[Federal Register Volume 84, Number 184 (Monday, September 23, 2019)]
[Rules and Regulations]
[Pages 49788-49933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19309]



[[Page 49787]]

Vol. 84

Monday,

No. 184

September 23, 2019

Part II





Department of Education





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34 CFR Parts 668, 682, and 685





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

  Federal Register / Vol. 84 , No. 184 / Monday, September 23, 2019 / 
Rules and Regulations  

[[Page 49788]]


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DEPARTMENT OF EDUCATION

34 CFR Parts 668, 682, and 685

RIN 1840-AD26
[Docket ID ED-2018-OPE-0027]


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

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Final rule.

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SUMMARY: The Department of Education (Department or We) establishes new 
Institutional Accountability regulations governing the William D. Ford 
Federal Direct Loan (Direct Loan) Program to revise a Federal standard 
and a process for adjudicating borrower defenses to repayment claims 
for Federal student loans first disbursed on or after July 1, 2020, and 
provide for actions the Secretary may take to collect from schools the 
amount of financial loss due to successful borrower defense to 
repayment loan discharges. The Department also amends regulations 
regarding pre-dispute arbitration agreements or class action waivers as 
a condition of enrollment, and requires institutions to include 
information regarding the school's internal dispute resolution and 
arbitration processes as part of in the borrower's entrance counseling. 
We amend the Student Assistance General Provisions regulations to 
establish the conditions or events that have or may have an adverse, 
material effect on an institution's financial condition and which 
warrant financial protection for the Department, update the definitions 
of terms used to calculate an institution's composite score to conform 
with changes in certain accounting standards, and account for leases 
and long-term debt. Finally, we amend the loan discharge provisions in 
the Direct Loan Program.

DATES: These regulations are effective July 1, 2020. The incorporation 
by reference of certain publications listed in these regulations is 
approved by the Director of the Federal Register as of July 1, 2020. 
Implementation date: For the implementation dates of the included 
regulatory provisions, see the Implementation Date of These Regulations 
in SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: For further information related to 
borrower defenses to repayment, pre-dispute arbitration agreements, 
internal dispute processes, and guaranty agency fees, Barbara 
Hoblitzell at (202) 453-7583 or by email at: [email protected]. 
For further information related to false certification loan discharge 
and closed school loan discharge, Brian Smith at (202) 453-7440 or by 
email at: [email protected]. For further information regarding 
financial responsibility and institutional accountability, John Kolotos 
(202) 453-7646 or by email at: [email protected]. For information 
regarding recalculation of subsidized usage periods and interest 
accrual, Ian Foss at (202) 377-3681 or by email at: [email protected].
    If you use a telecommunications device for the deaf (TDD) or a text 
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-
800-877-8339.

SUPPLEMENTARY INFORMATION: 

Executive Summary

Purpose of This Regulatory Action

    Section 455(h) of the Higher Education Act of 1965, as amended 
(HEA), authorizes the Secretary to specify in regulation which acts or 
omissions of an institution of higher education a borrower may assert 
as a defense to repayment of a Direct Loan. The regulations at 34 CFR 
685.206(c) governing defenses to repayment were first put in place in 
1995. Those 1995 regulations specified that a borrower may assert as a 
defense to repayment ``any act or omission of the school attended by 
the student that would give rise to a cause of action against the 
school under applicable State law,'' (the State law standard) but were 
silent on the process to assert a claim.
    In May 2015, a large nationwide school operator, filed for 
bankruptcy. The following month, the Department appointed a Special 
Master to create and oversee a process to provide debt relief for the 
borrowers associated with those schools, who had applied for student 
loan discharges on the basis of the Department's authority to discharge 
student loans under 34 CFR 685.206(c).
    As a result of difficulties in application, interpretation of the 
State law standard, and the lack of a process for the assertion of a 
borrower defense claim in the regulations, the Department began 
rulemaking on the topic of borrower defenses to repayment. On November 
1, 2016, the Department published final regulations \1\ (hereinafter, 
``2016 final regulations'') on the topic of borrower defenses to 
repayment, which significantly expanded the rules regarding how 
borrower defense claims could be originated and how they would be 
adjudicated. The 2016 final regulations were developed after the 
completion of a negotiated rulemaking process and after receiving and 
considering public comments on a notice of proposed rulemaking. In 
accordance with the HEA, the 2016 final regulations were scheduled to 
go into effect on July 1, 2017.
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    \1\ 81 FR 75926.
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    On May 24, 2017, the California Association of Private 
Postsecondary Schools (CAPPS) filed a Complaint and Prayer for 
Declaratory and Injunctive Relief in the United States District Court 
for the District of Columbia (Court), challenging the 2016 final 
regulations in their entirety, and in particular those provisions of 
the regulations pertaining to: (1) The standard and process used by the 
Department to adjudicate borrower defense claims; (2) financial 
responsibility standards; (3) requirements that proprietary 
institutions provide warnings about their students' loan repayment 
rates; and (4) the provisions requiring that institutions refrain from 
using arbitration or class action waivers in their agreements with 
students.\2\
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    \2\ Complaint and Prayer for Declaratory and Injunctive Relief, 
California Association of Private Postsecondary Schools v. DeVos, 
No. 17-cv-00999 (D.D.C. May 24, 2017).
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    In light of the pending litigation, on June 16, 2017, the 
Department published a notification of the delay of the effective date 
\3\ of certain provisions of the 2016 final regulations under section 
705 of the Administrative Procedure Act \4\ (APA), until the legal 
challenge was resolved (705 Notice). Subsequently, on October 24, 2017, 
the Department issued an interim final rule (IFR) delaying the 
effective date of those provisions of the final regulations to July 1, 
2018,\5\ and a notice of proposed rulemaking to further delay the 
effective date to July 1, 2019.\6\ On February 14, 2018, the Department 
published a final rule delaying the regulations' effective date until 
July 1, 2019 (Final Delay Rule).\7\
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    \3\ 82 FR 27621.
    \4\ 5 U.S.C. 705.
    \5\ 82 FR 49114.
    \6\ 82 FR 49155.
    \7\ 83 FR 6458.
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    Following issuance of the 705 Notice, the plaintiffs in Bauer filed 
a complaint challenging the validity of the 705 Notice.\8\ The 
attorneys general of eighteen States and the District of Columbia also 
filed a complaint challenging the validity of the 705

[[Page 49789]]

Notice.\9\ Plaintiffs in both cases subsequently amended their 
complaints to include the IFR and the Final Delay Rule, and these cases 
were consolidated by the Court.
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    \8\ Complaint for Declaratory and Injunctive Relief, Bauer v. 
DeVos, No. 17-cv-1330 (D.D.C. Jul. 6, 2017).
    \9\ Massachusetts v. U.S. Dep't of Educ., No. 17-cv-01331 
(D.D.C. Jul. 6, 2017).
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    In November 2017, the Department began a negotiated rulemaking 
process. The resultant notice of proposed rulemaking was published on 
July 31, 2018 (2018 NPRM).\10\ The 2018 NPRM used the pre-2016 
regulations, which were in effect at the time the NPRM was published, 
as the basis for proposed regulatory amendments.
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    \10\ 83 FR 37242.
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    The 2018 NPRM also expressly proposed to rescind the specific 
regulatory revisions or additions included in the 2016 final 
regulations, which were not yet effective. Accordingly, the preamble of 
the 2018 NPRM generally provided comparisons between the regulations as 
they existed before the 2016 final regulations, the 2016 final 
regulations, and the proposed rule. The Department received over 30,000 
comments in response to the 2018 NPRM. Many commenters compared the 
Department's proposed regulations to the 2016 final regulations, when 
the 2016 final regulations differed from a proposed regulatory change 
in the 2018 NPRM. The Department also provided a Regulatory Impact 
Analysis that was based on the President's FY 2018 budget request to 
Congress, which assumed the implementation of the 2016 final 
regulations.
    On September 12, 2018, the Court issued a Memorandum Opinion and 
Order in the consolidated matter, finding the challenge to the IFR was 
moot, declaring the 705 Notice and the Final Delay Rule invalid, and 
convening a status conference to consider appropriate remedies.\11\
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    \11\ Bauer, No. 17-cv-1330.
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    Subsequently, on September 17, 2018, the Court issued a Memorandum 
Opinion and Order immediately vacating the Final Delay Rule and 
vacating the 705 Notice, but suspending its vacatur of the 705 Notice 
until 5 p.m. on October 12, 2018, to allow for renewal and briefing of 
CAPPS' motion for a preliminary injunction in CAPPS v. DeVos and to 
give the Department an opportunity to remedy the deficiencies with the 
705 Notice.\12\ The Department decided not to issue a revised 705 
notice.
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    \12\ Bauer, No. 17-cv-1330.
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    On October 12, 2018, the Court extended the suspension of its 
vacatur until noon on October 16, 2018.\13\ On October 16, 2018, the 
Court denied CAPPS' motion for a preliminary injunction, ending the 
suspension of the vacatur.\14\
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    \13\ Minute Order (Oct. 12, 2018), Bauer, No. 17-cv-1330.
    \14\ Memorandum Opinion and Order, CAPPS, No. 17-cv-0999 (Oct. 
16, 2018).
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    In the 2018 NPRM, we proposed to rescind provisions of the 2016 
final regulations that had not yet gone into effect.\15\ However, as 
detailed in the Department's Federal Register notice of March 19, 
2019,\16\ as a result of the Court's decision in Bauer, those 
regulations have now become effective. This change necessitates 
technical differences in the structure of this document, which rescinds 
certain provisions, and amends others, of the 2016 final regulations 
that have taken effect, compared with that of the 2018 NPRM.
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    \15\ See: 83 FR 37250-51.
    \16\ 84 FR 9964.
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    In particular, while the 2018 NPRM technically proposed to amend 
the pre-2016 regulations (in addition to proposing that the 2016 
regulations be rescinded), these final regulations, as a technical 
matter, amend the 2016 final regulations which have since taken effect. 
Thus, we describe the changes to the final regulations and show them in 
the amendatory language at the end of the document based on the 
currently effective 2016 final regulations. We do this in order to 
accurately instruct the Federal Register's amendments to the Code of 
Federal Regulations.
    With the 2016 final regulations in effect, the Department initially 
considered publishing a second NPRM that used those regulations as the 
starting point, rather than the pre-2016 regulations. However, given 
that the policies we proposed in the 2018 NPRM were not affected by the 
set of regulations that served as the underlying baseline, and that we 
provided a meaningful opportunity for the public to comment on each of 
the regulatory proposals in the NPRM and on the rescission of the 2016 
final regulations, we determined that an additional NPRM would further 
delay the finality of the rulemaking process for borrowers and schools 
without adding meaningfully to the public's participation in the 
process. The Department addressed the provisions in these final 
regulations in the 2018 NPRM and afforded the public a meaningful 
opportunity to provide comment. For these reasons, despite the 
intervening events since publication of the 2018 NPRM, we are 
proceeding with the publication of these final regulations.
    Additionally, after further consideration, we are keeping many of 
the regulatory changes that were included in the 2016 final 
regulations. Some of the revisions proposed in the 2018 NPRM are 
essentially the same as, or similar to, the revisions made by the 
Department in the 2016 final regulations, which are currently in 
effect. The Department is not rescinding or further amending the 
following regulations in title 34 of the Code of Federal Regulations, 
even to the extent we proposed changes to those regulations in the 2018 
NPRM:
     Sec.  668.94 (Limitation),
     Sec.  682.202(b) (Permissible charges by lenders to 
borrowers),
     Sec.  682.211(i)(7) (Forbearance),
     Sec.  682.405(b)(4)(ii) (Loan rehabilitation agreement),
     Sec.  682.410(b)(4) and (b)(6)(viii) (Fiscal, 
administrative, and enforcement requirements), and
     Sec.  685.200 (Borrower eligibility).
    The Department also did not propose to rescind in the 2018 NPRM, 
and is not rescinding here, 34 CFR 685.223, which concerns the 
severability of any provision of subpart B in part 685 of title 34 of 
the Code of Federal Regulations; 34 CFR 685.310, which concerns the 
severability of any provision of subpart C in part 685 of title 34 of 
the Code of Federal Regulations; or 34 CFR 668.176, which concerns the 
severability of any provision of subpart L in part 668 of title 34 of 
the Code of Federal Regulations. If any provision of subparts B or C in 
part 685, subpart L in part 668, or their application to any person, 
act, or practice is at some point held invalid by a court, the 
remainder of the subpart or the application of its provisions to any 
person, act, or practice is not affected.
    While the negotiated rulemaking committee that considered the draft 
regulations on these topics during 2017-2018 did not reach consensus, 
these final regulations reflect the results of those negotiations and 
respond to the public comments received on the regulatory proposals in 
the 2018 NPRM. The regulations are intended to:
     Provide students with a balanced, meaningful borrower 
defense to repayment claims process that relies on a single, Federal 
standard;
     Grant borrower defense to repayment loan discharges that 
are adjudicated equitably, swiftly, carefully, and fairly;
     Encourage students to directly seek remedies from schools 
when acts or omissions by the school, including those that do not 
support a borrower defense to repayment claim, fail to

[[Page 49790]]

provide a student access to the educational or job placement 
opportunities promised, or otherwise cause harm to students;
     Ensure that schools, rather than taxpayers, bear the 
burden of billions of dollars in losses from approvals of borrower 
defense to repayment loan discharges;
     Establish that the Department has a complete record to 
review in adjudicating claims by allowing schools to respond to 
borrower defense to repayment claims and provide evidence to support 
their responses;
     Discourage schools from committing fraud or other acts or 
omissions that constitute misrepresentation;
     Encourage closing institutions to engage in orderly teach-
outs rather than closing precipitously;
     Enable the Department to properly evaluate institutional 
financial risk in order to protect students and taxpayers;
     Eliminate the inclusion of lawsuits as a trigger for 
letter of credit requirements until those lawsuits are settled or 
adjudicated and a monetary value can be accurately assigned to them;
     Provide students with additional time to qualify for a 
closed school loan discharge and protect students who elect this option 
at the start of a teach-out, even if the teach-out exceeds the length 
of the regular lookback period;
     Adjust triggers for Letters of Credit to reflect actual, 
rather than potential, liabilities; and
     Reduce the strain on the government, and the delay to 
borrowers in adjudicated valid claims, due to large numbers of borrower 
defense to repayment applications.

Summary of the Major Provisions of This Regulatory Action: For the 
Direct Loan Program, the Final Regulations

     Establish a revised Federal standard for borrower defenses 
to repayment asserted by borrowers with loans first disbursed on or 
after July 1, 2020;
     Revise the process for the assertion and resolution of 
borrower defense to repayment claims for loans first disbursed on or 
after July 1, 2020;
     Provide schools and borrowers with opportunities to 
provide evidence and arguments when a defense to repayment application 
has been filed and to provide an opportunity for each side to respond 
to the other's submissions, so that the Department can review a full 
record as part of the adjudication process;
     Require a borrower applying for a borrower defense to 
repayment loan discharge to supply documentation that affirms the 
financial harm to the borrower is not the result of the borrower's 
workplace performance, disqualification for a job for reasons unrelated 
to the education received, or a personal decision to work less than 
full-time or not at all;
     Revise the time limit for the Secretary to initiate an 
action to collect from the responsible school the amount of any loans 
first disbursed on or after July 1, 2020, that are discharged based on 
a successful borrower defense to repayment claim for which the school 
is liable;
     Modify the remedial actions the Secretary may take to 
collect from the responsible school the amount of any loans discharged 
to include those based on a successful borrower defense to repayment 
claim for which the school is liable; and
     Expand institutional responsibility and financial 
liability for losses incurred by the Secretary for the repayment of 
loan amounts discharged by the Secretary based on a borrower defense to 
repayment discharge.
    The final regulations for the Direct Loan Program also include many 
of the same or similar provisions as the 2016 regulations, which are 
currently in effect. For example, both the 2016 regulations and these 
final regulations:
     Require a preponderance of the evidence standard for 
borrower defense to repayment claims;
     Provide that a violation by a school of an eligibility or 
compliance requirement in the HEA or its implementing regulations is 
not a basis for a borrower defense to repayment unless the violation 
would otherwise constitute a basis under the respective regulations;
     Allow the same universe of people to file a borrower 
defense to repayment claim, as the definition of ``borrower'' in the 
2016 final regulations is the same as the definition of ``borrower'' in 
these final regulations;
     Provide a borrower defense to repayment process for both 
Direct Loans and Direct Consolidation Loans;
     Allow the Secretary to determine the order in which 
objections will be considered, if a borrower asserts both a borrower 
defense to repayment and other objections;
     Require the borrower to provide evidence that supports the 
borrower defense to repayment;
     Automatically grant forbearance on the loan for which a 
borrower defense to repayment has been asserted, if the borrower is not 
in default on the loan, unless the borrower declines such forbearance;
     Require the borrower to cooperate with the Secretary in 
the borrower defense to repayment proceeding; and
     Transfer the borrower's right of recovery against third 
parties to the Secretary.
    The final regulations also revise the Student Assistance General 
Provisions regulations to:
     Provide that schools that require Federal student loan 
borrowers to sign pre-dispute arbitration agreements or class action 
waivers as a condition of enrollment to make a plain language 
disclosure of those requirements to prospective and enrolled students 
and place that disclosure on their website where information regarding 
admission, tuition, and fees is presented; and
     Provide that schools that require Federal student loan 
borrowers to sign pre-dispute arbitration agreements or class action 
waivers as a condition of enrollment to include information in the 
borrower's entrance counseling regarding the school's internal dispute 
and arbitration processes.
    The final regulations also:
     Amend the financial responsibility provisions with regard 
to the conditions or events that have or may have an adverse material 
effect on an institution's financial condition, and which warrant 
financial protection for students and the Department;
     Update composite score calculations to reflect certain 
recent changes in Financial Accounting Standards Board (FASB) 
accounting standards;
     Update the definitions of terms used to describe the 
calculation of the composite score, including leases and long-term 
debt;
     Revise the Direct Loan program's closed school discharge 
regulations to extend the time period for a borrower to qualify for a 
closed school discharge to 180 days;
     Revise the Direct Loan program's closed school loan 
discharge regulations to specify that if offered a teach-out 
opportunity, the borrower may select that opportunity or may decline it 
at the beginning of the teach-out, but if the borrower accepts it, he 
or she will still qualify for a closed school discharge only if the 
school fails to meet the material terms of the teach-out plan or 
agreement approved by the school's accrediting agency and, if 
applicable, the school's State authorizing agency;
     Affirm that in instances in which a teach-out plan is 
longer than 180 days, a borrower who declines the teach-out opportunity 
and does not transfer credits to complete a comparable program, 
continues to qualify, under the

[[Page 49791]]

exceptional circumstances provision, for a closed school loan 
discharge;
     Modify the conditions under which a Direct Loan borrower 
may qualify for a false certification discharge by specifying that the 
borrower will not qualify for a false certification discharge based on 
not having a high school diploma in cases when the borrower could not 
reasonably provide the school a high school diploma and has not met the 
alternative eligibility requirements, but provided a written 
attestation, under penalty of perjury, to the school that the borrower 
had a high school diploma; and
     Require institutions to accept responsibility for the 
repayment of amounts discharged by the Secretary pursuant to the 
borrower defense to repayment, closed school discharge, false 
certification discharge, and unpaid refund discharge regulations.
     Prohibit guaranty agencies from charging collection costs 
to a defaulted borrower who enters into a repayment agreement with the 
guaranty agency within 60 days of receiving notice of default from the 
agency.

Timing, Comments and Changes

    On July 31, 2018, the Secretary published a notice of proposed 
rulemaking (NPRM) for these parts in the Federal Register.\17\ The 
final regulations contain changes from the NPRM, which are fully 
explained in the Analysis of Comments and Changes section of this 
document.
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    \17\ 83 FR 37242.
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    Implementation Date of These Regulations: Section 482(c) of the HEA 
requires that regulations affecting programs under title IV of the HEA 
be published in final form by November 1, prior to the start of the 
award year (July 1) to which they apply. However, that section also 
permits the Secretary to designate any regulation as one that an entity 
subject to the regulations may choose to implement earlier with 
conditions for early implementation.
    The Secretary is exercising her authority under section 482(c) of 
the HEA to designate the following new regulations at title 34 of the 
Code of Federal Regulations included in this document for early 
implementation beginning on September 23, 2019, at the discretion of 
each institution, as appropriate:
    (1) Section 668.172(d).
    (2) Appendix A to Subpart L of Part 668.
    (3) Appendix B to Subpart L of Part 668.
    The Secretary has not designated any of the remaining provisions in 
these final regulations for early implementation. Therefore, the 
remaining final regulations included in this document are effective 
July 1, 2020.
    Incorporation by Reference. In Sec.  [thinsp]668.172(d) of these 
final regulations, we reference the following accounting standard: 
Financial Accounting Standards Board (FASB) Accounting Standards Update 
(ASU) 2016-02, Leases (Topic 842).
    FASB issued ASU 2016-02 to increase transparency and comparability 
among organizations by recognizing lease assets and lease liabilities 
on the balance sheet and disclosing key information about leasing 
arrangements. This standard is available at www.fasb.org, registration 
required.
    Public Comment. In response to our invitation in the July 31, 2018, 
NPRM, more than 38,450 parties submitted comments on the proposed 
regulations, which included comments also relevant to the 2016 
regulations, the implementation of which had been delayed.
    We discuss substantive issues under the sections of the proposed 
regulations to which they pertain. Generally, we do not address 
technical or other minor changes or recommendations that are out of the 
scope of this regulatory action or that would require statutory changes 
in the preamble.

Analysis of Comments and Changes

    An analysis of the comments and of any changes in the regulations 
since publication of the 2018 NPRM follows.

Borrower Defenses--General (Sec.  685.206)

    Comments: Many commenters supported the Department's proposals to 
improve the borrower defense to repayment regulations. These commenters 
asserted that the proposed regulations would provide the necessary 
accountability in the system to prevent fraud, while giving borrowers a 
path to a more expedient resolution of complaints through arbitration 
or a school's internal dispute processes.
    Some commenters claim that the regulations demonstrate government 
overreach by creating regulations that would add billions of dollars to 
Federal spending.
    Discussion: We appreciate the comments in support of the proposed 
borrower defense to repayment regulations.
    We disagree with commenters who state that these regulations 
represent government overreach. Section 455(h) of the HEA authorizes 
the Secretary to specify in regulation which acts or omissions of an 
institution of higher education a borrower may assert as a defense to 
repayment of a Direct Loan. Section 455(h) of the HEA states: 
``Notwithstanding any other provision of State or Federal law, the 
Secretary shall specify in regulations which acts or omissions of an 
institution of higher education a borrower may assert as a defense to 
repayment of a loan made under this part, except that in no event may a 
borrower recover from the Secretary, in any action arising from or 
relating to a loan made under this part, an amount in excess of the 
amount such borrower has repaid on such loan.''
    The Department is not creating a new borrower defense to repayment 
program but rather is revising the terms under which a borrower may 
assert a defense to repayment of a loan, for loans first disbursed on 
or after July 1, 2020, which is the anticipated effective date of these 
regulations. The Department believes that these regulations strike an 
appropriate balance between attempting to correct aspects of the 2016 
final regulations, that people criticized as Federal Government 
overreach, and the interests of students, institutions, and the Federal 
Government.
    The Department acknowledges that the 2016 final regulations 
anticipated that taxpayers would bear a great expense and seeks to 
cabin that burden through these final regulations. The Department 
generally seeks to decrease costs to Federal taxpayers and decrease 
Federal spending through these final regulations. These costs are more 
fully outlined through the Regulatory Impact Assessment section to 
follow.
    Changes: None.
    Comments: One group of commenters supported the regulations for 
providing a better balance between relief for borrowers and due process 
for schools by providing both parties with an equal opportunity to 
provide evidence and arguments and to review and respond to evidence. 
These commenters acknowledged that balance is essential to a fair 
process. They expressed concern, however, that the pendulum has shifted 
too far once again and asserted that in comparison to the 2016 final 
regulations, the proposed regulations, which elevated the evidentiary 
standard to clear and convincing, make it too difficult for borrowers 
to obtain relief.
    Other commenters generally opposed the Department's proposed rules 
concerning the borrower defense to repayment. One commenter suggested 
that the proposed rules would effectively block relief for the vast 
majority of borrowers, while shielding institutions from accountability 
for their misconduct.

[[Page 49792]]

    Another group of commenters contended that the NPRM favors 
predatory institutions over students, doing so based upon unsupported 
assertions and hypotheticals that ignore and distort data and evidence.
    Discussion: We appreciate the commenters' concern that, in 
attempting to strike a balance, the pendulum may have swung too far, 
making it more difficult for harmed borrowers to receive relief. 
Similarly, the Department appreciates the commenters' recognition that 
the proposed regulations better balance the rights of students and 
institutions alike. In the sections below, we discuss changes we have 
made in the final regulations to achieve the balance and fairness 
commenters from all perspectives encouraged.
    For example, and as described below, under the final regulations, 
borrowers will be required to demonstrate a misrepresentation by a 
preponderance of the evidence instead of the clear and convincing 
evidence proposed alternative standard that was included in the 2018 
NPRM.
    We disagree with commenters who contend that the proposed rules 
would have blocked relief to borrowers who were victimized by bad 
actors. Nevertheless, we have revised the rules to provide a fairer and 
more equitable process for borrowers to seek relief when institutions 
have committed acts or omissions that constitute a misrepresentation 
and cause financial harm to students. The Department, in turn, has a 
process to recover the losses the Department sustains from institutions 
as a result of granting borrower defense to repayment discharges. This 
process is outlined in subpart G of Part 668, of Title 34 of the Code 
of Federal Regulations.
    We also disagree with commenters that the proposed rules indicate 
that the Department sides with institutions over students, and notes 
that those commenters used unsupported assertions and hypothetical 
examples to support their comments. We disagree that the proposed 
regulations would have shielded bad actors from being held accountable 
for their actions. These final regulations send a clear and unequivocal 
message that institutions need to be truthful in their communications 
with prospective and enrolled students.
    Throughout this document, as in the 2018 NPRM, we explain the 
reasons and rationales for these final regulations using data and real-
world examples, while drawing upon the Department's experience since 
the publishing of the 2016 final regulations. The Department remains 
committed to protecting borrowers and taxpayers from institutions 
engaging in predatory behavior--regardless of whether those 
institutions are propriety, non-profit, selective, or open enrollment--
which includes misrepresenting an institution's admissions standards 
and selectivity. The proposed and final regulations also ensure that 
schools are accountable to taxpayers for losses from the appropriate 
approval of borrower defense to repayment claims. Borrowers continue to 
have a meaningful avenue to seek a discharge from the Department, and 
nothing in these rules burdens a student's ability to access consumer 
protection remedies at the State level.
    Changes: None.
    Comments: Several commenters expressed dismay at the Department's 
30-day timetable, which the commenters characterized as accelerated, 
for considering comments and publishing a final rule. These commenters 
felt that a ``rush to regulate'' had resulted in a public comment 
period that did not give the public enough time to fully consider the 
proposals and a timeline that did not afford the Department enough time 
to develop an effective, cost-efficient rule. Another commenter also 
asserted that we were following a hastened review schedule and were 
inappropriately allowing only a 30-day comment period on an NPRM that 
the commenter asserts was riddled with inaccuracies. The commenter said 
that, while the APA requires a minimum of 30 days for public comment 
during rulemaking,\18\ a longer period was needed in this instance to 
allow affected parties to provide meaningful comment and information to 
the Department. The commenter noted that the Administrative Conference 
of the United States recommends a 60-day comment period when a rule is 
economically significant and argued that this recommendation is 
appropriate in this case due to the vast number of individuals affected 
by a regulation that modifies the Department's responsibilities for 
over $1 trillion in outstanding loans.
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    \18\ 5 U.S.C. 553(d).
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    Discussion: We disagree with the commenters who contend that the 
Department's timetable for developing borrower defense to repayment 
regulations did not give the public enough time to fully consider the 
proposals. The 30-day public comment period provided sufficient time 
for interested parties to submit comments, particularly given that 
prior to issuing the proposed regulations, the Department conducted two 
public hearings and three negotiated rulemaking sessions, where 
stakeholders and members of the public had an opportunity to weigh in 
on the issues at hand. The Department also posted the 2018 NPRM on its 
website several days before publication in the Federal Register, 
providing stakeholders additional time to view the proposed regulations 
and consider their viewpoints on the NPRM. Further, the Department 
received over 30,000 comments, many representing large constituencies. 
The large number of comments received indicates that the public had 
adequate time to comment on the Department's proposals.
    Additionally, the 30-day period referenced in 5 U.S.C. 553(d) 
refers to the period of time between the publication of a substantive 
rule and its effective date and not the amount of time necessary for 
public comment. The applicable case law, interpreting the APA, 
specifies that comment periods should not be less than 30 days to 
provide adequate opportunity to comment.
    With respect to the comment concerning inaccuracies in the NPRM, we 
address those concerns in response to comments summarized below.
    Changes: None.
    Comments: Another group of commenters offered their full support 
for our efforts to assist students in addressing wrongs perpetrated 
against them by schools that acted fraudulently or made a 
misrepresentation with respect to their educational services. The 
commenters asserted that, when students are defrauded, they need to 
have the means to remedy the situation. According to these commenters, 
colleges routinely overpromise and under-deliver for their students and 
must be held accountable to their students for their failures. These 
commenters recommended the Department proactively use the many tools 
already at its disposal to uniformly pursue schools throughout each 
sector of higher education that are not serving their students well 
rather than rely on the borrower defense to repayment regulations, 
which necessarily provide after-the-fact relief for borrowers. The 
commenters asserted that addressing a problem before it becomes a 
borrower defense to repayment issue should be the first priority, thus 
saving current and future students from harm. Another group of 
commenters offered a similar suggestion and proposed that the 
Department examine the effectiveness of its gatekeeping obligations 
under title IV of the HEA as well as the nature of its relationship 
with accrediting agencies

[[Page 49793]]

and States, to prevent participation by bad actors in the title IV 
programs.
    Another group of commenters who generally supported the proposed 
regulations noted areas of concern or disagreement. They suggested that 
we amend the regulations to provide a ``material benefit'' to schools 
that do not have a history of meritorious borrower defense to repayment 
claims. These commenters also propose that the regulations address the 
``moral hazard'' created by giving students an opportunity to receive 
an education and raise alleged misrepresentations to avoid paying for 
that education after they complete their education. These commenters 
would like the Department to mitigate the proliferation of ``scam 
artists'' and opportunists who advertise their ability to obtain, on 
behalf of a borrower, ``student loan forgiveness''. They also would 
like to discourage attorneys from exploiting students through the 
Department's procedural rules, while harming the higher education 
sector and the taxpayers in the process.
    Discussion: We agree with commenters who suggest that a better 
approach is to stop misrepresentation before it starts, rather than 
providing remedies after the student has already incurred debt and 
expended time and energy in a program that does not deliver what it 
promised. We also agree the Department should proactively use the many 
tools already at its disposal such as program reviews and findings from 
those reviews to pursue schools throughout each sector of higher 
education that are not serving their students well. The Department 
devotes significant resources to the oversight of title IV participants 
and makes every effort to work with accrediting agencies and States to 
identify problems early, including identifying schools that should be 
prevented from participating in title IV programs altogether. The 
Department recognizes accrediting agencies, and only recognized 
accrediting agencies may accredit institutions so that the institutions 
may receive Federal student aid.\19\ The Department of Education's 
Program Compliance Office has a School Eligibility Service Group that 
examines, analyzes, and makes determinations on the initial and renewal 
eligibility applications submitted by schools for participation in 
Federal student aid programs.\20\ This Office also performs financial 
analyses, monitors financial condition, and works with state agencies 
and accrediting agencies.\21\ The Office monitors schools and their 
agents, through on-site and off-site reviews and analysis of various 
reports, to provide early warnings of program compliance problems so 
that appropriate actions may be taken.\22\
---------------------------------------------------------------------------

    \19\ 20 U.S.C. 1001, et seq.; 34 CFR 600.2; 34 CFR 600.20; 34 
CFR 668.13.
    \20\ U.S. Dep't of Educ., Office of Federal Student Aid, 
Principal Office Functional Statements, available at https://www2.ed.gov/about/offices/list/om/fs_po/fsa/program.html.
    \21\ Id.
    \22\ Id.
---------------------------------------------------------------------------

    We do not believe it is necessary or appropriate, nor does the 
Department possess the legal authority, to provide ``material benefit'' 
to schools that follow the law and, therefore, do not have a history of 
meritorious borrower defense to repayment claims. The Department 
expects that all schools, in every sector, will engage in a forthright 
and honest manner with their prospective and enrolled students and, 
therefore, the Department has the discretion to impose certain 
consequences upon schools who commit certain types of 
misrepresentations, even if an institution has previously provided 
accurate information to students.
    We agree that a borrower defense to repayment regulation that is 
poorly constructed, under the statute, may create a ``moral hazard'' by 
giving students an opportunity to complete their education and raise 
alleged misrepresentations to avoid paying for that education. These 
regulations, however, include a process by which the Department 
receives information from both a borrower and the school. The 
Department will evaluate whether a borrower defense to repayment claim 
is meritorious, and the borrower will receive a discharge only if the 
borrower demonstrates, by a preponderance of the evidence, that the 
institution made a misrepresentation.
    We share the concern of commenters regarding the proliferation of 
people described by the commenter as ``scam artists'' and opportunists 
who disingenuously advertise ``student loan forgiveness'' and of some 
plaintiff's attorneys, and others, who seek to exploit borrowers. The 
Department, along with the Consumer Financial Protection Bureau (CFPB) 
and the Federal Trade Commission (FTC), receive and investigate 
consumer complaints regarding student loan scams. Those investigative 
functions are unchanged by these regulations. State consumer protection 
agencies and laws also help borrowers in this regard. Given these 
additional protections, the Department maintains that these final 
regulations strike the right balance between consumer protection and 
due process.
    The Department also seeks to prevent borrower defense claims before 
they arise by disseminating information about various institutions that 
will help students make informed decisions based upon accurate data. As 
stated here and throughout the rest of these final regulations, the 
Department believes that schools and the Federal government each play a 
role in helping students make informed choices when considering the 
pursuit of postsecondary education. We are also aware that research has 
shown that students across the socioeconomic spectrum receive 
insufficient and impersonal guidance about colleges from their high 
schools.\23\ Evidence also indicates that school selection is 
critically important to students' postsecondary success, given that 
students are more likely to persist to completion or degree attainment 
if they attend a well-matched institution.\24\ Similarly, research has 
shown that a student's choice of major or program may be even more 
important than his or her choice of institution in determining long-
term career and earnings outcomes.\25\ The Department has created 
online tools, like the College Scorecard \26\ and College 
Navigator,\27\ that provide objective data across a range of 
institutional attributes to enable prospective students and their 
families to weigh their options based upon the characteristics that 
they deem most important to their decision-making. While we know that 
millions of users access these tools each year, we have limited 
evidence on these tools' potential for impact on college-related 
decisions and outcomes. Moreover, we recognize that some students may 
be overwhelmed by the process of parsing through the volumes of 
information on

[[Page 49794]]

potential postsecondary options and have worked to streamline data 
sources through the College Scorecard and College Navigator to make it 
easier for users to focus on the criteria they deem most important. 
Nonetheless, we believe that, ``armed with detailed, relevant 
information on financial costs and benefits, students can more fairly 
evaluate the tradeoffs of attending a certain institution and 
understand the financial implications of their decisions.'' \28\
---------------------------------------------------------------------------

    \23\ Alexandria Walton Radford, Top Student, Top School?: How 
Social Class Shapes Where Valedictorians Go to College, University 
of Chicago Press, (2013).
    \24\ Audrey Light & Wayne Strayer, Determinants of College 
Completion: School Quality or Student Ability?, 35 J. of Human Res. 
299-332 (2000).
    \25\ See: Holzer, Harry J. and Sandy Baum, Making College Work: 
Pathways to Success for Disadvantaged Students (Washington, DC: 
Brookings Institution Press, 2017); Carnevale, Anthony, et al., 
``Learning While Earning: The New Normal,'' Center on Education and 
the Workforce, Georgetown University, 2015, 
1gyhoq479ufd3yna29x7ubjn-wpengine.netdna-ssl.com/wp-content/uploads/Working-Learners-Report.pdf; Schneider, Mark, ``Are Graduates from 
Public Universities Gainfully Employed? Analyzing Student Loan Debt 
and Gainful Employment,'' American Enterprise Institute, 2014, 
www.aei.org/publication/are-graduates-from-public-universities-gainfully-employed-analyzing-student-loan-debt-and-gainful-employment/.
    \26\ U.S. Dep't of Educ., College Scorecard, available at 
https://collegescorecard.ed.gov/.
    \27\ U.S. Dep't of Educ., College Navigator, available at 
https://nces.ed.gov/collegenavigator/.
    \28\ Exec. Office of the U.S. President, Using Federal Data to 
Measure and Improve the Performance of U.S. Institutions of Higher 
Education (rev. Jan. 2017), available at https://collegescorecard.ed.gov/assets/UsingFederalDataToMeasureAndImprovePerformance.pdf.
---------------------------------------------------------------------------

    The Department has announced its intent to expand the College 
Scorecard to provide program level outcomes data for all title IV 
programs, which is the first time such data will be made available to 
institutions or consumers.\29\ We believe that program-level data will 
be more useful to students than institution-level data. The 
Department's new MyStudentAid application allows the Department to 
provide more information to students who are completing their Free 
Application for Federal Student Aid (FAFSA) form online or interacting 
with the Department's Federal Student Aid office. Accordingly, we can 
ensure that more students are presented with useful information about 
the institutions included on their FAFSA application in a format that 
is user-friendly and does not require them to conduct an extensive 
search. Such information will help students become more informed 
consumers and, thus, be less likely to be deceived by an institution 
that provides information contradictory to the information that the 
Department makes available.
---------------------------------------------------------------------------

    \29\ See U.S. Dep't of Education, Secretary Devos Delivers on 
Promise to Expand College Scorecard, Provide Meaningful Information 
to Students on Education Options and Outcomes, available at https://www.ed.gov/news/press-releases/secretary-devos-delivers-promise-expand-college-scorecard-provide-meaningful-information-students-education-options-and-outcomes (May 21, 2019); See also: 84 FR 
31392, 31408.
---------------------------------------------------------------------------

    Changes: None.
    Comments: Many commenters did not support the proposed regulations, 
asserting that the proposed rule would undermine Congressional intent 
and shortchange students to benefit corporations with a history of 
fraud and abuse. These commenters assert that the 2018 NPRM contained 
errors and logical flaws and was colored throughout by a disturbingly 
cynical attitude about students, along with a naively charitable view 
of school owners and investors. They argued that the notion that 
borrower complaints of fraud result from poor choices in the 
marketplace and that information will cure the problem has been 
rejected by research and analysis and is not supported by the 
structure, text, or legislative history of the HEA. They further assert 
that the legislative history does not blame students for poor choices 
and recognizes that schools and the government have a role in helping 
students avoid poor-value programs. They predicted that the 
Department's proposed rule would have significant, negative 
implications for both defrauded borrowers and taxpayers. Another 
commenter predicted that the effect of proposed regulations would be to 
depress the percentage of tertiary-trained Americans and increase the 
rate of borrower bankruptcy filings. This commenter further asserted 
that the proposed regulations would lower the value of education in the 
U.S. and cause schools to treat students as economic pawns to be 
matriculated for profit motives over educational ones.
    Some commenters stated that any time limitation should be waived in 
cases where borrowers could produce new evidence to assert a claim or 
reopen a decision.
    Another commenter asserted that the 2016 final regulations benefit 
Latino and African American students, who are disproportionately 
concentrated in for-profit colleges and harmed by predatory conduct. 
This commenter urged the Department to retain the 2016 final 
regulations.
    Many of the commenters who did not support the proposed changes 
urged the Department to withdraw the 2018 NPRM and allow for the full 
implementation of the borrower defense regulations published in 2016.
    Discussion: We appreciate the concerns raised by the commenters. 
Our goal in the NPRM and in these final regulations is to balance the 
interests of students with those of taxpayers. We need to ensure, for 
instance, that borrowers receiving relief have claims supported by 
evidence and to protect the taxpayer dollars that fund the Direct Loan 
Program. The Department does not agree that the NPRM portrays students 
or their behaviors in a negative manner or is overly charitable to 
schools and their investors.
    To the contrary, we believe that students have the capacity to make 
reasoned decisions and that they should be empowered by information and 
shared accountability expectations. Students are not passive victims; 
they take an active role in making informed decisions. We describe in 
our response to comments, throughout this document, how we intend to 
support students and families in making informed decisions by 
disseminating information that will help students better evaluate their 
options.\30\
---------------------------------------------------------------------------

    \30\ See, e.g., U.S. Dep't of Educ., College Scorecard, 
available at https://collegescorecard.ed.gov/; U.S. Dep't of Educ., 
College Navigator, available at https://nces.ed.gov/collegenavigator/.
---------------------------------------------------------------------------

    We disagree with commenters that the proposed regulations do not 
align with the HEA or Congressional intent. Through section 455(h) of 
the HEA, 20 U.S.C. 1087e(h), Congress specifically provided the 
Department with the authority ``to specify in regulations which acts or 
omissions of an institution of higher education a borrower may assert 
as a defense to repayment of a loan made under [the Direct Loan 
Program].'' The proposed regulations, and these final regulations, 
represent the Department's exercise of this authority, as intended by 
Congress. We believe that there must be a fair and balanced process for 
the Department to evaluate whether a borrower, as a result of a 
school's act or omission, may be relieved of his or her obligation to 
repay a Federal student loan as contemplated by the statute. We 
disagree with the commenters that our approach prioritizes schools over 
students and believe the approach is justified by the Department's 
obligation to balance the interests of the Federal taxpayers with its 
responsibility to student borrowers under section 455(h) of the HEA.
    We believe we have reached a result in these final regulations that 
strikes the best possible balance between the different interests at 
hand. More details on the projected impact of these final regulations 
are included in the Regulatory Impact Analysis section of this 
Preamble. Further, we discuss in the sections that follow the changes 
we have made in the final regulations to achieve the balance and 
fairness commenters from all perspectives encouraged.
    We believe that these final regulations will increase and not lower 
the value of education in the United States and do not see how these 
final regulations would depress the number of students attending an 
institution of higher education. These final regulations establish 
clear expectations for schools in their dealings with students, and 
greater certainty provides an economic incentive for schools to 
flourish and provide better and more diverse opportunities for 
students. Borrowers are consumers and their choices will impact which 
schools are most desirable for particular careers and professions.

[[Page 49795]]

While the Department cannot regulate the motives of schools, it can, 
and will, hold schools accountable for their acts and omissions.
    Borrowers who are the victims of a misrepresentation by a deceitful 
institution will be able to obtain relief under these final 
regulations, after the Department has had the opportunity to weigh 
information and evidence from all sides, as discussed further below.
    The Department asserts that these final regulations will benefit, 
not harm, all students, including Latino and African American students. 
These final regulations will provide more information to students 
regarding their borrower defense claims than the 2016 final regulations 
and allow students to fully flesh out their claims, as the process in 
these regulations more clearly provides a school with an opportunity to 
provide responses and information as to a borrower's borrower defense 
application, requires that the applicant receives a copy of any 
response that the school submits, and clearly establishes that the 
applicant has an opportunity to reply to the school's response.
    In contrast, the 2016 final regulations allow a school to submit a 
response, but did not clearly afford a student the opportunity to reply 
to the response.\31\ Additionally, under the 2016 final regulations, a 
student has to request that the Department identify the records that 
the Department considers relevant to the borrower defense to repayment 
claim, and the Department will only provide the borrower ``any of the 
identified records upon reasonable request of the borrower.'' \32\
---------------------------------------------------------------------------

    \31\ 34 CFR 685.206(e)(3).
    \32\ Id.
---------------------------------------------------------------------------

    These final regulations, however, guarantee that the student will 
have a copy of the school's response and all the documents that the 
Department considers in adjudicating the borrower defense to repayment 
claim. Accordingly, these final regulations provide a more transparent 
process and afford due process for all borrowers no matter where they 
enroll in college and irrespective of race, religion, national origin, 
gender, or any other status or category.
    For the reasons detailed throughout the preamble to these final 
regulations, we determined that withdrawing the 2018 NPRM and leaving 
the 2016 final regulations in place was not the best long-term 
approach. The Department has decided instead to take an approach that 
applies the 2016 final regulations and these final regulations to 
applicable time periods. The 2016 final regulations, thus, will apply 
to loans first disbursed on or after July 1, 2017 and before July 1, 
2020, and these final regulations will apply to loans first disbursed 
on or after July 1, 2020. We describe our changes to each provision of 
those regulations in detail in the pertinent section of the preamble.
    Changes: As explained more fully below, the Department revises the 
proposed regulations to allow the Secretary to extend the limitations 
period when a borrower may assert a defense to repayment or may reopen 
the borrower's defense to repayment application to consider evidence 
that was not previously considered in two exceptional circumstances 
(relating to a final, non-default judgment on the merits by a State or 
Federal Court that has not been appealed or that is not subject to 
further appeal or a final decision by a duly appointed arbitrator or 
arbitration panel) as described in 34 CFR 685.206(e)(7). We also add a 
new paragraph (d) in Sec.  685.206 and language to Sec.  685.222 and 
Appendix A to subpart B of part 685 to clarify that the 2016 final 
regulations apply to loans first disbursed on or after July 1, 2017 and 
before July 1, 2020. These final regulations will apply to loans first 
disbursed on or after July 1, 2020.
    Comments: Some commenters expressed concern and confusion about the 
structure of the 2018 NPRM, particularly the regulations the Department 
used as the starting point for the preamble discussion and amendatory 
language as well as the baseline used for the Regulatory Impact 
Analysis. They asserted that using the pre-2016 regulations as the 
basis for the amendatory language raises issues under the APA. They 
also stated that using the 2019 President's Budget Request as the 
baseline for the Regulatory Impact Analysis, raises issues under the 
APA in part because the President's Budget Request assumed the 
implementation of the 2016 final regulations.
    Discussion: We welcome the opportunity to provide additional 
clarification about the structure of the 2018 NPRM and the reasons for 
the structure. First, with respect to the amendatory language, the 
Federal Register requires amendatory language to be drafted as 
amendments to the currently effective text of the Code of Federal 
Regulations.\33\ For that reason, because the effective date of the 
2016 final regulations was delayed, our amendatory language in the 2018 
NPRM was drafted to reflect changes to the pre-2016 regulatory text. In 
the preamble, to properly fulfill our obligations under the APA, we 
discussed our proposed changes as related to both the pre-2016 
regulatory text and the 2016 final regulations.
---------------------------------------------------------------------------

    \33\ See 1 CFR part 21. ``Each agency that prepares a document 
that is subject to codification shall draft it as an amendment to 
the Code of Federal Regulations . . .'' 1 CFR 21.1.
---------------------------------------------------------------------------

    In the Regulatory Impact Analysis (RIA) section of this document, 
we discuss in detail why we were required to use the President's 2019 
Budget Request as the baseline for the RIA in the 2018 NPRM.
    Changes: None.

Borrower Defenses--Claims (Sec.  685.206)

Affirmative and Defensive Claims

    Comments: Many commenters, and groups of commenters, advocated for 
the inclusion in the final regulations of affirmative borrower defense 
claims, meaning claims asserted before a borrower has defaulted on a 
Federal student loan. These commenters objected to the proposal that 
would have limited the Department's consideration of borrower defense 
claims to those asserted as a defense in collection proceedings. The 
commenters noted that limiting the consideration of borrower defense 
claims to defensive claims might encourage some borrowers to default on 
their loans to become eligible to file a claim.
    Commenters representing military personnel and veterans noted that 
limiting borrower defense claims to defaulted borrowers would fail to 
recognize the significant risk such a limit would place on service 
members, veterans, and their dependent family members. The commenters 
requested clear and reasonable protections from schools with predatory 
practices and misleading promises. These commenters noted that many 
jobs held by service members, veterans, spouses, and their adult 
children require government security clearances. Defaulting on a 
student loan could result in denial or loss of clearance and, 
therefore, a loss of employment. In such instances, the commenters 
asserted that the proposed regulations would increase the likelihood of 
devastating and, potentially, cascading consequences for military and 
veteran families.
    Some commenters, who supported the inclusion of both affirmative 
and defensive claims, did so with a caveat that these claims should be 
combined with a requirement that the claim be supported by clear and 
convincing evidence, rather than a preponderance of the evidence. One 
commenter, who supported the inclusion of affirmative claims, did so 
with a caveat that these

[[Page 49796]]

claims should be supported by evidence that is beyond a reasonable 
doubt.
    One commenter suggested that borrowers whose loan payments are 
current should be afforded priority over borrowers in default in the 
adjudication process.
    In opposing the proposal to only allow consideration of defensive 
claims, several commenters rejected the Department's assertion that we 
did not accept affirmative borrower defense to repayment claims prior 
to 2015 and alleged that the Department's explanation for proposing 
that the final regulation only allow for the consideration of defensive 
claims was insufficient. Another commenter who supported the inclusion 
of affirmative claims provided evidence that the Department considered 
borrower defense claims before the borrower was in default prior to 
2015.
    A number of commenters, however, supported the proposal to consider 
only defensive claims. One such commenter stated that the regulation 
was intended to only address claims raised in debt collection actions. 
Another commenter argued that the proposal to accept both affirmative 
and defensive claims exceeds the statutory authority conferred upon the 
Department by the HEA and that any such change can only be addressed by 
Congressional action. This commenter stated that it shared the concern 
raised by the Department in the NPRM that allowing consideration of 
affirmative claims would make it relatively easy for a borrower to 
apply for relief, even if the borrower had suffered no financial harm, 
resulting in a significant burden on the Department and institutions to 
address numerous unjustified claims. This commenter also contended that 
if the Department allows affirmative claims, borrowers would have 
nothing to lose by filing for loan relief.
    Discussion: In the 2018 NPRM, the Department explained that we were 
seeking public comment as to whether we should only allow defensive 
claims, as opposed to both affirmative and defensive claims.\34\ The 
Department stated that it believed that accepting defensive claims, and 
not affirmative claims, might better balance the competing interests of 
the Federal taxpayer and of borrowers. The Department sought comment on 
how it could continue to accept and review affirmative claims, but at 
the same time discourage borrowers from submitting unjustified claims.
---------------------------------------------------------------------------

    \34\ 83 FR 37253-37254.
---------------------------------------------------------------------------

    After consideration of the public comments received in response to 
the NPRM, the Department agrees that it is appropriate to accept both 
affirmative and defensive claims. The Department understands the 
concerns raised by the commenters who argued that allowing only 
defensive claims may provide borrowers with an incentive to default, 
which, in turn, would have negative consequences for the borrower. In 
addition, we are concerned about the potential negative impacts on 
military servicemembers, their families, and borrowers, in general, 
which could result from increased instances of loan default triggered 
by borrower efforts to become eligible to assert defensive claims.
    The Department acknowledges that the Department did accept 
affirmative borrower defense in limited circumstances before 2015. 
However, the Department's interpretation of the existing regulation has 
been that it was meant to serve primarily as a means for a borrower to 
assert a defense to repayment during the course of a collection 
proceeding. After further review of the information submitted by 
commenters and our own records, the Department acknowledges that 
throughout the history of the existing borrower defense repayment 
regulation, the Department has approved a small number of affirmative 
borrower defense to repayment requests.
    The Department's representation of its history of approving 
borrower defense to repayment loan relief in the NPRM was included as 
background to our explanations and reasoned bases for two alternative 
proposals. With these alternatives, we gave the public notice and 
opportunity to provide feedback on whether the Department should 
distinguish between affirmative and defensive borrower defense to 
repayment claims.
    As intended by the APA, the Department provided sufficient notice 
and the public provided comments, and the Department weighed such 
comments and has decided to allow the consideration of both affirmative 
claims and defensive claims in these final regulations. However, as 
explained further in this preamble at Borrower Defenses--Limitations 
Period for Filing a Borrower Defense Claim, we are establishing a 
three-year limitations period, that begins to run when the student 
leaves the school, for all defense to repayment claims under the new 
standard.
    The Department continues to be concerned about the burden to the 
Department and the taxpayer from a large volume of claims. However, as 
explained later in this document, the Department does not believe that 
a different evidentiary standard for affirmative claims versus 
defensive claims is appropriate. Different evidentiary standards might 
lead to inconsistency in the Department's adjudication of factually 
similar borrower defense claims, but for the timing of a borrower's 
application and loan status. Similarly, the Department does not agree 
that priority in adjudication should be given to borrowers whose loan 
payments are current over borrowers whose loans are in default. The 
Department believes it is appropriate for a borrower to have his or her 
claim adjudicated based upon the facts underlying his or her 
application, rather than repayment status. We also believe that the 
standard we adopt in these final regulations is properly calibrated to 
allow borrower defense relief only where it is merited, and not to open 
the door to a large volume of unjustified claims.
    The Department disagrees with the commenters who stated that the 
consideration of affirmative claims is outside of the Department's 
statutory authority or the purpose of the borrower defense regulations. 
We stated in the NPRM that the proposal to consider only defensive 
claims was within the Department's authority under section 455(h) of 
the HEA.\35\ However, by such a statement the Department did not imply 
that it does not have the authority to consider affirmative claims and, 
in fact, by proposing that borrowers could submit affirmative claims on 
loans first disbursed before the effective date of the final 
regulations, clearly indicated that it does have such authority.
---------------------------------------------------------------------------

    \35\ 83 FR 37253-37254.
---------------------------------------------------------------------------

    The Department has broad statutory authority to make, promulgate, 
issue, rescind, and amend regulations governing the manner of, 
operations of, and governing of the applicable programs administered by 
the Department and functions of the Department.\36\ Further, by 
providing that the Department may regulate borrowers' assertion of 
borrower defenses to repayment, section 455(h) of the HEA grants the 
Department the authority to not only identify borrower causes of action 
that may be recognized as defenses to repayment, but also to establish 
the procedures for receipt and adjudication of borrower claims--
including the type of proceeding through which the Department may 
consider such a claim. This regulatory scheme reflects the Department's 
history in considering borrower defense claims, whether prior to 2015, 
as pointed out by some commenters, or after 2015.

