[Federal Register Volume 83, Number 31 (Wednesday, February 14, 2018)]
[Rules and Regulations]
[Pages 6458-6470]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03090]


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DEPARTMENT OF EDUCATION

34 CFR Parts 668, 674, 682, and 685

[Docket ID ED-2017-OPE-0112]
RIN 1840-AD28


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: Final regulations.

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SUMMARY: The Secretary delays, until July 1, 2019, the effective date 
of selected provisions of the final regulations entitled Student 
Assistance General Provisions, Federal Perkins Loan Program, Federal 
Family Education Loan (FFEL) Program, William D. Ford Federal Direct 
Loan Program, and Teacher Education Assistance for College and Higher 
Education Grant Program (the 2016 final regulations), published in the 
Federal

[[Page 6459]]

Register on November 1, 2016. The Secretary is delaying the 2016 final 
regulations to ensure that there is adequate time to conduct negotiated 
rulemaking and develop revised regulations. The provisions for which 
the effective date is being delayed are listed in the SUPPLEMENTARY 
INFORMATION section of this document. The original effective date of 
the 2016 final regulations, published November 1, 2016, was July 1, 
2017. The effective date was delayed by a document issued under section 
705 of the Administrative Procedure Act (the 705 Document). The 
Department announced in an interim final rule (IFR) issued on October 
24, 2017, that, under the Department's interpretation of the Higher 
Education Act, the effective date could be no earlier than July 1, 
2018.

DATES: As of February 14, 2018, the effective date for the amendments 
to or additions of: Sec. Sec.  668.14(b)(30), (31), and (32); 668.41(h) 
and (i); 668.71(c); 668.90(a)(3); 668.93(h), (i), (j); 668.171; 668.175 
(c) and (d) and (f) and (h); Appendix C to Subpart L of Part 668; 
674.33(g)(3) and (g)(8); 682.202(b)(1); 682.211(i)(7); 682.402(d)(3), 
(d)(6)(ii)(B)(1) and (2), (d)(6)(ii)(F) introductory text, 
(d)(6)(ii)(F)(5), (d)(6)(ii)(G), (d)(6)(ii)(H) through (K), (d)(7)(ii) 
and (iii), (d)(8), and (e)(6)(iii); 682.405(b)(4); 682.410(b)(4) and 
(b)(6)(viii); 685.200(f)(3)(v) and (f)(4)(iii); 685.205(b)(6); 
685.206(c); 685.212(k); 685.214(c)(2), (f)(4) through (7); 
685.215(a)(1), (c)(1) through (c)(8), and (d); 685.222; Appendix A to 
Subpart B of Part 685; and 685.308(a), published November 1, 2016, at 
81 FR 75926, and delayed on June 16, 2017 (82 FR 27621) and October 24, 
2017 (82 FR 49114), is further delayed until July 1, 2019.

FOR FURTHER INFORMATION CONTACT: George Alan Smith, U.S. Department of 
Education, 400 Maryland Ave. SW, Mail Stop 294-34, Washington, DC 
20202. Telephone: (202) 453-7757 or by email at: 
[email protected].
    If you use a telecommunications device for the deaf (TDD) or a text 
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-
800-877-8339.

SUPPLEMENTARY INFORMATION: On October 24, 2017 (82 FR 49114), the 
Department of Education (Department) published an IFR giving notice 
that under its interpretation of section 482 of the Higher Education 
Act of 1965, as amended (HEA) (20 U.S.C. 1089), also known as the 
``master calendar requirement,'' selected provisions of the 2016 final 
regulations would have an effective date of July 1, 2018. (82 FR 49114) 
The original effective date of the 2016 final regulations (November 1, 
2016 at 81 FR 75926) was July 1, 2017. On June 16, 2017, a 705 Document 
(82 FR 27621) delayed the effective date of certain provisions of the 
2016 final regulations until a legal challenge by the California 
Association of Private Postsecondary Schools (CAPPS) is resolved. See 
Complaint and Prayer for Declaratory and Injunctive Relief, California 
Association of Private Postsecondary Schools v. DeVos, Civil Action No. 
1:17-cv-00999 (D.D.C. May 24, 2017). As explained in the IFR, because 
the 2016 final regulations have been postponed by the 705 Document 
beyond July 1, 2017, they cannot become effective earlier than July 1, 
2018, to comply with the master calendar requirement. (82 FR 49115-
49116).
    Also on June 16, 2017, the Department announced its intent to 
convene a committee to develop proposed regulations to revise the 
existing regulations on borrower defense to repayment of Federal 
student loans and other matters (82 FR 27640), the same topics 
addressed in the 2016 final regulations. Under the master calendar 
requirement, a regulatory change that has been published in final form 
on or before November 1 of the year prior to the start of an award 
year--which begins on July 1 of any given year--may take effect only at 
the beginning of the next award year, or in other words, on July 1 of 
the next year. In light of this requirement, the regulations resulting 
from negotiated rulemaking could not be effective before, at the 
earliest, July 1, 2019.
    Accordingly, the Department published a notice of proposed 
rulemaking (NPRM) proposing to delay the effective date of the 2016 
final regulations until July 1, 2019 (October 24, 2017 at 82 FR 49155). 
This notice adopts that proposal, delaying the effective date of the 
2016 final regulations, to continue to preserve the regulatory status 
quo, until July 1, 2019. The Department will continue to process 
borrower defense claims under the existing regulations that will remain 
in effect during the delay so that borrowers may continue to apply for 
the discharge of all or a part of their loans.
    Based on the above considerations, the Department delays until July 
1, 2019, the effective date of the following provisions of the final 
regulations in title 34 of the Code of Federal Regulations (CFR):
    Sec.  668.14(b)(30), (31), and (32) Program participation 
agreement.
    Sec.  668.41(h) and (i) Reporting and disclosure of information.
    Sec.  668.71(c) Scope and special definitions.
    Sec.  668.90(a)(3) Initial and final decisions.
    Sec.  668.93(h), (i), and (j) Limitation.
    Sec.  668.171 General.
    Sec.  668.175(c), (d), (f), and (h) Alternative standards and 
requirements.
    Part 668 subpart L, Appendix C.
    Sec.  674.33(g)(3) and (g)(8) Repayment.
    Sec.  682.202(b)(1) Permissible charges by lenders to borrowers.
    Sec.  682.211(i)(7) Forbearance.
    Sec.  682.402(d)(3), (d)(6)(ii)(B)(1) and (2), (d)(6)(ii)(F) 
introductory text, (d)(6)(ii)(F)(5), (d)(6)(ii)(G), (d)(6)(ii)(H) 
through (K), (d)(7)(ii) and (iii), (d)(8), and (e)(6)(iii) Death, 
disability, closed school, false certification, unpaid refunds, and 
bankruptcy payments.
    Sec.  682.405(b)(4)(ii) Loan rehabilitation agreement.
    Sec.  682.410(b)(4) and (b)(6)(viii) Fiscal, administrative, and 
enforcement requirements.
    Sec.  685.200(f)(3)(v) and (f)(4)(iii) Borrower eligibility.
    Sec.  685.205(b)(6) Forbearance.
    Sec.  685.206(c) Borrower responsibilities and defenses.
    Sec.  685.212(k) Discharge of a loan obligation.
    Sec.  685.214(c)(2) and (f)(4) through (7) Closed school discharge.
    Sec.  685.215(a)(1), (c)(1) through (c)(8), and (d) Discharge for 
false certification of student eligibility or unauthorized payment.
    Sec.  685.222 Borrower defenses.
    Part 685 subpart B, Appendix A Examples of borrower relief.
    Sec.  685.300(b)(11), (b)(12), and (d) through (i) Agreements 
between an eligible school and the Secretary for participation in the 
Direct Loan Program.
    Sec.  685.308(a) Remedial actions.

    Note: Section 668.90 has been redesignated as Sec.  668.91 and 
Sec.  668.93 has been redesignated as Sec.  668.94 pursuant to the 
borrower defense procedural rule, published January 19, 2017 at 82 
FR 6253 (the borrower defense procedural rule).

