
placement and earnings for gainful employment program borrowers as 
possible indicators of value, this list is not exhaustive and the 
hearing official or designated Department official would be permitted 
to also consider other factors. As with the other proposed methods, we 
believes this approach balances the interest of the Federal taxpayer 
with a borrower's interest in paying for only the true cost of his or 
her education, in light of the act or omission of the school giving 
rise to the borrower defense.
    Non-Federal negotiators requested that the Department create a 
presumption of full discharge and reimbursement of amounts paid on the 
loan whenever a borrower defense is approved by the Department. In 
cases where a Department official is making determinations, under 
proposed Sec.  685.222(e), such a presumption would shift the burden of 
disproving loss to the Department. In cases where a group process has 
been initiated under proposed Sec.  685.222(f)-(h), this burden would 
be shifted to the school. However, as noted, the Department has a 
responsibility to protect the interests of Federal taxpayers and such 
burden shifting is not justified when losses from borrower defenses may 
be borne by the taxpayer. The Department believes that to balance its 
interest in protecting the taxpayer with its interest in providing fair 
outcomes to borrowers, the Department must consider the extent to which 
claimants actually suffered financial loss when determining relief. In 
proposing that designated Department officials and hearing officials 
consider such calculations, however, the Department does not preclude 
full relief for borrowers; rather, such officials would carefully 
consider available evidence and make reasoned determinations as to when 
and whether full relief is justified.
    Proposed Sec.  685.222(i)(2) lists certain items the designated 
Department official or hearing official would include in the 
notification to the borrower of the relief determination. Given that 
the Department does not have the authority to determine the tax 
implications for relief in borrower defenses, which is within the 
jurisdiction of the Internal Revenue Service, the notice would simply 
advise the borrower that accepting the relief could affect the 
borrower's tax obligations. The Department would encourage any borrower 
who receives relief to seek advice from tax professionals on the tax 
implications of his or her acceptance of that relief.
    Relief granted through the group processes described in proposed 
Sec.  685.222(f) to (h) may raise specific concerns for members who did 
not file an application for borrower defense or members who may not 
have been engaged in the process to their satisfaction. As a result, 
for determinations of relief for a group of borrowers, the notice would 
also provide members of the group with an opportunity to opt out of the 
relief determination. This would provide borrowers in a group process 
with a second opportunity to opt out of the proceeding, in addition to 
the opt-out provided by the notice given at the initiation of the group 
process described in proposed paragraph (f)(2). If a borrower declines 
to accept the relief determination from the group process, the borrower 
may choose to have his or her borrower defense considered on an 
individual basis through the process described in proposed paragraph 
(e) of this section. As noted earlier, the decision of the hearing 
official in a group proceeding would likely bear

[[Page 39353]]

strongly on the resolution of the borrower's claim, if pursued on an 
individual basis.

Borrower Cooperation and Transfer of Rights (Sec.  685.222(j) and (k))

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution of 
higher education a borrower may assert as a defense to repayment of a 
Direct Loan.
    Current Regulations: Current borrower defense regulations (Sec.  
685.206(c)) do not address borrower cooperation or the transfer of 
rights.
    Proposed Regulations: Section 685.222(j) of the proposed 
regulations would require that a borrower seeking relief through the 
borrower defense process reasonably cooperate with the Secretary, 
whether relief is sought through an individual application filed under 
proposed Sec.  685.222(e) or through the group processes described in 
proposed Sec.  685.222(f) to (h). The Secretary would be permitted to 
revoke relief granted to a borrower who does not fulfill this 
obligation.
    In addition, proposed Sec.  685.222(k) would provide that, when the 
Secretary grants relief in response to a borrower defense claim, the 
borrower is deemed to have assigned to, and relinquished in favor of, 
the Secretary any right to a loan refund (up to the amount discharged) 
that the borrower may have by contract or applicable law with respect 
to the loan or the contract for educational services for which the loan 
was received, against the school, its principals, its affiliates, and 
their successors, its sureties, and any private fund. If the borrower 
asserts and recovers on a claim with a public fund, and if the 
Secretary determines that the borrower's recovery from that public fund 
was based on the same claim raised as a borrower defense and for the 
same loan for which the discharge was granted, the Secretary may 
reinstate the borrower's obligation to repay the amount discharged on 
the loan based on the amount recovered from the public fund.
    Proposed Sec.  685.222(k) would apply notwithstanding any provision 
of State law that would otherwise restrict transfer of those rights by 
the borrower, limit or prevent a transferee from exercising those 
rights, or establish procedures or a scheme of distribution that would 
prejudice the Secretary's ability to recover on those rights. However, 
Sec.  685.222(k) would not prevent a borrower from pursuing relief 
against any party named in Sec.  685.222(k) for claims in excess of 
what has been assigned to the Secretary, or for claims unrelated to the 
basis of the borrower defense on which the borrower received relief.
    Reasons: When a borrower seeks a discharge of a Direct Loan, the 
Department would require the borrower's cooperation to determine the 
facts of the claim and provide the school with due process, as 
appropriate. Absent this cooperation, the Department could be unable to 
successfully resolve the borrower's request for relief. Similarly, for 
the reasons discussed for requesting such information on claims to 
third parties under ``Process for Individual Borrowers (34 CFR 
685.222(e)),'' it is important that the Department prevent double 
recovery for the same claim, when the borrower has already recovered 
from another source.

Borrower Responsibilities and Defenses (Sec.  685.206)

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of an institution of 
higher education a borrower may assert as a defense to repayment of a 
Direct Loan.
    Current Regulations: Section 685.206(c) establishes the conditions 
under which a Direct Loan borrower may assert a borrower defense, the 
relief afforded by the Secretary in the event the borrower's claim is 
successful, and the Secretary's authority to recover from the school 
any loss that results from a successful borrower defense. Specifically, 
Sec.  685.206(c) provides that a borrower defense may be asserted based 
upon any act or omission of the school that would give rise to a cause 
of action against the school under applicable State law. Under Sec.  
685.206(c), a borrower defense is presumed to be raised only in 
response to a proceeding by the Department to collect on a Direct Loan, 
including, but not limited to, tax refund offset proceedings under 34 
CFR 30.33, wage garnishment proceedings under 31 U.S.C. 3720D, salary 
offset proceedings for Federal employees under 34 CFR part 31, and 
consumer reporting proceedings under 31 U.S.C. 3711(f). Under Sec.  
685.206(c), if a borrower defense is successful, the borrower is 
relieved of the obligation to pay all or part of the loan and 
associated costs and fees, and the borrower may be afforded such 
further relief as the Secretary determines is appropriate, including, 
among other things, reimbursement of amounts previously paid toward the 
loan. Although Sec.  685.206(c) permits the Secretary to seek recovery 
from the school of the amount of the loan to which the borrower defense 
applies, it also provides that the Secretary may not initiate such a 
proceeding after the three-year record retention period referenced in 
Sec.  685.309(c).
    Proposed Regulations: Proposed Sec.  685.206(c) would specify that 
it applies only to borrower defenses asserted with respect to Direct 
Loans disbursed prior to July 1, 2017. It would clarify that a borrower 
defense must relate to the making of the Direct Loan or the provision 
of educational services and define ``borrower defense'' to include one 
or both of the following: A defense to repayment of amounts owed to the 
Secretary on a Direct Loan, in whole or in part; and a right to recover 
amounts previously collected by the Secretary on the Direct Loan, in 
whole or in part. Proposed Sec.  685.206(c) would also exclude the 
language that specifically refers to the Department's defaulted loan 
collection proceedings.
    Rather than specifying the available relief in proposed Sec.  
685.206(c) for an approved borrower defense, proposed Sec.  
685.206(c)(2) would refer to proposed Sec.  685.222(e)-(k), which would 
provide procedures for both the assertion and the resolution of a 
borrower defense claim, including available relief for an approved 
borrower defense.
    Proposed Sec.  685.206(c)(2) also would refer to proposed Sec.  
685.222(a) for applicable definitions and to specify the order in which 
the Department would process multiple loan discharge claims submitted 
by the same borrower for the same loan or loans. Under proposed Sec.  
685.222(a)(6), the Secretary would determine the order in which 
multiple loan discharge claims submitted by the same borrower for the 
same loan or loans are processed, and notify the borrower of that 
order.
    Proposed Sec.  685.206(c) would continue to permit the Secretary to 
initiate a proceeding to recover from the school the amount of relief 
arising from an approved borrower defense, but it would remove the 
three-year limitation on the Secretary's ability to initiate such a 
proceeding.
    Reasons: The introduction of a definition of ``borrower defense'' 
streamlines the regulations. The proposed updates to Sec.  685.206 
provide clarity to borrowers who have loans first disbursed prior to 
July 1, 2017, and who are seeking relief based on a borrower defense 
claim. The Department considered whether to change the standard by 
which a borrower may assert a borrower defense for loans disbursed 
prior to the anticipated effective date of these regulations, or July 
1, 2017. However, the existing Direct Loan promissory notes incorporate 
the current borrower defense to repayment process for loans

[[Page 39354]]

first disbursed before July 1, 2017, which is based on an 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. As a 
result, the Department has decided to keep the current standard for 
loans first disbursed prior to July 1, 2017. Acts or omissions that may 
give rise to a cause of action under applicable State law may include 
any cause of action pertaining to the making of the Direct Loan or the 
provision of educational services for which the loan was provided. 
Similarly, other applicable State law principles governing the State 
law cause of action would apply, such as any applicable State law 
statutes of limitation.
    We discuss under ``Borrower Defenses--General (Sec.  685.222(a))'' 
the Department's reasons for clarifying that the Department will 
acknowledge a borrower defense asserted under the regulations ``only if 
the cause of action directly relates to the loan or to the school's 
provision of educational services for which the loan was provided.'' 60 
FR 37768, 37769. We also discuss the reasons for the proposed 
definition of ``borrower defense'' in that part of this NPRM.
    Proposed Sec.  685.206(c) would exclude the language that 
specifically refers to the Department's defaulted loan collection 
proceedings. While many loans that are the subject of a borrower 
defense may be in default, the Department has committed in this 
proposed rulemaking to establish a process outside of the defaulted 
loan collection proceedings to evaluate borrower defenses for loans 
regardless of whether the loans are in default or not. We believe that 
establishing such a dedicated process will enhance the Department's 
efforts to review and process borrower defenses and offer borrowers 
more consistent and focused relief.
    We also propose to amend Sec.  685.206 to refer to a new section of 
the regulations, Sec.  685.222, for the process to be followed when 
pursuing a borrower defense claim. Proposed Sec.  685.222 would provide 
an expanded description of the regulatory framework for the range of 
borrower defense claims, including the process by which claims and 
relief are determined.
    Proposed Sec.  685.206(c)(2) would refer to proposed Sec.  
685.222(a)(6), which addresses the order in which multiple claims for 
loan discharge from the same borrower for the same loan or loans will 
be processed by the Secretary. The proposed language indicates that, if 
the borrower asserts both a borrower defense and any other objection to 
an action of the Secretary with regard to that Direct Loan, the 
Secretary notifies the borrower of the order in which the borrower 
defense and any other objections will be considered. During the 
negotiated rulemaking process, a non-Federal negotiator requested that 
further clarification be provided regarding the order in which claims 
will be determined. The Department did not agree that it was 
appropriate to do so within the proposed regulations, since the 
particular circumstances may vary and establishing one order for all 
cases could result in a progression that could be unfair to individual 
borrowers. In general, we will evaluate claims in the order that is 
likely to result in a decision for the borrower sooner, while also 
effectively and efficiently using the Department's resources.
    While a borrower may still assert a borrower defense in connection 
with the Department's defaulted loan collection proceedings, the 
Department's current experience with borrower defense claims from 
Corinthian students suggests that such claims are more likely to arise 
outside of such proceedings. However, it is not clear whether this will 
be true in the future.
    The existing Direct Loan promissory notes incorporate the current 
borrower defense to repayment process for loans first disbursed before 
July 1, 2017, which is based on an 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. Because current 
regulations in Sec.  685.206(c) do not include a process for submission 
and consideration of claims, the Department intends to extend to 
borrowers with loans first disbursed before July 1, 2017, the processes 
developed to submit, review, and resolve borrower defense claims for 
borrowers with loans first disbursed on or after July 1, 2017.
    The Department is also proposing to remove the limitation period on 
the Department's ability to initiate a proceeding to recover losses 
from approved borrower defenses. We explain the reasons for this 
proposed change under the discussion for Sec.  685.206 and Sec.  
685.308, ``Remedial Action and Recovery from the Institution.''

150 Percent Direct Subsidized Loan Limit (Sec.  685.200)

    Statute: Section 455(q) of the HEA provides that a first-time 
borrower on or after July 1, 2013, is not eligible for additional 
Direct Subsidized Loans if the borrower has received Direct Subsidized 
Loans for a period that is equal to or greater than 150 percent of the 
length of the borrower's current program of study (thereinafter 
referred to as the ``150 percent limit''). In addition, some borrowers 
who are not eligible for Direct Subsidized Loans because of the 150 
percent limit become responsible for the interest that accrues on their 
loans when it would otherwise be paid by the government. The statute 
does not address what effect a discharge of a Direct Subsidized Loan 
has on the 150 percent limit. The statute also does not address whose 
responsibility it is to pay the outstanding interest on any remaining 
loans that have not been discharged, but have previously lost 
eligibility for interest subsidy.
    Current Regulations: Section 685.200(f)(4) provides two exceptions 
to the calculation of the period of time that counts against a 
borrower's 150 percent limit--the subsidized usage period--that can 
apply based on the borrower's enrollment status or loan amount. The 
regulations do not have an exception to the calculation of a subsidized 
usage period if the borrower receives a discharge of his or her Direct 
Subsidized Loan. They also do not address whose responsibility it is to 
pay the outstanding interest on any remaining loans that have not been 
discharged, but have previously lost eligibility for the interest 
subsidy based on the borrower's remaining eligibility period and 
enrollment.
    Proposed Regulations: Proposed Sec.  685.200(f)(4)(iii) would 
specify that a discharge based on school closure, false certification, 
unpaid refund, or defense to repayment will lead to the elimination of 
or recalculation of the subsidized usage period that is associated with 
the loan or loans discharged.
    The proposed regulations would also specify that, when the complete 
amount of a Direct Subsidized Loan or a portion of a Direct Subsidized 
Loan is discharged, the entire subsidized usage period associated with 
that loan is eliminated. In the event that a borrower receives a closed 
school, false certification, or, depending on the circumstances, 
defense to repayment or unpaid refund discharge, the Department would 
completely discharge a Direct Subsidized Loan or a portion of a Direct 
Subsidized Consolidation Loan that is a attributable to a Direct 
Subsidized Loan.
    The proposed regulations would also specify that, when only a 
portion of a Direct Subsidized Loan or a portion of a Direct 
Consolidation Loan that is attributable to a Direct Subsidized Loan is 
discharged, the subsidized usage period is recalculated instead of 
eliminated. Depending on the

[[Page 39355]]

circumstances, discharges due to defense to repayment and unpaid refund 
could result in only part of a Direct Subsidized Loan or a portion of a 
Direct Consolidation Loan that is attributable to a Direct Subsidized 
Loan being discharged.
    The proposed regulations would specify that when a subsidized usage 
period is recalculated instead of eliminated, the period is only 
recalculated when the borrower's subsidized usage period was calculated 
as one year as a result of receiving the Direct Subsidized Loan in the 
amount of the annual loan limit for a period of less than an academic 
year. For example, if a borrower received a Direct Subsidized Loan in 
the amount of $3,500 as a first-year student and on a full-time basis 
for a single semester of a two-semester academic year, the subsidized 
usage period would be one year. If the borrower later receives an 
unpaid refund discharge in the amount of $1,000, the subsidized usage 
period would be recalculated, and the subsidized usage period would 
become 0.5 years because the subsidized usage period was previously 
based on the amount of the loan and, after the discharge, is based on 
the relationship between the period for which the borrower received the 
loan (the loan period) and the academic year for which the borrower 
received the loan.
    In contrast, if the borrower received a Direct Subsidized Loan in 
the amount of $3,500 as a first-year student and on a full-time basis 
for a full two-semester academic year, the subsidized usage period 
would be one year. If the borrower later receives an unpaid refund 
discharge in the amount of $1,000, the subsidized usage period would 
still be one year because the subsidized usage period would still be 
calculated based on the relationship between the loan period and the 
academic year for which the borrower received the loan.
    Proposed Sec.  685.200(f)(3) would provide that, if a borrower 
receives a discharge based on school closure, false certification, 
unpaid refund, or defense to repayment that results in a remaining 
eligibility period greater than zero, the borrower is no longer 
responsible for the interest that accrues on a Direct Subsidized Loan 
or on the portion of a Direct Consolidation Loan that repaid a Direct 
Subsidized Loan, unless the borrower once again becomes responsible for 
the interest that accrues on a previously received Direct Subsidized 
Loan or on the portion of a Direct Consolidation Loan that repaid a 
Direct Subsidized Loan, for the life of the loan.
    For example, suppose a borrower receives three years' worth of 
Direct Subsidized Loans at school A and then transfers to school B and 
receives three additional years' worth of Direct Subsidized Loans. 
Further suppose that at this point, the borrower has no remaining 
eligibility period and enrolls in an additional year of academic study 
at school B, which triggers the loss of interest subsidy on all Direct 
Subsidized Loans received at schools A and B. If the borrower later 
receives a false certification discharge with respect to school B, the 
borrower's remaining eligibility period is now greater than zero. The 
borrower is no longer responsible for paying the interest subsidy lost 
on the three loans from school A. If the borrower then enrolled in 
school C and received three additional years of Direct Subsidized 
Loans, resulting in a remaining eligibility period of zero, and then 
enrolled in an additional year of academic study, the borrower would 
lose the interest subsidy on the Direct Subsidized Loans received at 
schools A and C.
    Reasons: The proposed regulations would codify the Department's 
current practice in this area and would provide clarity in the 
Department's policies and practices. Under the circumstances in which a 
borrower receives a closed school, false certification, defense to 
repayment, or unpaid refund discharge, a borrower has not received all 
or part of the benefit of the loan due to an act or omission of the 
school. In such event, we believe that a student's eligibility for 
future loans and the interest subsidy on existing loans should not be 
negatively affected by having received all or a portion of such loan. 
Accordingly, under the proposed regulations, we would increase the 
borrower's eligibility for Direct Subsidized Loans or reinstate 
interest subsidy on other Direct Subsidized Loans under the 150 percent 
limit where the borrower receives a discharge of a Direct Subsidized 
Loan and the discharge was based on an act or an omission of the school 
that caused the borrower to not receive all or part of the benefit of 
the loan.

Administrative Forbearance (Sec.  685.205(b)(6))

    Statute: Section 428(c)(3) of the HEA provides for the Secretary to 
permit FFEL Program lenders to exercise administrative forbearances 
that do not require the agreement of the borrower, under conditions 
authorized by the Secretary. Section 455(a) provides that Direct Loans 
have the same terms, conditions, and benefits as FFEL Loans.
    Current Regulations: Section 685.205(b) of the current regulations 
describes the circumstances under which the Secretary may grant 
forbearance on a Direct Loan without requiring documentation from the 
borrower. Section 685.205(b)(6) specifies that these circumstances 
include periods necessary for the Secretary to determine the borrower's 
eligibility for a closed school discharge, a false certification of 
student eligibility discharge, an unauthorized payment discharge, an 
unpaid refund discharge, a bankruptcy discharge, and teacher loan 
forgiveness.
    Proposed Regulations: We propose to add to Sec.  685.205(b)(6) a 
mandatory administrative forbearance when the Secretary is in receipt 
of, and is making a determination on, a discharge request based on a 
claimed borrower defense. The proposed changes would add cross-
references to the regulations on borrower defense claims (Sec. Sec.  
685.206(c) and 685.222). By these references, we would expand the 
circumstances under which the Secretary may grant forbearance on a 
Direct Loan without requiring documentation from the borrower.
    Reasons: During the Department's review of a borrower defense, we 
believe borrowers seeking relief should have the option to continue to 
make payments on their loans, as well as the option to have their loans 
placed in forbearance. Providing an automatic forbearance with an 
option for the borrower to decline the temporary forbearance and 
continue making payments would reduce the potential burden on borrowers 
pursuing borrower defenses.

Mandatory Administrative Forbearance for FFEL Program Borrowers (Sec.  
682.211)

    Statute: Section 428(c)(3)(D) of the HEA provides for the Secretary 
to permit lenders to provide borrowers with certain administrative 
forbearances that do not require the agreement of the borrower, under 
conditions authorized by the Secretary.
    Current Regulations: Section 682.211(i) specifies the circumstances 
under which a FFEL lender must grant a mandatory administrative 
forbearance to a borrower. The current regulations do not address 
circumstances in which a borrower has asserted a borrower defense with 
respect to a loan.
    Proposed Regulations: Proposed Sec.  682.211(i)(7) would require a 
lender to grant a mandatory administrative forbearance to a borrower 
upon being notified by the Secretary that the borrower has submitted an 
application

[[Page 39356]]

for a borrower defense discharge related to a FFEL Loan that the 
borrower intends to pay off through a Direct Loan Program Consolidation 
Loan for the purpose of obtaining relief, as reflected in proposed 
Sec.  685.212(k). The administrative forbearance would remain in effect 
until the Secretary notifies the lender that a determination has been 
made as to the borrower's eligibility for a borrower defense discharge. 
If the Secretary notifies the borrower that he or she would qualify for 
a borrower defense discharge if he or she were to consolidate, the 
borrower would then be able to consolidate the loan(s) to which the 
defense applies. If the borrower then obtains the Direct Consolidation 
Loan, the Secretary would recognize the defense and discharge that 
portion of the Consolidation Loan that paid off the FFEL Loan in 
question.
    Reasons: We are proposing to change the Direct Loan forbearance 
regulations in Sec.  685.205(b)(6) to provide for the Secretary to 
grant an administrative forbearance to a Direct Loan borrower during 
the period when the Secretary is determining the borrower's eligibility 
for a borrower defense discharge. Some non-Federal negotiators believed 
that a comparable forbearance benefit should be provided to FFEL 
Program borrowers who believe that they have a defense to repayment on 
a FFEL Loan and intend to seek relief under the Direct Loan borrower 
defense provisions by consolidating the FFEL Loan into a Direct 
Consolidation Loan, as addressed in proposed Sec.  685.212(k). As 
described more fully below regarding proposed Sec.  685.212, that 
section will be amended to address how a Direct Consolidation Loan 
borrower may assert a defense to repayment of that Consolidation Loan 
based on an act or omission of a school the borrower attended using the 
Direct Loan, FFEL Stafford or PLUS Loan, or a Perkins Loan paid off by 
that Consolidation Loan. If the borrower defense claim is approved in 
full, for example, the Secretary would discharge the portion of the 
Direct Consolidation Loan that paid off the Direct Loan, FFEL Loan, or 
Perkins Loan. Non-Federal negotiators requested that the mandatory 
administrative forbearance provisions for FFEL Program borrowers who 
are seeking relief based on a borrower defense claim be amended to 
mirror the mandatory administrative forbearance provisions for Direct 
Loan borrowers who are seeking relief under borrower defense. The 
Department agreed that this was appropriate and proposes to revise 
Sec.  682.211 to provide this benefit.

Discharge of a Loan Obligation (Sec.  685.212)

    Statute: Section 455(h) of the HEA provides that the Secretary may 
specify in regulations which acts or omissions of a school a borrower 
may assert as a defense to repayment of a Direct Loan. This provision 
allows for the discharge of the borrower's Direct Loan pursuant to the 
regulations regarding borrowers' defenses to repayment.
    Current Regulations: Current Sec.  685.212 states those grounds 
specified or explicitly referenced in sections 437 and 455(m) of the 
HEA, and section 6 of Public Law 109-382 (authorizing September 11 
survivors discharge), on which the Secretary discharges some or all of 
a borrower's obligation to repay a Direct Loan. These grounds include 
death, disability, closed school, false certification, bankruptcy, 
teacher loan forgiveness, public service loan forgiveness, and 
September 11 survivors discharge.
    Proposed Regulations: We propose to amend Sec.  685.212 to include 
discharge of all or part of a borrower's Direct Loan obligation by 
reason of a borrower defense that has been approved under Sec.  
685.206(c) or proposed Sec.  685.222. The proposed addition would also 
specify that, with respect to a Direct Consolidation Loan for which a 
borrower defense was approved, the Secretary would provide relief as to 
the portion of the Consolidation Loan obligation that repaid the 
original Direct Loan, FFEL Loan, Perkins Loan or other federally 
financed student loan used to attend the school to which the borrower 
defense claim relates. The proposed addition would further describe the 
standard we would apply to consideration of borrower defense claims 
raised by borrowers to Direct Consolidation Loans and to claims for 
return of payments and recoveries on the Consolidation Loan itself, and 
to payments and recoveries on the Federally-financed loans that were 
paid off by the Direct Consolidation Loan.
    Reasons: The proposed changes to Sec.  685.206(c) and proposed new 
Sec.  685.222 include new language establishing the grounds on which a 
borrower's obligation to repay a Direct Loan may be discharged. This 
proposed change to Sec.  685.212 would clarify current policy and 
provide for a more complete set of cross-references to the loan 
discharge types covered in Sec.  685.212.
    The proposed changes would also clarify that an appropriate portion 
of a borrower's obligation to repay a Direct Consolidation Loan may be 
discharged, if a borrower defense has been approved pursuant to Sec.  
685.206(c) or proposed Sec.  685.222. Section 455(h) of the HEA 
provides that the Secretary may allow for the discharge of a loan 
pursuant to a borrower defense for a loan made ``under this part''--the 
Direct Loan Program. This includes Direct Consolidation Loans made 
under section 455(g) of the HEA. This proposed change to Sec.  685.212 
is also meant to clarify current policy regarding the types of loans 
for which a borrower defense may be asserted, and how a borrower's 
obligation to repay a Direct Consolidation Loan is affected if a 
borrower defense claim has been approved under Sec.  685.206(c) and 
proposed Sec.  685.222. Because the act or omission of the school that 
would constitute a borrower defense under Sec.  685.206(c) or proposed 
Sec.  685.222 would pertain to the making of the Federal loans that 
were consolidated into his or her Direct Consolidation Loan or the 
provision of educational services for such Federal loans, the proposed 
language would clarify that relief for a borrower defense approved as 
to a Direct Consolidation Loan will be provided for that portion of the 
Consolidation Loan that corresponds to the original loan obtained to 
attend the school whose act or omission gave rise to a borrower 
defense. Thus, Sec.  685.212 would be amended in new paragraph (k) to 
list the Federal education loans that may be paid off by a Direct 
Consolidation Loan and with regard to which the borrower may assert a 
borrower defense claim. Those original loans include the loans listed 
in Sec.  685.220. For some of the discharges already listed in this 
section, the relief available is explained here; for others, the relief 
is described only in the specific regulations that describe the grounds 
and procedure for obtaining relief. Some of the discharges already 
listed provide only relief from the obligation to repay the remaining 
outstanding balance on the loan, while others, such as closed school 
discharges, may provide for both debt relief and refund of payments 
already recovered. The relief available for each of the listed 
discharges is controlled by the law on which the discharge is based; 
the basis and relief available for borrower defense discharges are 
stated fully in Sec.  685.206(c) and proposed Sec.  685.222 and will be 
reflected in the new Sec.  685.212(k).
    Thus, Sec.  685.212 would be amended to clarify that the Secretary 
would evaluate a borrower defense claim on a Direct Loan using the 
standards stated in Sec.  685.206(c) or, for loans first disbursed, or 
made, on or after July 1, 2017, in

[[Page 39357]]

Sec.  685.222. The standard that would be applied would depend upon 
factors such as the date that the Direct Consolidation Loan was first 
made; whether the underlying loan to which a borrower defense is 
asserted is a Direct Loan or some other eligible loan for 
consolidation; and whether the issue at hand refers either to a 
borrower's defense to repayment to the applicable portion of a Direct 
Consolidation Loan that may be attributable to the underlying loan to 
which a borrower defense is being asserted, or refers to the borrower's 
request for a return of payments collected by the Secretary on the 
underlying loan.

Direct Loans Paid Off by Direct Consolidation Loans

Applicable Standard
    For Direct Loans for which borrowers may be considering 
consolidation, the standards would differ depending on the date on 
which the first Direct Loan to which a claim is asserted was made. If 
the Direct Loan Consolidation borrower asserts a claim regarding an 
underlying Direct Subsidized, Unsubsidized, or PLUS Loan made before 
July 1, 2017, we would apply the standard in Sec.  685.206(c). For 
underlying Direct Loans made after July 1, 2017, we would apply the 
standard stated in Sec.  685.222(b), (c), or (d) to the borrower's 
defenses to repayment, as we would if the borrower had challenged those 
loans directly through the borrower defense process.
Return of Payments
    For underlying Direct Loans made before July 1, 2017, we would 
apply applicable state law as to the limitations period pursuant to 
Sec.  685.206(c), to any claim for return of payments made or recovered 
on the underlying loans or on that portion of the Direct Consolidation 
Loan attributable to the paying off of the underlying Direct Loan.
    For underlying Direct Loans made on or after July 1, 2017, we would 
apply the limitations period in Sec.  685.222(b), (c), or (d), as 
applicable, to any claim for return of payments made or recovered on 
the underlying loans or on that portion of the Direct Consolidation 
Loan attributable to the paying off of the underlying Direct Loan.

Other Eligible Loans Paid Off by Direct Consolidation Loans

Applicable Standard
    For other education loans paid off by the Direct Consolidation 
Loan, such as FFEL, Perkins, or other eligible loans for consolidation 
that are not Direct Loans, the standard that will apply to a defense to 
repayment of an applicable portion of the outstanding balance of 
borrowers' Direct Consolidation Loans would depend upon the date that 
the Direct Consolidation Loan was made. For such defense to repayment 
claims raised by Direct Consolidation Loan borrowers with regard to 
other education loans paid off by a Direct Consolidation Loan that was 
made before July 1, 2017, we would evaluate the defense to repayment 
with respect to the underlying loan under the Direct Loan defense 
standard in Sec.  685.206(c), as if the challenged loan were a Direct 
Loan. For such a Direct Consolidation Loan made on or after July 1, 
2017, we would evaluate the borrower's defense to repayment with 
respect to the underlying loan under the Direct Loan borrower defense 
standard in proposed Sec.  685.222.
Return of Payments
    However, for claims for return of payments made or recovered on the 
underlying loan, we would return only payments made or recovered by the 
Department directly, and only if the borrower proved that the loan or 
portion of the loan to which the payment was credited was not legally 
enforceable under the law governing the claims on the underlying, paid 
off loans. If the borrower seeks recovery of a payment made on the 
Direct Consolidation Loan itself, as distinct from payments made on the 
underlying paid-off loan, the applicable standard governing claims for 
return of payments would be that provided in Sec.  685.206(c) (for 
Direct Consolidation Loans made before July 1, 2017) or Sec.  
685.222(b), (c), or (d) (for Direct Consolidation Loans made on or 
after July 1, 2017). Similarly, depending on the date that the Direct 
Consolidation Loan was made, the limitation periods applicable to 
claims for return of payments made on the Direct Consolidation Loan 
would be those stated in either Sec.  685.206(c) or Sec.  685.222(b), 
(c), or (d), accordingly.
    In addition, the proposed amendment to Sec.  685.212 would not 
allow a borrower to assert a borrower defense more than once for a 
claim that is based on the same underlying circumstances and same 
evidence, unless allowed under the procedures in proposed Sec.  
685.222. For instance, if a borrower asserted a borrower defense with 
respect to a loan under either Sec.  685.206(c) or proposed Sec.  
685.222 that was denied in full or in part, the borrower may not then 
assert a borrower defense with respect to that original loan after 
consolidation, absent new evidence as described in proposed Sec.  
685.222(e)(5) or a reopening of an application for borrower defense by 
the Secretary under that section.

Remedial Action and Recovery From the Institution

General (Sec. Sec.  685.206, 685.308)

    Statute: Section 454(a) of the HEA provides that the Secretary may 
include in Direct Loan participation agreements with institutions 
provisions that are necessary to protect the interests of the United 
States and to promote the purposes of the Direct Loan Program, and that 
the institution accepts responsibility and financial liability stemming 
from its failure to perform its functions pursuant to the agreement.
    Current Regulations: The current regulations provide, in Sec.  
685.206(c), that the Secretary may initiate an action to recover from a 
school whose act or omission resulted in an approved borrower defense 
the amount of loss incurred by the Department for that claim, but may 
not do so after the end of the record retention period provided under 
Sec.  685.309(c), which is three years after the end of the award year 
in which the student last attended the institution. See Sec.  685.309, 
which references Sec.  668.24.
    In addition, current Sec.  685.308 provides that the Secretary may 
take various actions to recover for losses caused by institutions, and 
describes the procedures that would be used for some claims.
    Proposed Regulations: We propose to remove from Sec.  685.206 the 
provision stating that the Secretary would not initiate action to 
recover after the end of the three-year record retention period. We 
further propose to revise Sec.  685.308 to more accurately describe the 
instances in which the Secretary incurs a loss for which the 
institution is accountable.
    Reasons: We propose to remove the limitation on bringing actions 
against an institution to recover for losses incurred from borrower 
defenses for two reasons. First, the current three-year limitation in 
Sec.  685.206(c)(3) cites Sec.  685.309(c), which refers to Sec.  
668.24, the general record retention requirements for the title IV, HEA 
student financial assistance programs. Section 668.24(e)(2) provides 
that the institution is to keep records of borrower eligibility and 
other records of its ``participation'' in the Direct Loan Program for 
three years after the last award year in which the student attended the 
institution. The requirement pertains to the retention of ``program 
records''--records of the determination of eligibility for Federal 
student financial assistance and management of Federal funds provided

[[Page 39358]]

to the institution for those awards. Sec. Sec.  668.24(a), 685.309.\21\ 
The Department believes that these records will rarely, if ever, be 
needed to address borrower defense claims. Borrower defense claims will 
turn on other evidence--advertising, catalogs, enrollment contracts, 
recruiting scripts--that have not been and cannot be categorized as 
``program records.'' Moreover, institutions have always faced potential 
litigation on claims that would also constitute borrower defense 
claims, and have already made business judgments as to the need and 
period for which to retain business records that may be relevant in 
such litigation. The proposed change would do no more than hold the 
school to the same risk it has already assessed and for which it has 
exercised its business judgment to protect itself. As noted under 
``Federal Standard and Limitation Periods (34 CFR 685.222(b), (c), and 
(d) and 34 CFR 668.71),'' State laws and the new proposed Federal 
standard generally provide that the limitation period for affirmative 
claims for recovery based on misrepresentation begins only upon the 
claimant's discovery of the facts that give notice that the 
representation was false, and thus an institution would already be 
expected to have accounted for that potential in adopting its own 
record retention policies. We are not, however, proposing to impose any 
new requirements relating to record retention. Moreover, borrowers--
whether a designated Department official assists in developing the 
evidence for the borrower under proposed Sec.  685.222 or not--always 
bear the burden of proof, either initially or ultimately.\22\ The 
institution thus faces potential risk where a borrower belatedly 
asserts a borrower defense only if the borrower--or the Department, for 
claims considered as a group, asserts a claim pertaining to the 
borrower--meets that burden by producing credible evidence of the facts 
on which the claim is based.
---------------------------------------------------------------------------

    \21\ The record retention regulation was adopted pursuant to 20 
U.S.C. 1232f, which requires each recipient of Federal funds under a 
Department program to keep records that disclose ``the amount and 
disposition of those funds,'' and to ``maintain such records for 
three years after the completion of the activity for which the funds 
are used.''
    \22\ The rebuttable presumption applicable to group claims 
shifts the burden of rebuttal to the school; if the school submits 
evidence to rebut that presumption, the burden of proof then, and 
only then, shifts back to the borrower.
---------------------------------------------------------------------------

    Second, the most readily available tool for recovery of Federal 
claims has always been administrative offset, which Federal law 
encourages and even requires agencies to use. 31 U.S.C. 3716. That 
authority was amended in 2008 to remove its previous 10-year limitation 
period.\23\ Case law makes clear that limitations periods adopted by a 
legislative authority can be changed or abrogated, and the new 
limitation period applied even to claims that may have been barred 
under the prior rule.\24\ Because the limitation period in current 
Sec.  685.206(c)(3) is solely a regulatory limitation adopted by the 
Department pursuant to its regulatory authority and was in no way 
compelled by statute, the Department can change or remove that 
limitation and can apply the revised rule to any claim, without regard 
to when that claim arose. This would not produce an unfair result. As 
noted in the background discussion under ``Borrower Defenses (34 CFR 
668.71, 685.205, 685.206, and 685.222),'' the borrower defense 
provision in Sec.  685.206(c) has been infrequently utilized from 1995 
until the recent Corinthian experience, and there is no reason to 
believe that any institution would have relied on the three-year 
limitation period in current Sec.  685.206(c)(3) to discard business 
records that it would otherwise have retained.
---------------------------------------------------------------------------

    \23\ ``Notwithstanding any other provision of law, regulation, 
or administrative limitation, no limitation on the period within 
which an offset may be initiated or taken pursuant to this section 
[Sec.  3716] shall be effective.'' 31 U.S.C. 3716(e)(1).
    \24\ In re Lewis, 506 F.3d 927, 932 (9th Cir. 2007); U.S. v. 
Distefano, 279 F.3d 1241, 1244 (10th Cir. 2002) (noting that ``the 
Supreme Court has upheld, against due process challenges, statutes 
reviving such barred claims. See Chase Sec. Corp. v. Donaldson, 325 
U.S. 304, 311-14, 65 S.Ct. 1137, 89 L.Ed. 1628 (1945); Campbell v. 
Holt, 115 U.S. 620, 628, 6 S.Ct. 209, 29 L.Ed. 483 (1885). As have 
we. See Bernstein v. Sullivan, 914 F.2d 1395, 1400-03 (10th Cir. 
1990).'').
---------------------------------------------------------------------------

    We propose to revise Sec.  685.308 to more accurately describe the 
grounds on which an institution can cause loss for which the Secretary 
holds the school accountable, and the procedures used to establish and 
enforce that liability in some particular circumstances. An institution 
participates in the title IV, HEA programs only by entering into a 
program participation agreement. Under that agreement, the institution 
accepts responsibility to act as a fiduciary in handling, awarding, and 
accounting for title IV, HEA funds that it awards, and is liable for 
the costs of funds it fails to account for, or funds it awards or 
causes to be awarded improperly.\25\ An institution participates in the 
Direct Loan Program only by entering into a Direct Loan program 
participation agreement.\26\ Under that agreement, the institution 
agrees to ``originate'' Direct Loans that are made by the Department, 
and to accept financial liability for losses ``stemming from'' its 
failure to perform its functions under that agreement. The institution 
breaches its fiduciary duty as originator of Direct Loans when it 
causes a loan to be made to an individual who was ineligible to receive 
that loan, or causes an eligible individual to receive a loan in an 
ineligible amount, or by its act or omission causes the Secretary to 
incur an obligation to discharge a loan or to be unable to enforce the 
loan.
---------------------------------------------------------------------------

    \25\ See, e.g., Nat'l Career Coll., Inc. v. Spellings, 371 F. 
App'x 794, 796 (9th Cir. 2010) (college has fiduciary duties in 
handling the public's money. 34 CFR 668.15, 668.16, 668.82); Sistema 
Universitario Ana G. Mendez v. Riley, 234 F.3d 772, 775 (1st Cir. 
2000) (As a result of fiduciary status, institutions bear burden of 
proving that their expenditures of title IV funds were warranted and 
that they complied with program requirements); St. Louis Univ. v. 
Duncan, 97 F. Supp. 3d 1106, 1109 (E.D. Mo. 2015) (institution acts 
as fiduciary and is liable for improperly awarded funds); Maxwell v. 
New York Univ., No. 08 CV 3583 (HB), 2009 WL 1576295, at *7 
(S.D.N.Y. June 1, 2009), aff'd, 407 F. App'x 524 (2d Cir. 2010) 
(school acts as a fiduciary for the Department); Instituto De Educ. 
Universal, Inc. v. U.S. Dep't of Educ., 341 F. Supp. 2d 74, 82 
(D.P.R. 2004), aff'd sub nom. Ruiz-Rivera v. U.S. Dep't of Educ., 
No. 05-1775, 2006 WL 1343431 (1st Cir. May 10, 2006), and 
subsequently aff'd sub nom. Instituto de Educacion Universal v. U.S. 
Dep't of Educ., No. 06-1562, 2007 WL 1519059 (1st Cir. May 11, 2007) 
(Under HEA, an educational institution operates as a fiduciary to 
the Department, and is subject to the highest standard of care and 
diligence in administering these programs and accounting to the 
Department for the funds it receives. 34 CFR 668.82(a), (b) (1991-
94)); see also Chauffeur's Training Sch., Inc. v. Riley, 967 F. 
Supp. 719, 727 (N.D.N.Y. 1997) (institution liable under breach of 
contract for costs of payments the Department made to third parties 
on account of loans the institution improperly caused to be made).
    \26\ This Direct Loan Program Participation Agreement is now 
included in, and a separate part of, the general program 
participation agreement required by section 487(a) of the HEA.
---------------------------------------------------------------------------

    We propose to revise Sec.  685.308 to more accurately describe the 
range of these circumstances. In some instances, the Secretary 
identifies possible claims for Department losses for which the 
Secretary holds the school accountable in audits and program reviews, 
and if such claims are asserted in the final determinations that ensue 
from these audits or program reviews, the institution may contest the 
claims under the procedures in subpart H of part 668. In other 
instances, the Secretary asserts these claims in other contexts, and 
may follow other procedures to claim recovery. In any such other 
procedure, Federal law and Department regulations require the Secretary 
to provide the institution notice and an opportunity to dispute the 
claim and obtain a hearing on its objections. See 34 CFR 34.20 et seq. 
For borrower defense claims, we describe briefly in proposed Sec.  
685.222 the procedures we propose to use for these claims and intend to 
prescribe them in more detail in the future.

[[Page 39359]]

    We also propose to remove the reference to a remedial action 
(requiring schools to purchase loans) that was sanctioned under FFEL 
regulations in effect when this section was adopted in 1995, but which 
has not and will not be used for Direct Loans.

Severability (Sec.  685.223)

    Statute: Section 454(a) of the HEA provides that the Secretary may 
include in Direct Loan participation agreements with institutions 
provisions that are necessary to protect the interests of the United 
States and to promote the purposes of the Direct Loan Program; 20 
U.S.C. 3474 authorizes the Secretary to adopt such regulations as 
needed for the proper administration of programs.
    Current Regulations: None.
    Proposed Regulations: Proposed Sec.  685.223 would make clear that, 
if any part of the proposed regulations for part 685, subpart B, 
whether an individual section or language within a section, is held 
invalid by a court, the remainder would still be in effect.
    Reasons: We believe that each of the proposed provisions discussed 
in this preamble would serve one or more important, related, but 
distinct, purposes. Each provision would provide a distinct value to 
students, prospective students, and their families, the public, 
taxpayers, the Federal government, and institutions separate from, and 
in addition to, the value provided by the other provisions. To best 
serve these purposes, we propose to include this administrative 
provision in the regulations to make clear that the regulations are 
designed to operate independently of each other and to convey the 
Department's intent that the potential invalidity of one provision 
should not affect the remainder of the provisions.

Institutional Accountability

Financial Responsibility

General (Sec.  668.171)

    Statute: Section 487(c)(1) authorizes the Secretary to establish 
reasonable standards of financial responsibility. Section 498(a) of the 
HEA provides that, for purposes of qualifying an institution to 
participate in the title IV, HEA programs, the Secretary must determine 
the legal authority of the institution to operate within a State, its 
accreditation status, and its administrative capability and financial 
responsibility.
    Section 498(c)(1) of the HEA authorizes the Secretary to establish 
ratios and other criteria for determining whether an institution has 
the financial responsibility required to (1) provide the services 
described in its official publications, (2) provide the administrative 
resources necessary to comply with title IV, HEA requirements, and (3) 
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 for programs administered by the 
Secretary.
    Current Regulations: The current regulations in Sec.  668.171(a) 
mirror the statutory requirements that to begin and continue to 
participate in the title IV, HEA programs, an institution must 
demonstrate that it is financially responsible. The Secretary 
determines whether an institution is financially responsible based on 
its ability to provide the services described in its official 
publications, properly administer the title IV, HEA programs, and meet 
all of its financial obligations.
    The Secretary determines that a private non-profit or for-profit 
institution is financially responsible if it satisfies the ratio 
requirements and other criteria specified in the general standards 
under Sec.  668.171(b). Under those standards, an institution:
     Must have a composite score (combining the named measures 
of financial health elements to yield a single measure of a school's 
overall financial health) of at least 1.5, based on its Equity, Primary 
Reserve, and Net Income ratios;
     Must have sufficient cash reserves to make required 
refunds;
     Must be current in its debt payments. An institution is 
not current in its debt payment if it is in violation of any loan 
agreement or fails to make a payment for 120 days on a debt obligation 
and a creditor has filed suit to recover funds under that obligation; 
and
     Must be meeting all of its financial obligations, 
including but not limited to refunds it is required to make under its 
refund policy or under Sec.  668.22, and repayments to the Secretary 
for debts and liabilities arising from the institution's participation 
in the title IV, HEA programs.
    Proposed Regulations: We are not proposing any changes to the 
composite score requirements under Sec.  668.172 or in appendices A and 
B of subpart L, the refund reserve standards under Sec.  668.73, or the 
past performance requirements under Sec.  668.174.
    We propose to restructure Sec.  668.171, in part, by adding a new 
paragraph (c) that provides that an institution is not able to meet its 
financial or administrative obligations if it is subject to one or more 
of the following actions or triggering events:
     Any of the following lawsuits and other actions.
    Claims and actions related to a Federal loan or educational 
services. Currently or at any time during the three most recently 
completed award years, the institution is or was required to pay a 
material amount, or incurs a material liability, arising from an 
investigation or similar action initiated by a State, Federal, or other 
oversight entity, or settles or resolves for a material amount a suit 
by that entity based on claims related to the making of a Federal loan 
or the provision of educational services. An amount paid or settled is 
material if it exceeds the lesser of the threshold amount for which an 
audit is required under 2 CFR part 200, currently $750,000, or 10 
percent of the institution's current assets. Or, the institution is 
being sued by one or more State, Federal, or other oversight entities 
based on claims related to the making of a Federal loan or provision of 
educational services for an amount that exceeds the lesser of the 
threshold amount for which an audit is required under 2 CFR part 200, 
currently $750,000, or 10 percent of the institution's current assets.
    Claims of any kind. The institution is currently being sued by one 
or more State, Federal, or other oversight entities based on claims of 
any kind that are not related to a Federal loan or educational 
services, and the potential monetary sanctions or damages from that 
suit or suits are in an amount that exceeds 10 percent of its current 
assets.
    False claims and suits by private parties. The institution is 
currently being sued in a lawsuit filed under the False Claims Act or 
by one or more private parties for claims that relate to the making of 
loans to students for enrollment at the institution or the provision of 
educational services if that suit (1) has survived a motion for summary 
judgment by the institution and has not been dismissed, and (2) seeks 
relief in an amount that exceeds 10 percent of the institution's 
current assets.
    For suits relating to claims of any kind, suits filed under the 
False Claims Act, 31 U.S.C. 3729 et seq., or suits by private parties, 
during the fiscal year for which the institution has not yet submitted 
its financial statements, the institution settled or resolved the suit, 
had a judgment entered against it, or incurred a liability for an 
amount that exceeds 10 percent of its current assets.
    An institution would determine whether any of these suits or 
actions exceeded a materiality threshold by using the current assets 
reported in its most recent audited financial statements

[[Page 39360]]

submitted to the Department. Except for a suit by private parties, if a 
suit or action does not demand a specific amount of relief, the 
institution would calculate the potential amount of the relief by 
totaling the tuition and fees it received from every student who 
attended the institution during the period for which the relief is 
sought. In cases where no period is stated in the suit or action, the 
institution would total the tuition and fees it received from students 
who attended the institution during the three award years preceding the 
date that suit or action was filed or initiated.
     Repayments to the Secretary. Currently or at any time 
during the three most recently completed award years, the institution 
is or was required to repay the Secretary for losses from borrower 
defense claims in an amount that, for one or more of those years, 
exceeds the lesser of the threshold amount for which an audit is 
required under 2 CFR 200, currently $750,000, or 10 percent of the 
institution's current assets, as reported in the most recent audited 
financial statements.
     Accrediting agency actions. Currently or at any time 
during the three most recently completed award years, the institution's 
primary accrediting agency (1) required the institution to submit a 
teach-out plan, for a reason described in 34 CFR 602.24(c)(1), that 
covers the institution or any of its branches or additional locations, 
or (2) placed the institution on probation, show-cause, or similar 
status for failing to meet one or more of the agency's standards, and 
the accrediting agency does not notify the Secretary within six months 
of taking that action that the action is withdrawn because the 
institution has come into compliance with the agency's standards.
     Loan agreements and obligations. With regard to the 
creditor with the largest secured extension of credit, (1) the 
institution violated a provision or requirement in a loan agreement 
with that creditor, (2) the institution failed to make a payment in 
accordance with its debt obligations with that creditor for more than 
120 days, or (3) as provided under the terms of the security or loan 
agreement, a default or delinquency event occurs or other events occur 
that trigger, or enable the creditor to require or impose, an increase 
in collateral, a change in contractual obligations, an increase in 
interest rates or payments, or other sanction penalty or fee. These 
actions would be disclosed in a note to the institution's audited 
financial statements or audit opinion, or reported to the Department by 
the institution.
     Non-title IV revenue. For its most recently completed 
fiscal year, a proprietary institution did not derive at least 10 
percent of its revenue from sources other than title IV, HEA program 
funds, as provided under Sec.  668.28(c) (90/10 revenue test).
     Publicly traded institutions. As reported by the 
institution, or identified by the Secretary, (1) the Securities and 
Exchange Commission (SEC) warns the institution or its corporate parent 
that it may suspend trading on the institution's stock, or the 
institution's stock is delisted involuntarily from the exchange on 
which the stock was traded, (2) the institution disclosed or was 
required to disclose in a report filed with the SEC a judicial or 
administrative proceeding stemming from a complaint filed by a person 
or entity that is not part of a State or Federal action, (3) the 
institution failed to file timely a required annual or quarterly report 
with the SEC, or (4) the exchange on which the institution's stock is 
traded notifies the institution that it is not in compliance with 
exchange requirements.
     Gainful employment (GE). As determined by the 
Secretary each year, the number of students enrolled in GE programs 
that are failing or in the zone under the D/E rates measure in Sec.  
668.403(c) is more than 50 percent of the total number of title IV 
recipients enrolled in all the GE programs at the institution. However, 
an institution is exempt from this provision if fewer than 50 percent 
of students enrolled at the institution who receive title IV, HEA 
program funds are enrolled in GE programs.
     Withdrawal of owner's equity. For an institution whose 
composite score is less than 1.5, any withdrawal of owner's equity from 
the institution by any means, including by declaring a dividend.
     Cohort default rates. The institution's two most recent 
official cohort default rates are 30 percent or greater, as determined 
under subpart N of 34 CFR part 668. However, this provision does not 
apply if the institution files a challenge, request for adjustment, or 
appeal under that subpart with regard to its cohort default rate, and 
that action results in (1) reducing its default rate below 30 percent, 
or (2) the institution not losing its eligibility or being placed on 
provisional certification.
     Other events or conditions. The Secretary determines that 
an event or condition is reasonably likely to have an adverse impact on 
the financial condition, business, or results of operations of the 
institution. These events or conditions would include but are not 
limited to whether:
     There is a significant fluctuation between consecutive 
award years, or over a period of award years, in the amount of Direct 
Loan or Pell Grant funds, or a combination of those funds, received by 
the institution that cannot be accounted for by changes in those 
programs, such as changes in award amounts or eligibility requirements;
     The institution is cited by a State licensing or 
authorizing agency for failing State or agency requirements;
     The institution fails a financial stress test developed or 
adopted by the Secretary to evaluate whether the institution has 
sufficient resources to absorb losses that may be incurred as a result 
of adverse conditions and continue to meet its financial obligations to 
the Secretary and students;
     The institution or corporate parent has a non-investment 
grade bond or credit rating;
     As calculated by the Secretary, the institution has high 
annual dropout rates; or
     Any event reported on a Form 8-K to the SEC.
    In addition, we propose to add a new paragraph (d) under which an 
institution would notify the Secretary of any action or triggering 
event described above no later than 10 days after that action or event 
occurs. In that notice, the institution could show that certain actions 
or events are not material, or that those actions are resolved. 
Specifically, the institution would be permitted to demonstrate that:
     For a judicial or administrative proceeding the 
institution disclosed to the SEC, the proceeding does not constitute a 
material event;
     For a withdrawal of owner's equity, the withdrawal was 
used solely to meet tax liabilities of the institution or its owners 
for income derived from the institution; or, in the case where the 
composite score is calculated based on the consolidated financial 
statements of a group of institutions, the amount withdrawn from one 
institution in the group was transferred to another entity within that 
group;
     For a violation of a loan agreement, the creditor waived 
that violation. However, if the creditor imposes additional constraints 
or requirements as a condition of waiving the violation and continuing 
with the loan, the institution must identify and describe those 
constraints or requirements. In addition, if a default or delinquency 
event occurs or other events occur that trigger, or enable the creditor 
to require or impose, additional constraints or