[[Page 49797]]

Accordingly, the Department does not agree that congressional action is 
necessary for the Department's consideration of affirmative claims.
---------------------------------------------------------------------------

    \36\ See 20 U.S.C. 1221e-3.
---------------------------------------------------------------------------

    Changes: We are adding Sec.  685.206(e) to provide, with regard to 
loans first disbursed on or after July 1, 2020, that borrowers may 
submit a defense to repayment claim, both on affirmative and defensive 
bases, as long as the claim is submitted within three years from the 
date the borrower is no longer enrolled at the institution.

Application

    Comments: Some commenters supported the proposed regulatory 
provisions which would require the borrower to specify the 
misrepresentation being asserted for the defense to repayment, certify 
the claim under penalty of perjury, list how much financial harm was 
incurred, and acknowledge that if they receive a full discharge of the 
loan, the school may refuse to provide an official transcript. These 
commenters believe these requirements will reduce the number of 
unsubstantiated claims.
    One commenter suggested that the application also require borrowers 
to provide their grade point average (GPA) at the time of their 
termination or leaving the school and to state, if they failed the 
academic program, why they failed.
    One commenter suggested the Department start a process to consumer 
test the application, with input from other Federal agencies, to ensure 
that students of all institutional levels are able to comprehend and 
complete the application.
    Several commenters objected to a proposed requirement that 
borrowers making a defense to repayment claim provide personal 
information, including confirmation of the ``borrower's ability to pass 
a drug test, satisfy criminal history or driving record requirements, 
and meet any health qualifications.'' The commenters asserted that this 
would effectively require borrowers to waive their right to privacy and 
treats the borrower like a criminal, not an injured party. One of these 
commenters argued that these requirements are irrelevant to the 
question of school misconduct and are clearly intended to dissuade 
borrowers from asserting claims of fraud.
    Discussion: The Department thanks the commenters who supported the 
proposed regulations pertaining to the application. We believe the 
proposed regulation set forth clear borrower defense to repayment 
application requirements that would allow a borrower to understand and 
provide the information needed for the Department to accurately 
evaluate the borrower's claim. As proposed in the NPRM, this 
application requires the borrower to sign a waiver permitting the 
institution to provide the Department with items from the borrower's 
education record relevant to the defense to repayment claim. Such a 
waiver gives the borrower notice that the school may release 
information from the borrower's education records to the Department.
    We do not agree that it is appropriate to require that a borrower, 
submitting a borrower defense claim, include their GPA or other 
information regarding their success or failure in any course or 
program. The Department does not view that information as dispositive 
as to whether the borrower was harmed by a misrepresentation or an 
omission by the school. Including this information, however, could have 
an impact on determining the harm suffered by a student as a result of 
a misrepresentation. In considering the harm the student suffered as a 
result of an institution's misrepresentation, the Department must 
ascertain how much of that harm is the fault of the institution and how 
much of it is the result of a student's choices, behaviors, 
aspirations, and motivations.
    The Department does not adopt the commenter's suggestion regarding 
consumer testing the borrower defense application. The Department has 
significant experience developing and publishing applications similar 
to the one required in these final regulations and will rely on that 
experience in creating an appropriate and effective application for 
this purpose. We disagree with the commenters who objected to the 
proposed requirement that borrowers supply information relevant to 
assessing the borrower's allegation of harm as a violation of 
borrowers' privacy rights. Under the Privacy Act, an agency may 
``maintain in its records only such information about an individual as 
is relevant and necessary to the accomplish a purpose of the agency 
required to be accomplished by statute . . .'' \37\ While the 
information relevant to assessing the borrower's allegation of harm may 
be private, it is also necessary for the Department to have it in order 
to carry out its purposes. We will maintain the borrower's privacy, 
except for the limited purpose of resolving the borrower's claim.
---------------------------------------------------------------------------

    \37\ 5 U.S.C. 552a(e)(1).
---------------------------------------------------------------------------

    As explained earlier, the HEA provides the Department with the 
authority to establish regulations on all aspects of the borrower 
defense to repayment process, including how relief should be provided 
and determined. It is relevant to the Department's determination of 
relief to require a borrower to provide a complete picture of the 
financial harm caused by a school's misrepresentation, by providing 
information such as: Whether the borrower failed to actively pursue 
employment if he or she is a recent graduate; whether the borrower was 
terminated or removed from a job position as a result of job 
performance issues; or whether the borrower failed to meet other job 
qualifications for reasons unrelated to the school's misrepresentation.
    With respect to the borrower's attempts to pursue employment, the 
Department revised the final regulations to clarify what the Department 
expects the borrower to provide as part of the application. The 
borrower should provide documentation that the borrower actively 
pursued employment in the field for which the borrower's education 
prepared the borrower. Examples of this documentation include but are 
not limited to: Job application confirmation emails; correspondence 
with potential employers; registration at job fairs; enrolling with a 
job recruiter; and attendance at a resume workshop. Failure to provide 
such information could result in a presumption that the borrower failed 
to actively pursue employment in the field. The Department would like 
borrowers to have notice of what documentation the Department expects 
in support of an application for a borrower defense to repayment and 
what the consequences of failing to provide such documentation will be. 
The Department must rely on the borrower to supply such information, as 
the Department will not be aware of any attempts the borrower has made 
to seek employment. Such documentation will help support the relief 
that a borrower receives.
    While such information about pursuing employment may not be related 
to whether a school made a misrepresentation, as defined in these final 
regulations, it does relate directly to whether the borrower was 
financially harmed by the institution, as required by the standard for 
a borrower defense claim. Information on intervening causes of a 
borrower's circumstances that cannot be said to be even related to a 
borrower's education, much less the misrepresentation at issue, will be 
relevant to the Department's assessment of the amount of relief to 
provide to the borrower as a result of the harm that has been caused by 
the misrepresentation.
    With regards to criminal history, we carefully reviewed the public

[[Page 49798]]

comments. We do not adopt the commenters' logic that such a provision 
would treat borrowers like criminals, require borrowers to waive their 
right to privacy, or that these questions are ``clearly intended'' to 
dissuade borrowers from asserting borrower defense claims. However, 
after our review, the Department decided that the inclusion of the 
``criminal record'' language is contrary to the Department's priorities 
and does not properly support individuals who are attempting to 
transition out of the criminal justice system through higher education, 
job training, or other career pathways.
    Despite this change, the Department believes that requiring 
borrowers to provide a complete picture of the financial harm caused by 
a school's misrepresentation--including whether unrelated factors may 
have contributed to the borrower's financial circumstances--is 
appropriate to help the Department satisfy its fiduciary responsibility 
to taxpayers and to provide just relief for borrowers.
    Changes: The Department revised the regulations about the 
documentation the borrower should provide as part of the borrower 
defense to repayment application. The borrower still must provide 
documentation that the borrower actively pursued employment in the 
field for which the borrower's education prepared the borrower. The 
Department will presume that the borrower failed to actively pursue 
such employment, if the borrower fails to provide such documentation. 
As explained below, the Department also is revising Sec.  685.206(e)(8) 
to clarify the borrower defense to repayment application will state 
that the Secretary will grant forbearance while the application is 
pending and will notify the borrower of the option to decline 
forbearance. The Department removes ``criminal history or'' from Sec.  
685.206(e)(8)(v).

Definition of ``Borrower''

    Comments: A group of commenters recommended that the proposed 
regulatory language in the 2018 NPRM at Sec.  685.206(d)(1)(i), define 
``borrower'' to include the student on whose behalf a parent borrowed 
Federal funds. The purpose of this inclusion is to specifically address 
whether a parent borrower may raise a defense to repayment claim.
    Discussion: The Department regrets the omission of parent borrowers 
from the borrower defense provisions in the 2018 NPRM. We have amended 
the definition to reflect the approach taken in the 2016 final 
regulations, so that a parent borrower may raise a defense to repayment 
claim based on a misrepresentation or omission made to the parent or to 
the student on whose behalf the parent borrowed Federal funds. In the 
final regulations, Sec.  685.206(e)(1)(ii) mirrors Sec.  685.222(a)(4), 
the definition applicable for loans first disbursed on or after July 1, 
2017 and before July 1, 2020, which provides that the term ``borrower'' 
includes the student who attended the institution, any endorsers, or 
the student on whose behalf a parent borrowed.
    Changes: The definition of ``borrower'' in Sec.  685.206(e)(1)(ii) 
now includes both the borrower and, in the case of a Direct PLUS Loan, 
any endorsers, and for a Direct PLUS Loan made to a parent, the student 
on whose behalf the parent borrowed.

Definition of Direct Loan

    Comments: None.
    Discussion: The Department would like to clarify that ``Direct 
Loan'' in Sec.  685.206(e) means a Direct Unsubsidized Loan, a Direct 
Subsidized Loan, or a Direct PLUS Loan. With respect to both the pre-
2016 final regulations and 2016 final regulations, the Department 
interprets ``Direct Loan'' to mean a Direct Unsubsidized Loan, a Direct 
Subsidized Loan, or a Direct PLUS Loan in Sec. Sec.  685.206(c) and (d) 
and 685.222. These final regulations clarify that ``Direct Loan'' 
continues to have the same meaning as in the pre-2016 final regulations 
and 2016 final regulations.
    Changes: The Department expressly defines a Direct Loan in Sec.  
685.206(e)(1)(i) as a Direct Unsubsidized Loan, a Direct Subsidized 
Loan, or a Direct PLUS Loan.

Group Claims: Support for Revisions

    Comments: Several commenters supported the Department's proposal to 
eliminate the group claim process for borrower defense claims. They 
expressed concern that allowing for group claims would incentivize 
attorneys and advocacy groups to file claims on behalf of a class of 
students. One commenter asserted that outside actors could attempt to 
monetize borrower defense claims to their own benefits, especially if 
the Department were to accept group claims. However, the commenter 
noted that there are options that the Department could consider to 
limit this possibility as an alternative to disallowing group claims 
entirely.
    Discussion: The Department thanks the commenters for their support 
of the regulations that require individuals to assert borrower defense 
claims. To an extent, we understand the commenters' concerns about, and 
have already become aware of evidence of, outside actors attempting to 
personally gain from the bad acts of institutions as well as unfounded 
allegations. The evidence standard and the fact-based determination of 
the borrower's harm and resulting reliance requirements in the federal 
standard in these regulations for loans first disbursed after July 1, 
2020, necessitates that each claim be adjudicated separately. While, 
depending on the circumstances, borrower defense claims brought under 
those other standards might be amenable to a group process or for 
expedited processing if there are similar facts and claims among a 
number of borrowers, the new federal standard envisions a more fact-
specific inquiry. As a result, the Department no longer believes that a 
group process is appropriate.
    Changes: None.

Group Claims: Opposition to Revisions

    Comments: Many commenters encouraged the Department to include a 
process in the final regulations for group claims. These commenters 
noted that students who were at the same school at the same time, who 
were subject to the same misrepresentation, could expect their claims 
to be adjudicated more expeditiously, if considered as a group.
    Some commenters were not persuaded by the Department's assertion in 
the 2018 NPRM that a group claim process places an extraordinary burden 
on both the Department and the Federal taxpayer, given that the 2016 
final defense regulations asserted that a group adjudication process 
with common facts and claims would conserve the Department's 
administrative resources. These commenters further noted that no undue 
burden would be placed on the taxpayer so long as the Department is 
holding institutions financially accountable.
    Some commenters suggested that when the Department knows that a 
school engaged in misrepresentation to a group of students, debt relief 
should be granted to all of them.
    The commenters further recommended that the regulation require the 
Department to process any relevant and substantiated information in its 
possession in the same manner as a Freedom of Information Act (FOIA) 
request and make that information, to the extent permitted by law, 
available to the borrower and the school.
    The commenters suggested that the Department consider significant 
and plausible allegations of misrepresentation by multiple

[[Page 49799]]

borrowers sufficient impetus to launch its own investigation, the 
outcome of which may be used to substantiate pending borrower defense 
claims and enable such claims to move to the determination of harm 
phase. They assert that the Department could use compliance 
determinations by the Department, or other oversight bodies, as an 
alternative to a group process that would alleviate some of the burden 
associated with examining individual claims and focus such reviews on 
harm to borrowers rather than institutional intent, without curtailing 
due process rights for schools.
    Another commenter noted that allowing for group claims would 
strengthen the usefulness of the regulation as an accountability 
measure, as schools would know that efforts to defraud students could 
result in large groups of students being given relief, with the 
associated financial impact on the school.
    A commenter cited Federal Trade Commission v. BlueHippo Funding, 
LLC, 762 F.3d 238 (2nd Cir. 2014) for the proposition that consumer 
protection agencies need not show that each consumer individually 
relied on a misrepresentation. Similarly, another commenter stated a 
limitation on group claims will limit access to relief exclusively to 
students who have the financial resources to obtain legal 
representation.
    One commenter stated that a ban on group claims places undue burden 
on individuals who have been defrauded where there is widespread 
evidence of mistreatment.
    Other commenters who supported the inclusion of group claims noted 
that, while the proposed regulations make explicit that the Department 
has the authority to automatically discharge loans on behalf of a group 
of defrauded borrowers, the regulations do not include guidance to 
ensure that this authority is exercised by the Secretary.
    These commenters also advocated including a process in the final 
regulations that would enable State attorneys general (AGs) to petition 
the Department to provide automatic group loan discharges to students 
based on the findings of an AG's investigation. Another commenter also 
advocated for the rule to permit third parties, such as state AGs or 
legal aid organizations, to file group claims when they possess 
evidence of widespread misconduct.
    One commenter suggested that group discharges should include 
borrower defense claimants' private loans and Federal Family Education 
Loan (FFEL) Program loans.
    Discussion: After careful consideration of the comments, the 
Department retains its position that it is unnecessary to provide a 
process for group borrower defense claims.
    In 2016, the Department decided that a group process would conserve 
the Department's administrative resources. However, the standard for a 
borrower defense claim and the process that we are adopting in these 
final regulations is much different from the standard and process in 
the 2016 final regulations.
    Determinations under these final rules will be highly reliant upon 
evidence specific to individual borrowers, which requires the 
Department to reconsider its previous burden calculation. Under these 
final regulations, a school engaging in misrepresentation alone will 
not be sufficient for a successful claim. Relief will be granted based 
upon a borrower's ability to demonstrate that institutions made 
misrepresentations with knowledge of its false, misleading, or 
deceptive nature or with reckless disregard and to provide evidence of 
financial harm. This evidentiary determination and harm analysis 
require that the Department consider each borrower claim independently 
and on a case-by-case basis.
    The Department declines to accept the commenter's recommendation to 
process relevant and substantiated information in the same manner as a 
FOIA request. The purpose of the FOIA process is to allow the release 
of information for the public. Information submitted for a borrower 
defense claim is provided to the Department, and it is unclear how the 
FOIA process could be applicable to the process created by these final 
regulations. While the Department welcomes information from the 
borrower and encourages the submission of such information, the process 
outlined in these final regulations allows for sufficient access to the 
required information and documentation for the concerned parties to a 
claim.
    While the Department shares and understands the concerns that 
commenters expressed regarding the expeditious resolution of borrower 
claims, we believe it is prudent to balance the need for speedy 
recovery for students against the need to properly resolve each claim 
on the merits and provide relief in relation to the claimant's harm. To 
make this determination, it is necessary to have a completed 
application from each individual borrower, to consider information from 
both the borrower and the institution, and to examine the facts and 
circumstances of each borrower's individual situation.
    Additionally, the Department does not believe that the elimination 
of group claims reduces the usefulness of the regulation as an 
accountability measure. Schools are still subject to the consequences 
of their misrepresentation and, if necessary, the Secretary retains the 
discretion to establish facts regarding misrepresentation claims put 
forward by a group of borrowers.
    The Department does not agree that it is too burdensome for a 
borrower to submit an individual application to provide evidentiary 
details in order to receive consideration for a full or partial loan 
discharge or that a borrower must retain legal services in order to 
file a successful claim. Considering that a student had to sign a 
Master Promissory Note--a complicated legal document--as well as other 
documents in order to obtain a student loan, we have determined that 
the burden upon students to provide documentation and to complete an 
application is appropriate. In order to properly review the borrower's 
allegations and calculate the level of relief to which a student is 
entitled, based on the need to balance the interests of borrowers and 
taxpayers, the Department must collect information from borrowers 
through an application form.
    Further, presuming reliance on the part of the students would not 
properly balance the Department's responsibilities to protect students 
as well as taxpayer dollars.
    We appreciate, but do not adopt, the suggestions regarding the 
Department's consideration of allegations from multiple borrowers as an 
impetus to launch an investigation (though certainly such allegations 
could trigger an investigation) and the use of compliance 
determinations, by the Department or other oversight body, as an 
alternative to the group process. The Department believes that the most 
appropriate and fairest method of determining if a student was subject 
to a misrepresentation, relied on that misrepresentation, and was 
subsequently harmed by it, is through the individual claim process in 
these final regulations.
    Regarding any evidence from audits, program reviews, or 
investigations, the Department may, at the Secretary's discretion, 
determine if it is warranted and more efficient to establish facts 
regarding claims of misrepresentation put forth by a group.
    The Department rejects the commenter's suggestion to include 
regulatory language to ensure that the authority extended to the 
Secretary to automatically discharge loans on behalf of a group is 
exercised. Even if the

[[Page 49800]]

Department determines that it is more efficient to establish facts 
regarding claims of misrepresentation put forth by a group of 
borrowers, the Secretary will still need to determine that the borrower 
was harmed as a result of a decision based upon a misrepresentation.
    While we reject the suggestion of a process for State AG or legal 
aid organization petitions, the Secretary may determine that evidence 
of widespread misconduct, obtained by State AGs or legal aid 
organizations, merit a broader review of a school's actions in order to 
establish facts regarding misrepresentation to a group of borrowers. 
However, the Department has an obligation to taxpayers to independently 
assess the strength of each borrower defense claim. Consequently, we 
will not be compelled to take action at the recommendation or petition 
of a State AG, especially if those allegations have not resulted in a 
judgment on the merits in an impartial court of law, nor will the 
Department automatically treat State AG submissions as group claims. 
Instead, if a State AG has concerns about a particular institution, we 
would recommend that it work with their State agencies responsible for 
authorizing and regulating institutions. Those entities are a crucial 
part of the regulatory triad, which includes the Department, State 
authorizing agencies, and accreditors, and have the right and 
responsibility to enforce applicable State laws.
    The Department does not have the authority to discharge private 
student loans or FFEL loans for borrowers who assert borrower defense 
to repayment claims with respect to their Direct loans. Section 455(h) 
of the HEA specifically provides that a borrower may assert a borrower 
defense to repayment to ``a loan made under this part,'' referring to 
the Direct Loan Program. Private loans are not part of the Direct Loan 
Program and thus may not be discharged under the Department's borrower 
defense process by statute. Similarly, FFEL loans are made under the 
FFEL Program, and not the Direct Loan Program. As a result, a FFEL loan 
also cannot be discharged through the Direct Loan borrower defense 
process, unless the FFEL loan has consolidated into a Direct 
Consolidation Loan under 34 CFR 685.220. In that situation, the FFEL 
loan would be paid off with the proceeds of the Direct Consolidation 
Loan, and the borrower's Direct Consolidation Loan--as a loan made 
under the Direct Loan Program--would allow the borrower to apply for 
relief through the borrower defense process. Unless consolidated into a 
Direct Consolidation Loan, as described in 34 CFR 685.200, Private and 
FFEL loan funds are provided by lenders other than the Department and 
cannot be discharged through the Direct Loan Program's regulatory or 
statutory provisions that apply to the Direct Loan Program.
    The Department notes that the group process from the 2016 final 
regulations, at 34 CFR 685.222(f), will still be available for loans 
first disbursed on or after July 1, 2017, and before July 1, 2020.
    Changes: None.

Unsubstantiated Claims

    Comments: One commenter stated that the Department's concern 
regarding the receipt of many frivolous claims is unfounded, wrong-
headed, and not supported by research or complaints from dissatisfied 
consumers. Another commenter noted that in the NPRM, we stated that 
there was insufficient information to know whether the fear of 
frivolous claims was legitimate. The commenter also referred to the 
Department's position in the preamble to the 2016 final regulations, 
where we held that defense to repayment proceedings will be not be used 
by borrowers to raise frivolous claims.
    Referring to consumer products research, a commenter asserted that 
the Department's concern regarding frivolous claims ignores good-
government practices followed by peer agencies like the Veterans 
Administration, such as publishing complaints against schools, and does 
not reflect the overarching goals of the HEA.
    A group of commenters objected to the actions taken to mitigate 
frivolous claims. These commenters expressed a need to balance student 
protections with expectations of student responsibility, suggesting 
that the rule must emphasize that students have a right to accurate, 
complete, and clear information so that they can make sound decisions. 
The commenters also asserted that students should not be abandoned to 
the principle of caveat emptor and that the higher education community 
should work with students to avoid bad choices that result in lost time 
and opportunities.
    Another group of commenters expressed concern that those who are 
ideologically opposed to the existence of privately owned and operated 
schools may file frivolous claims as a means of harassing schools and 
harming the schools' reputations, before the claims could be 
adjudicated by the Department. These commenters encouraged the 
Department to establish a balanced adjudication process that includes 
procedural protections that provide for the quick dismissal of 
frivolous or unsubstantiated claims.
    Discussion: The Department agrees with the commenters that the 
defense to repayment regulations must provide student protections and 
not endorse a caveat emptor approach, while encouraging fiscal 
responsibility for students and the Department. As a policy matter, we 
do not believe that, in practice, the 2016 final regulations will 
effectively prevent unsubstantiated claims, which is why these final 
regulations are drafted to build-in further deterrents.
    The Department does not possess an official definition of 
``frivolous'' or ``unsubstantiated'' claims. In typical usage, however, 
a frivolous claim is one with little or no weight or not worthy of 
serious consideration.\38\ We use the term, here, to describe claims 
provided by borrowers that allege misrepresentations that actually did 
not occur, that seek discharge from private rather than Federal loans, 
or that seek relief from a school not associated with any of the 
borrower's current underlying loans.
---------------------------------------------------------------------------

    \38\ Webster's Dictionary defines frivolous as: ``of little 
weight or importance; having no sound basis; lacking in 
seriousness.'' Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/frivolous?src=search-dict-hed. 
Black's Law Dictionary defines ``frivolous'' as when an answer or 
plea is ``clearly insufficient on its face, and does not controvert 
the material points of the opposite pleading, and is presumably 
interposed for mere purposes of delay or to embarrass the 
plaintiff.'' https://thelawdictionary.org/frivolous/. The Supreme 
Court has held that a complaint is frivolous when it lacks ``an 
arguable basis either in law or in fact.'' Neitzke v. Williams, 490 
U.S. 319 (1989).
---------------------------------------------------------------------------

    Although we understand that some commenters may disagree with our 
approach, the Department's policy seeks to balance the needs of 
borrowers to have their claims resolved expeditiously against the needs 
of the Department to resolve claims fairly and efficiently without 
overburdening the Department, institutions that are operating and 
serving students, or taxpayers.
    The Department has examined the issue of unsubstantiated claims and 
has concluded that it remains a concern in terms of costs, burden, and 
delays. Processing unsubstantiated claims would place an administrative 
burden on the Department. Defending against unsubstantiated claims 
would be costly to all institutions, particularly smaller institutions. 
The Department has processed only a small percentage of the claims 
filed thus far. Of those, around 9,000 applications have been denied as 
unsubstantiated for reasons that include, but are not limited to, the 
following: (1) Borrowers who attended the institution, but not during 
the time

[[Page 49801]]

period that the institution made the alleged misrepresentation; (2) the 
borrower submitted the claim without any supporting evidence; and (3) 
on its face, the claim lacks any legal or factual basis for relief. 
This high number of unsubstantiated claims, as a practical matter, 
strains Department resources and delays relief to borrowers who have 
meritorious claims.
    The Department finds that the comment regarding consumer products 
research and borrower defense claims does not make explicit why such a 
comparison is an apples-to-apples comparison. It is not apparent from 
the commenter's argument that, in fact, they are.
    The Department believes that by taking seriously its dual 
responsibilities to students and taxpayers, we are employing good-
government practices in accordance with our statutory and regulatory 
responsibilities.
    Contrary to some commenters' suggestions, the Department believes 
that the regulation appropriately emphasizes disclosure insofar as 
students, who are themselves taxpayers, have a right to accurate, 
complete, and clear information that will enable them to make sound 
decisions.
    The Department further believes that requiring borrowers to sign an 
application claim under penalty of perjury will help deter 
unsubstantiated claims, as will the opportunity for institutions to 
respond to such claims, including by providing relevant documents from 
the student's academic and financial aid records.
    The Department reserves the ability to take action against 
borrowers who perjure themselves in filing a substantially inaccurate 
claim.
    We acknowledge that there is a risk that unsubstantiated claims 
could be filed in large numbers to target institutions for the purpose 
of damaging their reputations before the Department can adjudicate the 
claims as unsubstantiated. Indeed, we are aware of firms and advocacy 
groups that are engaging in such coordinated efforts against certain 
institutions.
    Nevertheless, by allowing institutions to respond in the 
adjudication process to all claims--substantiated and unsubstantiated--
asserted against them as part of the adjudication process, the 
Department will be able to mitigate this risk for institutions and make 
informed decisions on individual claims.
    Changes: None.

Retroactive Standards and Bases for Claims

    Comments: Several commenters also advocated that borrowers whose 
loans were disbursed prior to July 1, 2019, should be allowed to 
initiate both affirmative and defensive borrower defense claims.
    These commenters assert that this is especially important when a 
claim has failed under the current State law standard. The commenters 
argue that, as a matter of equity, those borrowers should be permitted 
to refile a claim under the Federal standard.
    Discussion: The date of loan disbursement determines which standard 
applies to the borrower defense claim. For loans first disbursed on or 
after July 1, 2020, these final regulations include opportunities for 
borrowers to make both affirmative and defensive claims under a Federal 
standard within the three-year limitations period.
    Likewise, for loans disbursed on or after July 1, 2017 and before 
July 1, 2020, borrowers may assert both affirmative and defensive 
claims, but pursuant to the 2016 final regulations. Borrowers of loans 
first disbursed prior to July 1, 2017, may assert a defense to 
repayment under the State law standard set forth in 685.206(c). Neither 
these final regulations nor the 2016 final regulations provide a 
borrower whose loans were disbursed when the State law standard was in 
effect the ability to refile a borrower defense claim under a later-
effective Federal standard, unless the loans were consolidated after 
July 1, 2020.
    Changes: None.

Borrower Defenses--Federal Standard (Section 685.206)

    Comments: Several commenters supported the establishment of a 
Federal standard for borrower defense to repayment claims, noting that 
a Federal standard would provide clarity and consistency and enhance 
Department officials' ability to work with schools to prioritize the 
delivery of quality education to students.
    Several commenters asserted that the proposed Federal standard 
makes it substantially more difficult for defrauded borrowers to assert 
a claim. The commenters argue that by eliminating the State law 
standard, and excluding final judgments made by Federal or State courts 
against a school from the list of acceptable defenses, the Department 
effectively nullifies State consumer protection laws and requires a 
borrower who successfully sues their school for fraud in a State court 
to continue repaying loans used to attend the school while the school 
continues to reap the benefit of the borrower's Federal student aid.
    Several commenters suggested that the Department establish the 
Federal standard as a floor and allow borrowers who choose to do so to 
assert claims based on a State standard.
    Other commenters asserted that any Federal standard should not 
limit the rights a borrower has in his or her own State. The commenters 
opined that States should have the right to protect their own consumers 
and ensure the quality of schools licensed to operate in their States. 
Several other commenters agreed, noting that the proposed standard 
would destroy the working relationship between the Federal government 
and States' attorneys general by limiting their role in protecting 
borrowers.
    Another commenter stated that there is no good basis for expanding 
the reach of the Federal government and supplanting State laws with 
Federal regulations.
    Discussion: We appreciate the support for adopting a Federal 
standard and agree that a Federal standard provides consistency.
    Section 455(h) of the HEA expressly states: ``Notwithstanding any 
other provision of State or Federal law, the Secretary shall specify in 
regulations which acts or omissions of an institution of higher 
education a borrower may assert as a defense to repayment of a loan.'' 
(Emphasis added). Congress did not require the Secretary to use State 
law as the basis for asserting a defense to repayment of a loan. 
Instead, Congress expressly required the Secretary to specify in 
regulations which acts or omissions constitute a borrower defense to 
repayment. Loans under title IV are a Federal asset, which means that 
the Secretary must maintain the authority to make determinations about 
when and how a student loan should be discharged.
    The Department disagrees now, as it did in promulgating the 2016 
final regulations, that moving to a Federal standard interferes with 
the ability of States to protect students. State authorizing agencies 
will remain an integral part of the regulatory triad, and State AGs may 
exercise their separate authority and pursue a legal process to take 
action against institutions. These final regulations do not nullify, 
abrogate, or derogate the authority of States to enforce their own 
consumer protection laws. A borrower defense to repayment application 
filed with the Department is only one of several available avenues for 
potential relief to borrowers, and borrowers may choose the best avenue 
of relief available to them.

[[Page 49802]]

    These final regulations continue to allow borrowers to submit the 
factual findings supporting a final judgment in a State AG enforcement 
action against their schools as evidence to support their borrower 
defense to repayment claims. However, the Department notes that, as a 
practical matter, factual findings in state AG enforcement actions 
often are of limited utility to borrower defense claims because State 
consumer protection laws cover broader issues than Department-backed 
student loans or even the provision of educational services. 
Accordingly, a judgment against an institution in an action brought by 
a State AG to enforce State law may not be relevant to a title IV 
defense to repayment claim. Therefore, the Department's final 
regulations expressly state that certain categories of State law claims 
which are enumerated in 34 CFR 685.206(e)(5)(ii)--including but not 
limited to, claims for personal injury, sexual harassment, civil rights 
violations, slander or defamation, property damage, or challenging 
general education quality or the reasonableness of an educator's 
conduct in providing educational services--are not directly and clearly 
related to the making of a loan or the provision of educational 
services by a school. For example, the reasonableness of an educator's 
conduct in providing educational services, such as the educator's 
teaching style, preparation for class, etc., is irrelevant to whether 
the educator made a misrepresentation as defined in these final 
regulations. When a borrower points to a final judgment in a State law 
action in support of an application for borrower defense to repayment, 
the Department must consider the final judgment's relevance to the 
borrower defense claim.
    A Federal standard assures borrowers equitable treatment under the 
law regardless of where they live or where their institutions are 
located. In considering claims under the 1995 borrower defense 
regulations, the Department found it unwieldy to navigate the consumer 
protection laws of 50 different States. Researching and applying the 
consumer protection laws of the 50 States requires significant 
resources and, thus, delays the adjudication of borrower defense to 
repayment claims. Further, applying disparate State law could result in 
differential and inequitable treatment of similarly situated borrowers. 
For instance, two borrowers who were exposed to identical 
misrepresentations and suffered the same hardship could have their 
borrower defense claims resolved inconsistently simply because the 
borrowers reside in different States.
    We do not agree that it would be beneficial to allow borrowers to 
select the State standard under which their claims would be reviewed. 
Most borrowers would lack the expertise and information to make such a 
choice-of-law determination. Moreover, this approach undercuts our 
objective to adjudicate claims swiftly and equitably.
    Separately, we do not believe that the Department should share with 
State AGs sensitive academic and financial information for borrowers 
who seek individual loan discharges through borrower defense to 
repayment claims, the work of State AGs may inform and advance the 
Department's efforts to ensure accountability at the institution level 
because of the important role State AGs play in enforcing consumer 
protection laws. That being said, title IV Federal student loans are 
Federal assets, backed by Federal tax dollars and governed by federal 
law. As a result, the Department must work independently to fulfill its 
fiduciary responsibilities to the American taxpayer.
    There is nothing in our final regulations that preempts State 
consumer protection laws or diminishes the State role in consumer 
protection. As explained above, States play a vital role in enforcing 
consumer protection laws that hold institutions accountable outside the 
realm of Federal student loans.
    Changes: The Department adopts, with changes for organization and 
consistency, the Federal standard as articulated in Alternative B for 
Sec.  685.206(e).

Alignment With Definition of Misrepresentation

    Comments: None.
    Discussion: The Department seeks to better align the Federal 
standard for borrower defense claims with the definition of 
misrepresentation. The 2018 NPRM proposed different alternatives,\39\ 
not all of which expressly incorporated the definition of 
misrepresentation. The Department adopts language that expressly 
incorporates the definition of misrepresentation in 685.206(e)(3). The 
Department also expressly includes a reference to the provision of 
educational services, which appears in the definition of 
misrepresentation, in the Federal standard. The Department sought to 
streamline the Federal standard and definition of misrepresentation and 
make them parallel to each other.
---------------------------------------------------------------------------

    \39\ 83 FR 37325-28.
---------------------------------------------------------------------------

    Changes: The Department is revising the proposed regulations 
creating a Federal standard for a borrower defense claim to state that 
the borrower must establish by a preponderance of the evidence that the 
institution at which the borrower enrolled made a misrepresentation, as 
defined in 685.206(e)(3), and also expressly to reference the provision 
of educational services.

Borrower Defenses--Misrepresentation

Definition of Misrepresentation and Intent as Part of the Federal 
Standard

    Comments: Many commenters wrote in support of the proposed 
definition of misrepresentation, noting that it is clear and focuses on 
actions that are commonly accepted as dishonest. Some of these 
commenters noted that the definition would separate inadvertent errors 
from intentional actions by the school. Other commenters noted that the 
definition of misrepresentation will help ensure that frivolous claims 
will be prevented or rightly rejected. Another commenter asserted that 
the Department should allow for an institution's innocent mistake and 
that allowing students to discharge their loans for innocent mistakes 
would create an incredible risk to schools, taxpayers, and ultimately 
the workforce.
    Many other commenters objected to the definition of 
misrepresentation, arguing that the requirement for intent, knowledge, 
or reckless disregard was too difficult for borrowers to meet, 
effectively denying access to relief to most borrowers. These 
commenters asserted that such evidence would likely be available only 
if a borrower had legal counsel and access to discovery tools, such as 
subpoenas for documents and testimony. They also noted that 
misrepresentations need not be intentional to harm students and 
suggested that negligent misrepresentations be incorporated into the 
definition as well.
    One commenter requested that the Department provide a more fulsome 
justification for why its view of misrepresentation has changed since 
the 2016 final regulations. Similarly, another commenter contended that 
the Department has not provided adequate justification for its view 
that misrepresentation requires intentional harm to students. One 
commenter asserted that if the Department can adjudicate allegations of 
fraud and misrepresentation in an administrative proceeding against a 
school, then students should be able to benefit from

[[Page 49803]]

the same standard for borrower defense to repayment.
    Another commenter argued that the proposed Federal standard would 
be arbitrarily difficult for borrowers to satisfy and seems designed to 
keep borrowers from receiving relief available to them under the law. 
This commenter asserted the Department should simplify the process and 
ensure that borrowers have equitable access to relief.
    Some commenters noted that the Department in the 2018 NPRM 
acknowledged that it is unlikely that a borrower would have evidence to 
demonstrate that a school acted with intent to deceive, but borrowers 
are more likely to be able to demonstrate reckless disregard for the 
truth. The commenter recommends that, as an alternative, the regulation 
allow borrowers to submit sufficient evidence to prove that a 
substantial material misrepresentation was responsible for their taking 
out loans, regardless of whether the misrepresentation was made with 
knowledge or recklessness by the school.
    According to one commenter, the proposed definition of 
misrepresentation adds a substantial amount of burden without 
distinguishing among the types of misrepresentations borrowers may have 
experienced. This commenter noted that the Department itself assumes 
that only five percent of misrepresentations are committed without 
intent, knowledge, or reckless disregard; or do not fall under the 
breach of contract or final judgment components of the standard in the 
2016 final regulations. The commenter opined that the Department, 
through its proposed definition of misrepresentation, was attempting to 
prevent borrowers who have been harmed by their institutions from 
accessing relief simply because of asymmetry between borrowers and the 
school about the nature of the misrepresentation.
    One commenter criticized the proposed definition of 
misrepresentation for exceeding the standards under State and Federal 
consumer protection laws.
    Another commenter asserted that all fifty States have a version of 
consumer protection laws that prohibit certain unfair and deceptive 
conduct, commonly known as ``unfair and deceptive trade acts and 
practices'' (UDAP). According to this commenter, these UDAP laws are 
modeled after the Federal Trade Commission Act and track the CFPB's 
statutory authority. This commenter asserts that the UDAP laws address 
both deception and unfairness and offer a common, stable structure, and 
pedigree that the Department should adopt. This commenter asserted that 
a scienter requirement is inconsistent with the state of mind 
requirements in other Federal laws governing unfair and deceptive 
practices. The commenter notes that, for example, the deception 
standard used by the FTC does not require a showing of intent by the 
party against whom a deception claim is brought. The commenter further 
notes that the CFPB, uses a similar standard for determining whether an 
act or practice is deceptive. According to the commenter, under both 
the FTC and CFPB's standard, a practice is deceptive if, among other 
things, it is likely to mislead a consumer.
    Discussion: We appreciate the commenters' support for the proposed 
definition of misrepresentation. We agree that it is important to 
differentiate between acts or omissions that a school made unknowingly 
or inadvertently and acts or omissions that a school made with 
knowledge of their false, misleading, or deceptive nature or with 
reckless disregard for the truth. The Department agrees with 
negotiators and commenters that it is unlikely that a borrower would 
have evidence to demonstrate that an institution acted with intent to 
deceive, and we are revising these final regulations to remove the 
phrase ``with intent to deceive'' from the Federal standard. It is 
difficult to prove what an officer's or employee's intent is, but it is 
not as difficult to prove that a statement was made with knowledge of 
its false, misleading, or deceptive nature or with a reckless disregard 
for the truth. For example, a student may demonstrate that an officer 
of the institution or employee misrepresented the actual licensure 
passage rates because the employee's representations are materially 
different from those included in the institution's marketing materials, 
website, or other communications made to the student. The officer or 
employee need not have an intent to deceive the student in making the 
misrepresentation about actual licensure passage rates. The student may 
use the institution's marketing materials, website, or other 
communications to demonstrate that the institution's officer or 
employee made the representation with knowledge of its false, 
misleading, or deceptive nature or with reckless disregard for the 
truth.
    To address concerns about the definition of misrepresentation and 
the Federal standard, the Department is revising the Federal standard 
to provide greater clarity. The Federal standard proposed in the 2018 
NPRM requires borrowers to demonstrate that the institution made a 
``misrepresentation of material fact, opinion, intention, or law.'' 
\40\ The Department realizes that it will be difficult to demonstrate a 
misrepresentation of ``opinion, intention, or law'' and, thus, is 
removing ``opinion, intention, or law'' from the Federal standard. It 
could be very difficult to demonstrate a misrepresentation of opinion 
or intention as opinions and intentions may change and do not 
constitute facts that may be proved or disproved. Similarly, it would 
be difficult to demonstrate that the institution made a material 
misrepresentation of law as laws are subject to different 
interpretations. Laws that are clearly stated and that are not subject 
to different interpretations may constitute a material fact. For 
example, if an institution made a material misrepresentation that these 
final regulations require a pre-dispute arbitration agreement and class 
action waiver, then the misrepresentation concerns a material fact. 
Accordingly, the Federal standard will only require borrowers to 
demonstrate a misrepresentation of a material fact.
---------------------------------------------------------------------------

    \40\ 83 FR 37325.
---------------------------------------------------------------------------

    Additionally, the Department is revising the definition of 
misrepresentation to better align with the Federal standard. The 
Federal standard in these final regulations requires, in part, a 
misrepresentation, as defined in Sec.  685.206(e)(3), of material fact 
upon which the borrower reasonably relied in deciding to obtain a 
Direct Loan, or a loan repaid by a Direct Consolidation Loan, and 
``that directly and clearly relates to: (A) [e]nrollment or continuing 
enrollment at the institution or (B) [t]he provision of educational 
services for which the loan was made.'' \41\ The definition of 
``misrepresentation'' proposed in the 2018 NPRM, however, requires the 
statement, act, or omission of material fact to directly and clearly 
relate ``to the making of a Direct Loan, or a loan repaid by a Direct 
Consolidation Loan, for enrollment at the school or to the provision of 
educational services for which the loan was made.'' \42\ Requiring the 
statement, act, or omission to directly and clearly relate to the 
making of a Direct Loan, or a loan repaid by a Direct Consolidation 
Loan, does not align with the Federal standard, which requires the 
misrepresentation to directly and clearly relate to enrollment or 
continuing enrollment at the institution or the provision of

[[Page 49804]]

educational services for which the loan was made.
---------------------------------------------------------------------------

    \41\ Sec.  685.206(e)(2).
    \42\ 83 FR 37326.
---------------------------------------------------------------------------

    Accordingly, the Department is revising the definition of 
misrepresentation to include a statement, act or omission that clearly 
and directly relates to enrollment or continuing enrollment at the 
institution or the provision of educational services for which the loan 
was made. Of course, a misrepresentation about the making of a Direct 
Loan, or a loan repaid by a Direct Consolidation Loan, will qualify as 
a misrepresentation because such a misrepresentation clearly and 
directly relates to enrollment or continuing enrollment at the 
institution or the provision of educational services for which the loan 
was made.
    The Department, however, does not wish to limit a misrepresentation 
of material fact to only a statement, act, or omission that directly 
and clearly relates to the making of a Direct Loan, or a loan repaid by 
a Direct Consolidation Loan. As the examples of misrepresentation in 
Sec.  685.206(e)(3)(i) through (xi) demonstrate, the misrepresentation 
of material fact may, for example, directly and clearly relate to the 
educational resources provided by the institution that are required for 
the completion of the student's educational program that are materially 
different from the institution's actual circumstances at the time the 
representation is made.\43\ The Federal standard already provides that 
the borrower must have reasonably relied on the misrepresentation of 
material fact in deciding to obtain a Direct Loan, or a loan repaid by 
a Direct Consolidation Loan.
---------------------------------------------------------------------------

    \43\ Sec.  685.206(e)(3)(x).
---------------------------------------------------------------------------

    We agree with the commenters who argued that a school should not be 
held liable if it committed an inadvertent mistake. Schools should work 
with students when an inadvertent mistake has occurred. As explained 
below, an inadvertent or innocent mistake should not, and will not, be 
treated as an act or omission that is false, misleading, or deceptive 
by an institution. In the preamble to the 2016 final regulations, we 
took the position that institutions should be responsible for the harm 
to borrowers as the result of even inadvertent or innocent mistakes. 
However, as reiterated throughout this document, in these final rules 
the Department is seeking to empower students by providing them with 
information and encouraging them to resolve disputes directly with 
schools in the first instance. Treating innocent mistakes in the same 
manner as acts or omissions made with knowledge of their false, 
misleading, or deceptive nature, places well-performing schools at risk 
unnecessarily, potentially limiting postsecondary opportunities for 
students or increasing costs. Balancing the Department's dual role to 
protect Federal tax dollars with its responsibility to borrowers, the 
Department is incorporating a scienter requirement into borrower 
defense to repayment claims. Any claim based on misrepresentation will 
require proof that the institution made the misrepresentation with 
knowledge that it was false, misleading, or deceptive or that the 
institution, in making the misrepresentation, acted with reckless 
disregard for the truth.
    The Department does not adopt the commenter's suggestion that the 
final regulations include a negligence standard. We view our definition 
of misrepresentation as similar to, but not the same as, the common law 
definition of fraud or fraudulent misrepresentation, which requires 
that the institution or a representative of the institution make the 
misrepresentation with knowledge of its false, misleading, or deceptive 
nature. Such a standard is different than the failure to exercise care 
that a negligence standard requires.
    Generally, courts find that a defendant committed fraud or a 
fraudulent misrepresentation when each of the following elements have 
been successfully satisfied: (1) A representation was made; (2) the 
representation was made in reference to a material fact; (3) when made, 
the defendant knew that the representation was false; (4) the 
misrepresentation was made with the intent that the plaintiff rely on 
it; (5) the plaintiff reasonably relied on it; and (6) the plaintiff 
suffered harm as a result of the misrepresentation.\44\ These elements, 
like our final regulations, create a relationship between the false 
statement, reliance upon the false statement, and a resulting harm.
---------------------------------------------------------------------------

    \44\ In re APA Assessment Fee Litigation, 766 F.3d 39, 55 (D.C. 
Cir. 2014); See also: Mid Atlantic Framing, LLC. v. Varnish 
Construction, Inc., 117 F.Supp.3d 145, 151 (N.D.N.Y. 2015); Chow v. 
Aegis Mortgage Corporation, 185 F.Supp. 914, 917 (N.D.Ill 2002); 
Master-Halco, Inc. v. Scillia Dowling & Natarelli, LLC, 739 
F.Supp.2d 109, 114 (D.Conn. 2010). Note: In cases involving 
commercial contracts, courts have often required a further element 
that the defrauded party's reliance must be reasonable. Hercules & 
Co., Ltd. v. Shama Restaurant Corp., 613 A.2d 916, 923 (D.C. Cir. 
1992).
---------------------------------------------------------------------------

    A plaintiff alleging negligent misrepresentation must show that: 
(1) The defendant made a false statement or omitted a fact that he had 
a duty to disclose; (2) it involved a material issue; and (3) the 
plaintiff reasonably relied upon the false statement or omission to his 
detriment.\45\ In contrast to fraudulent representation, an allegation 
of negligent misrepresentation need not show that the defendant had 
knowledge of the falsity of the representation or the intent to 
deceive.\46\ In addition, courts have found that, to be actionable, a 
negligent misrepresentation must be made as to past or existing 
material facts and that predictions as to future events, or statements 
as to future actions by a third party, are deemed opinions and not 
actionable fraud.\47\
---------------------------------------------------------------------------

    \45\ Sundberg v. TTR Realty, 109 A.3d 1123, 1131 (D.C. 2015); 
See also: Indy Lube Investments, LLC v. Wal-Mart Stores, Inc., 199 
F.Supp. 2d 1114, 1122 (D.Kan. 2002); City of St. Joseph, Mo. v. 
Southwestern Bell Telephone, 439 F.3d 468, 478 (8th Cir. 2006); 
Redmond v. State Farm Ins. Co., 728 A.2d 1202, 1207 (D.C. 1999).
    \46\ Sundberg, 109 A.3d at 1131.
    \47\ Stevens v. JPMorgan Chase Bank, N.A., 2010 WL 329963 
(N.D.Cal. 2010); See also: Newton v. Kenific Group, 62 F.Supp 3d 
439, 443 (D. Md. 2015); Fabbro v. DRX Urgent Care, LLC, 616 Fed. 
Appx. 485, 488 (3rd Cir. 2015) (Negligent misrepresentation claims, 
regarding the expenses involved in starting a franchise, were 
dismissed, in part, because: ``Predictions or promises regarding 
future events . . . are necessarily approximate.'')
---------------------------------------------------------------------------

    We believe that including a negligent misrepresentation standard 
into our definition would entirely alter the balance we seek to create 
with these final regulations, as negligent representation may include 
an inadvertent mistake. The Federal standard in these regulations goes 
beyond a mere negligence standard in requiring knowledge of the false, 
misleading, or deceptive nature of the representation, act, or omission 
and in requiring that the institution make the statement, act, omission 
with a reckless disregard for the truth. Reckless disregard often is a 
requirement of intentional torts, which go beyond mere negligence.\48\ 
For example, reckless disregard for the truth in the context of libel 
means that a publisher must act with a `` `high degree of awareness of 
probable falsity,' '' \49\ as ``mere proof of failure to investigate, 
without more, cannot establish reckless disregard for the truth.'' \50\ 
Similarly, an institution's statement, act, or omission must be made 
with a high degree of awareness of probable falsity to satisfy the 
requirement that the institution acted with reckless disregard for the 
truth.
---------------------------------------------------------------------------

    \48\ See Harte-Hanks Commc'ns, Inc. v. Connaughton, 491 U.S. 657 
(1989); Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974).
    \49\ Gertz, 418 U.S. at 332 (quoting St. Amant v. Thompson, 390 
U.S. 727, 731 (1968)).
    \50\ Id. at 332.
---------------------------------------------------------------------------

    The Department has now concluded that the 2016 final regulations' 
inclusion of misrepresentations that ``cannot be attributed to 
institutional intent or knowledge and are the result of

[[Page 49805]]

inadvertent or innocent mistakes'' \51\ is inappropriate for these 
final regulations and had the potential to result in vastly increased 
administrative burden and financial risk to schools and, when the 
burden proves too great, to the taxpayer. In such a case, a mere 
mathematical error could lead to devastating consequences to the 
institution and potentially to its current students, who will bear the 
cost of forgiving prior students' loans, even though the prior students 
may have decided to enroll for many reasons unrelated to the error.
---------------------------------------------------------------------------

    \51\ 81 FR 75947.
---------------------------------------------------------------------------

    We realize that the definition of misrepresentation in these final 
regulations is a marked departure from the definition of ``substantial 
misrepresentation'' by the school in accordance with 34 CFR part 668, 
part F, that was part of the Federal standard in the 2016 final 
regulations.\52\ The 2016 final regulations defined a misrepresentation 
as: ``Any false, erroneous or misleading statement an eligible 
institution, one of its representatives, or any ineligible institution, 
organization, or person with whom the eligible institution has an 
agreement to provide educational programs, or to provide marketing, 
advertising, recruiting or admissions services makes directly or 
indirectly to a student, prospective student or any member of the 
public, or to an accrediting agency, to a State agency, or to the 
Secretary. A misleading statement includes any statement that has the 
likelihood or tendency to mislead under the circumstances. A statement 
is any communication made in writing, visually, orally, or through 
other means. Misrepresentation includes any statement that omits 
information in such a way as to make the statement false, erroneous, or 
misleading. Misrepresentation includes the dissemination of a student 
endorsement or testimonial that a student gives either under duress or 
because the institution required the student to make such an 
endorsement or testimonial to participate in a program.'' \53\ The 2016 
final regulations define a ``substantial misrepresentation'' as ``[a]ny 
misrepresentation on which the person to whom it was made could 
reasonably be expected to rely, or has reasonably relied, to that 
person's detriment.'' \54\ In the 2016 final regulations, the 
Department used the standard of ``substantial misrepresentation,'' 
which was interpreted to include negligent misrepresentations, to 
adjudicate both borrower defense to repayment claims and also any fine, 
limitation, suspension, or termination proceeding against the school to 
recover any liabilities as a result of the borrower defense to 
repayment claim.
---------------------------------------------------------------------------