    As noted in the IFR, the Department interprets all references to 
``July 1, 2017'' in the text of the above-referenced regulations to 
mean the effective date of those regulations. The regulatory text 
included references to the specific July 1, 2017, date in part to 
provide clarity to readers in the future as to when the regulations had 
taken effect. Because the regulations did not take effect on July 1, 
2017, we would, in connection with this delay of the effective date, 
read those regulations as referring to the new effective date 
established by this rule, i.e., July 1, 2019.

[[Page 6460]]

    This delay of the effective date of the 2016 final regulations does 
not delay the effective dates of the regulatory provisions published in 
81 FR 75926 which: (1) Expand the types of documentation that may be 
used for the granting of a discharge based on the death of the 
borrower; (2) 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; (3) 
amend the regulations governing Direct Consolidation Loans to allow a 
borrower to obtain a Direct Consolidation Loan regardless of whether 
the borrower is also seeking to consolidate a Direct Loan Program or 
FFEL Program loan, if the borrower has a loan type identified in 34 CFR 
685.220(b); (4) address severability; and (5) make technical 
corrections. In the 2016 final regulations, 34 CFR 682.211(i)(7) and 
682.410(b)(6)(viii) were designated for early implementation, at the 
discretion of each lender or guaranty agency. That designation remains 
effective.
    Public Comment: In response to our invitation in the NPRM, 14 
parties submitted comments on the delay of the effective date. We do 
not discuss comments or recommendations that are beyond the scope of 
this regulatory action or that would require statutory change.

Analysis of Comments and Changes

    An analysis of the comments and of any changes to this regulatory 
action since publication of the NPRM follows.
    A number of commenters opposed the proposed rule to delay the 
effective date of selected provisions of the 2016 final regulations 
until July 1, 2019, stating that such delay (1) would harm student loan 
borrowers and, in some cases, taxpayers; (2) is unnecessary and 
unaligned with the mission of the Department of Education; (3) is not 
justifiable on the grounds that there is pending litigation as 
referenced in the NPRM; and (4) would not be compliant with the 
Administrative Procedure Act (APA). However, several commenters 
supported the delay because they believed, collectively, that a further 
delay would (1) relieve the regulatory burden on institutions; (2) 
mitigate uncertainty about the potential impact of the current 
regulations; and (3) prevent unnecessary harm and disruption to 
postsecondary educational institutions. We discuss and respond to these 
comments in greater detail below.
    Comments: Several commenters stated that a further delay of the 
2016 final regulations would harm borrowers because they would continue 
to be subject to the predatory practices of certain institutions 
without those institutions being held accountable through the financial 
responsibility standards and disclosures and student warnings contained 
in the 2016 final regulations. The commenters argued that the Secretary 
should protect and provide relief to borrowers who attended 
institutions of higher education that misrepresented their program 
offerings, or that employed deceptive marketing or recruiting tactics, 
instead of delaying the 2016 final regulations. The commenters claimed 
that a further delay would ensure that borrowers who apply or have 
applied for a loan discharge based on a borrower defense would be 
required to wait for new rules to go into effect before receiving 
consideration of their claims under the process established by the 2016 
final regulations while interest, collection costs and financial 
distress continued to mount. The commenters also stated that a further 
delay of the pre-dispute arbitration and class action waiver provisions 
of the 2016 final regulations would leave students without access to 
the courts, while statutes of limitation run. Several commenters also 
argued that a further delay of the rule would harm student loan 
borrowers because borrowers would be denied access to the many 
provisions in the 2016 final regulations that are beneficial to 
borrowers, including provisions that provide:
--Automatic closed school discharges for borrowers who were enrolled in 
schools that closed on or after November 13, 2013, and who did not 
enroll in another school within three years of their school's closure;
--A second level of Departmental review for closed school discharge 
claims that were denied by a guaranty agency;
--An expansion of the conditions under which a FFEL or Direct Loan 
borrower may qualify for a false certification discharge;
--A clear process, based on new Federal standards, that establishes a 
borrower's procedural rights and describes how the Department will 
consider individual and group borrower defense discharge claims and 
pending requests for forbearance or suspension of collection on loans 
that are subject to borrower defense claims;
--Prohibitions on schools' ability to enforce pre-dispute arbitration 
agreements and class action waivers as to borrower defense-related 
claims for students receiving Direct Loans;
--Institutional financial responsibility triggers to protect the 
Federal government from losses that may arise from borrower defense 
claims and sudden school closures; and,
--Institutional financial protection disclosures for prospective and 
enrolled students to assist students in making informed choices about 
where to matriculate.
    One commenter asserted that further delaying the 2016 final 
regulations would perpetuate existing harms experienced by borrowers, 
such as poor credit ratings resulting from debt that borrowers 
accumulated that the borrower may be able to discharge based on a 
borrower defense.
    One commenter argued that further delay in the effective date harms 
borrowers because the delay creates uncertainty in how the Department 
will treat future borrower defense claims. The commenter asserted that 
while borrowers can wait for the outcome of the new rulemaking effort 
for clarity on the process, waiting has risks for borrowers as well, 
including the application of statutes of limitations which may limit 
the loan amount that may be discharged. The same commenter noted that 
Direct Loan borrowers with loans issued during the delay cannot avail 
themselves of the Federal standard in the 2016 final regulations; these 
borrowers will be limited to the State law standard. Finally, this 
commenter stated that although the Department claimed that borrowers 
would not be harmed by the further delay of the effective date of the 
2016 final regulations because borrower defense claims would continue 
to be processed under existing regulations, the Department's own impact 
analysis estimates a reduction in student loan discharges of nearly two 
billion as a result of the further delay. Citing a July 2017 letter 
from the Department's Acting Under Secretary to Senator Richard Durbin, 
the commenter stated that the Department had not approved borrower 
defense applications since January 20, 2017, and that there were at 
least 64,000 outstanding borrower defense applications as of the date 
of the letter. The commenter noted that the number of unprocessed 
claims has since risen to 95,000, and that a further delay of the 2016 
final regulations will exacerbate the lack of expediency in the 
Department's borrower defense discharge process to the detriment of 
borrowers who continue to wait for relief.
    Discussion: The Department does not agree that borrowers will be 
significantly harmed by changing the effective date of the 2016 final

[[Page 6461]]