[[Page 39361]]

penalties on the institution, the institution would be permitted to 
show why these actions would not have an adverse financial impact on 
the institution.
    Reasons: As discussed under ``Alternative standards and 
requirements,'' the Department seeks to identify, and take action 
regarding, material actions and events that are likely to have an 
adverse impact on the financial condition or operations of an 
institution. In addition to the current process where, for the most 
part, the Department determines annually whether an institution is 
financially responsible based on its audited financial statements, 
under these proposed regulations the Department may determine at the 
time a material action or event occurs that the institution is not 
financially responsible. The consequences of these actions and events 
threaten an institution's ability to (1) meet its current and future 
financial obligations, (2) continue as a going concern or continue to 
participate in the title IV, HEA programs, and (3) continue to deliver 
educational services. In addition, these actions and events call into 
question the institution's ability or commitment to provide the 
necessary resources to comply with title IV, HEA requirements.
    Furthermore, we note that recent experiences with Corinthian, in 
which the Department ended up with no financial protection for either 
closed school or borrower defense claims, highlight the need to develop 
more effective ways to identify events or conditions that signal 
impending financial problems and secure financial protection while the 
institution has resources sufficient to provide that protection either 
by a letter of credit, or, by arranging a set-aside from current 
payables of Federal funds that could defray losses that may arise. 
Applying the routine tests under current regulations did not result in 
financial protection, because Corinthian appeared at the time it 
provided the Department with its audited financial statements to pass 
those tests. Only later--too late to secure financial protection--did 
further investigation reveal that Corinthian in fact had failed the 
financial tests in current regulations.\27\ Based on that experience, 
we conclude that regulations must be revised to better identify signs, 
and to augment the Department's tools for detection, of impending 
financial difficulties that could be taken into account and that would 
have required Corinthian to provide financial protection.
---------------------------------------------------------------------------

    \27\ At that very time, in 2013, the State of California had 
already sued Corinthian for widespread fraud. California v. Heald 
Coll., No. CGC-13-534793 (Sup. Ct. S.F. County, filed Oct. 10, 
2013).
---------------------------------------------------------------------------

    Most visible among these actions or triggering events are 
investigations of, and suits against, institutions by State, Federal, 
and other oversight agencies. For example, the FTC has investigated or 
filed suit against institutions for deceptive and unfair marketing 
practices.\28\ The SEC has investigated institutions for inflating job 
placement rates.\29\ The DOJ, CFPB, and various State AGs have 
investigated or filed suit against institutions for making false claims 
to the Federal and State governments as well as violations of consumer 
protection laws, false advertising and deceptive practices, and 
falsifying job placement rates.\30\ Putting aside, but in no way 
diminishing, the harm inflicted on students by troubling practices that 
precipitated these agency actions, the debts or liabilities resulting 
from those actions may be substantial.
---------------------------------------------------------------------------

    \28\ See, e.g., Fed. Trade Comm'n v. DeVry Educ. Group, Inc., 
C.A. No. 15-CF-00758 (S.D. Ind. Filed Jan. 17, 2016).
    \29\ See, e.g., Sec. and Exch. Comm'n v. ITT Educ. Servs. Inc., 
C. A. No. 1:15-cv-00758-JMS-MJD (S.D. Ind. filed May 12, 2015).
    \30\ See, e.g., U.S. et al. ex rel. Washington v. Educ. Mgmt. 
Corp., C.A. No. 2:07-cv-00461-TFM (W.D. Pa. filed Aug. 8, 2011); 
Consumer Fin. Prot. Bureau v. Corinthian Colls., Inc., C.A. No. 
1:14-cv-07194 (N.D. Ill., filed Oct. 27, 2015); California v. Heald 
Coll., No. CGC-13-534793 (Sup. Ct. S.F. County, filed Oct. 10, 
2013).
---------------------------------------------------------------------------

    For suits that are settled or investigations that are otherwise 
resolved, we initially proposed during negotiated rulemaking to adopt 
as materiality thresholds those amounts included in the SEC disclosure 
rules for legal proceedings under 17 CFR 229.103, otherwise referred to 
as Item 103 of Regulation S-K. Under those regulations, an entity 
filing an annual or quarterly report on Form 10-K or 10-Q with the SEC 
must disclose information about (1) any administrative or judicial 
proceeding that involves a claim for damages that exceeds 10 percent of 
the entity's current assets, or (2) any environmental claim where a 
governmental authority is a party to the proceeding and the monetary 
sanctions are more than $100,000.
    Some of the non-Federal negotiators argued that the $100,000 
threshold could easily be exceeded by claims resolved in favor of a 
small number of students, and that outcome would have no bearing on the 
financial operations of most institutions. Those negotiators suggested 
that a more reasonable threshold would be the amount applicable to 
audits required of non-profit and public entities that expend Federal 
funds. Under 2 CFR 200.501 of the Uniform Administrative Requirements, 
Cost Principles, and Audit Requirements for Federal Awards (Uniform 
Administrative Requirements), a non-Federal entity that expends more 
than $750,000 in Federal funds during its fiscal year must conduct an 
audit. We agreed, and propose in this NPRM to set the dollar threshold 
at the amount specified in the Uniform Administrative Requirements.
    The non-Federal negotiators also argued that because the dollar 
threshold and the percentage threshold based on SEC disclosure 
requirements would apply to a suit based on claims that were not 
related to a Federal student aid activity or requirement (for example, 
a violation of copyright laws), the Federal protection that would 
otherwise be required under this circumstance is not warranted. We 
agreed, and propose in this NPRM to apply the dollar and percentage 
thresholds to those suits or actions that are based on claims related 
to the making of a Federal loan or the provision of educational 
services.
    The publicity and information stemming from these suits and actions 
will make members of the public, and in particular currently enrolled 
and former students of the institution, aware or more aware of the 
alleged practices that gave rise to these suits and actions. As a 
result, we expect current and former students to be better informed and 
thus more likely to file borrower defense claims. Some students may 
file claims immediately after a suit or action is resolved, while 
others may take longer. In any case, because the institution is 
required to repay the Secretary for losses from borrower defense 
claims, the institution's liability does not end when it pays to 
resolve the suit or action; it continues as long as students file 
borrower defense claims based on the misconduct alleged and publicized 
in the suit. Consequently, if the amount paid by an institution to 
resolve the suit is material, it jeopardizes the institution's ability 
to meet not only its current financial obligations, but also future 
financial obligations stemming from borrower defense claims. For this 
reason, we propose that an institution is not financially responsible 
during the three-year period following the resolution if the amount the 
institution is required to pay is material--that is, it exceeds the 
lesser of the dollar or percentage thresholds. If the amount is not 
material, we believe it is unlikely that any resulting borrower defense 
claims will have an adverse impact on the institution.

[[Page 39362]]

    For a suit or action initiated by a State, Federal, or other 
oversight agency, or by an individual or relator,\31\ where the 
potential monetary sanctions or damages sought exceed 10 percent of an 
institution's current assets, we propose that the institution is not 
considered to be financially responsible for any year in which that 
suit or action is pending or unresolved.\32\
---------------------------------------------------------------------------

    \31\ A person may bring a suit under the False Claims Act, 31 
U.S.C. 3729 et seq., on behalf of the United States against a party 
whom the relator claims submitted false claims to the government. 
The suit is referred to as a ``qui tam'' suit, and the person is 
referred to as a ``relator.''
    \32\ A party who submits false claims may be liable under the 
False Claims Act for treble the actual amount of the claim plus a 
penalty of at least $5000 per violation. 31 U.S.C. 3729(a)(1)
---------------------------------------------------------------------------

    Like a contingent liability, a pending material government or 
individual action (one seeking an amount greater than 10 percent of 
current assets) would pose a threat to an institution's ability to meet 
its current financial obligations, because when a suit or action is 
settled or resolved, the institution must satisfy the resulting 
liability using current assets. In other words, a significant amount of 
current assets (cash and liquid assets, such as securities and accounts 
receivable, that can readily be converted to cash) that an institution 
would otherwise need to use to pay for typical current liabilities (for 
instance, wages payable and accounts payable) would be used instead to 
pay for damages stemming from the suit. However, for several reasons, 
we propose to treat a pending material State, Federal, or individual 
action as a liability for filed against the institution. First, as 
previously noted in this discussion, State and Federal suits and 
actions aim to address serious violations and harmful practices and may 
lead to settlements or compensation for victimized students, with an 
attendant financial burden on the institution. Moreover, it is not 
uncommon for several State AGs to file suits or take actions against an 
institution for the same or similar reasons or for State AGs to join a 
Federal action. These combined efforts underscore the severity and 
magnitude of the misconduct the suits or actions seek to address. 
Second, the impact of a suit or action may hinder or prevent investors 
or creditors from providing needed funds to an institution and make it 
more expensive for the institution to raise or obtain additional funds. 
Also, to protect their investment or stake in the institution, 
creditors may condition or alter the terms of existing loan agreements 
or otherwise make it more difficult for the institution to obtain 
additional loans. Third, the institution will have to use or divert 
resources that would otherwise be used to carry out normal operations 
to defray the costs of defending the litigation or the costs of 
achieving compliance with the State or Federal requirements on which 
the actions were based. In addition, it is not uncommon for the 
Department to impose additional administrative requirements on an 
institution subject to a suit or action, which may further stress the 
institution's financial resources. So, due to the severity and likely 
success of suits by State and Federal agencies or other oversight 
entities, and to account for the costs and risks stemming from a 
pending suit, we believe that a potential liability in the amount 
considered material under this proposed regulation would threaten an 
institution's ability to meet its current and future financial 
obligations.
    With regard to the threshold relating to current assets, we note 
that on May 9, 1973, the SEC published final regulations reducing its 
threshold for disclosures relating to legal proceedings from 15 percent 
to 10 percent of current assets, stating that the reduced percentage is 
a ``more realistic test of materiality.'' 38 FR 12100, 12101
    We are not proposing any changes to the composite score 
requirements under Sec.  668.172 or in appendices A and B of subpart L, 
the refund reserve standards under Sec.  668.73, or the past 
performance requirements under Sec.  668.174. We believe that the 
current financial ratio regulations in subpart L of part 668 reflect 
the kind of consideration of the effect of the financial risks that 
judgments and other actions pose on the ability of an institution to 
continue operating if faced with the need to satisfy such claims. We 
therefore include a brief explanation of the way this has been taken 
into account to some extent in the current regulations. For title IV 
purposes, KPMG Peat Marwick developed the composite score methodology 
that is the key element for establishing the financial responsibility 
requirements under 34 CFR part 668, subpart L. That methodology uses 
three ratios, Primary Reserve, Equity, and Net Income, to evaluate the 
overall financial health of an institution. Under this methodology, 
strength factors based on a common scale are assigned to each ratio 
result, making it arithmetically possible to weight and add the results 
of each ratio together to arrive at a composite score. The strength 
factors and weights were designed to reflect the different governing, 
mission, and operating characteristics of for-profit and non-profit 
institutions, and to allow institutions to offset a poor performance 
under one ratio with a good performance under another ratio.
    The first of these ratios, the Primary Reserve ratio is a measure 
of an institution's expendable or liquid resource base in relation to 
its operating size, so it is in effect a measure of the institution's 
margin against adversity. A for-profit institution with a Primary 
Reserve ratio of 0.05 earns a strength factor of 1.0 which means that 
the value of the institution's assets that can be converted to cash 
exceeds its liabilities by an amount equal to five percent of its total 
expenses. Expressed in days, the institution could continue operations 
at its current level for about 18 days (5 percent of 365 days) without 
additional revenue or support. 62 FR 62854 (November 25, 1997). A non-
profit institution with the same strength factor score could continue 
operations at its current level for about 37 days without additional 
revenue or support. Id. At this strength factor level, institutions 
have a small amount of expendable capital and would have difficulty 
finding resources internally to handle large negative economic events. 
Table 1 below shows, for a range of Primary Reserve ratio results, the 
margin against adversity expressed both as percentage of expendable 
assets that exceed liabilities and the number of days an institution 
can continue operations.

[[Page 39363]]



                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                                                  Liquid assets                       Survive
                                                                     exceed                           without
                  Primary reserve ratio result                    liabilities,   Strength factor    additional
                                                                  as % of total                   support,  # of
                                                                    expenses                           days
----------------------------------------------------------------------------------------------------------------
                                             For-profit Institutions
----------------------------------------------------------------------------------------------------------------
0.00...........................................................               0              0                 0
0.25...........................................................               3              0.5               9
0.50...........................................................               5              1                18
0.75...........................................................               8              1.5              27
0.100..........................................................              10              2                37
0.125..........................................................              13              2.5              46
0.150..........................................................              15              3                55
----------------------------------------------------------------------------------------------------------------
                                             Non-profit Institutions
----------------------------------------------------------------------------------------------------------------
0.00...........................................................               0              0                 0
0.05...........................................................               5              0.5              18
0.10...........................................................              10              1                37
0.15...........................................................              15              1.5              55
0.20...........................................................              20              2                73
0.25...........................................................              25              2.5              91
0.30...........................................................              30              3               110
----------------------------------------------------------------------------------------------------------------

    As illustrated in Table 1, a for-profit institution with a Primary 
Reserve strength factor of less than 2.0, or a non-profit institution 
with a strength factor of less than 1.0, would generally not have 
resources that it could liquidate in the short term to cover current 
operations if it also had to pay damages or settle a suit for an amount 
that exceeds 10 percent of its expendable assets. However, the 
institution may have the ability to borrow the funds needed to cover 
operations and pay damages stemming from a suit. For that, we look to 
another component of the composite score, the Equity ratio.
    The Equity ratio measures the amount of total resources that is 
financed by owners or the institution's investments, contributions, or 
accumulated earnings and how much of that amount is subject to claims 
of third parties. So, the Equity ratio captures an institution's 
overall capitalization structure and ability to borrow. The strength 
factors for the Equity ratio are the same for non-profit and for-profit 
institutions. A strength factor of zero means that that value of an 
institution's assets is equal to the value of its liabilities. For a 
for-profit institution, the absence of equity provides no evidence of 
owner commitment to the business because there are no accumulated 
earnings or invested amounts beyond the liabilities that are at risk. 
For a non-profit institution, the absence indicates there is little or 
no permanent endowment from which the institution could draw in extreme 
circumstances. At a strength factor of 1.0, an institution has about 
$8.33 of liabilities for every $10.00 of assets. However, this small 
amount of equity still makes it difficult for the institution to borrow 
significant amounts of money at market rates. For a strength factor of 
2.0, the institution has about $6.67 of liabilities for every $10.00 of 
assets. At this strength factor and higher levels where an increasing 
proportion of the institution's resources are not subject to claims of 
third parties, it is more likely that the institution will be able to 
borrow significant amounts of money at market rates.
    The remaining ratio, Net Income, is a primary indicator of the 
underlying causes of a change in an institution's financial condition 
because it directly affects the resources reflected on the 
institution's balance sheet (continued gains and losses measured by the 
ratio will impact all other fundamental elements of financial health 
over time). This ratio helps to answer the question of whether an 
institution ``operated within its means'' during its most recent fiscal 
year. A strength factor of 1.0 for the Net Income ratio means that an 
institution broke even for the year--it did not incur operating losses 
or add to its wealth with operating gains or surpluses. In other words, 
the institution was able to cover its cash and non-cash expenses for 
the year, but no more. As the strength factor increases, the wealth and 
surpluses added by operating gains help to increase an institution's 
margin against adversity.
    An institution is financially responsible under the composite score 
methodology if, after weighting, the strength factors for all of the 
ratios sum to a score that is at least 1.5. For a for-profit 
institution, the weighting for each ratio is fairly equal--30 percent 
of the score is based on the Primary Reserve ratio, 40 percent on the 
Equity ratio, and 30 percent on the Net Income ratio. For a non-profit 
institution the weighting places less emphasis on the Net Income ratio 
at 20 percent, with the Primary Reserve and Equity ratios at 40 percent 
each. As noted previously, the weighting reflects the importance or 
significance of the operating characteristics in the two sectors.
    In summary, a low strength factor for any of the three ratios 
indicates that an institution has little or no margin against 
adversity, and may not have the resources necessary to meet its 
operating needs. As one or more of the strength factors increase to 2.0 
and above, the institution's margin against adversity improves through 
a combination of increases in expendable assets, equity, or operating 
gains. After accounting for the importance of each of the ratios, the 
composite score provides an overall measure of the financial health of 
an institution.
    However, as shown in Table 1, the methodology contemplates that an 
institution should have expendable assets that exceed liabilities by at 
least 10 percent to earn a strength factor (1.0 for an non-profit, and 
2.0 for a for-profit) for the Primary Reserve ratio that provides for a 
margin against adversity in keeping with the minimum passing composite 
score of 1.5. While a good performance under the Equity ratio may help 
an institution obtain resources to meet its operating and contingency

[[Page 39364]]

needs, or a good performance under the Net Income ratio may increase 
its wealth over time, the expendable assets reflected in the Primary 
Reserve ratio, which represents 30 percent to 40 percent of the 
composite score, are the first line of defense in dealing with an 
adverse situation, such as a lawsuit. That is, an institution would 
first seek to pay damages resulting from the suit out of expendable 
assets or current assets as they are referred to under the comparable 
SEC materiality threshold. Either way, paying damages out of liquid 
assets for an amount above 10 percent of expendable or current assets 
is likely to have an adverse impact on an institution's ability to meet 
its current and future financial obligations, particularly if the 
institution has little or no liquid assets.
    With regard to a suit that is based on claims other than the making 
of a Federal loan or the provision of educational services, while that 
suit is pending an institution would not be financially responsible. If 
the institution settles or otherwise resolves that suit for an amount 
that exceeds 10 percent of its current assets, the institution would 
still not be considered financially responsible until it submits 
audited financial statements that cover the fiscal year in which the 
suit was settled or resolved. At that point, the Department would be 
able to evaluate the impact of the suit through the calculation of the 
institution's composite score. So, until the Department calculates the 
institution's composite score, the institution would be treated as if 
the suit was still pending.
    In cases where a suit or action does not demand a specific amount 
as relief, we could allow an institution to estimate and use that 
amount in determining whether the suit or action would exceed the 
materiality thresholds. However, doing so would lead to inconsistent 
and widely differing estimates among institutions, or more concerning, 
estimates significantly lower than the potential damages. Consequently, 
we propose a uniform approach under which the estimates are based on 
the total amount of tuition and fees received by the institution for 
students enrolled at the institution during the period for which the 
relief is sought. If no period is stated, an institution would estimate 
the amount based on the total amount of tuition and fees received by 
the institution for the three award years preceding the date the suit 
or action was filed or initiated. However, we do not believe this 
approach is appropriate for private party actions that do not demand a 
specific amount of relief because the reasons for those actions may 
impact a more limited group of students. We seek comment on this 
approach and on other approaches that provide a reasonable way to 
estimate the potential damages from suits and other actions.
    With regard to repayments to the Secretary for losses to the 
Secretary from resolved borrower defense claims, an institution's 
ability to meet its current and future financial obligations is 
threatened whenever repayments for those losses rise to levels above 
the materiality thresholds, regardless of whether those repayments are 
related to or otherwise stem from the factual findings and theories 
resulting from an investigation or lawsuit initiated by the Department, 
a State or Federal agency, oversight entity, or some other party. 
Therefore, we propose to apply the dollar and percentage materiality 
thresholds to this triggering event.
    To provide background on the proposed trigger relating to a teach-
out plan, under 34 CFR 602.24(c)(1), an accrediting agency requires an 
institution to submit a teach-out plan whenever (1) the Secretary takes 
an emergency action or initiates a proceeding to limit, suspend, or 
terminate the institution's participation in the title IV, HEA 
programs, (2) the agency acts to withdraw, terminate, or suspend the 
accreditation or pre-accreditation of the institution, (3) the 
institution notifies the agency that it intends to cease operations 
entirely or close a location that provides 100 percent of at least one 
program, or (4) a State licensing or authorizing agency notifies the 
accrediting agency that it has or will revoke the institution's license 
or legal authorization to provide an educational program. Except for 
the closure of small locations, these actions jeopardize the 
institution's participation in the title IV, HEA programs. During the 
negotiated rulemaking sessions, some of the non-Federal negotiators 
noted that an institution may close a location that only a few students 
attended. In that case, the negotiators argued that some materiality 
threshold should apply because that closure would probably not have an 
adverse impact on the institution. Although those negotiators did not 
propose any specific thresholds, they suggested that thresholds based 
on the number of students enrolled or affected by the closure, or a 
dollar amount associated with those students, would be appropriate. We 
seek comment on whether the Department should adopt a threshold for 
this circumstance, and specifically seek comment on what that threshold 
should be.
    With regard to a situation where an accrediting agency places an 
institution on probation, issues a show-cause order, or places an 
institution in a similar status, we view that action as calling into 
question the institution's ability to continue to provide educational 
services, and it may be a precursor to losing accreditation. Some of 
the non-Federal negotiators argued that because an institution may be 
placed on probation for a minor infraction or for a reason that could 
be readily resolved, the Department should not determine, or at least 
not determine immediately, that the institution is not financially 
responsible. In response, we suggested, and are proposing in this NPRM, 
that the Department would wait six months before making a determination 
to provide adequate time for an institution with a minor infraction to 
come into compliance with its accrediting agency standards. We also 
suggested during the negotiating sessions that we could accept an 
accrediting agency determination that an institution's failure to 
comply with agency standards within a six-month timeframe has not had 
and is not expected to have a material adverse financial impact on the 
institution, and that the agency anticipates the institution will come 
into compliance within a longer time frame set by the agency under 34 
CFR 602.20. However, some of the non-Federal negotiators believed that 
an accrediting agency could not make this determination or make 
predictions about future compliance by an institution. We seek comment 
about whether or how we should provide a way for an accrediting agency 
to inform the Department why its action of placing an institution on 
probation will not have an adverse impact on the institution's 
financial or operating condition.
    With regard to the triggers on loan agreements and obligations, 
some of the non-Federal negotiators believed that it was inappropriate 
to conclude that an institution is not financially responsible if it 
violates any loan agreement or fails to make a payment on a loan, 
regardless of the amount of or purpose for the loan or whether the loan 
was collateralized. In response we suggested, and are proposing in this 
NPRM, to apply this trigger when an institution violates a loan 
agreement with, or as currently provided under Sec.  668.171(b)(3)(ii), 
fails to make a payment for more than 120 days to, the creditor with 
the largest secured extension of credit to the institution. We believe 
this proposal addresses the materiality concerns raised by the 
negotiators and speaks

[[Page 39365]]

directly to an institution's ability to meet its current financial 
obligations. However, the creditor may impose penalties or more 
restrictive requirements on the institution under the terms of its 
security or loan agreements that call into question the institution's 
ability to meet its current and future financial obligations. The 
Department is particularly concerned about identifying events in which 
the institution displays early indications of financial difficulty, and 
taking appropriate precautions as early as possible to protect the 
taxpayer. Lenders and creditors that provide financing to an 
institution under security and loan agreements typically monitor the 
institution's financial performance to ensure that it satisfies the 
loan requirements and are thus in the best position to identify 
contemporaneously any risks or problems that may hinder or prevent the 
institution from doing so. If these risks or problems arise, the 
creditor may impose penalties and additional restrictions on the 
institution, including increasing collateral or compensating balance 
requirements. For this reason, we propose to treat the imposition of 
penalties and additional requirements in loan agreements as a 
triggering event but, under the reporting requirements in proposed 
paragraph (d), we will allow the institution to demonstrate that these 
actions by the creditor will not have adverse impact on the 
institution.
    With regard to the 90/10 revenue test, a for-profit institution 
that fails the test for a fiscal year is in danger of losing its 
eligibility to participate in the title IV, HEA programs if it fails 
again in the subsequent fiscal year. Therefore, we believe this is an 
appropriate trigger to include.
    For a publicly traded institution, we are proposing as triggers 
four SEC-related actions that jeopardize the institution's ability to 
meet its financial obligations or continue as a going concern. First, 
we propose as a trigger an SEC warning to the institution that it may 
suspend trading on the institution's stock and take other action 
regarding the registration status of the company, pursuant to section 
12(k) of the Securities Exchange Act, 15 U.S.C. 78l(k). The SEC does 
not make this warning public or announce that it is considering a 
suspension until it determines that the suspension is required to 
protect investors and the public interest.\33\ In that event, the SEC 
posts the suspension and the grounds for the suspension on its Web 
site. However, under the reporting requirements in proposed Sec.  
668.171(d), the institution would be required to notify the Department 
within 10 days of receiving such a warning from the SEC. The SEC may 
decide to suspend trading on the institution's stock based on (1) a 
lack of current, accurate, or adequate information about the 
institution, for example when the institution is not current in filing 
its periodic reports, (2) questions about the accuracy of publicly 
available information, including information in institutional press 
releases and reports and information about the institution's current 
operational status, financial condition, or business transactions, or 
(3) questions about trading in the stock, including trading by 
insiders, potential market manipulation, and the ability to clear and 
settle transactions in the stock.\34\
---------------------------------------------------------------------------

    \33\ See SEC Investor Bulletin: Trading Suspensions, available 
at www.sec.gov/answers/tradingsuspension.htm.
    \34\ Id.
---------------------------------------------------------------------------

    Second we propose that whenever the exchange on which the 
institution's stock is traded notifies the institution that it is not 
in compliance with exchange requirements, that notice is a triggering 
event. The major exchanges typically require institutions whose stock 
is listed to satisfy certain minimum requirements such as stock price, 
number of shareholders, and the level of shareholder's equity.\35\ If a 
stock falls below the minimum price, other requirements are not met, or 
the institution fails to provide timely reports of its performance and 
operations in its Form 10-Q or 10-K filings with the SEC, the exchange 
may delist the institution's stock. Delisting is generally regarded as 
the first step toward Chapter 11 bankruptcy. However, before the 
exchange initiates a process to delist the stock, it notifies the 
institution and gives it several days to respond with a plan of the 
actions it intends to take to come into compliance with exchange 
requirements.
---------------------------------------------------------------------------

    \35\ See, e.g., New York Stock Exchange Rule 801.00:
    Suspension and Delisting: Securities admitted to the list may be 
suspended from dealings or removed from the list at any time that a 
company falls below certain quantitative and qualitative continued 
listing criteria. When a company falls below any criterion, the 
Exchange will review the appropriateness of continued listing.
    Available at http://nysemanual.nyse.com/lcm/sections/lcm-sections/chp_1_9/default.asp.
---------------------------------------------------------------------------

    Third, as proposed, if an institution discloses or is required to 
disclose in a report filed with the SEC a judicial or administrative 
proceeding stemming from a complaint filed by a person or entity that 
is not part of a State or Federal action, that would be a triggering 
event. SEC rules require the institution to disclose litigation that is 
material within the context of its disclosure obligations to investors. 
17 CFR 229.103. We recognize that publicly traded institutions may, to 
comply unequivocally with this obligation, report litigation that they 
would not otherwise consider to be a material adverse event. As noted 
in the description of these proposed regulations above, an institution 
that makes such a disclosure of litigation in an SEC filing may explain 
in reporting that disclosure to the Department why that litigation or 
suit does not constitute a material adverse event that would pose an 
actual risk to its financial health.
    Fourth, we propose to add as a trigger the institution's failure to 
file timely a required annual or quarterly report with the SEC. As 
noted previously in this discussion, the late filing of, or failure to 
file, a required SEC report may precipitate an adverse action by the 
SEC or a stock exchange. We seek comment on how we could more narrowly 
tailor these proposed triggers for publicly traded institutions to 
capture only those circumstances that could pose a risk to the 
institution's financial health.
    The proposed GE trigger would apply to an institution at which the 
majority of its students who receive title IV, HEA assistance are 
enrolled in GE programs, and the majority of those GE students enroll 
in failing and zone programs. Since failing and zone programs are in 
danger of losing the title IV, HEA eligibility, the corresponding loss 
of revenue from those programs may jeopardize the institution's ability 
to continue as a going concern. In addition, because most of the GE 
students are enrolled in programs that have not enabled former 
graduates to earn enough to afford to pay their student loans, we 
question the institution's ability to provide adequate educational 
services. We seek comment on whether the majority of students that 
enroll in zone or failing GE programs is an appropriate threshold or 
whether and why we should adopt a different threshold.
    The withdrawal of owner's equity is currently an event that an 
institution reports to the Department under the provisions of the zone 
alternative in Sec.  668.175(d). An institution participates under the 
zone alternative if its composite score is between 1.0 and 1.5. We 
proposed at negotiated rulemaking and propose in this NPRM to relocate 
this provision to the general standards of financial responsibility 
under Sec.  668.171. Under the general standards, this provision would 
become a trigger in cases where an institution's financial condition is 
already precarious and any

[[Page 39366]]

withdrawal of funds from the institution would further jeopardize its 
ability to continue as a going concern or its continued participation 
in the title IV, HEA programs. However, as noted in the discussion of 
these proposed regulations above, an institution may show that the 
withdrawal of funds was for a legitimate purpose or that it has no 
impact on the institution's composite score.
    With regard to the trigger for an institution whose cohort default 
rate is 30 percent or more for two consecutive years, the institution 
is in danger of losing its program eligibility in the subsequent year 
if its cohort default rate is again 30 percent or more. However, if the 
institution files a challenge, request for adjustment, or appeal under 
subpart N, we propose to wait until that challenge, request, or appeal 
is resolved before determining whether the institution violated the 
trigger. However, we seek comment on whether this trigger should apply 
to an institution whose cohort default rate is 30 percent or more for 
any one year because, under that circumstance, the institution is 
required by statute to develop a default prevention plan and submit it 
to the Secretary, indicating that Congress recognized the risk that 
such an institution could pose to borrowers and taxpayers and therefore 
warranted a plan for remediation after a single year of low 
performance.
    As discussed during the negotiated rulemaking sessions, all of 
these actions and events would serve as ``automatic triggers,'' meaning 
that an institution would not be financially responsible for at least 
one year based solely on the occurrence of that action or event, or for 
the triggers relating to an action by a State, Federal, or other 
oversight entity, including an accrediting agency, would not be 
financially responsible for a period of three years after an action by 
that agency. During negotiated rulemaking we also discussed, and we 
have proposed in this NPRM, other factors or conditions that the 
Secretary could consider in determining whether an institution is 
financially responsible. These factors and conditions, which we refer 
to as ``discretionary triggers,'' are factors or conditions that could 
be reasonably likely to have an adverse impact on the financial 
condition, business, or results of operations of a particular 
institution. If the Secretary determines that any of these factors 
alone or in combination calls into question the financial capability of 
an institution, the Secretary notifies the institution of the reasons 
for that determination.
    Two of the discretionary triggers, fluctuations in Direct Loan and 
Pell Grant funds and high dropout rates, stem from the statutory 
provisions for selecting institutions for program reviews in section 
498a(a) of the HEA. 20 U.S.C. 1099c-1(a). Significant increases or 
decreases in the volume of Federal funds may signal rapid expansion or 
contraction of an institution's operations that may either cause or be 
driven by negative turns in the institution's financial condition or 
its ability to provide educational services. Similarly, high dropout 
rates may signal that an institution is employing high-pressure sales 
tactics or is not providing adequate educational services, either of 
which may indicate financial difficulties and result in enrolling 
students who will not benefit from the training offered and will drop 
out, leading to financial hardship and borrower defense claims.
    Another discretionary trigger deals with the oversight activities 
of a State authorizing or licensing agency, where a failure by an 
institution to comply with agency requirements could jeopardize its 
ability to operate, or provide educational programs, in that State.
    Some non-Federal negotiators expressed support for the proposed use 
of a financial stress test that would be developed or adopted by the 
Department. Under the test, we would be able to assess or model an 
institution's ability to deal with an economic crisis or other adverse 
conditions. Like the composite score, the stress test could be used to 
assess whether, or to augment an analysis of whether, an institution is 
able to meet its financial obligations to students and the Secretary. 
An institution's bond or credit rating could be used in a similar way. 
During negotiated rulemaking we proposed, and propose in this NPRM, 
that an institution with a non-investment grade bond or credit rating 
\36\ could be subject to additional scrutiny because any rating below 
investment grade indicates that the institution is likely to default on 
the debt for which that rating is issued.
---------------------------------------------------------------------------

    \36\ Generally, a bond rating lower than Baa3 (Moody's) or BBB- 
(Standard and Poor's, Fitch). www.investopedia.com/exam-guide/series-7/debt-securities/bond-ratings.asp.
---------------------------------------------------------------------------

    The last discretionary trigger, any event reported by an 
institution to the SEC on a Form 8-K, is intended to capture events 
that are not included in the automatic triggers but may nevertheless 
have a significant adverse impact on business operations. For example, 
an institution must report to the SEC that a material definitive 
agreement (a contract on which business operations are substantially 
dependent) was terminated.
    Under the reporting requirements in proposed Sec.  668.171(d), an 
institution would notify the Department of any action or event that 
constitutes an automatic or discretionary trigger no later than 10 days 
after that action or event occurs. Some of the non-Federal negotiators 
identified a few events that may not be material or would be resolved 
during the reporting period and argued that these events should not 
prompt any action by the Department. We agreed, and propose in this 
NPRM that, to keep the Department apprised, an institution would still 
be required to report those events but the institution may tell us in 
its notice why the action or event is not material or that it has been 
resolved. If we do not agree with the institution's assessment, the 
Department will notify the institution of the reasons for that 
determination.

Alternative Standards and Requirements (Sec.  668.175)

    Statute: Under sections 437(c) and 464(g) of the HEA, if the 
Secretary discharges a borrower's liability on a loan due to the 
closure of an institution, false certification, or unpaid refund, the 
Secretary pursues a claim against the institution or settles the loan 
obligation pursuant to the financial responsibility standards described 
in section 498(c).
    Section 498(c)(3) of the HEA provides that if an institution fails 
the composite score or other criteria established by the Secretary to 
determine whether the institution is financially responsible, the 
Secretary must determine that the institution is financially 
responsible if it provides third-party financial guarantees, such as 
performance bonds or letters of credit payable to the Secretary, for an 
amount that is not less than one-half of the annual potential 
liabilities of the institution to the Secretary for title IV, HEA 
funds, including liabilities for loan obligations discharged pursuant 
to section 437, and to students for refunds of institutional charges, 
including required refunds of title IV, HEA funds.
    Under section 498(h) of the HEA, the Secretary may provisionally 
certify an institution's eligibility to participate in the title IV, 
HEA programs for not more than one year in the case of an institution 
seeking an initial certification, or for no more than three years for 
an institution that seeks to renew its certification, if, in the 
judgment of the Secretary, the institution is in an administrative or 
financial condition that may jeopardize its ability to perform its 
financial

[[Page 39367]]

responsibilities under a program participation agreement. If, prior to 
the end of a period of provisional certification, the Secretary 
determines that the institution is unable to meet its responsibilities 
under its program participation agreement, the Secretary may revoke the 
institution's provisional certification to participate in the title IV, 
HEA programs.
    Current Regulations: Section 668.13(c) of the current regulations 
identifies the reasons and conditions for which the Secretary may 
provisionally certify an institution to participate in the title IV, 
HEA programs, including an institution's failure to meet the standards 
of financial responsibility under Sec.  668.15 or subpart L of the 
general provisions regulations. Under Sec.  668.13(c)(4), an 
institution may participate in the title IV, HEA programs under a 
provisional certification if the institution demonstrates to the 
Secretary's satisfaction that it (1) is capable of meeting the 
standards of participation in subpart B of the general provisions 
regulations within a specified period, and (2) is able to meet its 
responsibilities under its program participation agreement, including 
compliance with any additional conditions that the Secretary requires 
the institution to meet for the institution to participate under a 
provisional certification. If the Secretary determines that the 
institution is unable to meet its responsibilities under its 
provisional program participation agreement, the Secretary may revoke 
the institution's provisional certification as provided under Sec.  
668.13(d).
    As provided under Sec.  668.175, an institution that is not 
financially responsible under the general standards in Sec.  668.171 
may begin or continue to participate in the title IV, HEA programs only 
by qualifying under an alternative standard.
    Under the zone alternative in Sec.  668.175(d), a participating 
institution that is not financially responsible solely because its 
composite score is less than 1.5 may participate as a financially 
responsible institution for no more than three consecutive years, but 
the Secretary requires the institution to (1) make disbursements to 
students under the heightened cash monitoring or reimbursement payment 
methods described in Sec.  668.162, and (2) provide timely information 
regarding any adverse oversight or financial event, including any 
withdrawal of owner's equity from the institution. In addition, the 
Secretary may require the institution to (1) submit its financial 
statement and compliance audits earlier than the date specified in 
Sec.  668.23(a)(4), or (2) provide information about its current 
operations and future plans.
    Under the provisional certification alternative in Sec.  
668.175(f), an institution that is not financially responsible because 
it does not meet the general standards in Sec.  668.171(b), or because 
of an audit opinion in Sec.  668.171(d) or a condition of past 
performance in Sec.  668.174(a), may participate under a provisional 
certification for no more than three consecutive years, if the 
institution (1) provides an irrevocable letter of credit, for an amount 
determined by the Secretary that is not less than 10 percent of the 
title IV, HEA program funds the institution received during its most 
recently completed fiscal year, (2) demonstrates that it was current in 
its debt payments and has met all of its financial obligations for its 
two most recent fiscal years, and (3) complies with the provisions 
under the zone alternative.
    Proposed Regulations: We propose to relocate to proposed new Sec.  
668.171(c) two of the oversight and financial events that an 
institution currently reports to the Department under the zone 
alternative in Sec.  668.175(d)(2)(ii)--actions by an accrediting 
agency and any withdrawal of owner's equity from the institution. In 
addition we propose to remove from Sec.  668.175(d)(2) the two 
reporting events related to loan agreements and debt obligations.
    Under the provisional certification alternative in Sec.  
668.175(f), we propose to add a new paragraph (4) that ties the amount 
of the financial protection that an institution must provide to the 
Secretary to an action or triggering event described in Sec.  
668.171(c). Specifically, under this alternative, an institution would 
be required to provide to the Secretary financial protection, such as 
an irrevocable letter of credit, for an amount that is:
     For a State or Federal action under Sec.  668.171(c)(1)(i) 
or (ii), 10 percent or more, as determined by the Secretary, of the 
amount of Direct Loan Program funds received by the institution during 
its most recently completed fiscal year;
     For repayments to the Secretary for losses from borrower 
defense claims under Sec.  668.171(c)(2), the greatest annual loss 
incurred by the Secretary during the three most recently completed 
award years to resolve those claims or the amount of losses incurred by 
the Secretary during the current award year, whichever is greater, plus 
a portion of the amount of any outstanding or pending claims based on 
the ratio of the total value of claims resolved in favor of borrowers 
during the three most recently completed award years to the total value 
of claims resolved during the three most completed award years; and
     For any other action or triggering event described in 
Sec.  668.171(c), or if the institution's composite score is less than 
1.0, or the institution no longer qualifies under the zone alternative, 
10 percent or more, as determined by the Secretary, of the total amount 
of title IV, HEA program funds received by the institution during its 
most recently completed fiscal year.
    We propose to remove Sec.  668.175(e) because the transition year 
alternative, which pertains to fiscal years beginning after July 1, 
1997 and before June 30, 1998, is no longer applicable.
    In addition, we propose to add a new paragraph (h) that provides 
for providing financial protection using a set-aside in lieu of cash or 
a letter of credit. If an institution does not provide cash or the 
letter of credit for the amount required to participate under the zone 
or provisional certification alternatives within 30 days of the 
Secretary's request, the Secretary would provide funds to the 
institution only under the reimbursement or heightened cash monitoring 
payment methods, and would withhold temporarily a portion of any 
reimbursement claim payable to the institution in an amount that 
ensures that by the end of a nine-month period, the total amount 
withheld equals the amount of cash or the letter of credit the 
institution would otherwise provide. The Secretary would maintain the 
amount of funds withheld under this offset arrangement in a temporary 
escrow account, would use the funds to satisfy the debt and liabilities 
owed to the Secretary that are not otherwise paid directly by the 
institution, and would return to the institution any funds not used for 
this purpose during the period for which the cash or letter of credit 
was required.
    Reasons: The reportable items under the zone alternative were 
intended to alert the Department to adverse actions or events that 
could occur at any time, or fall outside the scope of activities that 
are typically included or disclosed in financial statements, and that 
could further degrade the financial health of an institution with 
little or no margin against adversity. As noted previously, the 
Department is taking a more contemporaneous and broader view of the 
actions or events that are likely to have an adverse impact on an 
institution, regardless of whether the institution is participating 
under the zone or another alternative. As such, the reportable events 
under the zone alternative relating to adverse actions by an 
accrediting agency or withdrawals of owner's equity fall naturally 
under the

[[Page 39368]]

scope of triggering events for the general standards of financial 
responsibility. With regard to removing the reporting requirements for 
loan agreements and debt obligations from the zone alternative, we note 
that while the provisions relating to loan agreements and debt 
obligations are currently part of the general standards, the Department 
typically relies on footnote disclosures in the financial statements to 
determine whether an institution violated those agreements or 
obligations. Because we would require under proposed Sec.  668.171(d) 
that institutions report these violations no later than 10 days after 
they occur, there would be no need to maintain the same reporting under 
the zone alternative.
    With regard to the proposed changes under the provisional 
certification alternative that tie the amount of the financial 
protection, such as a letter of credit, to an action or triggering 
event, as explained more fully under the discussion of the general 
standards in Sec.  668.171, every cited action or event is material 
and, on its own, likely to have an adverse impact on the institution. 
So, while the Secretary retains the discretion to determine the amount 
of the financial protection for any action or event, we propose for 
most of the triggering events to set as a floor the longstanding 
minimum--10 percent of the amount of title IV, HEA program funds 
received by the institution during its most recently completed fiscal 
year. To be clear, each of these triggering events would require a form 
of financial protection, such as a letter of credit, of at least 10 
percent, so an institution with three triggering events would have to 
submit financial protection for at least 30 percent of its prior year 
title IV, HEA program funds.
    For borrower defense claims, the amount of the financial protection 
is tied to the prior experience or history of an institution in having 
to reimburse the Secretary for losses stemming from those claims and 
the potential for future losses. As proposed, the Department would 
calculate the amount of the financial protection by looking at the 
three most recently completed award years and the current award year to 
determine the year in which the greatest Federal losses occurred, and 
adding to that amount an estimate for the amount of losses from any 
outstanding or pending claims. For example, the estimated loss for 
pending claims would be calculated by multiplying the percentage of 
prior claims resolved in the students' favor (say 75 percent) by the 
total amount of the pending claims (say $500,000), or $375,000. In the 
normal course, the Department would first seek reimbursement from the 
institution before using the financial protection to recover losses 
from borrower defense claims.
    For a State or Federal action under Sec.  668.171(c)(1)(i) or (ii), 
the amount of the financial protection is based only on Direct Loan 
funds, instead of all title IV, HEA funds as for all of the other 
triggers, because the Federal protection sought is related directly to 
loan liabilities that could arise in the wake of a State or Federal 
agency suit against the institution.
    With regard to the set-aside, the Department wishes to provide an 
alternative to an institution that, for costs or other reasons, is 
unable to provide a letter of credit, or cash equivalent to the amount 
of the letter of credit, within 30 days. However, while we acknowledge 
that obtaining a letter of credit could be costly and time consuming 
for some institutions, or obtaining a letter of credit collateralized 
by physical assets requiring valuation by a bank or creditor could take 
an extended time, we believe that the severity or potential 
consequences of the triggering events warrant the Department taking 
immediate steps to protect the Federal interest. Therefore, if an 
institution does not provide the letter of credit or cash within 30 
days of the Secretary's request, the Department would initiate 
administrative offsets to implement the set-aside.

Severability

    Current Regulations: None.
    Proposed Regulations: Proposed Sec.  668.176 would make clear that, 
if any part of the proposed regulations for part 668, subpart L, 
whether an individual section or language within a section, is held 
invalid by a court, the remainder would still be in effect.
    Reasons: We believe that each of the proposed provisions proposed 
in this NPRM serves one or more important, related, but distinct, 
purposes. Each of the requirements provides value to students, 
prospective students, and their families, to the public, taxpayers, and 
the Government, and to institutions separate from, and in addition to, 
the value provided by the other requirements. To best serve these 
purposes, we would include this administrative provision in the 
regulations to make clear that the regulations are designed to operate 
independently of each other and to convey the Department's intent that 
the potential invalidity of one provision should not affect the 
remainder of the provisions.

Debt Collection

How does the Secretary exercise discretion to compromise a debt or to 
suspend or terminate collection of a debt? (Sec.  30.70)

    Statute: Section 432(a) of the HEA authorizes the Secretary to 
enforce or compromise a claim under the FFEL Program; section 451(b) 
provides that Direct Loans are made under the same terms and conditions 
as FFEL Loans; and section 468(2) authorizes the Secretary to enforce 
or compromise a claim on a Perkins Loan. Section 452(j) of the General 
Education Provisions Act (GEPA) authorizes certain compromises under 
Department programs, and 31 U.S.C. 3711 authorizes a Federal agency to 
compromise or terminate collection of a debt, subject to certain 
conditions.
    Current Regulations: The current regulation in Sec.  30.70 was 
adopted in 1988 to describe the procedures and standards the Secretary 
follows to compromise, or suspend or terminate collection of, debts 
arising under programs administered by the Department. The HEA has, 
since 1965, authorized the Secretary to compromise--without dollar 
limitation--debts arising from title IV, HEA student loans. The Federal 
Claims Collection Act of 1966 (FCCA), now at 31 U.S.C. 3711, authorized 
Federal agencies to compromise, or suspend or terminate collection of, 
debts, subject to dollar limitations and compliance with the Federal 
Claims Collection Standards (FCCS), now at 31 CFR 900-904. As in effect 
in 1988 when the current regulation was adopted, the FCCA required 
agencies generally to obtain approval from the DOJ in order to resolve 
debts exceeding $20,000, unless DOJ were to prescribe a higher amount. 
No higher amount was prescribed, and the Department included that 
$20,000 dollar limit in Sec.  30.70.
    In 1988, section 452(j) of GEPA (20 U.S.C. 1234a(j)) was enacted to 
provide standards and procedures for certain compromises of debts 
arising under any program administered by the Department other than the 
Impact Aid Program or HEA programs. These provisions were also included 
in Sec.  30.70(c), (d), and (e). However, in 1989, the Department 
adopted 34 CFR 81.36 to implement these same GEPA standards; that 
regulation supersedes current Sec.  30.70(c), (d), and (e) to govern 
compromises of debts under certain Department programs. Compromises of 
debts under Department programs that do not fall under standards in 
Sec.  81.36 would continue to be subject to the standards and dollar 
limits generally applicable to Department debts. In 1990,

[[Page 39369]]

in Public Law 101-552, Congress increased the size of debts that 
agencies may resolve without DOJ approval to $100,000; that change is 
not reflected in Sec.  30.70. Finally, in 2008, Public Law 110-315 
amended section 432 of the HEA to require the Department to provide DOJ 
an opportunity to review and comment on any proposed resolution of a 
claim arising under any of the title IV, HEA loan programs that exceed 
$1,000,000. That, too, is not reflected in current Sec.  30.70.
    Proposed Regulations: The proposed changes would revise Sec.  30.70 
to--
     Reflect the increased debt resolution authority 
($100,000);
     Refer to Sec.  81.36 to describe the authority and 
procedures for those compromises of claims that are subject to section 
452(j) of GEPA;
     Clarify that the generally applicable $100,000 limit does 
not apply to resolution of claims arising under the FFEL Program, or 
under the Direct Loan Program or Perkins Loan Program; and include the 
requirement that the Department seek DOJ review of any proposed 
resolution of a claim exceeding $1,000,000 under any of those loan 
programs.
    Reasons: The current regulations do not reflect a series of 
statutory changes that have expanded the Secretary's authority to 
compromise, or suspend or terminate the collection of, debts.