    \52\ 34 CFR 685.222(d).
    \53\ 34 CFR 668.71(c).
    \54\ Id.
---------------------------------------------------------------------------

    Unlike these final regulations, the Department's 2016 final 
regulations did not guarantee that the school would be allowed to 
respond to a borrower defense to repayment claim. The Department's 2016 
final regulations provide that the Department may, but is not required 
to, consider a response or submission from the school.\55\ Under the 
2016 final regulations, the Department may adjudicate a borrower 
defense to repayment claim without any information from the school, 
grant that claim under the substantial misrepresentation, breach of 
contract, or judgment standards in the borrower's proceeding, and 
proceed to initiate a separate proceeding against the school to recover 
the amount of any relief provided to the borrower.
---------------------------------------------------------------------------

    \55\ 34 CFR 685.222(e)(3).
---------------------------------------------------------------------------

    The Department now believes that using the same standard in two 
separate proceedings, one for the borrower to receive relief and the 
other for the Department to recover liabilities from the school, is 
inefficient and does not provide the robust due process protections 
that are best for the borrower, school, and the Federal taxpayer. 
Accordingly, as discussed elsewhere in these final regulations, the 
Department must provide the school with notice of a borrower defense to 
repayment claim and a meaningful opportunity to respond to such a 
claim. The borrower also will be able to file a reply limited in scope 
to the school's response and any evidence otherwise in the possession 
of the Department that the Department considers.
    The Department believes a Federal standard with a different, more 
stringent definition of misrepresentation better guards the interests 
of all students, including an institution's future tuition-paying 
students, an institution acting in good faith, and the Federal taxpayer 
who, in some cases, inevitably must pay for any negligent or innocent 
mistakes. The ``substantial misrepresentation'' standard in the 2016 
final regulations behaves like a strict liability standard in torts 
that is, generally, reserved for abnormally dangerous activities where 
the activity at issue creates a foreseeable and highly significant risk 
of physical harm even when reasonable care is exercised by all 
actors.\56\ Although a ``substantial misrepresentation'' standard is 
appropriate for proceedings against schools in which the Department 
seeks to recover liabilities, guard the Federal purse, and protect 
Federal taxpayers, such a low standard is not appropriate when the 
Department is forgiving loans and increasing the national debt to the 
detriment of Federal taxpayers.\57\ Student loan debt accounts for $1.5 
trillion dollars of the national debt and is ``now the second highest 
consumer debt category--behind only mortgage debt--and higher than both 
credit cards and auto loans.'' \58\ Each time the Department discharges 
loans, the Department increases the national debt, especially if the 
Department is not able to recover the amount of discharged loans in a 
proceeding against the schools.
---------------------------------------------------------------------------

    \56\ Restatement (Third) of Torts Sec.  20 (2010).
    \57\ See Federal Reserve, Consumer Credit Outstanding (Levels), 
available at https://www.federalreserve.gov/releases/g19/HIST/cc_hist_memo_levels.html.
    \58\ Zack Freidman, Student Loan Debt Statistics in 2019: A $1.5 
Trillion Crisis, Forbes, Feb. 25, 2019, available at https://www.forbes.com/sites/zackfriedman/2019/02/25/student-loan-debt-statistics-2019/#7577f5f3133f.
---------------------------------------------------------------------------

    We also believe that a less precise definition of misrepresentation 
would unnecessarily chill productive communication between institutions 
and prospective and current students. We do not want to create legal 
risks that dissuade schools from putting helpful and important 
information in writing or allowing other students and faculty to share 
their opinions with prospective or current students. It could have a 
chilling effect on academic freedom and reduce the amount of 
information provided to students during academic and career counseling. 
We also believe it would be improper to subject an institution, and its 
current, past, and future students, to liability and reputational harm 
for innocent or inadvertent misstatements.
    Prospective students benefit when schools share more information, 
and more information naturally increases the risk that some of the 
information may be outdated or incorrect in some way. A student is 
entitled to honest dealing from the school, which means that a school 
must truthfully communicate when providing information. It does not 
mean, necessarily, that rapidly changing or purely subjective 
information must be perfectly free from error.
    Schools that provide a high-quality education may make innocent 
mistakes on highly complex or evolving issues. For example, if a school 
erroneously represented State licensure eligibility requirements for a 
particular profession because the school was unaware that the State 
amended its eligibility requirements just a few days before the

[[Page 49806]]

school made the representation, then the school did not act with 
knowledge that the representation was false. On the other hand, if the 
school continued to make such an erroneous representation after 
learning that the State amended the eligibility requirements, then the 
school acted with knowledge that the representation was false, which 
constitutes a misrepresentation under these final regulations. The 
Department recognizes that an institution may self-correct inadvertent 
misrepresentations through its various compliance programs and 
encourages institutions to do so.
    In determining whether a misrepresentation was made, the Department 
also may consider the context in which the misrepresentation is made. 
For example, demanding that the borrower make enrollment or loan-
related decisions immediately, placing an unreasonable emphasis on 
unfavorable consequences of delay, discouraging the borrower from 
consulting an adviser, failing to respond to borrower's requests for 
more information about the cost of the program and the nature of any 
financial aid, or unreasonably pressuring the borrower or taking 
advantage of the borrower's distress or lack of knowledge or 
sophistication are circumstances that may indicate whether the school 
had knowledge that its statement was false, misleading, or deceptive or 
was made with a reckless disregard for the truth. These examples of 
circumstances that may lead to a borrower's reasonable reliance on a 
school's misrepresentation standing alone, however, do not suffice to 
demonstrate that a misrepresentation occurred under these final 
regulations, just as they did not under the 2016 final regulations.\59\
---------------------------------------------------------------------------

    \59\ 34 CFR 685.222(d)(2)(i) through (v).
---------------------------------------------------------------------------

    The Department disagrees that it is too difficult for borrowers to 
demonstrate that a misrepresentation occurred, as borrowers may easily 
provide the type of evidence, described in the Sec.  685.206(e)(3)(i) 
through (xi), to substantiate a misrepresentation. This list of 
evidence is non-exhaustive, as every type of evidence that could be 
used to prove a misrepresentation cannot be predicted.
    For example, borrowers may provide evidence that actual licensure 
passage rates, as communicated to them by their admissions counselor, 
are significantly different from those included in the institution's 
marketing materials, website, or other communications made to the 
student. The Department amended the description of evidence that 
constitutes a misrepresentation to clarify that actual institutional 
selectivity rates or rankings, student admission profiles, or 
institutional rankings that are significantly different from those 
provided by the institution to national ranking organizations may 
constitute evidence that a misrepresentation occurred, as borrowers may 
rely upon misrepresentations made by an institution to a national 
ranking organization. A borrower also may provide evidence of a 
representation, such as marketing materials or an institutional ``fact 
sheet'', regarding the total, set amount of tuition and fees that they 
would be charged for the program that is significantly different in the 
amount, method, or timing of payment from the actual tuition and fees 
charged. Records about the amount, method, or timing of payment should 
be in the borrower's possession, and the Department has further revised 
its amendatory language to clarify that a representation regarding the 
amount, method, or timing of payment of tuition and fees that the 
student would be charged for the program that is materially different 
in amount, method, or timing of payment from the actual tuition and 
fees charged to the student may constitute evidence that a 
misrepresentation has occurred.
    In evaluating borrower defense claims, the Department understands 
that a borrower may not have saved relevant materials and records to 
substantiate his or her claim. The Department also may receive 
additional materials from the institution in its response to a 
borrower's allegations. The Department may rely on records otherwise in 
the possession of the Secretary, such as recorded calls, as long as the 
Department provides both borrowers and institutions with an opportunity 
to review and respond to such records. The Department encourages 
borrowers to use the Department's publicly available data as evidence 
to demonstrate a misrepresentation. The Department will make program-
level outcome data available to institutions and students through 
Federal administrative datasets, and these data tools may help students 
satisfy this standard in a manner not previously possible. For example, 
a borrower may use information in the expanded College Scorecard, which 
will include program-level outcomes data, to demonstrate that an 
institution, in providing significantly different information than the 
information in the expanded College Scorecard, committed a 
misrepresentation with knowledge of its falsity or reckless disregard 
for the truth.
    However, if changing economic conditions result in future students 
facing markedly diminished job opportunities or earnings, the 
institution would not have made a misrepresentation unless the data 
reported for earlier graduates met the definition of misrepresentation.
    Another area where an alleged misrepresentation may not actually 
meet the standard of a misrepresentation is job placement rate 
reporting. Since at least 2011, the Department had evidence that job 
placement rate determinations are highly subjective and unreliable.\60\ 
On March 1-2, 2011, RTI International, contractor for the Integrated 
Postsecondary Education Data System (IPEDS), convened a meeting of the 
IPEDS Technical Review Panel (TRP) to develop a single, valid, and 
reliable definition of job placement determined that while calculating 
job placement rates using a common metric would be preferable, doing so 
was not possible without further study, given that States and 
accreditors use many different definitions to define in-field job 
placements and identify the student measurement cohort for calculating 
rates. In the absence of a common methodology, the TRP recommended 
institutions disclose the methodology associated with the job placement 
rate reported to their accreditor or relevant state agency but advised 
against posting institutional job placement rates on College Navigator.
---------------------------------------------------------------------------

    \60\ Report and Suggestions from IPEDS Technical review Panel 
#34 Calculating Job Placement Rates, available at https://edsurveys.rti.org/IPEDS_TRP_DOCS/prod/documents/TRP34_Final_Action.pdf. The TRP does not report to or advise the 
Department of Education.
---------------------------------------------------------------------------

    For the reasons stated above, the Department encourages accreditors 
and States to adopt the use of program-level College Scorecard data to 
ensure that all students have access to earnings data that more 
accurately and consistently--regardless of accreditor or State--capture 
program outcomes and resolve the many challenges associated with more 
traditional job placement rate determinations. This change in practice, 
alone, will likely reduce the potential for misrepresentations related 
to job placement rate claims. Such a practice also will enable students 
to provide evidence of misrepresentation because the institution's 
representations may easily be compared to College Scorecard data.
    As in the 2016 final regulations, these final regulations do not 
require that a defense to repayment be approved only when evidence 
demonstrates that a school made a misrepresentation with

[[Page 49807]]

the intent to induce the reliance of the borrower on the 
misrepresentation.\61\ The Department agrees with negotiators and 
commenters that it is unlikely that a borrower would have evidence--
particularly clear and convincing evidence, as proposed in the 2018 
NPRM--to demonstrate that an institution acted with intent to deceive. 
The final regulations provide that a defense to repayment application 
will be granted when a preponderance of the evidence shows that an 
institution at which the borrower enrolled made a representation with 
knowledge that the representation was false, or with reckless disregard 
for the truth. Accordingly, a borrower is not required to provide 
evidence that an institution acted with intent to deceive or with 
intent to induce reliance. The borrower must prove by a preponderance 
of the evidence that the institution's act or omission was made with 
knowledge of its false, misleading, or deceptive nature or with a 
reckless disregard for the truth.
---------------------------------------------------------------------------

    \61\ 83 FR 37257.
---------------------------------------------------------------------------

    We recognize that misrepresentations can be made verbally. It can 
be difficult to determine whether a representative of an institution 
made a verbal misrepresentation to a borrower several years after the 
fact. While the Department will consider borrower defense claims in 
which the only evidence is the claim by the borrower that an 
institution's representative said something years prior, these 
necessarily are difficult claims to adjudicate. They also carry an 
inherent risk of abuse. We thus encourage borrowers to obtain and 
preserve written documentation of any information--including records of 
communications, marketing materials, and other writings--that they 
receive from a school that they rely upon when making decisions about 
their education. As a general rule, it is best for students to make 
these important decisions based upon written representations and 
documentation from the institution.
    Like the 2016 final regulations, the Department's proposed 
misrepresentation standard covers omissions. The Department believes 
that an omission of information that makes a statement false, 
misleading, or deceptive can cause injury to borrowers and can serve as 
the basis for a defense to repayment. For example, providing school-
specific information about the employment rate or specific earnings of 
graduates in a particular field without disclosing employment and 
earnings statistics compiled for that field by a Federal agency could 
constitute a misrepresentation under Sec.  685.206(e)(3)(vi). Failing 
to disclose state or regional data, when available, also could 
constitute a misrepresentation as reflected by the new example provided 
in revised Sec.  658.206(c)(3)(vi).\62\ These revisions help clarify 
what the Department may consider an omission with respect to the 
definition of misrepresentation.
---------------------------------------------------------------------------

    \62\ Note: As explained in the next section, below, the 
Department also revised Sec.  685.206(e)(3)(vi) to include a 
parenthetical that institutions using national data should include a 
written, plain language disclaimer that national averages may not 
accurately reflect the earnings of workers in particular parts of 
the country and may include earners at all stages of their career 
and not just entry level wages for graduates.
---------------------------------------------------------------------------

    As described in other sections of this Preamble, we have structured 
these final regulations to provide an equitable process for borrowers 
and institutions. The borrower and institution may review and respond 
to each other's submissions. The process created by these final 
regulations will assist the Department in making fair and accurate 
decisions, while providing borrowers and schools with due process 
protections.
    The Department believes the definition of ``substantial 
misrepresentation,'' at Sec.  668.71(c), is insufficient to address the 
various concerns and interests that commenters describe. As explained 
above, punishing an institution for an inadvertent mistake does not 
appropriately balance the Department's obligations to current and 
future students or taxpayers. The Department, however, will not require 
a borrower to demonstrate that the institution acted with specific 
intent to deceive. The borrower must only demonstrate that the 
institution's act or omission was made with knowledge of its false, 
misleading, or deceptive nature or with a reckless disregard for the 
truth. Additionally, the Department maintains the evidentiary standard 
of preponderance of the evidence from the 2016 final regulations for 
borrower defense to repayment applications. This lower evidentiary 
standard appropriately addresses concerns about the borrower's ability 
to demonstrate a misrepresentation occurred.
    One commenter's assertion that the Department assumes five percent 
of misrepresentations are not committed with intent, knowledge, or 
reckless disregard is wrong. In the 2018 NPRM, the Department's 
Regulatory Impact Analysis provided: ``By itself, the proposed Federal 
standard is not expected to significantly change the percent of loan 
volume subject to conduct that might give rise to a borrower defense to 
repayment claim. The conduct percent is assumed to be 95 percent of the 
[President's Budget] 2019 baseline level.'' \63\ The commenter appears 
to have assumed that the conduct percent is tied to the specific 
requirement that an act or omission be made with knowledge of its 
false, misleading, or deceptive nature or with a reckless disregard for 
the truth. As mentioned in the Net Budget Impacts section of the RIA, 
the distinction between the borrower percent and the conduct percent is 
somewhat blurred. The change the commenter points out is more reflected 
in the borrower percent as part of the ability of the borrower to prove 
elements of their case. Given that the two rates are multiplied in 
developing the estimates, we believe that the impacts of the regulation 
are captured appropriately.
---------------------------------------------------------------------------

    \63\ 83 FR 37299.
---------------------------------------------------------------------------

    The commenter's misunderstanding of the Department's Regulatory 
Impact Analysis informed the commenter's conclusion that the definition 
of misrepresentation substantially burdens borrowers without 
distinguishing among the types of misrepresentations borrowers may have 
experienced. The commenter does not provide any data to support this 
conclusion, and the Department's RIA does not establish this 
conclusion. Contrary to the commenter's assertions, the Department's 
definition of misrepresentation distinguishes among the different types 
of misrepresentations borrowers may have experienced. For example, the 
misrepresentation may be by act or omission. The school may have made 
the misrepresentation with knowledge of its false, misleading, or 
deceptive nature or with reckless disregard for the truth.
    The Department declines to adopt the UDAP standard suggested by 
commenters. Both the FTC and CFPB investigate consumer complaints that 
are not necessarily similar to borrower defense to repayment claims. 
The Department is not bound by FTC and CFPB standards and chooses not 
to adopt them.
    Additionally, the Department plays a role as a gatekeeper of 
taxpayer dollars regarding loan forgiveness--a role not shared by the 
FTC or CFPB. The Department is unique in that it is responsible for 
both distributing and discharging loans. The FTC and CFPB do not lend 
money, like the Department does, and therefore those agencies are not 
responsible for protecting assets in the same manner as the Department 
is.
    We disagree that the Federal standard, including the definition of 
misrepresentation, should include

[[Page 49808]]

UDAP violations to ensure that borrowers are protected. As we explained 
in the 2016 final regulations, we considered the available precedent 
and determined that it is unclear how such principles would apply in 
the borrower defense context as stand-alone standards.\64\ Such unfair 
and deceptive practices are often alleged in combination with 
misrepresentations and are not often addressed on their own by the 
courts. With this lack of guidance, it is unclear how such principles 
would apply in the borrower defense context. We would like to avoid for 
all parties the burden of interpreting other Federal agencies' and 
States' authorities in the borrower defense context. As a result, we 
decline to adopt a standard for relief based on UDAP.
---------------------------------------------------------------------------

    \64\ 81 FR 75939-75940.
---------------------------------------------------------------------------

    Changes: The Department adopts, with some changes, the definition 
of misrepresentation in the 2018 NPRM for Sec.  685.206(e)(3). As 
previously noted, the Department adopts the Federal standard in 
Alternative B in the 2018 NPRM and makes revisions to align the Federal 
standard with the definition of misrepresentation, such as removing the 
phrase ``an intent to deceive'' the phrase ``making of a Direct Loan, 
or a loan repaid by a Direct Consolidation Loan'' from Sec.  
685.206(e)(2).
    Additionally, the Department revised the regulations to clarify 
that the list of evidence of misrepresentation in Sec.  685.206(e)(3) 
is a non-exhaustive list. The Department further amended the 
description of evidence that a misrepresentation may have occurred to 
clarify that actual institutional selectivity rates or rankings, 
student admission profiles, or institutional rankings that are 
materially different from those provided by the institution to national 
ranking organizations may evidence a misrepresentation. The Department 
also revised its amendatory language to clarify that a representation 
regarding the amount, method, or timing of payment of tuition and fees 
that the student would be charged for the program that is materially 
different in amount, method, or timing of payment from the actual 
tuition and fees charged to the student evidences a misrepresentation 
in these final regulations. The Department revised the example of 
misrepresentation under Sec.  685.206(e)(3)(vi) to include the failure 
to disclose appropriate State or regional data in addition to national 
data for earnings in the same field as provided by an appropriate 
Federal agency.
    The Department revised the Federal standard to require a borrower 
to demonstrate a misrepresentation of a material fact and not a 
misrepresentation of a material opinion, intention, or law.

Determination of Misrepresentation

    Comments: One commenter suggested that the borrower should still be 
eligible for a defense to repayment discharge when the 
misrepresentation was made by an employee acting without the school's 
knowledge or against the school's direction. The commenter notes that 
if a borrower was harmed by the school's employee or agent, then the 
school, not the borrower, should be responsible for the harm caused.
    Several commenters sought determinations as to whether specific 
examples of statements or omissions would constitute misrepresentation 
under the proposed definition. These examples include: A failure to 
inform a student that the school may close prior to that final decision 
being made; a failure to disclose that a regulator has taken an adverse 
action against the school while the matter is on appeal and not final; 
a school makes a mistake without willful intent; an employee of the 
school provides inaccurate or unclear information that can be tied to a 
deficit in training or performance; changes that occur to the 
information originally provided to the borrower, through no fault of 
the school; if State or Federal governments make dramatic budgetary 
reductions in financial aid that result in a reduction of aid promised 
to a borrower; incorrect information regarding what financial aid is 
available; changes in costs after a student enrolls; incorrect 
information regarding the cost of attending the school; differences in 
reporting to adhere to State, Federal, accrediting agency, and 
licensing board requirements; Nursing National Council Licensure 
Examination (NCLEX) passage rates; clinical facility sites utilized 
during nursing school; institutions stating that a borrower can make 
the national average of earnings in a particular field, even if that 
average exceeds those of program graduates; typographical errors in 
marketing materials produced internally or by outside entities; and 
falsified data provided to an institutional ranking organization in 
order to inflate the school's rankings.
    One commenter asked whether students at specific institutions would 
be covered under this regulation, had this standard been in place and 
given the evidence now available to the Department.
    Other commenters sought clarification on what constitutes a 
deceptive practice or act or omission on the part of a school and 
requested guidance from the Department regarding what policies to put 
in place to ensure schools are not misleading students in any way. 
These commenters also would like to know how compliance with these 
policies may be enforced.
    Some commenters objected to the inclusion within the specific 
examples of statements or omissions that would constitute a 
misrepresentation under the proposed definition of ``availability, 
amount, or nature of financial assistance.'' These commenters note that 
the volatility of financial aid awards is more often attributable to a 
change in the student's eligibility, rather than an independent 
determination by the school.
    Another commenter objected to the inclusion within the specific 
examples of statements or omissions that would constitute a 
misrepresentation under the proposed definition of ``[a] representation 
regarding the employability or specific earnings of graduates without 
an agreement between the school and another entity for such employment 
or specific evidence of past employment earnings to justify such a 
representation or without citing appropriate national data for earnings 
in the same field as provided by an appropriate Federal agency that 
provides such data.''
    The commenter cites research that found that earnings from the 
Bureau of Labor Statistics exceed the actual earnings of program 
graduates in gainful employment (GE) programs in 96 percent of programs 
analyzed, including in almost every one of the top 10 most common GE 
occupations, even for the program graduates with the highest earnings.
    Discussion: A borrower may successfully allege a defense to 
repayment based on a misrepresentation by a school's employee who acts 
without the school's knowledge or against the school's direction as 
long as the borrower demonstrates they reasonably relied on the 
misrepresentation under the circumstances and that the employee acted 
with reckless disregard for the truth. The Department will not fault a 
borrower for failing to recognize that the employee is acting without 
the school's knowledge or against the school's direction, unless the 
circumstances clearly indicate the employee is not authorized to make 
the alleged representations on behalf of the school. These 
circumstances will help to determine whether the borrower reasonably 
relied on the misrepresentation of material fact, as

[[Page 49809]]

required by the Federal standard in Sec.  685.206(e)(2)(i).
    For example, if an employee in the school's cafeteria who serves 
food made a misrepresentation about the availability, amount, or nature 
of financial assistance available to a particular student, that student 
should reasonably recognize the employee is not authorized to make such 
representations. The Department will take into consideration whether 
the school's employee is authorized to act on behalf of the school in 
determining whether to recover funds from the school.
    To address some of the commenter's concerns, the Department is 
revising Sec.  685.206(e)(3)(vii) to clarify that a misrepresentation 
may constitute a ``representation regarding the availability, amount, 
or nature of any financial assistance available to students from the 
institution or any other entity to pay the costs of attendance at the 
institution that is materially different in availability, amount, or 
nature from the actual financial assistance available to the borrower 
from the institution or any other entity to pay the costs of attendance 
at the institution after enrollment.'' The Department recognizes that a 
student's eligibility for financial assistance may change and will 
examine the school's representation in light of the student's 
eligibility at the time the school made the representation regarding 
the availability, amount, or nature of any financial assistance 
available to the student. The school's representation must be 
materially different in availability, amount, or nature from the actual 
financial assistance available to the borrower in order to constitute a 
misrepresentation.
    Additionally, the Department revised the proposed definition of the 
terms ``school'' and ``institution'' to align more closely with the 
persons or entities who may make a misrepresentation in 34 CFR 668.71. 
Accordingly, these final regulations expressly define a school or 
institution to ``include an eligible institution, one of its 
representatives, or any ineligible institution, organization, or person 
with whom the eligible institution has an agreement to provide 
educational programs, or to provide marketing, advertising, recruiting, 
or admissions services.'' \65\ This definition captures the 
Department's interpretation of the 2016 final regulations, as the 
preamble to the 2016 final regulations indicates that schools may be 
held liable for their employees' representations.\66\
---------------------------------------------------------------------------

    \65\ 34 CFR 685.206(e)(1)(iv).
    \66\ 81 FR 75952.
---------------------------------------------------------------------------

    The Department agrees that it can be difficult to differentiate 
between an institution that misrepresents the truth to students as a 
matter of policy and an individual employee who violates the 
institution's policies to make the misrepresentation. To determine 
whether an institution acted with reckless disregard for the truth, the 
Department may consider the controls that an institution had in place 
to prevent or detect any misrepresentations. For this reason, it is 
important that the final regulations provide an opportunity for an 
institution to contribute to the record. An opportunity to respond in a 
proceeding is a well-established principle of due process. The 
Department will determine whether a misrepresentation occurred based on 
information from both the borrower and the school.
    We understand the commenters' interest in further clarification as 
to whether specific circumstances may constitute a misrepresentation. 
However, we do not believe it is possible or appropriate to provide an 
exhaustive list of examples or a hypothetical discussion of the 
analytical process the Department will undertake to ascertain whether a 
specific borrower's claim meets the requirements of misrepresentation. 
The determination of whether a school made a misrepresentation that 
could be the basis for a borrower defense claim will be made based on 
the specific facts and circumstances of each borrower defense to 
repayment application. The Department will carefully examine the facts 
presented in each application and cannot anticipate the unique facts of 
each application.
    In response to the commenter's request for more clarity regarding 
the circumstances that may constitute a misrepresentation, the 
Department made a minor revision to Sec.  685.206(e)(3)(ix). In Sec.  
685.206(e)(3)(ix), the Department added that a representation that the 
institution, its courses, or programs are endorsed by ``Federal or 
State agencies'' may constitute a misrepresentation if the institution 
has no permission or is not otherwise authorized to make or use such an 
endorsement. Institutions should not represent that their courses or 
programs are endorsed by Federal or State agencies, if these agencies 
have not endorsed them.
    In Sec.  685.206(e)(3)(x), the Department states that a 
representation regarding the location of an institution that is 
materially different from the institution's actual location at the time 
of the representation could constitute a misrepresentation for borrower 
defense purposes. The Department does not intend for this specific 
provision to apply to institutions that relocate to a new location 
after a student enrolls to comply with the new FASB standards or after 
an institution's lease runs out and is not subsequently renewed. Under 
the Department's definition of misrepresentation, an institution's 
representation about its location must be accurate at the time when the 
representation is made. If the institution makes a representation about 
its location and later changes its location, then the institution 
should accurately represent its change in location. We expect the 
implementation of the new FASB standards will increase the number of 
institutions that relocate, which should not be permitted to result in 
an increase in the number of borrower defense claims based upon 
misrepresentations about the school's location as long as the school's 
representation about its location is accurate at the time when the 
representation is made. Subject to additional material facts and 
circumstances, an institution that moves to a slightly different 
location, with comparable facilities and equipment, which does not 
create an overly burdensome commute, will not be viewed by the 
Department as having committed a misrepresentation.
    The Department acknowledges that allegations against the specific 
institutions that the commenters referenced are well-known. The 
discharge applications submitted by students who attended those schools 
are being evaluated under the pre-2016 regulations. It is not 
appropriate to speculate how those cases would be decided using a 
different standard, a different process, and different evidence. The 
Department does not comment on claims or matters that are pending.
    The Department's regulations provide a non-exhaustive list of 
evidence that a borrower may use to demonstrate that a 
misrepresentation occurred. Institutions may develop internal controls 
and compliance policies based on this non-exhaustive list. Institutions 
are well positioned to determine how to ensure compliance with 
institutional policies promulgated to prevent and prohibit 
misrepresentations to students. In these policies, institutions may 
describe the consequences, including disciplinary measures, that 
employees face if they make a misrepresentation.
    The Department will not determine that a school made a 
misrepresentation if a student's eligibility for financial aid changed 
as a result of changes in

[[Page 49810]]

Federal programs or a student's eligibility for aid. The Department, 
however, is concerned that many institutions engage in strategic 
dissemination of institutional aid where they provide significant first 
year aid to attract a student to the institution, but do not continue 
that level of support throughout the program even when the student 
meets the requirements for receiving that level of support. Conduct 
such as this could constitute a misrepresentation, depending on the 
details of the situation.
    Similarly, the Department will not determine that an institution 
made a misrepresentation for complying with differing requirements of 
accreditors or States to report multiple job placement rates for a 
single program, if a student, through no fault of the institution, 
misunderstands which of those placement rates more accurately reflects 
his or her likely outcomes. If the institution uses data that is 
required by accreditors or States in its own publications and 
materials, the Department encourages institutions to provide context 
for a student to understand the relevance of the job placement rate or 
other data required by accreditors or States. For example, institutions 
with an Office of Postsecondary Education Identification Number (OPE 
ID) may report job placement rates that include many campuses across 
the country.
    As a result, these institutions may be required to report a rate 
that is not intended to represent earnings for students who live in 
parts of the country where wages are lower than average or higher than 
average. The use of OPE IDs to report outcomes also may cause an 
institution to appear to be located in one part of the country, even 
though the campus that a student attends may be at an additional 
location in another part of the country where prevailing wages differ. 
Similarly, accreditors and States may define measurement cohorts 
differently and may have different standards for what constitutes an 
in-field job placement. Accordingly, an institution may report data 
accurately based on the various definitions they are required to use, 
and a student may not understand how to interpret this data. As long as 
the institution does not use that data in a manner to knowingly mislead 
or deceive students or with reckless disregard for the truth, the 
Department will not consider the use of such data to constitute a 
misrepresentation.
    An institution, however, that makes claims about guaranteed 
employment or guaranteed earnings to borrowers should maintain evidence 
to support those guarantees. An institution could be considered to have 
made a misrepresentation if evidence of such guarantees does not 
actually exist or do not apply to all students to whom the guarantee is 
made.
    We appreciate the commenters' concern regarding discrepancies 
between BLS and GE earnings data. To clarify, it is important to 
remember that GE rates, as previously calculated, were based upon 
earnings measured only a few years after a title IV participating 
student graduates, while BLS measures earnings of everyone in an 
occupation, including those who have years of experience and expertise.
    Thus, BLS data may more accurately represent long-term, 
occupational earning potential rather than the expected earnings of an 
institution's program graduates within two or three years of 
graduation. Until an expanded College Scorecard provides institutions 
with median program-level earnings, BLS data is the most reliable 
source of Federal wage data available to help students understand 
earnings for particular occupations. BLS data is helpful because a 
student is generally interested in earnings over the course of a 
career, and not just a few years after completion of the program.
    To address the concerns of commenters that a borrower may 
misunderstand the national data, the Department also revised Sec.  
685.206(e)(3)(vi) to include a parenthetical that institutions using 
should include a written, plain language disclaimer that national 
averages may not accurately reflect the earnings of workers in 
particular parts of the country and may include earners at all stages 
of their career and not just entry level wages for graduates. Such a 
disclaimer places the national data that an institution may use in 
context and will help the borrower understand that the national data 
does not guarantee a specific level of income. Such a disclaimer also 
will help the borrower understand that the national data may not be 
representative of what a student will make in the early years of their 
career or in a particular part of the country.
    Changes: The Department is revising 34 CFR 685.206(e)(3)(vi), which 
provides examples of misrepresentation, to include a parenthetical that 
instructs institutions to include a written, plain language disclaimer 
that national averages may not accurately reflect the earnings of 
workers in particular parts of the country and may include earners at 
all stages of their career and not just entry level wages for recent 
graduates.
    The Department revised the example of a misrepresentation in Sec.  
685.206(e)(3)(vi) regarding the availability, amount, or nature of the 
financial assistance available to students to expressly state that the 
representation regarding such financial assistance must be materially 
different from the actual financial assistance available to the 
borrower.
    In Sec.  685.206(e)(3)(ix), the Department added that a 
representation that the institution, its courses, or programs are 
endorsed by ``Federal or State agencies'' may constitute a 
misrepresentation if the institution has no permission or is not 
otherwise authorized to make or use such an endorsement.
    The Department also revised the proposed definition of the terms 
``school'' and ``institution'' to align more closely with the persons 
or entities who may make a misrepresentation in 34 CFR 668.71.

Borrower Defenses--Judgments and Breach of Contract

    Comments: A number of commenters supported the Department's 
proposal to use State judgments, breaches of contract, and/or other 
third-party information in its evaluation of, but not as an automatic 
approval for, borrower defense claims.
    Several commenters urged the Department to view breaches of 
contract and prior judgments as additional bases for a borrower defense 
claim. One commenter noted that if colleges were in violation of other 
laws, recognizing such claims would provide relief to wronged borrowers 
and failure to recognize these types of claims limits a borrower's 
opportunity to obtain relief.
    One commenter noted that although the preamble clarifies that 
breaches of contracts or judgments may be considered as evidence of a 
misrepresentation, this position should be explicitly stated in the 
text of the regulation.
    One commenter suggested that the Department modify the rule to 
require the Department to review any State judgments for relevant 
information before requiring additional documentation from the 
borrower, and that if a State judgment satisfies the Federal standard 
and the school was provided an opportunity to present its evidence, the 
borrower's claim should be accepted and proceed to the harm stage. 
Another commenter noted that under the Department's proposal, a person 
who has been determined to be a victim through a robust judicial 
process at the State level is denied relief. A different commenter 
indicated that individual borrowers should not be

[[Page 49811]]

required to identify illegal conduct at schools but should be able to 
rely on State court determinations.
    One commenter indicated that the Department should not eliminate 
breach of contract as a basis for a claim merely because the Department 
did not find a sufficient number of borrowers asserting those rights in 
the past as the next crisis may not look like the last one.
    Another commenter indicated that the final language should clarify 
whether a breach of contract can serve as the basis for a claim if it 
related directly to the educational services provided by the school.
    Discussion: The Department appreciates the commenters' support for 
our proposed regulations.
    Unlike the 2016 final regulations, the Federal standard in these 
final regulations does not include a breach of contract as a basis for 
a borrower defense to repayment claim. The 2016 final regulations 
provide that a borrower may assert a borrower defense to repayment, 
``if the school the borrower received the Direct Loan to attend failed 
to perform its obligations under the terms of a contract with the 
student.'' \67\ The Department, however, did not identify the elements 
of a breach of contract and did not define what may constitute a 
contract between the school and the borrower. The Department noted in 
the 2016 NPRM that ``a contract between the school and a borrower may 
include an enrollment agreement and any school catalogs, bulletins, 
circulars, student handbooks, or school regulations'' and cited to two 
Federal cases, one of which is unpublished.\68\ The Department further 
provided in the preamble of the 2016 final regulations that ``it is 
unable to draw a bright line on what materials would be included as 
part of a contract because that determination is necessarily a fact-
intensive determination best made on a case-by-case determination.'' 
\69\ The Department declined to adopt a materiality element with 
respect to a breach of contract and did not define the circumstances in 
which an immaterial breach may satisfy the Federal standard.\70\ 
Finally, the Department did not tie the breach of contract basis of the 
Federal standard to State law.
---------------------------------------------------------------------------

    \67\ 34 CFR 685.222(c).
    \68\ 81 FR 39341 (citing Ross v. Creighton University, 957 F.2d 
410 (7th Cir. 1992) and Vurimindi, 435 F. App'x at 133 (quoting 
Ross)).
    \69\ 81 FR 75944.
    \70\ Id.
---------------------------------------------------------------------------

    We continue to acknowledge that a breach of contract may depend on 
the unique facts of a claim, but are concerned that both borrowers and 
institutions will not know how the Department determines what 
constitutes a contract or a breach of contract with respect to borrower 
defense to repayment claims. The Department does not publish its 
decisions with respect to an individual borrower's claims and, thus, 
the public will not be able to know or understand the facts or 
circumstances the Department considers in accepting a breach of 
contract claim that satisfies the Federal standard.
    We also are concerned that the lack of clarity with respect to 
breach of contract as a basis for a borrower defense to repayment claim 
will lead to uncertainty and confusion among schools and borrowers in 
different states because the breach of contract basis in the 2016 
Federal standard is not tied to or based on State law. For example, 
contrary to the Federal case law cited in the preamble of the 2016 
final regulations, the Supreme Court of Virginia expressly held that 
statements in an institution's ``letters of offers of admission from 
the College's Admissions Committee; correspondence, including email, 
among the College's representatives and the students; and the College's 
[ ] Academic Catalog'' did not constitute a contract between the school 
and its students.\71\ These materials contained representations that a 
female liberal arts college, which had provided an education to women 
only for over 100 years, would remain single-sex.\72\ The school's 
catalog even expressly stated: The school ``offers an education fully 
and completely directed toward women. In a time of increasing 
opportunities for women, it is essential that the undergraduate years 
help the student build confidence, establish identity, and explore 
opportunities for careers and for service to the society that awaits 
her.'' \73\
---------------------------------------------------------------------------

    \71\ Dodge v. Trustees of Randolph-Macon College Woman's 
College, 661 SE2d 801, 802-03 (Va. 2008).
    \72\ Id.
    \73\ Id. at 802.
---------------------------------------------------------------------------

    The Supreme Court of Virginia ruled that these representations did 
not constitute a contract and, thus, admitting male students could not 
constitute a breach of contract claim.\74\ Under the 2016 final 
regulations, it is not clear whether such representations in a school's 
catalog or other materials may constitute a breach of contract in 
satisfaction of the Federal standard if the school then began to admit 
male students subsequent to the claimant's enrollment, as the breach 
need not be material in nature. Breach of contract laws vary among 
States, and the breach of contract standard in the 2016 final 
regulations may be in contravention of some breach of contract laws 
such as the breach of contract laws in Virginia. In promulgating the 
2016 final regulations, the Department expressly anticipated that 
guidance may eventually be necessary to further define breach of 
contract.\75\ The Department does not wish to maintain a borrower 
defense regime that increases uncertainty as to what constitutes a 
contract and how that contract may be breached. Instead of maintaining 
a Federal standard that requires more clarification through guidance, 
the Department has decided to provide more certainty and clarity 
through regulations that provide a different Federal standard.
---------------------------------------------------------------------------

    \74\ Id. at 803-04.
    \75\ 81 FR 75994.
---------------------------------------------------------------------------

    Unlike the Federal standard in the 2016 final regulations, the 
Federal standard in these final regulations requires a 
misrepresentation of material fact upon which the borrower reasonably 
relied in deciding to obtain a loan. The requirements of materiality 
and reasonable reliance provide more certainty and clarity. A breach of 
contract claim, unlike a claim of fraud or material misrepresentation, 
does not necessarily require any reliance by the borrower.\76\ If the 
borrower does not rely on a school's promise to perform a contractual 
obligation, the borrower may not have suffered harm as a result of the 
school's breach of contract.
---------------------------------------------------------------------------

    \76\ Compare Restatement (First) of Contracts section 312 (2018) 
with Restatement (First) of Contracts sections 470-471.
---------------------------------------------------------------------------

    For example, if the school represents in its catalog that it will 
publish the number of robberies in a specific geographic area in a 
crime log but fails to do so, the school may have failed to perform its 
obligation. Assuming arguendo that this failure constitutes a breach of 
contract claim, such a breach likely will not affect the benefit the 
student receives from the education. Such a breach also likely is not 
material in nature. A Federal standard that requires a material 
misrepresentation and reliance by a borrower provides a more accurate 
gauge for any harm the student may have suffered. A more accurate gauge 
of harm to the student will enable the Department to more easily 
determine the amount of relief to provide in a successful borrower 
defense to repayment claim.
    The Department is not eliminating breach of contract as the basis 
for a claim merely because the Department did not find a sufficient 
number of claims. The Department believes that a breach of contract 
that directly and clearly relates to enrollment or

[[Page 49812]]

continuing enrollment or the provision of educational services may be 
used as evidence in support of a borrower defense to repayment claim. 
Standing alone, however, a breach of contract, will not be sufficient 
to satisfy the Federal standard.
    Similarly, the Department acknowledges that if a borrower has 
obtained a non-default, favorable contested judgment against the school 
based on State or Federal law in a court or administrative tribunal of 
competent jurisdiction, then there may circumstances when the borrower 
may use such a judgment as evidence to satisfy the Federal standard in 
these final regulations.
    For example, where a borrower obtains a judgment against a school 
for statements it made to the borrower about licensure passage rates 
for a program in which the borrower enrolled, and court found that the 
school knew the statement to be false and that the borrower suffered 
financial harm, the borrower may use the judgment as evidence in 
support of his or her application to seek a discharge of a Direct Loan 
or a loan repaid by a Direct Consolidation Loan. These regulations do 
not prohibit a borrower from pursuing relief from courts or 
administrative tribunals. For example, settlements negotiated by States 
have included elimination of private loans, reimbursement of cash 
payments, and repayment of outstanding Federal loan debt. However, the 
defense to repayment provision limits relief to Federal student loan 
repayment obligations and does nothing to assist students who used 
cash, college savings plans, or other forms of credit to pay tuition.
    Unlike the 2016 final regulations, a judgment, standing alone, will 
not necessarily automatically satisfy the Federal standard. If the 
borrower has obtained a judgment against a school, then the court or 
administrative tribunal very likely provided an adequate remedy to the 
borrower as part of the judgment. Accordingly, the Department may not 
be able to offer any additional relief.
    Even if the Department may offer further relief, the Federal 
standard should not include an inherent assumption that the relief 
provided by the court or administrative tribunal was insufficient. 
Accepting judgments as evidence in support of borrower defense claims 
allows for the Department to undertake the necessary analysis to 
determine whether additional relief is warranted, but including such 
judgements as an automatic basis to qualify for relief presumes more 
than what is appropriate in all cases. We should not supplant the 
judicial system by granting relief that a court or administrative 
tribunal did not deem necessary.
    The Department chose not to use a State law standard in the 2016 
final regulations because a State law standard may result in inequities 
among borrowers who qualify for relief. If one State's laws are more 
generous than those in another State, then two equally situated 
borrowers may obtain very different results in their respective State 
courts. If a judgment based on State law automatically qualifies a 
borrower for a borrower defense to repayment, then inequities among 
borrowers will perpetually continue. Accordingly, the Department has 
determined that a judgment against the school, alone, should not 
constitute the Federal standard.
    In order to ensure that both borrowers and institutions have due 
process rights, these final regulations add new steps to the borrower 
defense to repayment adjudication process that provides both with an 
opportunity to provide evidence and respond to evidence provided by the 
other party. Therefore, automatic relief under any circumstance would 
be inappropriate, especially since the circumstances that resulted in a 
breach of contract may or may not meet the Federal standard for 
misrepresentation. As such, while a judgment or breach of contract 
related to enrollment or the provision of educational services may 
serve as compelling evidence to support a borrower's borrower defense 
to repayment claim, the Department cannot award automatic borrower 
defense relief since that would eliminate the opportunity for the 
institution to respond to the borrower's claim with the Department. The 
Department sufficiently explained in this Preamble that a judgment and/
or a breach of contract may be used as evidence in support of a 
borrower defense to repayment claim. Changing the amendatory language 
to this effect is not necessary and may mislead or confuse borrowers by 
implying that a judgment or breach of contract may independently and 
automatically satisfy the Federal standard. The Federal standard in 
these final regulations marks a departure from the Federal standard in 
the 2016 final regulations with respect to a judgment or breach of 
contract, and the Department does not wish to cause confusion.
    Changes: None.

Borrower Defenses--Provision of Educational Services and Relationship 
With the Loan

    Comments: Some commenters supported the Department's proposal to 
exclude defense to repayment claims that are not directly related to 
the provision of educational services. Some commenters also supported 
the definition the Department proposed for the provision of educational 
services.
    Other commenters argued that the limitation of the provision of 
educational services to a borrower's program of study was 
inappropriately narrow. These commenters suggested that the borrower's 
claim should apply to all Federal student loans, regardless of how the 
funds were spent, and to the school's pre- and post-enrollment 
activities. One commenter also stated that the provision of educational 
services is too narrowly defined, because schools may have made 
promises about the quality of the education that fall outside of the 
specific requirements of accreditors or State agencies, but that may 
significantly affect the borrower's educational experience. This 
commenter also asserted that the Department failed to adequately 
justify its decision to limit the provision of educational services 
only to those related to the borrower's program of study.
    Another commenter objected to the definition limiting 
misrepresentation to circumstances where the school had withheld 
something ``necessary for the completion'' of the program, as that 
would leave too much room for abuse by schools.
    One commenter found it needlessly inimical to require that a 
misrepresentation relate to a borrower's program of study for the 
borrower to make a defense to repayment claim. The commenter argued 
that the value of a degree rests in large part on the reputation of the 
school and, if that reputation is tarnished or destroyed, the value of 
the degree is as well.
    A group of commenters asked what ``educational resources'' means. 
Additionally, they noted that accrediting agencies, State licensing 
agencies, or authorizing agencies may require schools to maintain 
certain licensure passage or job placement rates in their programs, but 
there are not ``requirements for the completion of the student's 
educational program.'' These commenters inquired whether the definition 
of provision of educational services excludes borrower defenses on the 
basis of misrepresentations about job placement and exam passage rates.

[[Page 49813]]

These commenters further inquired whether a particular attribute or 
representation regarding transferability of credits constitutes a 
``requirement for the completion of the student's educational 
program.'' These commenters noted that only subparagraph (J) of 
proposed Sec.  685.206(d)(5)(iv), in the 2018 NPRM, refers to 
``educational resources'' and inquired whether subparagraph (J) is the 
only provision that may serve as the basis of a misrepresentation 
regarding the provision of educational services.
    Discussion: We thank the commenters for their support of the 
proposed regulations pertaining to the provision of educational 
services.
    As noted in the NPRM, the Department included a definition of 
``provision of educational services'' at the request of some of the 
non-Federal negotiators. The Department acknowledged that there are 
well-developed bodies of State law that explain this term, and each 
State may define this term differently. Accordingly, in the NPRM, we 
concluded that the term ``provision of educational services'' is 
subject to interpretation and proposed to define that term as ``the 
educational resources provided by the institution that are required by 
an accreditation agency or a State licensing or authorizing agency for 
the completion of the student's educational program.'' \77\ A 
misrepresentation relating to the ``provision of educational services'' 
thus is clearly and directly related to the borrower's program of 
study.
---------------------------------------------------------------------------

    \77\ 83 FR 37254.
---------------------------------------------------------------------------

    The Department expects the school's communications and acts that 
are directly or clearly related to the provision of educational 
services to conform to the Federal standard set forth in these final 
regulations.
    We do not believe it is appropriate to consider acts or omissions 
unrelated to the making of a Direct Loan for enrollment at the school 
or the provision of educational services for which the loan was made as 
relevant to a borrower defense claim. For example, under the 
Department's definition, an institution that advertises a winning 
sports team does not make a misrepresentation for borrower defense 
purposes, if in years subsequent to a borrower's enrollment the team 
has less successful seasons. Similarly, an institution that advertises 
certain on-campus restaurants does not make a misrepresentation for 
borrower defense purposes if one or more of those restaurants closed 
their on-campus locations and were no longer available to students who 
purchased a campus meal plan.
    However, if, for example, an institution represented in their 
college catalog that they provided highly-qualified faculty for the 
business program, modern equipment, low teacher-to-student ratios, and 
excellent training aids, but actually provided only one unqualified 
teacher for the program--who was also the school's registrar--one 
course session of forty-two students (all taking different level 
courses), and only two 10-key adding machines, then, with this 
combination of issues, the institution may have made a 
misrepresentation that could be used as a basis for a discharge 
application.\78\
---------------------------------------------------------------------------

    \78\ American Commercial Colleges, Inc. v. Davis, 821 S.W.2d 
450, 452 (Tex. App. Eastland 1991).
---------------------------------------------------------------------------

    Similarly, it is likely a misrepresentation when an institution 
insists in its marketing materials that its online program is 
``substantially identical'' to the same course offered in the 
traditional classroom setting, but only provided PowerPoint slides from 
in-class courses without any accompanying lectures or videos, scanned 
copies of books with cut-off information and blurred entire sentences, 
and instructors that did not prepare course materials and were hardly 
involved at all in any actual online instruction.\79\
---------------------------------------------------------------------------

    \79\ Bradford v. George Washington University, 249 F.Supp. 3d 
325, 330 (D.D.C. 2017).
---------------------------------------------------------------------------

    The Department disagrees that it should allow a borrower's defense 
to repayment application to apply to all Federal student loans, 
irrespective of how the borrower spends the funds. These loans are 
Federal assets, and the Federal taxpayer should not be liable for the 
choices of a borrower not related to a loan for enrollment at the 
school or to the provision of education services for which the loan was 
made.
    A school's pre- and post-enrollment activities may support a 
borrower defense to repayment application if the institution's pre- or 
post-enrollment acts or omissions directly and clearly relate to the 
making of a loan for enrollment or continuing enrollment at the school 
or to the provision of education services for which the loan was made. 
The Department revised both the regulations on the Federal standard and 
the definition of misrepresentation to clarify that an institution's 
act or omission that directly and clearly relates to the enrollment or 
continuing enrollment at the institution may constitute grounds for a 
borrower defense to repayment claim.
    Although the Department rejected similar requests by commenters in 
the past, the Department accepts these requests, which non-Federal 
negotiators also made during the most recent negotiated rulemaking 
sessions, to clarify that the provision of educational services must 
relate to the borrower's program of study. In adjudicating borrower 
defense to repayment applications, the Department seeks to avoid making 
inconsistent determinations. Tying the provision of educational 
services to the student's program of study will result in more 
consistent interpretations of the term ``provision of educational 
services.'' This definition provides greater clarity as claims related 
to more general concerns associated with the institution's provision of 
educational services will not be considered. The Department does 
consider enrollment in general education courses prior to the 
borrower's selection of a major or educational service provided in 
relation to a student's prior major to be included in the definition of 
a program of study.
    The definition of ``provision of educational services'' is based on 
educational resources as those resources provided by the institution 
that are required by an institution's academic programs, its 
accreditation agency or a State licensing or authorizing agency for the 
completion of the student's educational program. Educational resources 
may include an adequate number of faculty to fulfill the institution's 
mission and goals or successful completion of a general education 
component at the undergraduate level that ensures breadth of knowledge. 
The Department cannot describe all the educational resources that 
various accrediting agencies or State licensing or authorizing agencies 
may require for completion of the student's educational program, so we 
decline to provide an exhaustive list in these final regulations.
    The definition of the provision of educational services does not 
categorically exclude all borrower defenses on the basis of 
misrepresentations about job placement and exam passage rates. The 
final regulations define a misrepresentation as directly and clearly 
related to the making of a loan for enrollment at the school or to the 
provision of educational services for which the loan was made. 
Misrepresentations about job placement and exam passage rates may 
directly or clearly be related to the making of a loan for enrollment 
at the school.
    A representation regarding transferability of credits may 
constitute a requirement for the completion of the student's 
educational program depending on the circumstances. If the

[[Page 49814]]

school makes a statement that all credits from another school are 
transferable and may be used to complete an educational program with 
knowledge that few or none of the credits are transferable, then that 
school likely would be considered to have made a misrepresentation as 
defined in these final regulations.
    The definition of ``provision of educational services'' relates to 
elements necessary for the completion of the student's educational 
program, but a misrepresentation is not limited to circumstances where 
the school had withheld something ``necessary for the completion'' of 
the program. As explained above, a misrepresentation may be an act or 
omission that directly and clearly relates to the making of a loan for 
enrollment at the school.
    We disagree with the commenter who asserted that defenses to 
repayment should be based on harm to a school's general reputation. 
Institutions may suffer reputational damage for a number of reasons, 
including, for example, poor performance of an athletic team, sexual 
misconduct on the part of a member of the staff or instances when a 
staff member accepts payment in exchange for boosting a student's 
chances to be admitted. But reputational harm does not generally have a 
widespread impact on the quality of education the students receive. An 
institution's level of admissions selectivity has a significant impact 
on the institution's reputation, but it would be hard to argue that it 
is the fault of the institution if a borrower selected a less-selective 
institution and did not benefit from the advantages of a social network 
typical of an elite institution. A borrower would not be entitled to 
borrower defense to repayment relief as a result of reputational 
damage, although if the institution misrepresented its admissions 
selectivity or admissions criteria, then the borrower may be eligible 
for relief. A school's reputation is not always tied to 
misrepresentations as defined for purposes of these regulations, but a 
borrower's program of study remains integral to the purpose and use of 
the loan.
    Changes: The Department is not making any changes to the definition 
of ``provision of educational services.'' The Department is revising 
the definition of ``misrepresentation'' and the Federal standard to 
clarify that an institution's acts or omissions that clearly and 
directly relate to enrollment or continuing enrollment at the 
institution or provision of educational services for which the loan was 
made may constitute grounds for a borrower defense to repayment 
application.