regulations to July 1, 2019. While the Department acknowledges that 
certain benefits of the 2016 final regulations will be delayed, it has 
determined that those benefits are outweighed by the administrative and 
transaction costs for regulated entities and borrowers of having those 
regulations go into effect only to be changed a short while later. 
First, the 2016 final regulations did not create the borrower defense 
regime but modified the pre-existing borrower defense regulations, in 
place since 1995. Those pre-existing regulations remain in effect, as 
does the statute that allows borrowers to assert defenses to repayment. 
Therefore, borrowers can continue to apply for relief from payment of 
loans under this existing process, and the Department is committed to 
processing those applications in a timely manner. Second, the instant 
rule merely delays the marginal benefits of the 2016 final regulations 
for a brief period of time (an additional year), it does not revoke 
them.
    The Department does not share the commenters' concern that 
borrowers will be subject to certain institutions' predatory practices 
absent the 2016 final regulations. Because the current borrower defense 
regulations will remain in effect, borrowers will continue to be able 
to submit claims to the Department and have their claims processed in 
accordance with the HEA and those current regulations. Borrowers will 
not need to wait for new rules to go into effect to have a borrower 
defense claim considered. We do not anticipate that borrowers will be 
harmed by the current process because we routinely grant forbearances, 
and stop collection activities on defaulted loans, to borrowers while 
their discharge claims are under review. We acknowledge the commenter's 
concern regarding the number of pending claims before the Department. 
However, in the time since the commenter submitted the comment, the 
Department has issued decisions on borrower defense claims and we will 
continue to accept and process borrower defense claims.
    In the event that the borrower defense regulations currently being 
negotiated result in discharge standards for a borrower defense claim 
different from the current standards, the new standards would apply 
only to loans first disbursed on or after the effective date of those 
regulations. Claims filed as to loans first disbursed before July 1, 
2019, which would include currently pending claims and claims filed 
between the date of this final rule and July 1, 2019, will continue to 
be processed under the current standard for borrower defense claims.
    We further disagree with commenters who claimed that the July 1, 
2019 effective date would harm borrowers because the Federal standard 
established in the 2016 final regulations would not be in effect. As we 
noted in the 2016 final regulations, the Federal standard was designed 
to address much of the conduct covered by the State law-based standard 
so the vast majority of claims made by borrowers whose loans were first 
disbursed between July 1, 2017, and July 1, 2019, could be evaluated 
and discharges provided under the current State law-based standard. (81 
FR 75937-75941). Any benefits to borrowers associated with having the 
Federal standard in place during that time period are outweighed by the 
confusion and disruption that would result from allowing the 2016 final 
regulations to take effect during a time when they are subject to a 
legal challenge and when the Department is reevaluating its borrower 
defense regulations generally. In addition to causing confusion for 
borrowers, implementing a different standard for a potentially short 
period of time could delay the processing of claims. One of the goals 
of the 2016 final regulations was to provide borrowers with more 
consistency and clarity about their borrower defense claims. (81 FR 
39339-39340). Under the circumstances, the delay of the effective date 
of the 2016 final regulations provides greater clarity and consistency 
for borrowers, as well as a more streamlined process, than 
implementation of the rule under the current schedule.
    With respect to the comment about a two billion dollar reduction in 
claims based on the difference in the primary and baseline scenarios 
from the net budget impact in the 2016 final regulations, as noted in 
the Regulatory Impact Analysis (RIA), the Department estimates the 
savings resulting from the delay to be much less. The savings resulting 
from the delay are mainly driven by slight differences between the 
State law-based standards in the current regulations and the Federal 
standards from the 2016 final regulations if they were applicable to 
loans disbursed between July 1, 2018, and July 1, 2019. Since we have 
always maintained that there would be significant overlap between the 
State law-based and Federal standards from the 2016 final regulations, 
the differences are estimated to be minor. The provisions of the 2016 
final regulations pertaining to the process for review and 
determination of claims were not limited to specific cohorts designated 
by the effective date so the delay will not result in specific cohorts 
of borrowers being excluded from the process in effect when the claim 
is made. Additionally, the figures in the Accounting Statement for the 
2016 final regulations would more appropriately be characterized as the 
costs associated with a single cohort and not the costs associated with 
a fiscal year. As part of its ongoing efforts to improve the utility of 
student loan information, the Department has updated its Accounting 
Statement presentation to better align with OMB Circular A-4, so the 
effects presented in this document do show the impact on the affected 
cohorts by fiscal year. The Net Budget Impact section of the RIA 
presents the assumptions about the effect of the delay.
    With regard to the financial protection disclosures, the 2016 final 
regulations provided that before the disclosures would be required, the 
Secretary would conduct consumer testing to inform the identification 
of events for which disclosure would be required and to determine the 
form of the disclosure. In light of the fact that the 2016 final 
regulations provided for a future process before the disclosure 
requirement could be implemented, we do not believe a delayed effective 
date would significantly change what would occur in this regard during 
the period of the delay. In other words, because we did not anticipate 
the financial protection disclosures having a significant impact 
immediately following the 2016 final regulations' effective date, we 
believe the incremental effect of delaying those provisions is minimal. 
We address the comments related to institutional financial 
responsibility triggers in more detail in the RIA.
    Moreover, there are other existing protections for borrowers, 
including periodic reviews and site visits by Department employees to 
title IV participating institutions to monitor regulatory compliance; 
and the activities of the enforcement unit within FSA charged with 
taking actions against parties participating in title IV, HEA programs 
to enforce compliance. In addition to the Department, other entities 
also act to protect students, borrowers, and taxpayers, such as the 
States through State law enforcement activities and other Federal 
agencies whose jurisdictions may overlap with, or affect, the higher 
education sector.
    Finally, we note that borrowers may continue to apply for closed 
school and false certification discharges under the current 
regulations. With regard to the comments relating to the grounds for 
false certification discharge, as we stated in the notice of proposed

[[Page 6462]]

rulemaking that preceded the 2016 final regulations, these changes 
reflect statutory changes relating to false certification discharges 
for the lack of a high school diploma or its equivalent and for a 
disqualifying status. As a result, the Department's authority for false 
certification discharges on these grounds remains unchanged. (81 FR 
39377-39378). In addition, under the current regulations, the Secretary 
has the authority to provide false certification discharges without an 
application based on information in the Secretary's possession. The 
2016 final regulations explicitly provided that such information may 
include evidence that the school has falsified the Satisfactory 
Academic Progress of its students. Because the current regulation does 
not limit the information that may be considered by the Secretary to 
provide a false certification discharge without an application, we do 
not believe a delay of the 2016 revision to this provision will harm 
borrowers. With regard to a second level of review of a guaranty 
agency's determinations on closed school discharge requests, borrowers 
may raise any dispute with a guaranty agency to the Department's 
Federal Student Aid Ombudsman Group.
    The Department acknowledges the commenters' concern that the window 
under applicable statutes of limitation for some borrowers to file 
lawsuits may end during the period covered by the delay of the 2016 
final regulations' prohibitions on institutions' use of pre-dispute 
arbitration and class action waiver contractual provisions. However, as 
acknowledged in the 705 Document, serious questions regarding the 
legality of these provisions of the final regulations exist and these 
provisions are among the regulations directly challenged in the CAPPS 
litigation. The Department thinks that it is likely that the 
arbitration and class action waiver provisions will be overturned. 
Should the Department's regulations prohibiting schools from enforcing 
pre-dispute arbitration agreements and class action waivers be 
invalidated by the court, there would be significant confusion from 
borrowers and schools who may have engaged in court litigation on the 
basis of the prohibitions as to the enforceability of those agreements. 
We believe the harm from having these provisions take effect in the 
face of the CAPPS challenge is too great and outweigh any benefits 
these provisions would have. Further, we note that a borrower may 
continue to apply for relief, from the Department under the current, 
State-law based borrower defense to repayment regulations, irrespective 
of whether the borrower has a pre-dispute arbitration agreement with 
the school or an agreement to waive involvement in class action 
lawsuits.
    We also note that the pre-dispute arbitration and class action 
waiver provisions of the 2016 final regulations would require some 
institutions to change their policies and procedures and to amend their 
enrollment agreements. In addition, re-training staff and sending 
notices to borrowers informing them of the changed class action waivers 
and pre-dispute arbitration provisions would impose administrative 
costs on institutions. If pre-dispute arbitration requirements and 
class action waivers are addressed through the current rulemaking 
process, institutions would need to repeat or reverse these steps to 
address any requirements that would go into effect on July 1, 2019. 
Maintaining the regulatory status quo with respect to pre-dispute 
arbitration agreements and class action waivers will reduce the 
administrative burden on schools and lessen confusion for borrowers who 
would be affected by these changes.
    The Department further believes that implementing the 2016 final 
regulations at this time would cause significant confusion around 
borrower defenses generally that would be unfair to students and 
schools. Without a delay, if the current rulemaking process results in 
a different standard for borrower defense claims, there would be three 
separate sets of standards for borrower defense claims: the State-law 
based standard that is currently in effect; standards for loans 
disbursed between July 1, 2018, and July 1, 2019; and standards for 
loans disbursed on or after July 1, 2019. This would be more confusing 
for borrowers than the potential for two different standards--one for 
loans disbursed before July 1, 2019, and one for loans disbursed on or 
after July 1, 2019. Providing for an effective date of July 1, 2019, 
will allow the Department and the negotiating committee to develop new 
borrower defense regulations that would protect students from the most 
serious predatory practices, provide clear and evenhanded rules for 
students, colleges and universities to follow, and constrain the costs 
to taxpayers.
    The Department's processing of borrower defense claims is not 
affected by the effective date of the 2016 final regulations, as the 
current regulations remain in effect. While the process for reviewing 
claims and the standard under which they are reviewed would have 
changed under the 2016 final regulations, the Department does not 
expect that the length of time required to review individual claims 
would have changed significantly if the 2016 final regulations had gone 
into effect as originally scheduled. With regard to group claims, the 
Department has granted group claims under the existing regulations. 
While the 2016 final regulations provided a regulatory process for 
granting group borrower defense claims, the Secretary had and continues 
to have the authority, and has exercised that authority, to grant group 
claims under the borrower defense regulations currently in effect.
    Changes: None.
    Comment: Some commenters claimed that the delay hurts American 
taxpayers because the 2016 final regulations would hold institutions 
that commit fraud monetarily accountable for their actions in cases of 
student loan discharges, rather than requiring taxpayers to absorb the 
costs of borrower defense discharges.
    Discussion: As noted earlier in this section, the delay of the 
effective date of the 2016 final regulations will allow the Department 
to develop new borrower defense regulations that may be more beneficial 
to American taxpayers than the 2016 final regulations. We do not 
believe the delay will harm American taxpayers because the Department 
may assess liability for borrower defense claims on schools now, under 
the current regulations in effect. The financial protection triggers in 
the 2016 final rule were designed to increase the likelihood of 
recovering funds from institutions as claims come in over the life of 
the cohort, especially from institutions that might have significant 
exposure or that end up closing as a result of the financial risks 
identified by the triggers. The Department estimated that recovery 
activity would ramp up as the triggers were implemented, as reflected 
in the recovery assumption in the 2016 final rule (81 FR 76057), so a 
delay in the early years of recovery activity is not estimated to have 
a significant effect, as indicated by the change in the recovery 
assumption presented in this RIA. With the Department's authority to 
seek recoveries unchanged because of the change in effective date, we 
believe the possibility of slightly reduced recovery rates for a short 
period is warranted to further the goals of providing clarity by 
maintaining the regulatory status quo during this interim period. We 
note that the borrower defense procedural rule, which provided a 
regulatory framework for assessing liabilities against schools for 
which a borrower defense claim was successful, was published in the 
Federal Register on January 19, 2017,