Closed School Discharges (Sec. Sec.  668.14, 673.33, 682.402, and 
685.214)

    Statute: Sections 437(c) and 464(g)(1) of the HEA provide for the 
discharge of a borrower's liability to repay a FFEL Loan or a Perkins 
Loan if the student is unable to complete the program in which the 
student was enrolled due to the closure of the school. The same benefit 
applies to Direct Loan borrowers under the parallel terms, conditions, 
and benefits provisions in section 455(a) of the HEA.
    Current Regulations: Section 668.14(b)(31) provides that, as part 
of an institution's program participation agreement, the institution 
must submit a teach-out plan, if, among other conditions, the 
institution intends to close a location that provides 100 percent of at 
least one program offered by the institution or if the institution 
otherwise intends to cease operations. Sections 674.33(g), 682.402(d), 
and 685.214 describe the qualifications and procedures in the Perkins, 
FFEL, and Direct Loan Programs for a borrower to receive a closed 
school discharge.
     Proposed Regulations: Proposed Sec.  668.14(b)(32) would require, 
as part of its program participation agreement with the Department, a 
school to provide all enrolled students with a closed school discharge 
application and a written disclosure, describing the benefits and the 
consequences of a closed school discharge as an alternative to 
completing their educational program through a teach-out plan after the 
Department initiates any action to terminate the participation of the 
school in any title IV, HEA program or after the occurrence of any of 
the events specified in Sec.  668.14(b)(31) that would require the 
institution to submit a teach-out plan.
    Proposed revisions to Sec.  682.402(d)(6)(ii)(F) would require a 
guaranty agency that denies a closed school discharge request to inform 
the borrower of the opportunity for a review of the guaranty agency's 
decision by the Secretary, and explain how the borrower may request 
such a review. Proposed Sec.  682.402(d)(6)(ii)(K) would describe the 
responsibilities of the guaranty agency and the Secretary if the 
borrower requests such a review.
    Under current and proposed 682.402(d)(6)(ii)(H) and 685.214(f)(4), 
as well as under current Sec. Sec.  674.33(g)(8)(v), if a FFEL or 
Direct Loan borrower fails to submit a completed closed school 
discharge application within 60 days of the notice of availability of 
relief, the guaranty agency or the Department resumes collection on the 
loan. However, proposed Sec. Sec.  674.33(g)(8)(vi), 
682.402(d)(6)(ii)(I), and 685.214(f)(5) would require the guaranty 
agency or the Department, upon resuming collection, to provide a 
Perkins, FFEL, or Direct Loan borrower with another closed school 
discharge application, and an explanation of the requirements and 
procedures for obtaining the discharge.
    Proposed Sec. Sec.  674.33(g)(3)(iii), 682.402(d)(8)(iii), and 
685.214(c)(2) would authorize the Department, or a guaranty agency with 
the Department's permission, to grant a closed school discharge to a 
Perkins, FFEL, or Direct Loan borrower without a borrower application 
based on information in the Department's or guaranty agency's 
possession that the borrower did not subsequently re-enroll in any 
title IV-eligible institution within a period of three years after the 
school closed.
    Reasons: Many borrowers eligible for a closed school discharge do 
not apply. The Department is concerned that borrowers are unaware of 
their possible eligibility for a closed school discharge because of 
insufficient outreach and information about available relief. In some 
instances, the closing school might inform borrowers of the option to 
complete their program through a teach-out, but fail to advise them of 
the option for a closed school discharge. Currently, the Department 
sends identified eligible borrowers an application and an explanation 
of the qualifications and procedures to obtain a closed school 
discharge. Schools that close, or close a location, may also conduct 
teach-outs in accordance with their accreditor's standards. The 
proposed amendments to the program participation agreement regulations 
would provide such information to borrowers earlier in the process, and 
would help to ensure that the borrowers receive accurate and complete 
information with regard to their eligibility for a closed school 
discharge, as well as the consequences of receiving such a discharge.
    Non-Federal negotiators cited cases in which schools that were 
closing or had closed failed to provide complete or accurate 
information to their students about their options. They described 
instances in which schools told students that, if the student received 
a closed school discharge, the credits that the student earned at the 
school would not be transferable to another school. While borrowers who 
receive a closed school discharge may be able to transfer the credits 
that they have earned, others may struggle to find another institution 
willing to accept those credits. Yet relying on the information 
provided to them, these borrowers often choose teach-outs rather than 
closed school discharges. Though teach-outs can be beneficial to 
borrowers in a closed school situation, a closed school discharge may 
be a better option for some students.
    In the Perkins and Direct Loan Programs, closed school discharge 
determinations are generally made by the Department. The Department is 
the loan holder for all Direct Loans, and would become the loan holder 
for Perkins Loans held by a school that closes. In the FFEL Program, 
closed school discharge determinations are generally made by a guaranty 
agency. Under the current FFEL Program regulations, a borrower cannot 
request a review of a guaranty agency's determination of a borrower's 
eligibility for a closed school discharge. Proposed Sec.  
682.402(d)(6)(ii)(F) would provide for Departmental review of denied 
closed school discharge claims in the FFEL Program in order to provide 
an opportunity for a more complete review of their claims, comparable 
to that provided in current regulations for false certification claims.
    The proposed amendments to the FFEL, Perkins, and Direct Loan 
regulations, which would require loan holders to send borrowers a 
second closed school application if a borrower fails to submit an 
application within 60

[[Page 39370]]

days of the date the first application was sent, are intended to 
provide another opportunity to encourage borrowers who may be eligible 
for the closed school discharge to apply.
    The Department proposed during negotiated rulemaking that the 
Secretary allow closed school discharges to be granted without an 
application in all three loan programs if the borrower does not re-
enroll in a title IV-eligible program within three years. We asserted 
that such borrowers can be assumed to not have completed their academic 
program through a teach-out or transfer, and have included these 
provisions in the proposed regulations. We also asserted that an 
application or discharge request in these cases should not be 
necessary. By amending the regulations to provide for more outreach, 
disclosure of a borrower's options in a teach-out situation, and review 
by the Secretary of guaranty agency determinations, we hope to increase 
the number of eligible borrowers who apply for and receive a closed 
school discharge.

Death Discharges (Sec. Sec.  674.61(a), 682.402(b)(2), 685.212(a), and 
686.42(a))

    Statute: Section 420N(d)(2) of the HEA provides for the Secretary 
to establish, through regulation, categories of extenuating 
circumstances under which a TEACH Grant recipient who is unable to 
satisfy all or part of the TEACH Grant service obligation may be 
excused from fulfilling that portion of the service obligation.
    Section 437(a)(1) of the HEA provides for the discharge of a loan 
made under the FFEL Program if the borrower dies. In accordance with 
section 455(a)(1) of the HEA, this discharge provision also applies to 
loans made under the Direct Loan Program.
    Section 464(c)(1)(F)(i) provides that the liability to repay a 
Perkins Loan is cancelled upon the death of the borrower.
    Current Regulations: For the Perkins Loan Program, Sec.  674.61(a) 
provides that an institution must discharge the unpaid balance on a 
Perkins Loan if the borrower dies. For the FFEL Program and the Direct 
Loan Program, Sec. Sec.  682.402(b)(2) and 685.212(a)(1), respectively, 
provide for the discharge of a loan based on the death of the borrower 
or, in the case of a PLUS loan made to a parent, the death of the 
student on whose behalf the parent borrowed. For the TEACH Grant 
Program, Sec.  686.42(a) specifies that the Secretary discharges a 
grant recipient's obligation to complete the agreement to serve if the 
grant recipient dies. For all of these programs, the current 
regulations specify that a death discharge can be granted based on an 
original or certified copy of the borrower's, student's, or TEACH grant 
recipient's death certificate; an accurate and complete photocopy of 
the original or a certified copy of the death certificate; or, on a 
case-by-case basis, other reliable documentation of the individual's 
death.
    Proposed Regulations: We propose to amend Sec. Sec.  674.61(a), 
682.402(b)(2), 685.212(a), and 686.42(a) to allow for death discharges 
to be granted based on an accurate and complete original or certified 
copy of a death certificate that is scanned and submitted 
electronically or sent by facsimile transmission, or verification of a 
borrower's, student's or TEACH Grant recipient's death through an 
authoritative Federal or State electronic database that is approved for 
use by the Secretary. The proposed regulations would also make minor 
changes to the current death discharge regulatory language to make it 
more consistent across the title IV, HEA programs.
    Reasons: The proposed regulations would streamline the death 
discharge process and reduce administrative burden by allowing for 
death certificates to be submitted electronically or by facsimile 
transmission, and would further simplify the process in the future by 
allowing for death discharges to be granted based on verification of an 
individual's death through an authoritative Federal or State electronic 
database that the Secretary authorizes to be used for this purpose.
    During the negotiations, a non-Federal negotiator asked if, under 
the proposed regulations, it would be permissible for a loan holder to 
automatically grant a death discharge based on verification of a 
borrower's or student's death in an approved State or Federal 
electronic database, without the loan holder having received a request 
for the death discharge from a family member. The Department responded 
that loan holders can only grant death discharges after being informed 
of the borrower's or student's death by a family member or other 
representative of the deceased individual, but that they can use the 
information in an approved electronic database as the necessary 
supporting documentation for doing so.

Interest Capitalization (Sec. Sec.  682.202(b)(1), 682.410(b)(4), and 
682.405)

    Statute: Section 428H(e)(2) of the HEA allows a FFEL Program lender 
to capitalize interest when the loan enters repayment, upon default, 
and upon the expiration of deferment and forbearance, but does not 
specifically authorize the capitalization of interest when a defaulted 
loan is rehabilitated.
    Current Regulations: The current FFEL Program regulations in 
Sec. Sec.  682.202, 682.405, and 682.410 permit FFEL Program lenders to 
capitalize interest when the borrower enters or resumes repayment and 
requires a guaranty agency to capitalize interest when it pays the FFEL 
Program lender's default claim. However, these regulations do not 
specifically address whether a guaranty agency may capitalize interest 
when the borrower has rehabilitated a defaulted FFEL Loan or whether a 
FFEL Program lender may capitalize interest when purchasing a 
rehabilitated FFEL Loan from a guaranty agency.
    Proposed Regulations: The proposed revisions to the above-
referenced regulations would clarify that the only time that a guaranty 
agency may capitalize interest is when it pays the FFEL Program 
lender's default claim and, therefore, that capitalization by the 
guaranty agency when selling a rehabilitated FFEL Loan is not 
permitted. Similarly, the proposed regulations would clarify that 
capitalization by the FFEL Program lender when purchasing a 
rehabilitated FFEL Loan is not permitted. The proposed regulations 
would also clarify, through a conforming change, that, when a guaranty 
agency holds a defaulted FFEL Loan and the guaranty agency has 
suspended collection activity to give the borrower time to submit a 
closed school or false certification discharge application, 
capitalization is not permitted if collection on the loan resumes 
because the borrower does not return the appropriate form within the 
allotted timeframe.
    Reasons: Currently, some guaranty agencies and FFEL Program lenders 
capitalize interest when the borrower rehabilitates the loan, while 
others do not. Also, some guaranty agencies capitalize interest when 
resuming collection on a defaulted FFEL Loan when a borrower has not 
submitted a closed school or false certification discharge with a 
specific timeframe. The Department does not believe that interest 
capitalization in either circumstance is warranted, and the Department 
does not capitalize interest on loans that it holds in comparable 
circumstances. Further, the Department believes that FFEL Program 
lenders, in the case of a rehabilitated FFEL Loan, have sufficient 
tools at their disposal to ensure that a rehabilitated loan that has an 
outstanding interest balance is repaid in full by the end of the 
applicable repayment period or, in the case of the income-based 
repayment plan, forgiven.

[[Page 39371]]

Loan Repayment Rate Warnings and Financial Protection Disclosures 
(Sec.  668.41)

    Statute: Under 20 U.S.C. 1221-3 and 3474, the Secretary is 
authorized to adopt such regulations as needed for the proper 
administration of programs.
    Current Regulations: Current Sec.  668.41 requires institutions to 
make certain general disclosures of information to enrolled and 
prospective students, including availability of financial assistance, 
detailed institutional information, retention rate, completion and 
graduation rates, and placement of and types of employment obtained by 
graduates. Section 668.41 further requires specialized disclosures 
related to the ``Annual Security Report and Annual Fire Safety 
Report,'' the ``Report on Completion or Graduation Rates for Student-
Athletes,'' and the ``Report on Athletic Program Participation Rates 
and Financial Support Data.''

Proposed Regulations

Proprietary Institution Loan Repayment Warning

    Proposed Sec.  668.41(h) would expand the reporting and disclosure 
requirements under Sec.  668.41 to provide that, for any fiscal year in 
which an affected postsecondary institution has a loan repayment rate 
that is less than or equal to zero, the institution must deliver a 
Department-issued plain language warning to prospective and enrolled 
students and place the warning on its Web site and in all promotional 
materials and advertisements. In accordance with proposed Sec.  
668.41(h)(6), the Department would not calculate a repayment rate for 
an institution whose cohort is based on fewer than 10 borrowers. An 
institution with 10 or more borrowers that receives a failing repayment 
rate will have the opportunity to appeal its rate if the institution 
demonstrates that it has a low participation rate under the Direct Loan 
program by applying, with slight modifications, the participation rate 
index calculation described in Sec.  668.214(b)(1) that institutions 
may use to appeal a loss of eligibility due to high cohort default 
rates or placement on provisional certification. Consistent with the 
existing process, in calculating the participation rate index for the 
purposes of proposed Sec.  668.41(h)(6), the institution would divide 
the number of students receiving a Direct Loan to attend the 
institution during a period of enrollment that overlaps any part of a 
12-month period that ended during the six months immediately preceding 
the fiscal year for which the Department calculated the loan repayment 
rate, by the number of regular students enrolled at the institution on 
at least a half-time basis during any part of the same 12-month period. 
The resulting percentage would then be multiplied by 30 percent to 
yield a participation rate. A figure of 30 percent is used because that 
is the minimum cohort default rate that could precipitate a 
participation rate challenge. A participation rate equal to or less 
than 0.0625 for a fiscal year in which the Department has calculated a 
loan repayment rate would exempt the institution from having to deliver 
a loan repayment warning under proposed Sec.  668.41(h).
    Under proposed Sec.  668.41(h)(3), for each fiscal year, the 
Secretary would calculate the loan repayment rate for a proprietary 
institution based on the cohort of borrowers whose Direct Loans entered 
repayment at any time during the fifth fiscal year prior to the most 
recently completed fiscal year. The percentage change between what we 
refer to as the ``original outstanding balance (OOB)'' (the amount 
owed, as defined more specifically in proposed Sec.  668.41(h)(2)(ii), 
when the borrower enters repayment, including any accrued interest) and 
the ``current outstanding balance'' (including principal and both 
capitalized and uncapitalized interest) as of the end of the prior 
fiscal year for each borrower in the cohort would be calculated and 
expressed as a percentage reduction of, or increase in, the OOB. For 
any loan reported as being in default status at any time during the 
``measurement period'' and where there is a percentage reduction of the 
original balance, the difference between the OOB and COB would be 
considered to be zero; and for any loan that defaulted and had a 
percentage increase from the original balance, the difference between 
the OOB and COB would be that percentage increase. ``Measurement 
period'' is defined in proposed Sec.  668.41(h)(2)(iv) as the period of 
time between the date a borrower's loan enters repayment and the end of 
the fiscal year for which the current outstanding balance of that loan 
is determined. The OOB of a loan does not include PLUS loans made to 
parent borrowers, Perkins loans, or TEACH Grant-related loans. For 
consolidation loans, the OOB includes only those loans attributable to 
the borrower's enrollment in the institution. A median value is then 
determined on a scale where percentage reductions in original 
outstanding balance are positive values and percentage increases in 
original balance are negative values. The median value for all included 
borrowers at an institution is the institution's loan repayment rate 
for that year.
    Proposed Sec.  668.41(h)(4) would provide certain exclusions from 
the above calculation. The Secretary would exclude a borrower from the 
calculation if one or more of the borrower's loans were in a military 
deferment status during the last fiscal year of the measurement period; 
one or more of the borrower's loans are either under consideration by 
the Secretary, or have been approved, for discharge on the basis of the 
borrower's total and permanent disability under Sec.  682.402 or Sec.  
685.213; the borrower was enrolled in an institution during the last 
fiscal year of the measurement period; or the borrower died.
    In proposed Sec.  668.41(h)(5), we describe the process by which 
the Department would notify an institution of its loan repayment rate, 
and provide the institution an opportunity to challenge that rate. 
Specifically, the Department would provide to each institution a list 
of students in the cohort as determined under proposed Sec.  
668.41(h)(3), the draft repayment rate for that cohort, and the 
information used to calculate the draft rate. The institution would 
have 45 days to challenge the accuracy of the information used to 
calculate the draft rate. After considering any challenges to the draft 
rate made by the institution, the Department would notify the 
institution of its final repayment rate and whether the institution 
must deliver a loan repayment warning to students.

Financial Protection Disclosure

    Under proposed Sec.  668.41(i), institutions that are required to 
provide financial protection, including an irrevocable letter of credit 
or cash under proposed Sec.  668.175(d) or (f), or set-aside under 
proposed Sec.  668.175(h), would have to disclose that status, which 
would include information about why the institution is required to 
provide financial protection, to both enrolled and prospective students 
until released from the obligation to provide financial protection by 
the Department.

Disclosures to Students

    Under proposed Sec.  668.41(h)(7), an institution that is subject 
to the loan repayment warning must provide that warning to prospective 
and enrolled students and place the warning on its Web site and in all 
advertising and promotional materials in a form and manner prescribed 
by the Department in a notice published in the Federal Register. Prior 
to publishing the notice, the Department would conduct

[[Page 39372]]

consumer testing to improve the effectiveness of the warning language.
    Under proposed Sec.  668.41(h)(7), an affected institution would be 
required to provide the loan repayment warning to both enrolled and 
prospective students by hand delivering the warning as part of a 
separate document to the student individually or as part of a group 
presentation. Alternatively, an institution could send the warning to a 
student's primary email address or by another electronic communication 
method used by the institution for communicating with the student. In 
all cases, proposed Sec.  668.41(h)(7) would require the institution to 
ensure that the warning is the only substantive content in the message, 
unless the Secretary specifies additional, contextual language to be 
included in the message. Institutions would be required to provide a 
prospective student with the warning before the student enrolls, 
registers, or enters into a financial obligation with the institution.
    Proposed Sec.  668.41(h)(8) would also require that all promotional 
and advertising materials prominently include the warning. Promotional 
materials include, but are not limited to, an institution's Web site, 
catalogs, invitations, flyers, billboards, and advertising on or 
through radio, television, print media, social media, or the Internet. 
Proposed Sec.  668.41(h)(8) would further require that all promotional 
materials, including printed materials, about an institution be 
accurate and current at the time they are published, approved by a 
State agency, or broadcast.
    Finally, an institution would, under proposed Sec.  668.41(h)(9), 
be required to post the warning on the home page of the institution's 
Web site, in a simple and meaningful manner, within 30 days of the date 
the institution is informed by the Department of its final loan 
repayment rate. The warning must remain posted to the institution's Web 
site until the Department notifies the institution that it is no longer 
under a requirement to do so as a result of having a loan repayment 
rate greater than zero percent.
    Under proposed Sec.  668.41(i), an affected institution would be 
required to provide the financial protection disclosure to enrolled and 
prospective students in the manner described in proposed Sec.  
668.41(h)(7). An affected institution would also be required to post 
the disclosure on the home page of the institution's Web site in the 
manner described in proposed Sec.  668.41(h)(9) no later than 30 days 
after the date on which the Secretary informs the institution of the 
need to provide financial protection, until such time as the Secretary 
releases the institution from the requirement that it provide financial 
protection.
    Reasons: In deciding to enroll or continue attendance at any 
institution of higher education, students are making a substantial 
personal commitment that may mean incurring considerable amounts of 
student loan debt. Such a decision should, to the greatest extent 
possible, be an informed one. We believe that the warning related to 
loan repayment under proposed Sec.  668.41(h) and the financial 
protection disclosure under Sec.  668.41(i) would provide students with 
important information in making their educational and financial 
decisions.

Loan Repayment Rate

    The loan repayment rate warning would provide enrolled and 
prospective students with valuable information about the repayment 
outcomes associated with the Federal student loan debt incurred by 
students who attend a proprietary institution. Zero percent or negative 
loan repayment rates indicate that borrowers at the institution are 
likely to have experienced financial distress as they attempted to 
repay their loans and may continue to experience difficulty. Loans in 
negative amortization status are viewed with concern.\37\ Students who 
borrow to attend institutions should reasonably expect to be in a 
financial position that enables them to pay down their loans after 
leaving. Warning students of institutions with particularly low--zero 
percent or negative--repayment rates will give them critical 
information on which to base enrollment and borrowing decisions.
---------------------------------------------------------------------------

    \37\ Looney, Adam and Constantine Yannelis. ``A Crisis in 
Student Loans? How Changes in the Characteristics of Borrowers and 
in the Institutions They Attended Contributed to Rising Loan 
Defaults.'' Brookings Institution: http://www.brookings.edu/~/media/
projects/bpea/fall-2015/pdflooneytextfallbpea.pdf.
---------------------------------------------------------------------------

    Based on internal analysis of data from the National Student Loan 
Data System (NSLDS), the typical borrower in negative amortization--
more than half of those who have made no or negative repayment progress 
five years after leaving school--experienced long-term repayment 
hardship such as default. Those borrowers are especially unlikely to 
satisfy their loan debt in the long-term.38 39 In 
particular, we believe that it strikes an appropriate balance to 
measure repayment rates after five years, given that those data show 
that a substantial proportion of borrowers whose loans are in negative 
amortization five years after entering repayment remain in negative 
amortization or have defaulted on their loans 10 and even 15 years 
after entering repayment.
---------------------------------------------------------------------------

    \38\ Borrowers in negative amortization would be considered to 
have a ``negative repayment rate'' under the proposed regulations.
    \39\ Analysis of NSLDS data was based on a statistical sample of 
three cohorts of borrowers with FFEL Loans and Direct Loans entering 
repayment in 1999, 2004, and 2009, respectively. The repayment 
statuses of the loans were tracked in five-year intervals at five, 
ten, and fifteen years after entry into repayment, depending on the 
age of the cohort.
---------------------------------------------------------------------------

    Several non-Federal negotiators expressed concerns about the 
additional administrative burden that would be associated with the 
proposed regulations. Several non-Federal negotiators argued that both 
the opportunity to review and correct data calculated by the 
Department, as well as the obligation to ensure the warnings are 
properly provided to all prospective and enrolled students, would add 
significant burden for those institutions. Some of those negotiators 
suggested that institutions should be able to satisfy the warning 
requirement by providing a link from the institution's Web site to the 
College Scorecard. Others recommended that the Department be 
responsible for the dissemination of loan repayment rates and 
associated warnings, perhaps through the Free Application for Federal 
Student Aid (FAFSA). Still others proposed the Department explore ways 
to limit the warning requirement only to those institutions that 
contribute most to negative repayment outcomes.
    In response to suggestions that the Department assume 
responsibility for disseminating loan repayment rates, we believe that 
schools, as the primary and on-the-ground communicators with their 
students and the source of much of the information students receive 
about financial aid, are well placed to reach their students and to 
notify them of the potential risks of borrowing at that institution.
    Nonetheless, we recognize the potentially increased administrative 
responsibilities attendant to the proposed requirement and agree with 
the negotiators who suggested minimizing administrative burden by 
applying this requirement only to the sector of institutions where the 
frequency of poor repayment outcomes is greatest. Analysis of repayment 
performance under the proposed methodology shows that zero and negative 
repayment outcomes are endemic to the proprietary sector, but are 
relatively rare in the public and non-

[[Page 39373]]

profit sectors.\40\ Proprietary institutions are far more likely to 
have poor repayment rates, along with lower post-college earnings and 
higher default rates, than public or non-profit institutions, and 
therefore pose the greatest risk to students and 
taxpayers.41 42 For instance, a preliminary Department 
analysis of the College Scorecard five-year undergraduate repayment 
rates (using a comparable threshold of 50 percent of borrowers or fewer 
making progress on their loans) shows that more than 70 percent of 
institutions with a repayment rate below the threshold are proprietary 
institutions, and those institutions represent more than two in five of 
all proprietary institutions. On the other hand, at both public and 
private nonprofit institutions, fewer than 10 percent of institutions 
had repayment rates below the threshold.\43\ Based on this analysis, 
the financial risk to students is far more severe in the proprietary 
sector; so we propose to limit the burden of the warning requirement 
only to those institutions. Accordingly, the proposed warning 
requirement is tailored to address the sector in which these issues are 
most concentrated. By doing so, we would limit burden on postsecondary 
institutions generally and better target the Department's efforts to 
provide valuable consumer information.
---------------------------------------------------------------------------

    \40\ Analysis of NSLDS data was based on a cohort of borrowers 
with FFEL Loans and Direct Loans who entered repayment in 2009. The 
repayment status of loans taken out for attendance at each 
institution was observed five years after entry into repayment.
    \41\ The For-Profit Postsecondary School Sector: Nimble Critters 
Or Agile Predators? www.nber.org/papers/w17710.pdf; and Miller, Ben 
and Antoinette Flores. September 2015. Initial Analysis of College 
Scorecard Earnings and Repayment Data. www.americanprogress.org/issues/higher-education/news/2015/09/17/121485/initial-analysis-of-college-scorecard-earnings-and-repayment-data/.
    \42\ Looney, Adam and Constantine Yannelis. ``A Crisis in 
Student Loans? How Changes in the Characteristics of Borrowers and 
in the Institutions They Attended Contributed to Rising Loan 
Defaults.'' Brookings Institution: http://www.brookings.edu/~/media/
projects/bpea/fall-2015/pdflooneytextfallbpea.pdf.
    \43\ Analysis of the Department's College Scorecard data was 
based on a combined cohort of borrowers with FFEL Loans and Direct 
Loans who entered repayment in 2008 and 2009. At schools where fewer 
than 50 percent of borrowers have repaid at least $1 on their loans 
(as is calculated using the Scorecard methodology), the median 
borrower has repaid nothing on his loans.
---------------------------------------------------------------------------

    Several non-Federal negotiators also expressed concerns about the 
methodology for calculating the repayment rate. One negotiator, 
commenting on how the cohorts for this proposed repayment rate are 
determined, objected to the use of a five-year horizon on the grounds 
that students progressing directly to graduate study following 
completion of an undergraduate degree may be shortly out of school and 
in forbearance or otherwise have accrued interest at the time of the 
calculation. Another negotiator expressed concerns that the proposed 
new methodology would be overly punitive toward institutions with 
historically underserved student populations, and that disclosure of 
resulting loan repayment rates would, to an unfair degree, reflect 
negatively on them.
    While we appreciate the concerns and suggestions raised by 
negotiators, we maintain that the loan repayment rate methodology in 
proposed Sec.  668.41(h)(3) results in a rate that would provide useful 
new information. Specifically, this rate would effectively identify the 
proprietary institutions that are generating zero or negative repayment 
outcomes and that should be providing warnings to students as they are 
assessing the likelihood of their ability to repay the loan debt they 
may incur for enrollment at a particular institution, based on the 
outcomes of former students who have already entered repayment. Other 
repayment rate methodologies, such as those used for the disclosures 
required under the Gainful Employment rule and College Scorecard, 
calculate the share of borrowers who have reduced their principal 
balance by at least one dollar. The rate proposed in this regulation 
would measure the extent to which students repaid their loans, 
identifying those proprietary institutions at which students are least 
likely to repay their loans in full. Moreover, the Department will look 
for ways to harmonize the multiple repayment rate methodologies, 
contingent on consumer testing and user needs.
    We recognize that not all institutions present similar risk. 
Therefore, institutions with low numbers of borrowers and low borrowing 
rates are accordingly exempted from the proposed warning requirement. 
As discussed above, proposed Sec.  668.41(h)(6) would exempt an 
institution from the warning requirement if its repayment rate is based 
on fewer than 10 borrowers who have entered repayment in the fiscal 
year; or if the institution demonstrates that it has a low 
participation rate under the Direct Loan program. The exemption for a 
repayment rate calculation based on fewer than 10 borrowers reflects 
the concern that individuals comprising so small a cohort might be able 
to be identified, potentially compromising the privacy of those 
individuals. We propose the low participation rate exemption in 
recognition that, if the number of students who borrow Direct Loans 
constitutes a small percentage of the institution's students, in some 
cases due to the institution's low tuition costs, the loan repayment 
outcomes of those students may not provide a full picture of student 
experiences at the institution.
    Under the proposed calculation, borrowers who default at any point 
during the measurement period on their loans and who see a percentage 
reduction in their loan balances are treated as ``zero'' for the 
purposes of the repayment rate; borrowers who default and see a 
percentage increase in their loan balances are counted by the actual 
percentage increase. Given the significant impact that defaulting has 
on borrowers' financial circumstances, this provision is designed to 
ensure that institutions are held accountable for, and appropriate 
weight is placed on, those students' loan repayment outcomes.
    In addressing the negotiators' concerns related to basing the 
cohort on a five-year horizon beyond the fiscal year when borrowers 
entered repayment, and the possibility that some students may still be 
enrolled in or have recently separated from school, we note that 
borrowers who are enrolled in an institution (either the same or 
another institution) at any time during the last fiscal year of the 
measurement period are excluded from the calculation. Even those 
students recently out of school and remaining in a forbearance status 
(having made no payments on their loans) would not be included unless 
their loans went into repayment at some time during the fifth prior 
fiscal year. We also believe that the other exceptions included in 
proposed Sec.  668.41(h)(4) strengthen the accuracy of the rate.
    Regarding concerns that proposed Sec.  668.41(h) would unfairly 
target institutions whose enrollment is largely composed of underserved 
or economically disadvantaged populations, the Department holds that 
the requirement would not identify institutions on the basis that they 
enroll large numbers of underserved or economically disadvantaged 
populations. Rather, it would identify institutions at which borrowers 
on average are unable to repay their loans and accordingly pose a 
disproportionate risk to both students and taxpayers. Borrowers are 
responsible for managing debt payments, which begin shortly after they 
complete a program, even in the early stages of their career, and even 
if they come from economically disadvantaged backgrounds. As the U.S.

[[Page 39374]]

District Court for the District of Columbia stated in Association of 
Private Sector Colleges & Universities v. Duncan, 110 F.Supp.3d 176, 
194 (D.D.C. June 23, 2015), ``[W]hen graduates get low-paying jobs and 
then default on their student loans, nobody wins--not the government 
(which picks up the tab), and not the student (who may get back on her 
feet eventually, but who--in the meantime--may be denied credit, miss 
bill due dates, or even file for bankruptcy).'' Indeed, the Department 
believes it is even more important to warn students from disadvantaged 
populations about the poor repayment outcomes of an institution at 
which they are considering enrolling because they will bear the same 
responsibility for managing their debt as everybody else.
    One negotiator expressed concerns over the intended scope of the 
term ``promotional materials'' as now defined in proposed Sec.  
668.41(h)(8), pointing out that, at some large institutions, it would 
be difficult to put reasonable parameters around what might be 
considered promotional material. Other negotiators felt that the speed 
with which information about their institutions can be spread using 
social media, and the potential scale of dissemination, would make it 
impossible for them to ensure compliance with the proposed regulations.
    Proposed Sec.  668.41(h)(8)(ii) identifies the most commonly used 
methods to promote and advertise an institution, with the qualification 
that this list is not exhaustive and promotional materials are not 
limited to items on the list. We expect institutions to include the 
required warning in such other comparable media and formats in which 
they promote and advertise themselves. We invite comment on ways the 
Department can ensure that this warning, when included in promotional 
and advertising materials, is not hidden or presented in a way that 
makes it difficult for the public to see. Regarding the inclusion of 
social media as promotional material, we acknowledge the concerns 
related to potential burden and scope expressed by negotiators. To that 
end, we clarify here that it is not our intention for every ``post'' on 
a social media site or every individual ``Tweet'' to be considered 
promotional material. However, an institution's landing page on a 
social media platform is considered to be promotional material, as are 
any advertisements. On any social media profile/page that an 
institution maintains on such a platform, the institution would be 
required to include the warning.

Financial Protection

    The proposed financial protection disclosure would provide enrolled 
and prospective students with valuable information about the viability 
of the institution as a participant in the Federal financial aid 
programs. Under proposed Sec.  668.175(d), (f), or (h), some 
institutions would be required to provide financial protection, such as 
an irrevocable letter of credit, if the institution is not financially 
responsible because of an action or event described in proposed Sec.  
668.171(b) or (c). We believe that current and prospective students 
have a demonstrable interest in being made aware of the specific 
reasons for which their institution was required to provide any 
financial protection because these are factors that could have a 
significant impact on a student's ability to complete his or her 
education at an institution. For the thousands of students in recent 
years whose institutions have closed their doors precipitously, advance 
notice that those institutions faced significant financial risk and 
compliance issues could have allowed students time to reevaluate their 
decision to remain at an institution and choose to instead continue 
their education without interruption at an institution where the 
prospects for completing their education are more certain. We also 
believe that students are entitled to know about any such event that is 
significant enough to warrant disclosure to investors since students 
can have an equal, if not greater, financial stake in the continued 
operation of their institution.

Method of Delivery

    These provisions are designed to ensure that students receive any 
required loan repayment rate warning or financial protection 
disclosure. The information we propose to require in the loan repayment 
rate warning and financial protection disclosure pertains to material 
and deeply concerning problems at an institution that create 
significant risk to the educational prospects of students enrolling or 
already enrolled at that institution. Students deserve to know 
information that could have a significant impact on or relate to their 
chances of success.
    In addition to our interest in ensuring that students have accurate 
and complete information on which to base decisions about attending an 
institution, the Department has a significant interest in ensuring 
transparency more broadly. Recent events involving the closure of 
several large proprietary institutions have shown the need for 
lawmakers, regulatory bodies, State authorizers, taxpayers, and 
students to be more broadly aware of circumstances that could affect 
the continued existence of an institution. Though these additional 
disclosure requirements are not a singular remedy for this problem, we 
believe them to be an important step toward creating a more transparent 
environment in which institutions participate in the title IV, HEA 
programs.
    Some negotiators objected to the lack of specificity with respect 
to the wording of the proposed warning. Our intent, however, is to 
build a certain amount of flexibility into the proposed regulations to 
ensure that the warning is as meaningful as possible to its intended 
audience. Accordingly, under proposed Sec.  668.41(h)(7)(i), the 
Department would conduct consumer testing to help improve the 
effectiveness of the warning language. Upon completion of consumer 
testing, the final language would be published in the Federal Register. 
For illustrative purposes, we include examples of possible repayment 
rate warning language below:
     U.S. Department of Education Warning: A majority of 
borrowers at this school are not likely to repay their loans.
     U.S. Department of Education Warning: A majority of 
borrowers at this school have difficulty repaying their loans.
     U.S. Department of Education Warning: Most of the students 
who attended this school owe more on their student loans five years 
after leaving school than they originally borrowed.
    During negotiated rulemaking, the Department proposed requiring 
institutions to deliver any loan repayment rate warning or financial 
protection disclosure to prospective students at the first contact with 
those students. Negotiators requested clarification of what is 
considered ``first contact,'' believing it to be particularly difficult 
to establish at large institutions with which potential students 
regularly interact prior to enrolling. We agree with the negotiators 
that, in many cases, a point of first contact between an institution 
and a student may not be easy to isolate. Accordingly, we propose in 
Sec.  668.41(h)(7)(iii) to state that an institution must provide the 
warning or disclosure required under this section to a prospective 
student before that student enrolls, registers, or enters into a 
financial obligation with the institution.

Initial and Final Decisions (Sec.  668.90)

    Statute: Section 498(d) of the HEA provides that the Secretary is 
authorized to consider the past performance of an

[[Page 39375]]

institution or of a person in control of an institution, in determining 
whether an institution has the financial capability to participate in 
the title IV, HEA programs. Section 487(c)(1)(F) of the HEA, 20 U.S.C. 
1094(c)(1)(F), provides that the Secretary shall prescribe such 
regulations as may be necessary to provide for the limitation, 
suspension, or termination of the participation of an eligible 
institution in any program under title IV of the HEA.
    Current Regulations: When the Department proposes to limit, 
suspend, or terminate a fully certified institution's participation in 
a title IV, HEA program, the institution is entitled to a hearing 
before a hearing official under Sec.  668.90. In addition to describing 
the procedures for issuing initial and final decisions, Sec.  668.90 
also provides requirements for hearing officials in making initial and 
final decisions in specific circumstances.
    These regulations generally provide that the hearing official 
determines whether an adverse action--a fine, limitation, suspension, 
or termination--is ``warranted,'' but direct that in specific 
instances, the sanction must be imposed if certain predicate conditions 
are proven. For instance, in an action involving a failure to provide a 
surety in the amount specified by the Secretary under Sec.  668.15, the 
hearing official is required to consider the surety amount demanded to 
be ``appropriate,'' unless the institution can demonstrate that the 
amount was ``unreasonable.''
    Further, Sec.  668.90(a)(3)(v) states that, in a termination action 
brought on the grounds that the institution is not financially 
responsible under Sec.  668.15(c)(1), the hearing official must find 
that termination is warranted unless the conditions in Sec.  
668.15(d)(4) are met. Section 668.15(c)(1) provides that an institution 
is not financially responsible if a person with substantial control 
over that institution exercises or exercised substantial control over 
another institution or third-party servicer that owes a liability to 
the Secretary for a violation of any title IV, HEA program 
requirements, and that liability is not being repaid. Section 
668.15(d)(4) provides that the Secretary can nevertheless consider the 
first institution to be financially responsible if the person at issue 
has repaid a portion of the liability or the liability is being repaid 
by others, or the institution demonstrates that the person at issue in 
fact currently lacks that ability to control or lacked that ability as 
to the debtor institution.
    Proposed Regulations: The Secretary proposes to amend Sec.  
668.90(a)(3)(iii) by substituting the terms ``letter of credit or other 
financial protection'' for ``surety'' in describing what an institution 
must provide to demonstrate financial responsibility. Additionally, 
Sec.  668.90(a)(3)(iii) would be modified to require the hearing 
official to uphold the amount of the letter of credit or financial 
protection demanded by the Secretary, unless the institution 
demonstrates that the events or conditions on which the demand is based 
no longer exist or have been resolved in a manner that eliminates the 
risk they posed to the institution's ability to meet its financial 
obligations, or has now provided the required financial protection. We 
propose to further modify Sec.  668.90(a)(3)(v) to list the specific 
circumstances in which a hearing official may find that a termination 
or limitation action brought for a failure of financial responsibility 
for an institution's past performance failure under Sec.  668.174(a), 
or a failure of a past performance condition for persons affiliated 
with an institution under Sec.  668.174(b)(1), was not warranted. For 
the former, revised Sec.  668.90(a)(3)(v) would state that these 
circumstances would be compliant with the provisional certification and 
financial protection alternative in Sec.  668.175(f). For the latter, 
the circumstances would be those provided in Sec.  668.174(b)(2) or 
Sec.  668.175(g).
    Reasons: The proposed changes to Sec.  668.90(a)(3)(iii) would 
update the regulations to reflect both the current language in Sec.  
668.175 and proposed changes to that section. The changes would also 
create specific conditions under which the hearing official may find 
that the letter of credit or financial protection amount demanded would 
not be warranted. We believe that the new language would provide more 
clarity than the current standard, which only notes that the 
institution has to show that the amount was ``unreasonable.'' The 
proposed language would clearly establish that the amount would be 
unwarranted only if the reasons for which the Secretary required the 
financial protection no longer exist or have been resolved, or if some 
other acceptable form of financial protection arrangement is in place 
with the Secretary.
    Our proposed revisions to Sec.  668.90(a)(3)(iii) would reflect 
previous, as well as proposed, changes to the financial responsibility 
standards. First, the current financial responsibility standards in 
Sec.  668.175 require an institution in some instances to provide a 
letter of credit in order to be financially responsible. We propose to 
modify Sec.  668.90(a)(3)(iii) to reflect that language as well as 
changes proposed now to Sec.  668.175 by substituting the terms 
``letter of credit or other financial protection'' for ``surety.'' 
Thus, the proposed changes to Sec.  668.90 would clarify that a 
limitation, suspension, or termination action may involve a failure to 
provide any of the specified forms of financial protection, letter of 
credit or otherwise.
    We further propose to modify Sec.  668.90(a)(3)(iii) to state the 
specific grounds on which a hearing official may find that a limitation 
or termination action for failure to provide financial protection 
demanded is not warranted. The proposed change would provide that a 
hearing official must adopt the amount of the letter of credit or 
financial protection demanded by the Secretary, unless the institution 
demonstrates that the events or conditions forming the grounds for the 
financial protection or letter of credit no longer exist or have been 
resolved in a manner resolving the risk posed to the institution's 
ability to meet its financial obligations. The institution would be 
permitted to demonstrate that the Department miscalculated the amount 
on which the demand is grounded. However, it could not claim that the 
event does not constitute grounds for a demand for financial protection 
or that the amount demanded is unreasonable based on the institution's 
assessment of the risk posed by the event or condition. The institution 
could challenge a demand for protection based on delinquency on secured 
debt by proving that the delinquency has been cured or a workout 
satisfactory to the secured lender has been arranged. In the case of a 
demand for financial protection based on pending litigation, the 
institution would be permitted to demonstrate that the suit was 
dismissed or settled favorably. Alternatively, the institution could 
demonstrate that it has provided the Department with appropriate 
alternative financial protection (cash or a reimbursement funding 
arrangement with the Secretary that will result in set-aside of the 
amount required within an agreed timeframe).
    The proposed changes to Sec.  668.90(a)(3)(v) would also clarify 
and conform with other existing regulations the alternative methods in 
current regulations by which an institution may be able to meet the 
financial responsibility standards, and thus would be able to claim 
that a limitation or termination is unwarranted. Section 
668.90(a)(3)(v) would be revised to state the grounds on which a 
hearing official is authorized to find that a termination or limitation 
action brought for a failure of financial responsibility for an 
institution's failure of a past

[[Page 39376]]

performance condition under Sec.  668.174(a) or a failure of a past 
performance condition for persons affiliated with an institution under 
Sec.  668.174(b)(1) was not warranted. None of these provisions would 
be changed under these proposed regulations. The changes would not add 
substantive new restrictions, but simply conform Sec.  668.90 to these 
substantive requirements already in current regulations. Thus, as 
revised, Sec.  668.90(a)(3)(v) would require the hearing official to 
find that the limitation or termination for adverse past performance by 
the institution itself was warranted, unless the institution met the 
provisional certification and financial protection alternative in 
current Sec.  668.175(f). For an action based on adverse past 
performance of a person affiliated with an institution, the hearing 
official would be required to find that limitation or termination of 
the institution was warranted unless the institution demonstrated 
either proof of repayment or that the person asserted to have 
substantial control in fact lacks or lacked that control, as already 
provided in Sec.  668.174(b)(2), or the institution has accepted 
provisional certification and provided the financial protection 
required under Sec.  668.175(g).

Limitation (Sec.  668.93)

    Statute: Section 487(c)(1)(F) of the HEA, 20 U.S.C. 1094, provides 
that the Secretary shall prescribe such regulations as may be necessary 
to provide for the limitation, suspension, or termination of an 
eligible institution's participation in any program under title IV of 
the HEA.
    Current Regulations: Section 668.86 provides that the Secretary may 
limit an institution's participation in a title IV, HEA program, under 
specific circumstances, and describes procedures for a challenge to 
such a limitation. Current Sec.  668.93 lists types of specific 
restrictions that may be imposed by a limitation action, and includes 
in paragraph (i) ``other conditions as may be determined by the 
Secretary to be reasonable and appropriate.'' 34 CFR 668.93(i).
    Although a change in an institution's status from fully certified 
to provisionally certified is not currently a limitation listed in 
Sec.  668.93, Sec.  668.13(c) provides that the Secretary may 
provisionally certify an institution whose participation has been 
limited or suspended under subpart G of part 668, and Sec.  668.171(e) 
provides that the Secretary may take action under subpart G to limit or 
terminate the participation of an institution if the Secretary 
determines that the institution is not financially responsible under 
the provisions of Sec.  668.171 or Sec.  668.175.
    Proposed Regulations: The Secretary proposes to amend Sec.  668.93 
to clarify that a change in an institution's participation status from 
fully certified to provisionally certified to participate in a title 
IV, HEA program under Sec.  668.13(c) is a type of limitation that may 
be the subject of a limitation proceeding under Sec.  668.86.
    Reasons: The proposed change to Sec.  668.93 would clarify current 
policy and provide for a more complete set of limitations covered in 
Sec.  668.93.

Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) Repayment 
Plans (Sec.  685.209(a) and (c))

    Statute: Section 455(d)(1)(D) of the HEA authorizes the Secretary 
to offer Direct Loan borrowers (except parent PLUS borrowers) an 
income-contingent repayment (ICR) plan with varying annual repayment 
amounts based on the income of the borrower, for a period of time 
prescribed by the Secretary, not to exceed 25 years. Section 455(e)(1) 
of the HEA authorizes the Secretary to establish ICR plan repayment 
schedules through regulations.
    Current Regulations: For the PAYE Plan and the REPAYE Plan, current 
Sec.  685.209(a)(1)(ii) and (c)(1)(ii), respectively, define ``eligible 
loan'' as ``any outstanding loan made to a borrower under the Direct 
Loan Program or the FFEL Program except for a defaulted loan, a Direct 
PLUS Loan or Federal PLUS Loan made to a parent borrower, or a Direct 
Consolidation Loan or Federal Consolidation Loan that repaid a Direct 
PLUS Loan or Federal PLUS Loan made to a parent borrower.''
    For the REPAYE Plan, current Sec.  685.209(c)(2)(ii)(B) provides 
that if a married borrower and the borrower's spouse each have eligible 
loans, the Secretary adjusts the borrower's REPAYE Plan monthly payment 
amount by determining each individual's percentage of the couple's 
total eligible loan debt and then multiplying the borrower's calculated 
REPAYE Plan monthly payment amount by this percentage.
    For the REPAYE Plan, current Sec.  685.209(c)(4)(iii)(B) specifies 
that the annual notification to a borrower of the requirement to 
provide updated income and family size information explains the 
consequences, including the consequences described in Sec.  
685.209(c)(4)(vi), if the Secretary does not receive the information 
within 10 days following the annual deadline specified in the 
notification. Paragraph (c)(4)(vi) of Sec.  685.209 provides that if 
the Secretary removes a borrower from the REPAYE Plan because the 
borrower has failed to provide updated income information by the 
specified deadline, the Secretary sends the borrower a written 
notification containing the borrower's new monthly payment amount and 
providing other information, including the borrower's option to change 
to a different repayment plan and the conditions under which the 
borrower may return to the REPAYE Plan.
    Proposed Regulations: The proposed regulations make technical 
changes to amend Sec.  685.209(a)(1)(ii) of the PAYE Plan regulations 
by adding language to the definition of ``eligible loan'' stating that 
this term is used for purposes of determining whether a borrower has a 
partial financial hardship and adjusting the monthly payment amount for 
certain married borrowers. The definition of ``eligible loan'' in Sec.  
685.209(c)(1)(ii) of the REPAYE Plan regulations would be amended by 
adding language stating that this definition is used for purposes of 
adjusting the monthly payment amount for certain married borrowers.
    The proposed regulations would amend Sec.  685.209(c)(2)(ii)(B) of 
the REPAYE Plan regulations by adding language to provide that there is 
no adjustment to a married borrower's monthly payment amount based on 
the eligible loan debt of the borrower's spouse if the spouse's income 
is excluded from the calculation of the borrower's monthly payment 
amount in accordance with Sec.  685.209(c)(1)(i)(A) or (B).
    The proposed regulations would revise Sec.  685.209(c)(2)(v) of the 
REPAYE Plan regulations by removing language that refers to the 
Secretary's determination that the borrower does not have a partial 
financial hardship. Finally, the proposed regulations also would revise 
Sec.  685.209(c)(4)(iii)(B) of the REPAYE Plan regulations by removing 
the cross-reference to Sec.  685.209(c)(4)(vi).
    Reasons: The language that would be added to the definitions of 
``eligible loan'' in the PAYE and REPAYE plan regulations is intended 
to clarify that the inclusion of certain types of FFEL Loans in the 
definitions of ``eligible loan'' does not mean that these loans may be 
repaid under the PAYE or REPAYE plans. The PAYE and REPAYE plans are 
available only for Direct Loans. The proposed language would clarify 
that the FFEL Loans listed in the definitions are taken into 
consideration only for certain purposes related to the terms and 
conditions of the PAYE and REPAYE plans.

[[Page 39377]]

    The proposed change in Sec.  685.209(c)(2)(ii)(B) is needed to 
accurately reflect that the monthly payment amount for a married 
borrower who files a separate Federal income tax return from his or her 
spouse is not adjusted to take into account the spouse's eligible loan 
debt if the spouse's income is excluded from the calculation of the 
borrower's monthly payment amount in accordance with Sec.  
685.209(c)(1)(i)(A) or (B). Paragraphs (c)(1)(i)(A) and (B) provide 
that only the borrower's income is used to calculate the monthly REPAYE 
Plan payment amount if a married borrower filing separately is 
separated from his or her spouse or is unable to reasonably access the 
spouse's income information.
    The proposed change in Sec.  685.209(c)(4)(iii)(B) removes an 
unnecessary reference to the requirement for the annual notification 
informing a borrower of the need to recertify income and family size to 
provide information about the contents of a separate notification 
required under Sec.  685.209(c)(4)(vi) that will be sent if the 
borrower is removed from the REPAYE Plan as a result of failure to 
recertify income. The information included in that separate 
notification is not applicable at the time a borrower is merely being 
notified of the requirement to annually recertify income and family 
size.
    The removal of the reference to partial financial hardship in Sec.  
685.209(c)(2)(v) reflects that the concept of partial financial 
hardship does not apply under the terms and conditions of the REPAYE 
Plan.