Effective Date

    Comments: A group of commenters noted that the Department's 1995 
Notice of Interpretation, 60 FR 37769, clarified that the act or 
omission of a school, in order to serve as the basis for a borrower 
defense, must ``directly relat[e] to the loan or to the school's 
provision of educational services for which the loan was provided.'' 
These commenters assert that if this Notice of Interpretation is not 
sufficiently clear, then the Department should apply its definition of 
``provision of educational services'' in these final regulations to 
existing loans instead of to loans first disbursed on or after July 1, 
2019.
    Discussion: Although the Department issued a Notice of 
Interpretation in 1995 to clarify that an act or omission must directly 
relate to the loan or the school's provision of education services, 
commenters in 2016 requested that the Department clarify that the 
provision of educational services is tied to the student's program of 
study. Some of the non-Federal negotiators made this same request 
during the negotiated rulemaking in 2017, and the Department has 
responded by providing a definition for the term ``provision of 
educational services.'' For concerns discussed elsewhere in these final 
regulations regarding retroactively applying definitions and standards, 
the Department will only apply this definition to loans first disbursed 
on or after July 1, 2020.
    Changes: These final regulations provide that the definitions of 
provision of educational services and misrepresentation will apply to 
loans first disbursed on or after July 1, 2020.

Borrower Defenses--Consolidation Loans

    Comments: A group of commenters contend that FFEL borrowers should 
have the same rights to a borrower defense discharge as Direct Loan 
borrowers and that pursuant to Sec.  455(a) of the HEA, Direct Loans 
and FFEL loans are to have the same terms, conditions, and benefits. 
Another commenter argued that borrower defense should be available to 
FFEL borrowers without requiring consolidation or proof of any special 
relationship between their schools and FFEL lenders.
    A group of commenters asserted that there are several problems with 
the proposal to make consolidation a necessary prerequisite for FFEL 
borrowers to access the borrower defense to repayment process. 
Requiring consolidation creates another administrative obstacle for 
borrowers. These commenters noted other obstacles include the 
Department's proposal to preclude borrowers with new Direct Loans, 
consolidated after the effective date of the rule, from asserting 
defenses unless they are either in collection proceedings or within 
three years from leaving the school.
    These commenters also noted that not every FFEL borrower is 
eligible to consolidate into a Direct Consolidation Loan and that the 
Department should change the rules to permit all FFEL borrowers to do 
so. These commenters further asserted that the Department should allow 
for refunds of amounts already paid on FFEL loans. They urged the 
Department to give FFEL borrowers more certainty that their loans will 
be discharged by committing to a pre-approval process whereby the 
Department will determine FFEL borrowers' eligibility for discharge, 
contingent upon consolidation, prior to requiring consolidation or 
advising borrowers to consolidate to access relief.
    Another group of commenters also requested that the Department 
outline what policy will apply to borrowers whose borrower defense 
applications are submitted prior to the effective date of the final 
rule but are not yet approved on that date, including FFEL borrowers 
that have requested pre-approval of their application prior to applying 
for a Direct Consolidation Loan.
    This group of commenters suggested specific amendatory language 
regarding administrative forbearance for FFEL loan borrowers while the 
Department makes a preliminary determination before the borrower 
consolidates his or her loan(s). These commenters explained that 
administrative forbearance would be more appropriate than discretionary 
forbearance due to the limit imposed on discretionary forbearance. This 
group of commenters also suggested early implementation of 
administrative forbearance and suspension of collection activities.
    These commenters noted that the final regulations should allow 
servicers to suspend collection activity while the Department makes a 
preliminary determination (prior to the borrower consolidating his or 
her loans) as to whether relief may be appropriate under the new 
Federal standard.
    Discussion: The Department derives its authority for the borrower 
defense to repayment regulations from Sec.  455(h) of the HEA, which 
specifically concerns Direct Loans, not FFEL loans. The statutory 
authority for the borrower defense to repayment regulations does not 
allow FFEL borrowers to access the borrower defense to repayment 
process unless the FFEL borrower consolidates

[[Page 49815]]

their loans into a Direct Consolidation Loan. Direct Consolidation 
Loans are made under the Direct Loan Program. Generally, the Department 
views a consolidation loan as a new loan, distinct from the underlying 
loans that were paid in full by the proceeds of the Direct 
Consolidation Loan.
    Accordingly, the Department's existing practice is to provide 
relief under the Direct Loan authority if a qualifying borrower's 
underlying loans have been consolidated into a Direct Consolidation 
Loan under the Direct Loan Program. As a corollary, if consolidation is 
being considered depending on the outcome of any preliminary analysis 
of whether relief might be available under Sec.  685.206(c), relief 
cannot be provided until the borrower's loans have been consolidated 
into a Direct Consolidation Loan. Although commenters allege the 
Department is creating administrative obstacles for borrowers, the 
Department is allowing FFEL borrowers who are eligible to consolidate 
their loans into a Direct Consolidation Loan to receive relief under 
these regulations. This parallels, for example, how the Department 
makes FFEL borrowers eligible for PSLF, which is another opportunity 
limited to Direct Loan borrowers.
    FFEL Loans are governed by specific contractual rights and the 
process adopted here is not designed to address those rights. We can 
address potential relief under these procedures for only those FFEL 
borrowers who consolidate their FFEL Loans into a Direct Consolidation 
Loan. FFEL borrowers have other protections in their master promissory 
note and the Department's regulations. Since 1994, and to this day, the 
FFEL master promissory note states that for loans provided to pay the 
tuition and charges for a school, ``any lender holding [the] loan is 
subject to all the claims and defenses that [the borrower] could assert 
against the school with respect to [the] loan.'' \80\ As noted in the 
2016 final regulations, the Department adopted this provision from the 
FTC's Holder Rule provision, and the Department's 2018 NPRM did not 
propose to revise the regulation regarding this provision.
---------------------------------------------------------------------------

    \80\ 34 CFR 682.209(g).
---------------------------------------------------------------------------

    Upon further consideration, however, the Department will continue 
placing the borrower's loans into administrative forbearance for Direct 
Loan borrowers while a claim is pending.\81\ Interest still accrues 
during administrative forbearance, and will capitalize if the claim is 
not successful. The accrual of interest will deter borrowers from 
submitting a borrower defense to repayment application if no 
misrepresentation occurred. The Department amended these final 
regulations to clarify the borrower defense to repayment application 
will state that the Secretary will grant forbearance while the 
application is pending and will notify the borrower of the option to 
decline forbearance. Similarly, FFEL loans will be placed into 
administrative forbearance and collection will cease on FFEL loans, 
upon notification by the Secretary that the borrower has made a 
borrower defense claim related to a FFEL loan that the borrower intends 
to consolidate into the Direct Loan Program for the purpose of seeking 
relief in accordance with Sec.  685.212(k).
---------------------------------------------------------------------------

    \81\ These final regulations, unlike the 2016 final regulations, 
do not expressly state that a borrower who asserts a borrower 
defense to repayment application will be provided with information 
on availability of income-contingent repayment plans and income-
based repayment plans because this information is always available 
to borrowers. Borrowers also may avail themselves of such 
information on the Department's website at https://studentloans.gov/myDirectLoan/ibrInstructions.action.
---------------------------------------------------------------------------

    In the 2018 NPRM, the Department did not propose to revise 
regulations in Sec.  682.220, concerning the eligibility of FFEL 
borrowers to consolidate into a Direct Consolidation Loan, and 
maintains that the current eligibility requirements remain appropriate. 
The Department also did not propose to allow for refunds of amounts 
already paid on FFEL loans, as such a proposal exceeds its authority 
under section 455(h) of the HEA. The Department is limited by statute 
to discharging and refunding no more than the amount of the Direct Loan 
at issue, and only discharge of the remaining balance on the 
consolidated loan is possible.
    Finally, the Department does not agree with the suggestion that we 
revise the final regulations to create a ``pre-approval'' process to 
determine FFEL borrowers' eligibility for discharge, contingent upon 
consolidation. Notably, the 2016 final regulations did not include any 
regulations about a ``pre-approval'' process. The preamble of the 2016 
final regulations explained that the Department will provide FFEL 
borrowers with a preliminary determination as to whether they would be 
eligible for relief on their borrower defense claims under the Direct 
Loan regulations, if they consolidated their FFEL Loans into a Direct 
Consolidation Loan.\82\ However, no information was provided as to how 
such a determination would be made, what would happen if additional 
information made it clear that a misrepresentation did not actually 
occur, or that after giving advice not to consolidate, additional 
evidence makes it clear that it did. Importantly, FFEL payments cannot 
be refunded. Such a preliminary determination process, however, is not 
possible under these final regulations.
---------------------------------------------------------------------------

    \82\ 83 FR 75961.
---------------------------------------------------------------------------

    These final regulations create a robust process whereby borrowers 
and schools have an opportunity to review each other's submissions. The 
Department will not be able to provide a borrower with an accurate 
preliminary determination without weighing any evidence and issues that 
the school presents in its submission. Accordingly, the Department will 
not include a preliminary determination process under these final 
regulations.
    The Department still believes it is appropriate to determine what 
standard would apply to a particular borrower's discharge application 
based upon the date of the first disbursement of the Direct 
Consolidation Loan. Therefore, for Direct Consolidation Loans first 
disbursed on or after July 1, 2020, the standard that would be applied 
to determine if a defense to repayment has been established is the 
Federal standard in Sec.  685.206(e). The Department understands that 
this approach may deter some borrowers who might otherwise wish to 
consolidate their loans, but do not wish to be subject to the Federal 
standard and associated time limits we adopt in these final 
regulations. The Department believes that this concern is outweighed by 
the benefits of this standard. This approach is consistent with the 
longstanding treatment of consolidation loans as new loans, and we 
believe it will provide additional clarity as to the standard that 
applies, especially in cases where borrowers are consolidating more 
than one loan. As under the existing regulations, a borrower will be 
able to choose consolidation if she or he determines it is the right 
option for them.
    Changes: The Department is leaving in effect the revisions and 
additions to Sec. Sec.  682.211(i)(7) and 682.410(b)(6)(viii) that were 
made in the 2016 final regulations.
    Accordingly, we will ask loan holders to place FFEL loans into 
administrative forbearance and suspend collection upon notification by 
the Secretary that the borrower has made a borrower defense claim 
related to a FFEL loan that the borrower intends to consolidate into 
the Direct Loan Program for the purpose of seeking relief in accordance 
with Sec.  685.212(k).

[[Page 49816]]

    Additionally, the Department is revising Sec.  685.205(d)(6) to 
provide that Direct loans will be placed in administrative forbearance 
for the period necessary to determine the borrower's eligibility for 
discharge under Sec.  685.206, which includes the borrower defense to 
repayment regulations in these final regulations. The Department also 
is revising Sec.  685.206(e)(8) to clarify the borrower defense to 
repayment application will state that the Secretary will grant 
forbearance while the application is pending, that interest will accrue 
during this period and will capitalize if the claim is not successful, 
and will notify the borrower of the option to decline forbearance.
    In addition, we are revising the final regulations to clarify that 
the standard that applies to a borrower defense claim is determined by 
the date of first disbursement of a Direct Loan or Direct Consolidation 
Loan.

Borrower Defenses--Evidentiary Standard for Asserting a Borrower 
Defense

Preponderance of the Evidence, Clear and Convincing Evidentiary 
Standards

    Comments: There were many comments on the preponderance of the 
evidence and clear and convincing evidentiary standards under 
consideration by the Department. Those who supported a preponderance of 
the evidence standard noted that it is the typical evidentiary standard 
for most civil lawsuits. Some stated that a higher standard would make 
it impossible for borrowers to prove a misrepresentation, as defined by 
the proposed regulations, while others argued that a higher standard 
would be out of step with consumer protection law and the Department's 
other administrative proceedings. Some commenters expressed concern 
that a higher standard would create new barriers to relief for 
defrauded students. Other commenters pointed to the HEA's intention to 
provide loan discharges based on institutional acts or omissions, which 
they asserted normally would be adjudicated on a preponderance of the 
evidence standard.
    One commenter noted that a heightened standard of proof is 
particularly inappropriate for an administrative proceeding that does 
not include discovery rights for the borrower, which would be available 
to the borrower in court. This commenter noted that the vast majority 
of borrowers will not have access to a lawyer.
    Other commenters opposed the clear and convincing evidence 
standard. Some commenters asserted that there is no principled or 
logical basis for imposing the higher standard on borrowers seeking a 
loan discharge. Several commenters asserted that elevating the 
evidentiary standard to clear and convincing evidence would create 
substantial new barriers to relief for defrauded students, fail to 
protect them against institutional misconduct, and effectively prevent 
them from receiving the relief to which they are legally entitled. 
Another commenter noted that the clear and convincing evidence standard 
would present an extreme change.
    One commenter noted that the Department cites no support to suggest 
the evidentiary standard prevents or dissuades consumers from 
submitting claims. This commenter asserted that it seems likely that 
most borrowers do not know what the evidentiary standard expected of 
them is, would not be able to contextualize evidentiary requirements 
without legal assistance, and would not change their behavior even if 
they did understand the expectations for evidence. Similarly, another 
commenter asked what evidence the Department considered that a 
heightened evidentiary standard may be necessary to deter frivolous or 
unwarranted claims for relief.
    Opponents to the preponderance of the evidence standard often 
favored a clear and convincing evidence standard because it would 
protect institutions and taxpayers from frivolous borrower defense 
claims. Those who supported a clear and convincing evidence standard 
argued that it strikes a balance between the looser preponderance of 
the evidence standard and the far more stringent beyond a reasonable 
doubt standard.
    One commenter generally supported the clear and convincing evidence 
standard and asserted that the Department should provide the strongest 
evidentiary standard possible that also is in accordance with standard 
consumer protection practices.
    Some commenters expressed concern that under the preponderance of 
the evidence standard, a misstatement related to any provision of 
education services, no matter how small, would support a borrower 
defense claim, requiring the school to repay the Department and serving 
as a black mark against the school. These commenters worried that under 
the lower evidentiary standard, colleges would disclaim everything 
possible, disclose nothing to students, and treat them as potential 
litigants.
    Many commenters agreed that a school should be held accountable for 
knowingly providing false or misleading information to borrowers. 
However, they caution that misrepresentation is a serious accusation 
that can seriously damage a school, even if the Department determines 
that the institution did not make a misrepresentation. These commenters 
argue that a borrower making such a claim should be required to provide 
clear and irrefutable evidence.
    Discussion: The Department appreciates the many thoughtful comments 
received regarding the evidentiary standard appropriate for 
adjudicating defense to repayment claims. The Department considered the 
clear and convincing evidence standard because this standard is 
typically the standard required by courts in adjudicating claims of 
fraud.\83\
---------------------------------------------------------------------------

    \83\ See Restatement (Third) of Torts: Liab. For Econ. Harm 
section 9 TD No 2(2014) (``The elements of a tort claim ordinarily 
must be proven by a preponderance of the evidence, but most courts 
have required clear and convincing evidence to establish some or all 
of the elements of fraud.'').
---------------------------------------------------------------------------

    The Department has been persuaded, however, that for borrowers, 
without legal representation or access to discovery tools, the clear 
and convincing evidence standard may be too difficult to satisfy. 
Therefore, we adopt a preponderance of the evidence standard for 
borrower defense claims in these final regulations. We note that this 
is the same evidentiary standard used in the 2016 final regulations.
    The Department's decision to engage institutions in developing a 
complete record prior to adjudicating a defense to repayment claim will 
ensure that decisions are made on the basis of a strong evidentiary 
record. Such a record will help to protect institutions and taxpayers, 
while helping students with meritorious claims compile necessary 
information.
    The Department agrees that access to information may differ between 
students and institutions. We also wish to emphasize to consumers that, 
given the sizeable investment one makes in a college education, it is 
incumbent upon students to shop wisely and get information in writing 
before making a decision largely dependent upon that information. The 
Department seeks to establish a policy that encourages students to 
fulfill responsibilities they have in seeking information and 
evaluating the accuracy and validity of that information when making a 
decision as important as selecting an institution of higher education.
    The Department does not wish to create a standard so low that 
students either alone, or with the help of unscrupulous third parties, 
attempt to

[[Page 49817]]

induce statements that could then be misconstrued or used out of 
context to relieve borrowers who otherwise received an education from 
their repayment obligations.
    Borrowers should be protected against misrepresentations made by 
institutions that result in financial harm to them, but at the same 
time, the Department must uphold a sufficiently rigorous evidentiary 
standard to ensure that the defense to repayment process does not 
impose unnecessary or unjustified financial risk to institutions, 
taxpayers, or future students. A borrower who makes an unsubstantiated 
claim about a school with the Department incurs comparatively little 
risk.
    The Department believes it has established an evidentiary standard 
in these final regulations that carefully balances the need to protect 
borrowers in instances where they suffered harm as a result of 
misrepresentations with the need to maintain the integrity of the 
student loan program. In addition, this change is appropriate so that 
borrowers shop wisely, take personal responsibility for seeking the 
best information available and make informed choices, and accept the 
benefits of student loans with the full understanding that they, 
generally, are legally obligated to repay those loans in full.
    The Department acknowledges that some commenters supported the 
clear and convincing evidence standard. The Department agrees with 
commenters that a school should be held accountable for knowingly 
providing false or misleading information to borrowers and that a 
misrepresentation is a serious accusation that can damage a school's 
reputation. A clear and convincing evidence standard for borrower 
defense to repayment claims may have been appropriate if the Department 
adopted a different definition of misrepresentation. In these final 
regulations, misrepresentation constitutes a statement, act, or 
omission by an institution that is false, misleading, or deceptive and 
that was made with knowledge of its false, misleading, or deceptive 
nature. The Department provides a non-exhaustive list of types of 
evidence that may be used to prove that an institution made a 
misrepresentation.
    Changes: The Department adopts the ``preponderance of the 
evidence'' standard for both affirmative and defensive claims in these 
final regulations. It is appropriate to require a borrower to prove 
that an institution, more likely than not, made the alleged 
misrepresentation.

Multiple Standards

    Comments: One commenter objected to the proposal to use a higher 
evidentiary standard for borrowers based on their repayment status--
i.e., to apply the clear and convincing standard to borrowers asserting 
affirmative claims, while applying a preponderance of the evidence to 
those asserting defensive claims.
    Another commenter stated that if affirmative claims are allowed, 
then affirmative claims should be adjudicated under a clear and 
convincing evidence standard.
    One commenter asserted that the Department should use the clear and 
convincing evidence standard for both affirmative and defensive claims.
    Discussion: Although we considered applying a clear and convincing 
evidentiary standard to affirmative claims, we ultimately decided to 
apply the preponderance of the evidence standard to all claims, as 
described above. As previously noted, the definition of 
misrepresentation is more stringent than the 2016 definition and, thus, 
a preponderance of the evidence standard for all claims is more 
appropriate to balance the Department's interests in providing a fair, 
accessible, and equitable process for both borrowers and schools. 
Because a borrower is required to prove that an institution's act or 
omission was made with knowledge of its false, misleading, or deceptive 
nature or with a reckless disregard for the truth, there is no reason 
to require a higher evidentiary standard based on the borrower's 
repayment status. Applying a higher evidentiary standard to borrowers 
who are not in default may encourage these borrowers to default on the 
loans to receive the benefit of a lower evidentiary standard. After 
weighing the various interests, the Department determined that applying 
a higher evidentiary standard to affirmative claims, but not defensive 
claims is not justified.
    Changes: The Department adopts the ``preponderance of the 
evidence'' standard for both affirmative and defensive claims in these 
final regulations.

Evidence Presented in Support of the Claim

    Comments: Some commenters contended that a borrower's affidavit or 
sworn testimony should constitute sufficient evidence to support a 
defense to repayment claim. These commenters argued that a borrower 
would typically be unable to obtain evidence from a school to evince 
recklessness or intent and requiring more than their testimony would 
erect too great of a barrier to recovery.
    Some commenters suggested that a borrower should have physical 
forms of evidence to show misrepresentation by the school.
    Another commenter expressed concern that if any evidence is 
permitted beyond the borrower's sworn affidavit, schools could continue 
to defraud borrowers by submitting false or manufactured evidence in 
response to borrowers' claims.
    Discussion: The Department thanks the commenters for their 
opinions, but disagrees that a borrower's affidavit or sworn testimony, 
alone, is sufficient evidence to warrant a decision by the Department 
that has significant financial consequences not just for borrowers, but 
for institutions, current and future students, and taxpayers who 
ultimately will bear the costs if there are high volumes of discharges. 
Taking such an approach could increase the likelihood that future 
students will bear the cost of prior students' borrower defense claims 
in the form of increased tuition. Under the process adopted in these 
final regulations, a borrower may submit a sworn affidavit in support 
of the borrower defense application, but the institution will have an 
opportunity to respond and provide its own rebuttal evidence, if any. 
The borrower will have an opportunity to reply. Then the Department, 
with the full benefit of all the evidence presented, will adjudicate 
the claim. The Department believes that these procedures, similar to 
those used at certain stages in judicial proceedings, provide 
protections against frivolous affidavits.
    The Department believes that the defense to repayment regulations 
can play an important role in helping borrowers become more educated 
consumers, including by providing an incentive for institutions to put 
all claims material to the student's enrollment decision in writing. As 
more information becomes available to borrowers, they will be better 
able to make informed decisions.
    Borrower defense to repayment claims may be submitted three years 
after a borrower exited a program at a particular institution, and both 
the borrower and the institution may have difficulty recalling the 
precise language that was used or the information verbally conveyed. To 
be sure, institutions that make misrepresentations should suffer harsh 
consequences, but any finder of fact, including the Department as an 
adjudicator of borrower defense claims, is ill-equipped, many years 
after the

[[Page 49818]]

fact, to make determinations based solely on one party's statement. 
Therefore, an affidavit, alone, is not sufficient evidence to 
adjudicate a claim that could be worth tens, if not hundreds, of 
thousands of dollars to the borrower making the affidavit.
    The Department is removing the phrase ``intent to deceive'' in the 
Federal standard and will not require a borrower to demonstrate such 
intent in order to establish a borrower defense claim. Instead, the 
borrower must prove by a preponderance of the evidence that an 
institution made a misrepresentation of material fact upon which the 
borrower reasonably relied in deciding to obtain a loan that is clearly 
and directly related to enrollment or continuing enrollment at the 
institution or for the provision of educational services for which the 
loan was made. The definition of misrepresentation also does not 
expressly require the borrower to demonstrate that the institution 
acted with intent to deceive. As previously stated, a misrepresentation 
constitutes a statement, act, or omission that was made with knowledge 
of its false, misleading, or deceptive nature or with reckless 
disregard for the truth.
    As noted elsewhere in this preamble, evidence that borrowers may 
present to the Department includes, but is not limited to: Web-based 
advertisements or claims, direct written communications with an 
institution official, information provided in the college catalog or 
student handbook, the enrollment agreement between the institution and 
the student, or transcripts of depositions of school officials. It is 
important for students to obtain, review, and retain written materials 
provided by the school; if the student is told information materially 
different than the information provided in writing, the Department will 
consider the evidence of the alleged verbal misrepresentation. Students 
should seek a written explanation to clarify any discrepancies.
    The Department disagrees that an institution is likely to submit 
fraudulent documents to the Department in response to a borrower 
defense to repayment application. Institutions face grave risks for 
making any falsified or misleading representation to the Department. 
The Department may remove the institution from all title IV programs if 
the institution submitted false or manufactured evidence in response to 
a borrower's claim. Under no circumstance is a title IV participating 
institution permitted to commit fraud on students or the Department.
    The Department's goal is to ensure that defrauded students have 
reasonable access to financial remedies while ensuring students have 
access to the information they need to be smart consumers by making 
decisions based on information that a seller, vendor, or service 
provider commits in writing. Students, like all consumers, should 
obtain written representations in relation to any transaction in the 
marketplace that presents a significant financial commitment. Borrowers 
should understand the risks associated with making decisions based on 
verbal promises that an institution or any other entity in the 
marketplace is unable to substantiate or support in writing. Student 
advocacy groups, for instance, may help student become wise consumers 
on the front end, rather than successful borrower defense claimants 
after the fact.
    Changes: None.

Borrower Defenses--Financial Harm

General

    Comments: Many commenters supported the Department's definition of 
financial harm, noting that it clarifies what might be included and 
excluded, including the non-exhaustive list of examples. Some 
commenters noted that the definition appropriately addresses the 
longstanding legal principle that a victim's harm should be considered 
in determining a remedy. Other commenters supported the view that 
opportunity costs should not be included.
    Several commenters cited protecting the financial interest of the 
taxpayer as an important goal when considering financial harm, 
especially if a borrower continued his or her enrollment after 
realizing that a misrepresentation occurred.
    Some commenters believed that the requirement of proving financial 
harm beyond the debt incurred is ``arbitrary, unsupported, and not 
feasible.'' Others stated that the Department's proposed financial harm 
definition is burdensome to borrowers. Commenters suggested that the 
Department provide clear information, such as a checklist of examples 
of financial harm from those identified in the proposed rule, and ask 
borrowers to check all that apply, explaining the meaning of items in 
the list, and allowing borrowers to describe other examples of 
financial harm they have experienced. This commenter also suggested 
that the Department eliminate asking unnecessary questions and ask 
necessary questions in a way that does not deter borrowers from 
applying.
    Other commenters claimed that requiring financial harm is 
inconsistent with the statute and the statutory intent, citing the 
statutory language of ``acts or omissions by an institution of higher 
education.''
    Commenters stated that the requirement of financial harm will 
result in the denial of claims where a student acquired a loan on the 
basis of misrepresentations but did not suffer financial harm.
    Discussion: The Department thanks the commenters for their support 
of these regulatory changes. The definition of financial harm should 
provide clarity and the list of examples should also further enhance 
the understanding of its meaning. The Department's list of examples of 
financial harm may be found at Sec.  685.206(e)(4)(i) through (iv). The 
Department believes that borrower defense relief should relate to 
financial harm. The Department reminds commenters that these final 
regulations provide an administrative proceeding, and broader remedies 
are available to borrowers in other venues. The Department does not 
wish for its borrower defense to repayment process to supplant venues 
where borrowers may recover opportunity costs or other consequential or 
extraordinary damages.
    Unlike courts, which may award the borrower more than the loan 
amount for opportunity costs or other consequential extraordinary 
damages, Section 455(h) of the HEA authorizes the Department to allow 
borrowers to assert ``a defense to repayment of a [Direct Loan],'' and 
to discharge outstanding amounts to be repaid on the loan. This section 
further provides that ``in no event may a borrower recover from the 
Secretary . . . an amount in excess of the amount the borrower has 
repaid on such loan.'' \84\ Accordingly, it is improper for the 
Department to allow for extraordinary damages that likely will exceed 
the loan amount.
---------------------------------------------------------------------------

    \84\ 20 U.S.C. 1087e(h).
---------------------------------------------------------------------------

    Even if financial harm continues after the filing of a claim, the 
Department may not provide to a borrower any amount in excess of the 
payments that the borrower has made on the loan to the Secretary as the 
holder of the Direct Loan. Although a borrower may be able to pursue 
such remedies through other avenues, under applicable statute, a 
borrower may not receive punitive damages or damages for inconvenience, 
aggravation, or pain and suffering as part of a borrower defense to 
repayment discharge. The 2016 final regulations similarly state that 
relief to the borrower may not include ``non-pecuniary damages such as 
inconvenience, aggravation, emotional distress, or punitive damages.'' 
\85\
---------------------------------------------------------------------------

    \85\ 34 CFR 685.222(i)(8).

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

[[Page 49819]]

    Regarding the protection of taxpayer dollars, the Department 
believes that the financial harm standard is an important and necessary 
deterrent to unsubstantiated claims or those generally beyond the scope 
of borrower defense to repayment. Students may experience 
disappointments throughout their college experience and career, such as 
believing that they would have been better served by a different 
institution or major. However, such disappointments are not the 
institution or the taxpayer's responsibility.
    Without the link between loan relief and harm, it is likely that 
many borrowers could point to a claim made by an institution about the 
potential a student could realize by enrolling at the institution. For 
example, institutions that advertise undergraduate research experiences 
typically do not guarantee that every student will have such an 
opportunity. Similarly, institutions that include the nicest dorm on 
campus as part of the college tour cannot guarantee that every student 
will have the opportunity to live in that dormitory. Institutions 
frequently feature graduates' top outcomes on their websites, but doing 
so does not suggest, or guarantee, that all students will have the same 
outcomes. Many factors beyond the control of the institution will 
influence outcomes.
    Contrary to the commenter's statutory interpretation, the inclusion 
of financial harm in the calculation of a borrower's claim is a 
reasonable interpretation of a statute that is silent on the issue. The 
2016 final regulations made clear the Department's position that, even 
if a misrepresentation was made by an institution, relief may not be 
appropriate if the borrower did not suffer harm. The Department stated 
in the 2016 final regulations that ``it is possible a borrower may be 
subject to a substantial misrepresentation, but because the education 
provided full or substantial value, no relief may be appropriate.'' 
\86\
---------------------------------------------------------------------------

    \86\ 83 FR 75975.
---------------------------------------------------------------------------

    Defense to repayment relief is not provided for a borrower who is 
disappointed by the college experience or subsequent career 
opportunities, or who wishes he or she had chosen a different career 
pathway or a different major. Instead, defense to repayment relief is 
limited to instances where a school's misrepresentation resulted in 
quantifiable financial harm to the borrower. If a misrepresentation 
associated with the making of a loan did not result in any such harm, 
it would not qualify as a basis for a defense to repayment under these 
final regulations.
    The Department disagrees with commenters who believe that showing 
financial harm is overly burdensome. Although the process should be as 
simple as possible for borrowers, we need to balance that concern with 
the need to protect the interests of taxpayers. We believe that the 
examples of financial harm evidence should be within the ability of 
most applicants to show and should not substantially complicate the 
process of submitting a defense to repayment application.
    Although the 2016 final regulations did not expressly include 
``financial harm'' as part of a borrower defense to repayment claim, 
they tied relief to a concept of financial harm. Under the 2016 final 
regulations and specifically under Appendix A to subpart B of Part 685, 
a borrower would not be able to receive any relief if a school 
represents in its marketing materials that three of its undergraduate 
faculty members in a particular program have received the highest award 
in their field but failed to update the marketing materials to reflect 
the fact that the award-winning faculty had left the school. In such 
circumstances and under the 2016 final regulations, the Department 
notes: ``Although the borrower reasonably relied on a misrepresentation 
about the faculty in deciding to enroll at this school, she still 
received the value that she expected. Therefore, no relief is 
appropriate.'' \87\
---------------------------------------------------------------------------

    \87\ 34 CFR part 685, app. A.
---------------------------------------------------------------------------

    Although the borrower had a successful borrower defense to 
repayment claim, the borrower did not receive any relief, which is a 
waste of the borrower's time and resources. To avoid such situations, 
financial harm will be an element of the borrower defense to repayment 
claim under the 2020 final regulations.
    The borrower may always seek financial remedies from the 
institution through the courts or arbitration proceedings, but for the 
purpose of a defense to repayment claim, the Department's role is more 
narrowly limited to determining whether or not the student should 
retain the repayment obligation. This is why financial harm is a key 
element of a defense to repayment claim.
    The Department appreciates the suggestions for development of a new 
form to be used as the result of these regulations and will formally 
seek such public input pursuant to the Paperwork Reduction Act 
information collection process.
    Changes: None.

Factors for Assessing Financial Harm

    Comments: Several commenters argued that the Department should not 
penalize schools for conditions out of their control including economic 
conditions, or a borrower voluntarily choosing not to accept a job, to 
pursue part-time work, or to work outside of the field for which he or 
she studied.
    Several commenters indicated that it is important to balance the 
financial costs to institutions of borrower defense to repayment 
provisions with the need to establish an equitable recourse for 
students impacted by an institution's actions. They indicated that 
concern whether a school may close should not be a factor when 
determining whether a student has been harmed by fraud.
    Some commenters contended that the Department should expand the 
definition of financial harm to include monetary losses predominantly 
due to local, regional, or national labor market conditions or 
underemployment which could otherwise be used by institutions to 
``quibble with'' borrowers' applications.
    Other commenters suggested revising the rule to state that 
``Evidence of financial harm includes, but is not limited to, the 
following circumstances'' to clarify that the list is not exhaustive 
and that a borrower may raise other types of harm to establish 
eligibility for relief.
    Commenters noted that it can be difficult to quantify harm and 
especially challenging to distinguish among degrees of harm. Some 
pointed out that the proposed rule would not account for opportunity 
costs and that harm continues even after filing a claim. Some suggested 
that if misrepresentation is substantiated and there is resultant harm, 
the Department should grant full relief unless the harm can be shown to 
be a limited or quantifiable nature.
    Several commenters objected to requiring borrowers to demonstrate 
economic harm beyond taking out a loan. These commenters believe that 
obtaining the loan is enough to show they are financially harmed when 
the school committed a misrepresentation. One commenter suggested that 
part-time work is an indication of financial harm.
    Discussion: The Department agrees that schools should not be 
penalized for conditions beyond their control and believes that the 
definition of financial harm adopted in these final regulations 
achieves that goal. The Department is revising the definition of 
financial harm to expressly state that the harm is the amount of 
monetary loss that a borrower incurs as a consequence of a

[[Page 49820]]

misrepresentation. This definition further emphasizes that financial 
harm is an assessment of the amount of the loan that should be 
discharged. Borrowers also will have an opportunity to state in their 
borrower defense to repayment application the amount of financial harm 
allegedly caused by the school's misrepresentation. The borrower needs 
only to demonstrate the presence of financial harm to be eligible for 
relief under these final regulations,\88\ and the Department will 
consider the borrower's alleged amount of financial harm as stated in 
the application.
---------------------------------------------------------------------------

    \88\ 83 FR 37259-60 (``As with the 2016 final regulations, 
however, the Department does not believe it is necessary for a 
borrower to demonstrate a specific level of financial harm, other 
than the presence of such harm, to be eligible for relief under the 
proposed standard.'')
---------------------------------------------------------------------------

    Also, the Department believes that part-time work is not 
necessarily evidence of financial harm and, as a result, cannot be 
treated as such. A student may have very valid reasons for deciding to 
work part-time that are unrelated to any consequence suffered as a 
result of a misrepresentation.
    For example, a student who is a parent may decide to work part-time 
to raise children, especially as daycare is costly. If a borrower 
decides to work part-time, even though full-time work is available to 
the borrower, then the part-time work is not evidence of financial 
harm. If only part-time work is available to a borrower due to an 
institution's misrepresentation and the borrower would like and is 
qualified for full-time work, then part-time work may constitute 
evidence of financial harm.
    Where an institution has engaged in misrepresentation that results 
in financial harm to students, the final regulations the Department 
implements now will provide relief to students and seek funds from 
institutions without regard to the impact on the institution. At the 
same time, the final regulations are designed to protect against a 
systemic financial risk to institutions that are, in good faith, 
providing accurate information to students.
    The Department does not propose to consider the impact on a 
school's financial condition when making a determination of 
misrepresentation. In the 2018 NPRM, the Department was making the 
point that it cannot assume that the student is always right, 
accusations against an institution are always true, or false claims 
against an institution do not have serious implications for 
institutions, students, and taxpayers.
    The Department maintains, as we did in the 2018 NPRM and the 2016 
final regulations, that partial student loan discharge is a possible 
outcome of a defense to repayment claim. Our reasoning for this 
approach is discussed further in the Borrower Defenses--Relief section 
of this preamble.
    The Department continues to believe that, when choosing to pursue a 
particular career, students face a multitude of choices--where to live, 
where to attend school, when to attend school, and how quickly to 
graduate. Students are in the best position to make these decisions in 
light of their own circumstances. The Department believes that students 
must remain the primary decision-makers on the key points of how to 
navigate these difficult factors. Students should allege the amount of 
financial harm caused by the school's misrepresentation and not any 
financial harm incurred as a result of the student's own choices.
    The Department does not wish to impose liability on institutions 
for outcomes that are dependent upon highly variable local and national 
labor market conditions, as these conditions are outside the control of 
the institution. The Department is willing to clarify the type of 
evidence that may demonstrate financial harm. Upon further 
consideration and in response to commenter's concerns, the Department 
revised the type of evidence that may demonstrate financial harm. The 
2018 NPRM proposed: ``extended periods of unemployment upon graduating 
from the school's programs that are unrelated to national or local 
economic downturns or recessions.'' \89\ The Department realizes that 
the phrases, ``extended periods'' and ``economic downturns,'' are not 
defined and may be subject to different interpretations. Economists, 
however, have defined what constitute an ``economic recession.'' \90\ 
Accordingly, the Department revised the phrase to ``periods of 
unemployment upon graduating from the school's programs that are 
unrelated to national or local economic recessions'' in Sec.  
685.206(e)(4)(i).
---------------------------------------------------------------------------

    \89\ 83 FR 37327.
    \90\ See, e.g., Miller, David S. (2019). ``Predicting Future 
Recessions,'' FEDS Notes. Washington: Board of Governors of the 
Federal Reserve System, May 6, 2019, https://doi.org/10.17016/2380-7172.2338.
---------------------------------------------------------------------------

    In response to the commenters' suggestions, the final regulations 
also have been revised to clarify that the list of examples is non-
exhaustive. This rule provides a non-exhaustive list of examples of 
evidence of financial harm, meaning that borrowers are encouraged to 
provide evidence that they believe is instructive, and the Department 
will develop expertise in assessing financial harm based on this kind 
of evidence.
    The Department is not including a specific methodology in this 
regulation for determining financial harm, in part, because the 
Department is awaiting a court ruling on at least one potential 
methodology developed to assess financial harm to borrowers.\91\ The 
Department disagrees that it is unreasonable to require students to 
make their own assessment of financial harm, as they have the most 
information about their financial situation and circumstances. Indeed, 
it would be unreasonable to require the Department to assess financial 
harm without any input from the student as to what financial harm the 
student suffered. Students have the best records to assess and 
establish other costs associated with their education such as books, 
etc. Students will have the opportunity to provide whatever 
documentation they would like to provide to support their allegation of 
financial harm, and the Department will consider the student's 
submission. The Department also will take into account the amount of 
financial harm that the student alleges she or he suffered in 
determining the amount of relief to award for a successful borrower 
defense to repayment application. As described in the section on 
relief, below, the borrower's relief may exceed the financial harm 
alleged by the borrower but cannot exceed the amount of the loan and 
any associated costs and fees. The Department will consider the 
borrower's application, the school's response, the borrower's reply, 
and any evidence otherwise in the possession of the Secretary in 
awarding relief.
---------------------------------------------------------------------------

    \91\ Manriquez v. Devos, No. 18-16375 (9th Cir. argued Fed. 8, 
2019).
---------------------------------------------------------------------------

    The Department rejects, outright, the commenter's suggestion that 
taking out a loan is, on its own, evidence of financial harm. Under the 
2016 final regulations, the Department acknowledged in example 5 in 
Appendix A to subpart B of part 685 that a borrower may take out a loan 
as a result of a misrepresentation of a school but will not be entitled 
to recover any relief. The Department now understands that it is a 
waste of both the borrower's time and resources as well as the 
Department's to acknowledge that the borrower has suffered from a 
misrepresentation but cannot recover any relief because there was no 
financial harm. Accordingly, financial harm is an element of a borrower 
defense to repayment claim in these final regulations. The financial 
harm must be a consequence of an institution's misrepresentation, for 
the reasons explained above.

[[Page 49821]]

    Changes: We thank the commenter for the suggestion about clarifying 
what evidence constitutes financial harm. As a result of that 
recommendation, we are revising the text of Sec.  685.206(e)(4) to 
state that ``Evidence of financial harm includes, but is not limited 
to, the following circumstances.'' One of these examples is ``extended 
periods of unemployment upon graduating from the school's programs that 
are unrelated to national or local economic recessions,'' and the 
Department is revising ``extended periods of employment'' to ``periods 
of employment'' in Sec.  685.206(e)(4)(i). Upon further consideration, 
the Department determined that ``periods of unemployment'' is clearer 
than ``extended periods of unemployment,'' as the period of time that 
constitutes an extended period is not specified. The Department also 
removed the phrase ``economic downturn'' in Sec.  685.206(e)(4)(i), as 
the phrase ``economic recession'' provides greater clarity. The 
Department also revised Sec.  685.206(e)(8)(v) to allow the borrower to 
state the amount of financial harm in the borrower defense to repayment 
application.

Submission and Analysis of Evidence

    Comments: A number of commenters supported collecting information 
from the borrower, such as the specific regulations they are citing for 
their defense to repayment, outlining how much financial harm they 
think they suffered, and certifying the claim under penalty of perjury.
    Some commenters contended that the evidence borrowers would need to 
satisfy proposed financial harm requirements would require 
sophisticated analysis, including the possibility of expert testimony 
from labor economists. Similarly, several commenters argued that it is 
challenging to identify when students' outcomes are predominantly due 
to external factors and recommended that the Department eliminate that 
from the definition of financial harm.
    One commenter noted that borrowers may not know how to quantify the 
harm they have suffered as a result of the misrepresentation. Many 
commenters criticized the proposal to ask borrowers what the commenters 
cited as invasive and inappropriate questions about drug tests, full-
time versus part-time work status, or disqualifications for a job. 
These commenters noted that these are subjective and impacted by many 
outside factors. Commenters were also concerned that this information 
could potentially get back to the school. Another commenter stated that 
the burden should fall on the school or the Department--but not the 
borrower--to prove that external factors did not cause the financial 
harm.
    Discussion: The Department does not believe, and has not stated, 
that borrowers should be required to cite the specific regulation which 
they believe the institution violated, as a typical borrower would 
likely not have any knowledge of the relevant parts of Federal 
regulations.
    The Department does not believe borrowers should be required to 
seek legal counsel in order to submit a defense to repayment claim.
    Through these final regulations, the Department intends to create a 
borrower defense process that is accessible to typical borrowers and 
rests on evidence likely to be in their possession or the possession of 
the school. External factors such as labor market conditions can be 
assessed by the Department using available and reliable data. There is 
no need for borrowers to engage labor economists or expert witnesses. 
Borrower defense is an administrative determination based upon the best 
available information. The Department does not believe that the 
calculation of the borrower's financial harm should be discarded 
because of its potential complexity. For example, in many instances, 
the Department is being asked to evaluate whether job placement rates 
were misrepresented to students. Given that a TRP, as discussed earlier 
in the document, pointed to job placement determinations as highly 
subjective and imprecise, the Department has shown its willingness to 
engage in complicated and subjective determinations.
    The Secretary will determine financial harm based upon individual 
earnings and circumstances; the Secretary may also consider evidence of 
program-level median or mean earnings in determining the amount of 
relief to which the borrower may be entitled, in addition to the 
evidence provided by the individual about that individual's earnings 
and circumstances, if appropriate. The Department must have some 
information relating to the borrower's career experience subsequent to 
enrollment at the institution. The goal is a proper resolution for each 
borrower defense claim, which requires evidence not only of an 
institution's alleged misrepresentations, but also of, among other 
factors, the borrower's subsequent career and earnings. While the 
Department has not taken this approach previously and continues to 
believe that for purpose of the previous standards, information 
relating to the individual's career experience may not be necessary to 
provide appropriate relief, the administrative difficulties the 
Department has faced in formulating an approach without such 
information has led the Department to conclude that such information 
will be required from borrowers for these final regulations. Without 
information about the individual's unique circumstances, including 
career experience, the Department has found it difficult to determine 
that a particular borrower actually suffered the financial harm 
necessary to be entitled to relief under the borrower defense statute. 
The Department is accordingly moving to an approach that requires 
individuals to provide such evidence. It is mitigating the burden of 
that approach, however, by requiring borrowers to provide necessary 
documentation of financial harm at the time of application. In 
addition, the Department believes that other reforms in these 
regulations, including the new Federal borrower defense standard, 
mitigate the burdens of this approach.
    In response to the many commenters strongly opposed to the 
Department asking borrowers for information such as employment status, 
employment history, or other disqualifications for employment, we 
believe these factors, while potentially subjective and impacted by 
outside forces, provide important context when determining the proper 
extent to which an institution caused financial harm or how much relief 
is warranted based on the actions of the institution. These questions 
are not intended, in any way, to shame borrowers, and we will maintain 
the borrower's privacy, as required by applicable laws and regulations. 
Through this regulatory provision, the Department is attempting to 
confirm that any financial harm results from actions of the school and 
not the disposition, actions, or non-education related decisions made 
by the borrower. Despite the commenter's suggestions, the Department 
continues to believe that the borrower is in the best position to know 
certain information and that the burden on the borrower to submit a 
signed statement containing information they know is appropriate.
    In response to the suggestion that the burden for certain elements 
of a borrower defense claim should fall on the school or the 
Department, the process outlined is for both the borrower and school to 
provide the information needed for correct resolution. The process is 
meant to be accessible to unrepresented borrowers, and it will not rely 
on formal notions of burden shifting.
    The Department acknowledges that it is difficult to precisely 
quantify

[[Page 49822]]

financial harm. We believe that the information requested by the 
Department from borrowers and schools will provide a factual basis for 
the Department to determine the extent of financial harm.
    Changes: None.

Equitable Resolution of Claims

    Comments: Commenters indicated that common law principles of equity 
must apply and, as a result, the proposed definition of financial harm 
must be rejected. According to the commenters, the common law principle 
of equity requires that victims of fraud be made whole.
    These commenters stated that the Department is conflating harm and 
levels of harm based on a student's individual earning ability. The 
commenters explained that this analysis misuses the cause and effect of 
fraud upon a student's earning potential. A student's individual 
earning capacity is based upon that student's circumstances and one 
student's wages should not be used in comparison to another student. 
The commenters argued that the standard being used is unfair when, in 
an entire program that only results in graduates having wages below the 
Federal poverty line, a student that is making more than the Federal 
poverty line would receive only partial discharge, if any, because that 
student may be doing marginally better than his or her fellow 
graduates.
    The only harm that can be measured consistently according to these 
commenters is the amount of student loan debt as it is not based on 
individual student circumstances, improper cause and effect analysis on 
earning potential, and accounting for an entire population of graduates 
that has poor outcomes.
    Discussion: The Department appreciates the commenters' concerns, 
but we emphasize that the defense to repayment regulation is not meant 
to replace the courts in rendering decisions about consumer fraud. 
Instead, it seeks to provide students with relief from loan repayment 
obligations when an institution's misrepresentations, as defined at 
Sec.  685.206(e)(3), cause a student financial harm.
    The importance of harm resulting from the institution's acts or 
omissions was a critical part of the 2016 final regulations \92\ and 
remains a critical part of these final regulations, so that the 
financial risk to borrowers, institutions, and taxpayers is properly 
and fairly balanced. Were the Department to eliminate the need for a 
borrower to demonstrate harm, institutions may be more reluctant to 
provide information to prospective students, which could make it 
harder, rather than easier, for a student to select the right 
institution for them.
---------------------------------------------------------------------------

    \92\ Example 5 in Appendix A to subpart B of part 685 
demonstrates that a borrower would not receive relief from the 
Department unless there was financial harm.
---------------------------------------------------------------------------

    In order to assess whether a borrower is being appropriately 
compensated in a successful claim, the Department must assess his or 
her financial harm in context, and that context may consider earnings 
relative to peers, market wages, cost of living, and other factors.
    The Department disagrees that the only measure of harm that should 
be used is the amount of the student's loan debt. As discussed above, 
the Department believes that financial harm is implied in the statutory 
authority and necessary to the resolution of borrower claims. We 
believe the definition of financial harm provides such balance to all 
parties involved. If the borrower received an educational opportunity 
reasonably consistent with that promised by the institution from the 
institution, then the borrower should not be relieved of his or her 
repayment obligations, even if some of the information provided to the 
student in advance had inadvertent errors.
    Changes: None.