[[Page 6463]]

and those regulations have been effective since that date.
    Changes: None.
    Comment: One commenter asserted that the data provided for the 
impact of the delays in the effective date of the 2016 final 
regulations were inadequate because the cost of providing financial 
protection was not quantified in the RIA of the 2016 final regulations 
and the NPRM preceding this final rule; and there is no additional data 
to estimate the costs institutions may avoid from the delayed effective 
date of the financial protection provisions.
    Another commenter pointed out that if the effective date of the 
2016 final regulations was not delayed, the Department estimated that 
$381 million in loans would be forgiven between July 1, 2017, and July 
1, 2019. The commenter noted that the Department does point out that 
the Federal government will save this money by delaying the effective 
date but does not point out that borrowers will end up absorbing the 
cost. The commenter noted that the Department could change the current 
regulations and not include the new closed school discharge provisions, 
and noted that even a temporary delay causes financial stress that can 
trap some borrowers in poverty. Moreover, borrowers who default on 
their loans because they are not discharged would not be eligible for 
further financial aid.
    Discussion: The Department appreciates the comments about the RIA 
for the NPRM preceding this final rule. In that RIA, the Department 
acknowledged that the costs of providing financial protection were not 
quantified in the RIA for the 2016 final regulations and that there is 
no additional data to estimate those costs. That fact, however, does 
not mean that we have not sufficiently justified this delay.
    As discussed in the RIA for this final rule with respect to the 
delay of the financial protection provisions, several factors will 
affect the cost for individual institutions, including: the level of 
institutional conduct giving rise to borrower defense claims, the 
applicability of certain financial protection triggers, the financial 
strength of the institution, the manner in which the institution 
provides financial protection to the Department, and the potential 
development of financial products aimed at providing this protection. 
The Department believes that individual institutions are best 
positioned to evaluate their potential exposure to borrower defense 
claims, their financial relationships with parties who could provide 
financial protection, and the cost of providing protection. Along with 
the uncertainty about the projected amount of claims as recognized in 
the different sensitivity runs presented in the RIA for the 2016 final 
regulations, the Department believes that quantifying the cost of 
providing financial protection would provide a false sense of 
precision. Rather than producing a number that would be inapplicable to 
most institutions, the Department focused on explaining the regulations 
and providing data about the provisions for which it had information 
such as the cohort default rate (CDR), 90/10 revenue requirement, 
fluctuation in title IV aid, withdrawal rate, and accreditor action 
triggers. The 2016 final regulations did not present information about 
the provisions related to U.S. Securities and Exchange Commission or 
stock exchange actions, gainful employment, the withdrawal of owner's 
equity from an institution, teach-outs, State licensing, financial 
stress tests, an institution's violation of a loan agreement, or 
pending borrower defense claims. Additionally, given that the known 
borrower defense claims at the time were from a small number of 
institutions and many had not been approved or disapproved, it is 
unclear how the distribution of successful borrower defense claims at 
institutions would match up with the distribution of institutions' 
performance on the financial responsibility triggers for which the 
Department had some information.
    As is further discussed in the RIA for this final rule, the 
Department recognizes that the delayed effective date will postpone the 
impact of the financial protection provisions on institutions. This 
impact was not quantified for the same reasons described above, but 
would be a fraction of the total protection expected to be generated 
under the rule as some of the triggers are tied to the production of 
certain performance measures and would not have kicked in immediately 
under the 2016 regulations. Successful claims made by borrowers will be 
paid regardless of the limited delay in the date for requiring 
institutions to provide financial protection, and the Department 
believes the cost to taxpayers of the slightly reduced recoveries 
described in the Net Budget Impact in the RIA is justified by the 
benefits of reconsidering the financial protection provisions and 
appropriately balancing the costs to institutions with protection of 
borrowers and taxpayers.
    With respect to the comment about closed school discharges, the 
Department disagrees with the claim that borrowers will bear a $381 
million cost because of the delay. As noted in the NPRM, the $364 
million savings estimated for FY 2017 occurred because the Department 
did not execute the modification for cohorts 2014-2016 anticipated in 
the President's Budget (PB) for 2018 because of the change of the 
effective date of the 2016 final regulations. The difference in the 
$381 million estimated for the three-year automatic discharge in the 
2016 final regulations and the $364 million estimate for the 
modification in this rule is that the $381 million was based on PB 2017 
loan model assumptions and the modification to be executed was based on 
the PB 2018 assumptions. Under the credit reform scoring rules 
applicable to the student loan programs, the unexecuted modification 
created savings that needed to be recognized. This budget scoring 
requirement does not affect borrowers or their eligibility for a closed 
school discharge. Borrowers can avoid any uncertainty about the timing 
of receiving a closed school discharge or costs associated with a delay 
in receipt of such discharge by submitting a closed school discharge 
application at any time. Any costs or savings associated with changes 
in the automatic discharge provision as a result of the current 
negotiated rulemaking are outside the scope of the analysis of the 
delay, and we will address any related issues raised by commenters in 
response to the NPRM for the proposed rule resulting from the current 
rulemaking process.
    Changes: None.
    Comment: Some commenters expressed their belief that the delay is 
not aligned with Congressional intent, citing 20 U.S.C. 3402, and is 
contrary to the public interest.
    Discussion: In 20 U.S.C. 3402, Congress states that the 
establishment of a Department of Education is in the public interest, 
will promote the general welfare of the United States, will help ensure 
that education issues receive proper treatment at the Federal level, 
and will enable the Federal government to coordinate its education 
activities more effectively.
    In its execution of these responsibilities, and consistent with 20 
U.S.C. 3402, the Department has determined that the public interest is 
best served by a delay in the effective date of the 2016 final 
regulations.
    Changes: None.
    Comments: Some commenters expressed concerns that the Department 
did not follow required rulemaking processes in delaying the effective 
date of the 2016 final regulations. These concerns alleged specific 
statutory and

[[Page 6464]]