False Certification Discharges (Sec.  685.215)

    Statute: Section 437(c) of the HEA provides for the discharge of a 
borrower's liability to repay a FFEL Loan if the student's eligibility 
to borrow was falsely certified by the school. The false certification 
discharge provisions also apply to Direct Loans, under the parallel 
terms, conditions, and benefits provisions in section 455(a) of the 
HEA. Section 484(d) of the HEA specifies the requirements that a 
student who does not have a high school diploma or a recognized 
equivalent of a high school diploma must meet to qualify for a title 
IV, HEA loan.
    Current Regulations: Section 685.215(a)(1)(i) provides that a 
Direct Loan borrower may qualify for a false certification discharge if 
the school certified the eligibility of a borrower who was admitted on 
the basis of the ability to benefit but the borrower did not in fact 
meet the eligibility requirements in 34 CFR part 668 and did not meet 
the eligibility requirements in section 484(d) of the HEA. Section 
685.215(a)(1)(iii) provides that a borrower may qualify for a false 
certification discharge if the school certified the eligibility of a 
student who would not meet requirements for employment in the 
occupation for which the training program supported by the loan was 
intended due to a physical or mental condition, age, criminal record, 
or other requirement accepted by the Secretary that was imposed by 
State law. Section 685.215(c) and (d) describes the qualifications and 
procedures for receiving a false certification discharge.
    Proposed Regulations: Proposed Sec.  685.215(a)(1)(i) would 
eliminate the reference to ``ability to benefit'' and specify that a 
borrower qualifies for a false certification discharge if the borrower 
reported not having a high school diploma or its equivalent and did not 
satisfy the alternative to graduation from high school requirements 
under section 484(d) of the HEA.
    Under proposed Sec.  685.215(a)(1)(ii), if a school certified the 
eligibility of a borrower who is not a high school graduate (and does 
not meet applicable alternative to high school graduate requirements) 
the borrower would qualify for a false certification discharge if the 
school falsified the borrower's high school graduation status; 
falsified the borrower's high school diploma; or referred the borrower 
to a third party to obtain a falsified high school diploma.
    Proposed Sec.  685.215(a)(1)(iv) would specify that a borrower 
qualifies for a false certification discharge if the borrower failed to 
meet applicable State requirements for employment due to a physical or 
mental condition, age, criminal record, or other reason accepted by the 
Secretary that would prevent the borrower from obtaining employment in 
the occupation for which the training program supported by the loan was 
intended.
    Proposed Sec.  685.215(c) would update the information specifying 
how a borrower applies for a false certification discharge. It would 
also specify that the Department would notify a borrower who applies 
but does not meet the requirements for a false certification discharge 
and explain why the borrower does not meet the requirements.
    Proposed Sec.  685.215(c)(1) would describe the requirements a 
borrower must meet to qualify for a discharge due to a false 
certification of high school graduation status.
    Proposed Sec.  685.215(c)(2) would state the requirements a 
borrower must meet to obtain a discharge based on a disqualifying 
condition, as specified in proposed Sec.  685.215(a)(1)(iv).
    Proposed Sec.  685.215(c)(8) would amend the provisions for 
granting a false certification discharge without an application to 
include cases in which the Department has information in its possession 
showing that the school has falsified the Satisfactory Academic 
Progress (SAP) of its students.
    Proposed Sec.  685.215(d) would update the procedures for applying 
for a false certification discharge, and describe the types of evidence 
that the Department uses to determine eligibility for a false 
certification discharge. It would also provide that the Department will 
explain to the borrower the reasons for a denial of a false 
certification discharge claim, describe the evidence that the 
determination was based on, and provide the borrower with an 
opportunity to submit additional evidence supporting his or her claim. 
The Department would consider the response from the borrower, and 
notify the borrower whether the determination of eligibility has 
changed.
    Reasons: We propose to remove the ``ability to benefit'' language 
from Sec.  685.215(a)(1)(i) because there is no longer a statutory 
basis for certifying the eligibility of non-high school graduates based 
on an ``ability to benefit.'' Currently section 484(d) of the HEA 
establishes different standards under which a non-high school graduate 
may qualify for title IV aid. We believe that it is preferable to refer 
to section 484(d) of the HEA by cross-reference, rather than 
incorporate the statutory language in the regulations, so that any 
future changes to that language would be incorporated into the 
regulation. The changes we propose to make to Sec.  685.215(c)(1) 
(currently titled ``Ability to benefit'') are intended to conform to 
these changes.
    The proposed revisions to Sec.  685.215(a)(1)(i) and (ii) are 
intended to state more explicitly that a school's certification of 
eligibility for a borrower who is not a high school graduate, and does 
not meet the alternative to high school graduate requirements, is 
grounds for a false certification discharge. We propose these changes 
specifically to address the problem of schools encouraging non-high 
school graduates to obtain false high school diplomas to qualify for 
Direct Loans. Many non-Federal negotiators noted that often borrowers 
are misled by schools. These non-Federal negotiators stated that some 
schools tell borrowers that a high school diploma is not a requirement 
for title IV student aid, or that the borrower will be able to earn a 
high school diploma through the

[[Page 39378]]

program for which the borrower is taking out the student loan, so the 
borrower should answer ``Yes'' to the high school graduation question 
on the FAFSA. Non-Federal negotiators stated that some schools 
encourage borrowers to obtain the services of a third party that will 
provide them with what appears to be a legitimate high school diploma. 
These borrowers often do not understand that the ``high school 
diploma'' provided by the third party is worthless. Many non-Federal 
negotiators were supportive of the Department's efforts to provide 
relief for borrowers who have been victimized in this way. Some of the 
non-Federal negotiators, while supportive of this proposal, noted that 
borrowers themselves may provide false information to the schools 
regarding the borrower's high school graduation status. Unless the 
school investigates the borrower's claim to be a high school graduate, 
for instance by requesting transcripts, which are harder to falsify, 
the school may unknowingly falsely certify the borrower's eligibility.
    To address these situations, the Department proposed during the 
negotiated rulemaking to include the requirement in proposed Sec.  
685.215(a)(1)(i)(A) that the borrower ``reported'' not having a high 
school diploma or its equivalent. If the borrower informed the school 
that the borrower was not a high school graduate, and the borrower also 
did not satisfy the alternative to high school graduation eligibility 
criteria, but the school still certified the borrower's eligibility for 
title IV aid, the borrower would qualify for a false certification 
discharge.
    Under proposed Sec.  685.215(a)(1)(ii), a borrower would qualify 
for a false certification discharge if the borrower was not a high 
school graduate, and the school certified the borrower's eligibility 
based on falsified high school graduation status or based on a high 
school diploma falsified by the school or a third party to which the 
school referred the borrower. The reference in proposed Sec.  
685.215(a)(1)(ii)(B) to cases in which a school refers a borrower to a 
third party to obtain a false high school diploma would not refer only 
to a formal referral relationship between the school and the third 
party. An informal relationship involving any level of contact between 
the school and the third party would also qualify under the proposed 
regulations. A school would be considered to have ``referred the 
borrower'' to the third party in any instance in which the school 
advised or encouraged a borrower to obtain a false high school diploma 
from the third party.
    The proposed revision to Sec.  685.215(a)(1)(iv) would clarify that 
this section refers to a situation in which a borrower failed to meet 
State requirements for employment in the occupation for which the 
training program was supported or the loan was intended. These State 
requirements would not necessarily have to be imposed by State 
statutes; they could be requirements established through State 
regulations or other limitations established by the State. The 
Department considered using other employment standards, such as Federal 
standards, or standards established by non-governmental professional 
associations. However, we were unable to find examples of Federal 
standards for particular professions, other than standards specifically 
for employment in the Federal government. The Department believes that 
employment standards established by professional associations could 
vary, and that it would not be practical to require schools to 
determine which professional association standards to use.
    Some of the non-Federal negotiators recommended including limited 
English proficiency (LEP) as one of the characteristics that would 
disqualify a borrower from working in a particular profession and serve 
as the basis for a false certification loan discharge. We reviewed this 
proposal, but determined that it would not be practical to determine a 
borrower's English language proficiency at the time the borrower 
enrolled in the program. While a student's score on the Test of English 
as a Foreign Language (TOEFL) is a generally accepted indicator of 
English language proficiency, many schools do not administer this test, 
the TOEFL is not required for all academic programs, and the scores 
required to demonstrate sufficient proficiency differ between schools. 
Moreover, the TOEFL is not intended to measure an individual's language 
proficiency for any particular profession.
    Non-Federal negotiators recommended that the Department require 
schools to certify an LEP student's ability to successfully complete a 
postsecondary program by either administering an evaluative test such 
as the TOEFL; providing the student with complete instruction, 
instructional materials, and exams in her or his native language; or 
providing specific and sufficient accommodation through an approved 
English as a Second Language component. The Department expressed 
concern that such a limitation could impede access to postsecondary 
education for some LEP students. The Department also noted that 
certification of LEP students for Direct Loans does not constitute 
false certification of eligibility for title IV, HEA program funds. 
Non-Federal negotiators recommended that false certification discharge 
apply in cases in which an LEP student is enrolled in a program for a 
profession that requires English proficiency, or an LEP student is told 
that instruction will be offered in the student's first language or 
that the student will be provided English as a Second Language courses, 
but after the student takes out a Direct Loan and enrolls, no such 
instruction is provided. However, the Department noted that these are 
examples of misrepresentation, which would fall under the borrower 
defenses regulations.
    Current Sec.  685.215(c) requires the borrower to submit a 
``written request and a sworn statement'' to apply for a false 
certification discharge. We propose replacing this language with a 
requirement for a borrower to submit an application for discharge on 
``a form approved by the Secretary,'' which more accurately reflects 
current practice. The proposed changes to redesignated Sec.  
685.215(c)(8) would add, as an example of information that the 
Department may use to grant a false certification discharge without an 
application, evidence that a school has falsified the SAP of its 
students. Although the Department may already do this under the 
language in current Sec.  685.215(c)(7), we believe that it is helpful 
to specifically address such cases in the regulatory language. This 
change would put schools on notice that, if the Department learns of a 
school falsifying SAP through a program review or an audit, the 
Department has the authority to independently grant false certification 
discharges to affected borrowers at that school.
    Some of the non-Federal negotiators recommended that we also allow 
an individual borrower to apply for a false certification discharge if 
the borrower believes that the school falsified the borrower's SAP. We 
examined this proposal, and determined that it would be impractical. 
Schools have a great deal of flexibility both in determining and 
implementing SAP standards. There are a number of exceptions under 
which a borrower who fails to meet SAP can continue to receive title IV 
loans. As one of the non-Federal negotiators pointed out, borrowers who 
are in danger of losing title IV eligibility due to the failure to meet 
SAP standards often request reconsideration of the SAP determination. 
Schools often work with borrowers in good faith efforts to

[[Page 39379]]

attempt to resolve the situation without cutting off the borrowers' 
access to title IV assistance. We do not believe that a school should 
be penalized for legitimate attempts to help a student who is having 
difficulty meeting SAP standards, nor do we believe a student who has 
successfully appealed a SAP determination should then be able to use 
that initial SAP determination to obtain a false certification 
discharge of his or her student loans. In addition, we believe it would 
be very difficult for an individual borrower to sufficiently 
demonstrate that a school violated its own SAP procedures. Given these 
considerations, we propose to limit false certification discharges 
based on falsification of SAP to discharges based on ``information in 
the Secretary's possession.'' Such information would include, for 
example, findings from program reviews, audits, or other 
investigations.
    The proposed revisions to Sec.  685.215(d)(3) would provide more 
transparency to the process for granting false certification 
discharges. For example, under proposed Sec.  685.215(d)(3), when the 
Department denies a false certification discharge request, we would 
explain the reasons for the denial to the borrower, provide the 
borrower with the evidence that the decision was based on, and provide 
the borrower the opportunity to provide additional information which 
the Department would evaluate. This proposed new language was suggested 
by one of the non-Federal negotiators, and was generally supported by 
all of the members of the negotiating committee.
    In addition to the revisions that we are proposing in this NPRM, 
the non-Federal negotiators submitted recommendations to the Department 
for additional revisions to the false certification regulations. These 
included recommendations to extend the revisions to the FFEL 
regulations as well as the Direct Loan regulations; to allow false 
certification discharges in cases when a program that the borrower is 
enrolled in fails to meet title IV eligibility requirements (although 
the program was participating in the title IV, HEA programs at the time 
the loan was made); and to require active confirmation when a school 
notifies a borrower that an additional loan was made under the 
borrower's previously executed Master Promissory Note (MPN), to address 
issues of possible forgery of electronic signatures on an MPN.
    The Department declined to accept these recommendations. We are not 
proposing to extend the revisions to the FFEL Program because no new 
loans are being made in the FFEL Program, and we cannot apply these 
changes retroactively.
    False certification discharges are based on a school falsely 
certifying a borrower's eligibility. They do not apply in instances 
that do not concern a personal characteristic or qualification of the 
borrower, such as ineligibility of the school or the program offered by 
the school. See 59 FR 22469 (April 28, 1994).
    The recommendations regarding active confirmation and use of the 
MPN relate more to the way Direct Loans are awarded and disbursed than 
to the false certification requirements, and go beyond the scope of 
this regulatory action.

Direct Consolidation Loans (Sec.  685.220)

    Statute: Section 455(g) of the HEA provides that the loan types 
listed in section 428C(a)(4) may be consolidated into a Direct 
Consolidation Loan. Section 428C(a)(4)(E) of the HEA provides that 
loans made under part E of title VIII of the Public Health Service Act 
are eligible to be consolidated into a Federal Consolidation Loan under 
the FFEL Program. Loans made under part E of title VIII of the Public 
Health Service Act include both Nursing Student Loans and Nurse Faculty 
Loans.
    Current Regulations: Current Sec.  685.220(b)(21) specifies that 
nursing loans made under subpart II of part B of title VIII of the 
Public Health Service Act may be consolidated into a Direct 
Consolidation Loan.
    Current Sec.  685.220(d)(1)(i) states that a borrower may obtain a 
Direct Consolidation Loan if the borrower consolidates at least one 
Direct Loan or FFEL Loan. If the borrower has certain other eligible 
loan types such as a Perkins Loan or a loan issued by the U.S. 
Department of Health and Human Services (HHS), the borrower can only 
include these loans in a Direct Consolidation Loan if the borrower also 
includes at least one Direct or FFEL loan. Under Sec.  685.220(b), 
loans issued by HHS that may be consolidated into a Direct 
Consolidation Loan, if the borrower also includes at least one Direct 
or FFEL loan, include Health Professions Student Loans (HPSL), and 
Loans for Disadvantaged Students (LDS), made under subpart II of part A 
of title VII of the Public Health Service Act, Health Education 
Assistance Loans (HEAL), and Nursing Loans made under subpart II of 
part B of title VII of the Public Health Service Act.

Proposed Regulations

Consolidation of Nursing Loans

    The proposed regulations would revise Sec.  685.220(b)(21) to 
provide that nursing loans made under part E of title VIII of the 
Public Health Service Act may be consolidated into a Direct 
Consolidation Loan.

Consolidation of Eligible Loans

    We propose to remove current Sec.  685.220(d)(1)(i) to eliminate 
the requirement that a borrower must consolidate at least one FFEL or 
Direct Program Loan. This would allow a borrower to consolidate under 
the Direct Loan Program, if the borrower had any of the eligible loans 
listed in Sec.  685.220(b).

Reasons

Consolidation of Nursing Loans

    The proposed change is needed to conform Sec.  685.220(b)(21) to 
the statutory language in section 428C(a)(4)(E) of the HEA, which 
allows for the consolidation of both Nursing Student Loans and Nurse 
Faculty Loans. The current regulatory reference to nursing loans ``made 
under subpart II of part B of title VIII of the Public Health Service 
Act'' includes Nursing Student Loans, but not Nurse Faculty Loans. The 
current regulatory language reflects earlier statutory language that 
was subsequently amended.

Consolidation of Eligible Loans

    The proposed change to remove current Sec.  685.220(d)(1)(i) would 
eliminate the requirement that a borrower must have a Direct Program or 
FFEL loan to consolidate. As a result, other loan types listed in Sec.  
685.220(b), such as Perkins Loans and certain loans issued by HHS, 
would also be allowed to access consolidation, even if the borrower did 
not also consolidate a Direct Program or FFEL loan.
    The proposed change is necessary to be consistent with sections 
451(b)(2) and 455(a)(1) of the HEA, which provide that, unless 
otherwise specified, Direct Loans are to have the same terms, 
conditions, and benefits as FFEL Loans. 20 U.S.C. 1087a(b), 
1087e(b)(1). Under the FFEL Program, certain loans issued by HHS (HPSL, 
LDS, HEAL, and Nursing loans) and Federal Perkins loans were considered 
eligible student loans for consolidation, without any added requirement 
that the borrower also consolidate at least one FFEL Loan. 20 U.S.C. 
1078-3(a)(4)(B), (D); 34 CFR 682.100(a)(4). The authority for lenders 
to make FFEL Consolidation Loans expired on June 30, 2010, under 
section 428C(e) of the HEA, 20 U.S.C. 1078-

[[Page 39380]]

3(e). Since current Sec.  685.220(d)(1)(i) does not allow Federal 
Perkins loan borrowers and borrowers of loans issued by HHS as listed 
in Sec.  685.220 to obtain a Direct Consolidation Loan, unless they 
also consolidate either a Direct or FFEL loan, Federal Perkins and HHS 
student loan borrowers who do not also have at least one Direct Loan or 
FFEL Loan do not currently have access to consolidation. As a result, 
these borrowers are not receiving the same terms, conditions and 
benefits in the Direct Loan program as in the FFEL Program.
    To correct this situation, the Department proposes to allow 
borrowers to obtain a Direct Consolidation Loan regardless of whether 
the borrower is also seeking to consolidate a Direct Program or FFEL 
loan, if the borrower has a loan type identified in Sec.  685.222(b).

Agreements Between an Eligible School and the Secretary for 
Participation in the Direct Loan Program (Sec.  685.300)

    Statute: Section 454(a)(6) of the HEA, 20 U.S.C. 1087d(a)(6), 
provides that schools enter into Direct Loan Participation Agreements 
that include provisions needed to protect the interests of the United 
States and promote the purposes of the Direct Loan Program.
    Current Regulations: Section 685.300 states the requirements for a 
school to participate in the Direct Loan Program. First, the school 
must meet the requirements for eligibility under the HEA and applicable 
regulations. Second, the school must enter into a written program 
participation agreement with the Secretary. Under the agreement, the 
school agrees to comply with the HEA and applicable regulations. 
Paragraph (b) of Sec.  685.300 lists several specific provisions of the 
program participation agreement.
    Proposed Regulations: Proposed Sec.  685.300(d), (e), (f), (g), (h) 
and (i) would add specific provisions to the Direct Loan program 
participation agreement related to student claims and complaints based 
upon acts or omissions \44\ of a school that are related to the making 
of a Federal loan or the provision of educational services for which 
the loan was provided and that could also form the basis of borrower 
defense claims under Sec.  685.206(c) or proposed Sec.  685.222.
---------------------------------------------------------------------------

    \44\ Unless otherwise noted, we use the phrases ``borrower 
defense-type claims'' or ``potential borrower defenses'' to refer to 
such complaints or disputes.
---------------------------------------------------------------------------

    Specifically, proposed Sec.  685.300(d), (e), (f), (g), (h) and (i) 
would provide that--
     A school may not require any student to pursue a complaint 
based on such acts or omissions through an internal institutional 
process before the student presents the complaint to an accrediting 
agency or government agency authorized to hear the complaint;
     The school may not obtain or attempt to enforce a waiver 
of or ban on class action lawsuits regarding borrower defense-type 
claims;
     The school may not compel the borrower to enter into a 
pre-dispute agreement to arbitration of a borrower defense-type claim, 
or attempt to compel a borrower to arbitrate such a claim by virtue of 
an existing a pre-dispute arbitration agreement; \45\ and
---------------------------------------------------------------------------

    \45\ Unless otherwise noted, we use the phrase ``pre-dispute 
arbitration agreement'' to refer to agreements providing for 
arbitration of any future disputes between the parties, regardless 
of the label given the agreement, its form or its structure. These 
could take the form of stand-alone agreements, as well as such an 
agreement that is included within, annexed to, incorporated into, or 
otherwise made a part of a larger agreement between the parties.
---------------------------------------------------------------------------

     The school must notify the Secretary of the initial filing 
of such a claim, whether in arbitration or in court, and must provide 
copies of the initial filing, certain subsequent filings, and any 
decisions on such claims.
    Reasons: Through this rulemaking, the Department is proposing to 
address the procedures to be used for a borrower to establish a 
borrower defense based on acts or omissions of a school related to the 
making of a Direct Loan or the provision of educational services for 
which the Direct Loan was provided, and the effect of borrower defenses 
on institutional capability assessments, among other things. 80 FR 
63479. For disputes involving claims that may be potential borrower 
defenses, we propose to add to the Direct Loan program participation 
agreement provisions relating to schools' current use of certain 
dispute resolution procedures. For the reasons explained here, these 
procedures, individually and collectively, can:
     Affect whether institutions are held accountable for the 
acts and omissions that give rise to borrower defense claims;
     Make it more likely that the costs of losses from those 
acts or omissions will be passed on to the taxpayer;
     Reduce the incentive for institutions to engage in fair 
and ethical business practices rather than practices that give rise to 
borrower defense claims; and
     Frustrate or reduce the effectiveness of the Department's 
proposed processes for submitting and determining the validity of 
borrower defense claims.
    Accordingly, proposed Sec.  685.300(d) through (i), individually 
and collectively, are designed to help ensure that the proposed 
borrower defense and institutional accountability regulations will 
achieve their intended goals--to protect students, the Federal 
government, and taxpayers against risks from potential borrower 
defenses and potential school liabilities.
    We believe that to protect students, taxpayers, and the Federal 
government from the risk of loss arising from borrower defense claims 
based on the acts or omissions of the school, financial responsibility 
for these risks should be placed on the party whose conduct gives rise 
to the risk. To do so, borrowers must be free to present these claims 
to an authority well-situated to consider the merits of their claims 
and provide effective recourse directly against the school. 
Accordingly, we propose regulatory changes to Sec.  685.300 that would 
support these objectives in separate but complementary ways. In each 
case, the proposed regulations would enhance the opportunities for 
borrowers with borrower defenses to obtain relief directly from schools 
and help ensure that schools are held accountable for their acts or 
omissions that give rise to borrower defenses.
    Specifically, for Direct Loan participants, we propose to:
     Prohibit the use of class action waivers in order to, 
among other things, permit the aggregation of claims that may reflect 
widespread wrongdoing for which institutions might not otherwise be 
held accountable;
     Bar the use of mandatory pre-dispute arbitration 
agreements, in order to, among other things, prevent institutions from 
suppressing individual student complaints and shifting the financial 
risk associated with institutional wrongdoing to the Department and the 
taxpayers;
     Require institutions to modify existing arbitration 
agreements or notify individuals who have already executed arbitration 
agreements that the institution will not attempt to enforce an existing 
arbitration agreement in a manner prohibited by the regulations; and
     Require institutions to inform the Secretary of the 
assertion and resolution of potential borrower defense claims to enable 
the Secretary to monitor compliance with these requirements, to assess 
the nature and incidence of acts or omissions that form the grounds on 
which claims are asserted, to better focus corrective or enforcement 
actions, and to disseminate useful information about the nature and 
frequency of such

[[Page 39381]]

claims and the judicial and arbitral outcomes of these claims.
    We further propose in Sec.  685.300(d), regarding exhaustion of 
internal complaint procedures, to prohibit the school from requiring or 
attempting to require students to exhaust a school's internal complaint 
process before contacting or communicating a grievance with the 
school's accreditor or government agencies--including this Department--
with authority over the school.
    In proposing these regulatory changes, the Department is responding 
to comments made during negotiated rulemaking by the public and by non-
Federal negotiators, and to a proposal submitted by a negotiator, which 
was supported by a number of other negotiators, in each case relating 
to the use of arbitration by schools. Proposals the Department received 
both from non-Federal negotiators and from the public on this issue are 
available at www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html.
    During the negotiated rulemaking, we sought comment on two 
alternative options. Both options would bar the use of any pre-dispute 
arbitration agreements that include a waiver of the student's right to 
bring or participate in a class action lawsuit for claims that would 
constitute borrower defenses within the scope of Sec.  685.206(c) and 
proposed Sec.  685.222--in other words, claims related to the making of 
the Direct Loan or the provision of educational services for which the 
loan was intended. Both options would also require the school to submit 
copies of initial filings of any such claims and each ruling, award, or 
decision on the claims to the Secretary. Proposed Option A would 
prohibit schools from requiring students to pursue complaints, 
grievances, or disputes for such claims through an internal complaint 
process before presenting the complaint, grievance or dispute to an 
accrediting agency or government agency. Option A would allow the 
school to require the arbitration of claims asserted in a class action 
only if a court were to deny class certification or dismiss the class 
claims. This option would further require schools to ensure that the 
arbitration included certain procedural protections to increase the 
transparency and fairness of the arbitration proceeding. Option B would 
include provisions regarding class action waivers and submission of 
filings to the Secretary described above, but would only have barred 
the use of pre-dispute arbitration agreements.
    Nearly all of the negotiators supported the proposed Option B. Many 
negotiators stated that by requiring students to arbitrate disputes, 
arbitration clauses function to suppress meritorious student 
complaints. They also noted that many schools' arbitration agreements 
contain confidentiality clauses. Since arbitration records are not 
public like court records, the negotiators noted that potential student 
claimants and their representatives generally may not have access to 
prior pleadings, awards, or arbitrator decisions. Negotiators also 
noted that many school enrollment agreements contain bans on class 
claims or have provisions with that effect, which prevents evidence of 
widespread patterns and unlawful practices to come to the attention of 
students, the public, and the Department. One negotiator, however, 
stated that the Department's proposal was outside the notice of issues 
to be considered, and thus beyond the scope of the issues for the 
rulemaking, and was concerned that neither proposed Option A or Option 
B fit within the U.S. Supreme Court precedent regarding arbitration. 
However, the negotiator stated that of the two proposed options, Option 
B was preferred.
    As opposed to the options that were proposed by the Department at 
the negotiated rulemaking, in this NPRM, the Department proposes adding 
provisions that we believe would similarly prevent schools' use of 
internal complaint processes as a barrier to students' communication of 
such issues to accreditors or government agencies; ban the use of class 
action waivers by schools for potential borrower defense claims; 
prohibit mandatory pre-dispute arbitration agreements; and create 
transparency regarding the conduct and outcomes of arbitration 
proceedings. After evaluating the available research on arbitration and 
the concerns of all of the negotiators at the table, the Department has 
chosen to propose a modified version of Option B in this NPRM.

The Direct Loan Program Participation Agreement

    The Department proposes to add provisions addressing the use of 
class action waivers, pre-dispute arbitration agreements, submission of 
filings, and internal complaint processes to the Direct Loan program 
participation agreements. Section 452(b) of the HEA states, ``No 
institution of higher education shall have a right to participate in 
the [Direct Loan] programs authorized under this part [part D of title 
IV of the HEA].'' 20 U.S.C. 1087b(b). Rather, an institution may 
participate only by supplying an application containing ``such 
information and assurances as the Secretary may require.'' 20 U.S.C. 
1087c(b)(1). Further, section 454 of the HEA directs that a school may 
participate in the Direct Loan Program only by virtue of a 
``participation agreement.'' 20 U.S.C. 1087d. Section 454 further 
states that such program participation agreement shall include, among 
other things, ``such other provisions as the Secretary determines are 
necessary to protect the interests of the United States and promote the 
purposes of this part [Part D of title IV of the HEA, describing the 
Direct Loan Program].'' 20 U.S.C. 1087d(a)(6). The Direct Loan 
Agreement described in section 454 of the HEA is now included as a 
separate component of the program participation agreement required 
under section 487(a) of the HEA. 20 U.S.C. 1094(a). The purpose of the 
Direct Loan Program is to provide loans to students and parents to 
finance the attendance of students in postsecondary education. Loans 
are not grants, and are expected to be repaid. The same part of the 
HEA, part D, also includes the borrower defense provision, section 
455(h) of the HEA, which directs the Department to ``specify in 
regulations which acts or omissions of an institution . . . a borrower 
may assert as a defense to repayment'' of a Direct Loan. 20 U.S.C. 
1087e(h).
    While section 455(h) of the HEA authorizes the Department to 
establish grounds for a borrower to avoid repaying a Direct Loan, we 
believe that the overall ``purpose'' of the Direct Loan Program is to 
make loans that will then be repaid. To be repayable, the loans must be 
enforceable obligations of the borrowers. Acts and omissions by schools 
that give a borrower grounds for avoiding repayment of a Direct Loan 
thereby frustrate the achievement of the primary objectives of the 
Federal loan program--to both finance education and obtain repayment. 
By impeding the ability of borrowers to obtain effective relief 
directly from the school, the practices we propose to prohibit in Sec.  
685.300(d) through (ii) instead encourage these borrowers to raise 
their claims against the school to the Department as reasons for not 
repaying their loans, and in so doing, increase the financial risk to 
the taxpayer from the claims themselves.

Class Action Waivers

    In considering class action waivers, we consider the effect that 
such waivers can and have already had on the interests of taxpayers and 
the achievement of the purposes and objectives of the Direct Loan 
Program.

[[Page 39382]]

Among other things, the Department has reviewed the Notice of Proposed 
Rulemaking recently issued by the CFPB (hereinafter the ``CFPB 
Arbitration Agreements NPRM'') and considers the analysis and proposals 
made there as they bear on these assessments for the Direct Loan 
Program.\46\ The CFPB has been charged by statute with evaluating the 
use of mandatory, pre-dispute arbitration agreements. 12 U.S.C. 
5518(a). The CFPB conducted a comprehensive three-year study of those 
agreements' effect on consumers, and has made a preliminary 
determination that a ban on the use of mandatory pre-dispute 
arbitration agreements regarding covered consumer financial products 
and services to preclude assertion of claims through class action 
lawsuits would benefit consumers, serve the public interest, and be 
consistent with its study.\47\ The CFPB stated that its study, together 
with the CFPB's experience and expertise, resulted in the CFPB's notice 
of proposed rulemaking regarding class action waivers. The CFPB stated 
the following ``preliminary conclusions'':
---------------------------------------------------------------------------

    \46\ Consumer Financial Protection Bureau, Arbitration 
Agreements, 80 FR 32830 (May 24, 2016).
    \47\ CFPB, Small Business Advisory Review Panel for Potential 
Rulemaking on Arbitration Agreements, Oct. 7, 2015 (SBREFA Outline) 
at 4.
---------------------------------------------------------------------------

    (1) The evidence is inconclusive on whether individual arbitration 
conducted during the Study period is superior or inferior to individual 
litigation in terms of remediating consumer harm; (2) individual 
dispute resolution is insufficient as the sole mechanism available to 
consumers to enforce contracts and the laws applicable to consumer 
financial products and services; (3) class actions provide a more 
effective means of securing relief for large numbers of consumers 
affected by common legally questionable practices and for changing 
companies' potentially harmful behaviors; (4) arbitration agreements 
block many class action claims that are filed and discourage the filing 
of others; and (5) public enforcement does not obviate the need for a 
private class action mechanism.
    CFPB Arbitration Agreements NPRM, 81 FR 32830, 32855.
    The CFPB identified several features of class actions in the 
consumer financial services markets that we consider applicable to the 
postsecondary education market. First, the CFPB noted that class 
actions facilitate relief for individual consumers because they 
``provide a mechanism for compensating individuals where the amounts at 
stake for individuals may be so small that separate suits would be 
impracticable.'' \48\ Second, class actions ``strengthen incentives'' 
for industry members to ``engage in robust compliance and customer 
service on an ongoing basis.'' \49\ While government agencies ``can and 
do bring enforcement actions against companies that cause injury to 
large numbers of consumers, government resources to pursue such 
lawsuits are limited.'' \50\ Thus, the CFPB preliminarily concludes, 
``Public enforcement is not a sufficient means to enforce consumer 
protection laws and consumer financial contracts.'' \51\ As the CFPB 
stated, ``When companies can be called to account for their misconduct, 
public attention on the cases can affect or influence their individual 
business practices and the business practices of other companies more 
broadly.'' \52\ Moreover, the CFPB preliminarily finds that ``exposure 
to consumer financial class actions creates incentives that encourage 
companies to change potentially illegal practices and to invest more 
resources in compliance in order to avoid being sued.'' \53\ Based on 
its comprehensive study of the use of pre-dispute arbitration 
agreements in the financial services sector, the CFPB now proposes to 
bar the use of arbitration agreements to preclude the pursuit of class 
actions, which includes the use of class action waivers in arbitration 
agreements--agreements that require consumers in the financial services 
markets to agree to forego class action.\54\
---------------------------------------------------------------------------

    \48\ CFPB Arbitration Agreements NPRM, at 81 FR 32833; see also 
SBARP, at 15.
    \49\ Id. As the CFPB noted in its study, in the 46 consumer 
class actions and six individual suits filed by consumers in which 
defendant companies obtained orders compelling arbitration, in only 
12 instances did a consumer then pursue arbitration, and none of the 
12 were class arbitrations. CFPB, Arbitration Study, March 2015, 
Sec.  6.7.1.
    \50\ Id. As the CFPB also noted in its study, government 
enforcement authorities brought some 1150 administrative or judicial 
enforcement actions during the 2010-2012 survey period, of which 
some 133 address the same conduct as that on which consumers had 
brought a class action lawsuit; in 71 percent of these instances, 
the private class action preceded the government enforcement action. 
CFPB Arbitration Study, March 2015, Sec.  9.1.
    \51\ CFPB Arbitration Agreements NPRM, at 81 FR 32860.
    \52\ CFPB Considers Proposal to Ban Arbitration Clauses that 
Allow Companies to Avoid Accountability to Their Customers, Oct. 7, 
2015, available at www.consumerfinance.gov/newsroom
    \53\ CFPB Arbitration Agreements NPRM, at 81 FR 32864.
    \54\ www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-proposes-prohibiting-mandatory-arbitration-clauses-deny-groups-consumers-their-day-court/ CFPB 
Arbitration Agreements NPRM, 81 FR 32830, 32925, to be codified at 
12 CFR 1040.4.
---------------------------------------------------------------------------

    The proposed CFPB rule describes the financial services markets to 
which the CFPB rule would apply.\55\ We believe the findings and 
reasoning of the CFPB support the protections for Direct Loan borrowers 
of the kind we propose here. Agreements that bar relief by class action 
lawsuits for potential borrower defenses remove the risk to a school 
that the threat of such a class action would pose and, thus, they 
eliminate the financial incentive for the school to comply with the law 
that such a risk of a class action would otherwise create.\56\ By doing 
so, class action waivers impede borrowers from obtaining compensatory 
relief for themselves, and further prevent borrowers from obtaining 
injunctive relief to compel a school, in a timely manner, to desist 
from the conduct that caused them injury and could continue to cause 
other borrowers injury in the future. Class action waivers effectively 
allow a school to perpetuate misconduct with much less risk of adverse 
financial consequences than if the school could be held accountable in 
a class action lawsuit.
---------------------------------------------------------------------------

    \55\ See CFPB Arbitration Agreements NPRM, 81 FR 32830, 32925, 
to be codified at 12 CFR 1040.3 (describing covered services); See 
also: SBREFA Outline at 22.
    \56\ The Department makes no distinction between class action 
waivers included in arbitration agreements and such waivers 
established otherwise, such as in an enrollment agreement that does 
not include any reference to or agreement regarding arbitration. The 
negative effects of such waivers discussed here hold regardless of 
where the waiver is established.
---------------------------------------------------------------------------

    Recent history demonstrates the need to address bans by 
postsecondary institutions on class actions for potential borrower 
defense claims. Corinthian Colleges included explicit class action 
waiver provisions in enrollment agreements, and used those, with 
mandatory pre-dispute arbitration clauses, to resist class actions by 
students.\57\ Government investigations established that Corinthian had 
for years engaged in widespread misrepresentations and other abusive 
conduct. In April 2015, the Department levied a $30 million fine 
against Heald, a chain owned by Corinthian, for misrepresenting its 
placement rates, but several days later, Heald and the remaining 
Corinthian-owned schools closed, and Corinthian filed for bankruptcy 
relief. The State of California sued Corinthian in September 2013, and 
obtained a $1.1 billion judgment against the company only in March 
2016, after the company had filed for bankruptcy relief. The CFPB sued 
Corinthian in September 2014, and obtained a $531 million judgment

[[Page 39383]]

against the company only in October 2015--well after Corinthian had 
become insolvent and filed in bankruptcy. None of these government 
actions actually achieved affirmative recovery for Corinthian Direct 
Loan borrowers.\58\ Yet in 2012, a class of students attending 
Corinthian Colleges, including Heald College and Everest Institute, 
Miami, had filed class actions against the schools for students who 
attended the schools since 2005 (Everest) or 2009 (Heald), for 
``misrepresenting the quality of its education, its accreditation, the 
career prospects for its graduates, and the cost of education.'' 
Ferguson v. Corinthian Colleges, 733 F.3d 928 (9th Cir. 2013). 
Corinthian defended by claiming that the arbitration clause in their 
enrollment agreements barred relief in a class action, and in an August 
2013 ruling the Ninth Circuit Court of Appeals agreed. Id. Another 
class action filed in 2011 in Illinois against Corinthian Colleges by 
students, alleging deception about placement rates, was similarly 
barred. Montgomery v. Corinthian Colleges, C.A. No. 11-C-365 (N.D.Ill. 
Mar. 25, 2011). Other Corinthian students unsuccessfully pursued relief 
through individual and class actions against Corinthian schools, and, 
in each instance, Corinthian successfully opposed the suits and 
obtained rulings compelling individual arbitration of the student 
claims.\59\ In yet another case, Corinthian opposed recovery by a 
student who had been compelled to arbitrate, and had obtained a 
favorable award from the arbitrator that granted relief not only to the 
individual student but to a class of students; Corinthian argued, and 
the court agreed, that the arbitration agreement barred even class 
arbitrations. Reed v. Fla. Metropolitan Univ., 681 F.3d 630 (5th Cir. 
2012), abrogated by Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 
186 L. Ed. 2d 113 (2013).
---------------------------------------------------------------------------

    \57\ See, e.g., Montgomery v. Corinthian Colleges, C.A. No. 11-
C-365 (N.D.Ill. Mar. 25, 2011); Ferguson v. Corinthian Colleges, 
Inc., 773 F.3d 928 (9th Cir. 2013).
    \58\ This Department and the CFPB did achieve substantial relief 
in 2015 for many Corinthian students who had obtained private loans, 
but only through negotiations with the Educational Credit Management 
Corporation, which acquired some of the Corinthian schools.
    \59\ Eakins v. Corinthian Colleges, Inc., No. E058330, 2015 WL 
758286 (Cal. Ct. App. Feb. 23, 2015); Okwale v. Corinthian Colleges, 
No. 1:14-CV-135-RJS, 2015 WL 730015 (D. Utah Feb. 19, 2015); Kimble 
v. Rhodes College, No. C-10-5786, 2011 WL 2175249 (N.D. Cal. June 2, 
2011); Miller v. Corinthian Colleges, 769 F.Supp.2d. 1336 (D. Utah 
2011); Rodriguez v. Corinthian Colleges, Inc., No. 07-CV-02648-
EWNMJW, 2008 WL 2979505 (D. Colo. Aug. 1, 2008); Ballard v. 
Corinthian Colleges, Inc., No. C06-5256 FDB, 2006 WL 2380668 (W.D. 
Wash. Aug. 16, 2006); Anderson v. Corinthian Colleges, Inc., No. 
C06-5157 FDB, 2006 WL 2380683 (W.D. Wash. Aug. 16, 2006).
---------------------------------------------------------------------------

    If the student class actions had been able to proceed, the class 
actions could have compelled Heald College and the Corinthian Colleges, 
generally, to provide financial relief to the students and to change 
their practices while Corinthian was still a viable entity. Instead, 
impacted borrowers with Direct Loans from attendance at any of the 
Corinthian Colleges will only be able to obtain relief by raising the 
schools' misconduct as a defense to their Federal loans through the 
Department's current borrower defense process under Sec.  
685.206(c).\60\ As of the close of March 2016, the Department had 
granted discharge relief in the amount of $42,318,574 to 2,048 Direct 
Loan borrowers making claims related to Heald, Everest Institute, and 
Wyotech.\61\ As of June 1, the Department had received more than 23,000 
claims relating to Corinthian and other schools.
---------------------------------------------------------------------------

    \60\ Because Corinthian required pre-dispute arbitration 
agreements, students were unable to successfully pursue individual 
lawsuits against the schools.
    \61\ Third Report of the Special Master for Borrower Defense to 
the Under Secretary, March 25, 2016, available at https://www2.ed.gov/documents/press-releases/report-special-master-borrower-defense-3.pdf.
---------------------------------------------------------------------------

    Similarly, the inability of borrowers to bring class actions 
removed the deterrent force that the threat of being sued in a class 
action posed to other industry members during this same period. Federal 
and State reviews of for-profit school practices over the past five 
years, recounted, for example, in the Department's notice of proposed 
rulemaking for Program Integrity: Gainful Employment, 79 FR 16426 
(March 25, 2014), show numerous instances in which major for-profit 
schools engaged in deceptive acts of the kind on which students were 
attempting to sue. However, during that same period, courts regularly 
rebuffed the students' attempts by compelling the students to submit 
their claims to arbitration. See, e.g., Rosendahl v. Bridgepoint Educ., 
Inc., No. 11CV61 WQH WVG, 2012 WL 667049 (S.D. Cal. Feb. 28, 2012). Had 
students been able to bring class actions against Corinthian or other 
industry members, it is reasonable to expect that other schools would 
have been motivated to change their practices to avoid facing the risk 
of similar suits.
    Class action bans eliminate this incentive. By doing so, these 
agreements increase the likelihood that borrowers who have such claims 
will present them solely to the Department as defenses to repayment of 
their taxpayer-funded Federal loans. The Department's borrower defense 
process gives limited relief for borrowers, providing only discharge of 
the borrower's Federal loan obligation, and potential recovery of past 
payments made to the Secretary, rather than compensation in damages 
from the school for his or her losses. Recoveries through the court 
system --for the cost of the loan itself--would eliminate any need to 
seek relief from the Department--and the taxpayers. In addition, 
recoveries in damages may include other losses the borrower incurred as 
well, such as the tuition an individual privately paid or the value of 
the time spent at the institution. In the Department's experience, 
borrower defense claims are presented to the Department well after the 
underlying act or omission that gave rise to the claim has occurred, at 
a point at which the school may well have ceased operations and there 
may be less reliable evidence available to borrowers. That shifts the 
financial risk of a school's insolvency to the taxpayer, rather than to 
the school as the responsible party.
    We believe that class action lawsuits not only provide a vehicle 
for addressing a multitude of relatively small claims that would 
otherwise not be raised--or raised only as borrower defense claims--but 
create a strong financial incentive for both a defendant school and 
other similarly situated schools to comply with the law in their 
business operations. Pre-dispute arbitration agreements coupled with 
class action waivers eliminate this incentive by preventing the 
aggregation of small claims that may reflect widespread wrongdoing. We 
believe that banning class action waivers as they pertain to potential 
borrower defense claims would promote direct relief to borrowers from 
the party responsible for injury, encourage schools' self-corrective 
actions, and, by both these actions, lessen the amount of financial 
risk to the taxpayer in discharging loans through the defense to 
repayment process.

Pre-Dispute Arbitration Agreements

    Because pre-dispute arbitration agreements bar the student from 
bringing an individual lawsuit against the school for relief, these 
agreements pose some of the same risks to borrowers and the taxpayer as 
those posed by class action waivers. Even if the borrower were not 
contractually foreclosed from pursuing a class action suit, Federal and 
State rules impose requirements on class actions that may well prevent 
particular borrowers from bringing and successfully maintaining a class 
action. For such borrowers, mandatory pre-dispute arbitration 
agreements bar them from seeking

[[Page 39384]]

judicial relief.\62\ The ability to compel arbitration allows the 
school to bar the individual from bringing a suit, either individually 
or, by joinder, with other borrowers, and thereby avoid the publicity 
and financial risks described earlier that follow from class actions. 
Similarly, foreclosing individual or joinder actions eliminates, for 
other industry members, the risk that a well-publicized lawsuit will 
inspire similar individual or joinder actions against those schools, 
and therefore dampens or eliminates the incentive for other schools to 
comply with the law in their business dealings with their student 
customers. In addition, a well-publicized lawsuit is more likely to 
attract the attention and risk of compensatory or prophylactic 
enforcement action by this Department and other government agencies. 
Foreclosing individual student lawsuits removes this risk, much like 
class action waivers. Accordingly, mandated arbitration can be expected 
to frustrate the Federal and Direct Loan interests for the same 
reasons, though to a lesser degree, than class action waivers.
---------------------------------------------------------------------------

    \62\ Fed. R. Civ. Proc. 23 requires, for example, that questions 
of law or fact common to members of the class predominate over 
issues affecting only individual members. Fed. R. Civ. P. 23(b)(3). 
Courts have not infrequently denied class certification for student 
loan borrowers raising class action fraud claims against schools:
    When students who seek to be named as plaintiffs in a proposed 
class action may have considered a variety of factors in deciding to 
enroll in a school alleged to have defrauded them, absent are 
typical and predominant questions whether such plaintiffs relied 
upon misrepresentations made by the school in deciding to enroll 
therein; class certification must therefore be denied. Rodriguez v. 
McKinney, 156 FRD. 112, 116 (E.D.Pa. 1994) (no predominance); Graham 
v. Sec. Sav. & Loan, 125 FRD. 687, 691 n. 4 (N.D.Ind. 1989) (no 
typicality), aff'd sub nom. Veal v. First Am. Sav. Bank, 914 F.2d 
909 (7th Cir. 1990); see Torres v. CareerCom Corp., 1992 WL 245923, 
at *5 (E.D.Pa. Sept. 18, 1992) (no predominance); see generally 
Seiler Jr. v. E.F. Hutton & Co., 102 FRD. 880, 890 (D.N.J. 1984) (no 
typicality).
    Morgan v. Markerdowne Corp., 201 FRD. 341, 348 (D.N.J. 2001).
---------------------------------------------------------------------------

    We note that the CFPB considered a ban on mandatory pre-dispute 
arbitration agreements, and in light of its mandate, preliminarily 
found the evidence to be ``inconclusive whether individual arbitration 
conducted during the Study period is superior or inferior to individual 
litigation in remediating consumer harm . . .'' 81 FR 32830, 32855, 
32921. The CFPB did acknowledge that a ban on pre-dispute arbitration 
agreements would ``give[ ] providers [of financial services the] same 
incentives to comply with the law as the proposed rule [banning class 
action waivers]. 81 FR 32830, 32921. Section 1028(b) of the Dodd-Frank 
Act provides that the mandate of the CFPB with respect to any 
regulation the CFPB adopts regarding arbitration is to determine 
whether, it would be in the ``public interest and for the protection of 
consumers'' to ``prohibit or impose limitations on the use of an 
agreement . . . for a consumer financial product or service providing 
for arbitration of any future dispute between the parties . . .'' 12 
U.S.C. 5518(b). Also, under section 1028(b), ``the findings in such 
rule shall be consistent with the study.''
    The Department proposes to act under a different mandate, under 
section 454(a)(6) of the HEA, to adopt ``provisions as the Secretary 
determines are necessary to protect the interests of the United States 
and to promote the purposes of this part [the Direct Loan Program under 
Part D of title IV of the HEA].'' 20 U.S.C. 1087d(a)(6).
    As discussed above, the interests at stake in this determination 
are not the interests of the ``public'' and ``consumers,'' but the 
interests of the Federal taxpayers whose funds are at risk for borrower 
defense claims asserted on Federal Direct Loans, and the objective at 
stake here, as discussed, is the successful financing of postsecondary 
education by providing loans repayable by current recipients for the 
benefit of future generations of borrowers. Because the interests at 
stake in regard to Direct Loans, though not inconsistent with those 
prescribed in the Dodd-Frank Act, are different, the Department, for 
the reasons stated here, considers individual litigation a better tool 
to protect the taxpayers' interests in the Direct Loan program than 
individual arbitration.
    The current regulations in Sec.  685.206(c) require Department 
decision makers to apply the State law applicable to the variety of 
causes of action that constitute borrower defenses to repayment. Under 
the proposed regulations, this standard would continue to apply to 
grievances by borrowers related to existing Direct Loans and, thus, 
continue to require Department officials to acquire sufficient 
familiarity with the law of the States to properly apply that law to 
thousands of borrower defense claims. The Federal interest, and the 
purposes of the Direct Loan program, are frustrated to the extent that 
schools are able to bar individuals with Direct Loan-related grievances 
from having those claims adjudicated by State courts, which are well-
situated to adjudicate these claims under judicial procedures that 
assure appellate review of trial court rulings. We recognize the 
desirability of this option by retaining, under the proposed new 
standard in Sec.  685.222, the option to obtain borrower relief based 
on a favorable judgment of a court of competent jurisdiction, even if 
the judgment rests on a State law-based cause of action. By requiring 
institutions to permit individual borrowers access to judicial forums 
for claims that may constitute borrower defenses, the proposed 
regulations would allow borrower claims based on State law causes of 
action to be resolved locally, by tribunals well versed in that law, 
and whose decisions are subject to appellate review, unlike the far 
more narrow review to which arbitral awards are subject.\63\ Permitting 
this access would promote a balanced evolution of the borrower defense 
standard, assuring that borrowers with meritorious State law claims 
will be able to pursue those in an appropriate forum, thereby reducing 
both the incentive for borrowers to assert their claims only through 
the Department process, and the burden on the Federal administrative 
process to continue to evaluate those claims.
---------------------------------------------------------------------------

    \63\ See 9 U.S.C. 10.
---------------------------------------------------------------------------

    Accordingly, we propose to prohibit a Direct Loan participating 
school from requiring the student to agree, prior to a dispute about a 
potential borrower defense claim, to arbitrate such a dispute. We refer 
to such agreements as ``mandatory pre-dispute arbitration agreements'' 
and define those agreements as ``mandatory'' if the school requires the 
student to agree to arbitrate either as part of the enrollment 
agreement or in any other form the student is required to execute in 
order to enroll or continue in school. We recognize that some pre-
dispute arbitration agreements allow the consumer within a set period 
to affirmatively opt-out of an agreement to arbitrate. We include in 
the proposed definition that such agreements are binding unless the 
student affirmatively opts out of the agreement, and we invite comment 
on whether opt-out agreements should be considered ``mandatory'' 
agreements.

Transparency of the Arbitral Process and Outcomes

    The Department currently has little opportunity to monitor, and 
more importantly timely respond to, grievances that borrowers present 
in arbitration and even private suits, and the defenses and arguments 
raised by title IV participants in opposing relief. We propose, 
therefore, to require schools to provide us, in a timely manner, with 
copies of initial and certain subsequent filings in judicial or 
arbitral tribunals, and decisions and awards rendered in those 
proceedings.

[[Page 39385]]

    The CFPB also proposes to require companies that use pre-dispute 
arbitration agreements to submit to the CFPB copies of initial 
arbitration claim filings made or received by the companies, 
arbitration awards, and certain other records.\64\ The CFPB states that 
it is considering whether to make these available to the public by 
posting them to its Web site. The CFPB notes that this would permit the 
CFPB and the public to monitor arbitrations on an ongoing basis and 
identify trends that might ``indicate problematic business practices 
that harm consumers, particularly since many claims settle before an 
award is rendered.'' \65\
---------------------------------------------------------------------------

    \64\ CFPB Arbitration Agreements NPRM, 81 FR 32830, 32926 (May 
24, 2016), to be codified at 12 CFR 1040.4(b)(1).
    \65\ SBREFA Outline, at 20.
---------------------------------------------------------------------------

    We propose the same kind of requirement here, for similar reasons. 
Lack of timely notice and confidentiality provisions make it difficult 
for the Department to discern patterns and practices that may generate 
borrower defense claims, involve misuse of title IV, HEA funds, or 
constitute misrepresentations of the kind that the HEA authorizes the 
Department to remedy by fines and other actions. Without knowledge of 
the kinds of claims and relief granted, we cannot evaluate whether 
further measures are needed, or whether the school is resisting class 
action complaints on claims that would constitute borrower defenses 
under the proposed regulations.
    The proposed submission requirement for institutions that use 
arbitration agreements would enable the Department to analyze the 
claims that may also be potential borrower defense claims, the schools' 
responses, and the outcomes of the claims in arbitration. We would be 
able then, as needed, to publicize both the kinds of potential borrower 
defense claims asserted and the decisions on those claims, and to 
decide whether either an immediate response or intervention was needed, 
or whether systemic correction action was warranted.\66\ We would also 
be better able to evaluate the merits of a claim that a borrower later 
raises as a borrower defense to repayment. We believe that proposed 
Sec.  685.300(g), which would require schools to submit copies of 
filings for arbitration, responses, awards, and certain other documents 
within 60 days of the filing or receipt by the school, as applicable, 
is needed to enable the Secretary to monitor and evaluate these claims 
and thereby protect the interests of the United States and promote the 
purposes of the Direct Loan Program.\67\ In contrast, the Secretary has 
a far greater and more immediate interest in claims and defenses 
asserted in litigation, because court rulings on those assertions may 
construe the HEA and Department regulations, and thus have far greater 
effect than arbitration decisions. The issues will be joined as early 
as 20 days after the service of the complaint, when the defendant must 
answer or move to dismiss the complaint. To participate in a timely 
manner in litigation in which the parties assert their interpretations 
of the HEA and regulations, the Department needs prompt notice of these 
filings, in order to identify those that raise these kinds of 
assertions, and we propose in Sec.  685.300(h) that the school submit 
copies of each complaint, any counterclaim, any dispositive motion 
filed by either party, any ruling on a dispositive motion, and any 
judgment, within 30 days of receipt or filing by the school. We believe 
the proposed submission requirements are appropriate for the reasons 
stated above. However, we seek comment on whether the Department should 
adopt different submission, transparency, or procedural fairness 
requirements, and if so, what the supporting rationale for those 
requirements would be, and why those other requirements would meet the 
objectives outlined in this section.
---------------------------------------------------------------------------

    \66\ Schools and other institutions participating in the title 
IV, HEA programs have defended suits by borrowers by contending that 
borrowers cannot rely on State law to redress conduct by a defendant 
that also violates an HEA requirement, because, they argue, 
enforcement of HEA requirements is vested solely in the Secretary, 
not in private parties. See, e.g., Sanchez v. ASA College Inc., in 
which the defendant school raised this argument:
    Defendants also assert that dismissal is warranted because the 
HEA grants the Secretary ``exclusive authority'' to remedy any Title 
IV violations and, thus, that the HEA precludes Plaintiffs' claims 
based on failures to comply with its provisions. (Defs. Mem. 10-15).
    Sanchez v. ASA Coll., Inc., No. 14-CV-5006 JMF, 2015 WL 3540836, 
at *4 (S.D.N.Y. June 5, 2015). The Department, with timely notice in 
that instance, was able to file a statement of interest to rebut 
this serious misconception that a party injured by conduct that 
violates an HEA requirement of law cannot sue for relief for that 
injury in reliance on a State law that would allow a party to sue 
for relief for that conduct. A suit for relief based on State law in 
such a situation is not an attempt to find a private right of action 
for relief under the HEA.
    \67\ The 60-day submission requirement is the same period as 
proposed by the CFPB for submission of arbitral filings. CFPB 
Arbitration Agreements NPRM, 81 FR 32830, 32926, to be codified at 
12 CFR 1040.4(b)(2).
---------------------------------------------------------------------------

    To the extent that a school may now include in its arbitration 
agreements a confidentiality provision, the rule would require the 
school to remove that provision or modify its use to the extent needed 
to make these disclosures.