Borrower Defenses--Limitations Period for Filing a Borrower Defense 
Claim

    Comments: Many commenters supported the Department's proposal to 
limit claims to three years from the date the borrower completes his or 
her education. Commenters thought a three-year limitation would be 
fair, because: Evidence will still be available; recollections of the 
parties will be relatively clearer; and most borrowers should know that 
they have been wronged within three years. Many commenters argued that 
after three years, it becomes much harder for schools to defend 
themselves against claims, particularly since schools are discouraged 
by regulators from keeping records for longer than three to five years 
due to security and privacy concerns.
    Some commenters believe that a three-year limitations period should 
relate to defensive claims as well as affirmative claims, arguing that 
three years is enough time for a borrower to file a claim and that 
schools should not be expected to defend themselves against a claim 
made many years after the student left school.
    A commenter noted that one way to address this concern would be to 
allow borrowers to file defensive claims at any time, but only hold the 
school liable for five years. One commenter maintained that a three-
year period instead of a five-year period for the Department to seek 
recovery against an institution would balance the Department's interest 
in recovering from institutions against the institutions' reasonable 
ability to predict and control their financial situation.
    Another commenter suggested that a borrower should not be able to 
raise a claim if the borrower has been in default for more than three 
months.
    Other commenters argued that the proposed timeline does not provide 
enough time for borrowers to realize that they have been harmed, learn 
about the claim process, gather supporting evidence, and file a claim. 
Those commenters noted that disadvantaged borrowers may not understand 
their right to seek relief, may not possess the evidence needed, or may 
not be made aware that they were misled until much later.
    Some commenters argued that the Department cannot legally preclude 
borrowers from defending against a demand for repayment. Multiple 
commenters indicated that since there is no limitations period on 
repayment, there should be no limitations period on defenses. Some 
commenters opposed adding any limitation, arguing that a limitation 
would likely keep the most disadvantaged borrowers from receiving 
relief. One commenter noted that imposing a limitations period on 
borrower defense claims would be contrary to well-established law and 
inconsistent with the Department's practice with respect to other 
discharge programs. The commenter further argued that such a limitation 
would indiscriminately deny meritorious and frivolous claims alike.
    One commenter argued that because there is no requirement that the 
student be made aware of their eligibility to file a borrower defense 
claim during the statute of limitations, the opportunity to file a 
claim is rendered ``effectively moot.''
    Commenters argued that the limitations period, whatever its length, 
should run from discovery of the harm or misrepresentation rather than 
running from the date the student is no longer enrolled at the 
institution.
    Another commenter noted that the most frequent statute of 
limitations for civil suits involving fraud is six years from the act.
    Several commenters raised concerns that the Department was taking 
punitive measures against borrowers by requiring them to raise a 
borrower defense to repayment claim within the applicable

[[Page 49823]]

timeframes set for a proceeding to collect on a loan, which could 
result in a short effective limitation period of 30-65 days depending 
upon the proceeding. The commenter suggested instead to use ``positive 
incentives'' to encourage borrowers to file claims.
    Discussion: The Department appreciates the support for our 
limitations period proposal in the 2018 NPRM. However, after careful 
consideration of the comments, the Department has decided to revise the 
limitation period, as stated in the 2018 NPRM, in these final 
regulations.
    The Department was persuaded by the commenter who proposed that a 
three-year limitations period be put in place for both affirmative and 
defensive borrower defense claims. The commenter pointed out that, 
under the 2018 NPRM, a borrower who went into default nearly twenty 
years after graduation could, potentially, assert a defensive claim at 
that time. It is very unlikely that an institution would still possess 
the records needed to defend against such a claim at that time. In 
fact, it would be ill-advised and very difficult for institutions to 
maintain records for that entire period, especially when considering 
privacy, as well as physical and digital storage considerations. It is 
equally unlikely that faculty or staff would still be employed at the 
same school or be able to recall the incident(s) subject to the claim.
    Therefore, the Department now believes that a three-year period for 
the filing of affirmative and defensive claims with the Department, 
commencing from the date when the borrower is no longer enrolled at the 
school, is fair to both the borrower and the institution and strikes 
the right balance between providing obtainable relief for borrowers and 
allowing institutions to predict and control their financial 
conditions.
    The final regulations would also entirely avoid the consequence of 
a short limitations period--30-65 days--that many commenters thought 
borrowers would find difficult to satisfy. The Department understands 
the commenter's concerns that the timeline proposed for the filing of 
defensive claims in the 2018 NPRM was insufficient, but we disagree 
with the commenter who suggested that this was a punitive measure. On 
the other hand, we do agree that the Department should, within certain 
limits, create incentives to borrowers to file meritorious claims in a 
timely manner. As a result, the Department will not be implementing the 
filing deadlines for the various proceedings in which a defense 
borrower defense claim may be raised, including: Tax Refund Offset 
proceedings (65 days); Salary Offset proceedings for Federal employees 
under 34 CFR part 31 (65 days); Wage Garnishment proceedings under 
section 488A of the HEA (30 days); and Consumer Reporting proceedings 
under 31 U.S.C. 3711(f) (30 days). These short limitations periods are 
no longer necessary given the change in the final regulations regarding 
the three-year limitations period for the filing of all claims, 
including defensive claims arising as a result of a collections 
proceeding.
    Notwithstanding anything in these final regulations, borrowers may 
continue to maintain other legal rights that they may have in 
collection proceedings. No provision in these final regulations burdens 
a student's ability to seek relief outside the Department's borrower 
defense claim process. Subject to applicable law, borrowers are not 
deprived of a defense to, nor precluded from defending against, a 
collection action for as long as the debt can be collected.
    The Department is not persuaded by the commenter's suggestion that 
schools should be limited to five years of liability in a defensive 
borrower defense claim or that the Department should waive the time 
limit to file a claim entirely. The three-year limitations period 
strikes the proper balance for records retention, the parties' 
recollection of the events, and documentation requirements. Similarly, 
waiving the time limit could potentially generate massive liabilities 
for schools, which could create undesirable incentives for schools and 
negatively impact their long-term financial stability.
    We considered the commenter's suggestion to begin the limitation 
period at the discovery of harm. The Department recognizes that this 
standard can be found in other bodies of law. However, we have 
concluded that this suggestion would not be appropriate for an 
administrative proceeding like the adjudication of a borrower defense 
claim. Determining whether and when a borrower discovered or should 
have discovered the misrepresentation is a difficult task that is 
administratively burdensome. Such a determination is very subjective. 
Such a determination also requires the Department to consider evidence 
that likely will not be part of the borrower defense to repayment 
application or readily available to the borrower or the institution, 
especially if much time has passed between enrollment and the discovery 
of the misrepresentation.
    The Department notes that while the limitations period begins at 
graduation, the institution's misrepresentation was likely committed 
before the borrower enrolled. Taking into account the period of the 
borrower's enrollment--whether two, three, or four years--the effective 
limitations period is between five and seven years. Consequently, the 
limitations period is comparable to State statute of limitations 
periods for civil fraud. For example, New York state law requires that 
a fraud-based action must be commenced within six years of the fraud or 
within two years from the time the plaintiff discovered the fraud or 
could have discovered it with reasonable diligence.\93\
---------------------------------------------------------------------------

    \93\ Sargiss v. Magarelli, 12 NY3d 527, 532 (2009), quoting CPLR 
213 [8] and CLPR 203 [g].
---------------------------------------------------------------------------

    Further, when compared to a civil proceeding in a court of law, the 
Department does not possess the court's ability to compel parties to 
produce documents, call witnesses to produce testimony, or hold formal 
cross-examination. Therefore, the Department is limited in our ability 
to judge claims. As a result, the opportunities afforded to civil 
litigants are not all appropriately applied here. The Department has 
decided to seek a balance between the need for students who are 
eligible for relief to obtain it and to allow schools to be exposed to 
unlimited liability. The Department also notes here, as elsewhere, that 
nothing in these final regulations burdens a student's ability to seek 
relief outside the borrower defense claim process.
    Throughout these final regulations, the Department has emphasized 
the need for students to be engaged and informed consumers when making 
determinations about their education choices. We disagree with the 
commenter who stated that without notification, presumably from the 
Department, of the borrower's eligibility to file a claim, the 
opportunity to file a claim is ``effectively moot.'' We believe 
borrowers are able to inform themselves of their options, if they feel 
they have been harmed by an institution's misrepresentation.
    The three-year limitations period should be considered in the 
context that the period is not tied to the date of the act or omission, 
but rather from the date of that the borrower is no longer enrolled in 
the institution. For the many borrowers who enroll in multi-year 
programs, the Department's limitations period will be, in actual 
practice, longer than even a five- or six-year limitations period that 
begins to run from the time of the alleged wrong.

[[Page 49824]]

    As discussed in the 2018 NPRM, the Department believes that giving 
consideration to all comments received and on current records retention 
policies, which was not the subject of this rulemaking, that three 
years after the date of the end of their enrollment is sufficient and 
appropriate. Therefore, we believe these final regulations provide 
sufficient time for borrowers to become aware of the borrower defense 
process, gather evidence, and file a claim.
    The Department does not believe that, for loans first disbursed on 
or after July 1, 2020, it would be beneficial for students or schools 
to be subjected to different limitations periods depending upon the 
rules of individual States or accreditors. The Department notes that 
statutes of limitations for civil suits involving fraud vary between 
States and jurisdictions. For example, the statute of limitations for 
civil fraud in Louisiana is one year; \94\ three years in California; 
\95\ four years in Texas; \96\ and five years in Kentucky.\97\ Such a 
policy leads to inconsistent treatment of borrowers and confusion for 
schools that may be subject to different rules by their States and 
accreditors. The Department does not adopt the commenter's proposal to 
bar a borrower, who has been in default for more than three months, 
from raising a borrower defense claim. Unfortunately, the commenter did 
not add any justification for the Department to consider when raising 
this consideration. Even so, in an effort to treat all borrowers 
equally and fairly, we believe that every borrower, regardless of 
payment or non-payment status, continues to possess the ability to file 
a borrower defense claim within the limitations period.
---------------------------------------------------------------------------

    \94\ La. Civ. Code art. 3492.
    \95\ Cal. Civ. Proc. Code Sec.  338 (2006).
    \96\ Tx. Civ. Prac. & Rem. Sec.  16.001(a)(4).
    \97\ Ky. Rev. Stat. Sec.  413.120(11) (2016).
---------------------------------------------------------------------------

    The Department disagrees that creating a limitations period on 
filing affirmative claims is ``contrary to well-established law'' and 
inconsistent with past practice. In fact, in the past, the Department 
has, unwisely, embraced incongruous and inconsistent limitations 
periods for borrower defense claims. For loans first disbursed on or 
after July 1, 2017, the 2016 final regulations allowed for affirmative 
claims based upon judgments against the school to be filed at any time, 
while breaches of contract and substantial misrepresentations were 
limited to ``not later than six years.'' \98\ Despite our concerns 
regarding these multi-tiered limitation periods, as a matter of policy, 
the Department has decided to continue these inconsistencies until July 
1, 2020 due to retroactivity concerns. However, the Department looks 
forward to a consistent application of a standard limitations period 
for loans first disbursed on or after July 1, 2020.
---------------------------------------------------------------------------

    \98\ 34 CFR 685.222(b)-(d).
---------------------------------------------------------------------------

    Changes: For loans first disbursed on or after July 1, 2020, the 
Department has established a three-year limitations period to apply to 
both affirmative and defensive borrower defense claims at Sec.  
685.206(e)(6).

Borrower Defenses--Records Retention for Borrower Defense Claims

    Comments: Some commenters supported different timeframes, including 
four years, six years, or the record retention timeframes used by 
States and accreditors. Conversely, some commenters argued for shorter 
time-frames such as one or two years. Other commenters argued that 
keeping records for longer than three years raises privacy concerns.
    One commenter noted that basing the three-year proposed timeframe 
on the Federal records retention requirement does not take into 
consideration that accrediting agencies require much longer retention 
of records and that Federal records likely would not be relevant for 
these claims. Another commenter indicated that the Federal records 
retention requirement is a minimum retention requirement and that 
institutions may hold records for longer periods. A number of 
commenters requested that a records retention requirement align with 
other Department records retention policies.
    Discussion: The Department thanks the commenters for pointing out 
the plethora of records retention statutes that institutions, 
especially those with a presence in multiple States, are subject to as 
well as the added complexity of accreditor records retention 
requirements.
    As discussed in the previous section, we believe that the three-
year requirement provides ample opportunity for borrowers to make a 
claim as well as consistency with other Department requirements for 
institutions. As stated above, the Department continues to assert that 
the three-year limitations period will provide a fair opportunity for 
borrowers to file claims and a fair standard for institutions who 
retain thousands of pages of records. This three-year limitation period 
will also provide greater certainty to schools and taxpayers, protect 
student privacy, and ensure that borrower defense matters are processed 
on the basis of relatively fresh recollections and with records still 
available.
    Changes: None.

Borrower Defenses--Exclusions

    Comments: Many commenters supported the Department's non-exhaustive 
list of exclusions of what constitutes grounds for filing a borrower 
defense to repayment claim. These commenters noted that it was helpful 
to explain that certain areas would not be considered as the basis for 
a borrower defense to repayment claim.
    Some of these commenters further noted that they appreciated the 
Department citing factors it would not consider.
    Discussion: We appreciate commenters' support in outlining examples 
of exclusions of what would not constitute the basis for a borrower 
defense to repayment claim under these final regulations.
    Changes: None
    Comments: None.
    Discussion: As discussed above, the Department removed the phrase 
``that directly and clearly relates to the making of a Direct Loan, or 
a loan repaid by a Direct Consolidation Loan'' \99\ from the definition 
of misrepresentation to better align this definition with the Federal 
Standard. Both the Federal standard and the definition of 
misrepresentation refer to a misrepresentation of material fact ``that 
directly and clearly relates to enrollment or continuing enrollment at 
the institution or the provision of educational services for which the 
loan was made.''\100\
---------------------------------------------------------------------------

    \99\ 83 FR 37326.
    \100\ Compare Sec.  685.206(e)(2) with Sec.  685.206(e)(3).
---------------------------------------------------------------------------

    To align the language in the exclusions section with the Federal 
standard and the definition of misrepresentation, the Department is 
removing the phrase ``a claim that is not directly and clearly related 
to the making of the loan and provision of educational services by the 
school'' and replacing it with the phrase ``a claim that does not 
directly and clearly relate to enrollment or continuing enrollment at 
the institution or the provision of educational services for which the 
loan was made.'' This revision provides consistency and clarity with 
respect to the Federal standard, definition of misrepresentation, and 
exclusions section.
    Changes: The exclusions apply to a claim that does not directly and 
clearly relate to enrollment or continuing enrollment at the 
institution or the provision of educational services for which the loan 
was made instead of to

[[Page 49825]]

a claim that is not directly and clearly related to the making of the 
loan or the provision of educational services by the school. This 
revision aligns the exclusions section with the Federal standard and 
definition of misrepresentation.

Borrower Defenses--Adjudication Process (Sec. Sec.  685.206 and 
685.212)

General

    Comments: Many commenters wrote in support of the proposed 
adjudication process. They noted that the process is clear and provides 
due process for all parties. These commenters also assert that as 
compared with the process in the 2016 final regulations, the proposed 
process strikes a fairer balance between individual responsibility and 
school accountability.
    Discussion: We appreciate the support of these commenters. For the 
reasons described earlier in this document, we agree that our final 
rule strikes the right balance.
    Changes: We are adopting, with changes for organization and 
consistency, Alternative B for paragraphs (d)(5) Introductory Text and 
(d)(5)(i) and (ii) (Affirmative and Defensive) for loans first 
disbursed on or after July 1, 2020.

Process

    Comments: Many commenters expressed support for the proposed 
process providing an opportunity for schools to respond and provide 
evidence when notified of a borrower defense to repayment claim. One 
commenter who supported the proposed process noted that it would 
provide a clear process for both parties and, thus, enable the 
Department an opportunity to render a fair decision, hold appropriate 
parties accountable, and greatly reduce abuse of the loan discharge 
provision.
    One commenter expressed concern that the Department may require 
additional information about the borrower's personal employment history 
that is irrelevant to the allegations against a school. This commenter 
further asserts that racism impacts the ability to find employment, 
causing borrowers of color to appear less deserving of relief.
    Another commenter recommended that the Department employ an initial 
review of a borrower's discharge application to determine whether there 
is probable cause or jurisdiction to continue the investigation. The 
commenter recommended that, if there is insufficient information 
provided by the student or there is no jurisdiction, a form letter be 
sent to the borrower on the determination that the application has been 
closed with no further action by the Department. The borrower may then 
file a new application that meets the Department's standards. The 
commenter also recommended that the regulation be consistent and align 
with Federal regulations under 34 CFR 685.206 and 668.71.
    Some commenters suggested that the Department adopt a principle 
from civil litigation that pleadings from parties who are not 
represented by an attorney be liberally construed. These commenters 
recommend that the Department liberally construe applications from 
borrowers who are not represented by an attorney.
    Another commenter asserted that requiring written submissions in 
government proceedings can be an undue burden. This commenter asserts 
that the Supreme Court of the United States recognized the burden of 
requiring written submissions in Goldberg v. Kelley,\101\ and the 
Department should recognize this burden and revise its process. This 
commenter further noted that the lack of relief in the past may lead 
low-income borrowers to believe that it is not worth paying attention 
to the Department's notices.
---------------------------------------------------------------------------

    \101\ 397 U.S. 254 (1970).
---------------------------------------------------------------------------

    Discussion: The Department appreciates support from commenters for 
our revised process. We agree that these regulations create a more 
balanced and fair process. The 2016 final regulations only expressly 
gave institutions the opportunity to meaningfully respond pursuant to 
the group claims process, assuming the institution was not closed.\102\ 
The revised process affords institutions the opportunity to respond to 
allegations against the institution during the adjudication process for 
the borrower's claim. These regulations reduce the likelihood that the 
Department and schools will be burdened by unjustified claims or that 
taxpayers will bear the cost of wrongly discharged loans.
---------------------------------------------------------------------------

    \102\ 34 CFR 685.222.
---------------------------------------------------------------------------

    The Department will only request information that is or may be 
relevant to the defenses that the borrower asserts. As the Department 
stated in the 2016 final regulations, the kind of evidence that may 
satisfy a borrower's burden will necessarily depend on the facts and 
circumstances of each case.\103\
---------------------------------------------------------------------------

    \103\ 81 FR 75962.
---------------------------------------------------------------------------

    The Department does not have sufficient resources to perform a 
preliminary review of all claims to assess jurisdiction or sufficiency 
of information prior to performing a full review, and such a 
preliminary review would unnecessarily divert resources from the timely 
review of other claims. Creating such a preliminary review also would 
result in giving borrowers numerous attempts to file a satisfactory 
application, which could result in additional burden and backlog for 
the Department's processing of claims and a delay in awarding relief to 
borrowers in a timely manner. The borrower is required to submit a 
completed application, which the Department will review during the 
regular adjudication process. Incomplete applications will not be 
accepted, and borrowers will be notified when the Department is unable 
to process an incomplete application. Borrowers may submit another, 
completed borrower defense to repayment application within the 
limitations period. Borrowers must submit a completed application to 
receive Federal student aid and also must submit a completed borrower 
defense to repayment application to receive relief.
    The Department revised Sec.  685.206(e)(11)(ii) to clarify that the 
Department will not issue a written decision, which is final and not 
subject to further appeal, if the Department receives an incomplete 
application. Instead, the Department will return the application to the 
borrower and notify the borrower that the application is incomplete. 
The Department, however, is not precluded, when directed by the 
Secretary, from requesting more information from the borrower or the 
school with respect to the borrower defense to repayment process.
    The Department is cognizant of how these final regulations will 
align with other Federal regulations. The definition of 
misrepresentation, at 34 CFR 685.206(e)(3), for the borrower's defense 
to repayment application is purposefully different than the definition 
of substantial misrepresentation in 34 CFR 668.71(c) for initiating a 
proceeding or other measures against the institution. The different 
definitions of misrepresentation allow the Department to act in a 
financially responsible manner to protect taxpayers. The Department 
will discharge a loan, in whole or in part, when a borrower 
demonstrates by a preponderance of the evidence a misrepresentation 
pursuant to 34 CFR 685.206(e)(3) and financial harm to the borrower; 
this provision relates to loan forgiveness for borrowers. The 
Department will exercise its enforcement authority against institutions 
pursuant to the 34 CFR 668.71(c); this provision relates to the

[[Page 49826]]

Department's enforcement authority against schools.
    As explained in more detail above, the definition of 
misrepresentation for Department enforcement actions is broader than 
the definition of misrepresentation for borrower defense to repayment 
claims because as the latter underpins, in part, the Department's 
authority to recover liabilities, guard the Federal purse, and protect 
Federal taxpayers.
    Liberally construing pleadings of persons who are not represented 
by an attorney is appropriate in a court and is required pursuant to 
rules governing judicial proceedings. The Department is not a court of 
law and is not conducting a judicial proceeding that requires an 
attorney. The Department intends to provide instructions that are easy 
to understand and does not expect borrowers to provide legal arguments. 
The Department need not liberally construe applications filed by 
unrepresented borrowers, as doing so supposes that they are less 
capable of completing an application, which the Department does not 
believe is the case, however we will use our discretion and expertise, 
when necessary, to determine the merits of a borrower defense to 
repayment claims.
    In Goldberg v. Kelley, the Supreme Court considered whether a State 
may terminate public assistance payments to a particular recipient 
without affording the recipient the opportunity for an evidentiary 
hearing prior to the termination.\104\ The Supreme Court stated that 
the ``opportunity to be heard must be tailored to the capacities and 
circumstances of those who are to be heard.'' \105\
---------------------------------------------------------------------------

    \104\ Goldberg, 397 U.S. at 255.
    \105\ Id. at 268-69.
---------------------------------------------------------------------------

    Here, we are describing a process afforded to an individual who had 
the opportunity to engage in higher education, meaning their written 
submissions are appropriate for students who have been admitted to 
institutions of higher education as well as the institutions that they 
attended. Such individuals will have received secondary education or 
the equivalent of such education. With respect to Parent PLUS loans, 
parents who are borrowers have experience in applying for Federal 
student aid or other loans and in making other financial decisions. 
Requiring written submissions should not be a substantial burden on 
borrowers or institutions and allows the Department to easily keep a 
record of each party's evidence and arguments. A written record also is 
helpful to borrowers or institutions who may wish to later challenge 
the Department's determination in court proceedings.
    Unlike the 2016 final regulations, these final regulations require 
the Department to consider the borrower's application and all 
applicable evidence. The borrower will receive a copy of all applicable 
evidence and, thus, will know what evidence the Department relied upon 
in making its determination.
    The Department encourages all borrowers to read and pay careful 
attention to the Department's notices. The Department will continue to 
issue such notices and will strive to make notices easy to understand 
and accessible to all borrowers.
    Changes: We are adopting, with changes for organization and 
consistency, the approach in Alternative B for paragraphs (d)(5) 
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) of 
the 2018 NPRM for loans first disbursed on or after July 1, 2020.
    The Department is revising Sec.  685.206(e)(11)(ii) to clarify that 
if the Department receives a borrower defense to repayment application 
that is incomplete and is within the limitations period in 
685.206(e)(6) or (e)(7), it will not issue a written decision on the 
application and instead will notify the borrower in writing that the 
application is incomplete and will return the application to the 
borrower.
    Comments: Some commenters recommended that the Department revise 
the process to consider applications for borrower defense to repayment 
when the Department is already in possession of documents and evidence 
relevant to the claim.
    Other commenters noted that the proposed rule indicated that if the 
Secretary uses evidence in his or her possession, the school will be 
able to review and respond to such evidence, but that borrowers are not 
afforded the same opportunity. The commenters request that both parties 
to the claim be provided an opportunity to review and respond to all 
evidence under consideration in the determination of the claim. One of 
these commenters noted that under some States' processes, schools and 
borrowers have the opportunity to provide evidence and arguments and to 
respond to each other's submissions.
    Other commenters expressed concern that the Department provides 
schools, but not borrowers, an opportunity to respond to evidence at 
the point in the process where the Department is determining whether to 
discharge the borrower's loan.
    Discussion: The Department agrees with the commenters who 
recommended that the Department may consider evidence otherwise in the 
possession of the Secretary and adopts, with changes for organization 
and consistency, the approach in Alternative B for Sec.  685.206(d)(5) 
introductory text and (d)(5)(i) and (ii)(Affirmative and Defensive) of 
the 2018 NPRM.\106\
---------------------------------------------------------------------------

    \106\ 83 FR 37326.
---------------------------------------------------------------------------

    The Department also agrees with commenters that, subject to any 
applicable privacy laws, both the borrower and the institution should 
be able to review the evidence in possession of the Secretary that will 
be considered in the evaluation of the claim. The Department values 
transparency and would like both the borrower and the institution to 
have the opportunity to review evidence in possession of the Secretary 
and to respond to such evidence. Accordingly, the Department is 
revising the regulatory language to expressly state that if the 
Secretary considers evidence otherwise in her possession, then both the 
borrower and the institution may review and respond to that evidence 
and submit additional evidence.
    The Department acknowledges the concern that the borrower should 
have an opportunity to review and respond to the school's submission. 
The Department stated in its 2018 NPRM that ``the borrower and the 
school will each be afforded an opportunity to see and respond to 
evidence provided by the other.'' \107\ Accordingly, the Department is 
revising the final rule to provide that a borrower has the opportunity 
to review the school's submission and to respond to issues raised in 
that submission.
---------------------------------------------------------------------------

    \107\ 83 FR 37262.
---------------------------------------------------------------------------

    Changes: The Department adopts, with changes for organization and 
consistency, the approach in Alternative B for paragraphs (d)(5) 
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) of 
the 2018 NPRM for loans first disbursed on or after July 1, 2020, and 
revises Sec.  685.206(e)(9) to expressly state that the Secretary may 
consider evidence in his or her possession provided that the Secretary 
permits the borrower and the institution to review and respond to this 
evidence and to submit additional evidence. The Department also will 
revise Sec.  685.206(e)(10) to provide that a borrower will have the 
opportunity to review a school's submission and to respond to issues 
raised in that submission. We also make a conforming change in Sec.  
685.206(e)(11), to state that the Secretary issues a written decision 
after considering ``all applicable evidence'' as opposed to specifying 
that

[[Page 49827]]

such evidence would come from the borrower and the school.

Internal or Voluntary Resolution With School

    Comments: One commenter suggested that borrowers should be required 
to bring their claims to the school first and provide the school with 
an opportunity to clearly explain accountability and legal consequences 
to the borrower if the accusation is proven to be false or unfounded.
    Another commenter who suggested we consider a Resolution Agreement 
process similar to that used within the Department's Office for Civil 
Rights when considering borrower defense claims. The commenter 
suggested that this would reduce the burden on the Department's 
resources by allowing borrowers and schools to more quickly resolve the 
dispute and loan obligations prior to the Department's adjudication 
process. Another commenter suggested adding a period of time during 
which the borrower and school may meet to voluntarily resolve any 
dispute short of commencing with a filed claim.
    A group of commenters recommended a new provision that would 
require borrowers seeking to file an affirmative claim to first inform 
the school of their concern and give the school time to resolve the 
matter.
    One commenter suggested that, if a school is deficient, the 
borrower should sue the school to recover the money to repay his 
student loans.
    Discussion: The Department encourages institutions to provide an 
internal dispute resolution process to resolve a borrower's claims, 
including affirmative claims, before the borrower files the claim with 
the Department. The benefits of such a process included that the 
borrower could seek relief for cash payments, private loans, and 529 
plans used to pay tuition. In such a case, should the institution 
determine that it should repay some or all of a borrower's loans, these 
payments will not be considered as a defaulted loan. The Department, 
however, will not require the borrower to go through the institution's 
internal dispute resolution process prior to filing an application with 
the Department. The borrower retains options to resolve a claim, such 
as a traditional court proceeding, arbitration proceeding, or State-
level administrative process, and the Department does not wish to limit 
the borrower's ability to choose the best process for them. Likewise, 
the Department also does not wish to impose any requirement as to which 
process the borrower must go through first. Borrowers are best suited 
to determine which process will be most beneficial in their personal 
circumstances and will benefit from having options.
    For reasons of administrative burden and resource allocation, we do 
not believe it is necessary to include an early dispute resolution 
process in these final regulations, whereby the Department or another 
party would mediate borrower defense disputes between a borrower and 
the school, to attempt to resolve the disputes without the need for the 
parties to go through the Department's full borrower defense 
adjudication process.
    These final regulations do not prevent a borrower from engaging in 
other, existing dispute resolution processes to resolve any claim with 
an institution prior to filing an application with the Department. A 
borrower and institution also may choose to resolve a claim after the 
borrower files an application with the Department. The borrower may 
voluntarily withdraw his or her application with the Department if the 
borrower resolves a claim with the institution.
    Institutions may disclose any internal dispute resolution process 
available to borrowers and explain the benefits of any such process. 
Institutions also may disclose the consequences of making a false or 
fraudulent allegation in the school's internal dispute resolution 
process. The institution, however, should not present the consequences 
of making a false or fraudulent allegation with the intent to prevent, 
or in a manner that prevents, a borrower from filing a borrower defense 
to repayment application with the Department.
    The Department does not prohibit a borrower from filing or require 
a borrower to file a lawsuit against an institution. Borrowers may 
utilize any process available to them.
    Changes: The Department adopts, with changes for organization and 
consistency, the approach in Alternative B for paragraphs (d)(5) 
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) of 
the 2018 NPRM for loans first disbursed on or after July 1, 2020.

Role of the School in the Adjudication Process

    Comments: Some commenters expressed concern that the proposed 
regulation involves schools in a manner that privileges schools with 
respect to the adjudicatory process with no gesture towards fairness or 
balance for the borrowers.
    One commenter recommended the Department limit the schools' roles 
in the process to avoid overrepresentation of institutional interests 
to the detriment of harmed borrowers. The commenter noted that 
borrowers are at a distinct disadvantage, stating that while the school 
maintains records on the student's time at the school, the school's 
disclosures to that and other prospective or enrolled students, and 
hundreds or thousands of other data points, the student is largely 
reliant on his own testimony--and largely dependent on the Department 
and other fact-finding agencies to seriously investigate any claims. 
The commenter urges the Department to be cautious to protect the 
borrower from undue pressure by the school.
    Another commenter urged the Department to make changes to ensure 
the process is accessible and equitable to borrowers unrepresented by 
an attorney, since the proposed process, in the commenter's view, 
stacks unrepresented borrowers against represented schools, does not 
allow borrowers to re-apply based on evidence not previously 
considered, and will necessitate that borrowers seek guidance as to 
what to include in their applications. Some commenters expressed 
concern that providing documentation associated with a defense to 
repayment claim to a school provides opportunities for schools to 
retaliate against a borrower for filing a claim. The commenters 
suggested that any act of retaliation should be viewed as evidence to 
support the approval of a defense to repayment claim.
    Discussion: The Department believes that its adjudicatory process 
fairly balances the interests of institutions and students. The 
Department's revisions to the proposed regulations allow both the 
borrower and the school the opportunity to see and respond to evidence 
provided by the other. The revisions further allow both the borrower 
and the school to see and respond to evidence otherwise in the 
possession of the Secretary that the Secretary considers in the 
adjudication of the claim. Such a process provides both borrowers and 
schools with due process protections.
    It is critical that schools be provided an opportunity to respond 
to claims made against them so that the Department can adjudicate 
claims based on a complete record. It is incumbent upon the borrower to 
provide evidence to the Secretary to establish by a preponderance of 
the evidence that the school made an act or omission that qualifies as 
a basis for borrower defense to repayment relief, and it is reasonable 
to provide a school with the opportunity to respond to such claims. 
Additionally, if institutions have unknowingly made a misrepresentation 
or have an employee who has made

[[Page 49828]]

misrepresentations, the Department's notice to the institution of the 
borrower's claim may help the institution implement corrective action 
more quickly to ensure that other students are not impacted.
    The Department disagrees that students are largely reliant on their 
own testimony to file a defense to repayment claim. The Department 
urges students to make informed consumer decisions and treats students 
as empowered consumers. While students should request important 
information that is relevant to their enrollment decision in writing, 
institutional misconduct is never excusable.
    The Department intends to publish instructions for submitting a 
borrower defense application that will explain the process and provide 
other relevant information to help borrowers successfully complete the 
application.
    The Department acknowledges that institutions are more likely than 
students to have access to paid legal counsel, but a student will not 
need paid legal counsel to submit a borrower defense to repayment 
application. Institutions almost always are more likely than students 
to have access to paid legal counsel, but students do not need an 
attorney to file a claim with the Department's Office for Civil Rights 
and similarly will not need an attorney to submit a borrower defense to 
repayment application. Of course, students may seek help from legal aid 
clinics or take advantage of services from numerous student advocacy 
groups in submitting a borrower defense to repayment application. 
Additionally, institutions do not need to employ counsel to respond to 
a borrower's application and may choose to have staff--for example, 
staff in their Financial Student Aid office or admissions office--
submit a response to the Department. Moreover, by adopting a 
preponderance of the evidence standard, the Department believes that a 
student should reasonably and more easily be able to satisfy that 
standard.
    To address concerns that a student may have discovered evidence 
relevant to a borrower defense to repayment claim through a lawsuit or 
an arbitration proceeding, the Department revised section 685.206(e)(7) 
to state that the Secretary may extend the three-year limitations 
period when a borrower may assert a defense to repayment under section 
685.206(e)(6) or may reopen the borrower's defense to repayment 
application to consider evidence that was not previously considered in 
the exceptional circumstance when there is a final, non-default 
judgment on the merits by a State or Federal Court that establishes 
that the institution made a misrepresentation, as defined in Sec.  
685.206(e)(3), or a final decision by a duly appointed arbitrator or 
arbitration panel that establishes that the institution made a 
misrepresentation, as defined in Sec.  685.206(e)(3). In this 
exceptional circumstance, the Secretary may extend the time period when 
a borrower may assert a defense to repayment or may reopen a borrower's 
defense to repayment application to consider evidence that was not 
previously considered.
    The Department agrees that students should not suffer retaliatory 
acts by institutions that have been accused of misrepresentation, and 
the Department does not tolerate retaliation. The Department may 
consider evidence of any retaliatory acts by the institution in 
evaluating the borrower's application. The borrower may submit evidence 
of any such retaliatory acts to the Department. The Department is 
revising the proposed regulations to allow the borrower to file a reply 
to address the issues and evidence raised in the school's submission as 
well as any evidence otherwise in the possession of the Secretary that 
the Department will consider. The borrower's reply will be the final 
submission, and the final regulations do not provide the school with 
the opportunity to file a sur-reply. In this sense, the student will 
have the final word and may report any retaliatory acts to the 
Department. The Department also is not listing the types of information 
that the school may receive in these final regulations as proposed in 
the 2018 NPRM. The school will still receive the student's application 
as well as any evidence otherwise in the possession of the Secretary 
and used to adjudicate a borrower defense claim, but the language 
listing the information the school will receive is unnecessary. These 
revisions provide a more equitable balance and address the commenters' 
concerns.
    Changes: The Department adopts, with changes for organization and 
consistency, the approach in Alternative B for paragraphs (d)(5) 
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) 
for loans first disbursed on or after July 1, 2020. As noted above, the 
Department revised Sec.  685.206(e)(7) to provide that the Secretary 
may extend the time period when a borrower may assert a defense to 
repayment under Sec.  685.206(e) or may reopen the borrower's defense 
to repayment application to consider evidence that was not previously 
considered in two exceptional circumstances. The borrower may now file 
a reply that addresses the issues and evidence raised in the school's 
submission as well as any evidence otherwise in possession of the 
Secretary. Additionally, the Department will no longer list the types 
of information that the school may receive as proposed in Sec.  
685.206(d)(8)(i) because the final regulations expressly state the 
information the school will receive in Sec.  685.206(e)(10).

Timelines

    Comments: Several commenters requested the Department include 
specific timeframes within which various steps of the adjudication 
process would occur. Many commenters recommended a 45-day interval for 
a school to respond to a borrower's claim, a 30-day interval for the 
borrower to reply to the school's initial response, and an additional 
15-day interval for the school to submit any new evidence as a result 
of the borrower's reply. Other commenters proposed different timeframes 
for a school's response, a borrower's reply, and/or the resolution of 
the claim.
    Other commenters noted that the proposed process changes are 
described by the Department as a means to reduce the time required to 
review claims because it would discourage frivolous claims. The 
commenters note that most of the currently pending claims are supported 
by evidence in the Department's possession. They further assert that 
the proposed process requires a review of voluminous paperwork prepared 
by counsel for the school, which is likely to slow rather than expedite 
the adjudication process.
    Some commenters who supported the proposed process expressed 
concern that the regulation did not include specific information 
regarding how final determinations would be made or timeframes for the 
adjudication of claims.
    Discussion: The Department appreciates the recommendations made by 
commenters but does not believe that the proposed time limits would be 
appropriate in certain circumstances. For instance, the Department most 
likely could not adhere to the proposed time limits if a large number 
of defense to repayment claims were submitted to the Department 
simultaneously, which could be the case if an outside entity organized 
a particular group of students to submit claims en masse.
    The Department agrees that it is reasonable to prescribe a 
timeframe for an institution's response and the borrower's reply and 
intends to do so in the instructions for the defense to repayment 
application and the notice to the institution. In response to these

[[Page 49829]]

comments, the Department revised Sec.  685.206(e)(16)(ii) to specify 
that the Department will notify the school of the defense to repayment 
application within 60 days of the date of the Department's receipt of 
the borrower's application. This revision makes clear that the school 
will receive the borrower's application in a timely manner.
    The Department also revised Sec.  685.206(e)(10)(i) to state that 
the school's response must be submitted within a specified timeframe 
included in the notice, which shall be no less than 60 days. To give 
the borrower as much time as the school, the Department also revised 
Sec.  685.206(e)(10)(ii) to give the borrower no less than 60 days to 
submit a reply after receiving the school's response and any evidence 
otherwise in the possession of the Secretary. Although commenters 
suggested a timeframe less than 60 days for the school's response and 
the borrower's reply, the Department would like to give both borrowers 
and schools ample and equivalent time to review and respond to each 
other's submissions. The Department realizes that borrowers and schools 
have other matters to attend to and would like both borrowers and 
schools to have sufficient time to compile records to support their 
respective submissions. These timeframes also reduce the administrative 
burden on the Department. Because of potential process changes over 
time, the Department will provide more specific instructions in the 
application and notice to institutions and students rather than in the 
final regulation.
    The Department does not agree that it has all of the evidence 
required to adjudicate borrower defense claims in its possession. For 
example, for one college, the Department did not complete an 
investigation of the documents provided by the institution, but relied 
on the California Attorney General to review some of the documents and 
draw conclusions. It was the California AG's conclusions, and 
subsequent allegations, that prompted the Department to take action. 
The Department must also assess financial harm for each pending claim 
and may not immediately have all the relevant evidence necessary to 
make such a determination.
    As stated in the 2018 NPRM, the Department is committed to 
providing both borrowers and schools with due process and affords both 
the borrower and the institution the opportunity to see and respond to 
evidence provided by the other. We are revising the final regulations 
to expressly afford the borrower an opportunity to file a reply to 
address the issues and evidence in the school's submission as well as 
any evidence otherwise in the possession of the Secretary.
    The Department's regulations at Sec.  685.206(e)(3) provide how 
determinations will be made and examples of evidence of 
misrepresentation. Although such a process may be longer, this approach 
provides a fair and more equitable process for both borrowers and 
institutions.
    Changes: The Department adopts, with changes for organization and 
consistency, the approach in Alternative B for paragraphs (d)(5) 
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) 
for loans first disbursed on or after July 1, 2020. The Department is 
also revising at Sec.  685.206(e)(10) to allow the borrower to file a 
reply to address issues and evidence in the school's submission as well 
as any evidence otherwise in the possession of the Secretary.
    The Department revised Sec.  685.206(e)(16)(ii) to specify that the 
Department will notify the school of the defense to repayment 
application within 60 days of the date of the Department's receipt of 
the borrower's application. The Department also revised Sec.  
685.206(e)(10)(i) to state that the school's response must be submitted 
within a specified timeframe included in the notice, which shall be no 
less than 60 days.
    Comments: Some commenters sought assurance that, while a borrower's 
defense to repayment claim is pending, the borrower's loans should be 
placed in forbearance so that no additional financial burden accrues 
while the claim is being adjudicated.
    One commenter suggested that we include a provision that would 
forgive a borrower's interest accrual when the adjudication timeline is 
not met by the Department. The commenter asserts that this would be a 
show of good faith to borrowers, assuring them the Department will 
process claims in a reasonable timeframe, and that borrowers will not 
be the ones to pay the price if it does not.
    Discussion: As explained above, the Department is willing to place 
claims into administrative forbearance while a claim is pending. The 
Department determined that the accrual of interest while a loan is in 
administrative forbearance would deter a borrower from filing an 
unsubstantiated borrower defense to repayment application.
    The Department is changing the procedures to process borrower 
defense to repayment applications in these regulations. As stated in 
the 2016 final regulations, we are still unable to establish specific 
timeframes for processing claims. Neither these final regulations nor 
the 2016 final regulations set a timeline for the Department's 
adjudication. Nonetheless, the Department will strive to efficiently 
resolve all borrower defense to repayment applications in a timely 
manner. In lieu of forgiving a borrower's interest accrual, the 
Department will place the loans in administrative forbearance while the 
borrower defense to repayment application is pending. As explained, 
above, the Department wishes to deter borrowers from filing 
unsubstantiated borrower defense to repayment claims, and interest 
accrual will serve as a deterrent. Automatically placing loans in 
administrative forbearance is a compromise from the Department's 
position in the 2018 NPRM, proposing to require borrowers to request 
administrative forbearance separately from the borrower defense to 
repayment application. Automatically granting administrative 
forbearance to borrowers who complete and submit a borrower defense to 
repayment application is a sufficient response to the concern raised by 
the commenter about interest accrual.
    Changes: The Department adopts, with changes for organization and 
consistency, the approach in Alternative B for paragraphs (d)(5) 
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) 
for loans first disbursed on or after July 1, 2020. The Department is 
amending Sec.  685.205(e)(6) for loans to be placed in administrative 
forbearance for the period necessary to determine the borrower's 
eligibility for discharge under Sec.  685.206, which includes the 
borrower defense to repayment regulations in these final regulations.

Appeals

    Comments: Several commenters advocated for the inclusion of an 
appeals process for schools when a borrower defense to repayment claim 
is approved by the Department and for borrowers when a claim is denied. 
These commenters argued that, under the proposed regulations, a school 
seeking review of an approved borrower defense to repayment claim would 
be required to appeal their case in Federal court and create too high a 
bar for both borrowers and schools. The commenters assert that a non-
appealable decision by the Department is an affront to the basic 
elements of due process rights of schools accused of misrepresentation 
by former students.
    One commenter requested an appeal be specifically permitted when 
new

[[Page 49830]]

evidence comes to light. This commenter noted that, in a rule that 
requires borrowers to demonstrate intent, knowledge, or reckless 
disregard to meet the Federal standard for loan discharge, evidence is 
likely to come from State and Federal investigations spurred by 
borrower complaints, and with the extremely limited filing deadline 
that had been proposed, the taxpayer risk of that reconsideration is 
minimal.
    Some commenters expressed general concern that the adjudicatory 
process does not allow borrowers to reapply based on new evidence. 
These commenters inquired whether borrowers who have received denials 
will be permitted to submit new applications with new evidence. These 
commenters suggested that to the extent the Department denies borrower 
defense applications for failure to state a claim, the Department 
should notify the borrower of the reason for the denial in writing and 
should allow for reconsideration if a new application with new evidence 
is submitted.
    Another commenter asserted that it is unjust to provide schools, 
and not students, greater due process rights, including the ability to 
appeal a Department's decision.
    Discussion: The Department does not believe it is necessary add an 
appeals process to the adjudication process, nor does due process 
require an appeal. The Department provides both the borrower and the 
school the opportunity to see and respond to evidence provided by the 
other, which its current procedures for adjudicating borrower defense 
to repayment claims do not require. Additionally, the Department is 
providing both borrowers and institutions an opportunity to review and 
respond to evidence otherwise in possession of the Secretary that is 
used to adjudicate the claim.
    It is incumbent upon borrowers and schools to provide as much 
information as possible when making or responding to a borrower defense 
claim, and these final regulations provide a fair and equitable process 
for both parties. A party may challenge the Department's decision 
through a judicial proceeding, and courts are required to liberally 
construe pleadings of a party who is not represented by an attorney. 
Additionally, the Department is not the only avenue of relief for a 
borrower; the borrower may pursue relief through his or her State 
consumer protection agency or avail himself or herself of other 
consumer protection tools.
    Although the Department does not allow borrowers to submit an 
appeal, reapply, or request reconsideration of the application, the 
Department made certain revisions to address concerns about newly 
discovered evidence. As stated above, the Department revised Sec.  
685.206(e)(7) to state that the Secretary may extend the time period 
when a borrower may assert a defense to repayment under Sec.  
685.206(e) or may reopen the borrower's defense to repayment 
application to consider evidence that was not previously considered in 
the exceptional circumstance when there is a final, contested, non-
default judgment on the merits by a State or Federal Court that 
establishes that the institution made a misrepresentation, as defined 
in Sec.  685.206(e)(3), or a final decision by a duly appointed 
arbitrator or arbitration panel that establishes that the institution 
made a misrepresentation, as defined in Sec.  685.206(e)(3).
    This exceptional circumstance allows the borrower to reapply and 
provide newly discovered evidence to the Department for consideration. 
Additionally, as explained in the section regarding pre-dispute 
arbitration agreements, the limitations period will be tolled for the 
time period beginning on the date that a written request for 
arbitration is filed, by either the student or the institution, and 
concluding on the date the arbitrator submits in writing, a final 
decision, final award, or other final determination to the parties. 
Tolling the limitations period for such a pre-dispute arbitration 
arrangement between the school and the borrower will allow the borrower 
to discover evidence that may potentially be used in a borrower defense 
to repayment application and also provide the school with the 
opportunity to resolve the claim without cost to the taxpayer. Finally, 
the Department is providing a more robust borrower defense to repayment 
process in allowing both borrowers and schools to view and respond to 
each other's submissions. This robust process will make it less likely 
that there will be newly discovered evidence.
    As stated above, the Department does not have sufficient resources 
to perform a review of claims to assess whether the borrower failed to 
state a claim and to allow for reconsideration if a second application 
with new evidence is submitted. Such a process will unnecessarily 
divert resources from the timely review of other claims. Such a process 
also will result in giving borrowers countless attempts to file a 
satisfactory application. The borrower is required to submit a 
completed application, which the Department will review during the 
regular adjudication process.
    The Department's process also does not provide schools with an 
appeal. The Department may choose to initiate a proceeding to require a 
school whose act or omission resulted in a successful borrower defense 
to repayment to pay the Department the amount of the loan to which the 
defense applies. The recovery proceeding, which would be conducted in 
accordance with 34 CFR part 668 subpart G, is not an appeal.
    Changes: The Department adopts, with changes for organization and 
consistency, the approach in Alternative B for paragraphs (d)(5) 
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) 
for loans first disbursed on or after July 1, 2020. As noted above, the 
Department revised Sec.  685.206(e)(7) to provide that the Secretary 
may extend the time period when a borrower may assert a defense to 
repayment under section 685.206(e) or may reopen the borrower's defense 
to repayment application to consider evidence that was not previously 
considered in two exceptional circumstances. The Department is revising 
Sec.  685.206(e)(10) to provide that a borrower will have the 
opportunity to review a school's submission and to respond to issues 
raised in that submission. The proposed regulations also are further 
revised to give the borrower an opportunity to file a reply that 
addresses the issues and evidence raised in the school's submission as 
well as any evidence otherwise in possession of the Secretary.

Independence of Hearing Officials and Administrative Proceeding

    Comments: Some commenters suggested that the Department use 
Administrative Law Judges (ALJs) to review and make determinations on 
borrower defense to repayment claims. These commenters argued that ALJs 
are legal professionals and would provide a level of assurance to all 
parties that the process is fair. Some commenters also argued that 
administrative review by ALJs instead of a review by Department staff 
will insulate schools from any political bias and asserted that the 
Department's staff varies based on the President's administration.
    One commenter recommended that an ALJ make the determination on a 
claim, and that the parties be permitted to appeal this determination 
within a specified time. This commenter would require the Department to 
issue the determination on appeal in a manner consistent with the 
publication of decisions from the Department's Office of Hearings and 
Appeals (OHA). Neither party would be able to appeal the determination 
to the Secretary.

[[Page 49831]]

    Other commenters expressed concern that the adjudication process 
creates a conflict of interest within the Department, since the 
Department would be responsible for advocating on behalf of borrowers 
and determining the outcome of the case. These commenters urged the 
Department to ensure the independence of decision makers involved in 
borrower relief determinations.
    Discussion: We believe that, under the 2016 final regulations, the 
Department held too much power in that the Secretary could both 
initiate group claims and adjudicate appeals of those claims, and the 
institution, assuming the institution did not close, would have a 
limited opportunity to respond to the Department's allegations in the 
group claim process. Under these final regulations, only a borrower may 
initiate a claim, and both the borrower and the institution always have 
the opportunity to provide evidence to support their positions. Because 
the Secretary is required to provide to borrowers and institutions any 
additional evidence in their possession and that is used to adjudicate 
a claim, there is a greater level of transparency in the adjudication 
process.
    In contrast to the 2016 final regulations, these final regulations 
do not provide a process for the Secretary to initiate a claim. Section 
455(h) of the HEA expressly states that the ``Secretary shall specify 
in regulations which acts or omissions of an institution of higher 
education a borrower may assert as a defense to repayment of a loan 
made under this part.'' (emphasis added) We believe the better reading 
of Section 455(h) of the HEA is for the Department to adjudicate only 
borrower-initiated defense to repayment claims. We believe this will 
result in the adjudication of such claims being more balanced and less 
influenced by changes in Department policy.
    Through these final regulations, the Department is providing a fair 
and equitable process that does not require OHA or ALJs for the 
determination of a borrower defense to repayment claim. The Department 
has learned through processing tens of thousands of defense to 
repayment claims that there are not sufficient resources to subject 
each claim to an overly-extensive administrative procedure, burdening 
students and delaying the timely adjudication of claims. The Department 
believes that including the OHA in the process of adjudicating claims 
would create a regulatory process that is more costly for the 
Department to administer and could create the false impression that the 
claim or the determination are subject to a hearing and appeal, which 
is not the case.
    The Department appreciates the suggestion regarding the 
incorporation of an administrative law judge in the borrower defense 
process, but we have determined, as above, that this would 
unnecessarily complicate, make more expensive, and create confusion 
about the availability of a hearing and appeal.
    The commenter's inclusion of an ALJ would not change the 
Department's calculation of not including an appeals process in these 
final regulations, as explained in the previous section.
    The Department does not advocate on behalf of the borrower or the 
school. The Department is a neutral arbiter and will consider the 
evidence submitted by both the borrower and the institution. 
Additionally, the Department will provide both the borrower and the 
school with any evidence otherwise in the possession of the Secretary, 
and both parties will have an opportunity to respond to such evidence.
    Changes: The Department adopts, with changes for organization and 
consistency, the approach in Alternative B for paragraphs (d)(5) 
introductory text and (d)(5)(i) and (ii) (Affirmative and Defensive) 
for loans first disbursed on or after July 1, 2020.

Borrower Defenses--Relief (Sec.  685.206)

General

    Comments: One commenter suggested amendments to the proposed 
regulations to require that, in the case of an approved borrower 
defense to repayment, the Secretary reverse an affected loan's default 
status and reinstate the borrower's eligibility for title IV aid, and 
update reports to consumer reporting agencies to which the Secretary 
had previously made adverse credit reports regarding the loan. The 
commenter noted that proposed regulations provide that the Secretary 
may take such actions and stated that regardless of whether both 
affirmative and defensive claims are allowed, the Secretary should 
always reverse an affected loan's default status and any adverse credit 
reports as well as recalculate a borrower's eligibility period for 
which the borrower may receive Federal subsidized student loans.
    Discussion: The Department's practice has been, and currently is, 
that if the Department had previously made adverse credit reports to 
consumer reporting agencies regarding a Federal student loan that is 
the subject of an approved borrower defense application, the Department 
will take the appropriate steps to update those credit reports. 
Similarly, it is the Department's practice that, if appropriate, the 
necessary steps will be taken to reinstate the borrower's eligibility 
for title IV aid.
    The Department revised the regulations to expressly provide that 
the relief awarded to a borrower will include updating reports to 
consumer reporting agencies to which the Secretary previously made 
adverse credit reports with regard to the borrower's Direct Loan or 
loans repaid by the borrower's Direct Consolidation Loan. Additionally, 
the Department is revising the regulations to reference that as part of 
any further relief the borrower may receive, the Department will 
eliminate or recalculate the subsidized usage period that is associated 
with the loan or loans discharged, pursuant to 34 CFR 
685.200(f)(4)(iii). The Department did not rescind the revisions made 
to 34 CFR 685.200 through the 2016 final regulations. The Department 
also is clarifying that the list of further relief a borrower may 
receive is an exclusive list.\108\
---------------------------------------------------------------------------

    \108\ The exclusive list of further relief is located at Sec.  
685.206(e)(12)(ii). Further relief includes one or both of the 
following, if applicable: (1) Determining that the borrower is not 
in default on the loan and is eligible to receive assistance under 
title IV; and (2) eliminating or recalculating the subsidized usage 
period that is associated with the loan or loans discharged pursuant 
to Sec.  685.200(f)(4)(iii).
---------------------------------------------------------------------------

    However, such steps may not be applicable for all approved borrower 
defense applicants. For example, we do not anticipate that all approved 
borrower defense applicants will have been subject to adverse credit 
reporting as a result of a defaulted Federal student loan. Similarly, 
not all approved borrower defense applicants will need a determination 
that they are not in default on their loans because there may be 
borrowers who are not in a default status and who apply for borrower 
defense discharges.
    We also do not believe it is appropriate to expressly require in 
the final regulations that the Secretary recalculate a borrower's 
eligibility period for which the borrower may receive Federal 
subsidized student loans. Not all borrowers may have received 
subsidized Federal student loans, so such an action would not be 
relevant to all borrowers. Further, the changes made to Sec.  
685.200(f) (2017) by the 2016 final regulations, which are now 
effective, require that the Department recalculate the period for which 
the borrower may receive Federal subsidized student loans if a borrower 
receives a borrower defense to repayment discharge and sets forth the 
specific conditions for when the recalculation may occur. As a result, 
we

[[Page 49832]]

believe it is appropriate to designate the recalculation of a 
borrower's subsidized Federal student loan eligibility period as 
further relief that may be provided by the Secretary if a borrower 
defense to repayment application is approved.
    For clarity only, we have moved the phrase ``reimbursing the 
borrower for amounts paid toward the loan voluntarily or through 
enforced collection'' from the list of potentially applicable further 
relief in Sec.  685.206(e)(12)(ii) to the section on borrower defense 
relief in Sec.  685.206(e)(12)(i). If applicable, this item would be 
part of borrower defense relief itself, so the Department believes 
including it in the list of further relief could be confusing.
    Changes: As noted above, we moved ``reimbursing the borrower for 
amounts paid toward the loan voluntarily or through enforced 
collection'' from the list of potentially applicable further relief in 
Sec.  685.206(e)(12)(ii) to the paragraph describing borrower defense 
relief in Sec.  685.206(e)(12)(i). Additionally, the Department revised 
the regulations to note that ``relief'' and not ``further relief'' 
includes updating credit reports to consumer reporting agencies to 
which the Secretary previously made adverse credit reports with regard 
to the borrower's Direct Loan or loans repaid by the borrower's Direct 
Consolidation Loan in Sec.  685.206(e)(12)(i). The Department revised 
Sec.  685.206(e)(12)(ii)(B), which concerns further relief, to 
reference 34 CFR 685.200(f)(4)(iii), which address subsidized usage 
periods. Finally, the Department revised Sec.  685.206(e)(12)(ii) to 
clarify that the list of ``further relief'' is an exclusive list.