APA violations. First, commenters stated that the Department's 
justification to waive negotiated rulemaking was insufficient. Second, 
commenters wrote that we did not provide sufficient justification for 
the delay. One commenter said that the NPRM fails to identify any 
specific deficiencies in the 2016 final regulations, or findings and 
rationale that support revising those regulations. Third, a commenter 
stated that the minor cost savings detailed in the RIA were 
insufficient justification to delay the rule. In addition, one 
commenter stated that further negotiated rulemaking on the 2016 final 
regulations was redundant and wasteful.
    Discussion: The Department adhered to all applicable laws in 
promulgating this final rule. First, with regard to waiver of 
negotiated rulemaking, section 492(b)(2) of the HEA provides that the 
Secretary may waive negotiated rulemaking if she determines that there 
is good cause to do so, and publishes the basis for such determination 
in the Federal Register at the same time as the proposed regulations in 
question are first published. In the NPRM, the Department properly 
articulated the good cause supporting our waiver of the HEA's 
negotiated rulemaking requirement. The NPRM explained that the original 
catalyst for the delay was the CAPPS litigation, filed on May 24, 2017, 
and that it would not have been possible for the Department to engage 
in negotiated rulemaking and publish final regulations after that date 
(much less after October 24, 2017, the date the NPRM was published), 
and prior to July 1, 2018 (the current effective date of the 2016 final 
regulations). Negotiated rulemaking on this discrete issue simply was 
not practicable. It is a time-consuming and resource-intensive process, 
and could not practicably be completed by July 1, 2018.
    Negotiated rulemaking typically takes the Department well over 12 
months to complete. The statute requires the Department to hold public 
hearings before commencing any negotiations. Based upon the feedback 
the Department receives during the hearings, the Department then 
identifies those issues on which it will conduct negotiated rulemaking, 
announces those, and solicits nominations for non-Federal negotiators. 
Negotiations themselves are typically held over a 3 month period. 
Following the negotiations, the Department then prepares a notice of 
proposed rulemaking and submits the proposed rule to OMB for review. 
The proposed rules are then open for public comment for 30-60 days. 
Following the receipt of public comments, the Department then prepares 
a final regulation and submits it to OMB for review.
    With the completion of all of these steps taking well over 12 
months, it would not have been feasible for the Department to complete 
negotiated rulemaking on the delayed effective date by July 1, 2018. 
Indeed, it would not have been feasible even if the Department had 
commenced the process on May 24, 2017, when it learned of the CAPPS 
litigation. Thus, the Department had good cause to waive that 
requirement.
    Regarding the comment that we did not provide sufficient 
justification to propose delay of the effective date of the 2016 final 
regulations, the Department is in the process of developing proposed 
revisions to the borrower defense regulations through the negotiated 
rulemaking process. As a result of the timing of the negotiated 
rulemaking and the effect of the master calendar requirement, any 
regulations resulting from the negotiated rulemaking cannot become 
effective before July 1, 2019. Therefore, the Department proposed in 
the NPRM to delay the effective date of the 2016 final regulations to 
July 1, 2019. This would prevent a scenario in which the 2016 final 
regulations might become effective for a short period of time before 
new regulations resulting from the current borrower defense rulemaking 
process take effect, a result which likely would lead to a great deal 
of confusion and difficulty for borrowers and schools alike. 
Accordingly, the Department articulated a reasonable and sufficient 
justification to propose a delay of a final rule.
    Also with regard to the comment that the NPRM fails to identify any 
specific deficiencies in the 2016 final regulations, the APA and 
applicable case law require only that an agency's rulemaking justify 
the particular action or actions to be taken by that rule. This final 
rule does not amend the substance of the 2016 final regulations; it 
merely changes the effective date of the 2016 final regulations and is 
fully supported based on the information provided in the NPRM and in 
this final rule. Amending the substance of the 2016 final regulations 
(or prior borrower defense regulations) would require a separate 
rationale. We are separately conducting a negotiated rulemaking process 
to address the substance of the borrower defense regulations, and any 
resulting NPRM will provide a rationale for proposed changes.
    The NPRM at issue here proposed only a delay of the effective date 
of the 2016 final regulations; it did not propose any other changes and 
therefore the Department was not required to solicit comment on any 
matters other than the effective date. Also contrary to the commenter's 
assertions, the number of comments received in response to an NPRM has 
no bearing on the sufficiency of the Department's solicitation of 
public engagement. The APA requires the Department to ``give interested 
persons an opportunity to participate'' and consider ``the relevant 
matter presented,'' not to reach a certain threshold of comments before 
it may proceed with the rulemaking process. 5 U.S.C. 553(c). The 
Department requested comments that covered the scope of our 
rulemaking--delay of an effective date--and considered each applicable 
comment received in promulgating this final rule.
    The regulatory impact analysis in the NPRM estimated the quantified 
economic effects and net budget impact of the delay, and projected that 
the delay would result in a net cost savings. However, the delay was 
not proposed solely on the basis of those calculations. Executive Order 
13563 requires the Department to, in part, ``propose or adopt a 
regulation only upon a reasoned determination that its benefits justify 
its costs (recognizing that some benefits and costs are difficult to 
quantify).'' Just as the commenters note harms to borrowers that cannot 
be definitively quantified, not all benefits of the delay are 
measurable in monetary terms. Delaying the effective date as proposed 
in the NPRM will preserve the regulatory status quo while the 
Department reconsiders the substance of its regulations governing 
borrower defense, preventing borrowers and institutions alike from 
being subject to an uncertain, quickly changing set of regulatory 
requirements. The Department undertook the required analysis and 
determined that the benefits of the delay would justify the costs.
    With regard to the comment about redundancy and wastefulness, we 
have substantive concerns about the 2016 final regulations. In light of 
that, negotiated rulemaking and publication of an NPRM with request for 
further public comment is the statutorily required path to ensure 
public input and potentially make substantive changes to the 
Department's regulations. After careful consideration, we determined 
the benefits of proceeding with negotiated rulemaking to properly 
analyze the borrower defense regulations outweighed the costs of doing 
so.
    Changes: None.
    Comment: Some commenters also argued that the CAPPS lawsuit is an 
inappropriate basis for the delay

[[Page 6465]]