Federal Arbitration Act

    A negotiator asserted that the Department does not have the 
authority to proscribe waivers of class action litigation or use of 
mandatory pre-dispute arbitration agreements, citing recent Supreme 
Court rulings upholding contractual agreements to arbitrate that held 
that the Federal Arbitration Act (FAA) protects enforceable arbitration 
agreements and expresses a ``liberal Federal policy favoring 
arbitration.'' \68\ The FAA protects the validity and enforceability of 
arbitration agreements. Section 2 of the FAA states: ``[a] written 
provision in any . . . contract . . . to settle by arbitration a 
controversy thereafter arising out of such contract . . . shall be 
valid, irrevocable, and enforceable, save upon such grounds as exist at 
law or in equity for the revocation of any contract.'' 9 U.S.C. 2. This 
act was intended to reverse judicial hostility to arbitration and to 
put arbitration agreements on an equal footing with other 
contracts.\69\ The negotiator contended that the FAA as applied in case 
law barred the Department from adopting a rule that would ban either 
such class action waivers or mandatory pre-dispute arbitration 
agreements.
---------------------------------------------------------------------------

    \68\ AT&T Mobility v. Concepcion, 563 U.S. 333 (2011).
    \69\ Id. at 342.
---------------------------------------------------------------------------

    The Department does not have the authority, and does not propose, 
to displace or diminish the effect of the FAA. However, the Department 
has clear authority to regulate the conduct of institutions that wish 
to participate in the Direct Loan Program. As noted earlier, section 
452(b) of the HEA states, ``No institution of higher education shall 
have a right to participate in the [Direct Loan] programs authorized 
under this part [part D of title IV of the HEA].'' 20 U.S.C. 1087b(b). 
If a school chooses to participate in the Direct Loan Program, it must 
enter into a Direct Loan Program participation agreement. 20 U.S.C. 
1087d. Section 454(a)(6) of the HEA authorizes the Department to 
include in that participation agreement ``provisions that the Secretary 
determines are necessary to protect the interests of the United States 
and to promote the purposes of'' the Direct Loan Program. 20 U.S.C. 
1087d(a)(6). We propose to adopt regulations that limit the use of 
arbitration agreements under this authority. We discuss earlier the 
reasons we consider the proposed limits on arbitration to be necessary 
to protect the interests of the United States and promote the purposes 
of the Direct Loan Program. Under proposed Sec.  685.300(f), an 
institution would

[[Page 39386]]

remain free to require students to enter into mandatory pre-dispute 
arbitration agreements, so long as those agreements exclude any 
requirement to arbitrate a potential borrower defense. An institution 
that does not choose to accept these provisions is free to include 
arbitration requirements in its enrollment agreements, and to exercise 
its contractual rights under such agreements to compel arbitration. 
However, under the proposed regulations, the institution would not be 
permitted to obtain or exercise such agreements and continue to 
participate in the Direct Loan Program unless those agreements exclude 
any requirement that the student arbitrate a potential borrower defense 
claim.
Implementation for Agreements Regarding Arbitration
    Institutions that intend to mandate pre-dispute arbitration 
agreements or obtain class action waivers from students after the 
effective date of the proposed regulations will be required to include 
provisions in those agreements that exclude from any class action 
waiver or commitment to arbitrate those claims that relate to the 
making of the Direct Loan or the provision of educational services by 
the institution. The proposed regulations include provisions explaining 
the institution's commitment not to attempt to compel arbitration or 
resist class actions, as applicable, for claims that are potential 
borrower defense claims.
    We recognize that many agreements regarding arbitration or class 
action waivers have already been executed and more may be executed 
prior to the date on which the proposed regulations may be issued in 
final and take effect. The proposed regulations therefore require that 
an institution that has such agreements not only to comply with the 
regulations that would bar the institution from attempting to exercise 
mandatory pre-dispute arbitration agreements or class action waivers 
regarding borrower defense-type claims, but also to either amend the 
agreements, or at least notify, the students who executed those 
agreements that the institution would not attempt to exercise those 
agreements in a manner proscribed by the regulations.
    The institution would be required to notify students who had 
already executed a non-compliant arbitration or class action waiver 
agreement no later than the date on which the institution provides exit 
counseling, which provides a useful context in which to explain the 
change. For those who have executed a non-compliant arbitration or 
class action waiver but whom the institution has already provided exit 
counseling that included or accompanied the notice or amendment, the 
proposed rule would require the institution to provide the notice or 
amendment within 60 days of the date on which the institution receives 
a complaint in a lawsuit by a former student that raised borrower 
defense claims, or a demand for arbitration of a borrower defense 
claim. As proposed here, the institution would be barred from opposing 
such a lawsuit on the ground that the borrower had already agreed to 
waive class action relief or individual lawsuit for relief for such a 
claim. We request comment on whether the institution should provide 
notice to currently-enrolled students or to former students, and if so, 
when and to whom those notices should be required.

Severability

    While the Department is confident that the provisions addressing 
arbitration in Sec.  685.300(d), (e), (f), (g), (h) and (i) would not 
violate the FAA, it has carefully considered the negotiator's view, and 
the possibility that a court might rule that any of these provisions is 
invalid based on the FAA or any other reason. The Department considers 
the separate provisions barring waivers of class actions, barring 
mandatory pre-dispute arbitration agreements, and requiring the 
institution to provide to the Department copies of initial filings and 
subsequent filings, awards, and decisions in borrower defense suits or 
arbitrations, to be valuable independently and to operate independently 
and to serve separate but complementary objectives. Accordingly, in an 
abundance of caution, we propose in Sec.  685.309 to specify the 
Department's intent that if any provision of subpart C of part 685 is 
held invalid, the remaining parts shall not be affected.

Executive Orders 12866 and 13563

Regulatory Impact Analysis

Introduction

    Under Executive Order 12866, it must be determined 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 proposed regulatory action would have an annual effect on the 
economy of more than $100 million because the proposed regulations 
would have annual federal budget impacts of approximately $199 million 
in the low impact scenario to $4.2323 billion in the high impact 
scenario at 3 percent discounting and $198 million and $4.17 billion at 
7 percent discounting, additional transfers from affected institutions 
to student borrowers via reimbursements to the Federal government, and 
annual quantified costs of $14.9 million related to paperwork burden. 
Therefore, this proposed action is ``economically significant'' and 
subject to review by OMB under section 3(f) of Executive Order 12866. 
Notwithstanding this determination, we have assessed the potential 
costs and benefits, both quantitative and qualitative, of this proposed 
regulatory action and have determined that the benefits would justify 
the costs.
    We have also reviewed these regulations under Executive Order 
13563, which supplements and explicitly reaffirms the principles, 
structures, and definitions governing regulatory review established in 
Executive Order 12866. To the extent permitted by law, Executive Order 
13563 requires that an agency--
    (1) Propose or adopt regulations only on a reasoned determination 
that their benefits justify their costs (recognizing that some benefits 
and costs are difficult to quantify);
    (2) Tailor its regulations to impose the least burden on society, 
consistent with obtaining regulatory objectives and taking into 
account--among other things and to the extent practicable--the costs of 
cumulative regulations;
    (3) In choosing among alternative regulatory approaches, select 
those approaches that maximize net benefits (including potential 
economic, environmental, public health and safety, and other 
advantages; distributive impacts; and equity);

[[Page 39387]]

    (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 proposed regulations only on a reasoned 
determination that their benefits would justify their costs. In 
choosing among alternative regulatory approaches, we selected those 
approaches that maximize net benefits. Based on the analysis that 
follows, the Department believes that these proposed regulations are 
consistent with the principles in Executive Order 13563.
    We also have determined that this regulatory action would not 
unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.
    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 
regulatory alternatives we considered.
    Under ``Initial Regulatory Flexibility Act Analysis,'' we consider 
the effect of the proposed regulations on small entities.

Need for Regulatory Action

    The proposed regulations address several topics related to the 
administration of title IV, HEA student aid programs and benefits and 
options for borrowers. As stated in the preamble, the Department first 
implemented borrower defense regulations for the Direct Loan Program in 
the 1995-1996 academic year to protect borrowers. The Department's 
original intent was for this rule to be in place for the 1995-1996 
academic year, and then to develop a more extensive rule for both the 
Direct and FFEL loan programs through negotiated rulemaking in the 
following year.
    However, based on the recommendation of non-Federal negotiators in 
the spring of 1995, the Secretary decided not to develop further 
regulations for the Direct Loan and FFEL programs. As a result, the 
regulations have not been updated in two decades to establish 
appropriate processes or provide other necessary information to allow 
borrowers to effectively utilize borrower defenses.
    For instance, the current regulations require an analysis of State 
law in order to determine the validity of a borrower defense claim. 
This approach creates complexities in determining which State law 
applies and potential inequities, as students in one State may receive 
different relief than students in another State, despite having common 
facts and claims.
    For example, the landscape of higher education has changed 
significantly over the past 20 years. In particular, the role of 
distance education in the higher education sector has grown 
substantially. In the 1999-2000 academic year, about eight percent of 
students were enrolled in at least one distance education course; by 
the 2007-2008 academic year, that number had grown to 20 percent.\70\ 
Recent IPEDS data indicate that in the fall of 2013, 26.4 percent of 
students at degree-granting, title IV participating institutions were 
enrolled in at least one distance education class.\71\ Much of this 
growth occurred within, and coincided with, the growth of the 
proprietary higher education sector. In the fall of 1995, degree-
granting, for-profit institutions enrolled approximately 240,000 
students. In the fall of 2014, degree-granting, for-profit schools 
enrolled over 1.5 million students.\72\ These changes to the higher 
education industry have allowed students to enroll in colleges based in 
other States and jurisdictions with relative ease.
---------------------------------------------------------------------------

    \70\ Learning at a Distance: Undergraduate Enrollment in 
Distance Education Courses and Degree Programs (http://nces.ed.gov/pubs2012/2012154.pdf).
    \71\ 2014 Digest of Education Statistics: Table 311.15: Number 
and percentage of students enrolled in degree-granting postsecondary 
institutions, by distance education participation, location of 
student, level of enrollment, and control and level of institution: 
fall 2012 and fall 2013.
    \72\ 2015 Digest of Education Statistics: Table 303.10: Total 
fall enrollment in degree-granting postsecondary institutions, by 
attendance status, sex of student, and control of institution: 
Selected years, 1947 through 2025 (http://nces.ed.gov/programs/digest/d14/tables/dt14_303.10.asp?current=yes).
---------------------------------------------------------------------------

    These changes have also had an impact on the Department's ability 
to apply its borrower defense regulations. The current borrower defense 
regulations do not identify which State's law is considered the 
``applicable'' State law on which the borrower's claim can be 
based.\73\ Generally, the regulation was assumed to refer to the laws 
of the State in which the institution was located; we did not have much 
occasion to address differences in protection for borrowers in States 
that offer little protection from school misconduct or borrowers who 
reside in one State but are enrolled via distance education in a 
program based in another State. Some States have extended their rules 
to protect these students, while others have not.
---------------------------------------------------------------------------

    \73\ In the few instances prior to 2015 in which claims have 
been recognized under current regulations, borrowers and the school 
were typically located in the same State.
---------------------------------------------------------------------------

    As noted in the preamble, Corinthian, a publicly traded for-profit 
higher education company that enrolled over 70,000 students at more 
than 100 campuses nationwide, filed for bankruptcy in 2015 after being 
the subject of multiple investigations and actions by Federal and State 
governments. While the Department is committed to ensuring that 
students harmed by Corinthian's misrepresentations receive the relief 
to which they are entitled under the current borrower defense and 
closed school discharge regulations, the Department also recognized 
that the existing rules made this process burdensome, both for 
borrowers and for the Department. As the Department began to determine 
the best process for dealing with the fall-out of the Corinthian 
bankruptcy, it became apparent that under the current process, 
significant Department resources would be required to review individual 
State laws to determine the law that would be applicable to claims that 
might be received from many of these individual borrowers. In order to 
create and oversee a process to provide debt relief for these 
Corinthian students who applied for Federal student loan discharges 
based on claims against Corinthian, the Department appointed a Special 
Master in June of 2015.
    As a result of this experience, the Department is proposing new 
regulations that would develop a Federal standard for borrower defense 
to help ensure that all Direct Loan borrowers have a process to obtain 
adequate loan relief for injury caused by the acts or omissions of the 
institutions they attended. The proposed regulations would also provide 
clarity to the process by which a borrower defense is asserted and 
resolved. To protect taxpayers and the Federal government, the 
Department also seeks to hold institutions responsible for their acts 
and omissions that give rise to borrower

[[Page 39388]]

defenses. The proposed regulations would also limit required 
arbitration or internal institutional dispute resolution processes for 
borrower defense claims.
    Additionally, to enhance and clarify other existing protections for 
students, the proposed regulations would update the basis for obtaining 
a false certification discharge, clarify the processes for false 
certification and closed school discharges, require institutions to 
provide applications and explain the benefits and consequences of a 
closed school discharge, and establish a process for a closed school 
discharge without an application for students who do not re-enroll in a 
title IV-participating institution within three years of an 
institution's closure. The proposed regulations would also codify the 
Department's practice that a discharge based on school closure, false 
certification, unpaid refund, or defense to repayment will result in 
the elimination or recalculation of the subsidized usage period 
associated with the loan discharged.
    The Department also proposes to amend the regulations governing the 
consolidation of Nursing Student Loans and Nurse Faculty Loans so that 
they align with the statutory requirements of section 428C(a)(4)(E) of 
the HEA; clarify rules regulating the capitalization of interest on 
defaulted FFEL Loans; require that proprietary schools with zero or 
negative loan repayment rates warn prospective and enrolled students of 
those repayment rate outcomes; require that a school disclose on its 
Web site and to prospective and enrolled students if it is required to 
provide financial protection to the Department; clarify the treatment 
of spousal income in the PAYE and REPAYE plans; and make other changes 
that we do not expect to have a significant economic impact.
    We believe that our proposals in this NPRM represent our best 
efforts to engage all sectors of the postsecondary industry and develop 
regulations that are both effective and practical.

Summary of Proposed Regulations

    The table below briefly summarizes the major provisions of the 
proposed regulations.

                                    Table 2--Summary of Proposed Regulations
----------------------------------------------------------------------------------------------------------------
                   Provision                           Reg section               Description of provision
----------------------------------------------------------------------------------------------------------------
                                          Borrower defense to repayment
----------------------------------------------------------------------------------------------------------------
Applicability..................................           Sec.   685.206  Clarifies that existing regulations
                                                                           apply to loans first disbursed before
                                                                           July 1, 2017.
State Law......................................           Sec.   685.206  Clarifies that a borrower defense
                                                                           claim may be asserted if an
                                                                           institution violates applicable State
                                                                           law as it relates to the making of
                                                                           the loan or the provision of
                                                                           educational services.
Federal Standard and Process...................           Sec.   685.222  Adds a new section addressing borrower
                                                                           defenses for loans first disbursed on
                                                                           or after July 1, 2017, and defines
                                                                           circumstances under which a borrower
                                                                           defense may be established.
                                                                           Establishes a process for asserting
                                                                           and determining a borrower defense
                                                                           claim for loans first disbursed
                                                                           before and after July 1, 2017.
Misrepresentation..............................            Sec.   668.71  Amends the definition of
                                                    Sec.   685.222(d)(2)   ``misrepresentation'' for what the
                                                                           Secretary may consider in determining
                                                                           whether schools engaged in
                                                                           misrepresentation for Sec.   668.71,
                                                                           adopts the definition for Sec.
                                                                           685.222, and in Sec.   685.222
                                                                           requires that a borrower must have
                                                                           reasonably relied on the
                                                                           misrepresentation.
Remedial Action and Recovery from the                     Sec.   685.206  Removes provision that the Secretary
 Institution.                                                              will not initiate action to recover
                                                                           after the end of the three-year
                                                                           record retention period.
                                                       Sec.   685.222(e)  Establishes that the Secretary may
                                                                           initiate an action to recover for the
                                                                           amount of relief resulting from an
                                                                           individually filed and determined
                                                                           borrower defense application.
                                                    Sec.   685.222(h)(5)  Indicates that the Secretary will
                                                                           recover the amount of relief
                                                                           resulting from a group process for
                                                                           borrower defenses with respect to
                                                                           loans made to attend an open school.
                                                          Sec.   685.308  Revises to describe grounds on which
                                                                           an institution causes a loss for
                                                                           which the Secretary holds schools
                                                                           accountable, along with the
                                                                           procedures to establish and enforce
                                                                           that liability.
Administrative Forbearance.....................     Sec.   685.205(b)(6)  Adds a mandatory administrative
                                                                           forbearance during the period when
                                                                           the Secretary is determining the
                                                                           borrower's eligibility for a borrower
                                                                           defense discharge.
                                                          Sec.   682.211  Mirrors the Direct Loan mandatory
                                                                           administrative forbearance for FFEL
                                                                           program loans.

[[Page 39389]]

 
Limits on Dispute Resolution Procedures........   Sec.   685.300(b)(11),  Adds to Direct Loan program
                                                                 (d)-(i)   participation agreement provisions
                                                                           relating to schools' use of certain
                                                                           dispute resolution procedures. Under
                                                                           these proposed provisions, schools
                                                                           may not: (1) Require students to
                                                                           pursue borrower defense complaints
                                                                           through an internal institutional
                                                                           process before the student presents
                                                                           the complaint to an accrediting
                                                                           agency or government agency; (2)
                                                                           require arbitration of a potential
                                                                           borrower defense claim asserted
                                                                           through a class action lawsuit until
                                                                           a court has denied class
                                                                           certification or dismissed the class
                                                                           claim, and, if that ruling may be
                                                                           subject to appellate review on an
                                                                           interlocutory basis, the time to seek
                                                                           such review has elapsed or the review
                                                                           has been resolved, or (3) compel a
                                                                           student to enter into a pre-dispute
                                                                           agreement to arbitrate a borrower
                                                                           defense claim, or to rely in any way
                                                                           on a pre-dispute arbitration
                                                                           agreement with respect to any aspect
                                                                           of a borrower defense claim.
                                                                          Requires institutions to include the
                                                                           notices and provisions in Sec.
                                                                           685.300(e)(3) in any agreements
                                                                           entered into after effective date of
                                                                           this regulation with a student
                                                                           recipient of a Direct Loan for
                                                                           attendance at the school, or, with
                                                                           respect to a Parent PLUS Loan, a
                                                                           student for whom the PLUS loan was
                                                                           obtained, including any agreement
                                                                           regarding arbitration.
                                                                          Requires institutions to notify the
                                                                           Secretary of the initial filing of
                                                                           the claim, whether in court or in
                                                                           arbitration, and provide copies of
                                                                           the complaint and any counterclaim,
                                                                           any pre-dispute arbitration agreement
                                                                           filed with the arbitrator or
                                                                           arbitration administrator, any
                                                                           dispositive motion filed by a party
                                                                           to the suit, and the ruling on any
                                                                           dispositive motion and the judgment
                                                                           issued by the court.
                                                                          For agreements executed before the
                                                                           effective date of the proposed
                                                                           regulation, requires institutions to
                                                                           comply with the regulations and
                                                                           either amend the agreements or notify
                                                                           students that the institution would
                                                                           not attempt to exercise those
                                                                           agreements in a manner proscribed by
                                                                           the proposed regulations.
                                                                           Notification would occur no later
                                                                           than exit counseling, or in the case
                                                                           of previously enrolled students who
                                                                           did not receive the updated exit
                                                                           counseling and who sue or file for
                                                                           arbitration, the date on which the
                                                                           institution files its initial
                                                                           response or answer to a complaint in
                                                                           a lawsuit or demand for arbitration
                                                                           made by a student who was not already
                                                                           provided with notice or amendment.
----------------------------------------------------------------------------------------------------------------
                                             Closed School Discharge
----------------------------------------------------------------------------------------------------------------
Provide Application............................     Sec.   668.14(b)(32)  Requires a school to provide to all
                                                                           enrolled students, after the
                                                                           Department initiates any action to
                                                                           terminate the school's participation,
                                                                           a closed school discharge application
                                                                           and a written disclosure of the
                                                                           benefits and consequences of a closed
                                                                           school discharge as an alternative to
                                                                           a teach-out.
Departmental Review of Guaranty Agency Denials.                     Sec.  Requires guaranty agency that denies a
                                                    682.402(d)(6)(ii)(F)   closed school discharge request to
                                                                           inform borrower of opportunity for
                                                                           review by the Secretary.
Discharge without Application..................                     Sec.  Authorizes the Department or a
                                                 674.33(g)(3)(iii); Sec.   guaranty agency acting with the
                                                     682.402(d)(8)(iii);   Department's permission to grant a
                                                    Sec.   685.214(c)(2)   closed school discharge without
                                                                           borrower application based on
                                                                           evidence in the Department's or
                                                                           guaranty agency's possession that the
                                                                           borrower did not subsequently re-
                                                                           enroll in a title IV institution
                                                                           within three years after the school
                                                                           closed.
----------------------------------------------------------------------------------------------------------------
                                          False Certification Discharge
----------------------------------------------------------------------------------------------------------------
Basis for Discharge............................           Sec.   685.215  Eliminates references to ``ability-to-
                                                                           benefit'' and establishes as grounds
                                                                           for a false certification discharge
                                                                           the certification of eligibility of a
                                                                           student who is not a high school
                                                                           graduate or the improper
                                                                           certification of a borrower's
                                                                           satisfactory academic progress.
                                                                          Borrower can also qualify for false
                                                                           certification discharge if the
                                                                           borrower failed to meet applicable
                                                                           State requirements for employment due
                                                                           to physical or mental condition, age,
                                                                           criminal record, or other reason
                                                                           accepted by the Secretary that would
                                                                           prevent the borrower from obtaining
                                                                           employment in the field for which the
                                                                           training program supported by the
                                                                           loan was intended.
Process........................................        Sec.   685.215(d)  Updates procedures and describes
                                                                           evidence the Department uses to
                                                                           determine eligibility for a false
                                                                           certification discharge.
                                                                          Also requires the Department to:
                                                                           Explain to the borrower the reasons
                                                                           for a denial and the evidence the
                                                                           determination was based on; provide
                                                                           the borrower with an opportunity to
                                                                           submit additional evidence; and
                                                                           notify the borrower if the
                                                                           determination changes based on the
                                                                           additional evidence submitted.

[[Page 39390]]

 
                                                Other Provisions
----------------------------------------------------------------------------------------------------------------
Disclosures and Warnings.......................     Sec.   668.41(h) and  Requires warning to enrolled and
                                                                     (i)   prospective students by a proprietary
                                                                           institution that does not qualify for
                                                                           a low borrowing exemption if its loan
                                                                           repayment rate is equal to or below
                                                                           zero percent. Requires disclosure by
                                                                           an institution from any sector that
                                                                           is required to provide financial
                                                                           protection to the Secretary such as
                                                                           an irrevocable letter of credit or
                                                                           cash under Sec.   668.175(d) or (f),
                                                                           or to establish a set-aside under
                                                                           Sec.   668.175(h). Specifies manner
                                                                           in which such disclosures must be
                                                                           made.
Interest Capitalization........................    Sec.   682.202(b)(1);  Clarifies that interest capitalization
                                                   Sec.   682.410(b)(4);   when a guaranty agency sells a
                                                          Sec.   682.405   rehabilitated loan is not permitted.
                                                                           Also clarifies that when a guaranty
                                                                           agency holds a defaulted FFEL Loan
                                                                           and the guaranty agency has suspended
                                                                           collection activity to give the
                                                                           borrower time to submit a closed
                                                                           school or false certification
                                                                           discharge application, capitalization
                                                                           is not permitted if collection on the
                                                                           loan resumes because the borrower
                                                                           does not return the appropriate form
                                                                           within the allotted timeframe.
150 Percent Direct Subsidized Loan Limit.......           Sec.   682.202  Codifies Department's current practice
                                                                           that a discharge based on school
                                                                           closure, false certification, unpaid
                                                                           refund, or defense to repayment will
                                                                           lead to the elimination (for full
                                                                           discharge) or recalculation (for
                                                                           partial discharge) of the subsidized
                                                                           usage period that is associated with
                                                                           the loan or loan discharged. If the
                                                                           discharge results in a remaining
                                                                           eligibility period greater than zero,
                                                                           the borrower is no longer responsible
                                                                           for interest that accrues on a Direct
                                                                           Subsidized Loan or portion of a
                                                                           Direct Consolidation Loan that repaid
                                                                           a Direct Subsidized Loan, unless the
                                                                           borrower again exceeds the 150
                                                                           percent limit with additional
                                                                           borrowing.
Electronic Death Certificate...................   Sec.   674.61(a); Sec.  Allows death discharges to be based on
                                                     682.402(b)(2); Sec.   an accurate and complete original or
                                                        685.212(a); Sec.   certified copy of the death
                                                               686.42(a)   certificate that is scanned and
                                                                           submitted electronically or through
                                                                           verification of the death through an
                                                                           authoritative Federal or State
                                                                           electronic database approved by the
                                                                           Secretary.
Debt Compromise Authority......................             34 CFR 30.70  Reflects increased debt compromise
                                                                           authority to $100,000.
                                                                          Clarifies that generally applicable
                                                                           limit does not apply to claims
                                                                           arising under FFEL, Direct Loans, or
                                                                           Perkins Loan programs and requires
                                                                           that the Department seek DOJ review
                                                                           for resolution of such claims over
                                                                           $1,000,000.
PAYE and REPAYE Clarifications.................    Sec.   685.209(a) and  For REPAYE, removes language
                                                                     (c)   regarding, and cross-references to,
                                                                           partial financial hardship.
                                                                          For REPAYE, makes it clear that no
                                                                           adjustment is made to a borrower's
                                                                           monthly payment for a spouse's
                                                                           eligible loan debt if the spouse's
                                                                           income is excluded from the
                                                                           calculation of the borrower's monthly
                                                                           payment.
                                                                          For PAYE and REPAYE, makes it clear
                                                                           that the inclusion of FFEL Loans in
                                                                           the definition of ``eligible loans''
                                                                           is to take them into consideration
                                                                           for certain terms and conditions of
                                                                           the PAYE and REPAYE plans, but does
                                                                           not allow FFEL program loans to be
                                                                           repaid under these plans.
Nurse Faculty Loan, Federal Perkins, or Health            Sec.   685.220  Provides that nurse faculty loans made
 Professions Student Loan Consolidation.                                   under part E of title VIII of the
                                                                           Public Health Service Act may be
                                                                           consolidated into a Direct
                                                                           Consolidation Loan. Reflects updates
                                                                           to statutory language.
                                                                          Revises Sec.   685.220(d)(1)(i) to
                                                                           allow a borrower to obtain a Direct
                                                                           Consolidation Loan if the borrower
                                                                           consolidates at least one eligible
                                                                           loan under Sec.   685.222(b). This
                                                                           reflects the Department's long-
                                                                           standing policy that generally Direct
                                                                           Program Loans should be given the
                                                                           same treatment for parallel aspects
                                                                           of FFEL Loans, unless otherwise
                                                                           provided for in the HEA or the
                                                                           Department's regulations.
----------------------------------------------------------------------------------------------------------------

Discussion of Costs and Benefits

    The primary potential benefits of the proposed regulations are: (1) 
An updated and clarified process and a Federal standard to improve the 
borrower defense process and usage of the borrower defense process and 
to increase protections for students; (2) increased financial 
protections for taxpayers and the Federal government; (3) additional 
information to help students, prospective students, and their families 
make educated decisions based on information about an institution's 
financial soundness and its borrowers' loan repayment outcomes; (4) 
improved conduct of schools by holding individual institutions 
accountable and thereby deterring misconduct by other schools; (5) 
improved awareness and usage, where appropriate, of closed school and 
false certification discharges; and (6) technical changes to improve 
the administration of the title IV, HEA programs.
    We have considered and determined the primary costs and benefits of 
the proposed regulations for the following groups or entities that we 
expect to be impacted by the proposed regulations:
     Students and borrowers
     Institutions
     Guaranty agencies and loan servicers
     Federal, State, and local government

Borrower Defense, Closed School Discharges, and False Certification 
Discharges

Students and Borrowers

    Borrowers would be the primary beneficiary of the proposed 
regulations. The proposed regulations would allow borrowers to navigate 
the borrower defense process more efficiently and effectively. A 
simplified process may encourage borrowers who may have

[[Page 39391]]

been unaware of the process, or intimidated by the complexity of the 
process in the past, to file a claim.
    Furthermore, these proposed changes could reduce the number of 
borrowers who are struggling to meet their student loan obligations. 
During the public comment periods of the negotiated rulemaking 
sessions, many public commenters who were borrowers mentioned that they 
felt that they had been defrauded by their institutions of higher 
education and were unable to pay their student loans or obtain debt 
relief under the current regulations. Future borrowers are less likely 
to face these misrepresentations, since the financial consequences to 
schools would be dire.
    Providing an automatic forbearance with an option for the borrower 
to decline the temporary relief and continue making payments would 
reduce the potential burden on borrowers pursuing borrower defenses. 
These borrowers would be able to focus on supplying the information 
needed to process their borrower defense claims without the pressure of 
continuing to make payments on loans for which they are currently 
seeking relief. When claims are successful, there will be a transfer 
between the Federal government and affected student borrowers as 
balances are forgiven and some past payments are returned. In the 
scenarios described in the Net Budget Impacts section of this analysis, 
those transfers range from $182 million to $5.8 billion annually.
    Borrowers who ultimately have their loans discharged will be 
relieved of debts they may not have been able to repay, and that debt 
relief can ultimately allow them to become bigger participants in the 
economy, possibly buying a home, saving for retirement, or paying for 
daycare. They also will be able to return into the higher education 
marketplace and pursue credentials they need for career advancement. To 
the extent borrowers have subsidized loans, the elimination or 
recalculation of the borrowers' subsidized usage period could relieve 
them of their responsibility for accrued interest and make them 
eligible for additional subsidized loans, which could make returning to 
higher education a more acceptable option.
    The proposed regulations would also give borrowers more information 
with which they can make informed decisions about the institutions they 
choose to attend. An institution would be required to disclose the 
reasons that it was required to obtain a letter of credit. Recent 
events involving closure of several large proprietary institutions have 
shown the need for lawmakers, regulatory bodies, State authorizers, 
taxpayers, and students to be more broadly aware of circumstances that 
could affect the continued existence of an institution. The disclosure 
of institutions' status as being required to provide financial 
protection would allow borrowers to receive early warning signs that an 
institution's financial or accreditation status may be at risk, and 
therefore borrowers may be able to withdraw or transfer to an 
institution in better standing in lieu of continuing to work towards 
earning credentials that may have limited value.
    Proprietary institutions would also be required to provide a 
warning to prospective and enrolled students if their repayment rate is 
equal to or below zero percent. To estimate the effect of the repayment 
rate warning on institutions, the Department analyzed College Scorecard 
data and found that 493 of 1,174 proprietary institutions with 
repayment rates in the data had rates less than or equal to 50 percent, 
roughly equivalent to a repayment rate of zero percent or below, which 
would trigger the warning requirement under the proposed regulations. 
This analysis does not take into account the low borrowing exemption, 
and does not include graduate students.

Institutions

    Institutions would bear many of the costs of the proposed 
regulations, which fall into three categories: Paperwork costs 
associated with compliance with the regulations; other compliance costs 
that may be incurred as institutions adapt their business practices and 
training to ensure compliance with the regulations; and costs 
associated with obtaining letters of credit or suitable equivalents if 
required by the institution's performance under a variety of triggers. 
Additionally, there may be a potentially significant amount of funds 
transferred between institutions and the Federal government as 
reimbursement for successful claims. Some institutions may close some 
or all of their programs if their activities generate large numbers of 
borrower defense claims.
    A key consideration in evaluating the effect on institutions is the 
distribution of the impact. While all institutions participating in 
title IV loan programs are subject to the possibility of borrower 
defense, closed school, and false certification claims and the 
reporting requirements in the proposed regulations, the Department 
expects that fewer institutions will engage in conduct that generates 
borrower defense claims. Eventually, the proposed regulations can be 
expected to reduce the number of schools that would face the most 
significant costs to come into compliance, transfers to reimburse the 
government for successful claims, costs to obtain required letters of 
credit, and disclosure of borrower defense claims against the schools. 
In the scenarios described in the Net Budget Impacts section of this 
analysis, the annual transfers from institutions to students, via the 
Federal government, as reimbursement for successful claims ranges from 
$55 million to $3.8 billion. On the other hand, it is possible that 
high-quality, compliant institutions, especially in the for-profit 
sector, will see benefits if the overall reputation of the sector 
improves as a result of (1) more trust that enforcement against bad 
actors will be effective, and (2) the removal of bad schools from the 
higher education marketplace, freeing up market share for the remaining 
schools.
    The accountability framework in the proposed regulations requiring 
institutions to provide financial protection in response to various 
triggers would generate costs for institutions. Some of the triggering 
provisions would affect institutions differently depending upon their 
type and control, as, for example, only publicly traded institutions 
are subject to delisting or SEC suspension of trading, only proprietary 
institutions are subject to the 90/10 rule, and public institutions are 
not subject to the financial protection requirements. To the extent 
data were available, the Department evaluated the financial protection 
triggers to analyze the expected impact on institutions. Several of the 
triggers are based on existing performance measures and are aimed at 
identifying institutions that may face sanctions and experience 
difficulty meeting their financial obligations. The triggers and their 
potential consequences are discussed in Table 3.

[[Page 39392]]



                       Table 3--Automatic Triggers
------------------------------------------------------------------------
             Trigger                  Description           Impact
------------------------------------------------------------------------
 Automatic Triggers (institution found to be not financially responsible
  under Sec.   668.171 and must qualify under an alternative standard)
------------------------------------------------------------------------
State or Federal agency actions.  If currently or in  Since 2010, at
                                   three most          least 25
                                   recently            institutions have
                                   completed award     been investigated
                                   years an            or reached
                                   institution has     settlements with
                                   to repay a debt     State AGs, with
                                   or liability        some being
                                   arising from an     involved in
                                   investigation by    actions by
                                   a State, Federal,   multiple States.
                                   or other            Federal agencies,
                                   oversight entity,   including the
                                   or settles or       Department, DOJ,
                                   resolves a suit     FTC, CFPB, and
                                   brought by one of   the SEC have been
                                   those entities      involved in
                                   related to the      actions against
                                   making of a         at least 20
                                   Federal loan or     institutions,
                                   the provision of    with multiple
                                   educational         actions against
                                   services, or has    some schools.
                                   been sued by a     Amount of
                                   government agency   financial
                                   for such claims,    protection
                                   unless that suit    calculated as 10
                                   has since been      percent or more,
                                   dismissed.          as determined by
                                   Material if         the Secretary, of
                                   amount exceeds      the amount of
                                   the audit           Direct Loans
                                   threshold in 2      received by the
                                   CFR part 200,       institution in
                                   currently           the most recently
                                   $750,000, or 10     completed fiscal
                                   percent of          year.
                                   current assets.
                                  For judgments
                                   entered against
                                   the institution
                                   in most recent
                                   fiscal year in
                                   suit by
                                   government
                                   agency, if amount
                                   exceeds
                                   thresholds above.
                                  For suits by
                                   State, Federal,
                                   or other
                                   oversight
                                   entities
                                   unrelated to
                                   Federal loans or
                                   provision of
                                   educational
                                   services, if the
                                   potential damages
                                   exceed 10 percent
                                   of current assets.
                                  For pending qui
                                   tam suits or
                                   suits by private
                                   parties related
                                   to borrower
                                   defense-type
                                   claims if the
                                   suit has survived
                                   a motion for
                                   summary judgment
                                   and the suit
                                   seeks recovery of
                                   10 percent of
                                   current assets or
                                   more.
Repayments to the Secretary.....  Currently or at     Amount of required
                                   any time in the     financial
                                   three most          protection
                                   recently            calculated as the
                                   completed award     greatest annual
                                   years, the          loss incurred in
                                   institution was     the last three
                                   required to repay   completed award
                                   the Secretary for   years plus the
                                   any losses from     portion of
                                   borrower defense    outstanding
                                   claims that         claims
                                   exceeded the        represented by
                                   lesser of the       the ratio of
                                   audit threshold     successful
                                   amount in 2 CFR     borrower claims
                                   part 200            to total claims
                                   (currently          over the three
                                   $750,000) or 10     most recently
                                   percent of          completed award
                                   current assets.     years.
Accrediting Agency Actions......  If currently or at  In the past three
                                   any time in the     fiscal years, 52
                                   three most          non-public
                                   recently            institutions have
                                   completed award     lost eligibility
                                   years, the          based on
                                   institution's       accreditation
                                   primary             issues and 54
                                   accrediting         were put on
                                   agency required     heightened cash
                                   the institution     monitoring level
                                   to submit a teach-  two.
                                   out plan for
                                   itself or any
                                   additional
                                   branches or
                                   locations or
                                   placed the
                                   institution on
                                   probation, issued
                                   a show-cause
                                   order, or placed
                                   the institution
                                   in a similar
                                   accreditation
                                   status for
                                   failing to meet
                                   one or more of
                                   the agency's
                                   standards, and
                                   the accrediting
                                   agency does not
                                   notify the
                                   Secretary within
                                   six months that
                                   the institution
                                   has come into
                                   compliance.
Loan Agreements and Obligations.  If an institution   ..................
                                   discloses in a
                                   note in its most
                                   recently audited
                                   financial
                                   statement that it
                                   violated a
                                   provision or
                                   requirement in a
                                   loan agreement
                                   with its largest
                                   secured creditor
                                   or failed to make
                                   a payment for
                                   more than 120
                                   days to its
                                   largest secured
                                   creditor. Also,
                                   the occurrence of
                                   a monetary or
                                   nonmonetary
                                   default or
                                   delinquency
                                   event, as defined
                                   under the terms
                                   of a security or
                                   loan agreement
                                   between the
                                   institution and
                                   the creditor with
                                   the largest
                                   secured extension
                                   of credit to the
                                   institution, or
                                   the occurrence of
                                   any other event
                                   as provided under
                                   such an agreement
                                   that triggers or
                                   provides a
                                   recourse by the
                                   creditor for an
                                   increase in
                                   collateral,
                                   changes in
                                   contractual
                                   obligations, an
                                   increase in
                                   interest rates or
                                   payments, or
                                   imposes some
                                   sanction,
                                   penalty, or fee
                                   upon the
                                   institution.
Non-Title IV Revenue............  If the institution  In the most recent
                                   fails the 90/10     90/10 report, 14
                                   revenue test in     institutions
                                   the most recently   received 90
                                   completed fiscal    percent or more
                                   year. Applies to    of their revenues
                                   proprietary         from title IV
                                   institutions only.  funds. The total
                                                       title IV funding
                                                       for those
                                                       institutions in
                                                       award year (AY)
                                                       2013-14 was $57
                                                       million.
Publicly Traded Institutions....  If the              ..................
                                   institution's
                                   stock is
                                   involuntarily
                                   delisted from the
                                   exchange on which
                                   it is traded, the
                                   SEC warns the
                                   institution it
                                   will suspend
                                   trading on the
                                   institution's
                                   stock, or the
                                   institution fails
                                   to file a
                                   required annual
                                   or quarterly
                                   report with the
                                   SEC on time, or
                                   the institution
                                   disclosed or was
                                   required to
                                   disclose in a
                                   report filed with
                                   the SEC a
                                   judicial or
                                   administrative
                                   proceeding not
                                   covered under the
                                   triggers listed
                                   above.

[[Page 39393]]

 
Gainful Employment..............  For institutions    The Department
                                   where over 50       found that of
                                   percent of          3,958
                                   students who        institutions that
                                   receive title IV    reported GE
                                   aid are enrolled    programs for 2013-
                                   in GE programs,     14, 1,059
                                   if more than 50     institutions had
                                   percent of those    a D/E rate in our
                                   enrolled in GE      2011 GE
                                   programs are in     Informational
                                   programs that       Rates and over 50
                                   failed or are in    percent of their
                                   the zone under      enrollment in GE
                                   the D/E rates       programs. Of
                                   measure.            these, 107 non-
                                                       public
                                                       institutions had
                                                       more than 50
                                                       percent of their
                                                       GE enrollment in
                                                       zone or failing
                                                       programs. Title
                                                       IV aid received
                                                       by these
                                                       institutions in
                                                       AY2014-15 totaled
                                                       $1.02 billion.
                                                       The Department
                                                       will continue to
                                                       monitor this
                                                       trigger as more
                                                       recent D/E rates
                                                       become available.
Withdrawal of Owner's Equity....  For institutions    ..................
                                   with a composite
                                   score under 1.5,
                                   any withdrawal of
                                   owner's equity
                                   from the
                                   institution by
                                   any means,
                                   including by
                                   declaring a
                                   dividend.
Cohort Default Rates............  Institution's two   From the most
                                   most recent         recently released
                                   cohort default      official CDR
                                   rates are 30        rates, for AY2012-
                                   percent or          13 and AY2011-12,
                                   greater. Does not   37 of 3,081 non-
                                   apply if            public
                                   institution files   institutions that
                                   a challenge,        had CDR rates in
                                   request for         both years were
                                   adjustment, or      over 30 percent
                                   appeal with         in both years.
                                   respect to its      Title IV aid
                                   CDR, and that       received by these
                                   action results in   institutions in
                                   reducing the CDR    AY2014-15 totaled
                                   below 30 percent    $27.8 million.
                                   or the
                                   institution not
                                   losing
                                   eligibility or
                                   not being placed
                                   on provisional
                                   certification.
------------------------------------------------------------------------
                         Discretionary Triggers
------------------------------------------------------------------------
Significant Fluctuation in        There are           The Department
 Direct Loan or Pell Grant         significant         looked at
 Volumes.                          fluctuations in     fluctuations in
                                   Direct Loan or      Direct Loan
                                   Pell Grant funds,   amounts and found
                                   or a combination    that 991 of 3,590
                                   of those funds,     non-public
                                   received by the     institutions had
                                   institution in      an absolute
                                   consecutive award   change in Direct
                                   years that cannot   Loan volume of 25
                                   be explained by     percent or more
                                   changes in the      between the 2013-
                                   institutions'       14 and 2014-15
                                   programs. No        award years.
                                   specific
                                   threshold is
                                   established.
High Annual Dropout Rates.......  High dropout rates  The Department
                                   as calculated by    analyzed College
                                   the Secretary. No   Scorecard data to
                                   specific            develop a
                                   threshold is        withdrawal rate
                                   established.        within six years.
                                                       Of 928
                                                       proprietary
                                                       institutions with
                                                       data, 482 had
                                                       rates from 0 to
                                                       20 percent, 415
                                                       from 20 to 40
                                                       percent, 30 from
                                                       40 to 60 percent,
                                                       and 1 from 60 to
                                                       80 percent. Of
                                                       1,058 private not-
                                                       for-profit
                                                       institutions with
                                                       data, 679 had
                                                       rates from 0 to
                                                       20 per cent, 328
                                                       from 20 to 40
                                                       percent, 51 from
                                                       40 to 60 percent,
                                                       and none above 60
                                                       percent. Of 1,476
                                                       public
                                                       institutions with
                                                       data, 857 had
                                                       rates from 0 to
                                                       20 per cent, 587
                                                       from 20 to 40
                                                       percent, 32 from
                                                       40 to 60 percent,
                                                       and none above 60
                                                       percent.
State Licensing Agency..........  Institution is      ..................
                                   cited by State
                                   licensing or
                                   authorizing
                                   agency for
                                   failing State or
                                   agency
                                   requirements.
Financial Stress Test...........  The institution     ..................
                                   fails a financial
                                   stress test used
                                   to evaluate
                                   whether the
                                   institution has
                                   sufficient
                                   resources to
                                   absorb losses
                                   that may be
                                   incurred as a
                                   result of adverse
                                   conditions and
                                   continue to meet
                                   its obligations
                                   to students and
                                   to the Secretary.
Credit Rating...................  Institution or      According to
                                   corporate parent    Moody's Investors
                                   has non-            Services, it
                                   investment grade    rates over 500
                                   bond or credit      universities
                                   rating.             representing the
                                                       majority of debt
                                                       in the sector.
                                                       This includes
                                                       over 230 four-
                                                       year public
                                                       institutions,
                                                       which are exempt
                                                       from the
                                                       financial
                                                       protection
                                                       triggers, and
                                                       almost 275
                                                       private colleges
                                                       and universities.
                                                       Of these, only 12
                                                       were below the
                                                       Baa3 rating for
                                                       investment grade
                                                       as of December
                                                       2014, but the
                                                       report did note
                                                       that downgrades
                                                       were more common
                                                       than
                                                       upgrades.\74\
SEC 8-K Reporting...............  If an institution   At least eight
                                   reports an          publicly traded
                                   adverse event to    institutions have
                                   the SEC on a Form   reported events
                                   8-K.                in Form 8-K
                                                       filings, with
                                                       most reporting
                                                       multiple events
                                                       in the past five
                                                       years.
------------------------------------------------------------------------

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

    \74\ See Moody's Investors Service, The Financial & Strategic 
Outlook for Private Colleges, January 5, 2015, available at 
www.cic.edu/News-and-Publications/Multimedia-Library/CICConferencePresentations/2015%20Presidents%20Institute/20150105-The%20Financial%20and%20Strategic%20Outlook%20for%20Private%20Colleges%205.pdf.
_____________________________________-

    In addition to any resources institutions would devote to training 
or changes in business practices to improve compliance with the 
proposed regulations, institutions would incur costs associated with 
the reporting and disclosure requirements of the proposed regulations. 
This additional workload is discussed in more detail under Paperwork 
Reduction Act of 1995. In total, the proposed regulations are estimated 
to increase burden on institutions participating in the title IV, HEA 
programs by 384,293 hours. The monetized cost of this burden on 
institutions, using wage data developed using BLS data available at 
www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $14,045,915. This cost was 
based on an hourly rate of $36.55.

Guaranty Agencies and Loan Servicers

    Several provisions may impose a cost on guaranty agencies or 
lenders, particularly the limits on interest capitalization. Loan 
servicers may have to update their process to accept electronic death 
certificates, but

[[Page 39394]]

increased use of electronic documents should be more efficient over the 
long term. As indicated in the Paperwork Reduction Act of 1995 section 
of this preamble, the proposed regulations are estimated to increase 
burden on guaranty agencies and loan servicers by 7,622 hours related 
to the mandatory forbearance for FFEL borrowers considering 
consolidation for a borrower defense claim and reviews of denied closed 
school claims. The monetized cost of this burden on guaranty agencies 
and loan servicers, using wage data developed using BLS data available 
at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $278,584. This cost was 
based on an hourly rate of $36.55.

Federal, State, and Local Governments

    In addition to the costs detailed in the Net Budget Impacts section 
of this analysis, the proposed regulations would affect the Federal 
government's administration of the title IV, HEA programs. The borrower 
defense process in the proposed regulations would provide a framework 
for handling claims in the event of significant institutional 
wrongdoing. The Department may incur some administrative costs or 
shifting of resources from other activities if the number of 
applications increases significantly and a large number of claims 
require hearings. Additionally, to the extent borrower defense claims 
are not reimbursed by institutions, Federal government resources that 
could have been used for other purposes will be transferred to affected 
borrowers. Taxpayers will bear the burden of these unreimbursed claims. 
In the scenarios presented in the Net Budget Impacts section of this 
analysis, annualized unreimbursed claims range from $64 million to $4.1 
billion.
    The accountability framework and financial protection triggers 
would provide some protection for taxpayers as well as potential 
direction for the Department and other Federal and State investigatory 
agencies to focus their enforcement efforts. The financial protection 
triggers may potentially assist the Department as it seeks to identify, 
and take action regarding, material actions and events that are likely 
to have an adverse impact on the financial condition or operations of 
an institution. In addition to the current process where, for the most 
part, the Department determines annually whether an institution is 
financially responsible based on its audited financial statements, 
under these proposed regulations the Department may determine at the 
time a material action or event occurs that the institution is not 
financially responsible.

Other Provisions

    The technical corrections and additional changes in the proposed 
regulations should benefit student borrowers and the Federal 
government's administration of the title IV, HEA programs. Updates to 
the acceptable forms of certification for a death discharge would be 
more convenient for borrowers' families or estates and the Department. 
The provision for consolidation of Nurse Faculty Loans reflects current 
practice and gives those borrowers a way to combine the servicing of 
all their loans. Many of these technical corrections and changes 
involve relationships between the student borrowers and the Federal 
government, such as the clarification in the REPAYE treatment of 
spousal income and debt, and they are not expected to significantly 
impact institutions.

Net Budget Impacts

    The proposed regulations are estimated to have a net budget impact 
in costs over the 2017-2026 loan cohorts ranging between $1.997 billion 
in the lowest impact scenario to $42.698 billion in the highest impact 
scenario. A cohort reflects all loans originated in a given fiscal 
year. Consistent with the requirements of the Credit Reform Act of 
1990, budget cost estimates for the student loan programs reflect the 
estimated net present value of all future non-administrative Federal 
costs associated with a cohort of loans.
    The provisions most responsible for the costs of the proposed 
regulations are those related to the discharge of borrowers' loans, 
especially the changes to borrower defense and closed school 
discharges. When an institution engages in behavior that could result 
in successful borrower defense claims against it, there are several 
possible methods borrowers could pursue to obtain relief under the 
proposed regulations. If the level of misconduct and resulting 
investigations and demands for financial protection lead to the closure 
of the institution, borrowers that fall within the applicable 
timeframes may choose a closed school discharge. If applicable, 
borrowers could also consider a false certification discharge based on 
the institution falsely certifying the borrower's high school diploma 
or satisfactory academic progress. The cost of these two options is 
discussed in the Closed School and False Certification Discharges 
discussion of this Net Budget Impacts section. If the institution does 
not close, the borrower cannot or does not pursue closed school or 
false certification discharges, or the Secretary determines the 
borrower's claim is better suited to a borrower defense group process, 
the borrower may pursue a borrower defense claim.