Partial Discharges

    Comments: Several commenters supported the Department's position 
that a partial loan discharge as relief for an approved borrower 
defense application would be warranted in some circumstances. One such 
commenter stated that that the proposed process would provide fair 
compensation to borrowers and tiers of relief to compensate borrowers 
as necessary. Another commenter asserted that the proposed approach, in 
allowing for partial relief, would provide the Department with 
flexibility in providing borrowers with relief. This commenter 
expressed support for a tiered method of relief that had been developed 
by the Department in 2017 based upon a comparison of earnings between a 
borrower defense claimant to earnings of graduates in a similar 
program. The commenter also supported adopting this methodology for 
calculating partial relief for the purposes of this regulation. One 
commenter asserted that relief should be based on the degree of harm 
suffered by a borrower.
    Several commenters, in support of the provision of partial relief, 
suggested that partial relief should be limited to the amount of 
tuition paid with the Federal student loan and not include funds 
received for living expenses. One such commenter stated that relief 
should not be capped at the total cost of a student's attendance at the 
school, as opposed to the total amount of tuition and fees. This 
commenter asserted institutions should not be held responsible for 
portions of a Direct Loan, up to the full cost of attendance, including 
the student's living expenses, because schools are unable to limit the 
amount of Direct Loans students may choose to take out to support their 
living expenses under the Department's regulations. This commenter also 
argued that the nexus between a school's act or omission, underlying a 
borrower defense to repayment, is more attenuated than the nexus 
between the act or omission and the tuition and fees charged by the 
institution. This commenter stated that it is difficult to see how a 
claim based on an act or omission relating to the provision of 
educational services, as required under the proposed regulations, could 
be connected to a Direct Loan used to pay for living expenses given 
that the amount of such a loan is controlled by the Department's loan 
limits and the student's decisions.
    Many commenters advocated full relief, in the form of a complete 
discharge of a borrower's remaining Direct Loan balance and a refund of 
payments made, for borrowers who demonstrate that they qualify for 
borrower defense to repayment relief. Some of these commenters 
supported full relief for approved applications in each instance, and 
others supported establishing a presumption of full relief.
    Many commenters argued that any effort to determine a partial loan 
discharge amount would lead to the inconsistent treatment of borrowers; 
be subjective, costly, time-consuming, and difficult to administer; add 
to the burden on the Department; and unnecessarily delay the 
Department's provision of borrower defense relief. One group of 
commenters stated that a calculation of partial relief based upon a 
borrower's degree of harm suffered would be speculative because most 
students would not have enrolled had the school made truthful 
representations. One commenter stated that full relief should be 
provided, given the profit the Department receives from the student 
loan program.
    Generally, some of the commenters who objected to the Department's 
position that a partial loan discharge would be warranted in some 
circumstances argued that borrowers who had demonstrated 
misrepresentation by their school would have been harmed in many ways 
and incurred financial harm, and non-financial harms, beyond the 
obligation to repay a Federal student loan. As a result, even full 
relief from the Department through the borrower defense process would 
be insufficient to remedy students' injuries.
    One group of commenters asserted that under State unfair and 
deceptive practices laws that have traditionally been the primary basis 
for borrower defense claims, all such types of direct and consequential 
damages and pecuniary as well as emotional harms may provide a basis 
for relief. According to these commenters, such relief may include 
relief exceeding the amount paid for the service or good.
    Several commenters suggested that the Department adopt an approach 
similar to that used by enforcement agencies and financial regulators 
when consumers have been fraudulently induced to take on other types of 
consumer debt. Those other regulators, stated one of the commenters, 
seek to unwind the transaction and put borrowers in the same position 
they would have been absent fraud. This commenter stated that partial 
relief in accordance with an unspecified methodology on the basis of 
the value provided by the services received would be difficult to 
determine and deviates from the approach used by financial regulators.
    In arguing for a full relief approach, several commenters stated 
that allowing partial relief would establish a presumption that the 
education provided by a school that has been found culpable of 
wrongdoing has some value to the borrower. These commenters stated that 
the provision of partial relief would reduce the Department's incentive 
to ensure it is properly monitoring schools to prevent misconduct and 
harm both borrowers and taxpayers.
    Commenters urged the Department to abandon its proposal to provide 
partial relief stating that the Department spent three years trying to 
develop a methodology to calculate partial discharges and have been 
unsuccessful in devising a fair and consistent way to do so. These 
commenters suggested that, consistent with closed school and false 
certification loan discharges, the

[[Page 49833]]

borrowers should receive full discharges of the Federal student loans 
associated with their defense to repayment claim. One group of such 
commenters disagreed with the Department's rationale in the NPRM for 
why full relief is justified for the false certification and closed 
school processes, but not for the borrower defense process. These 
commenters asserted the Department's rationale that the false 
certification and closed school discharge processes are straightforward 
as compared to the borrower defense process. This group of commenters 
also stated that if the Department is unwilling to provide full relief 
for all approved borrower defense claims, the Department should 
simplify the relief process and ensure that borrowers receive 
consistent relief, such as by establishing a presumption of full 
relief. Where full relief is not warranted, the commenters suggested 
that the Department be required to explain in writing the basis for its 
decision and provide the borrower with an opportunity to respond.
    One group of commenters asserted that it was incumbent upon the 
Department to clearly delineate the conditions borrowers would need to 
meet in order to receive partial or full relief. The commenters noted 
that, given the burden the Department proposed to impose upon borrowers 
to assert a successful claim, providing full relief for the borrower 
and recovering those funds from the school remains the appropriate 
action for the Department to pursue. The commenters further asserted 
that there are a number of reasons to doubt the Department's ability to 
make fair and accurate determinations of the degree of financial harm 
suffered by each individual borrower, and stated that any such 
determination would need to account for a wide range of factors that 
could include the borrower's education and employment history, the 
regional unemployment rates both overall and in the borrower's career 
field, and numerous other circumstances that directly impact an 
individual's earnings potential. The commenters asserted that, even if 
these factors could be reliably measured and some income gain 
determined to exist, that gain would then need to be measured against 
the expenditures the borrower put towards his or her program. The 
commenters noted that, as evidence of the inherent complexity of this 
method, the proposed rule referenced the serious difficulties the 
Department faced in attempting to create a formula to address this, and 
resultantly, does not include a proposed formula. The commenters also 
referenced the Department's claim of the associated administrative 
burden imposed by reviewing the tens of thousands of borrower defense 
claims that have been asserted in recent years and noted that, setting 
aside the significant challenges inherent in attempting to make these 
determinations at all, that doing so on the scale considered would 
greatly increase the time and difficulty involved in processing each 
claim, adding enormously to the burden on the Department and further 
delaying the expeditious review of claims.
    Another commenter expressed confusion as to why the borrower's 
financial circumstances would be considered in determining the amount 
of relief to which he was entitled. The commenter agrees that a 
borrower's choice not to pursue a field related to their course of 
study at a school or periods of unemployment due to regional economic 
circumstances should not be a basis for relief, but was concerned that 
the language offered in the proposed regulation would create 
inequitable outcomes for borrowers who experienced the same 
misrepresentations, but had more successful outcomes than others. The 
commenter asserts that a borrower's relief in the case of proven 
misrepresentation should in no way be based on whether the borrower was 
savvy enough to pursue a different field, transfer schools, live in a 
more economically advantageous region, or be simply more fortunate than 
other borrowers. The commenter recommends that a borrower should have 
to show harm to receive a loan discharge, and that the measure of that 
harm should in no way be linked to an individual's life choices or 
circumstances, but instead on the harm that resulted from the 
fraudulent activities of the school.
    Commenters asked whether the Department could approve a borrower 
defense discharge and subsequently determine that the amount of 
financial relief to be provided would be zero. The commenters also 
asked whether borrower defense claims could be made on the basis of 
misrepresentations about job placement, exam passage rates, and the 
transferability of credits.
    One commenter stated that if a borrower has been harmed, or will 
clearly suffer harm, as a result of a school's misrepresentation, full 
relief should be provided. This commenter asserted that partial relief 
should be provided only in very limited cases where the value of the 
harm is directly related to the misrepresentation.
    One commenter expressed concerns about tax implications and credit 
reporting for partial relief awards. The commenter stated that while a 
rescission of a transaction may not result in taxable income for 
borrowers as a ``purchase price adjustment'' and lead to the deletion 
of the related tradeline from a borrower's credit report, the 
Department's proposed rule would not offer borrowers such protections.
    One commenter requested the Department more clearly articulate how 
partial relief would be applied in the case of a defensive claim 
asserted as to a defaulted loan. Specifically, this commenter asked 
whether the Department would strike the borrower's record of default 
and if the borrower would be obligated to pay for collection costs on 
the partial relief provided.
    Discussion: The Department appreciates the support of commenters 
regarding its proposal to provide for partial loan relief, if 
warranted, in these final regulations, which is consistent with the 
existing regulation at 34 CFR 685.222(i). As we stated in 2016, given 
the Department's responsibility to protect the interests of Federal 
taxpayers as well as borrowers, we do not believe that full relief is 
appropriate for all approved borrower defense claims, nor do we believe 
that it is appropriate to establish a presumption of full relief.\109\
---------------------------------------------------------------------------

    \109\ See 81 FR 75973-75976.
---------------------------------------------------------------------------

    We acknowledge that an approach that allows the Department to make 
determinations of partial relief may be more administratively 
burdensome and time-consuming because it involves a more complicated 
analysis than an approach that assumes full relief. However, given the 
taxpayer and borrower interests at issue, as well as those of current 
and future students who will bear the cost of an institution's 
repayment of the claim to the Department, we continue to believe that 
an approach that provides the Department with the flexibility to 
provide partial relief, if warranted, strikes an appropriate balance 
between these interests.
    The Department agrees that not every borrower who experiences a 
misrepresentation suffers the same amount or types of harm, for a 
variety of reasons including those listed by commenters. However, since 
the degree of financial harm suffered is critical to the determination 
of defense to repayment relief for the reasons explained above, the 
Department must take this into consideration when awarding relief. It 
is impossible to know whether all borrowers who attended the same 
institution experienced the same misrepresentation, relied on that

[[Page 49834]]

information to make the same decision(s), or were harmed by the 
misrepresentation in the same way or to the same degree.
    As the Department explains in one of the examples for how relief 
may be determined for substantial misrepresentation borrower defense 
claims in Appendix A corresponding to section 685.222 of the 2016 final 
regulations, a borrower would not be eligible for defense to repayment 
relief even if an institution was proven to have misrepresented the 
truth, if the student still received an education of value. For 
example, presume a prestigious law school misstated its full-time 
employment rate six months after graduation by 20 percent, but the 
borrower graduated, obtained and maintained employment as an attorney, 
and has above average earnings; and the school has maintained its 
strong reputation. In this case, the Department may determine, 
notwithstanding other evidence, that the institution made a 
misrepresentation related to the making of a Direct Loan for enrollment 
at the school; however, given the facts of this hypothetical, the 
Department could also determine that the borrower was not harmed by the 
misstatement of the placement rates.
    It is possible that a successful borrower defense claim could be 
based upon evidence of an institutional misrepresentation of job 
placement rates, exam passage rates, the transferability of credits, or 
other similar factors, if it is related to the making of a Direct Loan 
for enrollment at the school.
    Although we are now adopting a new misrepresentation standard for 
loans first disbursed on or after July 1, 2020 that does not 
incorporate Appendix A from the 2016 final regulations, the same 
principle of educational value from that example applies.
    We disagree that such an approach would be subjective and lead to 
the inconsistent treatment of borrowers. As we stated in 2016, 
administrative agency tribunals and State and Federal courts commonly 
make relief determinations, and the proposed process provides 
Department employees reviewing borrower defense applications with the 
same discretion that triers-of-fact in other fora have.\110\
---------------------------------------------------------------------------

    \110\ See 81 FR 75975.
---------------------------------------------------------------------------

    Nor do we believe that a determination of partial relief, if 
warranted, under the proposed regulations would be speculative. Under 
Sec.  685.206(e)(8), a borrower would be required to state the amount 
of financial harm that they claim to have resulted from the school's 
action and to supply any supporting relevant evidence. Given that 
applicants will provide information regarding the amount of their 
financial harm, the Department believes that it will be able to make 
relief determinations in a reasonable manner and has retained this 
requirement in these final regulations.
    Upon further consideration, the Department revised Sec.  
685.206(e)(12)(i) to clarify that the amount of relief that a borrower 
receives may exceed the amount of financial harm, as defined Sec.  
685.206(e)(4), that the borrower alleges in the application pursuant to 
Sec.  685.206(e)(8)(v) but cannot exceed the amount of the loan and any 
associated costs and fees. The Department realizes that the school's 
response and any evidence otherwise in the possession of the Secretary 
may reveal that a borrower's allegation of financial harm is too low.
    Accordingly, the Department revised Sec.  685.206(e)(12)(i) to 
expressly note that in awarding relief, the Secretary shall consider 
the borrower's application, as described in 685.206(e)(8), which 
includes any payments received by the borrower and the financial harm 
alleged by the borrower, as well as the school's response, the 
borrower's reply, and any evidence otherwise in the possession of the 
Secretary, as described in Sec.  685.206(e)(10). The Department did not 
intend to limit its award of relief to the financial harm that the 
borrower alleges. The Department also did not intend to limit its 
ability to award relief to consideration of the financial harm that the 
borrower alleges.
    We acknowledge that borrowers subjected to the same 
misrepresentation may suffer differing degrees of financial harm. 
However, given the Department's interests as explained above, we do not 
believe it is inequitable to provide each borrower defense applicant 
with a meritorious claim with relief that may account for the 
borrower's degree of harm or injury and is in accord with the approach 
taken by the courts under common law.
    The Department disagrees that a full relief approach should be 
taken because of any profit made by the Federal government on the 
Federal student aid programs. The Department is responsible for the 
interests of all Federal taxpayers whose taxes fund the Federal student 
aid programs, and as stated above, the Department believes an approach 
that balances those interests with those of borrowers seeking borrower 
defense relief is best served by taking an approach to relief that 
would allow for partial relief, if warranted, whether the loan program 
proves profitable or not.
    While we understand that some enforcement agencies and/or financial 
regulators may seek ``full relief'' for consumers under Federal or 
State consumer protection law, as pointed out by some commenters, such 
agencies are not directly responsible, as the Department is, for the 
administration of a Federal benefit program funded by Federal taxpayer 
dollars. We also understand that under some State consumer protection 
laws, consumers may be able to receive similar relief. However, we do 
not believe such an approach is appropriate for the borrower defense 
process given the Department's responsibility to Federal taxpayers. The 
Department does not possess the authority to authorize relief beyond 
the monetary value of the loan made to the borrower. We note that 
nothing in Department's regulations precludes borrowers, who are 
unsatisfied with the amount of relief they receive, from seeking such 
relief directly from their schools through the Federal or State court 
systems under Federal or State consumer protection law.
    We decline at this time to include a specific relief methodology 
for borrower defense claims asserted under the misrepresentation 
standard for loans first disbursed on or after July 1, 2020, or to 
include further conceptual examples such as those in appendix A to 34 
CFR 668, part 685. While the Department will continue to consider the 
borrower's cost of attendance and the value of the education provided 
by the school for borrower defense claims asserted under the 
substantial misrepresentation standard for loans first disbursed on or 
after July 1, 2017, and before July 1, 2020, we believe that the 
proposed regulation appropriately provides the Department with the 
flexibility to determine the appropriate measure of relief that should 
be provided to a borrower defense applicant for claims asserted as to 
loans first disbursed on or after July 1, 2020.
    As the Department's standard for borrower defense claims asserted 
after July 1, 2020, requires borrowers to demonstrate financial harm 
and state the amount of that harm, the Department believes that it will 
be able to make appropriate relief determinations in consideration of 
the borrower's degree of financial harm based upon the specific 
circumstances established by borrower defense applicants.
    The Department will make its own determination of financial harm, 
as defined in Sec.  685.206(e)(4), based on the information in the 
borrower's

[[Page 49835]]

application, the school's response, the borrower's reply, and any 
evidence otherwise in the possession of the Secretary that was provided 
to both the school and the borrower. The Department revised the final 
regulations to reflect that the Department makes a determination of 
financial harm and will award relief equivalent to the financial harm 
incurred by the borrower. As explained above, the Department's award of 
relief may exceed the financial harm alleged by the borrower in the 
borrower defense to repayment application. The Department's award of 
relief, however, may not exceed the Department's own determination of 
financial harm.
    ``Financial harm'' is defined in Sec.  685.206(e)(4), in part, as 
the amount of monetary loss that a borrower incurs as a consequence of 
a misrepresentation, as defined in Sec.  685.206(e)(3). Financial harm, 
thus, will always be related to an alleged misrepresentation. For 
example, an alleged misrepresentation may include a significant 
difference between the earnings the institution represented to the 
borrower that he or she would be likely to earn after graduation and 
the borrower's actual post-graduation earnings or aggregate earnings 
reported by the Department for the program in which the borrower was 
enrolled. Pursuant to the definition of financial harm in Sec.  
685.206(e)(4), the Department will determine how much relief to award 
by considering the amount of monetary loss that a borrower incurs as a 
consequence of a misrepresentation and the factors outlined in 34 CFR 
685.206(e)(4)(i) through (iv): Periods of unemployment after graduation 
unrelated to national or local economic recessions, significant 
differences in cost of attendance from what the borrower was led to 
believe, the borrower's inability to secure employment after being 
promised employment, and inability to complete the program because of a 
significant reduction in offerings.
    The Department would like to be transparent about relief 
determinations and has revised the regulations to expressly state the 
Department will specify the relief determination in the written 
decision and publish decision letters with personally identifiable 
information redacted.\111\ Accordingly, the borrower and school will 
know how the Department calculated the relief to the borrower.
---------------------------------------------------------------------------

    \111\ Note: It is possible that particular programs and/or 
schools are so small, even including the school or program's name 
could be too revealing. We will consider an exception in these types 
of circumstances.
---------------------------------------------------------------------------

    Unlike the 2016 final regulations, these final regulations do not 
expressly state that the Department will advise the borrower that there 
may be tax implications as a consequence of any relief the borrower 
receives. Such an express provision is not necessary because the 
Department intends to inform the borrower at the outset of the borrower 
defense to repayment process that there may be tax implications, likely 
by posting such information on the Department's website. The 
Department, however, cannot provide tax advice, as the tax implications 
will vary depending on an individual borrower's circumstances and does 
not wish to mislead borrowers in this regard.
    We disagree that the proposed regulation allowing for partial 
relief, if warranted, would reduce the Department's incentive to 
monitor schools' wrongdoing. The Department actively monitors schools 
for their compliance with the Department's regulations as part of its 
regular operations and will continue to do so, regardless of the amount 
of borrower defense relief provided to borrowers.
    With regard to the possible tax implications and credit reporting 
for partial relief awards, the Department does not have the authority 
to determine how a full or partial loan discharge may be addressed for 
tax purposes. If a borrower receives a partial loan discharge, then the 
Department will update reports to consumer reporting agencies to which 
the Secretary previously made adverse credit reports. The Department 
has revised 34 CFR 685.206(e)(12)(1) to expressly include updating 
reports to consumer reporting agencies as part of the ``relief'' that 
the borrower will receive and not ``further relief'' that a borrower 
may receive.
    We maintain our position from the NPRM \112\ and the 2016 final 
regulations that the amount of relief awarded to a borrower during the 
defense to repayment process would be reduced by any amounts that the 
borrower received from other sources based on a claim by the borrower 
that relates to the same loan and the same misrepresentation by the 
school as the defense to repayment. To clarify that position, we are 
incorporating language from Sec.  685.222(i)(8) on that point into 
Sec.  685.206(e)(12) of these final regulations.
---------------------------------------------------------------------------

    \112\ 83 FR 37263.
---------------------------------------------------------------------------

    After careful consideration of the comments, our internal 
determination processes, and our ability to rely on the data available 
to us, we do not support the proposal to reduce the amount of relief by 
the amount of credit balances received by the borrower. The Department 
now agrees with the commenters who suggested that, in a situation where 
the borrower is granted full relief, the portion of the loan that can 
be forgiven should not be limited to the portion borrowed to pay direct 
costs to the institution. The Department will carefully consider the 
amount of monetary loss that a borrower incurs as a consequence of a 
misrepresentation.
    The currently existing regulations, at 34 CFR 685.222(i)(2)(i), 
provide that for claims brought under the substantial misrepresentation 
standard, as stated in 685.222(d)(1), as to loans first issued on or 
after July 1, 2017, the Department factors in the borrower's cost of 
attendance (COA) to attend the school, as well as the value of the 
borrower's education. In the preamble to those regulations, we 
justified factoring the student's COA into determinations of relief by 
explaining, in part, that the COA reflects the amount the borrower was 
willing to pay to attend the school based upon the information provided 
by the school and the Federal student loan programs were designed to 
support both tuition and fees and living expenses. We also noted that 
we did not believe that an institution's liability should be limited to 
the loan amount the institution received, because that amount does not 
represent the full Federal loan cost to a student for the time spent at 
the institution.
    We adopt the currently existing regulation's rationale here. While 
it is true that a student may not have taken out some Federal student 
loans for living expenses absent his or her attendance at the school, 
the student nonetheless received the proceeds of that loan to attend 
the school. The nexus between any act or omission underlying a valid 
borrower defense to repayment claim and a student's total COA while 
enrolled is sufficiently strong to necessitate full relief, where 
appropriate.
    As a result, in these final regulations, we will not exclude credit 
balances from the relief calculation as to loans first disbursed on or 
after July 1, 2020. Relief will not be limited to those portions of a 
Direct Loan that are directly received by the institution. The portions 
of the loan that generated credit balances will be included in defense 
to repayment loan discharges. Additionally, treating students who lived 
on-campus differently than those who decided, for whatever personal 
reasons, to live off-campus would create disparate outcomes between 
these two populations of students that would be difficult for the 
Department to justify.

[[Page 49836]]

    Because a borrower must make a defense to repayment claim within 
three years of exiting the institution, the Department does not believe 
that the loan discharge or collections should be limited to the amount 
of payments a borrower has made during that or any other period of 
time. Debt relief is based on the total debt associated with the 
enrollment during which the misrepresentation occurred, plus 
accumulated interest.
    Because the Department is no longer differentiating between 
affirmative and defensive claims, we do not believe it is necessary to 
develop different protocols for assessing harm in either case.
    Changes: The Department revised Sec.  685.206(e)(8)(v) to allow the 
borrower to state the amount of financial harm in the borrower defense 
to repayment application. The Department will specify the relief 
determination in the written decision as provided in 34 CFR 
685.206(e)(11)(iii). The Department also is revising the language in 
Sec.  685.206(e)(8)(vi) with respect to the borrower defense 
application, and Sec.  685.206(e)(10) with respect to a school's 
submission of evidence.
    The Department revised Sec.  685.206(e)(12)(i) to clarify that the 
amount of relief that a borrower receives may exceed the amount of 
financial harm, as defined in Sec.  685.206(e)(4), that the borrower 
alleges in the application pursuant to Sec.  685.206(e)(8)(v) but 
cannot exceed the amount of the loan and any associated costs and fees. 
The Department further revised Sec.  685.206(e)(12) to expressly note 
that in awarding relief, the Secretary shall consider the borrower's 
application, as described in Sec.  685.206(e)(8), which includes any 
payments received by the borrower and the financial harm alleged by the 
borrower, as well as the school's response, the borrower's reply, and 
any evidence otherwise in the possession of the Secretary, as described 
in Sec.  685.206(e)(10). The Department also revised the final 
regulations in Sec.  685.206(e)(12)(i) to reflect that the Department 
makes a determination of financial harm and will award relief 
equivalent to the financial harm incurred by the borrower.
    The Department revised 34 CFR 685.206(e)(12)(i) to expressly 
include updating reports to consumer reporting agencies as part of the 
``relief'' and not ``further relief'' that a borrower will receive.
    Also, for clarity, we have added to Sec.  685.206(e)(12) the 
language included in Sec.  685.222(i)(8) of the 2016 final regulations, 
regarding a borrower's relief not exceeding the amount of the loan and 
any associated fees, and being reduced by other forms of recovery 
related to the borrower defense.
    Comments: Several commenters noted that the Department requested 
public comment on potential calculations for partial relief but did not 
include a proposal for how the Department envisions partial relief 
might be calculated. These commenters recommended that the Department 
propose a methodology in regulation and obtain public comment on the 
proposal. One group of these commenters asserted that a failure to 
include a proposal for calculating partial relief in the proposed 
regulations is a violation of the notice and comment requirements of 
the Administrative Procedure Act.
    Discussion: The Department disagrees that it should or is required 
to publish an internal methodology for partial discharge for borrower 
defense in the Federal Register and seek notice and comment. As noted 
by the commenter, the Department sought public comment on potential 
methods for calculating relief in the NPRM. After considering the 
comments received, the Department believes that given the many factors 
involved in making a borrower defense determination, from those 
relating to the availability of data, the specific facts of any 
individual claim, as well as the evolution of the types of claims that 
are being filed, it is appropriate that the Department maintain 
discretion and flexibility to make relief determinations on a case-by-
case basis as appropriate to the individual circumstances of a 
particular claim.
    The Department also disagrees that it was required to include a 
proposal for a partial relief methodology in the 2018 NPRM. In the 2018 
NPRM, the Department sought public comment on methods for calculating 
partial relief. And, after reviewing related comments, the Department 
is declining to adopt any one uniform methodology in these final 
regulations. These actions are in compliance with the Administrative 
Procedure Act's notice and comment requirements.
    Changes: None.
    Comments: One commenter expressed appreciation for the clear 
statement in proposed 34 CFR 685.206(d)(12)(iii) regarding the 
borrower's right to pursue relief for any portion of a claim exceeding 
the discharged amount or any other claims arising from unrelated 
matters. However, the commenter requested additional clarity in 
proposed 34 CFR 685.206(d)(12)(i), as the commenter stated that if only 
partial relief is granted to the borrower, any amounts granted outside 
of the Federal borrower defense to repayment process should first be 
credited toward loan amounts that are still owed by the borrower. The 
commenter asserted that a borrower's obligation to repay discharged 
amounts should be reinstated as a result of non-Federal relief only if 
full relief had been granted in the Federal process, or when non-
Federal relief exceeds the remaining portion of a borrower's loan after 
partial relief has been provided.
    Several commenters asked the Department to clarify whether 
financial aid awards related to private student loans, veterans' 
benefits, or other losses separate from those related to Federal 
student loans (e.g., educational expenses paid out-of-pocket, tuition 
payment plans, loss of state grant eligibility, and payment for 
childcare or transportation) should not be used to offset the discharge 
of Federal student loans.
    Discussion: The Department thanks the commenter for its support for 
the clarification in proposed 34 CFR 685.206(d)(12)(iii) that a 
borrower is not limited or foreclosed from pursuing legal and equitable 
relief under applicable law for recovery of any portion of a claim 
exceeding that the borrower has assigned to the Secretary or any claims 
unrelated to the borrower defense to repayment. This provision is 
similar to the existing provision in 34 CFR 685.222(k)(3) (2017), and 
the Department does not consider this a change in its position.
    The Department does not agree that it is appropriate to reinstate 
an approved borrower defense applicant's obligation to repay on the 
loan when the borrower has received a recovery from another source 
based on the same borrower defense claim, only when the borrower has 
either received full relief from the Department or has received a 
recovery that exceeds the remaining portion the borrower's Federal 
loan, if the borrower received a partial borrower defense discharge. 
The proposal echoes the language in the Department's existing 
regulation at 34 CFR 685.222(k)(1) and also does not represent a change 
in the Department's existing policy. This rule is intended to prevent a 
double recovery for the same injury at the expense of the taxpayer. As 
provided in the NPRM, because the borrower defense process relates to 
the borrower's receipt of a Federal loan, we would reinstate the 
borrower's obligation to repay on the loan based on the amount received 
from another source only if the Secretary determines that the recovery 
from the other source also relates to the Federal loan that is the 
subject of the borrower defense. Recoveries related to private loans 
and veterans' benefits, for

[[Page 49837]]

example, would not lead to a reinstatement of the borrower's obligation 
to repay the Federal loan.
    Changes: None.

Withholding Transcripts

    Comments: One group of commenters supported the position that a 
school has the ability to withhold an official transcript from a 
borrower who receives a total discharge of his Federal student loan. 
These commenters assert that this has always been the case in instances 
where the borrower was provided a loan discharge through the false 
certification, closed school, or borrower defense to repayment 
provisions.
    Many commenters strongly opposed the Department's assertion that 
schools have the ability to withhold transcripts of borrowers who 
receive loan discharges. The commenters concluded that schools have a 
moral obligation to maintain and provide students access to their 
academic records, especially in the case of education disruption due to 
institutional misrepresentation or unforeseen closure.
    One commenter noted that it is unclear why, or whether, a school 
would have the right to withhold transcripts of a student who does not 
owe a debt to the school or to the Federal Government. This commenter 
further notes that bankruptcy case law specifically prohibits the 
withholding of academic transcripts after a borrower has his student 
loan debt discharged; the Family Educational Rights and Privacy Act 
(FERPA) requires that students be granted access to at least unofficial 
transcripts; and that policies pertaining to withholding transcripts 
are also a matter of State law and institutional policy, not Federal 
law or regulation, such that the Department's prohibition may be in 
violation of these laws and policies. The commenter also opined that 
including this warning in regulation appears to be a threat intended to 
deter borrowers from filing claims. The commenter asserts that this 
warning is unlikely to deter frivolous claims since the consequences do 
not apply to claimants whose loans are not discharged in full. The 
commenter recommends that the Department should not imply borrowers who 
receive discharges should not have access to their transcripts when the 
Department is not aware of the school's policy and has no authority to 
establish such a requirement.
    Another commenter noted that the allowing schools to withhold 
transcripts is a retaliatory directive to schools to further harm 
borrowers who have cleared every hurdle to prove that they have been 
defrauded.
    Discussion: The Department appreciates the commenters who pointed 
out that the 2018 NPRM simply acknowledges current practice, which 
allows institutions to establish their own policies regarding the 
provision of official transcripts to students. The Department agrees 
that as a result of FERPA regulations, an institution is obligated to 
make student's academic record available to him or her. However, FERPA 
does not require an institution to send a borrower a copy of that 
record or to provide an official transcript.
    The Department is not requiring institutions to withhold 
transcripts. We emphasize the need for institutions to adhere to 
applicable State laws and policies that may prohibit them from 
withholding transcripts. To make this clear, we are revising the 
regulations to state that the institution may, if allowed or not 
prohibited by other applicable law, refuse to verify, or to provide an 
official transcript that verifies the borrower's completion of credits 
or a credential associated with the discharged loan.
    The Department is aware that students who are provided loan relief 
through bankruptcy may still be able to obtain transcripts. A 
significant difference, however, is that the institution is not asked 
to reimburse the Department for any loans taken by the student in the 
case of a borrower's subsequent bankruptcy. But the Department will 
seek recovery from the institution for successful borrower defense 
claims. However, for those borrowers applying for borrower defense 
relief that are not also petitioning for bankruptcy, the Department 
believes it is appropriate to generally inform borrowers through an 
acknowledgement in the borrower defense application that a school may 
withhold an official transcript, if allowed or not prohibited by other 
applicable law, in the event that the borrower receives full relief. 
Such a provision will help inform borrowers of the possibility that the 
institution may refuse to verify or provide an official transcript, if 
allowed or not prohibited by other applicable law.
    The Department is not suggesting that an institution should 
withhold a borrower's official transcript or that an institution's 
right to withhold an official transcript is a retaliatory act. 
Borrowers, however, should understand that by receiving a full loan 
discharge, there is a possibility that they may not receive an official 
transcript. Understanding this possibility will inform a borrower's 
decision whether to assert that the education they obtained was 
actually of no value. The higher education community consistently makes 
the case that higher education has inherent value beyond that which can 
be measured in job placements and earnings. The Department agrees with 
that position, which is why we believe that it would be the rare 
student who received no value whatsoever from the educational 
experience. In such rare cases, the borrower would have little use for 
an official transcript from the institution, such as for the purpose of 
transferring credits or using the credentials earned while in 
attendance at such an institution.
    Changes: We revised the language from proposed Sec.  
685.206(d)(3)(vi), now in Sec.  685.206(e)(8)(vi), to state that the 
institution may, if allowed or not prohibited by other applicable law, 
refuse to verify, or to provide an official transcript that verifies 
the borrower's completion of credits or a credential associated with 
the discharged loan. As previously stated, the Department also is 
revising the language in Sec.  685.206(e)(8)(vi) with respect to the 
borrower defense application and Sec.  685.206(e)(10) with respect to a 
school's submission of evidence.

Transfer to Secretary of Borrower's Right of Recovery Against Third 
Parties

    Comments: None.
    Discussion: Like the 2016 final regulations, these final 
regulations provide that upon granting any relief to a borrower, the 
borrower transfers to the Secretary the borrower's right of recovery 
against third parties.\113\ Unlike the 2016 final regulations, these 
regulations refer to ``any right to a loan refund (up to the amount 
discharged) that the borrower may have by contract or applicable law 
with respect to the loan or the provision of educational services'' 
\114\ because ``provision of educational services'' is a defined term; 
the 2016 final regulations instead reference the contract for 
educational services. The 2016 final regulations note such a transfer 
or rights from the borrower to the Secretary for the right to recover 
against third parties includes any ``private fund,'' and these final 
regulations clarify that the transfer applies to any private fund, 
including the portion of a public fund that represents funds received 
from a private party.
---------------------------------------------------------------------------

    \113\ Compare 34 CFR 685.222(k) with 34 CFR 685.206(e)(15).
    \114\ 34 CFR 685.206(e)(15)(i).
---------------------------------------------------------------------------

    Changes: None.

[[Page 49838]]

Borrower Defenses--Recovery From Schools (Sec. Sec.  685.206 and 
685.308)

Institutional Liability Cap

    Comments: Several commenters suggested that the Department's 
recovery from institutions for losses related to the provision of 
relief to borrowers for borrower defense applications be subject to a 
maximum limit. One commenter suggested that such institutional 
liability for a borrower defense claim be capped at some reasonable 
level and suggested the amount the borrower had paid on the loan during 
the first three years. Another commenter suggested that the maximum 
limit should be the amount paid by the student during the first five 
years from the student's last day of enrollment at the institution. 
This commenter asserted that without such a limit, borrower defense 
applicants would be able to bring claims at any point during the 
repayment of the loan, which could be beyond the document retention 
period for the relevant documents and affect the school's ability to 
defend itself.
    Discussion: The Department does not agree that there should be a 
cap on institutional liability for relief granted for an approved 
borrower defense application. The Department has an obligation to 
protect the interests of the Federal taxpayer and borrowers. As a 
result, the Department believes it is appropriate to require an 
institution to pay the amount of relief provided in the borrower 
defense process based upon the institution's act or omission. In the 
separate recovery proceeding against the institution brought under 34 
CFR part 668, subpart H, the institution will have the opportunity to 
dispute the amount of the liability.
    We also do not agree that schools will be limited in their defense 
against a borrower defense relief liability to the Department without a 
maximum liability limit or a change to the proposed time limit on the 
Department's ability to recover from the school. The new requirements 
will apply to borrower defense relief granted as to loans first 
disbursed on or after July 1, 2020. We believe that schools will adjust 
their business practices to maintain documents for students with loans 
first disbursed on or after July 1, 2020, in anticipation of borrower 
defense claims from those students.
    Changes: None.

Limitations Period for Recovering Funds From Schools

    Comments: One group of commenters offered support for the 
Department's proposal for a five-year limitations period for the 
Department's ability to recover funds from schools in the event of a 
loan discharge as a result of an approved borrower defense application 
and requested we include a definition of ``actual notice.''
    One commenter objected to the five-year limitations period and 
suggested that the recovery period should be aligned with the three-
year record retention requirement.
    Another commenter supported the establishment of a time limit for 
the Secretary to initiate an action to collect from the school the 
amount of any loans discharged for a successful borrower defense to 
repayment claim, but recommended that this limit be consistent with the 
standard civil statute of limitations of six years.
    One commenter suggested that the Department maintain the language 
in the 2016 final rules (in 34 CFR 685.206 and 685.222 (2017)) allowing 
the Department to recover from a school the amount of borrower defense 
relief awarded by the Department, within the later of three years from 
the end of the last award year that the student-applicant attended the 
institution or the limitation period that would apply to the cause of 
action or standard that the borrower defense claim is based, or at any 
time notice of the borrower defense claim is received during those 
periods. This commenter stated that the Department's proposal to have a 
three-year time limit from the last award year the student was enrolled 
in the institution for such actions related to loans first disbursed 
before July 1, 2019, is contrary to the Department's stated goal of 
protecting taxpayers. This commenter also stated that the Department's 
proposed five-year time limit from the time of the borrower defense 
adjudication for loans first issued on or after July 1, 2019, was a 
strong proposal.
    Another group of commenters also cited the approach in the 2016 
final regulations, which the commenters implied echoes State law 
concepts such as tolling and discovery to statutes of limitation and 
asked why the Department has proposed rescinding such provisions. These 
commenters asserted that the 2016 final regulations seem to allow the 
Department to recoup more money from institutions and lessen taxpayer 
liability and were concerned about the budget impact of the proposal. 
These commenters also asked why the Department's proposal for a five-
year limitation period for recovery actions based upon borrower defense 
relief granted for loans first disbursed on or after July 1, 2019, 
should not also apply to actions based upon loans first disbursed 
before July 1, 2019.
    Discussion: The Department appreciates the comments in support of 
the five-year limitations period for the Department to initiate a 
proceeding against a school. The final regulations provide that such a 
proceeding will not be initiated more than five years after the date of 
the final determination included in the written decision referenced in 
Sec.  685.206(e)(11), and the school will receive a copy of the written 
decision pursuant to Sec.  685.206(e)(11) for its records. The written 
decision will provide adequate notice of when the five-year period 
begins for schools.
    The Department believes that since an institution will be provided 
the opportunity to respond to the borrower's defense to repayment claim 
in the course of the borrower defense adjudication process, and that 
claim must be made within three years after the student leaves the 
institution, the institution will be made aware of the need to retain 
records relevant to its defense for a borrower defense to repayment 
claim and adjust its business practices accordingly. As a result, the 
Department does not agree that a longer time limit, such as six years, 
for a recovery proceeding is necessary. As explained in the 2018 NPRM, 
one reason for the recovery action limitation period to be three years 
is to align with the document retention requirements under the 
Department's regulations. We acknowledge that schools will retain 
records once aware of a need due to potential liability from borrower 
defense applications. The three-year document retention period is one, 
among other justifications, for the limitations period.
    Further, the Department has decided not to align with the typical 
statute of limitations in civil statutes because that period of time is 
based on when the alleged act occurred. For a student enrolled in a 
bachelor's or graduate program, the student may not have had the 
opportunity to complete the program within that time period, and 
therefore may not understand that the institution made 
misrepresentations during the admissions process or enrollment period. 
Therefore, the Department is using established timeframes that are 
based on when the student left the institution rather than when the 
alleged act or omission occurred. The Department believes that a 
borrower should have three years subsequent to leaving an institution 
during which time he or she can submit a defense to repayment 
application.
    The Department believes it is similarly appropriate to establish a 
timeframe during which it can initiate a

[[Page 49839]]

collection claim against an institution. The Department believes that 
the proposed timeframe establishes clear expectations for schools that 
will provide them with some certainty for their planning and 
operational needs and will also allow the Department to meet its 
responsibility to Federal taxpayers. The process by which the 
Department initiates a collection action against an institution is 
separate from the process by which the Department adjudicates a defense 
to repayment claim. Although the Department does not anticipate that it 
would typically take that long to initiate collection actions, the 
Department needs sufficient time to initiate that process. The 
Department believes that five years is ample time to complete that 
process and collect from the school the amount of the loan discharged.
    The amount the Department may collect from the institution is 
limited to the amount of loan forgiveness granted as part of the 
defense to repayment determination. Even if it takes five years for the 
Department to initiate that collection, the amount collected will be 
limited to the amount of loan forgiveness awarded by the Department at 
the time of the claim adjudication. The Department will inform the 
institution at the same time it notifies the borrower of the outcome of 
the adjudication process.
    For the reasons stated above, we are taking a different approach 
for recovery actions for borrower defense relief based upon loans first 
issued on or after July 1, 2020. Upon further consideration, the 
Department has also decided to retain the recovery process time limits 
and requirements in the 2016 final regulations, at 34 CFR 685.206 and 
685.222 (2017), for loans first disbursed before July 1, 2020. As these 
provisions are currently effective, we do not believe this approach 
will disadvantage schools that have already made adjustments in their 
document retention policies and procedures in anticipation of these 
recovery provisions.
    The Department also wanted to assure that a school will receive 
timely notice of a borrower's allegations in a borrower defense to 
repayment application and is revising these regulations to state the 
Department will notify the school within 60 days of the date of the 
Department's receipt of the borrower's application. Such timely 
notification will place the school on notice to preserve any records 
relevant to the borrower defense to repayment application and begin to 
prepare its response.
    As was the case in the NPRM, these final regulations expressly 
state that the Department may initiate a proceeding against 
provisionally certified institutions to recover the amount of the loan 
to which the defense applies in accordance with 34 CFR part 668, 
subpart G. Such a provision is consistent with 34 CFR part 668, subpart 
G, as provisionally certified institutions are participating 
institutions as defined in 34 CFR 668.2 and receive title IV, Federal 
Student Aid.
    Changes: We have revised 34 CFR 685.206 to reflect that the 
borrower defense standard, adjudication process, and recovery 
proceedings are tied to the date of first disbursement of the Direct 
Loan or Direct Consolidation Loan. We also clarified that the five-year 
limitations period on Departmental recovery actions against schools is 
applicable for borrower defense claims asserted as to loans first 
disbursed on or after July 1, 2020. The Department also revised 34 CFR 
685.206(e)(16)(ii) to state the Department will notify the school 
within 60 days of the date of the Department's receipt of the 
borrower's application.
    Comments: None.
    Discussion: The Department proposed in the 2018 NPRM to promulgate 
a regulation that the school must repay the Secretary the amount of the 
loan which has been discharged and amounts refunded to a borrower for 
payments made by the borrower to the Secretary, unless the school 
demonstrates that the Secretary's decision to approve the defense to 
repayment application was clearly erroneous. Upon further 
consideration, this amendatory language does not align well with 34 CFR 
part 668, subpart G, which provides the rules and procedures for the 
Department to initiate a recovery proceeding against a school. 
Additionally, the Department stated in the preamble of the 2018 NPRM: 
``The burden of proof rests with the Department, and the school has an 
opportunity to appeal the decision of the hearing official to the 
Secretary.'' \115\ A clearly erroneous standard is inconsistent with 
the Department's intention and statement that the burden of proof lies 
with the Department. Accordingly, the Department is withdrawing this 
proposed regulation.
---------------------------------------------------------------------------

    \115\ 83 FR 37263.
---------------------------------------------------------------------------

    Changes: The Department withdraws the proposed regulation that the 
school must demonstrate the Secretary's decision to approve the defense 
to repayment application was clearly erroneous.

Pre-Dispute Arbitration Agreements, Class Action Waivers, and Internal 
Dispute Processes (Sec. Sec.  668.41 and 685.304)

Legal Authority and Basis for Regulating Class Action Waivers and 
Arbitration Agreements

    Comments: A group of commenters argued that the HEA grants the 
Department legal authority and wide discretion to place conditions upon 
the receipt of title IV funding by participating schools, including 
restricting or prohibiting the use of pre-dispute arbitration 
agreements or class action waivers.
    A number of commenters challenged the assertion in the 2018 NPRM 
that the 2016 final regulations' limitations on the use of mandatory 
arbitration and class action waivers were not consistent with law. 
These commenters disagreed with the Department's citation to the 
Supreme Court's decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 
1612 (2018) and the reference to a congressional resolution 
disapproving a rule published by the CFPB that would have regulated 
certain pre-dispute arbitration agreements. These commenters argued 
that neither the Supreme Court decision, nor Congress' action, has any 
bearing on the authority of the Department to include contractual 
conditions relating to arbitration as part of a program participation 
agreement or contract. In addition, the commenters noted that Congress 
did not take any action to disapprove the 2016 final regulations.
    Discussion: The Department agrees with the commenters who argued 
that the HEA grants the Department legal authority and wide discretion 
to place conditions upon the receipt of title IV funds. That authority 
includes restricting, prohibiting, and, importantly, encouraging the 
use of pre-dispute arbitration agreements and class action waivers.
    The Department respectfully disagrees with the commenters' 
assertion that the 2018 NPRM's reliance on the Epic Systems decision 
and the congressional resolution disapproving the CFPB rule were 
invalid. The Department cited Epic Systems because it is consistent 
with precedential decisions in Federal court in favor of establishing 
``a liberal federal policy favoring arbitration agreements'' \116\ and 
decisions against prohibitions on class action waivers.\117\ Together, 
these three cases stand for the

[[Page 49840]]

proposition that, absent a contrary congressional mandate, Federal 
policy favors arbitration agreements.
---------------------------------------------------------------------------

    \116\ CompuCredit Corp. v. Greenwood, 565 U.S. 95, 98 (2012).
    \117\ AT&T Mobility, LLC v. Concepcion, 563 U.S. 333, 347-51 
(2011).
---------------------------------------------------------------------------

    Given the Court's precedents, Congress' resolution disapproving the 
CFPB's rule, and our reweighing of the benefits and costs regarding 
pre-dispute arbitration clauses and class action waivers, the 
Department has decided to bring its policies to align more closely with 
the ``liberal federal policy favoring arbitration agreements.'' The HEA 
provides the authority and discretion for the Department to make that 
policy shift. It is our view, as explained in the 2018 NPRM, that 
arbitration agreements and class action waivers, when coupled with 
student protections promoting informed decision making, preserve 
reasonable transparency, and cooperative dispute resolution potential 
that is positive for both students and institutions.
    Changes: None.

General Support for Class Action Waivers, Pre-Dispute Arbitration 
Agreements, and Internal Dispute Processes

    Comments: Many commenters expressed support for the regulations 
pertaining to the use of pre-dispute arbitration agreements, class 
action waivers, and internal dispute processes. These commenters 
frequently noted that arbitration and internal dispute processes can 
provide a path to resolution that is reasonable and fair to both the 
student and the school, while reducing potential costs to taxpayers. 
These commenters also underscored the importance of ensuring students 
were properly informed of their options and given the necessary 
information regarding how to proceed.
    A group of commenters who wrote in support of the proposed 
regulations also suggested a change to the regulatory language to 
distinguish between schools that use such pre-dispute arbitration 
agreements and waivers for use of recreational facilities or parking 
lots or similar non-enrollment activities and those that require such 
agreements as a condition of enrollment.
    Discussion: The Department appreciates the support for the proposed 
regulations from many of the commenters. The Department agrees that it 
is very important that students are properly informed of their options 
and given the necessary information regarding how to proceed. We also 
appreciate the detailed comments and suggestions on the proposed rules 
relating to mandatory arbitration and class action waivers.
    We agree with the commenters who argued that arbitration may 
provide a method for borrowers and schools to address a student's 
concerns without the significant expense and time commitment that are 
common to court litigation. It is well established that alternative 
dispute resolution (ADR) processes like arbitration are more likely to 
result in savings to the parties, without reducing the parties' 
satisfaction with the result.\118\
---------------------------------------------------------------------------

    \118\ Hensler, Deborah R., ``Court-Ordered Arbitration: An 
Alternative View,'' University of Chicago Legal Forum, Volume 1990, 
Issue 1, Article 12, https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1074&context=uclf.
---------------------------------------------------------------------------

    We also agree with the commenters who suggested that allowing 
arbitration will better ensure that the school, rather than the 
taxpayer, will bear the cost of the school's actions. As a result, a 
decision in favor of the student would be the school's responsibility. 
In addition, depending on the particular circumstances of a claim, a 
student potentially could be awarded greater relief, including refunds 
of cash payments, when appropriate, as a result of an arbitration 
decision in the student's favor.
    With regard to the regulatory distinction for schools that use pre-
dispute arbitration agreements and waivers for the use of recreational 
facilities, parking lots, or other similar activities, the Department 
agrees with the commenter that the regulations should distinguish 
between schools that use pre-dispute arbitration agreements as a 
condition of enrollment and those that do not. The Department makes 
this distinction because the regulated type of agreements have a clear 
relationship with the educational services provided by the institution. 
The Department also believes that a change reflecting the commenter's 
suggestion would improve consistency between Sec. Sec.  668.41 and 
685.304.
    Section 668.41(h)(1) limits arbitration disclosure requirements to 
cases where agreements are used as a condition of enrollment. The 
commenter recommended duplicating that language in Sec.  685.304, 
specifically in Sec.  685.304(a)(6)(xiii), (xiv), and (xv) replacing 
``if the school'' with ``if, as a condition of enrollment, the 
school.'' Inclusion of the commenter's suggested language would make it 
clearer in Sec.  685.304 that the agreements are related exclusively to 
enrollment agreements.
    On the other hand, the Department's proposed language does include 
``to pursue as a condition of enrollment'' in Sec.  
685.304(a)(6)(xiii); ``to enroll in the institution'' in Sec.  
685.304(a)(6)(xiv); and ``to enroll in the institution'' in Sec.  
685.304(a)(6)(xv). We believe deleting those phrases and replacing them 
with the suggested language would be clearer and provide consistency 
between Sec. Sec.  668.41 and 685.304. In addition, although not 
specifically raised by a commenter, we add language to clarify that our 
changes to the entrance counseling requirements apply for loans 
disbursed on or after July 1, 2020. This clarifying change is 
consistent with the approach we are taking throughout these final 
regulations.
    Changes: The Department adopts the changes suggested by the 
commenter to replace ``if the school'' with ``if, as a condition of 
enrollment, the school'' in Sec.  685.304(a)(6)(xiii), (xiv), and (xv), 
and deleting the previously included references to enrollment in those 
sections. In addition, we are adding the phrase ``For loans first 
disbursed on or after July 1, 2020'' to the beginning of Sec.  
685.304(a)(6)(xiii), (xiv), and (xv).