because CAPPS' litigation addresses only some of the regulatory 
provisions being delayed, but the notices effectuating the delay 
included many regulatory provisions, including those related to closed 
school discharge.
    Discussion: The CAPPS litigation is not the basis for the delay 
proposed in the NPRM, although it was the reason for the initial delay 
of the 2016 final regulations' effective date. We further note that 
contrary to the commenter's assertion, CAPPS' complaint expressly prays 
for an order declaring ``that the entirety of the Final Rule is 
contrary to the Constitution,'' and asks that the Court enjoin the 
Department from ``taking any action whatsoever pursuant to the final 
regulations,'' indicating that its challenge is broader than the 
commenters portray.
    Changes: None.
    Comment: Some commenters supported the proposal in the NPRM. One 
commenter asserted that the 2016 final regulations' intention missed 
the mark and created an unnecessarily complex and costly system that is 
confusing to students, unfair to institutions, and puts taxpayers on 
the hook for huge costs. The commenter also suggested that maintaining 
the regulatory status quo under the 1994-95 standard is critical to the 
public interest and that requiring institutions to use their time and 
finances to implement the expensive 2016 final regulations while 
another rulemaking is occurring would be burdensome and contrary to the 
goals of Executive Order 13777, which is intended to help alleviate the 
regulatory burdens on the American people. This same commenter 
emphasized that the delay will help to maintain an existing, easily 
understood process--especially for students seeking redress under the 
current State law-based standard.
    Commenters asserted that the delay of selected provisions of the 
2016 final regulations would mitigate uncertainty about the potential 
impact of the regulations, especially in light of ongoing litigation, 
the master calendar requirement, and ongoing negotiated rulemaking.
    One commenter asserted that the Department properly used Section 
705 of the APA to avoid substantial harm to students. The commenter 
suggested that if some of the provisions of the 2016 final regulations 
went into effect and were quickly struck down by a court, the result 
would be chaotic, particularly if the subsequent regulatory framework 
change occurred in the course of an award year. The commenter asserted 
further that the ongoing negotiated rulemaking is justified based on 
the need to improve the borrower defense regulations as part of a 
regulatory reset. This commenter argued that because the reset could 
lead to significant changes, it would be nonsensical, even aside from 
the litigation, to implement new regulations for a full or for part of 
an award year only to change them after the current negotiated 
rulemaking process is complete.
    One commenter asserted that the arbitration and class action 
provisions in the 2016 final regulations would require institutions to 
incur significant costs in changing multiple policies and procedures 
and amending existing and future enrollment agreements, re-training 
staff, litigating new cases, and sending notices to borrowers that 
existing class action waivers or arbitration provisions will not be 
enforced. According to the commenter, the implementation of these 
requirements would divert resources from students and would require the 
further diversion of resources if schools were required to retrain 
staff and litigate the effects of the temporary ban on past agreements 
with students, including those signed during the interim period, if the 
regulations were to change as a result of the current rulemaking 
process.
    The commenter also stated that the financial responsibility 
provisions that require, in some circumstances, an institution to 
obtain a letter of credit or some type of financial protection would 
impose a significant burden on schools because a letter of credit is 
difficult to obtain and the additional cost could cause many schools, 
including some historically black colleges and universities, to close. 
The commenter also argued that the delay is appropriate because schools 
may need to establish different compliance measures if the current 
negotiated rulemaking process modifies the financial responsibility 
provisions. In such event, the commenter stated that the temporary 
implementation of these provisions would lead to potentially 
unnecessary compliance and training costs for schools to accommodate 
different rules.
    The commenter also argued that the repayment rate provisions which 
would require proprietary schools with a certain loan repayment rate to 
distribute a warning to students and prospective students might damage 
the reputation of such schools and impact such schools' ability to draw 
students and raise funds. The commenter argued that the delay would 
prevent any disruptions as changes to the requirements are considered 
during the negotiated rulemaking process.
    Finally, the commenter stated its view that given the significant 
expansion of borrower defense under the 2016 final regulations and the 
changes to the borrower defense regulations that may result from the 
Department's current rulemaking effort, the additional delay is 
required to prevent confusion for students and the expenditure of 
school resources on implementing the different borrower defense 
standards and procedures when those resources could otherwise be used 
to enhance student experiences.
    Discussion: While comments regarding the effect of the 2016 final 
regulations are outside of the scope of the NPRM, the Department agrees 
that the delay will provide clarity for institutions and students, as 
well as save institutions from incurring the costs and expending the 
resources necessary to comply with the requirements under the 2016 
final regulations that would potentially be in effect for only a short 
period of time.
    Changes: None.

Executive Orders 12866, 13563, and 13771

Regulatory Impact Analysis

    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.
    The Department estimates the quantified annualized economic and net 
budget impacts of the delay of the effective date to be -$26.9 million 
in reduced costs to institutions and the Federal government. These 
reduced costs result from the delay of the borrower defense provisions 
of the 2016 final regulations as they would apply to

[[Page 6466]]

the 2017 to 2019 loan cohorts, as well as from the delayed paperwork 
burden on institutions and the delayed execution of the closed school 
automatic discharge. This final regulatory action is a significant 
regulatory action subject to review by OMB under section 3(f) of 
Executive Order 12866.
    We have also reviewed this final rule under Executive Order 13563, 
which supplements and explicitly reaffirms the principles, structures, 
and definitions governing regulatory review established in Executive 
Order 12866. To the extent permitted by law, Executive Order 13563 
requires that an agency--
    (1) Propose or adopt regulations only on a reasoned determination 
that their benefits justify their costs (recognizing that some benefits 
and costs are difficult to quantify);
    (2) Tailor its regulations to impose the least burden on society, 
consistent with obtaining regulatory objectives and taking into 
account--among other things and to the extent practicable--the costs of 
cumulative regulations;
    (3) In choosing among alternative regulatory approaches, select 
those approaches that maximize net benefits (including potential 
economic, environmental, public health and safety, and other 
advantages; distributive impacts; and equity);
    (4) To the extent feasible, specify performance objectives, rather 
than the behavior or manner of compliance a regulated entity must 
adopt; and
    (5) Identify and assess available alternatives to direct 
regulation, including economic incentives--such as user fees or 
marketable permits--to encourage the desired behavior, or provide 
information that enables the public to make choices.
    Executive Order 13563 also requires an agency ``to use the best 
available techniques to quantify anticipated present and future 
benefits and costs as accurately as possible.'' The Office of 
Information and Regulatory Affairs of OMB has emphasized that these 
techniques may include ``identifying changing future compliance costs 
that might result from technological innovation or anticipated 
behavioral changes.''
    We are issuing this final rule only on a reasoned determination 
that its benefits justify its costs. Based on the analysis that 
follows, the Department believes that this final rule is consistent 
with the principles in Executive Order 13563.
    We also have determined that this regulatory action does not unduly 
interfere with State, local, or Tribal governments in the exercise of 
their governmental functions.
    In accordance with both Executive Orders, the Department has 
assessed the potential costs and benefits, both quantitative and 
qualitative, of this regulatory action.
    The quantified economic effects and net budget impact associated 
with the delayed effective date are not expected to be economically 
significant.

Effects of Delay

    As indicated in the RIA published with the 2016 final regulations 
on November 1, 2016, those final regulations were economically 
significant with a total estimated net budget impact of $16.6 billion 
over the 2017-2026 loan cohorts in the primary estimate scenario, 
including a cost of $381 million for cohorts 2014-2016 attributable to 
the provisions for a three-year automatic closed school discharge.
    However, as noted in the RIA for the NPRM published October 24, 
2017, the analysis of the net budget impact in this final rule is 
limited to the effect of delaying the effective date of the 2016 final 
regulations from July 1, 2018, to July 1, 2019, and does not account 
for any potential changes in the 2016 final regulations or 
administrative updates to existing processes and procedures related to 
borrower defense claims.
    As the net budget impact is based on the net present value of the 
cash flows of the relevant cohorts over 40 years, delaying the 2016 
final regulations until July 1, 2019, will have limited effect, as 
discussed below.
    Even with the change in the effective date to July 1, 2019, 
borrowers will still be able to submit claims. The provisions of the 
2016 final regulations pertaining to the process for review and 
determination of claims were not limited to specific cohorts designated 
by the effective date so the delay will not result in specific cohorts 
of borrowers being excluded from the process in effect when the claim 
is made. Loans made before July 1, 2017, were always subject to the 
State law-based standard, and borrowers' ability to bring claims under 
that standard is unchanged by the delay. For claims filed after the 
effective date of the regulations for loans made on or after July 1, 
2019, the Federal standard established in the 2016 final regulations 
would apply. As discussed previously, the Department interprets all 
references to ``July 1, 2017'' in the text of the final regulations to 
mean the effective date of the final regulations. As a result, the 
delay in the effective date means that loans made between July 1, 2018, 
and June 30, 2019, will be subject to the current State law-based 
standard. As we noted in the 2016 final regulations, the Federal 
standard was designed to address much of the conduct already covered by 
the State law-based standard, so the vast majority of discharge claims 
associated with loans made between July 1, 2017, and the delayed 
effective date could be made under the current, State law-based 
standard as well. (81 FR 76057)
    Some commenters suggested that borrowers will be harmed by the 
delay, either through uncertainty as to how claims will be handled, the 
application of statutes of limitation, or processing delays. Commenters 
also expressed concerns about the processing of existing claims and the 
effect of the delay on their resolution. The Department does not agree 
that the delay of the effective date of the 2016 final regulations will 
affect the processing of existing claims. Existing claims were always 
subject to the State law-based standard in the current regulations. 
Efforts to improve the efficiency of claims processing are ongoing and 
are not contingent upon implementation of the 2016 final regulations.
    The Department maintains that the loans affected by the delay from 
July 1, 2018 to July 1, 2019 are those issued between those dates and 
for which any potential borrower defense claims will now be evaluated 
under the State law-based standard. These loans have not been made yet, 
and the NPRM and this final rule clarify that the State law-based 
standard will apply to them--this provides borrowers certainty 
regarding the standard that will be applied to their claims. Some 
commenters noted the difference in the annualized estimate for the 
primary and baseline scenarios and suggested the delay will cost 
borrowers approximately two billion dollars. As explained in the Net 
Budget Impact, the Department estimates the cost of the delay to be 
much less than two billion dollars given that there is significant 
overlap between the current State law-based standard and the Federal 
standard from the 2016 final regulations and that claims associated 
with these loans will be handled under the process in place when their 
claim is made. The Department does not believe that the delay will 
result in reversion to the baseline scenario assumptions for the 
borrower percentage so the effect on borrowers will be much lower than 
the commenters suggested. Additionally, the figures in the Accounting 
Statement for the 2016 final regulations would more appropriately be 
characterized as the costs associated with a single loan cohort and not 
the costs associated with a fiscal year, so the change in the