Borrower Defense Discharges

    The proposed regulations would establish a Federal standard for 
borrower defense claims related to loans first disbursed on or after 
July 1, 2017, as well as describe the process for the assertion and 
resolution of all borrower defense claims--both those made for Direct 
Loans first disbursed prior to July 1, 2017, and for those made under 
the proposed regulations after that date. As indicated in this 
preamble, while regulations governing borrower defense claims have 
existed since 1995, those regulations have rarely been used. Therefore, 
the Department has used the limited data it has available on borrower 
defense claims, especially information about the results of the 
collapse of Corinthian, projected loan volumes, Departmental expertise, 
the discussions at negotiated rulemaking, and information about past 
investigations into the type of institutional acts or omissions that 
would give rise to borrower defense claims to develop scenarios that 
the Department believes will capture the range of net budget impacts 
associated with the borrower defense proposed regulations. The 
Department will continue to refine these estimates, welcomes comments 
about the assumptions used in developing them, and will consider those 
comments as the final regulations are developed.
    While there are many factors and details that will determine the 
cost of the proposed regulations, ultimately a borrower defense claim 
entered into the student loan model (SLM) by risk group, loan type, and 
cohort will result in a reduced stream of cash flows compared to what 
the Department would have expected from a particular cohort, risk 
group, and loan type. The net present value of the difference in those 
cash flow streams generates the expected cost of the proposed 
regulations. In order to generate an expected level of claims for 
processing in the SLM, the Department used President's Budget 2017 
(PB2017) loan volume estimates to identify the maximum potential 
exposure to borrower defense claims for each cohort, loan type, and 
sector. While all of the PB2017 projected Direct Loan volume for the 
2017 to 2026 cohorts of over $1 trillion is subject to the proposed 
regulations, the Department expects only a fraction of that amount to 
be affected by institutional behavior that

[[Page 39395]]

results in a borrower defense claim (labeled as ``Misrep Scenario'' in 
Table 4). Additionally, while FFEL, Perkins, and certain other Federal 
student loan borrowers are able to claim relief under the Direct Loan 
process by consolidating into a Direct Loan, borrowers may choose not 
to consolidate because they may lose some benefits in doing so or 
because they have determined that their chances of success under the 
borrower defense process may not warrant the step of consolidation. As 
a result, the percentage of that volume that consolidates will also 
affect the estimated net budget impact. The budget impact would be 
further affected by the percentage of potentially eligible borrowers 
who successfully pursue a claim (labeled as ``Borr Claim Pct'' in Table 
4) and the level of recoveries the Department is able to receive from 
institutions subject to borrower defense claims (labeled as ``Recovery 
Pct'' in Table 4). The scenarios presented in this budget estimate 
involve assumptions about these factors as shown in Table 4. The 
Department also faced a challenge in establishing the appropriate 
baseline against which to compare the costs of the regulation. Due to 
the limited history of borrower defense claims, existing budget 
estimates contain no data from which to devise a baseline. While many 
borrowers who will pursue a claim through the new process would have 
been able to do so under the existing standard, the Department is 
attributing their claims to the proposed regulations. That is, while 
the costs we are describing here are the actual projected costs of 
borrower defense discharges, not all of them are attributable to the 
new standard proposed in this regulation. Another factor that could 
mitigate the costs to the Federal government of the proposed 
regulations (and change the nature of the costs experienced by affected 
institutions) is that elimination or modification of the practices 
giving rise to borrower defense claims could improve outcomes for 
student borrowers. In the scenarios, we assume that 4-year institutions 
may be able to implement training or practice changes faster than some 
smaller 2-year institutions, resulting in a lower upper end of the 
range for the Misrep Scenario 2. To avoid underestimating the potential 
cost of the proposed regulations, the Department did not explicitly 
adjust its estimates for this factor.

                                                        Table 4--Assumptions for Budget Scenarios
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Misrep          Misrep        Borr claim      Borr claim     Recovery  pct   Recovery  pct
                         Sector                           scenario 1  (%  scenario 2  (%   pct A  (% of    pct B  (% of      1  (% of        2  (% of
                                                            of volume)      of volume)        volume)         volume)         claim)          claim)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2yr or less public......................................             0.5               2              10              75              30              65
2yr or less private not-for-profit......................             0.5               2              10              75              30              65
2yr or less private for profit..........................               5              25              10              75              30              65
4yr public..............................................             0.5               1              10              75              30              65
4yr private not-for-profit..............................             0.5               1              10              75              30              65
4yr private for profit..................................               5              20              10              75              30              65
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The combined application of these assumptions created the eight (= 
two Misrep Scenarios x two Borr Claim Pct x two Recovery Pct) scenarios 
evaluated in the SLM as an increase in the claims rate. Scenario 1A2, 
the lowest Federal budget impact scenario, assumes that institutional 
misconduct is not widespread, but instead limited to actors 
representing a small share of loan volume. It also assumes that the 
increased information about the availability of borrower defense relief 
does not lead to a significant increase in the percentage of borrowers 
making a claim, and that the Department recovers a substantial portion 
of successful claims from institutions. As shown in Table 4, the other 
end of the range is represented by Scenario 2B1, in which a high 
percentage of borrowers from institutions representing a significant 
percent of loan volume make successful claims and the Department is 
unable to recover a significant amount from institutions. The 
Department also estimated the impact if the Department received no 
recoveries from institutions for each combination of misrepresentation 
and borrower claim percentage scenario, the results of which are 
discussed after Table 5.
    The Department does not specify how many institutions are 
represented in each scenario, as the scenario could represent a 
substantial number of institutions engaging in acts giving rise to 
borrower defense claims or could represent a small number of 
institutions with significant loan volume subject to a large number of 
claims. According to Federal Student Aid data center loan volume 
reports,\75\ the five largest proprietary institutions in loan volume 
received 26 percent of Direct Loans disbursed in the proprietary sector 
in award year 2014-15 and the 50 largest represent 69 percent. The 
Department has not assigned specific probabilities to any of the 
scenarios and the results in Table 5 and the likelihood of any one 
scenario will depend on how institutions conduct their activities to 
ensure compliance, how much borrowers' awareness of their options 
increases, and the extent of the deterrent effect that the Department's 
and other agencies' efforts to uncover and sanction misconduct through 
investigations and enforcement may have on the industry.
---------------------------------------------------------------------------

    \75\ Federal Student Aid, Student Aid Data: Title IV Program 
Volume by School, available at https://studentaid.ed.gov/sa/about/data-center/student/title-iv.

                            Table 5--Budget Estimates for Borrower Defense Scenarios
----------------------------------------------------------------------------------------------------------------
                                                                     Estimated      Annualized      Annualized
                                                                     costs for        cost to         cost to
                            Scenario                              cohorts  2017-   Federal Gov't   Federal Gov't
                                                                    2026 ($mns)         (3%             (7%
                                                                                   discounting)    discounting)
----------------------------------------------------------------------------------------------------------------
1A1:............................................................          $1,297            $128            $127
1A2:............................................................             646              64              63

[[Page 39396]]

 
1B1:............................................................          10,174           1,007             993
1B2:............................................................           5,072             502             446
2A1:............................................................           5,498             544             537
2A2:............................................................           2,752             272             269
2B1:............................................................          41,347           4,092           4,039
2B2:............................................................          20,674           2,046           2,020
----------------------------------------------------------------------------------------------------------------

    The transfers among the Federal government and affected borrowers 
and institutions associated with each scenario above are included in 
Table 6, with the difference in amounts transferred to borrowers and 
received from institutions generating the budget impact in Table 5. In 
the absence of any recovery from institutions, taxpayers would bear the 
full cost of successful claims from affected borrowers. At a 3 percent 
discount rate, the annualized costs with no recovery are approximately 
$184 million for Misrep_Scenario_1 and Borr Claim_Pct_A, $1.44 billion 
for Misrep_Scenario_1 and Borr Claim_Pct_B, $778 million for 
Misrep_Scenario_2 and Borr Claim_Pct_A, and $5.85 billion for 
Misrep_Scenario_2 and Borr Claim_Pct_B. At a 7 percent discount rate, 
the annualized costs with no recovery are approximately $180 million 
for Misrep_Scenario_1 and Borr Claim_Pct_A, $1.42 billion for 
Misrep_Scenario_1 and Borr Claim_Pct_B, $768 million for 
Misrep_Scenario_2 and Borr Claim_Pct_A, and $5.77 billion for 
Misrep_Scenario_2 and Borr Claim_Pct_B. This potential increase in 
costs demonstrates the significant effect that recoveries from 
institutions have on the net budget impact of the borrower defense 
provisions.

Closed School Discharge and False Certification Discharges

    In addition to the provisions previously discussed, the proposed 
regulations also would make changes to the closed school discharge 
process, which are estimated to cost $1.351 billion for cohorts 2017-
2026. The proposed regulations include requirements to inform students 
of the consequences, benefits, requirements, and procedures of the 
closed school discharge option, including providing students with an 
application form, and establishes a Secretary-led discharge process for 
borrowers who qualify but do not apply and, according to the 
Department's information, did not subsequently re-enroll in any title 
IV-eligible institution within three years from the date the school 
closed. The increased information about and automatic application of 
the closed school discharge option and possible increase in school 
closures related to the institutional accountability provisions in the 
proposed regulations are likely to increase closed school claims. Chart 
1 provides the history of closed schools, which totals 12,040 schools 
through April 2016.
[GRAPHIC] [TIFF OMITTED] TP16JN16.000

    In order to estimate the effect of the proposed changes to the 
discharge process that would grant relief without an application after 
a three-year period, the Department looked at all Direct Loan borrowers 
at schools that closed from 2008-2011 to see what percentage of them 
had not received a closed school discharge and had no record of title-
IV aided enrollment in the three years following their school's 
closure. Of 2,287 borrowers in the file, 47 percent

[[Page 39397]]

had no record of a discharge or subsequent title IV aid. This does not 
necessarily mean they did not re-enroll at a title IV institution, so 
this assumption may overstate the potential effect of the three-year 
discharge provision. The Department used this information and the high 
end of closed school claims in recent years to estimate the effect of 
the proposed regulations related to closed school discharges. The 
resulting estimated cost to the Federal government of the closed school 
provisions is $1.351 billion over the 2017 to 2026 loan cohorts.
    The proposed regulations would also change the false certification 
discharge process to include instances in which schools certified the 
eligibility of a borrower who is not a high school graduate (and does 
not meet applicable alternative to high school graduate requirements) 
where the borrower would qualify for a false certification discharge if 
the school falsified the borrower's high school graduation status; 
falsified the borrower's high school diploma; or referred the borrower 
to a third party to obtain a falsified high school diploma. Under 
existing regulations, false certification discharges represent a very 
low share of discharges granted to borrowers. The proposed regulations 
would replace the explicit reference to ability to benefit requirements 
in the false certification discharge regulations with a more general 
reference to requirements for admission without a high school diploma 
as applicable when the individual was admitted, and specify how an 
institution's certification of the eligibility of a borrower who is not 
a high school graduate (and does not meet applicable alternative to 
high school graduate requirements) could give rise to a false 
certification discharge claim. However, the Department does not expect 
an increase in false certification discharge claims to result in a 
significant budget impact from this change. We believe that schools 
that comply with the current ability to benefit assessment requirement 
and that honor the current high school graduation requirements will 
continue to comply in the manner they now do, and we have no basis to 
believe that changing the terminology or adding false certification of 
SAP as an example of a reason the Secretary may grant a false 
certification discharge without an application will lead to an increase 
in claims that will result in a significant net budget impact. The 
Department will continue to evaluate the changes to the false 
certification discharge regulations and welcomes comments to consider 
as the final analysis of the proposed regulations is developed.

Other Provisions

    In addition to the provisions previously discussed, the proposed 
regulations would also make a number of technical changes related to 
the PAYE and REPAYE repayment plans and the consolidation of Nurse 
Faculty Loans, update the regulations describing the Department's 
authority to compromise debt, and update the acceptable forms of 
verification of death for discharge of title IV loans or TEACH Grant 
obligations. The technical changes to the REPAYE and PAYE plans were 
already reflected in the Department's budget estimates for those 
regulations, so no additional budget effects are included here. While 
some borrowers may be eligible for additional subsidized loans and no 
longer be responsible for accrued interest on their subsidized loans as 
a result of their subsidized usage period being eliminated or 
recalculated because of a closed school, false certification, unpaid 
refund, or defense to repayment discharge, the institutions primarily 
affected by the 150 percent subsidized usage regulation are not those 
expected to generate many of the applicable discharges, so this 
reflection of current practice is not expected to have a significant 
budget impact. Allowing death discharges based on death certificates 
submitted or verified through additional means is convenient for 
borrowers, but is not estimated to substantially change the amount of 
death discharges. The proposed updates to the debt compromise limits 
reflect statutory changes and the Secretary's existing authority to 
compromise debt, so we do not estimate a significant change in current 
practices. Revising the regulations to expressly permit the 
consolidation of Nurse Faculty Loans is not expected to have a 
significant budget impact, as this technical change reflects current 
practices. According to Department of Health and Human Services budget 
documents, approximately $26.5 million in grants are available annually 
for schools to make Nurse Faculty Loans, and borrowers would lose 
access to generous forgiveness terms if they choose to consolidate 
those loans. Therefore, we would expect the volume of consolidation to 
be very small, and do not estimate any significant budget impact from 
this provision.

Assumptions, Limitations, and Data Sources

    In developing these estimates, a wide range of data sources were 
used, including data from the National Student Loan Data System; 
operational and financial data from Department systems; and data from a 
range of surveys conducted by the National Center for Education 
Statistics such as the 2012 National Postsecondary Student Aid Survey. 
Data from other sources, such as the U.S. Census Bureau, were also 
used.

Accounting Statement

    As required by OMB Circular A-4 (available at www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf), in the 
following table, we have prepared an accounting statement showing the 
classification of the expenditures associated with the provisions of 
these regulations. This table provides our best estimate of the changes 
in annual monetized costs and transfers as a result of these proposed 
regulations. Expenditures are classified as transfers from the Federal 
Government to affected student loan borrowers or from affected 
institutions to students (via the Federal government), as noted.

 Table 6--Accounting Statement: Classification of Estimated Expenditures
  (in millions) With Discount Rates of Three Percent and Seven Percent
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                Category                             Benefits
------------------------------------------------------------------------
Updated and clarified borrower defense
 process and Federal standard to
 increase protection for student
 borrowers and taxpayers................          not quantified
Improved awareness and usage of closed
 school and false certification
 discharges.............................          not quantified
Improved consumer information about
 institutions' performance and practices          not quantified
------------------------------------------------------------------------

[[Page 39398]]

 
                Category                               Costs
------------------------------------------------------------------------
                                                3%              7%
                                         -------------------------------
Costs of obtaining Letters of credit or
 equivalents............................          not quantified
                                         -------------------------------
Costs of compliance with paperwork                 14.95           14.91
 requirements...........................
------------------------------------------------------------------------
                Category                             Transfers
------------------------------------------------------------------------
                                                3%              7%
                                         -------------------------------
Borrower Defense claims from the Federal
 government to affected borrowers
 (partially borne by affected
 institutions, via reimbursements):
    SC1A1...............................             184             181
    SC1A2...............................             182             180
    SC1B1...............................           1,438           1,419
    SC1B2...............................           1,434           1,415
    SC2A1...............................             777             767
    SC2A2...............................             778             768
    SC2B1...............................           5,846           5,770
    SC2B2...............................           5,846           5,770
Reimbursements of borrower defense
 claims from affected institutions to
 affected student borrowers, via the
 Federal government:
    SC1A1...............................              55              54
    SC1A2...............................             119             117
    SC1B1...............................             431             426
    SC1B2...............................             932             920
    SC2A1...............................             233             230
    SC2A2...............................             506             499
    SC2B1...............................           1,754           1,731
    SC2B2...............................           3,800           3,751
Closed school discharges from the                    135             135
 Federal government to affected students
------------------------------------------------------------------------

Alternatives Considered

    In the interest of promoting good governance and ensuring that 
these proposed regulations produce the best possible outcome, the 
Department reviewed and considered various proposals from internal 
sources as well as from non-Federal negotiators and the public. We 
summarize below the major proposals that we considered but which we 
ultimately declined to implement in these proposed regulations.
    Areas of significant discussion between the Department and the non-
Federal negotiators included the group discharge process for borrower 
defense claims, the limitation periods, the appropriate procedure for 
considering borrower defense claims including the role of State AGs, 
legal assistance organizations, the Department, borrowers, and 
institutions, and the continued use of or adoption of certain State 
standards for borrower defense claims and the process of the 
Department's recovery from schools for any liabilities to the 
Department for borrower defense claims. The extensive discussion of 
these issues is summarized in the preamble sections related to each 
topic. In developing the proposed regulations, the Department 
considered the budgetary impact, administrative burden, and 
effectiveness of the options it considered.

Clarity of the Regulations

    Executive Order 12866 and the Presidential memorandum ``Plain 
Language in Government Writing'' require each agency to write 
regulations that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following:
     Are the requirements in the proposed regulations clearly 
stated?
     Do the proposed regulations contain technical terms or 
other wording that interferes with their clarity?
     Does the format of the proposed regulations (grouping and 
order of sections, use of headings, paragraphing, etc.) aid or reduce 
their clarity?
     Would the proposed regulations be easier to understand if 
we divided them into more (but shorter) sections? (A ``section'' is 
preceded by the symbol ``Sec.  '' and a numbered heading; for example, 
Sec.  668.16.)
     Could the description of the proposed regulations in the 
SUPPLEMENTARY INFORMATION section of this preamble be more helpful in 
making the proposed regulations easier to understand? If so, how?
     What else could we do to make the proposed regulations 
easier to understand?
    To send any comments that concern how the Department could make 
these proposed regulations easier to understand, see the instructions 
in the ADDRESSES section.

Initial Regulatory Flexibility Analysis

Description of the Reasons That Action by the Agency Is Being 
Considered

    The Secretary is proposing to amend the regulations governing the 
Direct Loan Program to establish a new Federal standard, limitation 
periods, and a process for determining whether a borrower has a 
borrower defense based on an act or omission of a school. We also 
propose to amend the Student Assistance General Provisions regulations 
to revise the financial responsibility standards and add disclosure 
requirements for schools. Finally, we propose to amend the discharge 
provisions in the Perkins Loan, Direct Loan, FFEL Program, and TEACH 
Grant programs. The proposed changes would provide transparency, 
clarity, and ease of administration to current and new regulations and 
protect students, the Federal government, and taxpayers against 
potential school

[[Page 39399]]

liabilities resulting from borrower defenses.
    The U.S. Small Business Administration Size Standards define ``for-
profit institutions'' as ``small businesses'' if they are independently 
owned and operated and not dominant in their field of operation with 
total annual revenue below $7,000,000. The standards define ``non-
profit institutions'' as ``small organizations'' if they are 
independently owned and operated and not dominant in their field of 
operation, or as ``small entities'' if they are institutions controlled 
by governmental entities with populations below 50,000. Under these 
definitions, an estimated 4,365 institutions of higher education 
subject to the paperwork compliance provisions of the proposed 
regulations are small entities. Accordingly, we have prepared this 
initial regulatory flexibility analysis to present an estimate of the 
effect of the proposed regulations on small entities. The Department 
welcomes comments on this analysis and requests additional information 
to refine it.

Succinct Statement of the Objectives of, and Legal Basis for, the 
Proposed Regulations

    Section 455(h) of the HEA authorizes the Secretary to specify in 
regulation which acts or omissions of an institution of higher 
education a borrower may assert as a defense to repayment of a Direct 
Loan. Current regulations in Sec.  685.206(c) governing defenses to 
repayment have been in place since 1995, but rarely used. Those 
regulations specify 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.'' In response to the collapse of Corinthian, the 
Secretary announced in June of 2015 that the Department would develop 
new regulations to clarify and streamline the borrower defense process, 
in a manner that would protect borrowers and allow the Department to 
hold schools accountable for actions that result in loan discharges.

Description of and, Where Feasible, an Estimate of the Number of Small 
Entities to Which the Regulations Will Apply

    These proposed regulations would affect institutions of higher 
education that participate in the Federal Direct Loan Program and 
borrowers. Approximately 60 percent of IHEs qualify as small entities, 
even though the range of revenues at the non-profit institutions varies 
greatly. Using data from the Integrated Postsecondary Education Data 
System, the Department estimates that approximately 4,365 IHEs qualify 
as small entities--1,891 are not-for-profit institutions, 2,196 are 
for-profit institutions with programs of two years or less, and 278 are 
for-profit institutions with four-year programs.

Description of the Projected Reporting, Recordkeeping, and Other 
Compliance Requirements of the Regulations, Including an Estimate of 
the Classes of Small Entities That Will Be Subject to the Requirement 
and the Type of Professional Skills Necessary for Preparation of the 
Report or Record

    Table 7 relates the estimated burden of each information collection 
requirement to the hours and costs estimated in the Paperwork Reduction 
Act of 1995 section of the preamble. This additional workload is 
discussed in more detail under the Paperwork Reduction Act of 1995 
section of the preamble. Additional workload would normally be expected 
to result in estimated costs associated with either the hiring of 
additional employees or opportunity costs related to the reassignment 
of existing staff from other activities. In total, these changes are 
estimated to increase burden on small entities participating in the 
title IV, HEA programs by 171,250 hours. The monetized cost of this 
additional burden on institutions, using wage data developed using BLS 
data available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $6,259,193. 
This cost was based on an hourly rate of $36.55.

                               Table 7--Paperwork Reduction Act for Small Entities
----------------------------------------------------------------------------------------------------------------
                                       Reg section         OMB Control No.             Hours           Cost
----------------------------------------------------------------------------------------------------------------
Program Participation Agreement--            668.14  OMB 1845-0022                           939         $34,308
 requires school to provide
 enrolled students a closed school
 discharge application and written
 disclosure of the benefits of
 consequences of the discharge as
 an alternative to completing their
 educational program through a
 teach-out.
Reporting and Disclosure of                  668.41  OMB 1845-0004                        64,084       2,342,270
 repayment rate outcomes and
 letters of credit to enrolled and
 prospective students.
Financial Responsibility--reporting         668.171  OMB 1845-0022                         1,617          59,094
 of actions or triggering events in
 668.171(c) no later than 10 days
 after action or event occurs.
Alternative Standards and                   668.175  OMB 1845-0022                        32,336       1,181,881
 Requirements--ties amount of
 letter of credit to action or
 triggering event in 668.171(c).
Borrower defense process--provides          685.222  OMB 1845-NEW                            530          19,372
 a framework for the borrower
 defense process. Institutions
 could engage in fact-finding,
 provide evidence related to claims
 and appeal decisions.
Agreements between an eligible              685.300  OMB 1845-NEW2                        71,745       2,622,268
 school and the Secretary for
 participation in the Direct Loan
 Program--prohibits pre-dispute
 arbitration agreements for
 borrower defense claims, specifies
 required agreement and
 notification language, and
 requires schools to provide copies
 of arbitral and judicial filings
 to the Secretary.
----------------------------------------------------------------------------------------------------------------

Identification, to the Extent Practicable, of All Relevant Federal 
Regulations That May Duplicate, Overlap, or Conflict With the 
Regulations

    The proposed regulations are unlikely to conflict with or duplicate 
existing Federal regulations.

Alternatives Considered

    As described above, the Department participated in negotiated 
rulemaking when developing the proposed regulations, and considered a 
number of options for some of the provisions. Issues considered include 
the group discharge process for borrower defense claims, the limitation 
periods, the appropriate procedure for considering borrower defense 
claims including the role of State AGs, the Department, borrowers, and 
institutions, and the continued use of State standards for borrower 
defense claims. While no alternatives were aimed specifically at

[[Page 39400]]

small entities, limiting repayment rate warnings to affected 
proprietary institutions will reduce the burden on the private not-for-
profit institutions that are a significant portion of small entities 
that would be affected by the proposed regulations.

Paperwork Reduction Act of 1995

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department provides the general public and Federal agencies 
with an opportunity to comment on proposed and continuing collections 
of information in accordance with the Paperwork Reduction Act of 1995 
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps ensure that: The public 
understands the Department's collection instructions, respondents can 
provide the requested data in the desired format, reporting burden 
(time and financial resources) is minimized, collection instruments are 
clearly understood, and the Department can properly assess the impact 
of collection requirements on respondents.
    Sections 668.14, 668.41, 668.171, 668.175, 682.211, 682.402, 
685.222, and 685.300 contain information collection requirements. Under 
the PRA, the Department has submitted a copy of these sections and an 
Information Collections Request to OMB for its review.
    A Federal agency may not conduct or sponsor a collection of 
information unless OMB approves the collection under the PRA and the 
corresponding information collection instrument displays a currently 
valid OMB control number. Notwithstanding any other provision of law, 
no person is required to comply with, or is subject to penalty for 
failure to comply with, a collection of information if the collection 
instrument does not display a currently valid OMB control number.
    In the final regulations, we will display the control numbers 
assigned by OMB to any information collection requirements proposed in 
this NPRM and adopted in the final regulations.

Discussion

Section Sec.  668.14--Program Participation Agreement

Requirements

    Proposed Sec.  668.14(b)(32) would require, as part of the program 
participation agreement, a school to provide to all enrolled students a 
closed school discharge application and a written disclosure, 
describing the benefits and the consequences of a closed school 
discharge as an alternative to completing their educational program 
through a teach-out plan after the Department initiates any action to 
terminate the participation of the school in any title IV, HEA program 
or after the occurrence of any of the events specified in Sec.  
668.14(b)(31) that would require the institution to submit a teach-out 
plan.

Burden Calculation

    From AY 2011-12 to 2014-15 there were 182 institutions that closed 
(30 private, 150 proprietary, and 2 public). The number of students who 
were enrolled at the institutions at the time of the closure was 43,299 
(5,322 at the private institutions, 37,959 at the proprietary 
institutions, and 18 at the public institutions). With these figures as 
a base, we estimate that there could be 46 schools closing in a given 
award year (182 institutions divided by 4 = 45.5) with an average 238 
students per institution (43,299 divided by 182 = 237.9).
    We estimate that an institution will require two hours to prepare 
and process the required written disclosure with a copy of the closed 
school discharge application and the necessary mailing list for 
currently enrolled students. We anticipate that most schools will 
provide this information electronically to their students, thus 
decreasing burden and cost.
    On average, we estimate that it will take the estimated 8 private 
institutions that will close a total of 324 hours (1,904 students x .17 
(10 minutes)) to prepare and process the required written disclosure 
with a copy of the closed school discharge application and the 
necessary mailing list for the estimated 1,904 enrolled students.
    On average, we estimate that it will take the estimated 38 
proprietary institutions that will close a total of 1,537 hours (9,044 
students x .17 (10 minutes)) to prepare and process the required 
written disclosure with a copy of the closed school discharge 
application and the necessary mailing list for the estimated 9,044 
enrolled students.
    For Sec.  668.14, the total increase in burden will be 1,861 hours 
under OMB Control Number 1845-0022.

Section Sec.  668.41--Reporting and Disclosure of Information

Requirements

    Proposed Sec.  668.41(h) would expand the reporting and disclosure 
requirements under Sec.  668.41 to provide that, for any fiscal year in 
which a proprietary institution's loan repayment rate is equal to or 
less than zero, the institution must deliver a warning about its 
repayment outcomes to enrolled and prospective students. Institutions 
with fewer than 10 borrowers, or that meet the threshold for a low 
borrowing rate exemption, would not be required to make the disclosure.
    The process through which a proprietary institution would be 
informed of its repayment rate, and provided the opportunity to 
challenge that rate, is included in proposed Sec.  668.41(h)(5). 
Initially, the Department provides to each institution a list composed 
of students selected in accordance with the methodology in proposed 
Sec.  668.41(h)(3) and discussed above, as well as the draft repayment 
rate and the underlying data used to make the calculation. A period of 
45 days is allowed for institution to make corrections to the 
underlying data. The institution has 45 days following the date it 
receives notification of its draft loan repayment rate to challenge the 
accuracy of the information used by the Department to calculate the 
draft rate. After considering any challenges to its draft loan 
repayment rate, the Department notifies the institution of its final 
repayment rate.
    Under proposed Sec.  668.41(i), institutions that are required to 
provide financial protection, including an irrevocable letter of credit 
or cash under proposed Sec.  668.175(d), or set-aside under proposed 
Sec.  668.175(h), would have to disclose information about that 
requirement to both enrolled and prospective students until released 
from the letter of credit, or obligation to provide alternative 
financial protection, by the Department.
    The loan repayment warning under proposed Sec.  668.41(h) and the 
financial protection disclosure under proposed Sec.  668.41(i) must be 
provided to both enrolled (Sec.  668.41(h)(7)(ii)) and prospective 
students (Sec.  668.41(h)(7)(iii)) by hand delivery as part of a 
separate document to the student individually or as part of a group 
presentation. Alternatively, the warning or disclosure may be sent to 
the primary email address or other electronic communication method used 
by the institution for communicating with the student. In all cases, 
the institution must ensure that the warning or disclosure is the only 
substantive content in the message unless the Secretary specifies 
additional, contextual language to be included in the message. 
Prospective students must be provided with the warning or disclosure 
before the student enrolls, registers, or enters into a financial 
obligation with the institution.
    Under proposed Sec.  668.41(h)(8), all promotional materials made 
available by or on behalf of an institution to

[[Page 39401]]

prospective students must prominently include the loan repayment 
warning. All promotional materials, including printed materials, about 
an institution must be accurate and current at the time they are 
published, approved by a State agency or broadcast.

Burden Calculation

    There will be burden on schools to review the list identified in 
Sec.  668.41(h)(5)(i)(A) and to submit challenges to the accuracy of 
the information used to calculate the draft loan repayment rate, as 
provided in Sec.  668.41(h)(5)(iii). Based on an analysis of College 
Scorecard repayment rate data for 1,174 proprietary institutions, we 
estimate that 493 proprietary institutions would not meet the zero 
percent or less threshold for the loan repayment rate calculations.
    We estimate that it will take institutional staff 20 hours to 
review the listing of students included in the initial loan repayment 
rate calculations. We estimate that it will take institutional staff 
another 35 hours to review the draft loan repayment rate produced by 
the Secretary when challenging the accuracy of the information used to 
calculate that draft rate. We are estimating a total of 55 hours burden 
per institution for institutional activities under proposed Sec.  
668.41(h)(5).
    We estimate that it will take proprietary institutions a total of 
27,115 hours (493 institutions x 55 hours) for an initial review and 
subsequent challenge to information used in the calculation of the 
institution's repayment rate.
    For Sec.  668.41(h)(5), the total increase in burden related to the 
calculation, issuance, and challenges of the loan repayment rate will 
be 27,115 hours under OMB Control Number 1845-0004.
    There will be burden on schools to deliver the loan repayment 
warning and the financial repayment disclosure to enrolled and 
prospective students under this proposed regulation.
    For the loan repayment warning, under proposed Sec.  
668.41(h)(7)(i), the Department commits to consumer test the language 
of the warning, which the Secretary will publish in a Federal Register 
notice. We anticipate that it will take proprietary institutions a 
total of 32,045 hours (493 institutions x 65 hours) to produce and 
provide the loan repayment warnings to current and prospective 
students, ensure that promotional materials include the warning, and 
update the institution's Web site.
    For Sec.  668.41(h)(7), the total increase in burden related to the 
production and dissemination of the loan repayment warnings is 32,045 
hours under OMB Control Number 1845-0004.
    For the financial protection disclosure, we estimate that it will 
take institutions an additional 50 hours to produce and provide the 
required financial protection disclosures to current and prospective 
students and update the institution's Web site. We estimate that 169 
private institutions may have 2 events requiring such reporting for a 
total burden of 16,900 hours (169 institutions x 2 events x 50 hours). 
We estimate that 392 proprietary institutions may have 3 events 
requiring such reporting for a total burden of 58,800 hours (392 
institutions x 3 events x 50).
    For Sec.  668.41(i), the total increase in burden related to the 
production and dissemination of the financial protection disclosures is 
75,700 hours under OMB Control Number 1845-0004.
    The combined total increase in burden under OMB Control Number 
1845-0004 for proposed Sec.  668.41 will be 134,860 hours.

Financial Responsibility

General (34 CFR 668.171)

Requirements

    Under proposed Sec.  668.171(d), in accordance with procedures to 
be established by the Secretary, an institution would notify the 
Secretary of any action or triggering event described in proposed Sec.  
668.171(c) no later than 10 days after that action or event occurs.
    In that notice, the institution may show that certain actions or 
events are not material or that those actions are resolved. 
Specifically:
     The institution may explain why a judicial or 
administrative proceeding the institution disclosed to the SEC does not 
constitute a material event.
     The institution may demonstrate that a withdrawal of 
owner's equity was used solely to meet tax liabilities of the 
institution or its owners. Or, where the composite score is calculated 
based on the consolidated financial statements of a group of 
institutions, the amount withdrawn from one institution in the group 
was transferred to another entity within that group.
     The institution may show that the creditor waived a 
violation of a loan agreement. If the creditor imposes additional 
constraints or requirements as a condition of waiving the violation and 
continuing with the loan, the institution must identify and describe 
those constraints or requirements. In addition, if a default or 
delinquency event occurs or other events occur that trigger, or enable 
the creditor to require or impose, additional constraints or penalties 
on the institution, the institution would be permitted to show why 
these actions would not have an adverse financial impact on the 
institution.

Burden Calculation

    There will be burden on schools to provide the notice to the 
Secretary when one of the actions or triggering events identified in 
Sec.  668.171(c) occurs. We estimate that an institution will take two 
hours per action or triggering event to prepare the appropriate notice 
and provide it to the Secretary. We estimate that 169 private 
institutions may have 2 events annually to report for a total burden of 
676 hours (169 institutions x 2 events x 2 hours). We estimate that 392 
proprietary institutions may have 3 events annually to report for total 
burden of 2,352 hours (392 institutions x 3 events x 2 hours). We 
estimate that 91 public institutions may have 1 event annually to 
report for a total burden of 182 hours (91 institutions x 1 event x 2 
hours). This total burden of 3,210 hours will be assessed under OMB 
Control Number 1845-0022.

Alternative Standards and Requirements (34 CFR 668.175)

Requirements

    Under the provisional certification alternative in Sec.  668.175, 
we propose to add a new paragraph (f)(4) that ties the amount of the 
financial protection that an institution must submit to the Secretary 
to an action or triggering event described in proposed Sec.  
668.171(c). Specifically, under this alternative, an institution would 
be required to provide the Secretary financial protection, such as an 
irrevocable letter of credit, for an amount that is:
     For a State or Federal action under proposed Sec.  
668.171(c)(1)(i)(A) or (B), 10 percent or more, as determined by the 
Secretary, of the amount of Direct Loan program funds received by the 
institution during its most recently completed fiscal year; and
     For repayments to the Secretary for losses from borrower 
defense claims under proposed Sec.  668.171(c)(2), the greatest annual 
loss incurred by the Secretary during the three most recently completed 
award years to resolve those claims or the amount of losses incurred by 
the Secretary during the most recently completed award year, whichever 
is greater, plus a portion of the amount of any outstanding or pending 
claims based on the ratio of the total value of claims resolved in 
favor of borrowers during the three most recently completed award years 
to the

[[Page 39402]]

total value of claims adjudicated during the three most completed award 
years;
     For any other action or triggering event described in 
proposed Sec.  668.171(c), if the institution's composite score is less 
than 1.0, or the institution no longer qualifies under the zone 
alternative, 10 percent or more, as determined by the Secretary, of the 
total amount of title IV, HEA program funds received by the institution 
during its most recently completed fiscal year.

Burden Calculation

    There will be burden on schools to provide the required financial 
protection, such as a letter of credit, to the Secretary to utilize the 
provisional certification alternative. We estimate that an institution 
will take 40 hours per action or triggering event to obtain the 
required financial protections and provide it to the Secretary. We 
estimate that 169 private not-for-profit institutions may have 2 events 
annually to report for a total burden of 13,520 hours (169 institutions 
x 2 events x 40 hours). We estimate that 392 proprietary institutions 
may have 3 events annually to report for total burden of 47,040 hours 
(392 institutions x 3 events x 40 hours). We estimate that 91 public 
institutions may have 1 event annually to report for a total burden of 
3,640 hours (91 institutions x 1 event x 40 hours). This total burden 
of 64,200 hours will be assessed under OMB Control Number 1845-0022.
    The combined total increase in burden under OMB Control Number 
1845-0004 for proposed Sec.  668.41 will be 134,860 (27,115 + 32,045 + 
75,700) hours.
    The combined total increase in burden under OMB Control Number 
1845-0022 for proposed Sec.  668.14, Sec.  668.171, and Sec.  668.175 
will be 69,271 (1,861 + 3,210 + 64,200) hours.

Mandatory Administrative Forbearance for FFEL Program Borrowers (Sec.  
682.211)

Requirements

    Under proposed Sec.  682.211(i)(7), a lender would be required to 
grant a mandatory administrative forbearance to a borrower upon being 
notified by the Secretary that the borrower has submitted an 
application for a borrower defense discharge related to a FFEL Loan 
that the borrower intends to pay off through a Direct Loan Program 
Consolidation Loan for the purpose of obtaining relief under proposed 
Sec.  685.212(k). The administrative forbearance would remain in effect 
until the Secretary notifies the lender that a determination has been 
made as to the borrower's eligibility for a borrower defense discharge. 
If the Secretary notifies the borrower that the borrower would qualify 
for a borrower defense discharge if the borrower were to consolidate, 
the borrower would then be able to consolidate the loan(s) to which the 
defense applies and, if the borrower were to do so, the Secretary would 
recognize the defense and discharge that portion of the Consolidation 
Loan that paid off the FFEL Loan in question.

Burden Calculation

    There will be burden for the current 1,446 FFEL lenders to track 
the required mandatory administrative forbearance when they are 
notified by the Secretary of the borrower's intention to enter their 
FFEL Loans into a Direct Consolidation Loan to obtain a borrower 
defense discharge. We estimate that it will take each lender 
approximately four hours to develop and program the needed tracking 
into their current systems. There will be an estimated burden of 5,480 
hours on the 1,370 for-profit lenders (1,370 x 4 = 5,480 hours). There 
will be an estimated burden of 304 hours on the 76 not-for-profit 
lenders (76 x 4 = 304 hours). The total burden of 5,784 hours will be 
assessed under OMB Control Number 1845-0020.

Closed School Discharges--Sec.  682.402

Requirements

    Proposed Sec.  682.402(d)(6)(ii)(F) would provide a second level of 
Departmental review for denied closed school discharge claims in the 
FFEL Program. The proposed regulations would require a guaranty agency 
that denies a closed school discharge request to inform the borrower of 
the opportunity for a review of the guaranty agency's decision by the 
Secretary, and an explanation of how the borrower may request such a 
review.
    Proposed Sec.  682.402(d)(6)(ii)(I) would require the guaranty 
agency or the Department, upon resuming collection, to provide a FFEL 
borrower with another closed school discharge application, and an 
explanation of the requirements and procedures for obtaining the 
discharge.
    Proposed Sec.  682.402(d)(6)(ii)(K) would describe the 
responsibilities of the guaranty agency if the borrower requests such a 
review.
    Proposed Sec.  682.402(d)(8)(iii) would authorize the Department, 
or a guaranty agency with the Department's permission, to grant a 
closed school discharge to a FFEL borrower without a borrower 
application based on information in the Department's or guaranty 
agency's possession that the borrower did not subsequently re-enroll in 
any title IV-eligible institution within a period of three years after 
the school closed.

Burden Calculation

    There will be burden on guaranty agencies to provide information to 
borrowers denied closed school discharge regarding the opportunity for 
further review of the discharge request by the Secretary. We estimate 
that it will take the 27 guaranty agencies 4 hours to update their 
notifications and establish a process for forwarding any requests for 
escalated reviews to the Secretary. There will be an estimated burden 
of 68 hours on the 17 public guaranty agencies (17 x 4 hours = 68 
hours). There will be an estimated burden of 40 hours on the 10 not-
for-profit guaranty agencies (10 x 4 hours = 40 hours). The total 
burden of 108 hours will be assessed under OMB Control Number 1845-
0020.
    There will be burden on guaranty agencies to, upon receipt of the 
request for escalated review from the borrower, forward to the 
Secretary the discharge form and any relevant documents. For the period 
between 2011 and 2015 there were 43,268 students attending closed 
schools, of which 9,606 students received a closed school discharge. It 
is estimated that 5 percent of the 43,268, or 2,163, closed school 
applications were denied. We estimate that 10 percent or 216 of those 
borrowers whose application was denied will request escalated review by 
the Secretary. We estimate that the process to forward the discharge 
request and any relevant documentation to the Secretary will take .5 
hours (30 minutes) per request. There will be an estimated burden of 58 
hours on the 17 public guaranty agencies based on an estimated 116 
requests (116 x .5 hours = 58 hours). There will be an estimated burden 
of 50 hours on the 10 not-for-profit guaranty agencies (100 x .5 hours 
= 50 hours). The total burden of 108 hours will be assessed under OMB 
Control Number 1845-0020.
    The guaranty agencies will have burden assessed based on these 
proposed regulations to provide another discharge application to a 
borrower upon resuming collection activities with explanation of 
process and requirements for obtaining a discharge. We estimate that 
for the 2,163 closed school applications that were denied, it will take 
the guaranty agencies .5 hours (30 minutes) to provide the borrower 
with another discharge application and instructions for filing the 
application again. There will be an estimated burden of 582 hours on 
the 17 public guaranty agencies based on an estimated 1,163 borrowers 
(1,163 x .5 hours = 582

[[Page 39403]]

hours). There will be an estimated burden of 500 hours on the 10 not-
for-profit guaranty agencies (1,000 x .5 hours = 500 hours). The total 
burden of 1,082 will be assessed under OMB Control Number 1845-0020.
    There will be burden assessed the guaranty agencies to determine 
the eligibility of a borrower for a closed school discharge without the 
borrower submitting such an application. This requires a review of 
those borrowers who attended a closed school but did not apply for a 
closed school discharge to determine if the borrower re-enrolled in any 
other institution within three years of the school closure. We estimate 
that there will be 20 hours of programming to allow for a guaranty 
agency to establish a process to review its records for borrowers who 
attended a closed school and to determine if any of those borrowers 
reenrolled in a title IV-eligible institution within three years. There 
will be an estimated burden of 340 hours on the 17 public guaranty 
agencies for this programming (17 x 20 hours = 340 hours rounded up). 
There will be an estimated burden of 200 hours on the not-for-profit 
guaranty agencies for this programming (10 x 20 hours = 200 hours). The 
total burden of 540 hours will be assessed under OMB Control Number 
1845-0020.
    The total burden of 1,838 hours for Sec.  682.402 will be assessed 
under OMB Control Number 1845-0020.
    The combined total increase in burden under OMB Control Number 
1845-0020 for proposed Sec.  682.211 and Sec.  682.402 will be 7,622 
hours (5,784 + 108 + 540 + 108 + 1,082).

Process for Individual Borrowers (34 CFR 685.222(e))

Requirements

    Proposed Sec.  685.222(e)(1) would describe the steps an individual 
borrower must take to initiate a borrower defense claim. First, an 
individual borrower would submit an application to the Secretary, on a 
form approved by the Secretary. In the application, the borrower would 
certify that he or she received the proceeds of a loan to attend a 
school; may provide evidence that supports the borrower defense; and 
would indicate whether he or she has made a claim with respect to the 
information underlying the borrower defense with any third party, and, 
if so, the amount of any payment received by the borrower or credited 
to the borrower's loan obligation. The borrower would also be required 
to provide any other information or supporting documentation reasonably 
requested by the Secretary.
    While the decision of the Department official would be final as to 
the merits of the claim and any relief that may be warranted on the 
claim, if the borrower defense is denied in full or in part, the 
borrower would be permitted to request that the Secretary reconsider 
the borrower defense upon the identification of new evidence in support 
of the borrower's claim. ``New evidence'' would be defined as relevant 
evidence that the borrower did not previously provide and that was not 
identified by the Department official as evidence that was relied upon 
for the final decision.

Burden Calculation

    There will be burden associated with the filing of the Departmental 
form by the borrower asserting a borrower defense claim. We are 
conducting a separate information collection review process for the 
proposed form to provide for public comment on the form as well as the 
estimated burden. A separate information collection review package will 
be published in the Federal Register and available through 
Regulations.gov for review and comment.
    Additionally there will be burden on any borrower whose borrower 
defense claim is denied, if they elect to request reconsideration from 
the Secretary based on new evidence in support of the borrower's claim. 
We estimate that two percent of borrower defense claims received would 
be denied and those borrowers would then request reconsideration by 
presenting new evidence to support their claim. As of April 27, 2016, 
18,688 borrower defense claims had been received. Of that number, we 
estimate that 467 borrowers, including those that opt out of a 
successful borrower defense group relief, would require .5 hours (30 
minutes) to submit the request for reconsideration to the Secretary for 
a total of 234 burden hours (467 x .5 hours). This burden will be 
assessed under OMB Control Number 1845-NEW.

Group Process for Borrower Defenses--General (34 CFR 685.222(f))

Requirements

    Proposed Sec.  685.222(f) would provide a framework for the 
borrower defense group process, including descriptions of the 
circumstances under which group borrower defense claims could be 
considered, and the process the Department would follow for borrower 
defenses for a group.
    Once a group of borrowers with common facts and claims has been 
identified, the Secretary would designate a Department official to 
present the group's common borrower defense in the fact-finding 
process, and would provide each identified member of the group with 
notice that allows the borrower to opt out of the proceeding.

Burden Calculation

    There will be burden on any borrower who elects to opt out of the 
group process after the Secretary has identified them as a member of a 
group for purposes of borrower defense. We estimate that one percent of 
borrowers who are identified as part of a group process for borrower 
defense claims would opt out of the group claim process. As of April 
27, 2016, 18,688 borrower defense claims had been received. Of that 
number, we estimate that 187 borrowers would require .08 hours (5 
minutes) to submit the request to opt out of the group process to the 
Secretary for a total of 15 burden hours (187 x .08 hours). This burden 
will be assessed under OMB Control Number 1845-NEW.

Group Process for Borrower Defense--Closed School (34 CFR 685.222(g))

Requirements

    Section 685.222(g) of the proposed regulations would establish a 
process for review and determination of a borrower defense for groups 
identified by the Secretary for which the borrower defense is made with 
respect to Direct Loans to attend a school that has closed and has 
provided no financial protection currently available to the Secretary 
from which to recover any losses based on borrower defense claims, and 
for which there is no appropriate entity from which the Secretary can 
otherwise practicably recover such losses.
    Under proposed Sec.  685.222(g)(1), a hearing official would review 
the Department official's basis for identifying the group and resolve 
the claim through a fact-finding process. As part of that process, the 
hearing official would consider any evidence and argument presented by 
the Department official on behalf of the group and on behalf of 
individual members of the group. The hearing official would consider 
any additional information the Department official considers necessary, 
including any Department records or response from the school or a 
person affiliated with the school as described Sec.  668.174(b) as 
reported to the Department or as recorded in the Department's records 
if practicable.

[[Page 39404]]

Burden Calculation

    There will be burden on any school which elects to provide records 
or response to the hearing official's fact finding. We anticipate that 
each group would represent a single institution. We estimate that there 
will be four potential groups involving closed schools. We estimate 
that the fact-finding process would require 50 hours from 1 private 
closed school or persons affiliated with that closed school (1 private 
institution x 50 hours). We estimate that the fact-finding process 
would require 150 hours from 3 proprietary closed schools or persons 
affiliated with that closed school (3 proprietary institutions x 50 
hours). We estimate the burden to be 200 hours (4 institutions x 50 
hours). This burden will be assessed under OMB Control Number 1845-NEW.

Group Process for Borrower Defense--Open School (34 CFR 685.222(h))

Requirements

    Proposed Sec.  685.222(h) would establish the process for groups 
identified by the Secretary for which the borrower defense is asserted 
with respect to Direct Loans to attend an open school.
    A hearing official would resolve the borrower defense and determine 
any liability of the school through a fact-finding process. As part of 
the process, the hearing official would consider any evidence and 
argument presented by the school and the Department official on behalf 
of the group and, as necessary, evidence presented on behalf of 
individual group members.
    The hearing official would issue a written decision. If the hearing 
official approves the borrower defense, that decision would describe 
the basis for the determination, notify the members of the group of the 
relief provided on the basis of the borrower defense, and notify the 
school of any liability to the Secretary for the amounts discharged and 
reimbursed.
    If the hearing official denies the borrower defense in full or in 
part, the written decision would state the reasons for the denial, the 
evidence that was relied upon, the portion of the loans that are due 
and payable to the Secretary, and whether reimbursement of amounts 
previously collected is granted, and would inform the borrowers that 
their loans will return to their statuses prior to the group borrower 
defense process. It also would notify the school of any liability to 
the Secretary for any amounts discharged. The Secretary would provide 
copies of the written decision to the members of the group, the 
Department official and the school.
    The hearing official's decision would become final as to the merits 
of the group borrower defense claim and any relief that may be granted 
within 30 days after the decision is issued and received by the 
Department official and the school unless, within that 30-day period, 
the school or the Department official appeals the decision to the 
Secretary. A decision of the hearing official would not take effect 
pending the appeal. The Secretary would render a final decision 
following consideration of any appeal.
    After a final decision has been issued, if relief for the group has 
been denied in full or in part, a borrower may file an individual claim 
for relief for amounts not discharged in the group process. In 
addition, the Secretary may reopen a borrower defense application at 
any time to consider new evidence, as discussed above.

Burden Calculation

    There will be burden on any school that provides evidence and 
responds to any argument made to the hearing official's fact finding 
and if the school elects to appeal the final decision of the hearing 
official regarding the group claim. We anticipate that each group would 
represent claims from a single institution. We estimate that there will 
be six potential groups involving open schools. We estimate that the 
fact-finding process would require 150 hours from the 3 open private 
institutions or persons affiliated with that school (3 institutions x 
50 hours). We estimate that the fact-finding process would require 150 
hours from the 3 open proprietary institutions or persons affiliated 
with that school (3 institutions x 50 hours). We estimate the burden to 
be 300 hours (6 institutions x 50 hours).
    We further estimate that the appeal process would require 150 hours 
from the 3 open private institutions or persons affiliated with that 
school (3 institutions x 50 hours). We estimate that the appeal process 
would require 150 hours from the 3 open proprietary institutions or 
persons affiliated with that school (3 institutions x 50 hours). We 
estimate the burden to be 300 hours (6 institutions x 50 hours). The 
total estimated burden for this section will be 600 hours assessed 
under OMB Control Number 1845-NEW.
    Additionally, any borrower whose borrower defense claim is denied 
under the group claim may request reconsideration based on new evidence 
to support the individual claim. We believe that the estimate for the 
total universe of denied claims in Sec.  685.222(e) includes these 
borrowers.
    The combined total increase in burden under OMB Control Number 
1845-NEW for proposed Sec.  685.222 will be 1,049 hours (234 + 15 + 200 
+ 600).

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

Requirements

    Proposed Sec.  685.300(e) requires institutions that, after the 
effective date of the proposed regulations, incorporate pre-dispute 
arbitration or any other pre-dispute agreement addressing class actions 
in any agreements with Direct Loan Program borrowers to include 
specific language regarding a borrower's right to file or be a member 
of a class action suit against the institution when the class action 
concerns acts or omissions surrounding the making of the Direct Loan or 
provision of educational services purchased with the Direct Loan. 
Additionally, in the case of institutions that, prior to the effective 
date of the proposed regulations, incorporated pre-dispute arbitration 
or any other pre-dispute agreement addressing class actions in any 
agreements with Direct Loan Program borrowers, the proposed regulations 
would require institutions to provide to borrowers agreements or 
notices with specific language regarding a borrower's right to file or 
be a member of a class action suit against the institution when the 
class action concerns acts or omissions surrounding the making of the 
Direct Loan or provision of educational services purchased with the 
Direct Loan. Institutions would be required to provide such notices or 
agreements to such borrowers no later than at the time of the loan exit 
counseling for current students or the date the school files an initial 
response to an arbitration demand or complaint suit from a student who 
hasn't received such agreement or notice.
    Proposed Sec.  685.300(f) would require institutions that, after 
the effective date of the proposed regulations, incorporate pre-dispute 
arbitration agreements with Direct Loan Program borrowers to include 
specific language regarding a borrower's right to file a lawsuit 
against the institution when it concerns acts or omissions surrounding 
the making of the Direct Loan or provision of educational services 
purchased with the Direct Loan. Additionally, in the case of 
institutions that, prior to the effective date of the proposed 
regulations, incorporated pre-dispute arbitration agreements with 
Direct Loan Program borrowers, the proposed regulations would require 
institutions to provide to

[[Page 39405]]

borrowers agreements or notices with specific language regarding a 
borrower's right to file a lawsuit against the institution when the 
class action concerns acts or omissions surrounding the making of the 
Direct Loan or provision of educational services purchased with the 
Direct Loan. Institutions would be required to provide such agreements 
or notices to such borrowers no later than at the time of the loan exit 
counseling for current students or the date the school files an initial 
response to an arbitration demand or complaint suit from a student who 
hasn't received such agreement or notice.