General Opposition to Class Action Waivers and Pre-Dispute Arbitration 
Agreements

    Comments: Many commenters expressed opposition to the regulations 
pertaining to the use of pre-dispute arbitration agreements and class 
action waivers. Many commenters argued that permitting participating 
institutions to use mandatory pre-dispute arbitration agreements and 
class action waivers, as part of an enrollment or other agreement, 
denies students their rights, including their constitutional right, to 
be heard in court. They further asserted that class action restrictions 
prevent students from working together to assert their legal rights and 
helps institutions ``avoid liability.'' One commenter asserted that a 
student does not hold the bargaining power to reject a forced 
arbitration clause.
    Commenters stated that the Department's claim that arbitrations are 
more efficient and less adversarial than traditional court proceedings 
was ``highly dubious.''
    Other commenters argued that unscrupulous schools have used 
mandatory arbitration, class action waiver, and internal dispute 
resolution provisions to discourage borrowers from raising their claims 
and hide evidence of illegal school conduct from the public, the result 
of which has been an unfair shifting of the burden of the cost of 
illegal conduct from schools to students and taxpayers.
    A group of commenters disputed the Department's assertion that 
allowing schools to mandate that students sign pre-dispute arbitration 
agreements and class action waivers, or agree to engage internal 
dispute processes, helps to provide a path for borrowers to seek 
remedies from schools before filing a

[[Page 49841]]

borrower defense claim. These commenters argued that allowing schools 
to require students to sign such agreements or agree to such processes 
limits borrowers' options in seeking redress, limits their ability to 
gather the types of evidence needed to support borrower defense claims, 
and provides protection to schools that act against the interests of 
their students. These commenters noted that there is usually no or very 
limited discovery during arbitration, and a student cannot discover 
documents detrimental to the school.
    Another group of commenters stated that students would be at a 
distinct legal disadvantage against potentially large for-profit school 
chains that can afford high-quality legal counsel. The commenters 
referenced research that shows these agreements are typically used by 
organizations where there was already a significant power imbalance in 
favor of the employer or school. They further noted that the Economic 
Policy Institute has found that the use of mandatory arbitration among 
employers is much more common in low-wage workplaces and in industries 
that are disproportionately female and minority. Other commenters 
echoed these points, adding that class action waivers effectively 
ensure that the most economically disadvantaged will face a legal 
challenge skewed to the advantage of schools and deprive the Department 
of a vehicle that would expose the most fraudulent schools.
    A commenter representing student veterans noted that veterans have 
a substantial interest in being able to submit complaints to Federal 
regulators, so that they can adequately highlight gaps or abusive 
practices in the market related to misrepresentations or fraud by 
colleges and universities and financial products, such as student 
loans. The commenter noted that enforcement agencies have historically 
relied on consumer complaints like these to bring actions against 
schools.
    Another commenter representing veterans suggested that the 
regulations be amended to provide students the right to: (1) Choose to 
arbitrate claims once a dispute arises, and (2) exercise their 
constitutional right to adjudicate claims before impartial judges and 
juries. The commenter further suggested the Department revise the 
proposed regulations to include a provision from the 2016 final 
regulations that prohibits a school from ``compel[ing] any student to 
pursue a complaint based on a borrower defense claim through an 
internal dispute process before the student presents the complaint to 
an accrediting agency or government entity authorized to hear the 
complaint.''
    One commenter noted that the U.S. Department of Defense has raised 
alarm about the dangers of arbitration, noting in a 2006 report that 
``loan contracts to Servicemembers should not include mandatory 
arbitration clauses or . . . require the Servicemember to waive his or 
her right of recourse, such as the right to participate in a plaintiff 
class [action lawsuit].'' \119\
---------------------------------------------------------------------------

    \119\ Department of Defense, ``Report on Predatory Lending 
Practices Directed at Members of the Armed Forces and Their 
Dependents,'' August 9, 2006, http://archive.defense.gov/pubs/pdfs/Report_to_Congress_final.pdf.
---------------------------------------------------------------------------

    Another commenter expressed concern that schools requiring pre-
dispute arbitration agreements as a condition of enrollment would not 
be held accountable to a Federal agency.
    One commenter suggested that the Department ban the use of Federal 
funds for schools mandating use of arbitration or class action waiver 
agreements.
    Several other commenters suggested that the Department did not 
sufficiently justify in the NPRM this change in policy. One commenter 
noted the Department previously stated that ``[h]ad students been able 
to bring class actions against'' certain specific institutions ``it is 
reasonable to expect that other schools would have been motivated to 
change their practices to avoid facing the risk of similar suits.'' 
\120\
---------------------------------------------------------------------------

    \120\ 81 FR 39383.
---------------------------------------------------------------------------

    Discussion: The Department understands the concerns expressed by 
commenters regarding the arbitration provisions of these final 
regulations. The Department has weighed the commenters' expressed 
concerns against the potential benefits of arbitration and believes 
that the best approach is to ensure a regulatory framework that 
requires that students have sufficient notice of whether the school 
mandates arbitration and to allow the student to decide whether to 
enroll at that institution or another.
    The Department values the ability of students to make informed, 
freely chosen decisions regarding how they spend their education 
dollars, time, and efforts. This includes students, who may be 
concerned about the fairness of such a process. The Department is 
endeavoring to protect all students, including by ensuring those who 
are concerned about the fairness of such a process have the power to 
reject a forced arbitration clause by taking their financial aid 
dollars to institutions that do not mandate internal dispute processes, 
arbitrations, or bar class actions. As with any major life or financial 
decision the students will make, it is best for students to approach 
the choice with as much information as possible and conduct a unique-
to-them, cost-benefit analysis on their own terms, weighing what is 
important to them and what they are willing to accept. These final 
regulations require that institutions play their part in keeping their 
potential students informed.
    The Department does not believe that class action waivers and pre-
dispute arbitration agreements are inherently ``unfair,'' as the 
commenters suggest, nor are the benefits relied upon by the Department 
in the 2018 NPRM ``highly dubious.'' Similarly, the use of mandatory 
arbitration among employers with certain worker populations does not 
``effectively ensure'' that students, including minorities and females, 
will face a legal challenge skewed against them. It is true that 
arbitration proceedings do not have the same extensive discovery 
procedures provided for in traditional litigation in court. However, as 
cited by the American Bar Association, arbitration provides significant 
advantages over a court proceeding, including: Party control over the 
process; typically lower cost and shorter resolution time; flexible 
process; confidentiality and privacy controls; awards that are fair, 
final, and enforceable; qualified arbitrators with specialized 
knowledge and experience; and broad user satisfaction.\121\ Further, in 
2012, the ABA found that the median length of time from the filing of 
an arbitration demand to the final award in domestic, commercial cases 
was just 7.9 months, whereas the filing-to-disposition time in the U.S. 
District Court for the Southern District of New York was 33.2 months 
and 40.8 months in the Second Circuit Court of Appeals.\122\ 
Arbitration does, in fact, help ``provide a path'' for borrowers to 
acquire relief in an efficient, cost-effective, and quicker manner than 
traditional litigation.
---------------------------------------------------------------------------

    \121\ Sussman, Edna, and John Wilkinson, ``Benefits of 
Arbitration for Commercial Disputes,'' American Bar Association, 
March 2012, https://www.americanbar.org/content/dam/aba/publications/dispute_resolution_magazine/March_2012_Sussman_Wilkinson_March_5.authcheckdam.pdf.
    \122\ Sussman and Wilkinson, https://www.americanbar.org/content/dam/aba/publications/dispute_resolution_magazine/March_2012_Sussman_Wilkinson_March_5.authcheckdam.pdf.
---------------------------------------------------------------------------

    Contrary to the commenter's assertions, mandatory arbitration 
clauses and class action waivers do not help institutions ``avoid 
liability,'' but instead provide more speedy recovery and potentially 
greater relief to students impacted by the institutions' alleged

[[Page 49842]]

conduct, as determined by an experienced legal professional as fact-
finder. Rather than discouraging borrowers from raising claims and, as 
a result, hiding illegal conduct, arbitration provides a more cost-
effective and accessible conflict resolution path than traditional 
court proceedings. Neither arbitration agreements nor class action 
waivers limit borrowers' options for redress in reporting a complaint 
about an institution to the Department, an accreditor, or any other 
governmental entity (including the CFPB, with respect to student 
loans). Therefore, even in the case of a mandatory arbitration 
agreement, the Department can still learn about illegal actions on the 
part of an institution.
    Institutions will continue to be held accountable to the Department 
because the student can still file a borrower defense claim with the 
Department, even if the borrower receives an unfavorable arbitration 
decision, as the borrower submits a borrower defense to repayment claim 
with the Department, not the school, and the Department adjudicates the 
claim in accordance with its own regulatory requirements.
    We have revised the regulations at Sec.  668.41(h)(1)(i) to 
require, in schools' plain language disclosures regarding their pre-
dispute arbitration agreements and/or class action agreements required 
as a condition of enrollment, a statement that the school cannot 
require students to limit, relinquish, or waiver their ability to 
pursue filing a borrower defense claim, pursuant to Sec.  685.206(e) at 
any time. The Department agrees that a student must always be allowed 
to voice concerns or register complaints with the Department, if the 
borrower's allegations meet the criteria for such a claim. 
Unequivocally, arbitrator determinations are not binding on the 
Department.
    The Department rejects the commenter's suggestion that it ban the 
use of Federal funds for schools that mandate arbitration and class 
action waivers. As discussed, Federal policy favors arbitration, and 
the Department is not convinced by the commenter's arguments to deviate 
here from that policy. The Department rejects the suggestion in the 
2016 NPRM that class actions against certain institutions would have 
motivated other institutions to change their practices. In fact, it is 
possible that many institutions changed their approach in light of 
allegations made against those certain institutions, including those 
made by attorneys general, regardless of whether students had been able 
to bring class actions. Under those specific circumstances cited in the 
2016 NPRM, the State of California found that the institution 
misrepresented job placement rates and the transferability of credits 
to students, advertised programs that were not offered, and failed to 
disclose a relationship with a preferred student loan lender.\123\ 
Further, the Department focuses its efforts on appropriately regulating 
the ``good actors,'' not necessarily overcorrecting or hyper-regulating 
the entire sector to address outlier instances of institutional 
misconduct.
---------------------------------------------------------------------------

    \123\ Final Judgment, State of California v. Corinthian 
Colleges, Inc., et. al., No. CGC-13-534793 (Superior Court of 
California, County of San Francisco). Note: In 2018, the California 
Attorney General announced a settlement with Balboa Student Loan 
Trust providing debt relief for students who took out private loans 
to attend Corinthian Colleges. Final Judgment and Permanent 
Injunction, State of California v. Balboa Student Loan Trust, No. 
BC-709870 (Superior Court of California, County of Los Angeles).
---------------------------------------------------------------------------

    With respect to the Economic Policy Institute study cited by one 
commenter and the other commenters who echoed the concerns highlighted 
in the study, if the Department's final regulations would put students 
at a ``distinct legal disadvantage'' against schools that ``can afford 
high quality legal counsel,'' it is difficult to understand how this 
same concern would not apply to a complex, expensive court proceeding. 
Arbitration may frequently go further than a traditional trial in 
leveling out the practical, real-world legal disadvantages between the 
institution and the student.
    The Department does not adopt the suggestion by the commenter 
representing student veterans. We would like to thank the commenter for 
bringing to our attention the Department of Defense's 2006 Report. 
However, that report draws its conclusions from concerns regarding 
predatory lending practices, including payday loans, car title loans, 
tax refund anticipations loans, and unsecured loans focused on the 
military and rent-to-own.\124\ As a result, we do not believe that the 
conclusions that the report reaches are applicable in the context of 
these final regulations. Further, these final regulations do not 
require a borrower to ``waive his or her right of recourse.'' As stated 
repeatedly, under these final regulations, borrowers, including student 
veterans, who meet the eligibility requirements maintain the right to 
file with the Department claims for loan discharges arising from 
borrower defense to repayment, false certification, and closed schools.
    The Department also continues to believe that the regulatory triad 
provides sufficient opportunities to review an institution, conduct 
oversight, and sanction an institution appropriately. Student 
complaints will continue to alert members of the triad to engage in 
oversight reviews.
    Changes: The final regulations at Sec.  668.41(h)(1)(i) have been 
revised to require, in schools' plain language disclosures regarding 
their pre-dispute arbitration agreements and/or class action waivers 
required as a condition of enrollment, a statement that a school 
cannot, in any way, require students to limit, relinquish, or waive 
their ability to pursue filing a borrower defense claim, pursuant to 
Sec.  685.206(e), at any time.

Arbitration Agreements

    Comments: Since most arbitration proceedings and results are 
confidential, several commenters noted that the regulatory change could 
enable a lack of transparency from schools by allowing fraudulent 
practices to continue even after students discovered and challenged 
them.
    Another commenter noted that most students enter into a pre-dispute 
arbitration agreement before any harm occurs. As a result, these 
students are not able to make an informed choice about whether to 
surrender legal rights and remedies.
    Another group of commenters recommended that the Department 
definitively state in the regulations that no arbitration agreement may 
abrogate a borrower's right to file a Federal borrower defense to 
repayment claim, and that the borrower may initiate such a claim. 
Moreover, they suggested that the time a borrower commits to an 
arbitration process should toll the time limit for filing a discharge 
claim.
    One commenter asserted that arbitrators have a pecuniary incentive 
to rule in favor of a corporation. This commenter noted that 
arbitrators are paid based on the volume of cases and hours spent per 
case. Arbitrators thus have a strong financial incentive to rule in 
favor of the party on whom they depend for additional cases. This 
commenter further asserted that arbitration can cost more in 
``upfront'' fees, as much as 3,009 percent more, than litigation. To 
support this point, the commenter relied upon two American Arbitration 
Association (AAA) studies, the CFPB's 2015 ``Arbitration Study: Report 
to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer 
Protection Act,'' and a Public Citizen study entitled ``The Costs of 
Arbitration.'' \125\
---------------------------------------------------------------------------

    \125\ American Arbitration Association, ``Consumer Arbitration 
Rules,'' January 1, 2016, https://www.adr.org/sites/default/files/Consumer%20Rules.pdf; and ``Commercial Arbitration Rules and 
Mediation Procedures,'' July 1, 2016 https://www.adr.org/sites/default/files/Commercial%20Rules.pdf; Arbitration Study: Report to 
Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer 
Protection Act section 1028(a), CFPB, Appendix A at 43 (2015), 
available at http://files.consumerfinance.gov/f/201503_cfpb_arbitration-studyreport-to-congress-2015.pdf; Public 
Citizen, ``The Costs of Arbitration,'' p. 2, April 2002, available 
at https://www.citizen.org/documents/ACF110A.PDF.

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

[[Page 49843]]

    Another commenter noted that arbitration does not usually allow for 
an appeal. According to this commenter, the Federal Arbitration Act 
allows the losing party 90 days to appeal an arbitration award on 
narrow grounds, and a court essentially vacates an arbitration award 
for a ``manifest disregard of the law.''
    One commenter further suggested that the likely result of an 
arbitration may conflict with cohort default rate restrictions. The 
commenter noted that the 2018 NPRM states that ``[a]rbitration may . . 
. allow borrowers to obtain greater relief than they would in a 
consumer class action case where attorneys often benefit most.'' The 
commenter asserts that, if the Department believes this is the case, 
the practice may run counter to other regulations that prevent schools 
from ``[making] a payment to prevent a borrower's default on a loan'' 
for purposes of calculating the cohort default rate.
    Discussion: The Department appreciates the commenters' concerns 
regarding the allowance of pre-dispute arbitration agreements in the 
final regulations and the effect of those agreements on transparency.
    In making this policy determination, the Department considered many 
factors, including the commenter's concern about transparency. Our 
primary motivation for this policy change is to provide borrowers, who 
believe they have been wronged, an opportunity to obtain relief in the 
quickest, most efficient, most cost-effective, and most accessible 
manner possible. The Department acknowledges that arbitration 
proceedings are not public forums in the same way as traditional court 
proceedings.
    However, those public hearings, while transparent, have serious 
drawbacks: Prohibitive costs, time delays, access for laypersons, among 
many others. Litigation can also have a serious negative impact on an 
institution's reputation, even when ultimately the court rules in the 
institution's favor. In our weighing of these factors, the Department 
has chosen to emphasize speedy relief and accessibility.
    We also note that if the borrower is unsatisfied--due to the 
confidential nature of the arbitration proceeding or for any other 
reason--the final regulations do not preclude the borrower from 
pursuing other avenues for relief which they may find to be more 
transparent.
    An eligible borrower may file a borrower defense to repayment claim 
regardless of any decision against a borrower in an arbitration 
proceeding and, under revised Sec.  668.41(h)(1)(i), a school cannot 
require students to limit, relinquish, or waiver their ability to 
pursue filing a borrower defense claim. The Department acknowledges 
that the borrower may file a borrower defense to repayment application 
with the Department at the same as initiating the arbitration 
proceeding with the school.
    Regarding arbitration awards conflicting with cohort default rate 
restrictions, payment to the student would not violate the prohibition 
on an institution making a payment, even if the borrower would have 
otherwise defaulted on the loan. If a school loses in arbitration, 
making a payment to a student as a result, that payment would be made 
to resolve a student's complaint with the school, whether through 
settlement or an order from the arbitrator. Additionally, the 
Department believes that institutions should be allowed to repay a 
student's loan if, for example, during the first year of study it 
becomes clear to the institution that the student cannot benefit from 
the education provided. In such circumstances, the Department does not 
wish to discourage the institution from repaying the student's loans.
    As discussed elsewhere in this document, the Department believes 
that, in reweighing the issues and subsequent legal developments, these 
final regulations provide students with information that they need to 
empower themselves to understand the legal rights and available 
remedies they are giving up, even before a dispute arises. Upon 
extensive review, the Department finds that it is a much more desirable 
policy to incentivize informed customers to make rational decisions 
that they think are best for them. The Department will not dictate to 
students what they ought to want. Mandatory arbitration clauses permit 
relatively inexpensive and expeditious resolution of customer 
grievances. Considering the burdens attending litigation, arbitration 
adjudicates claims relatively quickly, cheaply, and, concurrently, 
gives the ``customers'' what they want. The underlying, well-considered 
justification for all this is that Department has elected not to 
substitute its own subjective and paternalistic judgment in place of 
the student's own wishes about their legal rights and remedies.
    Neither an arbitration agreement nor an arbitrator's decision can 
abrogate a borrower's right to file a borrower defense claim. The 
Department notes that students who are not satisfied with the 
arbitrator's determination are still free to file a borrower defense 
claim with the Department. We have incorporated a provision, in Sec.  
668.41(h)(1), that states that an institution's disclosure to students, 
where an explanation of class-action waivers and mandatory pre-dispute 
arbitration agreements is provided, must include a statement that the 
borrower need not participate in any internal dispute resolution 
processes prior to filing a borrower defense claim.
    The Department strongly disagrees with the commenter's statement 
that an arbitrator's pecuniary interests would taint the arbitration 
proceeding. The Department notes that a failure to disclose facts that 
a reasonable person would consider likely to affect the impartiality of 
the arbitrator would be a violation of the Arbitrator's Code of Ethics 
as well as a violation of the Uniform Arbitration Act (Revised).\126\ 
The Code of Ethics for Arbitrators in Commercial Disputes provides that 
an arbitrator should: (1) Uphold the integrity and fairness of the 
arbitration process; (2) disclose any interest or relationship, arising 
at any time, likely to affect the impartiality, or which might create 
an appearance of partiality or bias; (3) avoid impropriety or the 
appearance of impropriety in communicating with the parties or their 
counsel; (4) conduct the proceedings fairly and diligently; (5) make 
decisions in a just, independent, and deliberate manner; and (6) be 
faithful to the relationship of trust and confidentiality inherent in 
the office.\127\
---------------------------------------------------------------------------

    \126\ ``The Code of Ethics for Arbitrators in Commercial 
Disputes,'' American Arbitration Association, Effective March 1, 
2004, https://www.adr.org/sites/default/files/document_repository/Commercial_Code_of_Ethics_for_Arbitrators_2010_10_14.pdf; Uniform 
Arbitration Act (Revised), National Conference of Commissioners on 
Uniform State Laws, 2000, https://www.uniformlaws.org/viewdocument/final-act-1?CommunityKey=a0ad71d6-085f-4648-857a-e9e893ae2736&tab=librarydocuments; Note: The Uniform Arbitration Act 
has been adopted in 35 jurisdictions and 14 jurisdictions have 
adopted substantially similar legislation.
    \127\ American Arbitration Association, https://www.adr.org/sites/default/files/document_repository/Commercial_Code_of_Ethics_for_Arbitrators_2010_10_14.pdf.
---------------------------------------------------------------------------

    Further, this commenter asserted that arbitration costs more in 
``upfront'' fees than litigation. Neither AAA study cited by the 
commenter supports this proposition. The CFPB study is the

[[Page 49844]]

precise document that the Department relied upon, in part, in the 2016 
final regulations' rationale for the pre-dispute arbitration and class 
action waiver provisions. Congress's resolution disapproving the CFPB 
final rule could be read to reaffirm the strong Federal policy in 
support of arbitration. As a result, we have followed Congress' 
direction in not following the CFPB's final rule's concepts in these 
regulations.
    The commenter relies on a 2002 Public Citizen study for the 
statistic that total arbitration costs incurred by a plaintiff's use of 
the AAA could increase by as much as 3,009 percent as compared with 
filing that same claim in court.\128\ This claim relies upon a 
comparison between the costs of initiating a lawsuit in court to the 
fees potentially charged to a plaintiff for initiating an arbitration. 
The study compares court filing fees in the Circuit Court of Cook 
County to fees charged by the AAA. Although it is true that court 
filing fees are lower than arbitration initialization fees, this 
calculation does not take into account the additional potential costs 
related to litigation, including attorney's fees and costs associated 
with the discovery process, fees charges by expert witnesses, travel 
expenses, and other miscellaneous costs.\129\
---------------------------------------------------------------------------

    \128\ Public Citizen, ``The Costs of Arbitration,'' https://www.citizen.org/documents/ACF110A.PDF.
    \129\ See, e.g., Epic Systems Corp. v. Lewis, 138 S.Ct. 1612, 
1621 (2018) (referring to the Federal Arbitration Act (FAA), 9 
U.S.C. 2, and citing Scherk v. Alberto-Culver Co., 417 U.S. 506, 511 
(1974)) (``[I]n Congress's judgment arbitration had more to offer 
than courts [once] recognized--not least the promise of quicker, 
more informal, and often cheaper resolutions for everyone 
involved.'') (emphasis added). Notably, ``the virtues Congress 
originally saw in arbitration, its speed and simplicity and 
inexpensiveness'' should not, in the Supreme Court's view, ``be 
shorn away;'' as a corollary, ``arbitration [ought not to] look[ ] 
like the litigation'' the FAA ``displace[d].'' Epic Systems, 138 
S.Ct. at 1623 (emphasis added); see also AT&T Mobility LLC v. 
Concepcion, 563 U.S. 333, 347, 348 (2011). Note: It could be argued 
that the calculation in the study does not take into account the 
many other additional potential costs of both litigation and 
arbitration. Regardless the cost, however, it is incontrovertible 
that Congress has found to favor arbitration.
---------------------------------------------------------------------------

    For example, the current filing fee to initiate a civil action in 
the Circuit Court of Cook County, Illinois is $368.\130\ However, for 
most individuals, filing a civil action usually requires them to obtain 
legal services or representation, which adds significantly to the 
cost.\131\ Under the commercial arbitration rules of the AAA, the 
current initial filing fee for a claim of less than $75,000 is 
$925.\132\ Admittedly, that number is higher than the court filing fee, 
without counting attorney's fees. However, it is a far cry from the 
3,009 percent cited by the commenter. Consequently, in reality, the 
problems the commenter describes are not nearly as stark as advertised.
---------------------------------------------------------------------------

    \130\ Clerk of the Court, Cook County, ``Court Fees and Costs 
705 ILCS 105/27.2a,'' Effective January 1, 2017, http://www.cookcountyclerkofcourt.org/Forms/pdf_files/CCG0603.pdf.
    \131\ See: Paula Hannaford-Agor, ``Measuring the Cost of Civil 
Litigation: Findings from a Survey of Trial Lawyers,'' Voir Dire, 
Spring 2013, https://www.ncsc.org/~/media/Files/PDF/
Services%20and%20Experts/Areas%20of%20expertise/Civil%20Justice/
Measuring-cost-civil-litigation.ashx.
    \132\ American Arbitration Association, ``Commercial Arbitration 
Rules and Mediation Procedures: Administrative Fee Schedules,'' May 
1, 2018, https://www.adr.org/sites/default/files/Commercial_Arbitration_Fee_Schedule_1.pdf.
---------------------------------------------------------------------------

    The Department disagrees with this same commenter's assertion that 
``individual rights'' would be curtailed by an arbitration's ``severely 
limited right to appeal.'' The Department notes that no constitutional 
right to appeal exists in a civil proceeding. In addition, a borrower 
has the right to file a borrower defense to repayment claim 
irrespective of the arbitrator's determination and still may have an 
avenue for relief through the Department's process.
    A commenter suggested tolling the limitations period for a borrower 
defense claim for the time period in which the student and the 
institution are in active arbitration proceedings. The Department finds 
this suggestion reasonable and believes it may incentivize institutions 
to more quickly resolve arbitrations--providing relief to wronged 
borrowers more quickly--and not drag out proceedings in order to 
consume the current limitations period.
    As a result, we adopt changes to the final regulations to toll the 
limitations period beginning on the date that the student files a 
request for arbitration and ending when the arbitrator submits a final 
determination to the parties.
    Changes: We have added language to Sec.  668.41(h)(1) to specify 
that schools must, in their plain language disclosures, state that 
borrowers do not need to participate in an arbitration proceeding or 
any internal dispute resolution process offered by the institution 
prior to filing a borrower defense to repayment application with the 
Department. This plain language disclosure must also state that any 
arbitration, required by a pre-dispute arbitration agreement, pauses 
the limitations period for filing a borrower defense to repayment 
application for the length of time that the arbitration proceeding is 
under way.
    The Department also includes language in Sec.  685.206(e)(6)(i) to 
state that, for loans first disbursed on or after July 1, 2020, the 
limitations period will be tolled for the time period beginning on the 
date that a written request for arbitration, in connection with a pre-
dispute arbitration agreement, is filed, by either the student or the 
institution, and concluding on the date the arbitrator submits, in 
writing, a final decision, final award, or other final determination, 
to the parties.

Class Action Waivers

    Comments: One commenter noted that class actions are an important 
part of resolving disputes in cases of widespread damages, especially 
in cases where individual damages may not be substantial or when 
individuals may not have the resources to seek representation for their 
complaints.
    A group of commenters stated that the preamble to the 2018 NPRM did 
not adequately explain why class action waivers should be allowed, and 
did not reassure the public that such a waiver cannot affect a 
borrower's ability to file a claim or to use a class action lawsuit to 
help support a claim of misrepresentation. They asserted that class 
action lawsuits may also serve to alert the Department that a pattern 
of misrepresentation may be present.
    Discussion: The Department appreciates the comments regarding the 
use of class action waivers. The commenter's concern regarding an 
individual's ability to acquire representation is mitigated by the 
Department's proposal to allow students and schools to employ internal 
dispute resolution options, where legal representation is not 
necessary, before the filing of a borrower defense claim. Further, as 
stated in an earlier section, nothing in these final regulations 
burdens a student's ability to file a borrower defense to repayment 
application, or any claim with a government agency, even after an 
arbitrator submits a finding against the student's claim.
    We appreciate the commenter's concerns regarding transparency and 
alerting the Department to potential institutional wrongdoing. In the 
discussion regarding arbitration and class action waivers in the 2018 
NPRM, the Department explained the benefits of our position, including 
allowing borrowers to obtain greater relief, reducing the expense of 
litigation for both students and institutions, and easing the burden on 
the U.S. court system.\133\ We are concerned that the adjudication of 
class action lawsuits benefit the wrong individuals, that is,

[[Page 49845]]

lawyers and not wronged students.\134\ For these reasons, the 
Department has concluded that allowing class action waivers would 
benefit both institutions and students by fast-tracking dispute 
resolutions in a lower cost and more efficient.
---------------------------------------------------------------------------

    \133\ 83 FR 37245.
    \134\ For more information on this topic, see: James R. Copland, 
et al., ``Trial Lawyers, Inc. 2016,'' Manhattan Institute, https://media4.manhattan-institute.org/sites/default/files/TLI-0116.pdf.
---------------------------------------------------------------------------

    Changes: None.

Plain Language Disclosures

    Comments: Several commenters who supported the proposed regulations 
requested that we develop standardized information that schools can 
provide to students regarding pre-dispute arbitration and class 
actions. The commenters suggest that this would ensure that all schools 
provide students with the same or similar plain language information.
    One commenter suggested a number of specific changes to the 
disclosure requirements, including the creation of common disclosures. 
The commenter recommended that the Department work in consultation with 
the CFPB to develop and consumer-test common, plain-language 
disclosures about arbitration clauses and class action waivers that 
would be supplemented with specific information from the school about 
its own processes. The commenter suggested that the disclosures should, 
at a minimum, note that pre-dispute arbitration clauses and class 
action waivers are not required at all schools of higher education and 
clearly state that students will not be able to exercise their right to 
sue their school if they have concerns about their academic experience 
at the school. The commenter also suggested that the Department ensure 
the disclosures made by schools are prominent and readily available to 
current and prospective students. The commenter recommended that the 
Department require that disclosures be listed on all pages of the 
school's website that include information about admissions, tuition, or 
financial aid; post the disclosure on the homepage itself, rather than 
on a sub-page, with the headline portion of the disclosure in an easily 
readable, prominent format; and enforce the disclosure requirements as 
part of its regular audit and program review processes.
    This commenter also expressed concern that the regulations would 
not require schools to submit fulsome information about arbitration 
proceedings at the school. If such a requirement is not included in the 
final regulations, the commenter recommended the Department instead 
require that schools submit basic details on at least a quarterly basis 
that would allow the Department to know if further investigation may be 
necessary. Specifically, the commenter suggested that we should require 
schools to report the total number of arbitration proceedings on 
borrower defense-related topics conducted during the previous quarter 
and provide a high-level summary of each such proceeding, including the 
nature of the complaint and its resolution (including whether the 
student completed the arbitration proceeding; whether the student is 
still enrolled in the school, has graduated, or has withdrawn; and the 
dollar amount or other forms of relief awarded to the student in each).
    Commenters expressed concern that disclosures fail to change the 
fact that students must accept the schools' harmful contract terms or 
not attend the school. They asserted that students are unlikely to 
appreciate the rights they are giving up. Commenters argued that 
disclosures are ``ineffective'' and that an ``information only'' 
approach was not sufficient.
    Another commenter noted that requiring schools to make disclosures 
not just on their websites, but also ``in their marketing materials,'' 
is not a requirement that is included in the actual regulatory language 
that the Department proposed.
    Discussion: The Department appreciates the many suggestions and 
recommendations from commenters about elements to include in disclosure 
materials, potential consultation partners, location of disclosures on 
institutional websites, as well as reported items, frequency, and 
submission requirements.
    The Department believes that government does not know what is best 
for a particular student, nor can bureaucrats in Washington know what 
is better for a student than the student knows for herself. The 
Department does not believe that students who enroll at institutions 
that use arbitration agreements and class action waivers are forced to 
attend those institutions or are unaware that other postsecondary 
options--some of which do not require such agreements--are available.
    As explained in the 2018 NPRM, we are rescinding Sec.  685.300(g) 
and (h)--which required schools to submit arbitral and judicial records 
to the Department--in an effort, in part, to reduce the administrative 
burden both on institutions and on the Department. Notably, these 
provisions required a significant amount of paperwork to be submitted 
to the Department, and we no longer believe that the value of these 
submissions outweighs the costs and burdens associated with them. 
Additionally, the Department is concerned about the long-term viability 
of these provisions and the deleterious effects that they may have. 
Publicizing arbitral documents would upend the arbitration process and 
could lead to institutions being less open during arbitration 
proceedings. On the other hand, publicizing these documents would 
potentially subject institutions to continuous liability for conduct 
that it has long since corrected--an outcome the Department wishes to 
avoid. The provisions also would require the Department to constantly 
monitor these submissions and would create an onerous, unnecessary 
administration burden for the Department when it should be dedicating 
its resources in this area to the adjudication of borrower defense to 
repayment claims.
    Similarly, the Department understands the commenter's suggestion 
that developing standardized information for schools to provide to 
students regarding pre-dispute arbitration and class action waivers 
would be helpful. However, the Department believes that any language 
developed by the Department, or any standardized form, would not 
sufficiently respond to each institution's unique circumstances or 
reflect a school's particular interests or approach, and therefore 
could interfere with the Department's goal of allowing borrowers as 
well as institutions to select the appropriate dispute resolution 
process.
    The Department agrees that any disclosures should be easy to find 
and provided in clear, easy-to-understand, plain language. In the final 
regulations, at Sec.  668.41(h)(1), we have added language directing 
institutions to include plain language disclosures in 12-point font, or 
the equivalent on their mobile platforms, on their admissions 
information web page and in the admissions section of the institution's 
catalogue. We believe these specified locations and manner for posting 
the information balance the need for notification without becoming 
overly burdensome.
    As discussed in the previous section, the Department rejects the 
assertion that students are unable to appreciate the rights they are 
giving up and the rights they are gaining. The Department believes that 
students, when armed with information, should have the right and 
opportunity to select an institution or program that will best meet 
their needs, whatever those needs may be. In

[[Page 49846]]

addition, the Department believes that these final regulations help 
achieve that aim. We believe that the more detailed disclosure items in 
entrance counseling requirements in Sec.  685.304, in concert with the 
plain language disclosures in Sec.  668.41, will work well to provide 
students with the information they need to become more informed about 
the choices they are making, both before and after they enroll in a 
school.
    The final regulations were revised to expressly provide that all 
disclosures must be in 12-point font on the institution's admissions 
information web page and in the admissions section of the institution's 
catalogue. The Department erred on the side of specifying where the 
disclosures should be placed to provide greater clarity and certainty 
in these final regulations.
    Changes: The Department revised Sec.  668.41(h)(1) to expressly 
state where the institution must include the requisite disclosures.

Entrance Counseling

    Comments: Some commenters who supported the disclosure requirement 
for schools that require their students to sign pre-dispute arbitration 
agreements or class action waivers objected to the requirement to 
include this information in entrance counseling. These commenters 
asserted that including the information in entrance counseling would 
not provide any additional value.
    One commenter recommended that the Department require schools to 
verify that students who obtained loan counseling through an 
interactive tool also receive an arbitration/class action waiver 
disclosure through a separate avenue. The commenter suggested the 
Department should require that schools obtain the student's signature 
to verify that the student received and read the loan counseling 
materials. This commenter further suggested that, since it already has 
an experiment in progress on loan counseling, the Department should 
also consider the lessons learned from participating schools to 
continually improve these requirements, and assess whether any of the 
participating schools have arbitration clauses or class action waivers 
to evaluate those schools' outcomes specifically and separately from 
the overall treatment group.
    One commenter asserted that counseling will not remedy their 
concern about unequal bargaining power between the student and the 
institution. The commenter argued that the Department's disclosure 
requirements are inadequate because the proposed rule does not address 
the qualifications to serve as a counselor and does not specify the 
method of counseling.
    Discussion: The Department appreciates the suggestions from 
commenters regarding the regulatory provision that institutions that 
require students to sign pre-dispute arbitration agreements or class 
action waivers as a condition of enrollment include information in the 
borrower's entrance counseling regarding the school's internal dispute 
and arbitration processes. We believe that students should receive 
entrance counseling on the school's internal dispute and arbitration 
processes. While we regard the inclusion of this counseling as a best 
practice, we will not require it through regulation. The Department 
will not require schools to verify that students received arbitration 
or class action waiver counseling through a separate tool or to obtain 
a student's signature to verify that the student received and read the 
counseling materials. We believe that the commenter's suggested options 
could prove too burdensome for institutions and the Department and that 
this level of monitoring would not necessarily be helpful or cost-
effective.
    In addition, the Department has no current plans to assess schools 
that employ arbitration clauses or class action waivers specifically or 
separately in any Department experimental site. The Department will 
take into account any lessons learned from ongoing experimental site 
projects and incorporate them into future rulemaking efforts, as 
appropriate.
    The Department disagrees with the commenter's objection that 
including information regarding pre-dispute arbitration agreements or 
class action waivers in entrance counseling would not provide any 
additional value to the students. We believe that the value added for 
students, especially at Sec.  685.304(a)(6)(xiv) and (xv), is keeping 
them informed about the agreements they are becoming a party to and 
about the internal dispute resolution options afforded to them by the 
school.
    The Department did not propose the additional counseling 
requirements to remedy concerns about the relative bargaining power 
between the institution and the borrower, but rather to help borrowers 
have the information they need about pre-dispute arbitration agreements 
and class action waivers. The Department believes, first and foremost, 
that providing disclosure information to students is in their best 
interests and will empower students to make informed decisions about 
their academic choices. We believe that the requirement in Sec.  
685.304(a)(5) that an individual with expertise in the title IV 
programs is reasonably available shortly after the counseling to answer 
questions, addresses some of the commenter's concerns about employee 
qualifications.
    Changes: None.

Closed School Discharges (Sec.  685.214)

Option To Accept a Teach-Out Opportunity or Apply for Closed School 
Discharge

    Comments: While sharing the Department's desire to encourage closed 
and closing schools to implement teach-out plans for their students, 
many commenters believed that borrowers enrolled at closed or closing 
schools should have the option to accept a teach-out plan or apply for 
a closed school discharge.
    Another commenter stated that there are many reasons a student 
would opt for a discharge rather than a teach-out, including: The low 
quality of education provided previously; a preference not to continue; 
the teach-out school has a poor reputation; or the same program is 
available at a local community college or other institution.
    Discussion: After considering the commenters' arguments, the 
Department now agrees that students should have the option to pursue a 
closed school loan discharge by submitting an application, transfer to 
another institution, or accept the teach-out plan offered by their 
institution, which may include a teach-out plan offered by the closing 
institution or a plan from a teach-out partner.
    If the orderly closure or the teach-out plan has been approved by 
the school's accrediting agency and, if applicable, the school's State 
authorizing agency, once a student accepts a teach-out plan offered by 
the institution or its partner, the student would not be eligible for a 
closed school loan discharge unless the school fails to materially 
adhere to the terms of the teach-out plan or agreement with the 
student.
    Changes: In light of the commenter's suggestions, proposed Sec.  
685.214(c)(1)(ii) (now Sec.  685.214(c)(2)(ii)) has been revised as 
follows: ``Certify that the borrower (or the student on whose behalf 
the parent borrowed) has not accepted the opportunity to complete, or 
is not continuing in, the program of study or a comparable program 
through either an institutional teach-out plan performed by the school 
or a teach-out agreement at another school, approved by the school's 
accrediting agency and, if applicable, the school's State authorizing 
agency.''

[[Page 49847]]

Automatic Closed School Discharges

    Comments: A number of commenters, who opposed granting automatic 
closed school discharges, stated that the practice is not good for the 
school, the government, or the taxpayer.
    Several commenters supported providing automatic closed school 
discharges to borrowers without requiring an application, as was 
provided for in the 2016 final regulations. Under the 2016 final 
regulations, the Department would automatically discharge a borrower's 
loans if the borrower does not re-enroll in another school or transfer 
their credits within three years of their school's closure. These 
commenters believed that not including the automatic discharge 
provision in our proposed regulations after the rule had been in effect 
would adversely affect students already navigating the complicated 
school closure process. One commenter expressed the view that, without 
the automatic loan discharge, borrowers will find it almost impossible 
to have their loans discharged.
    A group of commenters requested information regarding how the 
Department's regulatory impact analysis of its proposed rescission of 
the automatic closed-school discharge provision of the 2016 final 
regulations took into account the actual application rate of eligible 
students under current closed-school discharge provisions.
    One commenter recommended that students that attended schools that 
have been found to have engaged in fraud or misrepresentation and fined 
by the Federal government should have a right to an automatic discharge 
going back at least five years from the closing of the school.
    One commenter noted that the Department provided three 
justifications for its decision not to include an automatic discharge 
provision in the NPRM. In this commenter's view, none of the 
justifications are sufficient under the APA for this policy change.
    Another commenter noted that automatic discharges would help to 
address the disparities that are especially detrimental to borrowers of 
a specific minority group and hinder their ability to obtain relief 
through the court system or through administrative proceedings.
    Other commenters expressed the view that, in the absence of quality 
information or direction, rescinding the automatic discharge provisions 
severely limits the ability of borrowers to find a pathway to relief.
    Some commenters noted that the Department stated that one of the 
reasons that automatic discharges might be detrimental to borrowers is 
that schools may withhold transcripts from borrowers who receive 
automatic closed school discharges. The commenters argued that this is 
an unsubstantiated assertion, not backed up by evidence.
    One commenter stated that the Department has used flawed reasoning 
in stating that an unknowing borrower granted an automatic closed 
school discharge may lose the ability to obtain an official copy of 
their transcript. According to this commenter, the Department's 
reasoning is flawed because: Relevant case law demonstrates that 
withholding transcripts is unconstitutional at public colleges; such 
withholding could violate State law property rights; the change is 
unsubstantiated by any evidence of customary practice; and the 
Department neglected to consider less arbitrary actions to ameliorate 
the stated concerns.
    Discussion: The Department believes that providing automatic closed 
school discharges to borrowers runs counter to the goals of these final 
regulations, which include encouraging students at closed or closing 
schools to complete their educational programs, either through an 
approved teach-out plan, or through the transfer of credits separate 
from a teach-out.
    The Department does not agree that we do not provide quality 
information and direction to students who are enrolled in a closed or 
closing school. The Department takes its responsibility to keep 
students at a closed or closing school well-informed seriously, as do 
State authorizing bodies and accreditors, and we direct the commenter 
to the FSA website, where we have posted an explanation of the criteria 
for a closed school loan discharge, a description of the discharge 
process and the proper steps to take, answers to the most frequently 
asked questions, fact sheets on closed or closing institutions, 
schedules for live webinars presented by FSA, information on transfer 
fairs, and more. While the Department encourages schools to post the 
``Loan Discharge Application: School Closure'' form on their 
institutional website,\135\ as discussed in more detail below, we are 
rescinding Sec.  668.14(b)(32), which requires closing institutions 
provide information about closed school discharge opportunities to 
their students, because it is the Department's, not the school's, 
burden to provide this information to students.
---------------------------------------------------------------------------

    \135\ ``Loan Discharge Application: School Closure,'' https://ifap.ed.gov/dpcletters/attachments/GEN1418AttachLoanDischargeAppSchoolClosure.pdf.
---------------------------------------------------------------------------

    We do not agree that without an automatic discharge it would be 
almost impossible for a borrower to qualify for a closed school 
discharge. The application process for a closed school discharge is not 
overly burdensome or difficult to navigate, and it is generally not 
difficult for the Department to make determinations of borrower 
eligibility for closed school discharges based on the announcement date 
and enrollment information regarding the borrower.
    We also do not agree with the proposal that automatic closed-school 
discharges be available with a look-back period of five years. We 
believe that five years is too long, even in the case of a school 
against which the Department has assessed liabilities. We believe that 
a five-year period would include many students who left the school for 
reasons completely unrelated to the school's closure or the quality of 
instruction provided. If a closed school engaged in misrepresentation 
or other fraudulent practices, and the borrower was enrolled outside 
the window of eligibility for a closed school discharge, the 
appropriate remedy for the borrower is to apply for a borrower defense 
discharge. Also, under exceptional circumstances, the Secretary retains 
the right to extend the closed school loan discharge period.
    In the NPRM, the Department articulated its reasons for not 
including in these final regulations provisions for automatic closed 
school discharges, which were not part of our regulations prior to 
2016.\136\ The Department continues to believe that the closed school 
loan discharge application is the most accurate and fairest method to 
initiate the discharge process and make initial determinations on the 
potential claim.
---------------------------------------------------------------------------

    \136\ 83 FR 37267-37268.
---------------------------------------------------------------------------

    Additionally, as discussed in the 2016 final regulations and the 
2018 NPRM, the Department evaluated the potential impact of the 
automatic discharge provision using a data set of borrowers from 
schools that closed between 2008 and 2011 so re-enrollment could be 
evaluated. This accounted for those that filed for a closed school 
discharge in the window since their school's closure.
    Significantly, under the APA, an agency ``must show that there are 
good reasons for the new policy,'' but it need not show that ``the 
reasons for the new policy are better than the reasons for the old 
one.'' \137\ As detailed again

[[Page 49848]]

throughout this section, the Department does not believe that including 
automatic closed school discharges in the regulations is the best 
approach when considering all of the relevant factors. The Department 
believes that it is incumbent upon the borrower to make the decision as 
to whether it is in his or her best interest to retain the credits 
earned at the closed school or receive a closed school loan discharge.
---------------------------------------------------------------------------

    \137\ FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 
(2009).
---------------------------------------------------------------------------

    While there may be disagreement about whether automatic closed 
school loan discharge is better for borrowers than closed school loan 
discharges provided to students who apply for such a benefit, the 
Department has met the required legal standard for proposing and making 
this change. Given that automatic closed school loan discharges did not 
exist in our regulations until recently, we do not believe that this 
provision has become such an integral part of the program that it 
cannot function, and students cannot be served, without inclusion of an 
automatic discharge provision. As stated in the NPRM, the Department 
continues to believe that it is not overly burdensome for borrowers to 
apply for a closed school loan discharge, and that they should retain 
the choice of whether to apply.
    The final regulations make no distinctions between borrowers based 
on race. We do not believe that the provisions of the final regulations 
will penalize any one racial group over another, as all borrowers will 
be subject to the same requirements.
    Closed school discharge requests are rarely adjudicated through the 
court system and rarely require borrowers to participate in 
administrative proceedings. In most cases, to apply for a closed school 
discharge, an eligible borrower is only required to complete the closed 
school discharge application form and submit it to the Department.
    The Department is neither requiring nor encouraging institutions to 
withhold a transcript in the event of a closed school loan discharge, 
the Department notes that institutions may have the authority, subject 
to certain State laws, to develop policies and outline circumstances 
under which a student may be denied an official transcript.\138\ A 
student's right to a transcript under certain laws does not necessarily 
entitle that student to an official transcript.
---------------------------------------------------------------------------

    \138\ Note: The Department discusses the issues regarding the 
withholding of transcripts in more detail in the ``Relief'' section 
of these Final Regulations.
---------------------------------------------------------------------------

    However, the possibility of a school withholding transcripts was 
only cited as one reason not to provide for automatic closed school 
discharges. As noted above, granting automatic closed school discharges 
may be detrimental to schools and taxpayers since borrowers would not 
be required to state that they do not intend to transfer their credits 
to another institution to complete their program. Students could 
intentionally delay reenrollment at a new institution for three years 
in order to retain the credits already completed, but eliminate the 
debt associated with earning those credits. There are large costs to 
institutions and taxpayers when students retain the right to transfer 
their credits and also receive a closed school loan discharge. The 
Department wishes to emphasize to all borrowers that taking student 
loans has significant associated consequences, and that all borrowers 
who take loans should do so with the understanding that they are 
expected to repay their loans.
    Finally, given that there may be tax implications or other negative 
effects on the borrower, while some borrowers may appreciate an 
automatic discharge provision, we believe that closed school loan 
discharges should only be available by application. Some borrowers may 
be satisfied with the education they received prior to the school's 
closure and may have left the school in order to meet certain family or 
work obligations, but wish to transfer those credits in the future in 
order to complete their program at another institution.
    Changes: We are revising Sec.  685.214(c)(3)(ii) to specify that 
the automatic closed school discharge provision will apply for schools 
that closed on or after November 1, 2013 and before July 1, 2020.

Extending the Window To Qualify From 120 Days to 180 Days

    Comments: Several commenters supported extending the window of time 
during which a student must have withdrawn prior to a school's closure 
to receive a closed school discharge to 180 days. However, some 
commenters believed that the additional changes proposed by the 
Department eliminate any benefit of this change. One commenter viewed 
it as an ``empty gesture,'' and noted that the Secretary already has 
the authority to extend the window to 180 days under exceptional 
circumstances.
    Some commenters supportive of the expansion recommended that the 
window be increased to at least one year.
    A number of commenters requested data that the Department 
considered in assessing the impact of extending the eligibility period 
from 120 to 180 days.
    Other commenters opposed the proposed expansion. These commenters 
believed that closed school discharge claims should be based on why the 
student decided to withdraw from the closing school, not when. One 
commenter believed that allowing borrowers to qualify for closed school 
discharges based on when they withdrew from the school and not why they 
withdrew is inconsistent with the statute. In these commenters' views, 
the statute expressly ties a student's eligibility for a closed school 
loan discharge to the school's closure. These commenters noted that if 
a borrower withdrew from a school for personal reasons it may be 
documented in the school records and they argued that since these 
students left the institution for reasons unrelated to the school's 
closure they should not qualify for the discharge. Another commenter 
opposed to the expansion noted that extending the window creates 
increased liability for taxpayers to forgive the loans of students 
whose withdrawal was unrelated to the closure, such as personal 
circumstances or academic dismissal.
    Another commenter stated that if a borrower withdraws before the 
school closes, the borrower has not suffered any loss due to the 
school's closure.
    A commenter, who is opposed to the expansion, noted that 20 U.S.C. 
1087(c), the statute that authorizes closed school loan discharges, 
specifies that a borrower is eligible for a closed school loan 
discharge only if he or she ``is unable to complete the program in 
which [he or she] is enrolled due to the closure of the institution.'' 
This commenter claimed that the statute required a causal connection 
between the student's inability to complete the program and the closure 
of the institution. The commenter contended that the Department's 
current regulations conflict with section 1087(c) because the 
regulations allow a borrower to obtain a closed school loan discharge 
based on when the student withdrew and without regard to the reason for 
the withdrawal. The commenter noted that a borrower could apply for a 
closed school discharge even if the borrower voluntarily withdrew 
before the closure decision had been announced or even made. The 
commenter asserted that, by expanding the loan discharge window, the 
Department would likely see an increase in the frequency with which 
closed school discharges are granted.
    One commenter noted that if the Department extends the window to 
180 days, conforming changes would need to be made in associated 
regulations.

[[Page 49849]]

    Discussion: The Department thanks the commenters that supported 
extending the closed school discharge window to 180 days.
    Although some commenters believed that other changes reduce the 
importance of the extension, we expect that more borrowers will qualify 
for closed school discharges as a result of the extension, and we 
believe this is an important benefit. While it is accurate that the 
Secretary already has the authority to extend the window, borrowers at 
closing schools cannot know in advance whether an extension will be 
provided. Specifying the window of 180 days in the regulations allows 
more borrowers to make better informed decisions regarding whether to 
continue attending the school while also allowing them to benefit from 
the intended purpose of the regulations, without the need for a 
determination as to whether exceptional circumstances exist.
    The Department relied on its experience, as well as information 
from others involved in school closures, when proposing to extend the 
eligibility period for a closed school discharge. The Department has 
received numerous requests from state attorneys general, members of 
Congress, and former students and employees from closed schools to 
extend the look-back period beyond 120 days when a school closes. 
Together, this information validates the Department's belief that the 
longer period is needed.
    In the event that a closing institution is engaging in a teach-out 
plan in which it provides the teach-out services directly, the 180-day 
look-back period will begin on the actual date of the campus closure. 
However, students who elect a closed school loan discharge at the 
beginning of the teach-out period remain eligible for a closed school 
loan discharge under the exceptional circumstances provision, if the 
teach-out is longer than 180 days. A student should not feel compelled 
to continue enrollment at an institution after the announcement of a 
teach-out simply to be sure that he or she is enrolled less than 180 
days prior to the date of closure.
    We do not agree with the recommendation to extend the window to a 
full year. The purpose of the 180-day window is to provide borrowers 
access to a closed school discharge even if they choose to leave a 
school that is clearly showing signs of a loss of quality or 
institutional instability 180 days prior to closing.
    Based on our experience in handling closed school situations, we 
believe that 180 days provides an appropriate period to assume that a 
student has left the school due to a loss of quality. However, if we 
determined that a school experienced deteriorating educational quality 
for a longer period before it finally closed, the Secretary could use 
her authority, as referenced above, to increase the window of 
eligibility for a closed school discharge. We have made this 
exceptional circumstance explicit in the final regulations.
    We do not agree with the commenters who contended that the 
Department should make a determination as to why the borrower withdrew 
and not grant closed school discharges to borrowers who withdrew for 
personal reasons prior to the school closing. We do not believe that 
the statute requires a determination of the motives of a borrower for 
leaving a school to establish the borrower's eligibility for a closed 
school discharge. Moreover, the Department could not accurately make 
such determinations. Personal reasons, by their very nature, are 
individualized. They are not likely to be documented in a consistent, 
reliable manner and it is not always clear what factors ultimately lead 
anyone to take action.
    We disagree with some commenters' analysis of the requirements in 
20 U.S.C. 1087(c). The HEA provides that a borrower may receive a 
closed school discharge if the borrower ``is unable to complete the 
program in which the student is enrolled due to the closure of the 
institution'' (sections 454(g)(1) and 437(c)(1)), but does not 
establish a period prior to the closure of the school during which a 
borrower may withdraw and still qualify for a closed school discharge. 
The Department has long interpreted the statute to allow discharge for 
students who withdrew a short time before a school closure, in 
recognition that a precipitous closure may be preceded by degradation 
in academic quality or student services. These final regulations are in 
line with the Department's previous interpretations.
    The Department disagrees with the commenter who stated that a 
borrower who withdraws from a school that is on the verge of closing 
has not suffered any loss due to the school's closure. As noted, a 
closing school's educational environment may deteriorate, especially as 
the remaining student population contracts. A borrower who withdraws 
from a school prior to the actual closure date due to deteriorating 
conditions has suffered a loss, whether monetary, time, or other 
hardship. When the borrower enrolled in the school, they had every 
reason to expect the school to remain in existence for the duration of 
their education program. Had the borrower known that the school would 
close before they completed the educational program, the borrower would 
most likely have enrolled at a different school.
    Although the expansion of the window to 180 days may result in 
greater costs to taxpayers, we believe that any increased cost is more 
than offset by the benefit that it provides to borrowers who, through 
no fault of their own, find that they have incurred education debt for 
attendance at a school that is closing. In addition, the 180-day period 
covers any gaps between the spring and fall semesters, since the 
previous 120-day period could put students in a position of exceeding 
that window simply for not enrolling in summer classes. We believe that 
the totality of these regulations will encourage borrowers at closed or 
closing schools to complete their education program through teach-outs, 
rather than to take the closed school discharge. This is the 
Department's preferred policy because it incentivizes and prioritizes 
educational attainment.
    Changes: Because we are extending the window to 180 days, 
applicable to loans first disbursed on or after July 1, 2020, we are 
adding a new Sec.  685.214(g) and have made conforming changes to Sec.  
685.214(f)(1).