[[Page 6467]]

effective date would not result in the two billion dollar difference as 
it reflects just one year of the 40-year life of the cohort. The 
Department has updated its Accounting Statement in this final rule so 
the effects presented in this RIA show the impact on the affected loan 
cohorts by fiscal year.
    As discussed in the Analysis of Comments and Changes the potential 
effects on borrowers include possible reduced access to courts from the 
delay in the arbitration and class action waiver provisions while 
statutes of limitation are running. We think it is likely that these 
provisions will be overturned in the CAPPS litigation and are concerned 
about the confusion to borrowers that would result. We believe the harm 
that would occur outweighs any benefits of these provisions. We note 
that a borrower may submit a borrower defense claim to the Department 
with respect to his or her Federal loans at any time without regard to 
arbitration agreements or class action waiver clauses in agreements 
between the borrower and the school, as the loan is between the Federal 
government and the borrower.
    In addition to borrowers, institutions are also affected by the 
delayed effective date. As indicated in the RIA for the 2016 final 
regulations, institutions would bear the major costs of compliance, 
paperwork burden, and providing financial protection to the Department. 
In terms of cost savings for institutions, the estimated annual 
paperwork burden was approximately $9.4 million in the first year after 
the 2016 final regulations were to take effect. In the revised scenario 
developed to estimate the effect of this delay in the effective date, 
estimated transfers from institutions to students, via the Federal 
government, would be reduced by approximately $9.3 million for the 2017 
and 2018 loan cohorts because of the slight reduction in claims from 
the application of the State law-based standard and the change in the 
effective date of the financial protection provisions as reflected in 
the assumptions presented in Table 1. The costs of providing financial 
protection were not quantified in the RIA for the 2016 final 
regulations, and the Department has no additional data to estimate 
costs institutions may avoid from the delayed effective date of the 
financial protection provisions. Given the limited history of borrower 
defense claims and recovery actions and numerous factors that affect 
the cost for individual institutions, the Department believed that 
quantifying the cost of providing financial protection would provide a 
false sense of precision. As noted in the 2016 final regulations and 
the NPRM, there are several ways for institutions to provide financial 
protection to the Department, including some that may be developed in 
the future. The price of this protection would likely vary by the size 
of the institution and the institution's existing financial 
relationships with parties who could provide the financial protection. 
Other key elements that contribute to the uncertain cost of financial 
protection overall are the distribution of borrower defense claims, the 
type of institutions involved, the applicability of specific financial 
protection triggers, and the Department's pursuit of recoveries. The 
Department recognizes that the delayed effective date will postpone the 
impact of the financial protection provisions on institutions. This 
would be a fraction of the total protection expected to be generated 
under the rule as some of the triggers are tied to the production of 
certain performance measures such as gainful employment rates and there 
would be some time, possibly months, between the effective date and the 
next release of rates. The recovery assumption always assumed some 
ramping up of financial protection as different metrics became 
available for application, so the change in effective date will affect 
the early years when recoveries were assumed to be smaller. Borrowers 
are not affected by institutions' delay in incurring the costs of 
financial protection, and the Department believes it is worth the cost 
to taxpayers from reduced recoveries described in the Net Budget Impact 
in the RIA to reconsider the financial protection provisions and 
appropriately balance the costs to institutions with protection of 
borrowers and taxpayers.

Net Budget Impact

    As described in the NPRM, to estimate the net budget impact of the 
delay in the effective date to July 1, 2019, the Department developed a 
scenario that revised the primary estimate assumptions from the 2016 
final regulations for the affected 2017 to 2019 cohorts, as was done 
for the one-year delay described in the IFR. The Department has 
reviewed the comments it received, particularly those about the 
potential impacts and estimation of the effects of the delay and 
responded in the Analysis of Comments and Changes section and this RIA. 
However, the Department believes that the assumptions for the scenario 
to estimate the net budget impact on the student loan program from the 
delay from July 2018 to July 2019 remain appropriate and reasonable.
    As before, the Department applies an assumed level of school 
conduct that could generate borrower defense claims, borrower claims 
success, and recoveries from institutions (respectively labeled as 
Conduct Percent, Borrower Percent, and Recovery Percent in Table 1) to 
the PB 2018 loan volume estimates to generate the estimated net 
borrower defense claims for each loan cohort, loan type, and sector. 
The assumptions for the primary scenario from the 2016 final 
regulations were the basis for the PB2018 baseline that assumed the 
final regulations would go into effect on July 1, 2017. The scenario 
developed for the NPRM is designed to capture the incremental change 
from the one-year delay in the IFR associated with the further one-year 
delay in the effective date to July 1, 2019. Compared to the scenario 
developed for the IFR, recoveries are reduced by an additional two 
percent for the 2017 and 2018 cohorts, all of the 2018 cohort is 
subject to the State law-based standard, and the affected portion of 
the 2019 cohort is subject to the current, State law-based standard and 
reduced recoveries at the five percent level used for the one-year 
delay in the IFR. Table 1 presents assumptions for the primary estimate 
from the final regulations and the revised estimate for the delay from 
July 1, 2018 to July 1, 2019, in the effective date. In this scenario, 
the conduct percent is 90 percent of the primary scenario from the 
final regulations and the borrower percent is the same. The financial 
protection provided was always expected to increase over time, so the 
delayed effective date in the near term is not expected to 
significantly affect the amount of recoveries over the life of any 
particular loan cohort, limiting any net budget impact from the delay. 
To estimate the potential reduction in recoveries related to the 
proposed delayed effective date, we reduced recoveries for the affected 
portion of the 2017 and 2018 cohorts by seven percent for the private 
not-for-profit and proprietary sectors and by five percent for the 2019 
cohort. As in the 2016 final regulations and the IFR, recoveries from 
public institutions were held constant at 75 percent across scenarios.

[[Page 6468]]