Burden Calculation

    There will be burden on any school that meets the conditions for 
supplying students with the changes to any agreements. Based on the AY 
2014-2015 Direct Loan information available, there were 1,528,714 
Unsubsidized Direct Loan recipients at proprietary institutions. 
Assuming 66 percent of these students would continue to be enrolled at 
the time these regulations become effective there would be 1,008,951 
students who would be required to receive the agreements or notices 
required by proposed Sec.  685.300(e) or (f). We anticipate that it 
will take proprietary institutions .17 hours (10 minutes) per student 
to research who is required to receive these agreements or notices, 
prepare them, and forward the information accordingly for a total 
burden of 171,522 hours (1,008,951 students x .17 hours) assessed under 
OMB Control Number 1845-NEW2.

Requirements

    Proposed Sec.  685.300(g) requires institutions to provide to the 
Secretary copies of specified records connected to a claim filed in 
arbitration by or against the school regarding a borrower defense 
claim. The school must submit any records within 60 days of the filing 
by the school of such records to an arbitrator or upon receipt by the 
school of such records that were filed by someone other than the 
school, such as an arbitrator or student regarding a claim.
    Proposed Sec.  685.300(h) requires institutions to provide to the 
Secretary copies of specified records connected to a claim filed in a 
lawsuit by the school, a student, or any party against the school 
regarding a borrower defense claim. The school must submit any records 
within 30 days of the filing or receipt of the complaint by the school 
or upon receipt by the school of rulings on a dipositive motion or 
final judgement.

Burden Calculation

    There will be burden on any school that must provide to the 
Secretary copies of specified records connected to a claim filed in 
arbitration by or against the school regarding a borrower defense 
claim. We estimate that 5 percent of the 1,959 proprietary schools, or 
98 schools, would be required to submit documentation to the Secretary 
to comply with the proposed regulations. We anticipate that each of the 
98 schools would have an average of 4 filings, with an average of four 
submissions for each filing. Because these are copies of documents 
required to be submitted to other parties we anticipate 5 burden hours 
to produce the copies and submit to the Secretary for a total of 7,840 
hours (98 institutions x 4 filings x 4 submissions/filing x 5 hours) 
assessed under OMB Control Number 1845-NEW2.
    The combined total increase in burden under OMB Control Number 
1845-NEW2 for proposed Sec.  685.300 will be 179,362 hours (171,522 + 
7,840).
    Consistent with the discussion above, the following chart describes 
the sections of the proposed regulations involving information 
collections, the information being collected, and the collections that 
the Department will submit to OMB for approval and public comment under 
the PRA, and the estimated costs associated with the information 
collections. The monetized net costs of the increased burden on 
institutions, lenders, guaranty agencies, and borrowers, using wage 
data developed using BLS data, available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $14,328,558 as shown in the chart below. This cost was 
based on an hourly rate of $36.55 for institutions, lenders, and 
guaranty agencies and $16.30 for borrowers.

                                            Collection of Information
----------------------------------------------------------------------------------------------------------------
                                                                           OMB Control No. and
       Regulatory  section                Information collection            estimated burden         Estimated
                                                                           [change in burden]          costs
----------------------------------------------------------------------------------------------------------------
Sec.   668.14 Program              The proposed regulation would        1845-0022...............         $68,025
 participation agreement.           require, as part of the program     This would be a revised
                                    participation agreement, a school    collection. We estimate
                                    to provide to all enrolled           burden would increase
                                    students with a closed school        by 1,861 hours.
                                    discharge application and a
                                    written disclosure, describing the
                                    benefits and the consequences of a
                                    closed school discharge as an
                                    alternative to completing their
                                    educational program through a
                                    teach-out plan after the
                                    Department initiates any action to
                                    terminate the participation of the
                                    school in any title IV, HEA
                                    program or after the occurrence of
                                    any of the events specified in
                                    Sec.   668.14(b)(31) that would
                                    require the institution to submit
                                    a teach-out plan.
Sec.   668.41 Reporting and        The proposed regulation would        1845-0004...............       4,929,133
 disclosure of information.         provide that, for any fiscal year   This would be a revised
                                    in which a proprietary               collection. We estimate
                                    institution's loan repayment rate    burden would increase
                                    is zero percent or less, the         by 134,860 hours.
                                    institution must provide a warning
                                    to enrolled and prospective
                                    students about that institution's
                                    repayment outcomes. If an
                                    institution is required to provide
                                    financial protection to the
                                    Secretary, such as an irrevocable
                                    letter of credit or cash under
                                    Sec.   668.175(d) or (f), or to
                                    establish a set-aside under Sec.
                                    668.175(h), the institution must
                                    disclose that protection to
                                    enrolled and prospective students.
Sec.   668.171 Financial           The proposed regulations add a new   1845-0022...............         117,326
 responsibility--General.           paragraph (d) under which, in       This would be a revised
                                    accordance with procedures to be     collection. We estimate
                                    established by the Secretary, an     burden would increase
                                    institution would notify the         by 3,210 hours.
                                    Secretary of any action or
                                    triggering event described in Sec.
                                      668.171(c) no later than 10 days
                                    after that action or event occurs.

[[Page 39406]]

 
Sec.   668.175 Alternative         The proposed regulations would add   1845-0022...............       2,346,510
 standards and requirements.        a new paragraph (f)(4) that ties    This would be a revised
                                    the amount of the letter of credit   collection. We estimate
                                    that an institution must submit to   burden would increase
                                    the Secretary to an action or        by 64,200 hours.
                                    triggering event described in Sec.
                                      668.171(c).
Sec.   682.211 Forbearance.......  The proposed regulations would add   1845-0020...............         211,405
                                    a new paragraph Sec.                This would be a revised
                                    682.211(i)(7) that requires a        collection. We estimate
                                    lender to grant a mandatory          burden would increase
                                    administrative forbearance to a      by 5,784 hours.
                                    borrower upon being notified by
                                    the Secretary that the borrower
                                    has submitted an application for a
                                    borrower defense discharge related
                                    to a FFEL Loan that the borrower
                                    intends to pay off through a
                                    Direct Loan Program Consolidation
                                    Loan for the purpose of obtaining
                                    relief under proposed Sec.
                                    685.212(k).
Sec.   682.402 Death, disability,  The proposed regulations would       1845-0020...............          67,179
 closed school, false               provide a second level of           This would be a revised
 certification, unpaid refunds,     Departmental review for denied       collection. We estimate
 and bankruptcy payments.           closed school discharge claims in    burden would increase
                                    the FFEL Program. The proposed       by 1,838 hours.
                                    language would require a guaranty
                                    agency that denies a closed school
                                    discharge request to inform the
                                    borrower of the opportunity for a
                                    review of the guaranty agency's
                                    decision by the Department, and an
                                    explanation of how the borrower
                                    may request such a review. The
                                    proposed regulations would require
                                    the guaranty agency or the
                                    Department, upon resuming
                                    collection, to provide a FFEL
                                    borrower with another closed
                                    school discharge application, and
                                    an explanation of the requirements
                                    and procedures for obtaining the
                                    discharge. The proposed
                                    regulations would describe the
                                    responsibilities of the guaranty
                                    agency if the borrower requests
                                    such a review. The proposed
                                    regulations would authorize the
                                    Department, or a guaranty agency
                                    with the Department's permission,
                                    to grant a closed school discharge
                                    to a FFEL borrower without a
                                    borrower application based on
                                    information in the Department's or
                                    guaranty agency's possession that
                                    the borrower did not subsequently
                                    re-enroll in any title IV-eligible
                                    institution within a period of
                                    three years after the school
                                    closed.
Sec.   685.222 Borrower defenses.  The proposed regulation would        1845-NEW................          33,299
                                    describe the steps an individual    This would be a new
                                    borrower must take to initiate a     collection. We estimate
                                    borrower defense claim. The          burden would increase
                                    proposed regulations also would      by 1,049 hours.
                                    provide a framework for the
                                    borrower defense group process,
                                    including descriptions of the
                                    circumstances under which group
                                    borrower defense claims could be
                                    considered, and the process the
                                    Department would follow for
                                    borrower defenses for a group. The
                                    proposed regulations would
                                    establish a process for review and
                                    determination of a borrower
                                    defense for groups identified by
                                    the Secretary for which the
                                    borrower defense is made with
                                    respect to Direct Loans to attend
                                    a school that has closed and has
                                    provided no financial protection
                                    currently available to the
                                    Secretary from which to recover
                                    any losses based on borrower
                                    defense claims, and for which
                                    there is no appropriate entity
                                    from which the Secretary can
                                    otherwise practicably recover such
                                    losses. The proposed regulation
                                    would establish the process for
                                    groups identified by the Secretary
                                    for which the borrower defense is
                                    asserted with respect to Direct
                                    Loans to attend an open school.
685.300 Agreements between an      The proposed regulations would       1845-NEW2...............       6,555,681
 eligible school and the            require institutions, following     This would be a new
 Secretary for participation in     the effective date of the            collection. We estimate
 the Direct Loan Program.           regulations, to incorporate          burden would increase
                                    language into agreements allowing    by 179,362 hours.
                                    participation by Direct Loan
                                    students in class action lawsuits
                                    as well as pre-dispute arbitration
                                    agreements. There is required
                                    agreement and notification
                                    language to be provided to
                                    affected students. Additionally,
                                    the proposed regulations would
                                    require institutions to submit to
                                    the Secretary copies of arbitral
                                    records and judicial records
                                    within specified timeframes when
                                    the actions concern a borrower
                                    defense claim.
----------------------------------------------------------------------------------------------------------------


[[Page 39407]]

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

------------------------------------------------------------------------
                                                   Total       Proposed
                                                  proposed    change in
                  Control No.                      burden       burden
                                                   hours        hours
------------------------------------------------------------------------
1845-0004.....................................      153,530      134,860
1845-0020.....................................    8,249,520       +7,622
1845-0022.....................................    2,285,241      +69,271
1845-NEW......................................        1,049       +1,049
1845-NEW2.....................................      179,362     +179,362
  Total.......................................   10,868,702     +392,164
------------------------------------------------------------------------

    We have prepared Information Collection Requests for these 
information collection requirements. If you want to review and comment 
on the Information Collection Requests, please follow the instructions 
in the ADDRESSES section of this NPRM.

    Note: The Office of Information and Regulatory Affairs in OMB 
and the Department review all comments posted at 
www.regulations.gov.

    In preparing your comments, you may want to review the Information 
Collection Requests, including the supporting materials, in 
www.regulations.gov by using the Docket ID number specified in this 
NPRM. These proposed collections are identified as proposed collections 
1845-0004, 1845-0020, 1845-0022, 1845-NEW, and 1845-NEW2.
    We consider your comments on these proposed collections of 
information in--
     Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
assumptions;
     Enhancing the quality, usefulness, and clarity of the 
information we collect; and
     Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques.
    Between 30 and 60 days after publication of this document in the 
Federal Register, OMB is required to make a decision concerning the 
collections of information contained in these proposed regulations. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives your comments on these Information 
Collection Requests by July 18, 2016. This does not affect the deadline 
for your comments to us on the proposed regulations.
    If your comments relate to the Information Collection Requests for 
these proposed regulations, please specify the Docket ID number and 
indicate ``Information Collection Comments'' on the top of your 
comments.

Intergovernmental Review

    These programs are not subject to Executive Order 12372 and the 
regulations in 34 CFR part 79.

Assessment of Educational Impact

    In accordance with section 411 of the General Education Provisions 
Act, 20 U.S.C. 1221e-4, the Secretary particularly requests comments on 
whether these proposed regulations would require transmission of 
information that any other agency or authority of the United States 
gathers or makes available.
    Accessible Format: Individuals with disabilities can obtain this 
document in an accessible format (e.g., braille, large print, 
audiotape, or compact disc) on request to one of the persons listed 
under FOR FURTHER INFORMATION CONTACT.
    Electronic Access to This Document: The official version of this 
document is the document published in the Federal Register. Free 
Internet access to the official edition of the Federal Register and the 
Code of Federal Regulations is available via the Federal Digital System 
at: www.gpo.gov/fdsys. At this site you can view this document, as well 
as all other documents of this Department published in the Federal 
Register, in text or PDF. To use PDF you must have Adobe Acrobat 
Reader, which is available free at the site.
    You may also access documents of the Department published in the 
Federal Register by using the article search feature at: 
www.federalregister.gov. Specifically, through the advanced search 
feature at this site, you can limit your search to documents published 
by the Department.

(Catalog of Federal Domestic Assistance Number does not apply.)

List of Subjects

34 CFR Part 30

    Claims, Income taxes.

34 CFR Part 668

    Administrative practice and procedure, Colleges and universities, 
Consumer protection, Grant programs--education, Loan programs--
education, Reporting and recordkeeping requirements, Selective Service 
System, Student aid, Vocational education.

34 CFR Part 674

    Loan programs--education, Reporting and recordkeeping, Student aid.

34 CFR Parts 682 and 685

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

34 CFR Part 686

    Administrative practice and procedure, Colleges and universities, 
Education, Elementary and secondary education, Grant programs--
education, Reporting and recordkeeping requirements, Student aid.

    Dated: June 9, 2016.
John B. King, Jr.,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary of 
Education proposes to amend parts 30, 668, 674, 682, 685, and 686 of 
title 34 of the Code of Federal Regulations as follows:

PART 30--DEBT COLLECTION

0
1. The authority citation for part 30 continues to read as follows:

    Authority: 20 U.S.C. 1221e-3(a)(1), and 1226a-1, 31 U.S.C. 
3711(e), 31 U.S.C. 3716(b) and 3720A, unless otherwise noted.

0
2. Section 30.70 is revised to read as follows:


Sec.  30.70  How does the Secretary exercise discretion to compromise a 
debt or to suspend or terminate collection of a debt?

    (a)(1) The Secretary uses the standards in the FCCS, 31 CFR part 
902, to determine whether compromise of a debt is appropriate if the 
debt arises under a program administered by the Department, unless 
compromise of the debt is subject to paragraph (b) of this section.
    (2) If the amount of the debt is more than $100,000, or such higher 
amount as the Department of Justice may prescribe, the Secretary refers 
a proposed compromise of the debt to the Department of Justice for 
approval, unless the compromise is subject to paragraph (b) of this 
section or the debt is one described in paragraph (e) of this section.
    (b) Under the provisions in 34 CFR 81.36, the Secretary may enter 
into certain compromises of debts arising because a recipient of a 
grant or cooperative agreement under an applicable Department program 
has spent some of these funds in a manner that is not allowable. For 
purposes of this section, neither a program authorized under the Higher 
Education

[[Page 39408]]

Act of 1965, as amended (HEA), nor the Impact Aid Program is an 
applicable Department program.
    (c)(1) The Secretary uses the standards in the FCCS, 31 CFR part 
903, to determine whether suspension or termination of collection 
action on a debt is appropriate.
    (2) Except as provided in paragraph (e), the Secretary--
    (i) Refers the debt to the Department of Justice to decide whether 
to suspend or terminate collection action if the amount of the debt 
outstanding at the time of the referral is more than $100,000 or such 
higher amount as the Department of Justice may prescribe; or
    (ii) May suspend or terminate collection action if the amount of 
the debt outstanding at the time of the Secretary's determination that 
suspension or termination is warranted is less than or equal to 
$100,000 or such higher amount as the Department of Justice may 
prescribe.
    (d) In determining the amount of a debt under paragraph (a), (b), 
or (c) of this section, the Secretary deducts any partial payments or 
recoveries already received, and excludes interest, penalties, and 
administrative costs.
    (e)(1) Subject to paragraph (e)(2) of this section, under the 
provisions of 31 CFR part 902 or 903, the Secretary may compromise a 
debt in any amount, or suspend or terminate collection of a debt in any 
amount, if the debt arises under the Federal Family Education Loan 
Program authorized under title IV, part B, of the HEA, the William D. 
Ford Federal Direct Loan Program authorized under title IV, part D of 
the HEA, or the Perkins Loan Program authorized under title IV, part E, 
of the HEA.
    (2) The Secretary refers a proposed compromise, or suspension or 
termination of collection, of a debt that exceeds $1,000,000 and that 
arises under a loan program described in paragraph (e)(1) of this 
section to the Department of Justice for review. The Secretary does not 
compromise, or suspend or terminate collection of, a debt referred to 
the Department of Justice for review until the Department of Justice 
has provided a response to that request.
    (f) The Secretary refers a proposed resolution of a debt to the 
Government Accountability Office (GAO) for review and approval before 
referring the debt to the Department of Justice if--
    (1) The debt arose from an audit exception taken by GAO to a 
payment made by the Department; and
    (2) The GAO has not granted an exception from the GAO referral 
requirement.
    (g) Nothing in this section precludes--
    (1) A contracting officer from exercising his authority under 
applicable statutes, regulations, or common law to settle disputed 
claims relating to a contract; or
    (2) The Secretary from redetermining a claim.
    (h) Nothing in this section authorizes the Secretary to compromise, 
or suspend or terminate collection of, a debt--
    (1) Based in whole or in part on conduct in violation of the 
antitrust laws; or
    (2) Involving fraud, the presentation of a false claim, or 
misrepresentation on the part of the debtor or any party having an 
interest in the claim.

(Authority: 20 U.S.C. 1082(a)(5) and (6), 1087a, 1087hh, 1221e-
3(a)(1), 1226a-1, and 1234a, 31 U.S.C. 3711)

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

0
3. The authority citation for part 668 is revised to read as follows:

    Authority: 20 U.S.C. 1001-1003, 1070g, 1085, 1088, 1091, 1092, 
1094, 1099c, 1099c-1, 1221-3, and 1231a, unless otherwise noted.

0
4. Section 668.14 is amended by:
0
A. In paragraph (b)(30)(ii)(C), removing the word ``and''.
0
B. In paragraph (b)(31)(v), removing the period and adding, in its 
place, the punctuation and word ``; and''.
0
C. Adding a new paragraph (b)(32).
    The addition reads as follows:


Sec.  668.14  Program participation agreement.

* * * * *
    (b) * * *
    (32) The institution will provide all enrolled students with a 
closed school discharge application and a written disclosure, 
describing the benefits and consequences of a closed school discharge 
as an alternative to completing their educational program through a 
teach-out agreement, as defined in 34 CFR 602.3, immediately upon 
submitting a teach-out plan after the occurrence of any of the 
following events:
    (i) The initiation by the Secretary of an action to terminate the 
participation of an institution in any title IV, HEA program under 34 
CFR 600.41 or subpart G of this part or the initiation of an emergency 
action under Sec.  668.83; or
    (ii) The occurrence of any of the events in paragraph (b)(31)(ii)-
(v) of this section.
* * * * *
0
5. Section 668.41 is amended by:
0
A. Adding new paragraphs (h) and (i).
0
B. Revising the authority citation.
    The additions and revision read as follows:
    Sec. Sec.  668.41 Reporting and disclosure of information.
* * * * *
    (h) Loan repayment warning for proprietary institutions--(1) 
General. For any fiscal year in which a proprietary institution's loan 
repayment rate is equal to or less than zero, the institution must 
deliver a warning to enrolled and prospective students in the manner 
described in paragraphs (h)(7) and (8) of this section.
    (2) Definitions. For purposes of this section, the term--
    (i) ``Fiscal year'' means the 12-month period beginning on October 
1 and ending on the following September 30 that is identified by the 
calendar year in which it ends;
    (ii) ``Original outstanding balance'' (OOB) means the amount of the 
outstanding balance, including accrued interest, on the Direct Loans 
owed by a student for enrollment at the institution on the date the 
loans first entered repayment. The OOB does not include PLUS loans made 
to parent borrowers or TEACH Grant-related loans. For consolidation 
loans, the OOB includes only those loans attributable to the borrower's 
enrollment at the institution;
    (iii) ``Current outstanding balance'' (COB) means the amount of the 
outstanding balance, including capitalized and uncapitalized interest, 
on the Direct Loans owed by the student at the end of the most recently 
completed fiscal year; and
    (iv) ``Measurement period'' is the period of time between the date 
that a borrower's loan enters repayment and the end of the fiscal year 
for which the COB of that loan is determined.
    (3) Methodology. For each fiscal year, the Secretary calculates an 
institution's loan repayment rate for the cohort of borrowers whose 
Direct Loans entered repayment at any time during the fifth fiscal year 
prior to the most recently completed fiscal year by--
    (i) Determining the OOB of the loans for each of those borrowers;
    (ii) Determining the COB of the loans for each of those borrowers;
    (iii) Calculating the difference between the OOB and the COB of the 
loans for each of those borrowers and expressing that difference as a 
percentage reduction of, or an increase in, the OOB;
    (iv) Using zero as the value for any loan on which the borrower 
defaulted for which there is a percentage reduction of the OOB; and

[[Page 39409]]

    (v) On a scale where percentage reductions in principal are 
positive values and percentage increases in principal are negative 
values, determining the median value. The median value is the loan 
repayment rate for that fiscal year.
    (4) Exclusions. The Secretary excludes a borrower from the 
calculation of the loan repayment rate if--
    (i) One or more of the borrower's loans were in a military-related 
deferment status during the last fiscal year of the measurement period;
    (ii) One or more of the borrower's loans are either under 
consideration by the Secretary, or have been approved, for a discharge 
on the basis of the borrower's total and permanent disability, under 
Sec.  685.213;
    (iii) The borrower was enrolled in an eligible institution during 
the last fiscal year of the measurement period; or
    (iv) The borrower died.
    (5) Issuing and correcting loan repayment rates. In accordance with 
procedures established by the Secretary--
    (i) Before issuing a final loan repayment rate for a fiscal year, 
the Secretary--
    (A) Provides to the institution a list of the students in the 
cohort described in paragraph (h)(3) of this section, the draft 
repayment rate for that cohort, and the information used to calculate 
the draft rate; and
    (B) Allows 45 days for the institution to challenge the accuracy of 
the information that the Secretary used to calculate the draft rate; 
and
    (ii) After considering any challenges to the draft loan repayment 
rate, the Secretary notifies the institution of its final repayment 
rate.
    (iii) If an institution's final loan repayment rate is equal to or 
less than zero--
    (A) Using the calculation described in paragraph (h)(6)(ii) of this 
section, the institution may submit an appeal to the Secretary within 
15 days of receiving notification of its final repayment rate; and
    (B) The Secretary will notify the institution if the appeal is 
accepted and the institution qualifies for an exemption from the 
warning requirement under paragraph (h)(7) of this section.
    (6) Privacy and low borrowing considerations. An institution is not 
required to deliver a warning under paragraph (h)(7) of this section 
based on a final repayment rate for that fiscal year if the institution 
demonstrates to the Secretary's satisfaction that--
    (i) That rate is based on fewer than 10 borrowers in the cohort 
described in paragraph (h)(3) of this section; or
    (ii) The institution's participation rate index is less than or 
equal to 0.0625. An institution calculates its participation rate index 
as if its cohort default rate were 30 percent, using the formula 
described in Sec.  668.214(b)(1).
    (7) Student warnings -- (i) General. An institution must deliver 
the warning required under this section to enrolled and prospective 
students in a form and manner prescribed by the Secretary in a notice 
published in the Federal Register. Before publishing that notice, the 
Secretary will conduct consumer testing to help ensure that the warning 
is meaningful and helpful to students.
    (ii) Delivery to enrolled students. An institution must deliver the 
warning required under this section by notifying each enrolled student 
in writing no later than 30 days after the Secretary informs the 
institution of its final loan repayment rate by--
    (A)(1) Hand-delivering the warning as a separate document to the 
student individually or as part of a group presentation; or
    (2) Sending the warning to the student's primary email address or 
delivering the warning through the electronic method used by the 
institution for communicating with the student about institutional 
matters; and
    (B) Ensuring that the warning is the only substantive content in 
the message sent to the student under this paragraph unless the 
Secretary specifies additional, contextual language to be included in 
the message.
    (iii) Delivery to prospective students. An institution must provide 
the warning required under this paragraph (h) to a prospective student 
before that student enrolls, registers, or enters into a financial 
obligation with the institution by--
    (A)(1) Hand-delivering the warning as a separate document to the 
student individually, or as part of a group presentation; or
    (2) Sending the warning to the student's primary email address or 
delivering the warning through the electronic method used by the 
institution for communicating with prospective students about 
institutional matters; and
    (B) Ensuring that the warning is the only substantive content in 
the message sent to the student under this paragraph unless the 
Secretary specifies additional, contextual language to be included in 
the message.
    (8) Promotional materials. (i) If an institution is required to 
deliver a warning under paragraph (h)(1) of this section, it must, in 
all promotional materials that are made available to prospective or 
enrolled students by or on behalf of the institution, include the 
warning under paragraph (h)(7) of this section, in a prominent manner.
    (ii) Promotional materials include, but are not limited to, an 
institution's Web site, catalogs, invitations, flyers, billboards, and 
advertising on or through radio, television, print media, social media, 
or the Internet.
    (iii) The institution must ensure that all promotional materials, 
including printed materials, about the institution are accurate and 
current at the time they are published, approved by a State agency, or 
broadcast.
    (9) Institutional Web site. (i) An institution must prominently 
provide the warning required in this section in a simple and meaningful 
manner on the home page of the institution's Web site.
    (ii) The warning must be posted to the institution's Web site no 
later than 30 days after the date the Secretary informs the institution 
of its final loan repayment rate, and remain posted to that Web site 
for the 12-month period following the date on which the Secretary 
informs the institution of its final loan repayment rate.
    (i) Financial protection disclosures. If an institution is required 
to provide financial protection to the Secretary, such as an 
irrevocable letter of credit or cash under Sec.  668.175(d) or (f), or 
to establish a set-aside under Sec.  668.175(h), the institution must--
    (1) Disclose information about that financial protection to 
enrolled and prospective students in the manner described in paragraph 
(h)(7) of this section;
    (2) Post the disclosure on the home page of the institution's Web 
site in the manner described in paragraph (h)(9) of this section no 
later than 30 days after the date the Secretary informs the institution 
of the need for the institution to provide financial protection, until 
such time as the Secretary releases the institution from the 
requirement that it provide financial protection; and
    (3) Identify and explain clearly in that disclosure the reason or 
reasons that the institution was required to provide that financial 
protection.

(Authority: 20 U.S.C. 1092, 1094, 1099c)


Sec.  668.71  [Amended]

0
6. Section 668.71 is amended by:
0
A. In the second sentence of the definition of ``Misrepresentation'' in 
paragraph (c), removing the word ``deceive'' and adding in its place 
the words ``mislead under the circumstances''.

[[Page 39410]]

0
B. In the definition of ``Misrepresentation'' in paragraph (c), adding 
a new fourth sentence, ``Misrepresentation includes any statement that 
omits information in such a way as to make the statement false, 
erroneous, or misleading.''
0
7. Section 668.90 is amended by revising paragraph (a)(3) to read as 
follows:


Sec.  668.90  Initial and final decisions.

    (a) * * *
    (3) Notwithstanding the provisions of paragraph (a)(2) of this 
section--
    (i) If, in a termination action against an institution, the hearing 
official finds that the institution has violated the provisions of 
Sec.  668.14(b)(18), the hearing official also finds that termination 
of the institution's participation is warranted;
    (ii) If, in a termination action against a third-party servicer, 
the hearing official finds that the servicer has violated the 
provisions of Sec.  668.82(d)(1), the hearing official also finds that 
termination of the institution's participation or servicer's 
eligibility, as applicable, is warranted;
    (iii) In an action brought against an institution or third-party 
servicer that involves its failure to provide a letter of credit or 
other financial protection in the amount specified by the Secretary 
under Sec.  668.15 or subpart L of part 668, the hearing official finds 
that the amount of the letter of credit or other financial protection 
established by the Secretary is appropriate, unless the institution can 
demonstrate that the amount was not warranted because--
    (A) The events or conditions identified by the Secretary as the 
grounds on which the protection is required no longer exist or have 
been resolved in a manner that eliminates the risk they posed to the 
institution's ability to meet its financial obligations; or
    (B) The institution has proffered alternative financial protection 
that provides students and the Department adequate protection against 
losses resulting from the risks identified by the Secretary. Adequate 
protection consists of one or both of the following--
    (1) A deposit with the Secretary of cash in the amount of financial 
protection demanded by the Secretary to be held by the Secretary in 
escrow; or
    (2) An agreement with the Secretary that a portion of the funds 
earned by the institution under a reimbursement funding arrangement 
will be temporarily withheld in such amounts as will meet, by the end 
of a nine-month period, the amount of the required financial protection 
demanded;
    (iv) In a termination action taken against an institution or third-
party servicer based on the grounds that the institution or servicer 
failed to comply with the requirements of Sec.  668.23(c)(3), if the 
hearing official finds that the institution or servicer failed to meet 
those requirements, the hearing official finds that the termination is 
warranted;
    (v)(A) In a termination action against an institution based on the 
grounds that the institution is not financially responsible under Sec.  
668.15(c)(1), the hearing official finds that the termination is 
warranted unless the institution demonstrates that all applicable 
conditions described in Sec.  668.15(d)(4) have been met; and
    (B) In a termination or limitation action against an institution 
based on the grounds that the institution is not financially 
responsible--
    (1) Upon proof of the conditions in Sec.  668.174(a), the hearing 
official finds that the limitation or termination is warranted unless 
the institution demonstrates that all the conditions in Sec.  
668.175(f) have been met; and
    (2) Upon proof of the conditions in Sec.  668.174(b)(1), the 
hearing official finds that the limitation or termination is warranted 
unless the institution demonstrates that all applicable conditions 
described in Sec.  668.174(b)(2) or Sec.  668.175(g) have been met.
* * * * *
0
8. Section 668.93 is amended by redesignating paragraphs (h) and (i) as 
paragraphs (i) and (j), respectively, and adding a new paragraph (h), 
to read as follows:


Sec.  668.93  Limitation.

* * * * *
    (h) A change in the participation status of the institution from 
fully certified to participate to provisionally certified to 
participate under Sec.  668.13(c).
* * * * *
0
9. Section 668.171 is revised to read as follows:


Sec.  668.171  General.

    (a) Purpose. To begin and to continue to participate in any title 
IV, HEA program, an institution must demonstrate to the Secretary that 
it is financially responsible under the standards established in this 
subpart. As provided under section 498(c)(1) of the HEA, the Secretary 
determines whether an institution is financially responsible based on 
the institution's ability to--
    (1) Provide the services described in its official publications and 
statements;
    (2) Meet all of its financial obligations; and
    (3) Provide the administrative resources necessary to comply with 
title IV, HEA program requirements.
    (b) General standards of financial responsibility. Except as 
provided under paragraphs (c) and (d) of this section, the Secretary 
considers an institution to be financially responsible if the Secretary 
determines that--
    (1) The institution's Equity, Primary Reserve, and Net Income 
ratios yield a composite score of at least 1.5, as provided under Sec.  
668.172 and appendices A and B to this subpart;
    (2) The institution has sufficient cash reserves to make required 
returns of unearned title IV, HEA program funds, as provided under 
Sec.  668.173;
    (3) The institution is able to meet all of its financial 
obligations and otherwise provide the administrative resources 
necessary to comply with title IV, HEA program requirements; and
    (4) The institution or persons affiliated with the institution are 
not subject to a condition of past performance under Sec.  668.174(a) 
or (b).
    (c) Actions and triggering events. An institution is not able to 
meet its financial or administrative obligations under paragraph (b)(3) 
of this section if it is subject to one or more of the following 
actions or triggering events.
    (1) Lawsuits and other actions. (i)(A) Currently or at any time 
during the three most recently completed award years, the institution 
is or was required to pay a debt or incurs a liability arising from an 
audit, investigation, or similar action initiated by a State, Federal, 
or other oversight entity, or settles or resolves a suit brought 
against it by that entity, that is based on claims related to the 
making of a Federal loan or the provision of educational services, for 
an amount that, for one or more of those years, exceeds the lesser of 
the threshold amount for which an audit is required under 2 CFR part 
200 or 10 percent of its current assets; or
    (B) The institution is currently being sued by a State, Federal, or 
other oversight entity based on claims related to the making of a 
Federal loan or the provision of educational services for an amount 
that exceeds the lesser of the threshold amount for which an audit is 
required under 2 CFR part 200 or 10 percent of its current assets;
    (ii) The institution is currently being sued by one or more State, 
Federal, or other oversight entities based on claims of any kind that 
are not described in paragraph (c)(1)(i)(B) of this section, and the 
potential monetary sanctions or damages from that suit or suits are in 
an amount that exceeds 10 percent of its current assets;

[[Page 39411]]

    (iii) The institution is currently being sued in a lawsuit filed 
under the False Claims Act, 31 U.S.C. 3729 et seq., or by one or more 
private parties for claims that relate to the making of loans to 
students for the purpose of enrollment or the institution's provision 
of educational services, if that suit--
    (A) Has survived a motion for summary judgment by the institution 
and has not been dismissed; and
    (B) Seeks relief in an amount that exceeds 10 percent of the 
institution's current assets; or
    (iv) For a suit described in paragraph (c)(1)(ii) or (iii) of this 
section, during a fiscal year for which the institution has not 
submitted its audited financial statements to the Secretary, the 
institution entered into a settlement, had judgment entered against it, 
incurred a liability, or otherwise resolved that suit for an amount 
that exceeds 10 percent of its current assets.
    (v) In determining whether a suit or action under this paragraph 
exceeds the audit or percentage thresholds, the institution must--
    (A) Except for private party suits under paragraph (c)(1)(iii) of 
this section, for a suit or action that does not demand a specific 
amount as relief, calculate that amount by totaling the tuition and 
fees the institution received from every student who was enrolled at 
the institution during the period for which the relief is sought, or if 
no period is stated, the three award years preceding the date the suit 
or action was filed or initiated; and
    (B) Use the amount of current assets reported in its most recent 
audited financial statements submitted to the Secretary.
    (2) Repayments to the Secretary. During the current award year or 
any of the three most recently completed award years, the institution 
is or was required to repay the Secretary for losses from borrower 
defense claims in an amount that, for one or more of those years, 
exceeds the lesser of the threshold amount for which an audit is 
required under 2 CFR part 200 or 10 percent of its current assets, as 
reported in its most recent audited financial statements submitted to 
the Secretary.
    (3) Accrediting agency actions. Currently or any time during the 
three most recently completed award years, the institution is or was--
    (i) Required by its accrediting agency to submit a teach-out plan, 
for a reason described in Sec.  602.24(c)(1), that covers the 
institution or any of its branches or additional locations; or
    (ii) Placed on probation or issued a show-cause order, or placed on 
an accreditation status that poses an equivalent or greater risk to its 
accreditation, by its accrediting agency for failing to meet one or 
more of the agency's standards, and the accrediting agency does not 
notify the Secretary within six months of taking that action that it 
has withdrawn that action because the institution has come into 
compliance with the agency's standards.
    (4) Loan agreements and obligations. As disclosed in a note to its 
audited financial statements or audit opinion, or reported by the 
institution under paragraph (d) of this section--
    (i) The institution violated a provision or requirement in a loan 
agreement with the creditor with the largest secured extension of 
credit to the institution;
    (ii) The institution failed to make a payment for more than 120 
days in accordance with its debt obligations owed to the creditor with 
the largest secured extension of credit to the institution; or
    (iii) As provided under the terms of a security or loan agreement 
between the institution and the creditor with the largest secured 
extension of credit to the institution, a monetary or nonmonetary 
default or delinquency event occurs, or other events occur that 
trigger, or enable the creditor to require or impose on the 
institution, an increase in collateral, a change in contractual 
obligations, an increase in interest rates or payments, or other 
sanctions, penalties, or fees.
    (5) Non-title IV revenue. For its most recently completed fiscal 
year, a proprietary institution did not derive at least 10 percent of 
its revenue from sources other than title IV, HEA program funds, as 
provided under Sec.  668.28(c).
    (6) Publicly traded institutions. As reported by the institution 
under paragraph (d) of this section, or identified by the Secretary--
    (i) The Securities and Exchange Commission (SEC) warns the 
institution that it may suspend trading on the institution's stock, or 
the institution's stock is delisted involuntarily from the exchange on 
which the stock was traded;
    (ii) The institution disclosed or was required to disclose in a 
report filed with the SEC a judicial or administrative proceeding 
stemming from a complaint filed by a person or entity that is not part 
of a State or Federal action under paragraph (c)(1) of this section;
    (iii) The institution failed to file timely a required annual or 
quarterly report with the SEC; or
    (iv) The exchange on which the institution's stock is traded 
notifies the institution that it is not in compliance with exchange 
requirements.
    (7) Gainful employment. As determined annually by the Secretary, 
the number of students who receive title IV, HEA program funds enrolled 
in gainful employment programs that are failing or in the zone under 
the D/E rates measure in Sec.  668.403(c) is more than 50 percent of 
the total number of students who received title IV program funds who 
are enrolled in all the gainful employment programs at the institution. 
An institution is exempt from this provision if less than 50 percent of 
all the students enrolled at the institution who receive title IV, HEA 
program funds are enrolled in gainful employment programs.
    (8) Withdrawal of owner's equity. For an institution whose 
composite score is less than 1.5, any withdrawal of owner's equity from 
the institution by any means, including by declaring a dividend.
    (9) Cohort default rates. The institution's two most recent 
official cohort default rates are 30 percent or greater, as determined 
under subpart N of this part, unless--
    (i) The institution files a challenge, request for adjustment, or 
appeal under that subpart with respect to its rates for one or both of 
those fiscal years; and
    (ii) That challenge, request, or appeal remains pending, results in 
reducing below 30 percent the official cohort default rate for either 
or both years, or precludes the rates from either or both years from 
resulting in a loss of eligibility or provisional certification.
    (10) Other events or conditions. The Secretary determines that 
there is an event or condition that is reasonably likely to have a 
material adverse effect on the financial condition, business, or 
results of operations of the institution, including but not limited to 
whether--
    (i) There is a significant fluctuation between consecutive award 
years, or a period of award years, in the amount of Direct Loan or Pell 
Grant funds, or a combination of those funds, received by the 
institution that cannot be accounted for by changes in those programs;
    (ii) The institution is cited by a State licensing or authorizing 
agency for failing State or agency requirements;
    (iii) The institution fails a financial stress test developed or 
adopted by the Secretary to evaluate whether the institution has 
sufficient capital to absorb losses that may be incurred as a result of 
adverse conditions and continue to meet its financial obligations to 
the Secretary and students;
    (iv) The institution or its corporate parent has a non-investment 
grade bond or credit rating;

[[Page 39412]]

    (v) As calculated by the Secretary, the institution has high annual 
dropout rates; or
    (vii) Any adverse event reported by the institution on a Form 8-K 
filed with the SEC.
    (d) Reporting requirements. In accordance with procedures 
established by the Secretary, an institution must notify the Secretary 
of any action or event identified in paragraph (c) of this section no 
later than 10 days after that action or event occurs. The Secretary may 
take an administrative action under paragraph (g) of this section 
against the institution if it fails to provide timely notice under this 
paragraph. In its notice to the Secretary, the institution may 
demonstrate that--
    (1) The reported disclosure of a judicial or administrative 
proceeding under paragraph (c)(6)(ii) of this section does not 
constitute a material event;
    (2) The reported withdrawal of owner's equity under paragraph 
(c)(8) of this section was used exclusively to meet tax liabilities of 
the institution or its owners for income derived from the institution, 
or, in the case where the composite score is calculated based on the 
consolidated financial statements of a group of institutions, the 
amount withdrawn from one institution in the group was transferred to 
another entity within that group; or
    (3) The reported violation of a provision or requirement in a loan 
agreement under paragraph (c)(4) of this section was waived by the 
creditor. However, if the creditor imposes additional constraints or 
requirements as a condition of waiving the violation, or imposes 
penalties or requirements under paragraph (c)(4)(iii) of this section, 
the institution must identify and describe those penalties, 
constraints, or requirements and demonstrate that complying with those 
actions will not adversely affect the institution's ability to meet its 
current and future financial obligations.
    (e) Public institutions. (1) The Secretary considers a domestic 
public institution to be financially responsible if the institution--
    (i)(A) Notifies the Secretary that it is designated as a public 
institution by the State, local, or municipal government entity, tribal 
authority, or other government entity that has the legal authority to 
make that designation; and
    (B) Provides a letter from an official of that State or other 
government entity confirming that the institution is a public 
institution; and
    (ii) Is not subject to a condition of past performance under Sec.  
668.174.
    (2) The Secretary considers a foreign public institution to be 
financially responsible if the institution--
    (i)(A) Notifies the Secretary that it is designated as a public 
institution by the country or other government entity that has the 
legal authority to make that designation; and
    (B) Provides documentation from an official of that country or 
other government entity confirming that the institution is a public 
institution and is backed by the full faith and credit of the country 
or other government entity; and
    (ii) Is not subject to a condition of past performance under Sec.  
668.174.
    (f) Audit opinions. Even if an institution satisfies all of the 
general standards of financial responsibility under paragraph (b) of 
this section, the Secretary does not consider the institution to be 
financially responsible if, in the institution's audited financial 
statements, the opinion expressed by the auditor was an adverse, 
qualified, or disclaimed opinion, or the auditor expressed doubt about 
the continued existence of the institution as a going concern, unless 
the Secretary determines that a qualified or disclaimed opinion does 
not significantly bear on the institution's financial condition.
    (g) Administrative actions. If the Secretary determines that an 
institution is not financially responsible under the standards and 
provisions of this section or under an alternative standard in Sec.  
668.175, or the institution does not submit its financial and 
compliance audits by the date and in the manner required under Sec.  
668.23, the Secretary may--
    (1) Initiate an action under subpart G of this part to fine the 
institution, or limit, suspend, or terminate the institution's 
participation in the title IV, HEA programs; or
    (2) For an institution that is provisionally certified, take an 
action against the institution under the procedures established in 
Sec.  668.13(d).

(Authority: 20 U.S.C. 1094 and 1099c and section 4 of Pub. L. 95-
452, 92 Stat. 1101-1109)

0
10. Section 668.175 is amended by:
0
A. Revising paragraphs (d) and (f).
0
B. Removing and reserving paragraph (e).
0
C. Adding paragraph (h).
0
D. Revising the authority citation.
    The revisions and addition read as follows:


Sec.  668.175  Alternative standards and requirements.

* * * * *
    (d) Zone alternative. (1) A participating institution that is not 
financially responsible solely because the Secretary determines that 
its composite score is less than 1.5 may participate in the title IV, 
HEA programs as a financially responsible institution for no more than 
three consecutive years, beginning with the year in which the Secretary 
determines that the institution qualifies under this alternative.
    (i)(A) An institution qualifies initially under this alternative 
if, based on the institution's audited financial statement for its most 
recently completed fiscal year, the Secretary determines that its 
composite score is in the range from 1.0 to 1.4; and
    (B) An institution continues to qualify under this alternative if, 
based on the institution's audited financial statement for each of its 
subsequent two fiscal years, the Secretary determines that the 
institution's composite score is in the range from 1.0 to 1.4.
    (ii) An institution that qualified under this alternative for three 
consecutive years, or for one of those years, may not seek to qualify 
again under this alternative until the year after the institution 
achieves a composite score of at least 1.5, as determined by the 
Secretary.
    (2) Under the zone alternative, the Secretary--
    (i) Requires the institution to make disbursements to eligible 
students and parents, and to otherwise comply with the provisions, 
under either the heightened cash monitoring or reimbursement payment 
method described in Sec.  668.162;
    (ii) Requires the institution to provide timely information 
regarding any of the following oversight and financial events--
    (A) Any event that causes the institution, or related entity as 
defined in Accounting Standards Codification (ASC) 850, to realize any 
liability that was noted as a contingent liability in the institution's 
or related entity's most recent audited financial statement; or
    (B) Any losses that are unusual in nature or infrequently occur or 
both, as defined in accordance with Accounting Standards Update (ASU) 
No. 2015-01 and ASC 225;
    (iii) May require the institution to submit its financial statement 
and compliance audits earlier than the time specified under Sec.  
668.23(a)(4); and
    (iv) May require the institution to provide information about its 
current operations and future plans.
    (3) Under the zone alternative, the institution must--
    (i) For any oversight or financial event described in paragraph 
(d)(2)(ii) of this section for which the institution is

[[Page 39413]]

required to provide information, in accordance with procedures 
established by the Secretary, notify the Secretary no later than 10 
days after that event occurs; and
    (ii) As part of its compliance audit, require its auditor to 
express an opinion on the institution's compliance with the 
requirements under the zone alternative, including the institution's 
administration of the payment method under which the institution 
received and disbursed title IV, HEA program funds.
    (4) If an institution fails to comply with the requirements under 
paragraphs (d)(2) or (3) of this section, the Secretary may determine 
that the institution no longer qualifies under this alternative.
    (e) [Reserved]
    (f) Provisional certification alternative. (1) The Secretary may 
permit an institution that is not financially responsible to 
participate in the title IV, HEA programs under a provisional 
certification for no more than three consecutive years if--
    (i) The institution is not financially responsible because it does 
not satisfy the general standards under Sec.  668.171(b)(1), is subject 
to an action or triggering event under Sec.  668.171(c), or because of 
an audit opinion described in Sec.  668.171(f); or
    (ii) The institution is not financially responsible because of a 
condition of past performance, as provided under Sec.  668.174(a), and 
the institution demonstrates to the Secretary that it has satisfied or 
resolved that condition.
    (2) Under this alternative, the institution must--
    (i) Provide to the Secretary an irrevocable letter of credit that 
is acceptable and payable to the Secretary, provide cash, or agree to a 
set-aside under paragraph (h) of this section, for an amount determined 
by the Secretary under paragraph (f)(4) of this section, except that 
this requirement does not apply to a public institution; and
    (ii) Comply with the provisions under the zone alternative, as 
provided under paragraph (d)(2) and (3) of this section.
    (3) If at the end of the period for which the Secretary 
provisionally certified the institution, the institution is still not 
financially responsible, the Secretary may again permit the institution 
to participate under a provisional certification, but the Secretary--
    (i) May require the institution, or one or more persons or entities 
that exercise substantial control over the institution, as determined 
under Sec.  668.174(b)(1) and (c), or both, to provide to the Secretary 
financial protection for an amount determined by the Secretary to be 
sufficient to satisfy any potential liabilities that may arise from the 
institution's participation in the title IV, HEA programs; and
    (ii) May require one or more of the persons or entities that 
exercise substantial control over the institution, as determined under 
Sec.  668.174(b)(1) and (c), to be jointly or severally liable for any 
liabilities that may arise from the institution's participation in the 
title IV, HEA programs.
    (4) The institution must provide to the Secretary an irrevocable 
letter of credit for an amount that is--
    (i) For a State or Federal action under Sec.  668.171(c)(1)(i)(A) 
or (B), 10 percent or more, as determined by the Secretary, of the 
amount of Direct Loan Program funds received by the institution during 
its most recently completed fiscal year;
    (ii) For repayments to the Secretary for losses from borrower 
defense claims under Sec.  668.171(c)(2), equal to the greatest annual 
loss incurred by the Secretary during the three most recently completed 
award years to resolve those claims or the amount of losses incurred by 
the Secretary during the current award year, whichever is greater, plus 
a portion of the amount of any outstanding or pending claims based on 
the ratio of the total value of claims resolved in favor of borrowers 
during the three most recently completed award years to the total value 
of claims resolved during the three most recently completed award 
years; and
    (iii) For any other action or triggering event described in Sec.  
668.171(c), or if the institution's composite score is less than 1.0 or 
the institution no longer qualifies under the zone alternative, 10 
percent or more, as determined by the Secretary, of the total amount of 
title IV, HEA program funds received by the institution during its most 
recently completed fiscal year.
* * * * *
    (h) Set-aside. If an institution does not provide cash or the 
letter of credit for the amount required under paragraph (d) or (f) of 
this section within 30 days of the Secretary's request, the Secretary 
offsets the amount of title IV, HEA program funds that an institution 
has earned in a manner that ensures that, by the end of a nine-month 
period, the total amount offset equals the amount of cash or the letter 
of credit the institution would otherwise provide. The Secretary 
maintains the amount of funds offset in a temporary escrow account, 
uses the funds to satisfy the debt and liabilities owed to the 
Secretary not otherwise paid directly by the institution, and provides 
to the institution any funds not used for this purpose during the 
period for which the cash or letter of credit was required.

(Authority: 20 U.S.C. 1094 and 1099c)

0
11. Section 668.176 is added to subpart L to read as follows:


Sec.  668.176  Severability.

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

(Authority: 20 U.S.C. 1094, 1099c)

PART 674--FEDERAL PERKINS LOAN PROGRAM

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

    Authority:  20 U.S.C. 1070g, 1087aa--1087hh, unless otherwise 
noted.
0
13. Section 674.33 is amended by:
0
A. In paragraph (g)(3) introductory text, removing the words ``may 
discharge'' and adding, in their place, the word ``discharges''.
0
B. In paragraph (g)(3)(i), removing the word ``or''.
0
C. In paragraph (g)(3)(ii), removing the period and adding, in its 
place, the punctuation and word ``; or''.
0
D. Adding paragraph (g)(3)(iii).
0
E. Redesignating paragraphs (g)(8)(vi), (vii), (viii), and (ix) as 
paragraphs (g)(8)(vii), (viii), (ix), and (x), respectively.
0
F. Adding a new paragraph (g)(8)(vi).
    The additions read as follows:


Sec.  674.33  Repayment.

* * * * *
    (g) * * *
    (3) * * *
    (iii) Based on information in the Secretary's possession, the 
borrower did not subsequently re-enroll in any title IV-eligible 
institution within a period of three years from the date the school 
closed.
* * * * *
    (8) * * *
    (vi) Upon resuming collection on any affected loan, the Secretary 
provides the borrower another discharge application and an explanation 
of the requirements and procedures for obtaining a discharge.
* * * * *
0
14. Section 674.61 is amended by revising paragraph (a) to read as 
follows:


Sec.  674.61  Discharge for death or disability.

    (a) Death. (1) An institution must discharge the unpaid balance of 
a borrower's Defense, NDSL, or Federal Perkins loan, including 
interest, if the borrower dies. The institution must discharge the loan 
on the basis of--

[[Page 39414]]

    (i) An original or certified copy of the death certificate;
    (ii) An accurate and complete photocopy of the original or 
certified copy of the death certificate;
    (iii) An accurate and complete original or certified copy of the 
death certificate that is scanned and submitted electronically or sent 
by facsimile transmission; or
    (iv) Verification of the borrower's death through an authoritative 
Federal or State electronic database approved for use by the Secretary.
    (2) Under exceptional circumstances and on a case-by-case basis, 
the chief financial officer of the institution may approve a discharge 
based upon other reliable documentation of the borrower's death.
* * * * *

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

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

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


Sec.  682.202  [Amended]

0
16. Section 682.202 is amended in paragraph (b)(1) by removing the 
words ``A lender'' and adding, in their place, ``Except as provided in 
Sec.  682.405(b)(4), a lender''.
0
17. Section 682.211 is amended by adding paragraph (i)(7) to read as 
follows:


Sec.  682.211  Forbearance.