                                    Table 1--Revised Assumptions for One-Year Delay From July 1, 2018 to July 1, 2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       2017                            2018                            2019
                         Cohort                          -----------------------------------------------------------------------------------------------
                                                           Pub/Priv NFP        Prop        Pub/Priv NFP        Prop        Pub/Priv NFP        Prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
Conduct Percent:
    Final Primary.......................................             3.0              20             2.4              16             2.0            13.6
    Delay to 2019.......................................             2.7              18            2.16            14.4             1.8           12.24
Borrower Percent:
    Final Primary.......................................              35              45            36.8            47.3            36.8            47.3
    Delay to 2019.......................................              35              45            36.8            47.3            36.8            47.3
                                                         -----------------------------------------------------------------------------------------------
                                                                Pub          Priv/Prop        Public         Priv/Prop          Pub          Priv/Prop
                                                         -----------------------------------------------------------------------------------------------
Recovery Percent:
    Final Primary.......................................              75            23.8              75            23.8              75            23.8
    Delay to 2019.......................................              75          22.134              75          22.134              75          24.871
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The net budget impact associated with these effects of the one-year 
delay in the effective date on the borrower defense provisions only is 
approximately -$46.1 million from the 2017 to 2019 loan cohorts.
    As the amount and composition of borrower defense claims and 
estimated recoveries over the lifetime of the relevant loan cohorts are 
not expected to change greatly due to the delayed effective date, the 
Department does not estimate an economically significant net budget 
impact from the delay itself, with a potential net budget impact 
related to borrower defense claims of -$46.1 million in reduced costs 
for the affected cohorts. This represents the incremental change 
associated with the one-year delay from July 1, 2018, to July 1, 2019. 
If compared to the PB 2018 baseline, the savings would be approximately 
-$78.8 million.
    The closed school automatic discharge provisions were the other 
significant source of estimated net budget impact in the 2016 final 
regulations. Under credit reform scoring, the modification to older 
cohorts for the automatic discharge provision estimated to cost $364 
million was expected to occur in FY 2017 in the PB 2018. As a result of 
the delay in the effective date, the Department will not execute the 
modification in FY 2017.
    Moving the execution of the modification beyond FY 2017 will 
require a new cost analysis with economic assumptions from the fiscal 
year of the execution. This will result in a change of cost, but at 
this point it is not possible to know the discount rates in future 
fiscal years, so the cost of the modification will be determined in the 
year that it is executed. While the actual cost of the future 
modification cannot be determined at this time, the Department did 
approximate the effect of the delay by shifting the timing of the 
relevant discharges back by a year and recalculating a modification 
using the discount rates and economic assumptions used for the 
calculation of the PB2018 modification. When calculated in this manner, 
the delay in the modification to July 2018 described in the IFR 
resulted in estimated savings of less than $10 million. Using the same 
approach, the delay to July 2019 is expected to save approximately $15 
million above the savings from the initial one-year delay.
    As the delay does not change the substance of the automatic 
discharge, we would expect the amount and composition of loans affected 
by the automatic discharge not to change significantly. The closed 
school three-year automatic discharge provisions were applicable to 
loans made on or after November 1, 2013, and were not linked to the 
effective date of the final regulations. Therefore, delaying the 
effective date of those provisions will not change the set of loans 
eligible for this automatic discharge. Additionally, borrowers would 
have the ability to apply for a closed school discharge before July 1, 
2019, if they did not want to wait for the automatic discharge to be 
implemented. For future cohorts, the delay is not significant as the 
three-year period will fall beyond the delayed effective date. Any 
significant change to the estimated net budget impact associated with 
the closed school automatic discharge depends on any substantive 
changes made to the provisions as a result of the current rulemaking 
process and changes to economic assumptions when the modification is 
executed.
    Consistent with Executive Order 13771 (82 FR 9339, February 3, 
2017), we have determined that this rule will result in cost savings. 
Therefore, this rule would be considered an Executive Order 13771 
deregulatory action.

Accounting Statement

    In evaluating whether a regulation is economically significant, a 
key consideration is whether the annual effect in any given year is 
over $100 million.
    To evaluate this, the Department looked at the difference in the 
undiscounted cash flows related to the death, disability, and 
bankruptcy (DDB) claims in which borrower defense claims are included 
for the one-year delay established in the IFR and the one-year delay 
scenario established in this notice and described under the heading 
``Net Budget Impact''. The difference from subtracting this delay 
scenario from the IFR one-year delay scenario for the 2017 to 2019 loan 
cohorts is summarized in Table 2.

                    Table 2--Difference in Undiscounted Net Cashflows for the 2017 to 2019 Loan Cohorts From the One-Year Delay in 2016 Borrower Defense Rule to July 1, 2019
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  FY 2017      FY 2018      FY 2019      FY 2020      FY 2021      FY 2022      FY 2023      FY 2024      FY 2025      FY 2026
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Change in DDB Cashflow........................................         159        7,489      496,637      637,361      538,468    6,004,802    9,525,520    4,668,143    2,156,009    3,003,657
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 6469]]

    Table 3 shows the effects when those differences in the DDB 
cashflows are discounted at 7 and 3 percent and annualized.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
                Category                             Benefits
------------------------------------------------------------------------
Institutions may not incur compliance
 costs or costs of obtaining financial
 protection until the rule is in effect.          Not Quantified
------------------------------------------------------------------------
                Category                               Costs
------------------------------------------------------------------------
                                                7%              3%
------------------------------------------------------------------------
Continued use of State-law based
 standard
Delay in providing consumer information
 about institutions' performance and
 practices                                        Not Quantified
Potential decreased awareness and usage
 of closed school and false
 certification discharges
------------------------------------------------------------------------
Savings associated with delay in                    -9.5           -9.51
 compliance with paperwork requirements.
------------------------------------------------------------------------
                Category                             Transfers
------------------------------------------------------------------------
                                                7%              3%
------------------------------------------------------------------------
Reduction in transfers from the Federal             -3.5            -3.8
 government to affected borrowers in the
 2017 to 2019 cohorts that would have
 been partially borne by affected
 institutions via reimbursements........
Reduced reimbursements from affected                -1.2            -1.3
 institutions to affected students, via
 the Federal government as loan cohorts
 2017 to 2019 are subject to the
 existing borrower defense regulation...
Delay in closed school automatic                   -14.8           -14.8
 discharge implementation from 2018 to
 2019...................................
------------------------------------------------------------------------

Paperwork Reduction Act of 1995

    As indicated in the Paperwork Reduction Act section published in 
the 2016 final regulations, the assessed estimated burden was 253,136 
hours, affecting both institutions and individuals, with an estimated 
cost of $9,458,484. The table below identifies the regulatory sections, 
OMB Control Numbers, estimated burden hours, and estimated costs of 
those final regulations.

----------------------------------------------------------------------------------------------------------------
                                                                                                 Estimated cost
                                                                                                  $36.55/hour
             Regulatory section               OMB Control No.            Burden hours             institution,
                                                                                                  $16.30/hour
                                                                                                   individual
----------------------------------------------------------------------------------------------------------------
668.14.....................................          1845-0022  1,953........................             71,382
668.41.....................................          1845-0004  5,346........................            195,396
668.171....................................          1845-0022  3,028........................            110,673
668.175....................................          1845-0022  60,560.......................          2,213,468
682.211....................................          1845-0020  5,784........................            211,405
682.402....................................          1845-0020  1,838........................             67,179
685.222....................................          1845-0142  249 (Individuals)............              4,059
685.222....................................          1845-0142  800 (Institutions)...........             29,240
685.300....................................          1845-0143  179,362......................          6,555,681
----------------------------------------------------------------------------------------------------------------
    Total.....................................................  258,920......................          9,458,484
----------------------------------------------------------------------------------------------------------------
Cost savings due to delayed effective date excluding 682.211    253,136......................          9,247,079
 early implementation allowed.
Burden remaining..............................................  5,784........................            211,405
----------------------------------------------------------------------------------------------------------------

    This final rule delays the effective date of the implementation of 
all of the cited regulations and will result in a cost savings in the 
total amount of $9,458,484. However, 34 CFR 682.211(i)(7) which was 
included in the 2016 final regulations, regarding mandatory forbearance 
based on a borrower defense claim, with an estimated 5,784 hours and 
$211,405 cost, was designated for early implementation. Lenders may 
have elected early implementation and, therefore, those specific costs 
and hours remain applicable and have been subtracted from the overall 
estimated cost savings. Based on the delayed effective date of July 1, 
2019, the revised estimated annual cost savings to institutions and 
individuals is $9,247,079 ($9,458,484-$211,405) with an estimated 
burden hours savings of 253,136 (258,920-5,784).
    Accessible Format: Individuals with disabilities may obtain this 
document in an accessible format (e.g., braille, large print, 
audiotape, or compact disc) on request to the contact person listed 
under FOR FURTHER INFORMATION CONTACT.
    Electronic Access to this Document: The official version of this 
document is the document published in the Federal Register. 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.

[[Page 6470]]

Specifically, through the advanced search feature at this site, you can 
limit your search to documents published by the Department.

List of Subjects

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 requirements, 
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.

    Dated: February 9, 2018.
Betsy DeVos,
Secretary of Education.
[FR Doc. 2018-03090 Filed 2-9-18; 4:15 pm]
BILLING CODE 4000-01-P