* * * * *
    (i) * * *
    (7) The lender must grant a mandatory administrative forbearance to 
a borrower upon being notified by the Secretary that the borrower has 
made a borrower defense claim related to a 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). The mandatory 
administrative forbearance shall remain in effect until the lender is 
notified by the Secretary that the Secretary has made a determination 
as to the borrower's eligibility for a borrower defense discharge.
* * * * *
0
18. Section 682.402 is amended by:
0
A. Revising paragraphs (b)(2), (d)(6)(ii)(F) introductory text and 
(d)(6)(ii)(H).
0
B. Redesignating paragraph (d)(6)(ii)(I) as paragraph (d)(6)(ii)(J).
0
C. Adding new paragraphs (d)(6)(ii)(I) and (d)(6)(ii)(K).
0
D. In paragraph (d)(8) introductory text, removing the words ``may be'' 
and adding in their place the word ``is''.
0
E. In paragraph (d)(8)(i), removing the word ``or''.
0
F. In paragraph (d)(8)(ii), removing the period and adding in its place 
the punctuation and word ``; or''.
0
G. Adding paragraph (d)(8)(iii).
0
H. In paragraph (e)(6)(iii), removing the last sentence.
    The revisions and additions read as follows:


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

* * * * *
    (b) * * *
    (2)(i) A discharge of a loan based on the death of the borrower (or 
student in the case of a PLUS loan) must be based on--
    (A) An original or certified copy of the death certificate;
    (B) An accurate and complete photocopy of the original or certified 
copy of the death certificate;
    (C) An accurate and complete original or certified copy of the 
death certificate that is scanned and submitted electronically or sent 
by facsimile transmission; or
    (D) Verification of the borrower's or student's death through an 
authoritative Federal or State electronic database approved for use by 
the Secretary.
    (ii) Under exceptional circumstances and on a case-by-case basis, 
the chief executive officer of the guaranty agency may approve a 
discharge based upon other reliable documentation of the borrower's or 
student's death.
* * * * *
    (d) * * *
    (6) * * *
    (ii) * * *
    (F) If the guaranty agency determines that a borrower identified in 
paragraph (d)(6)(ii)(C) or (D) of this section does not qualify for a 
discharge, the agency shall notify the borrower in writing of that 
determination, the opportunity for review by the Secretary, and an 
explanation of the manner in which to request such a review within 30 
days after the date the agency--
* * * * *
    (H) If a borrower described in paragraph (d)(6)(ii)(E) or (F) fails 
to submit the completed application within 60 days of being notified of 
that option, the lender or guaranty agency shall resume collection and 
shall be deemed to have exercised forbearance of payment of principal 
and interest from the date it suspended collection activity. The lender 
may capitalize, in accordance with Sec.  682.202(b), any interest 
accrued and not paid during that period.
    (I) Upon resuming collection on any affected loan, the lender or 
guaranty agency provides the borrower another discharge application and 
an explanation of the requirements and procedures for obtaining a 
discharge.
* * * * *
    (K)(1) Within 30 days after receiving the borrower's request for 
review under paragraph (d)(6)(ii)(F) of this section, the agency shall 
forward the borrower's discharge request and all relevant documentation 
to the Secretary for review.
    (2) The Secretary notifies the agency and the borrower of the 
determination upon review. If the Secretary determines that the 
borrower is not eligible for a discharge under paragraph (d) of this 
section, within 30 days after being so informed, the agency shall take 
the actions described in paragraph (d)(6)(ii)(H) or (d)(6)(ii)(I) of 
this section, as applicable.
    (3) If the Secretary determines that the borrower meets the 
requirements for a discharge under paragraph (d) of this section, the 
agency shall, within 30 days after being so informed, take actions 
required under paragraph (d)(6) and (d)(7) of this section, as 
applicable.
* * * * *
    (8) * * *
    (iii) The Secretary or guaranty agency determines, based on 
information in their possession, that the borrower did not subsequently 
re-enroll in any title IV-eligible institution within a period of three 
years after the school closed.
* * * * *
0
19. Section 682.405 is amended by:
0
A. Redesignating paragraph (b)(4) as paragraph (b)(4)(i).
0
B. Adding a new paragraph (b)(4)(ii).
    The addition reads as follows:


Sec.  682.405  Loan rehabilitation agreement.

* * * * *
    (b) * * *
    (4) * * *
    (ii) The lender must not consider the purchase of a rehabilitated 
loan as entry into repayment or resumption of repayment for the 
purposes of interest capitalization under Sec.  682.202(b).
* * * * *


Sec.  682.410  [Amended]

0
20. Section 682.410 is amended in paragraph (b)(4) by adding, after the 
words ``to the lender'', the words and punctuation ``, but shall not 
capitalize any unpaid interest thereafter''.

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

0
21. The authority citation for part 685 continues to read as follows:

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


[[Page 39415]]


0
22. Section 685.200 is amended by:
0
A. Adding paragraph (f)(3)(v).
0
B. Adding paragraph (f)(4)(iii).
    The additions read as follows:


Sec.  685.200  Borrower eligibility.

* * * * *
    (f) * * *
    (3) * * *
    (v) A borrower who receives a closed school, false certification, 
unpaid refund, or defense to repayment discharge that results in a 
remaining eligibility period greater than zero is no longer responsible 
for the interest that accrues on a Direct Subsidized Loan or on the 
portion of a Direct Consolidation Loan that repaid a Direct Subsidized 
Loan unless the borrower once again becomes responsible for the 
interest that accrues on a previously received Direct Subsidized Loan 
or on the portion of a Direct Consolidation Loan that repaid a Direct 
Subsidized Loan, for the life of the loan, as described in paragraph 
(f)(3)(i) of this section.
    (4) * * *
    (iii) For a first-time borrower who receives a closed school, false 
certification, unpaid refund, or defense to repayment discharge on a 
Direct Subsidized Loan or a portion of a Direct Consolidation Loan that 
is attributable to a Direct Subsidized Loan, the Subsidized Usage 
Period is reduced. If the Direct Subsidized Loan or a portion of a 
Direct Consolidation Loan that is attributable to a Direct Subsidized 
Loan is discharged in full, the Subsidized Usage Period is zero years. 
If the Direct Subsidized Loan or a portion of a Direct Consolidation 
Loan that is attributable to a Direct Subsidized Loan is discharged in 
part, the Subsidized Usage Period may be reduced if the discharge 
results in the inapplicability of paragraph (f)(4)(i) of this section.
* * * * *
0
23. Section 685.205 is amended by revising paragraph (b)(6) to read as 
follows:


Sec.  685.205  Forbearance.

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


Sec.  685.206  Borrower responsibilities and defenses.

* * * * *
    (c) Borrower defenses. (1) For loans first disbursed prior to July 
1, 2017, the borrower may assert a borrower defense under this 
paragraph (c). A ``borrower defense'' refers to any act or omission of 
the school attended by the student that relates to the making of the 
loan or the provision of educational services for which the loan was 
provided that would give rise to a cause of action against the school 
under applicable State law, and includes one or both of the following:
    (i) A defense to repayment of amounts owed to the Secretary on a 
Direct Loan, in whole or in part.
    (ii) A claim to recover amounts previously collected by the 
Secretary on the Direct Loan, in whole or in part.
    (2) The order of objections for defaulted Direct Loans are as 
described in Sec.  685.222(a)(1) to (6). A borrower defense claim under 
this section must be asserted, and will be resolved, under the 
procedures in Sec.  685.222(e) to (k).
    (3) For an approved borrower defense under this section, the 
Secretary may initiate an appropriate proceeding to collect from the 
school whose act or omission resulted in the borrower defense the 
amount of relief arising from the borrower defense.
* * * * *


Sec.  685.209  [Amended]

0
25. Section 685.209 is amended by:
0
A. In paragraph (a)(1)(ii), adding the punctuation and words ``, for 
purposes of determining whether a borrower has a partial financial 
hardship in accordance with paragraph (a)(1)(v) of this section or 
adjusting a borrower's monthly payment amount in accordance with 
paragraph (a)(2)(ii) of this section,'' immediately after the words 
``Eligible loan''.
0
B. In paragraph (c)(1)(ii), adding the punctuation and words ``, for 
purposes of adjusting a borrower's monthly payment amount in accordance 
with paragraph (c)(2)(ii) of this section,'' immediately after the 
words ``Eligible loan''.
0
C. In paragraph (c)(2)(ii)(B) introductory text, removing the word 
``Both'' and adding, in its place, the words ``Except in the case of a 
married borrower filing separately whose spouse's income is excluded in 
accordance with paragraph (c)(1)(i)(A) or (B) of this section, both''.
0
D. In paragraph (c)(2)(v), removing the words ``or the Secretary 
determines the borrower does not have a partial financial hardship''.
0
E. In paragraph (c)(4)(iii)(B), removing the citations ``(c)(2)(iv), 
(c)(4)(v), and (c)(4)(vi)'' and adding, in their place, the citations 
``(c)(2)(iv) and (c)(4)(v)''.
0
26. Section 685.212 is amended by:
0
A. Revising paragraphs (a)(1) and (a)(2).
0
B. Adding paragraph (k).
    The revision and addition read as follows:


Sec.  685.212  Discharge of a loan obligation.

    (a) Death. (1) If a borrower (or a student on whose behalf a parent 
borrowed a Direct PLUS Loan) dies, the Secretary discharges the 
obligation of the borrower and any endorser to make any further 
payments on the loan based on--
    (i) An original or certified copy of the death certificate;
    (ii) An accurate and complete photocopy of the original or 
certified copy of the death certificate;
    (iii) An accurate and complete original or certified copy of the 
death certificate that is scanned and submitted electronically or sent 
by facsimile transmission; or
    (iv) Verification of the borrower's or student's death through an 
authoritative Federal or State electronic database approved for use by 
the Secretary.
    (2) Under exceptional circumstances and on a case-by-case basis, 
the Secretary discharges a loan based upon other reliable documentation 
of the borrower's or student's death that is acceptable to the 
Secretary.
* * * * *
    (k) Borrower defenses. (1) If a borrower defense is approved under 
Sec.  685.206(c) or Sec.  685.222--
    (i) The Secretary discharges the obligation of the borrower in 
whole or in part in accordance with the procedures in Sec. Sec.  
685.206(c) and 685.222, respectively; and
    (ii) The Secretary returns to the borrower payments made by the 
borrower or otherwise recovered on the loan that exceed the amount owed 
on that portion of the loan not discharged, if the borrower asserted 
the claim not later than--
    (A) For a claim subject to Sec.  685.206(c), the limitation period 
under applicable law to the claim on which relief was granted; or
    (B) For a claim subject to Sec.  685.222, the limitation period in 
Sec.  685.222(b), (c), or (d), as applicable.
    (2) In the case of a Direct Consolidation Loan, a borrower may 
assert a borrower defense under Sec.  685.206(c) or Sec.  685.222 with 
respect to a Direct Loan, a FFEL Program Loan, a Federal Perkins Loan, 
Health Professions Student Loan, Loan for Disadvantaged Students under 
subpart II of part A of title VII of the Public

[[Page 39416]]

Health Service Act, Health Education Assistance Loan, or Nursing Loan 
made under subpart II of part B of the Public Health Service Act that 
was repaid by the Direct Consolidation Loan.
    (i) The Secretary considers a borrower defense claim asserted on a 
Direct Consolidation Loan by determining--
    (A) Whether the act or omission of the school with regard to the 
loan described in paragraph (k)(2) of this section other than a Direct 
Subsidized, Unsubsidized, or PLUS Loan, constitutes a borrower defense 
under Sec.  685.206(c), for a Direct Consolidation Loan made before 
July 1, 2017, or under Sec.  685.222, for a Direct Consolidation Loan 
made on or after July 1, 2017; or
    (B) Whether the act or omission of the school with regard to a 
Direct Subsidized, Unsubsidized, or PLUS Loan made on after July 1, 
2017 that was paid off by the Direct Consolidation Loan, constitutes a 
borrower defense under Sec.  685.222.
    (ii) If the borrower defense is approved, the Secretary discharges 
the appropriate portion of the Direct Consolidation Loan.
    (iii) The Secretary returns to the borrower payments made by the 
borrower or otherwise recovered on the Direct Consolidation Loan that 
exceed the amount owed on that portion of the Direct Consolidation Loan 
not discharged, if the borrower asserted the claim not later than--
    (A) For a claim asserted under Sec.  685.206(c), the limitation 
period under applicable law to the claim on which relief was granted; 
or
    (B) For a claim asserted under Sec.  685.222, the limitation period 
in Sec.  685.222(b), (c), or (d), as applicable.
    (iv) The Secretary returns to the borrower a payment made by the 
borrower or otherwise recovered on the loan described in paragraph 
(k)(2) of this section only if--
    (A) The payment was made directly to the Secretary on the loan; and
    (B) The borrower proves that the loan to which the payment was 
credited was not legally enforceable under applicable law in the amount 
for which that payment was applied.
* * * * *
0
27. Section 685.214 is amended by:
0
A. Revising paragraph (c)(2).
0
B. Revising paragraph (f)(4).
0
C. Redesignating paragraphs (f)(5) and (6) as paragraphs (f)(6) and 
(7), respectively.
0
D. Adding a new paragraph (f)(5).
    The revisions and addition read as follows:


Sec.  685.214  Closed school discharge.

* * * * *
    (c) * * *
    (2) The Secretary discharges a loan under this section without an 
application from the borrower if the Secretary determines, based on 
information in the Secretary's possession, that--
    (i) The borrower qualifies for the discharge; and
    (ii) The borrower did not subsequently re-enroll in any title IV-
eligible institution within a period of three years from the date the 
school closed.
* * * * *
    (f) * * *
    (4) If a borrower fails to submit the application described in 
paragraph (c) of this section within 60 days of the Secretary's 
providing the discharge application, the Secretary resumes collection 
and grants forbearance of principal and interest for the period in 
which collection activity was suspended. The Secretary may capitalize 
any interest accrued and not paid during that period.
    (5) Upon resuming collection on any affected loan, the Secretary 
provides the borrower another discharge application and an explanation 
of the requirements and procedures for obtaining a discharge.
* * * * *
0
28. Section 685.215 is amended by:
0
A. Revising paragraph (a)(1).
0
B. Revising paragraph (c) introductory text.
0
C. Revising paragraph (c)(1).
0
D. Redesignating paragraphs (c)(2) through (7) as paragraphs (c)(3) 
through (8), respectively.
0
E. Adding a new paragraph (c)(2).
0
F. Revising redesignated paragraph (c)(8).
0
G. Revising paragraph (d).
    The revisions and addition read as follows:


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

    (a) Basis for discharge--(1) False certification. The Secretary 
discharges a borrower's (and any endorser's) obligation to repay a 
Direct Loan in accordance with the provisions of this section if a 
school falsely certifies the eligibility of the borrower (or the 
student on whose behalf a parent borrowed) to receive the proceeds of a 
Direct Loan. The Secretary considers a student's eligibility to borrow 
to have been falsely certified by the school if the school--
    (i) Certified the eligibility of a student who
    (A) Reported not having a high school diploma or its equivalent; 
and
    (B) Did not satisfy the alternative to graduation from high school 
requirements under section 484(d) of the Act that were in effect at the 
time of certification;
    (ii) Certified the eligibility of a student who is not a high 
school graduate based on--
    (A) A high school graduation status falsified by the school; or
    (B) A high school diploma falsified by the school or a third party 
to which the school referred the borrower;
    (iii) Signed the borrower's name on the loan application or 
promissory note without the borrower's authorization;
    (iv) Certified the eligibility of a student who, because of a 
physical or mental condition, age, criminal record, or other reason 
accepted by the Secretary, would not meet State requirements for 
employment (in the student's State of residence when the loan was 
originated) in the occupation for which the training program supported 
by the loan was intended; or
    (v) Certified the eligibility of a student for a Direct Loan as a 
result of the crime of identity theft committed against the individual, 
as that crime is defined in paragraph (c)(5)(ii) of this section.
* * * * *
    (c) Borrower qualification for discharge. To qualify for discharge 
under this section, the borrower must submit to the Secretary an 
application for discharge on a form approved by the Secretary. The 
application need not be notarized but must be made by the borrower 
under penalty of perjury; and in the application, the borrower's 
responses must demonstrate to the satisfaction of the Secretary that 
the requirements in paragraph (c)(1) through (7) of this section have 
been met. If the Secretary determines the application does not meet the 
requirements, the Secretary notifies the applicant and explains why the 
application does not meet the requirements.
    (1) High school diploma or equivalent. In the case of a borrower 
requesting a discharge based on not having had a high school diploma 
and not having met the alternative to graduation from high school 
eligibility requirements under section 484(d) of the Act applicable at 
the time the loan was originated, and the school or a third party to 
which the school referred the borrower falsified the student's high 
school diploma, the borrower must state in the application that that 
the borrower (or the student on whose behalf a parent received a PLUS 
loan)--
    (i) Did not have a valid high school diploma at the time the loan 
was certified; and

[[Page 39417]]

    (ii) Did not satisfy the alternative to graduation from high school 
statutory or regulatory eligibility requirements identified on the 
application form and applicable at the time the institution certified 
the loan.
    (2) Disqualifying condition. In the case of a borrower requesting a 
discharge based on a condition that would disqualify the borrower from 
employment in the occupation that the training program for which the 
borrower received the loan was intended, the borrower must state in the 
application that the borrower (or student for whom a parent received a 
PLUS loan) did not meet State requirements for employment (in the 
student's State of residence) in the occupation that the training 
program for which the borrower received the loan was intended because 
of a physical or mental condition, age, criminal record, or other 
reason accepted by the Secretary.
* * * * *
    (8) Discharge without an application. The Secretary discharges all 
or part of a loan as appropriate under this section without an 
application from the borrower if the Secretary determines, based on 
information in the Secretary's possession, that the borrower qualifies 
for a discharge. Such information includes, but is not limited to, 
evidence that the school has falsified the Satisfactory Academic 
Progress of its students, as described in Sec.  668.34.
    (d) Discharge procedures. (1) If the Secretary determines that a 
borrower's Direct Loan may be eligible for a discharge under this 
section, the Secretary provides the borrower an application and an 
explanation of the qualifications and procedures for obtaining a 
discharge. The Secretary also promptly suspends any efforts to collect 
from the borrower on any affected loan. The Secretary may continue to 
receive borrower payments.
    (2) If the borrower fails to submit the application described in 
paragraph (c) of this section within 60 days of the Secretary's 
providing the application, the Secretary resumes collection and grants 
forbearance of principal and interest for the period in which 
collection activity was suspended. The Secretary may capitalize any 
interest accrued and not paid during that period.
    (3) If the borrower submits the application described in paragraph 
(c) of this section, the Secretary determines whether the available 
evidence supports the claim for discharge. Available evidence includes 
evidence provided by the borrower and any other relevant information 
from the Secretary's records and gathered by the Secretary from other 
sources, including guaranty agencies, State authorities, test 
publishers, independent test administrators, school records, and 
cognizant accrediting associations. The Secretary issues a decision 
that explains the reasons for any adverse determination on the 
application, describes the evidence on which the decision was made, and 
provides the borrower, upon request, copies of the evidence, and 
considers any response from the borrower and any additional information 
from the borrower, and notifies the borrower whether the determination 
is changed.
    (4) If the Secretary determines that the borrower meets the 
applicable requirements for a discharge under paragraph (c) of this 
section, the Secretary notifies the borrower in writing of that 
determination.
    (5) If the Secretary determines that the borrower does not qualify 
for a discharge, the Secretary notifies the borrower in writing of that 
determination and the reasons for the determination.
* * * * *


Sec.  685.220  [Amended]

0
29. Section 685.220 is amended by:
0
A. Removing the words ``subpart II of part B'' from paragraph (b)(21) 
and adding, in their place, the words ``part E''.
0
B. Removing paragraph (d)(1)(i).
0
C. Redesignating paragraph (d)(1)(ii) as (d)(1)(i), and paragraph 
(d)(1)(iii) as (d)(1)(ii).
0
30. Section 685.222 is added to subpart B to read as follows:


Sec.  685.222  Borrower defenses.

    (a) General. (1) For loans first disbursed prior to July 1, 2017, a 
borrower asserts and the Secretary considers a borrower defense in 
accordance with the provisions of Sec.  685.206(c), unless otherwise 
noted in Sec.  685.206(c).
    (2) For loans first disbursed on or after July 1, 2017, a borrower 
asserts and the Secretary considers a borrower defense in accordance 
with this section. To establish a borrower defense under this section, 
a preponderance of the evidence must show that the borrower has a 
borrower defense that meets the requirements of this section.
    (3) A violation by the school of an eligibility or compliance 
requirement in the Act or its implementing regulations is not a basis 
for a borrower defense under either this section or Sec.  685.206(c) 
unless the violation would otherwise constitute a basis for a borrower 
defense under this section.
    (4) For the purposes of this section or Sec.  685.206(c), 
``borrower'' means--
    (i) The borrower; and
    (ii) In the case of a Direct PLUS Loan, the student and any 
endorsers.
    (5) For the purposes of this section or Sec.  685.206(c), a 
``borrower defense'' refers to an act or omission of the school 
attended by the student that relates to the making of a Direct Loan for 
enrollment at the school or the provision of educational services for 
which the loan was provided and that meets the requirements under 
paragraphs (b), (c), or (d), and includes one or both of the following:
    (i) A defense to repayment of amounts owed to the Secretary on a 
Direct Loan, in whole or in part; and
    (ii) A right to recover amounts previously collected by the 
Secretary on the Direct Loan, in whole or in part.
    (6) If the borrower asserts both a borrower defense and any other 
objection to an action of the Secretary with regard to that Direct 
Loan, the Secretary notifies the borrower of the order in which the 
Secretary considers the borrower defense and any other objections. The 
order in which the Secretary will consider objections, including a 
borrower defense, will be determined by the Secretary as appropriate 
under the circumstances.
    (b) Judgment against the school. (1) The borrower has a borrower 
defense if the borrower, whether as an individual or as a member of a 
class, or a governmental agency, has obtained against the school a 
nondefault, favorable contested judgment based on State or Federal law 
in a court or administrative tribunal of competent jurisdiction.
    (2) A borrower may assert a borrower defense under this paragraph 
at any time.
    (c) Breach of contract by the school. The borrower has a borrower 
defense if the school the borrower received a Direct Loan to attend 
failed to perform its obligations under the terms of a contract with 
the student. A borrower may assert a defense to repayment of amounts 
owed to the Secretary under this paragraph at any time after the breach 
by the school of its contract with the student. A borrower may assert a 
right to recover amounts previously collected by the Secretary under 
this paragraph not later than six years after the breach by the school 
of its contract with the student.
    (d) Substantial misrepresentation by the school. (1) A borrower has 
a borrower defense if the school or any of its representatives, or any 
institution, organization, or person with whom the school has an 
agreement to provide

[[Page 39418]]

educational programs, or to provide marketing, advertising, recruiting, 
or admissions services, made a substantial misrepresentation in 
accordance with 34 CFR part 668, subpart F, that the borrower 
reasonably relied on when the borrower decided to attend, or to 
continue attending, the school. A borrower may assert, at any time, a 
defense to repayment under this paragraph (d) of amounts owed to the 
Secretary. A borrower may assert a claim under this paragraph (d) to 
recover funds previously collected by the Secretary not later than six 
years after the borrower discovers, or reasonably could have 
discovered, the information constituting the substantial 
misrepresentation.
    (2) For the purposes of this section, a designated Department 
official pursuant to paragraph (e) of this section or a hearing 
official pursuant to paragraphs (f), (g), or (h) may consider, as 
evidence supporting the reasonableness of a borrower's reliance on a 
misrepresentation, whether the school or any of the other parties 
described in paragraph (d)(1) engaged in conduct such as, but not 
limited to:
    (i) Demanding that the borrower make enrollment or loan-related 
decisions immediately;
    (ii) Placing an unreasonable emphasis on unfavorable consequences 
of delay;
    (iii) Discouraging the borrower from consulting an adviser, a 
family member, or other resource;
    (iv) Failing to respond to the borrower's requests for more 
information, including about the cost of the program and the nature of 
any financial aid; or
    (v) Otherwise unreasonably pressuring the borrower or taking 
advantage of the borrower's distress or lack of knowledge or 
sophistication.
    (e) Procedure for an individual borrower. (1) To assert a borrower 
defense under this section, an individual borrower must--
    (i) Submit an application to the Secretary, on a form approved by 
the Secretary--
    (A) Certifying that the borrower received the proceeds of a loan, 
in whole or in part, to attend a named school;
    (B) Providing evidence that supports the borrower defense; and
    (C) Indicating whether the borrower has made a claim with respect 
to the information underlying the borrower defense with any third 
party, such as the holder of a performance bond or a tuition recovery 
program, and, if so, the amount of any payment received by the borrower 
or credited to the borrower's loan obligation; and
    (ii) Provide any other information or supporting documentation 
reasonably requested by the Secretary.
    (2) Upon receipt of a borrower's application, the Secretary--
    (i) If the borrower is not in default on the loan for which a 
borrower defense has been asserted, grants forbearance and--
    (A) Notifies the borrower of the option to decline the forbearance 
and to continue making payments on the loan; and
    (B) Provides the borrower with information about the availability 
of the income-contingent repayment plans under Sec.  685.209 and the 
income-based repayment plan under Sec.  685.221; or
    (ii) If the borrower is in default on the loan for which a borrower 
defense has been asserted--
    (A) Suspends collection activity on the loan until the Secretary 
issues a decision on the borrower's claim;
    (B) Notifies the borrower of the suspension of collection activity 
and explains that collection activity will resume if the Secretary 
determines that the borrower does not qualify for a full discharge; and
    (C) Notifies the borrower of the option to continue making payments 
under a rehabilitation agreement or other repayment agreement on the 
defaulted loan.
    (3) The Secretary designates a Department official to review the 
borrower's application to determine whether the application states a 
basis for a borrower defense, and resolves the claim through a fact-
finding process conducted by the Department official.
    (i) As part of the fact-finding process, the Department official 
notifies the school of the borrower defense and considers any evidence 
or argument presented by the borrower and also any additional 
information, including--
    (A) Department records;
    (B) Any response or submissions from the school; and
    (C) Any additional information or argument that may be obtained by 
the Department official.
    (ii) The Department official identifies to the borrower and may 
identify to the school the records he or she considers relevant to the 
borrower defense. The Secretary provides to the borrower or the school 
any of the identified records upon reasonable request.
    (4) At the conclusion of the fact-finding process, the Department 
official issues a written decision as follows:
    (i) If the Department official approves the borrower defense in 
full or in part, the Department official notifies the borrower in 
writing of that determination and of the relief provided as described 
in paragraph (i) of this section.
    (ii) If the Department official denies the borrower defense in full 
or in part, the Department official notifies the borrower of the 
reasons for the denial, the evidence that was relied upon, any portion 
of the loan that is due and payable to the Secretary, and whether the 
Secretary will reimburse any amounts previously collected, and informs 
the borrower that if any balance remains on the loan, the loan will 
return to its status prior to the borrower's submission of the 
application. The Department official also informs the borrower of the 
opportunity to request reconsideration of the claim based on new 
evidence pursuant to paragraph (e)(5)(i) of this section.
    (5) The decision of the Department official is final as to the 
merits of the claim and any relief that may be granted on the claim. 
Notwithstanding the foregoing--
    (i) If the borrower defense is denied in full or in part, the 
borrower may request that the Secretary reconsider the borrower defense 
upon the identification of new evidence in support of the borrower's 
claim. ``New evidence'' is relevant evidence that the borrower did not 
previously provide and that was not identified in the final decision as 
evidence that was relied upon for the final decision; and
    (ii) The Secretary may reopen a borrower defense application at any 
time to consider evidence that was not considered in making the 
previous decision.
    (6) The Secretary may consolidate applications filed under this 
paragraph (e) that have common facts and claims, and resolve the 
borrowers' borrower defense claims as provided in paragraphs (f), (g), 
and (h) of this section.
    (7) The Secretary may initiate a separate proceeding to collect 
from the school the amount of relief resulting from a borrower defense 
under this paragraph.
    (f) Group process for borrower defense, generally. (1) Upon 
consideration of factors including, but not limited to, common facts 
and claims, fiscal impact, and the promotion of compliance by the 
school or other title IV, HEA program participants, the Secretary may 
initiate a process to determine whether a group of borrowers, 
identified by the Secretary, has a borrower defense.
    (i) The members of the group may be identified by the Secretary 
from individually filed applications pursuant to paragraph (e)(6) of 
this section or from any other source.

[[Page 39419]]

    (ii) If the Secretary determines that there are common facts and 
claims that apply to borrowers who have not filed an application under 
paragraph (e) of this section, the Secretary may identify such 
borrowers as members of a group.
    (2) Upon the identification of a group of borrowers under paragraph 
(f)(1) of this section, the Secretary--
    (i) Designates a Department official to present the group's claim 
in the fact-finding process described in paragraph (g) or (h) of this 
section, as applicable;
    (ii) Provides each identified member of the group with notice that 
allows the borrower to opt out of the proceeding; and
    (iii) Notifies the school, as practicable, of the basis of the 
group's borrower defense, the initiation of the fact-finding process 
described in paragraph (g) or (h) of this section, and of any procedure 
by which to request records and respond.
    (3) For a group of borrowers identified by the Secretary, for which 
the Secretary determines that there may be a borrower defense under 
paragraph (d) based upon a substantial misrepresentation that has been 
widely disseminated, there is a rebuttable presumption that each member 
reasonably relied on the misrepresentation.
    (g) Procedures for group process for borrower defenses with respect 
to loans made to attend a closed school. For groups identified by the 
Secretary under paragraph (f) of this section, for which the borrower 
defense is asserted with respect to a Direct Loan to attend a school 
that has closed and has provided no financial protection currently 
available to the Secretary from which to recover any losses arising 
from borrower defenses, and for which there is no appropriate entity 
from which the Secretary can otherwise practicably recover such 
losses--
    (1) A hearing official resolves the borrower defense through a 
fact-finding process. As part of the fact-finding process, the hearing 
official considers any evidence and argument presented by the 
Department official on behalf of the group and, as necessary to 
determine any claims at issue, on behalf of individual members of the 
group. The hearing official also considers any additional information 
the Department official considers necessary, including any Department 
records or response from the school or a person affiliated with the 
school as described in Sec.  668.174(b), if practicable. The hearing 
official issues a written decision as follows:
    (i) If the hearing official approves the borrower defense in full 
or in part, the written decision notifies the members of the group in 
writing of that determination and of the relief provided on the basis 
of that claim as determined under paragraph (i) of this section.
    (ii) If the hearing official denies the borrower defense in full or 
in part, the written decision states the reasons for the denial, the 
evidence that was relied upon, the portion of the loans that are due 
and payable to the Secretary, and whether reimbursement of amounts 
previously collected is granted, and informs the borrowers that if any 
balance remains on the loan, the loan will return to its status prior 
to the group claim process.
    (iii) The Secretary provides copies of the written decision to the 
members of the group and, as practicable, to the school.
    (2) The decision of the hearing official is final as to the merits 
of the group borrower defense and any relief that may be granted on the 
group claim.
    (3) After a final decision has been issued, if relief for the group 
has been denied in full or in part pursuant to paragraph (g)(1)(ii) of 
this section, an individual borrower may file a claim for relief 
pursuant to paragraph (e)(5)(i) of this section.
    (4) The Secretary may reopen a borrower defense application at any 
time to consider evidence that was not considered in making the 
previous decision.
    (h) Procedures for group process for borrower defenses with respect 
to loans made to attend an open school. For groups identified by the 
Secretary under paragraph (f) of this section, for which the borrower 
defense is asserted with respect to Direct Loans to attend an open 
school or a school that is not otherwise covered by paragraph (g) of 
this section, the claim is resolved in accordance with the procedures 
in this paragraph (h).
    (1) A hearing official resolves the borrower defense and determines 
any liability of the school through a fact-finding process. As part of 
the process, the hearing official considers any evidence and argument 
presented by the school and the Department official on behalf of the 
group and, as necessary to determine any claims at issue, on behalf of 
individual members of the group. The hearing official issues a written 
decision as follows:
    (i) If the hearing official approves the borrower defense in full 
or in part, the written decision establishes the basis for the 
determination, notifies the members of the group of the relief as 
described in paragraph (i) of this section, and notifies the school of 
any liability to the Secretary for the amounts discharged and 
reimbursed.
    (ii) If the hearing official denies the borrower defense for the 
group in full or in part, the written decision states the reasons for 
the denial, the evidence that was relied upon, the portion of the loans 
that are due and payable to the Secretary, and whether reimbursement of 
amounts previously collected is granted, and informs the borrowers that 
their loans will return to their statuses prior to the group borrower 
defense process. The decision notifies the school of any liability to 
the Secretary for any amounts discharged or reimbursed.
    (iii) The Secretary provides copies of the written decision to the 
members of the group, the Department official, and the school.
    (2) The decision of the hearing official becomes final as to the 
merits of the group borrower defense and any relief that may be granted 
on the group borrower defense within 30 days after the decision is 
issued and received by the Department official and the school unless, 
within that 30-day period, the school or the Department official 
appeals the decision to the Secretary. In the case of an appeal--
    (i) The decision of the hearing official does not take effect 
pending the appeal; and
    (ii) The Secretary renders a final decision.
    (3) After a final decision has been issued, if relief for the group 
has been denied in full or in part pursuant to paragraph (h)(1)(ii) of 
this section, an individual borrower may file a claim for relief 
pursuant to paragraph (e)(5)(i) of this section.
    (4) The Secretary may reopen a borrower defense application at any 
time to consider evidence that was not considered in making the 
previous decision.
    (5) The Secretary collects from the school any liability to the 
Secretary for any amounts discharged or reimbursed to borrowers under 
this paragraph (h).
    (i) Relief. If a borrower defense is approved under the procedures 
in paragraphs (e), (g), or (h) of this section--
    (1) The Department official or the hearing official, as applicable, 
determines the appropriate method for calculating, and the amount of, 
relief arising out of the facts underlying an individual or group 
borrower defense, based on information then available to the official 
or which the official may request; and determines the amount of relief 
to award the borrower, which may be a discharge of all amounts owed to 
the Secretary on the loan at issue and may include the recovery of 
amounts previously collected by the Secretary on the loan, or some 
lesser amount. In

[[Page 39420]]

determining the appropriate method for calculating relief, the 
Department official or the hearing official, as applicable--
    (i) Will consider the availability of information required for a 
method of calculation;
    (ii) When calculating relief for a group of borrowers, may consider 
information derived from a sample of borrowers from the group; and
    (iii) May use one or more of the methods described in Appendix A to 
this subpart, or such other method determined by the official;
    (2) In the written decision described in paragraphs (e), (g), and 
(h) of this section, the designated Department official or hearing 
official, as applicable, notifies the borrower of the relief provided 
and--
    (i) Specifies the relief determination;
    (ii) Advises that there may be tax implications; and
    (iii) Provides the borrower an opportunity to opt out of group 
relief, if applicable;
    (3) Consistent with the determination of relief under paragraph 
(i)(1) of this section, the Secretary discharges the borrower's 
obligation to repay all or part of the loan and associated costs and 
fees that the borrower would otherwise be obligated to pay and, if 
applicable, reimburses the borrower for amounts paid toward the loan 
voluntarily or through enforced collection;
    (4) The Secretary or the hearing official, as applicable, affords 
the borrower such further relief as the Secretary or the hearing 
official determines is appropriate under the circumstances. Such 
further relief includes, but is not limited to, one or both of the 
following:
    (i) Determining that the borrower is not in default on the loan and 
is eligible to receive assistance under title IV of the Act.
    (ii) Updating reports to consumer reporting agencies to which the 
Secretary previously made adverse credit reports with regard to the 
borrower's Direct Loan; and
    (5) The total amount of relief granted with respect to a borrower 
defense cannot exceed the amount of the loan and any associated costs 
and fees and will be reduced by the amount of any refund, 
reimbursement, indemnification, restitution, compensatory damages, 
settlement, debt forgiveness, discharge, cancellation, compromise, or 
any other benefit received by, or on behalf of, the borrower that was 
related to the borrower defense. The relief to the borrower may not 
include non-pecuniary damages such as inconvenience, aggravation, 
emotional distress, or punitive damages.
    (j) Cooperation by the borrower. To obtain relief under this 
section, a borrower must reasonably cooperate with the Secretary in any 
proceeding under paragraph (e), (g), or (h) of this section. The 
Secretary may revoke any relief granted to a borrower who fails to 
satisfy his or her obligations under this paragraph (j).
    (k) Transfer to the Secretary of the borrower's right of recovery 
against third parties. (1) Upon the granting of any relief under this 
section, the borrower is deemed to have assigned to, and relinquished 
in favor of, the Secretary any right to a loan refund (up to the amount 
discharged) that the borrower may have by contract or applicable law 
with respect to the loan or the contract for educational services for 
which the loan was received, against the school, its principals, its 
affiliates, and their successors, its sureties, and any private fund. 
If the borrower asserts a claim to, and recovers from, a public fund, 
the Secretary may reinstate the borrower's obligation to repay on the 
loan an amount based on the amount recovered from the public fund, if 
the Secretary determines that the borrower's recovery from the public 
fund was based on the same borrower defense and for the same loan for 
which the discharge was granted under this section.
    (2) The provisions of this paragraph (k) apply notwithstanding any 
provision of State law that would otherwise restrict transfer of those 
rights by the borrower, limit or prevent a transferee from exercising 
those rights, or establish procedures or a scheme of distribution that 
would prejudice the Secretary's ability to recover on those rights.
    (3) Nothing in this paragraph (k) limits or forecloses the 
borrower's right to pursue legal and equitable relief against a party 
described in this paragraph (k) for recovery of any portion of a claim 
exceeding that assigned to the Secretary or any other claims arising 
from matters unrelated to the claim on which the loan is discharged.
0
31. Section 685.223 is added to subpart B to read as follows:


Sec.  685.223  Severability.

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

(Authority: 20 U.S.C. 1087a et seq.)

0
32. Appendix A to subpart B of part 685 is added to read as follows:

Appendix A to Subpart B of Part 685--Calculating Borrower Relief

    The Department official or the hearing official, as applicable, 
determines the amount of relief to award the borrower, which may be 
a discharge of all amounts owed to the Secretary on the loan at 
issue and may include the recovery of amounts previously collected 
by the Secretary on the loan, or some lesser amount. A borrower's 
relief may be calculated using one or more of the following methods 
or such other method as the Secretary may determine.
    (A) The difference between what the borrower paid, and what a 
reasonable borrower would have paid had the school made an accurate 
representation as to the issue that was the subject of the 
substantial misrepresentation underlying the borrower defense claim.
    (B) The difference between the amount of financial charges the 
borrower could have reasonably believed the school was charging, and 
the actual amount of financial charges made by the school, for 
claims regarding the cost of a borrower's program of study.
    (C) The total amount of the borrower's economic loss, less the 
value of the benefit, if any, of the education obtained by the 
student. Economic loss, for the purposes of this section, may be no 
greater than the cost of attendance. The value of the benefit of the 
education may include transferable credits obtained and used by the 
borrower; and for gainful employment programs, qualifying placement 
in an occupation within the Standard Occupational Classification 
(SOC) code for which the training was provided, provided the 
borrower's earnings meet the expected salary for the program's 
designated occupations or field, as determined using an earnings 
benchmark for that occupation. The Department official or hearing 
official will consider any evidence indicating that no identifiable 
benefit of the education was received by the student.

0
33. Section 685.300 is amended by:
0
A. Redesignating paragraph (b)(11) as paragraph (b)(12).
0
B. Adding a new paragraph (b)(11).
0
C. Adding new paragraphs (d) through (i).
    The additions read as follows:


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

* * * * *
    (b) * * *
    (11) Comply with the provisions of paragraphs (d) through (i) 
regarding student claims and disputes.
* * * * *
    (d) Borrower defense claims in an internal dispute process. The 
school will not compel any student to pursue a complaint based on a 
borrower defense claim through an internal institutional process before 
the student presents the complaint to an accrediting agency or 
government agency authorized to hear the complaint.

[[Page 39421]]

    (e) Class action bans. (1) The school shall not seek to rely in any 
way on a pre-dispute arbitration agreement, nor on any other pre-
dispute agreement, with a student, with respect to any aspect of a 
class action that is related to a borrower defense claim including to 
seek a stay or dismissal of particular claims or the entire action, 
unless and until the presiding court has ruled that the case may not 
proceed as a class action and, if that ruling may be subject to 
appellate review on an interlocutory basis, the time to seek such 
review has elapsed or the review has been resolved.
    (2) Reliance on a pre-dispute arbitration agreement, or on any 
other pre-dispute agreement, with a student, with respect to any aspect 
of a class action includes, but is not limited to, any of the 
following:
    (i) Seeking dismissal, deferral, or stay of any aspect of a class 
action;
    (ii) Seeking to exclude a person or persons from a class in a class 
action;
    (iii) Objecting to or seeking a protective order intended to avoid 
responding to discovery in a class action;
    (iv) Filing a claim in arbitration against a student who has filed 
a claim on the same issue in a class action;
    (v) Filing a claim in arbitration against a student who has filed a 
claim on the same issue in a class action after the trial court has 
denied a motion to certify the class but before an appellate court has 
ruled on an interlocutory appeal of that motion, if the time to seek 
such an appeal has not elapsed or the appeal has not been resolved; and
    (vi) Filing a claim in arbitration against a student who has filed 
a claim on the same issue in a class action after the trial court in 
that class action has granted a motion to dismiss the claim and, in 
doing so, the court noted that the consumer has leave to refile the 
claim on a class basis, if the time to refile the claim has not 
elapsed.
    (3) Required provisions and notices. (i) The school must include 
the following provision in any agreements with a student recipient of a 
Direct Loan for attendance at the school, or, with respect to a Parent 
PLUS Loan, a student for whom the PLUS loan was obtained, that include 
any agreement regarding pre-dispute arbitration or any other pre-
dispute agreement addressing class actions and that are entered into 
after effective date of this regulation:

    ``We agree that neither we nor anyone else will use this 
agreement to stop you from being part of a class action lawsuit in 
court. You may file a class action lawsuit in court or you may be a 
member of a class action lawsuit even if you do not file it. This 
provision applies only to class action claims concerning our acts or 
omissions regarding the making of the Direct Loan or the provision 
by us of educational services for which the Direct Loan was 
obtained.''

    (ii) When a pre-dispute arbitration agreement or any other pre-
dispute agreement addressing class actions has been entered into before 
the effective date of this regulation that did not contain a provision 
described in paragraph (e)(3)(i) of this section, the school must 
either ensure the agreement is amended to contain the provision 
specified in paragraph (e)(3)(iii)(A) of this section or provide the 
student to whom the agreement applies with the written notice specified 
in paragraph (e)(3)(iii)(B) of this section.
    (iii) The school must ensure the agreement described in paragraph 
(e)(3)(ii) of this section is amended to contain the provision 
specified in paragraph (e)(3)(iii)(A) or must provide the notice 
specified in paragraph (e)(3)(iii)(B) to students no later than the 
exit counseling required under Sec.  685.304(b), or the date on which 
the school files its initial response to a demand for arbitration or 
service of a complaint from a student who has not already been sent a 
notice or amendment.
    (A) Agreement provision.

    ``We agree that neither we nor anyone else who later becomes a 
party to this agreement will use it to stop you from being part of a 
class action lawsuit in court. You may file a class action lawsuit 
in court or you may be a member of a class action lawsuit even if 
you do not file it. This provision applies only to class action 
claims concerning our acts or omissions regarding the making of the 
Direct Loan or the provision by us of educational services for which 
the Direct Loan was obtained.''

    (B) Notice provision.

    ``We agree not to use any pre-dispute agreement to stop you from 
being part of a class action lawsuit in court. You may file a class 
action lawsuit in court or you may be a member of a class action 
lawsuit even if you do not file it. This provision applies only to 
class action claims concerning our acts or omissions regarding the 
making of the Direct Loan or the provision by us of educational 
services for which the Direct Loan was obtained.''
    (f) Pre-dispute arbitration agreements. (1) The school will not 
compel a student to enter into a pre-dispute agreement to arbitrate a 
borrower defense claim, or rely in any way on a mandatory pre-dispute 
arbitration agreement with respect to any aspect of a borrower defense 
claim.
    (2) Reliance on a mandatory pre-dispute arbitration agreement with 
respect to any aspect of a borrower defense claim includes, but is not 
limited to, any of the following:
    (i) Seeking dismissal, deferral, or stay of any aspect of a 
judicial action filed by the student;
    (ii) Objecting to or seeking a protective order intended to avoid 
responding to discovery in a judicial action filed by the student; and
    (iii) Filing a claim in arbitration against a student who has filed 
a suit on the same claim.
    (3) Required provisions and notices. (i) The school must include 
the following provision in any mandatory pre-dispute arbitration 
agreements with a student recipient of a Direct Loan for attendance at 
the school, or, with respect to a Parent PLUS Loan, a student for whom 
the PLUS loan was obtained, that include any agreement regarding 
arbitration and that are entered into after effective date of this 
regulation:

    ``We agree that neither we nor anyone else will use this 
agreement to stop you from bringing a lawsuit regarding our acts or 
omissions regarding the making of the Direct Loan or the provision 
by us of educational services for which the Direct Loan was 
obtained. You may file a lawsuit for such a claim or you may be a 
member of a class action lawsuit for such a claim even if you do not 
file it. This provision does not apply to lawsuits concerning other 
claims.''

    (ii) When a mandatory pre-dispute arbitration agreement has been 
entered into before the effective date of this regulation that did not 
contain a provision described in paragraph (f)(3)(i), the school shall 
either ensure the agreement is amended to contain the provision 
specified in paragraph (f)(3)(iii)(A) of this section or provide the 
student to whom the agreement applies with the written notice specified 
in paragraph (f)(3)(iii)(B) of this section.
    (iii) The school shall ensure the agreement described in paragraph 
(f)(3)(ii) of this section is amended to contain the provision 
specified in paragraph (f)(3)(iii)(A) or shall provide the notice 
specified in paragraph (f)(3)(iii)(B) to students no later than the 
exit counseling required under Sec.  685.304(b), or the date on which 
the school files its initial response to a demand for arbitration or 
service of a complaint from a student who has not already been sent a 
notice or amendment.
    (A) Agreement provision.

    ``We agree that neither we nor anyone else who later becomes a 
party to this pre-dispute arbitration agreement will use it to stop 
you from bringing a lawsuit regarding our acts or omissions 
regarding the making of the Direct Loan or the provision by us of 
educational services for which the Direct Loan was obtained. You may 
file a lawsuit for such a claim or you may be a member of a class 
action lawsuit for such a claim even if you

[[Page 39422]]

do not file it. This provision does not apply to other claims.''

    (B) Notice provision.

    ``We agree not to use any pre-dispute arbitration agreement to 
stop you from bringing a lawsuit regarding our acts or omissions 
regarding the making of the Direct Loan or the provision by us of 
educational services for which the Direct Loan was obtained. You may 
file a lawsuit regarding such a claim or you may be a member of a 
class action lawsuit regarding such a claim even if you do not file 
it. This provision does not apply to any other claims.''

    (g) Submission of arbitral records. (1) A school shall submit a 
copy of the following records to the Secretary, in the form and manner 
specified by the Secretary, in connection with any claim filed in 
arbitration by or against the school concerning a borrower defense 
claim:
    (i) The initial claim and any counterclaim;
    (ii) The pre-dispute arbitration agreement filed with the 
arbitrator or arbitration administrator;
    (iii) The judgment or award, if any, issued by the arbitrator or 
arbitration administrator;
    (iv) If an arbitrator or arbitration administrator refuses to 
administer or dismisses a claim due to the school's failure to pay 
required filing or administrative fees, any communication the school 
receives from the arbitrator or an arbitration administrator related to 
such a refusal; and
    (v) Any communication the school receives from an arbitrator or an 
arbitration administrator related to a determination that a pre-dispute 
arbitration agreement regarding educational services provided by the 
school does not comply with the administrator's fairness principles, 
rules, or similar requirements, if such a determination occurs.
    (2) Deadline for submission. A school shall submit any record 
required pursuant to paragraph (g)(1) of this section within 60 days of 
filing by the school of any such record with the arbitrator or 
arbitration administrator and within 60 days of receipt by the school 
of any such record filed or sent by someone other than the school, such 
as the arbitration administrator or the student.
    (h) Submission of judicial records. (1) A school shall submit a 
copy of the following records to the Secretary, in the form and manner 
specified by the Secretary, in connection with any claim filed in a 
lawsuit by the school against the student, or by any party, including a 
government agency, against the school concerning a borrower defense 
claim:
    (i) The complaint and any counterclaim;
    (ii) Any dispositive motion filed by a party to the suit; and
    (iii) The ruling on any dispositive motion and the judgment issued 
by the court.
    (2) Deadline for submission. A school shall submit any record 
required pursuant to paragraph (h)(1) of this section within 30 days of 
filing or receipt, as applicable, of the complaint, answer, or 
dispositive motion, and within 30 days of receipt of any ruling on a 
dispositive motion or a final judgment.
    (i) Definitions. For the purposes of paragraphs (d) through (h) of 
this section, the term--
    (1) ``Borrower defense claim'' means a claim that is or could be 
asserted as a defense to repayment under Sec.  685.206(c) or Sec.  
685.222;
    (2) ``Class action'' means a lawsuit in which one or more parties 
seek class treatment pursuant to Federal Rule of Civil Procedure 23 or 
any State process analogous to Federal Rule of Civil Procedure 23;
    (3) ``Dispositive motion'' means a motion asking for a court order 
that entirely disposes of one or more claims in favor of the party who 
files the motion without need for further court proceedings;
    (4) ``Pre-dispute arbitration agreement'' means an agreement 
between a school and a student providing for arbitration of any future 
dispute between the parties; and
    (5) ``Mandatory pre-dispute arbitration agreement'' means a pre-
dispute arbitration agreement included in an enrollment agreement or 
other document that must be executed by the student as a condition for 
enrollment at the school.
* * * * *
0
34. Section 685.308 is amended by revising paragraph (a) to read as 
follows:


Sec.  685.308  Remedial actions.

    (a) The Secretary collects from the school the amount of the losses 
the Secretary incurs and determines that the institution is liable to 
repay under Sec. Sec.  685.206, 685.214, 685.215(a)(1)(i), (ii), or 
(iii), 685.216, or 685.222 or that were disbursed--
    (1) To an individual, because of an act or omission of the school, 
in amounts that the individual was not eligible to receive; or
    (2) Because of the school's violation of a Federal statute or 
regulation.
* * * * *
0
35. Section 685.310 is added to subpart C to read as follows:


Sec.  685.310  Severability.

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

(Authority: 20 U.S.C. 1087a et seq.)

PART 686--TEACHER EDUCATION ASSISTANCE FOR COLLEGE AND HIGHER 
EDUCATION (TEACH) GRANT PROGRAM

0
36. The authority citation for part 686 continues to read as follows:

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

0
37. Section 686.42 is amended by revising paragraph (a) to read as 
follows:


Sec.  686.42  Discharge of an agreement to serve.

    (a) Death. (1) If a grant recipient dies, the Secretary discharges 
the obligation to complete the agreement to serve based on--
    (i) An original or certified copy of the death certificate;
    (ii) An accurate and complete photocopy of the original or 
certified copy of the death certificate;
    (iii) An accurate and complete original or certified copy of the 
death certificate that is scanned and submitted electronically or sent 
by facsimile transmission; or
    (iv) Verification of the grant recipient's death through an 
authoritative Federal or State electronic database approved for use by 
the Secretary.
    (2) Under exceptional circumstances and on a case-by-case basis, 
the Secretary discharges the obligation to complete the agreement to 
serve based on other reliable documentation of the grant recipient's 
death that is acceptable to the Secretary.
* * * * *
[FR Doc. 2016-14052 Filed 6-13-16; 11:15 am]
BILLING CODE P