Exceptional Circumstances

    Comments: Several commenters recommended that the Department retain 
the existing list of exceptional circumstances under which it can 
expand the eligibility window. These commenters believed that the 
Department should not tie its own hands and foreclose its future 
ability to assist students dealing with an abrupt school closure.
    One commenter noted that the Department provided no rationale for 
the change, except in the case of the reference to a loss of 
accreditation. The commenter stated that there was no analysis of how 
this provision would interact with State laws. The commenter also 
believed that the proposed language on accreditation was unnecessarily 
detailed and could accidentally exclude some circumstances, such as 
voluntary withdrawal from accreditation without closure. The commenter 
believed that the elimination of the example of the institution's 
discontinuation of the majority of its programs would encourage 
institutions to keep open one small program to avoid paying for closed 
school discharges.
    Another commenter stated that the existing extenuating circumstance 
language provides clear indicators that help to determine what would 
rise to

[[Page 49850]]

the level of an exceptional circumstance. The commenter noted that the 
regulation is already structured as a non-exhaustive list and stated 
that the Department provided no justification for removing some of the 
items from the list. This commenter also recommended, in addition to 
restoring the list of exceptional circumstances that is in the current 
regulations, that the Department add the institution's loss of title IV 
eligibility to the list of exceptional circumstances. The commenter 
stated that, much like the loss of accreditation, the loss of Federal 
financial aid eligibility indicates a severe circumstance outside of 
closure that can severely affect a student's ability to attend the 
institution.
    Another commenter stated that, if the Department intends to make 
these types of changes, it must make clear to the public that it is 
doing so and must also provide a good reason for the change.
    Another commenter supported the proposal to narrow the list of the 
exceptional circumstances under which the Department can expand the 
window beyond 180 days.
    Discussion: We thank the commenter who supported narrowing the list 
of exceptional circumstances.
    The Department appreciates the opportunity to clarify our reasoning 
for the changes proposed in the NPRM to the non-exhaustive list of 
exceptional circumstances for extending the closed school discharge 
window. The Department proposed removing the reference in the existing 
list of extenuating circumstances to a school discontinuing the 
majority of its academic programs because closed school discharges are 
based on a school closing, not on the school discontinuing some 
academic programs, but continuing to offer others. We proposed removing 
the reference to findings by a State or Federal government agency that 
the institution violated State or Federal law because such violations 
do not necessarily lead to closure or have any bearing on why a school 
has closed.
    The proposed revisions to the language regarding accreditation and 
State authorization were intended to provide more clarity and useful 
detail to these examples. The accreditation example does not address 
the situation of a school voluntarily withdrawing from accreditation 
because we do not believe that situation occurs frequently enough to 
warrant a mention in this list.
    Upon further consideration, we agree with the recommendation made 
by the commenter to add the loss of title IV eligibility as an 
exceptional circumstance. The Department adopts the commenter's 
reasoning that the loss of Federal financial aid eligibility in 
conjunction with an impending school closure indicates a severe 
circumstance that can severely affect a student's ability to attend the 
institution.
    The Department included an exceptional circumstance where the 
teach-out of the student's educational program exceeds the 180-day look 
back period. The Department seeks to avoid the perverse outcome of 
requiring a student to enroll in a longer-than-180-days teach-out that 
they did not want, in order to reach the 180-day look back date.
    As noted above, the list remains non-exhaustive, so removing these 
items does not tie the hands of the Secretary in future situations in 
the event of a school closure. We believe that the list provides 
sufficient indicators for future determinations of when ``exceptional 
circumstances'' occur.
    Changes: The non-exclusive list of exceptional circumstances in 
Sec.  685.214(c)(1)(i)(B) (now redesignated Sec.  685.214(c)(2)(i)(B)) 
has been revised to include: ``the revocation or withdrawal by an 
accrediting agency of the school's institutional accreditation; the 
revocation or withdrawal by the State authorization or licensing 
authority of the school's authorization or license to operate or to 
award academic credentials in the State; the termination by the 
Department of the school's participation in a title IV, HEA program; or 
the teach-out of the student's educational program exceeds the 180-day 
look-back period for a closed school loan discharge.''

Imposition of Retroactive Requirements

    Comments: A group of commenters contended that the teach-out 
proposal would impermissibly impose retroactive requirements on current 
and past borrowers. These commenters noted that there is no time limit 
on when a borrower may submit a closed school discharge claim and 
argued that it would be legally impermissible to apply the new 
requirements to loans made before the effective date of the 
regulations. These commenters also noted that the Department has 
notified current borrowers of the existing requirement and argued that 
there is no legal basis to change those requirements for those 
borrowers. These commenters also contended that the retroactivity issue 
is particularly applicable to the FFEL program in which no new loans 
have been made since 2010.
    Discussion: We appreciate the commenters' concerns. We agree that 
the changes to the closed school discharge regulations, including those 
pertaining to teach-outs, should not apply to current loans. The NPRM 
did not specify an effective date for those changes, but we acknowledge 
that our proposal caused some confusion by including changes to the 
FFEL regulations in this area. The changes to the closed school 
discharge regulations will apply only to new loans made after the 
effective date of these regulations: July 1, 2020. Since no new loans 
are being made under the FFEL or Perkins Loan programs and the 
outstanding loans in those programs will not be affected by these 
changes, we are not making changes to those program regulations in this 
area.
    Changes: We have revised Sec.  685.214(c) and (f) and added a new 
paragraph (g) to specify that the changes being made to the closed 
school discharge regulation applies only to loans first disbursed on or 
after July 1, 2020. We also are not making the revisions we proposed in 
the NPRM to the FFEL (Sec.  682.402) and Perkins (Sec.  674.33) closed 
school discharge regulations.

Teach-Out Plans, Orderly Closures, and Transfer of Credits

    Comments: Several commenters supported the proposed change to the 
regulations that would require borrowers applying for a closed school 
discharge to certify that the school did not provide the borrower an 
opportunity to complete their program of study through a teach-out plan 
approved by the school's accrediting agency and, if applicable, the 
school's State authorizing agency.
    Many commenters also expressed strong support for the proposed 
revisions to the closed school discharge regulations that would provide 
that a borrower would qualify for a closed school discharge if a school 
failed to meet the material terms of the teach-out plan approved by the 
school's accrediting agency and, if applicable, the school's State 
authorizing agency, such that the borrower was unable to complete the 
program of study in which they were enrolled.
    Some commenters expressed concerns that accreditation agency 
standards for teach-out agreements are not uniform.
    One commenter noted that this proposal would encourage schools to 
follow their State or accreditor's teach-out process. This commenter 
stated that students, and taxpayers alike, are best protected from 
financial harm when schools provide the best path for students to 
complete their program of study rather than abruptly closing their 
doors.
    Another commenter noted that the proposed regulations would provide 
a

[[Page 49851]]

strong incentive for schools to provide students with an opportunity to 
complete their program through an approved teach-out that takes place 
at the closing institution or at another school. Another commenter 
suggested that without the teach-out ``safe harbor'' rule, borrowers 
would be encouraged to submit fraudulent closed school discharge 
claims. This commenter argued that schools that are closing make a 
considerable commitment to teach out their students and that since the 
borrower will have an opportunity to leave the school with their 
planned credential, there is no need for a loan discharge in these 
cases.
    One commenter supported the proposal to require borrowers applying 
for a closed school discharge to certify that the school did not 
provide the borrower with an opportunity to complete their program of 
study, regardless of whether the student took advantage of the teach-
out. This commenter recommended that the Department obtain information 
on approved teach-out plans from accreditors and State authorizing 
agencies and use this information to deny discharges to students who 
attended those schools, instead of relying on self-certification.
    One commenter argued that the proposed regulations would create an 
incentive for the orderly teach out of a school that is planning to 
close, thus offering an important protection for students, taxpayers, 
and schools.
    Another commenter argued in support of the proposed regulations 
that the Department should not penalize a school that creates a teach-
out program to help current students finish a program of study. In this 
commenter's view, if a school puts in the effort to establish a teach-
out agreement, it shows that the school ultimately has their students' 
best interests at heart by giving them the opportunity to complete 
their program of study.
    Another commenter noted that the proposed changes would be 
consistent with existing regulations, which do not allow students who 
transferred credits from a closed school to another school and who 
finished the program elsewhere to qualify for a closed school loan 
discharge.
    Another commenter stated that the proposed regulations are 
consistent with the statutory requirements in 20 U.S.C. 1087(c), the 
section of the statute that authorizes closed school loan discharges, 
if the borrower ``is unable to complete the program in which [he or 
she] is enrolled due to the closure of the institution.'' In this 
commenter's view, the statute demands a causal connection between the 
student's inability to complete the program of study and the 
institution's closure. A student's failure to complete must be ``due 
to'' the closure.
    Several commenters contended that in a fully approved teach-out 
plan, faculty and staff often go above and beyond to serve students 
through completion of their program. These commenters argued that this 
considerable commitment by the school toward its students, and the fact 
the student will leave with his or her planned credential, means there 
is no need for a loan discharge in these cases.
    Several commenters opposed the proposed changes to the closed 
school loan discharge provisions, as well. While one of these 
commenters agreed that more schools should offer teach-out plans, the 
commenter also stated that the quality of teach-out plans varies widely 
and the process for determining an acceptable teach-out plan lacks 
rigor and consistency. The commenter contended that the Department 
acknowledged this inconsistency and lack of quality in its announcement 
that it intended to start a negotiated rulemaking process concerning 
teach-out plans. The commenter also noted that, for some students, 
completing the credential through a teach-out plan may be undesirable.
    Many commenters stated that students who attended a closed school 
have a right to have their debt cancelled, even if the closed school 
offers an option to enroll at another school or location. The 
commenters stated that borrowers at closed schools should not be forced 
to transfer to another school.
    One commenter recommended maintaining the current policy on closed 
school discharges, or, alternatively, establishing standards for degree 
program comparability in teach outs. The commenter recommended that the 
regulations specify such factors as program length, costs and aid, 
programmatic accreditation, and quality to determine program 
comparability.
    One commenter stated that the proposed changes would close the 
window on many adult learners that do not have the money to transfer to 
another program.
    One commenter opposed to the proposed changes to the closed school 
discharge requirements relating to teach outs stated that students may 
be wary of a teach-out option if it is being provided by a school that 
is about to close. These students may be uncertain of the value of 
participating in the teach-out, compared to the value of starting fresh 
elsewhere.
    One commenter stated that the proposed regulations ignore the fact 
that a teach-out program may not meet a student's needs, or may not 
properly match their program of study, or may be at a school that isn't 
realistic for a student to attend. As another commenter noted, there 
are any number of reasons a student will choose a particular 
educational program. Some of those reasons may be related to the 
school's location and class schedule, or other factors relevant to that 
student's unique situation. In addition, there is no guarantee that the 
teach-out program is a high-quality program. The commenter noted that 
the student may be jumping from one bad program to another at the 
behest of the failing institution.
    Another commenter opposed to the proposed changes argued that under 
the proposed regulations borrowers would be treated differently in 
different States, as States and accreditors must approve teach-out 
plans. The commenter believed that this is inconsistent with the 
rationale used in the NPRM for adopting a single Federal evidentiary 
standard for borrower defense claims. The commenter noted that 
accrediting agencies and States have complex and conflicting policies, 
which would result in inconsistent results based on geography, quality, 
and other factors. The commenter noted that the proposed regulations 
assume that teach outs are always the best option, but expressed the 
view that this may not be true in all cases, especially at the 
beginning of a long program. The commenter noted that there may be 
problems with teach outs such as exclusions, potential additional cost, 
geographic proximity, record keeping and transcripts, and transfer of 
student aid. The commenter noted that teach outs are non-binding and 
institutions may renege on them, and teach-out agreements may conflict 
with State laws, such as those regarding tuition recovery funds. As 
noted by another commenter, a teach out might involve travel or other 
constraints that make it impractical for some students. The commenter 
recommended that the Department take into consideration that students 
choose programs for reasons other than academics, such as compatibility 
with work or family obligations.
    Another commenter expressed the view that the proposed regulations 
would eliminate the path to loan discharge when there is a teach out 
available, regardless of whether the opportunity was accessible, in the 
same mode of instruction, or of comparable quality, and would encourage 
predatory institutions to submit sub-par teach-out opportunities.

[[Page 49852]]

    Another commenter took issue with the statement in the NPRM that 
``borrowers may be better served by completing their programs . . . 
than by having their loans forgiven.'' The commenter stated that the 
Department provided no evidence to support that assertion. In the 
commenter's view, this type of decision-making does not qualify as a 
``good reason'' under the APA for changing the closed school discharge 
eligibility requirements.
    Another commenter opposed the proposed changes to the closed school 
discharge regulations to deny loan discharges to those who were offered 
a teach-out--even if they did not complete it. The commenter stated 
that the statutory language creating closed school discharges indicates 
that Congress intended to make the discharges available to all students 
in a program. Specifically, 20 U.S.C. 1087(c) reads that ``if a 
borrower . . . is unable to complete the program in which such student 
is enrolled due to the closure of the institution . . . then the 
Secretary shall discharge the borrower's liability on the loan.'' The 
statutory language does not refer to completing another, substantially 
similar, program; nor does it refer to a program offered by another 
institution, in another modality, or in another location. In the 
commenter's view, the Department's proposal to deny discharges to 
anyone who had the opportunity to complete a program is a subversion of 
congressional intent and the plain reading of the legislative text.
    The commenter also noted that the Department's proposed changes run 
counter to its own longstanding interpretation that the statute 
permitting closed school loan discharges applies to all borrowers from 
the institution. While teach-out plans are required from closing 
institutions, the Department has previously recognized that a teach-out 
may not be what a student signed up for, and may differ in key ways 
from the original program. To respect students' choices and ensure they 
are able to make the choice that's right for them, the regulations have 
allowed students to either transfer their credits (or accept a teach-
out) or to receive a loan discharge.
    The commenter expressed the view that the Department is proposing 
to eliminate that choice in an attempt to reduce liabilities for 
closing institutions. The commenter noted that the Department expects 
this provision, along with the elimination of automatic discharges, to 
reduce closed school discharges by 65 percent.
    The commenter noted several problems with teach-out plans in the 
current system: In teach-out arrangements, students are not always able 
to transfer all of their credits or pick up their programs exactly 
where they left off at the closing institution; some teach-out plans 
offer only impractical or sub-par options for students; accrediting 
agency policies relating to teach-out agreements differ across 
agencies, particularly where teach-out agreements are concerned; none 
of the accrediting agencies expressly require in their standards that 
institutions arrange teach outs in the same modality as the original 
program; it can be difficult to find teach-out arrangements for some 
niche programs, so some students may fall through the cracks in 
establishing teach-out agreements; and few accreditors list standards 
beyond geography, costs, and program type that they consider in 
approving or rejecting proposed teach-out arrangements, although some 
regional accreditors require that teach-outs be offered by institutions 
with regional accreditation only.
    The commenter expressed the view that the result of the proposed 
regulations would be to create a strong incentive for institutions to 
establish teach-out agreements, without much consideration for the 
quality of the teach out or how well it will serve the students 
affected by the institution's closure.
    The commenter also noted that State policies vary widely on school 
closures. The Department provided no discussion on the question of when 
State authorizers require institutions to get their sign-off on teach-
out plans.
    The commenter stated that one State's efforts to require teach-out 
plans from institutions and ensure other protections are in place 
before colleges close received push-back from institutions of higher 
education, and that organizations representing States have said they 
are not aware of other States requiring these provisions.
    Commenters requested the reason behind why the Department stated 
that accreditors will only approve adequate teach-out plans. In 
addition, the commenter requested clarification as to whether the 
Department would foreclose closed-school discharges to students who 
were offered an online-only teach out. The commenter asked what 
percentage of schools that closed in the past five years offered a 
teach-out plan and whether the Department has considered the impact of 
the proposed regulations in relation to this information. The commenter 
also requested whether the Department would allow a borrower to 
establish eligibility for a closed school discharge when the borrower's 
individual circumstances precluded them from completing their program 
of study through the teach-out.
    The commenter stated that some accreditors require teach-out plans 
prior to a school closing if the school is in financial straits. 
However, such teach-out plans may only offer an initial suggestion of 
which institutions the closing college might reach an agreement with--
not a signed contract with those institutions. Such a plan does not 
constitute a formal agreement with another institution to take over in 
the event that the institution cannot or will not teach out its own 
students. Furthermore, it does not mean the teach-out will be executed 
according to the plan in the event of actual closure.
    The commenter suggested that, if the Department retains this 
proposal, teach-out agreements would be a more appropriate measure than 
teach-out plans for institutions not remaining open long enough to 
teach out their own students, since the plans may be outdated or 
uncertain. The commenter also recommended that the Department should 
require that the teach-out be the same in its implementation as it was 
in the accreditor's approval of the plan, ensuring that the letter of 
the plan is followed through, since the documents on file with the 
accreditor may not always comport with on-the-ground realities.
    Finally, the commenter proposed that, if the Department does not 
revise these proposed regulations, the Department clarify that they 
only apply to schools closing after the effective date of the 
regulations, July 1, 2020.
    Another commenter recommended that the proposed ``teach out'' 
changes only apply for those closing schools whose graduates 
consistently find careers in their fields of study. In this commenter's 
view, letting a school continue to provide education that is not going 
to be applicable to the borrower's career goals is a waste of the 
borrower's time and money, and he or she should be permitted to file 
for full discharge of the loans.
    Another commenter noted that there are times where the approved 
teach-out schools are out-of-State, the ``teach-out'' school is at risk 
of closing, the other school has a poor reputation, or the school with 
the approved teach-out is too far away from the closing school.
    Discussion: The Department agrees with commenters that teach-out 
plan requirements are not uniform among accreditors and we, through the 
recent negotiated rulemaking effort, are taking steps to improve and 
modernize the requirements relating to teach-out plans and to better 
coordinate information

[[Page 49853]]

between the Department and accreditors.
    We acknowledge that even a well-planned and well-executed teach out 
may not be ideal for every student. Issues such as modality, location, 
and compatibility with work and family situations may make it difficult 
for a student in an education program to participate in a teach-out 
offered by a closing or closed school. Therefore, the Department has 
revised its proposal to allow a student to choose either the teach-out 
or the closed school discharge. These final regulations do not 
disqualify a borrower who has declined to participate in a teach out 
from receiving a closed school discharge. However, to avoid 
circumstances where students complete their program and apply for 
discharge, the borrower is required to certify that they did not 
complete the program of study, or a comparable program, through a 
teach-out at another school or by transferring academic credits or 
hours earned at the closed school to another school.
    The Department does not have the authority to regulate the quality 
of academic instruction, nor does it have the authority to regulate 
each detail of teach-out plans or agreements. We do, however, work 
together as a member of the regulatory triad and believe that the 
accreditor will approve plans that will serve students appropriately in 
the event of a closure. The Department can hold accreditors accountable 
for ensuring that teach-out plans provide acceptable options and 
opportunities for students.
    The Department does not believe that an online only teach-out is an 
equivalent option, if the original program was not taught exclusively 
via distance education. While we believe this could be an available 
option that may be suitable for some students, it is insufficient for 
this to be the only teach-out option to be offered to students 
currently enrolled in ground-based programs. Similarly, it is not 
sufficient for a teach-out plan to include only ground-based courses in 
the event that it is an online institution that is engaged in a teach-
out.
    The Department does not generally require schools to submit teach-
out plans to us since accreditors and State authorizing bodies are 
charged with reviewing and approving teach-out plans. However, the 
Department reserves the right to review any teach-out plan that has 
been approved by the institution's accreditor and State authorizing 
body.
    Under these final regulations, the Department allows the borrower 
to choose between the teach-out (or transfer) and the closed school 
discharge. As stated elsewhere, we believe that in many instances, and 
in particular among students close to the end of their program, the 
student may be best served by completing their academic program at the 
closing institution or a teach-out partner institution. For students 
with less than 25 percent of the program remaining to complete, a 
teach-out that takes place at the closing institution may offer the 
most rapid and cost-effective route to degree completion. Moreover, 
while accreditors generally require a student to complete at least 25 
percent of their program at an institution that awards a credential, 
many accreditors waive the 25 percent rule for students who are 
enrolled in a formal teach-out agreement with another institution.
    One commenter challenged the Department's assertion that borrowers 
may be better served by completing their programs than by having their 
loans forgiven. We stand by this assertion. In our view, obtaining the 
education credential that the borrower wanted to pursue is generally 
preferable to foregoing credential completion or being required to 
start a program over at another institution. Disruptions in a student's 
time in school can have devastating consequences and, too often, lead 
to the student abandoning their educational pursuit.\139\ It is better 
to create a path for students to finish their degree, certificate, or 
program, rather than create perverse incentives to stop their 
schooling, with only a plan for an indeterminate, future starting date.
---------------------------------------------------------------------------

    \139\ See: Park, Toby J., ``Working Hard for the Degree: An 
Event History Analysis of the Impact of Working While Simultaneously 
Enrolled,'' April 2012, Presented at the American Educational 
Research Association's Annual Conference, Vancouver, BC, available 
at: https://www.insidehighered.com/sites/default/server_files/files/PARK_WORKING.pdf.
---------------------------------------------------------------------------

    Our goal is not to reduce the number of closed school discharges 
awarded through these regulations or reduce the liability for closing 
institutions, as one commenter suggested. Rather, it is to provide 
students enrolled at a closing or closed school as many options as 
possible for completing their program. The Department seeks to 
encourage institutions to provide approved teach-out offerings rather 
than closing precipitously.
    Regarding the commenters' other concerns about teach-out plans, we 
believe that the revised language in these final regulations, 
consistent with the Department's long-standing interpretation of 20 
U.S.C. 1087(c), addresses those concerns. Since borrowers will have a 
choice of participating in the teach out or receiving a closed school 
discharge, a borrower who believes, due to the closure of the 
institution, that the teach out offered by the school will not meet his 
or her needs, may decline the teach out and still qualify for a closed 
school discharge.
    Changes: We have revised our proposed changes (now reflected in 
Sec.  685.214(c)(2)(ii)) to specify that a borrower is eligible for a 
closed school discharge if the borrower opts not to accept the 
opportunity to complete the borrower's program of study pursuant to a 
teach-out plan or agreement, as approved by the school's accrediting 
agency and, if applicable, the school's State authorizing agency. As 
discussed above, we are no longer making changes to the regulations 
regarding FFEL or Perkins loans, so parallel changes are no longer 
necessary to Sec.  674.33 or Sec.  682.402.

Departmental Review of Guaranty Agency Denial of a Closed School 
Discharge Request

    Comments: Commenters supported allowing a borrower the opportunity 
for the Department to review a closed school discharge claim, which was 
denied by the guaranty agency, to provide a more complete review of the 
claim for the closed school discharge. One commenter suggested that 
this secondary review process would result in greater uniformity of the 
processing of closed school discharge applications. Another commenter 
provided detailed proposed regulatory language in support of this 
change.
    Discussion: We thank the commenters for their support for the 
proposed changes in the NPRM and their suggestions. However, since no 
new loans are being made under the FFEL program, plus the facts that 
the outstanding FFEL loans will not be affected by these changes and 
that the changes proposed regarding Departmental review of guaranty 
agencies' denials were also included in the 2016 regulations, we will 
not be making changes to the FFEL program regulations in this area.
    Changes: None.

Additional Recommendations

    Comments: One commenter recommended that, before granting a closed 
school discharge, the Department notify the school about the proposed 
discharge, the basis for the proposed discharge, and provide the school 
with a copy of the application and supporting documentation submitted 
to the Department. Under this proposal, the

[[Page 49854]]

school would have 60 days to submit a response and information to the 
Secretary addressing the closed school discharge claim. The commenter 
also suggested that the Department should provide the borrower with a 
copy of any response and information submitted by the school. Another 
commenter also suggested that the school have an opportunity to provide 
information to the Department that might affect the decision of whether 
to grant a closed school discharge. A third commenter stated that the 
Department would not be able to make an accurate closed school 
discharge determination without information from by the school.
    Discussion: The Department disagrees with the commenters' proposal. 
The determining factors that establish a borrower's eligibility for a 
closed school discharge are limited to whether the borrower was in 
attendance at the school at the time it closed or withdrew within the 
applicable number of days of the date the school closed, and the 
borrower did not complete his or her program or a comparable program at 
another institution. For most borrowers in these situations, the 
Department already has information about the school's closure date and 
has access to information about whether the borrower was in attendance 
or had recently withdrawn. The Department has made decisions on these 
claims for more than 20 years without having a formal submission 
process for additional information from the school, and we do not have 
any evidence that those decisions were incorrect. Accordingly, we do 
not believe that we need to establish a process for schools to review 
the borrower's information and respond.
    Changes: None.
    Comments: One commenter noted that the 2016 final regulations 
established requirements that closing institutions provide information 
about closed school discharge opportunities to their students. The 
commenter recommended that the Department include these requirements in 
these regulations, citing the concerns the Department raised in the 
2016 final regulations that potentially eligible borrowers may be 
unaware of their possible eligibility for closed school discharges 
because of a lack of outreach and information about available relief.
    Discussion: The Department appreciates the commenter's concerns 
regarding the removal of the requirements included in Sec.  
668.14(b)(32). As stated above in the Automatic Closed School 
Discharges section, the Department provides information on our website 
to students regarding the closed school loan discharge process, 
frequently asked questions, fact sheets, webinars, and transfer fairs.
    The Department is rescinding Sec.  668.14(b)(32) because we 
concluded that it is the Department's, not the school's, responsibility 
to provide this information to students. The Department believes that 
the borrower will have the best access to accurate, up-to-date and 
complete information by obtaining it from the Department's website, or 
the websites of accreditors and state authorizing bodies. Unlike 
institutional websites that may cease to operate when a school closes, 
the Department's website will continue to provide students with updated 
information.
    Even so, we encourage schools to post the Department's closed 
school loan discharge application on their institutional website and to 
direct their students to the FSA website for further information.
    Changes: None.
    Comments: One commenter had specific concerns about the timeframe 
for appeal of closed school loan discharge determinations, whether 
appeal is an option for non-defaulted borrowers, and capitalization of 
interest. The commenter also raised concerns about PLUS loans and 
closed school discharges as they pertain to PLUS loans. The commenter 
recommended we specify that the reference to a borrower making a 
monetary claim with a third party refers to both the student and the 
parent in the case of a parent PLUS loan.
    One commenter expressed a concern that the proposed closed school 
regulations would allow even the most financially unstable institutions 
on the brink of closure to continue benefitting from Federal student 
aid.
    One commenter expressed the view that the final regulations should 
clarify that students are not eligible for closed school discharge when 
their college merges with another college, changes locations, or 
undergoes a change in ownership or a change in control. The commenter 
cited one example of a case in which a college was engaged in internal 
restructuring that required a change in OPEID numbers. According to the 
commenter, the school was required to offer students a closed school 
discharge despite offering the same program to students under the new 
OPEID number. In this commenter's view, the Department should clarify 
that internal restructurings do not result in a closed school 
discharge.
    One commenter recommended that the Department look closely at 
borrower defense claims regarding institutions that have recently 
closed. The commenter asserts that many of these claims are closed 
school discharge claims disguised as borrower defense claims.
    One commenter recommended that the Department designate the closed 
school discharge regulations for early implementation to incentivize 
institutions that are currently considering institutional or location 
closures to provide a teach-out for their students.
    One commenter stated that if a school goes ``out of business'' or 
goes bankrupt, the former students should have reduced loan repayment 
obligations, especially for loans made by the school.
    One commenter noted that under both the current and proposed 
regulations, the Department is required to identify any Direct Loan or 
Perkins Loan borrower ``who appears to have been enrolled at the school 
on the school closure date or to have withdrawn not more than 120 days 
prior to the closure date'' and to ``mail the borrower a closed school 
discharge application and an explanation of the qualifications and 
procedures for obtaining a discharge.'' FFEL regulations similarly 
require guaranty agencies, upon the Department's determination that a 
school has closed, to identify potentially eligible borrowers and mail 
them a discharge application with instructions and eligibility 
criteria. This commenter asserts that the Department has not fulfilled 
its duty to provide notices and application forms to all potentially 
eligible borrowers, and that many borrowers whose schools have closed 
remain unaware of their eligibility. The commenter contends that 
applying the proposed changes to the closed school discharge 
regulations to such borrowers would unfairly harm them by making many 
of them newly ineligible to discharge their loans without ever having 
received notice of their eligibility.
    Discussion: The Department does not believe that it is necessary to 
create an appeal process for borrowers making claims for closed school 
discharges. In most cases, closed school discharge decisions are based 
solely on whether the borrower was attending the school when it closed 
or shortly before and did the borrower choose to complete their program 
through a teach-out or transfer of credits. If the borrower's claim is 
denied but they have additional supporting information they can always 
submit a new claim and still receive full relief. Thus, there is no 
reason for a new formal appeal process.
    We do not share the commenter's concern that the rules relating to 
Parent

[[Page 49855]]

PLUS loan borrowers are unclear. We believe that our current language 
makes it clear that Parent PLUS loan borrowers must satisfy the same 
requirements for a discharge as student borrowers except that the 
Department considers the date the student stopped attending the school 
and whether the student completed their program of study.
    We disagree that the final regulations would have any impact on a 
school's eligibility to participate in the student financial aid 
programs. If a school stops offering educational programs, it loses its 
eligibility to participate in the title IV student financial aid 
programs for other reasons. However, if a school closes one location 
and otherwise keeps offering educational programs, the continuing 
locations would remain eligible to participate. Depending upon how far 
the closing or closed campus is from the remaining campuses of the 
institution, or in the case of a campus relocation, the distance 
between the old and new location, the State or the accreditor may make 
a determination of whether this would be classified as a school 
closure. For example, in some states a new or continuing campus must be 
within a certain travel distance of the closing or moving campus, or 
must be on the same mass transit line, in order for the move to a new 
campus or merger with an existing campus to not be classified as a 
school closure.
    The Department has not proposed modifying the definition of 
``closed school.'' Generally speaking, the merger of campuses, changes 
in campus location changes of ownership would be not be considered 
closed schools and students enrolled at those institutions would not 
generally be eligible for closed school loan discharge.
    We do not believe that a school's closure or bankruptcy should 
automatically reduce its' former students' loan repayment obligations. 
If those students qualify for a closed school discharge, or have a 
borrower defense to repayment, they can apply for that relief 
individually. The Department has no authority to determine whether or 
not a student remains obligated to repay private loans, including those 
issued by the institution, in the event that an institution closes.
    If a borrower at a school that has closed may qualify for either a 
closed school discharge or a borrower defense discharge, we encourage 
the borrower to apply for a closed school discharge. The closed school 
discharge application process is generally less burdensome than the 
borrower defense application process since in the case of the closed 
school, the evidence of the closure is clear and apparent. We do not 
believe there is a strong incentive for a borrower who may qualify for 
a closed school discharge to apply for a borrower defense discharge 
instead.
    The Department thanks the commenter for the suggestion regarding 
early implementation of the closed school discharge regulatory 
provisions. We reviewed the provisions and our procedures to determine 
if early implementation was possible. As a result, we are limiting our 
early implementation of these final regulations to those expressly 
listed in the ``Implementation Date of These Regulations'' section at 
the beginning of this document.
    Changes: None.
    Comments: None.
    Discussion: In the discharge procedures for loans first disbursed 
on or after July 1, 2020, the Department makes a technical amendment in 
Sec.  685.214(g)(6) to state that if the borrower does not qualify for 
a closed school discharge, the Department resumes collection. This 
technical amendment reflects the Department's longstanding practice to 
resume collection if a borrower's closed school discharge application 
is denied.
    Changes: The Department makes a technical amendment to Sec.  
685.214(g)(6) to state that if the borrower does not qualify for a 
closed school discharge, the Department resumes collection.

False Certification Discharges

Application Process

    Comments: One commenter recommended that the Department remove the 
new requirement that a borrower submit a ``completed'' application in 
order to obtain a false certification loan discharge, and that we 
instead retain the language in the 2016 final regulations that required 
a borrower to submit an application in order to qualify for a false 
certification discharge. Another commenter agreed with the 
recommendation to remove ``completed,'' at least until the false 
certification discharge application is tested and revised to reduce 
inadvertent borrower errors. The commenter believed that by requiring a 
completed application within 60 days of suspending collections, the 
Department, guaranty agencies, and servicers would lack the discretion 
to notify the borrower regarding inadvertent errors and allow the 
borrower additional time to submit a corrected application while 
collection remains suspended.
    One commenter recommended that the Department provide a school with 
written notice that a student has filed a discharge application and 
give the school the opportunity to respond. Another commenter also 
supported this proposal and urged the Department to provide the 
institution with a copy of the application and supporting information 
and afford the school a reasonable period of time to respond, such as 
60 days. Under this proposal, the student would be provided a copy of 
the school's response and supporting documentation.
    One commenter expressed the view that the proposed regulatory 
changes related to false certification discharges will result in 
borrower confusion about their false certification discharge 
applications. The commenter objected to the Department's proposal to 
remove language included in the 2016 final regulations that would 
require the Secretary to issue a decision that explains the reasons for 
any adverse determination on the application, describe the evidence on 
which the decision was made, and provide the borrower, upon request, 
copies of the evidence. The 2016 final regulations also provide that 
the Secretary considers any response and additional information from 
the borrower and notifies the borrower whether the determination has 
changed. In the commenter's view, this language would offer borrowers 
an opportunity to respond and submit additional evidence that could 
prove critical both to the approval of a borrower's application and to 
the Department's oversight of institutional misconduct.
    Discussion: These final regulations require the borrower to submit 
a ``completed'' application because an incomplete application--such as 
an application without a signature or an application with missing 
information--does not provide all the information necessary for the 
Department, guaranty agency, or servicer to make a decision on the 
claim, which will result in the application being returned to the 
borrower as incomplete. Therefore, we will retain the term 
``completed'' in the final regulations.
    Requiring the borrower to submit a ``completed'' application in the 
regulations does not preclude the Department from contacting the 
borrower and asking the borrower to provide the missing information. 
Additionally, we believe sixty days from the day that the Secretary 
suspended collection efforts is a reasonable period of time for a 
borrower to complete the application, and for any necessary follow-up 
communication between the borrower and the Department.
    We disagree with the commenters' proposal that the Department give 
a

[[Page 49856]]

school an opportunity to respond to the borrower's false certification 
discharge application. The information and documentation that the 
Department routinely collects through the false certification discharge 
application process is typically sufficient for the Department to make 
a determination of eligibility. Further, while information is generally 
not required from the school, the Department has the discretion to 
contact the school to request additional information. In addition to 
any relevant information that a school may provide in response to a 
request from the Department, the final regulations provide that the 
Secretary may determine whether to grant a request for discharge by 
reviewing the application in light of information available from the 
Secretary's records and from other sources, including, but not limited 
to, the school, guaranty agencies, State authorities, and relevant 
accrediting associations. In other words, the Secretary has the 
discretion to review all necessary and relevant information to make a 
determination about a discharge based on false certification under 
these final regulations. We believe this approach strikes the right 
balance between thoughtful use of government resources and facilitating 
a full and fair process, by providing secretarial discretion and not 
requiring the Department to conduct unnecessary mandatory steps.
    We do not believe that these final regulations will result in 
confusion to borrowers about their false certification discharge 
applications. Both the proposed and final regulations expressly state 
that the false certification discharge application will explain the 
qualifications and procedure for obtaining a discharge.
    Information on eligibility for a false certification discharge will 
be provided to borrowers on the false certification discharge form and 
other forms, and we will provide updated information on our websites. 
Additionally, these final regulations provide in Sec.  685.215(f)(5) 
that if the Secretary determines that the borrower does not qualify for 
a discharge, the Secretary notifies the borrower in writing of that 
determination and the reasons for the determination, and resumes 
collection.
    We do not believe that it is necessary to provide a formal appeal 
process for a borrower to dispute a denial of a false certification 
discharge application. Due process does not require an appeal in this 
context. We provide additional avenues for a borrower to dispute a 
denial of a loan discharge through such means as contacting the FSA 
Ombudsman Group.\140\ Currently, the Ombudsman Group works with 
borrowers and their loan holders to attempt to resolve disputes over 
matters such as discharge decisions. This process continues to be 
effective and the Ombudsman Group is engaged in a continuing process to 
improve their responsiveness to borrowers.\141\ Given the considerable 
time and resources involved in formal appeal processes and the 
efficiency of the Ombudsman Group, we have decided not to include a 
formal process in the final regulations. With regard to (1) providing 
information to borrowers with regard to ``false certification'' 
discharge and (2) a formal appeal, we believe our regulatory approach 
strikes the right balance between thoughtful use of government 
resources and facilitating a full and fair process, by not adding 
additional, unnecessary mandatory steps.
---------------------------------------------------------------------------

    \140\ See: https://studentaid.ed.gov/sa/repay-loans/disputes/prepare.
    \141\ In the Report of the Federal Student Aid Ombudsman, the 
Ombudsman Group reported that customer satisfaction survey results 
were ``not as high as desired,'' but had improved from FY 2016. 
(See: FSA Fiscal Year 2018 Annual Report, https://www2.ed.gov/about/reports/annual/2018report/fsa-report.pdf, at pg. 100-101.) The 
Ombudsman noted, however, that they attributed the customer rating 
to individuals expressing dissatisfaction because they expected the 
Ombudsman to act as their advocate, desired an outcome that falls 
outside law and regulations, or based their satisfaction on the 
outcome achieved rather than the service provided.
---------------------------------------------------------------------------

    Changes: None.

False Certification of a Borrower Without a High School Diploma or 
Equivalent

    Comments: Several commenters supported the proposal to amend the 
eligibility criteria for false certification loan discharges to specify 
that, in cases when a borrower could not provide the school an official 
high school transcript or diploma but provided an attestation that the 
borrower was a high school graduate, the borrower would not qualify for 
a false certification discharge based on not having a high school 
diploma. These commenters agreed that a student attestation of high 
school graduation should be a bar to a false certification discharge. 
Many commenters expressed the view that if a student lies about earning 
a high school diploma for the purpose of applying for Federal student 
loans, the school should not be held responsible. One commenter noted 
that this proposal would provide a useful protection for schools 
serving populations for which providing a diploma can be difficult, 
such as non-traditional students who are unable to access their 
transcripts due to the length of time since high school graduation. 
Another commenter made the point that institutions and taxpayers should 
not be accountable for the fraudulent behavior of borrowers.
    One commenter supportive of the proposal suggested additional 
language that, in the commenter's' view, would better reflect the 
intent of the regulatory change. The commenter recommended language 
specifying that a borrower does not qualify for a false certification 
discharge if the borrower falsely attested to the school in writing and 
under penalty of perjury that the borrower had a high school diploma or 
completed high school through home schooling.
    One commenter, supportive of the proposal to deny a false 
certification loan discharge to students who deceived the school about 
the students' high school completion status, expressed concern that the 
parameters described in Sec.  685.215(c)(1)(ii) are convoluted and may 
be difficult to manage at an open access institution such as most 
community colleges and vocational schools. Institutions often rely on 
the students' self-certification of high school completion, such as 
through the information submitted by the student in the FAFSA, which 
would fail the requirement described in proposed Sec.  
685.215(c)(1)(ii)(A). This commenter proposed revising Sec.  
685.215(c)(1)(ii) to provide that a borrower would not qualify for a 
false certification discharge under Sec.  685.215(c)(1) if the borrower 
submitted a written attestation, including certification through the 
FAFSA, that the borrower had a high school diploma or its recognized 
equivalent.
    One commenter agreed with the proposal, but noted that if the 
borrower reported not having a high school diploma or its equivalent 
upon admission to the school and the school certified the student's 
eligibility for Federal student aid, the school should be held liable 
for the funds that were provided to the student. As another commenter 
noted, although schools may rely on information in the FAFSA when 
certifying borrower eligibility, it is also the school's responsibility 
to resolve conflicting information. The commenter suggested including 
language that establishes an exception to this rule in cases where the 
school had information that indicates that the student's information is 
inaccurate.
    Other commenters stated that, in some cases, a false attestation by 
a student is the result of a deliberate effort by a school. These 
commenters believed that students who have been induced to misrepresent 
their eligibility as a result of institutional efforts or practices 
should be entitled to relief under the regulations. Other commenters

[[Page 49857]]

expressed the view that the proposal may lead to schools rushing 
students through the attestation forms and, thus, may incentivize fraud 
on the part of schools. One commenter asserted that students will be 
counseled by schools to sign the attestation and stated that at least 
one accrediting agency forbids such attestations. The commenter 
recommended that a separate process be put in place for students who 
are unable to obtain their high school diplomas or transcripts due to 
natural disasters.
    A group of commenters expressed the view that the attestation 
provision will enable predatory schools to defraud both students and 
taxpayers, while denying relief to borrowers. This group believed that 
the proposal conflicts with the broad statutory mandate to grant false 
certification discharges and raises serious due process concerns by 
creating a blanket restriction that denies false certification 
discharges whenever a school produces an attestation of high school 
status presumably signed by the borrower without consideration of facts 
or evidence. These commenters also noted that the FSA Handbook allows 
schools to accept alternative documentation of high school graduation 
status if a student cannot provide official documentation to verify 
high school completion status and, thus, an avenue already exists for 
the limited number of borrowers who cannot obtain their official high 
school transcripts to qualify for Federal student financial aid. These 
commenters asserted that the attestation exception is unnecessary and 
does not provide any benefit to borrowers.
    Additionally, these commenters contended that the attestation 
exception would deprive borrowers of due process rights. According to 
these commenters, the proposed rule assumes the validity of a 
borrower's attestation and forecloses a borrower's ability to present 
evidence that he or she did not knowingly sign a false attestation. 
These commenters provided examples of signatures obtained through 
duress, misrepresentation, or deceitful and illegal business practices. 
In the view of these commenters, the regulations would provide a road 
map for abuse by predatory schools, that would only need to produce an 
attestation form--no matter how dubiously obtained--to insulate 
themselves from Departmental oversight and to bar any remedy for 
borrowers.
    A group of commenters stated that it would be improperly 
retroactive for the Department to apply the attestation exception to 
all Perkins and Direct Loan borrowers, rather than to loans disbursed 
after the effective date of the regulations.
    This group also opposed the Department's use of the disbursement 
date of the loan rather than the origination date to indicate when a 
borrower was falsely certified. These commenters argued that the use of 
disbursement date conflicts with the plain language of the HEA, which 
requires an institution to certify an individual's eligibility to 
borrow before it ``receives'' financial aid through a disbursement. 
These commenters stated that, while a school may admit a high school 
senior who is not yet eligible for student financial aid, it may not 
certify eligibility of that student until the student has obtained his 
or her high school diploma or GED. In the view of these commenters, 
allowing schools to certify for aid upon disbursement will incentivize 
schools to falsely certify high school seniors who subsequently do not 
graduate to continue receiving revenue. According to these commenters, 
the proposal would essentially allow a school to ``provisionally'' 
certify a borrower's eligibility and encourage fraud.
    Discussion: We thank the commenters who supported our proposal. We 
also thank the commenter who pointed out that, while schools may rely 
on information provided on the FAFSA to certify eligibility for student 
financial aid, schools also have an obligation to resolve discrepant 
information. If the school has evidence that a borrower has falsely 
certified his or her high school graduation status, the school may not 
certify the borrower's eligibility for title IV funds, regardless of 
the information provided by the student in the FAFSA. While these 
regulations would prevent a borrower who falsely certified high school 
graduation status from receiving a false certification discharge, 
nothing in these final regulations relieves a school of its obligation 
to ensure that it certifies only eligible borrowers for Federal student 
aid under title IV.
    The Department may always conduct a program review and make 
findings against a school that unlawfully certifies eligible borrowers 
for Federal student aid under title IV, and the Department may recover 
liabilities against such schools under 34 CFR part 668, subpart G. 
These final regulations, unlike the 2016 final regulations, place the 
burden on the borrowers and not the schools to certify eligibility for 
Federal student aid for purposes of a false certification discharge. 
Schools must rely upon the information that a borrower provides about a 
high school diploma or alternative eligibility requirements and cannot 
issue subpoenas to compel the production of records that will 
demonstrate the student has a high school diploma or its equivalent. 
Even if discrepant information exists, borrowers who submitted to the 
school a written attestation, under penalty of perjury, that they had a 
high school diploma, should not receive a false certification discharge 
if the borrower was untruthful in attesting that he or she had earned a 
high school diploma. Federal taxpayers should not pay for a borrower's 
misrepresentation of eligibility requirements for Federal student aid 
with respect to a high school diploma or its equivalent. In the event 
that a borrower was encouraged or coerced to sign an untrue attestation 
regarding his or her high school graduation status, the borrower would 
be entitled to relief under the borrower defense to repayment 
regulations, not the false certification loan discharge regulations.
    The Department appreciates the suggestion to revise the regulatory 
language with respect to borrowers who completed high school through 
home schooling. We believe that proposed Sec.  685.215(c)(1)(ii)(A) 
(Sec.  685.215(e)(1)(ii)(A) of these final regulations), which 
expressly includes borrowers who were home schooled adequately 
addresses students who received an education through homeschooling.
    Although commenters provided some examples of schools that may have 
deliberately encouraged borrowers to falsely certify their high school 
graduation status, or rushed borrowers through the process of signing 
attestation forms, we are not aware of data that shows this is 
widespread. Additionally, the commenter misinterprets what the 
Accrediting Commission of Career Schools and Colleges (ACCSC) states in 
its ``Standards of Accreditation.'' Whereas the commenter stated that 
ACCSC ``forbids'' the use of attestations, in fact, the Standards state 
that ACCSC does not consider a self-certification to be documentation, 
not that the usage of such attestations is forbidden.\142\ It would be 
detrimental to the school, and to the school's reputation, to 
systematically and intentionally enroll and award aid to ineligible 
students, who did not graduate from a high school or who do not meet 
the alternative eligibility criteria.
---------------------------------------------------------------------------

    \142\ ACCSC, ``Standards of Accreditation,'' July 1, 2018, 
http://www.accsc.org/UploadedDocuments/1967/ACCSC-Standards-of-Accreditation-and-Bylaws-07118.pdf.
---------------------------------------------------------------------------

    If a school knows that the borrower did not have a high school 
diploma or

[[Page 49858]]

has not met the alternative eligibility requirements and represents to 
the borrower that the borrower should submit a written attestation, 
under penalty of perjury that the borrower had a high school diploma, 
then the school has committed a misrepresentation that constitutes 
grounds for a borrower defense to repayment claim. The Department will 
continue to hold schools accountable for misrepresentations made to a 
borrower under Sec.  685.206, and the Department may initiate a 
proceeding against a school for a substantial misrepresentation by an 
institution under Sec.  668.71. These enforcement mechanisms provide 
safeguards against fraudulent practices by schools.
    The Department agrees with the commenter that 34 CFR 
685.215(c)(1)(ii), as proposed in the 2018 NPRM, does not permit a 
student's certification of high school graduation status on the FAFSA 
to qualify as the written attestation, under penalty of perjury, that 
the borrower had a high school diploma. A form separate from the FAFSA 
will better signify the consequences and importance of such a written 
attestation, under penalty of perjury, to the borrower. The Department 
will provide a model language for such a written attestation that 
schools may choose to use.
    The Department acknowledges that the FSA Handbook provides a list 
of documentation other than a high school diploma that may be used by a 
borrower to demonstrate eligibility for receiving Federal student aid 
under title IV. For example, a student who has a General Educational 
Development (GED) certificate is eligible to receive financial 
assistance under title IV.\143\ A borrower who meets alternative 
eligibility requirements does not need to submit to the school a 
written attestation, under penalty of perjury, that the borrower had a 
high school diploma. The Department's final regulations recognize that 
there are alternative eligibility requirements and expressly reference 
these alternative eligibility requirements in 34 CFR 685.215(e)(1)(i).
---------------------------------------------------------------------------

    \143\ Federal Student Aid Handbook, AVG-90 (2017-18).
---------------------------------------------------------------------------

    We agree that the alternative eligibility requirements may benefit 
some borrowers, but some borrowers cannot satisfy these alternative 
eligibility requirements. If a borrower went to high school 40 years 
ago and lost his or her diploma, he or she may not be able to readily 
satisfy the alternative eligibility requirements. These final 
regulations afford such a borrower an avenue to nonetheless qualify to 
receive Federal student aid.
    Similarly, these final regulations provide an avenue for students 
who lost their high school diplomas as the result of a natural disaster 
to qualify to receive Federal financial aid. The Department 
acknowledges that such students also may qualify for Federal financial 
aid through the alternative eligibility requirements.\144\ Accordingly, 
the Department does not need to create a separate process for survivors 
of natural disasters.
---------------------------------------------------------------------------

    \144\ Federal Student Aid Handbook, ``School-Determined 
Requirements,'' May 2018, Pg. 1-10, https://ifap.ed.gov/fsahandbook/attachments/1819FSAHbkVol1Ch1.pdf.
---------------------------------------------------------------------------

    These final regulations provide borrowers with due process. 
Procedural due process requires notice and an opportunity to be heard. 
These regulations give borrowers notice that if they falsely or 
fraudulently submit to the school a written attestation, under penalty 
of perjury, that they had a high school diploma, then they will not 
qualify for a false certification discharge. The Federal false 
certification discharge application provides the borrower with an 
opportunity to be heard. Accordingly, these final regulations satisfy 
due process. However, in the event that the borrower was coerced into 
signing such an attestation as a result of a school's 
misrepresentation, the borrower would likely qualify for relief under 
the borrower defense to repayment regulations.
    These final regulations provide that a borrower does not qualify 
for a false certification discharge under Sec.  685.215(e)(1) if the 
borrower was unable to provide the school with an official transcript 
or an official copy of the borrower's high school diploma and submitted 
to the school a written attestation, under penalty of perjury, that the 
borrower had a high school diploma. If the school forges the borrower's 
signature on such an attestation, then the borrower did not submit this 
written attestation to the school and would qualify for a false 
certification discharge.
    Additionally, if the school signs the borrower's name on the loan 
application or promissory note without the borrower's authorization, 
then the borrower may still qualify for a false certification discharge 
under Sec.  685.215(a)(1)(iii). These final regulations continue to 
include forged signatures on a loan application or promissory note as 
an adequate basis for a false certification student loan discharge.
    The Department in its 2018 NPRM proposed rescinding the provision 
in the 2016 final regulations that if the Secretary determines that the 
borrower does not qualify for a false certification discharge, the 
Secretary will notify the borrower in writing of its determination on 
the request for a false certification discharge and the reasons for the 
determination.\145\ In response to comments that raised due process 
concerns, the Department will no longer rescind this provision for the 
discharge procedures that apply to loans first disbursed on or after 
July 1, 2020, and includes this provision in the final regulations as 
Sec.  685.215(f)(5). If the Secretary determines that a borrower does 
not qualify for a discharge, then under Sec.  685.215(f)(5), the 
Secretary notifies the borrower in writing of that determination and 
the reasons for that determination, and resumes collection. The 
Department has always resumed collection of the loan after the 
Department denied a false certification discharge and is adding the 
phrase ``and resumes collection'' in Sec.  685.215(f)(5) as a technical 
amendment to provide clarity.
---------------------------------------------------------------------------

    \145\ 83 FR 37251.
---------------------------------------------------------------------------

    We understand the commenter's concern about retroactive application 
of the regulatory changes. The regulations regarding false 
certification will apply to loans first disbursed on or after July 1, 
2020, and will not apply retroactively. We have revised these final 
false certification regulations only to apply to new borrowers in the 
Direct Loan program. False certification discharges are not available 
in the Perkins Loan program; therefore, these regulations will not 
affect those borrowers. We also are not making changes to the false 
certification discharge requirements for the FFEL program.
    The Department disagrees that using the disbursement date of the 
loan rather than the origination date for purposes of false 
certification discharge contradicts the HEA. As noted in the 2018 NPRM, 
the Department acknowledged the concerns of the negotiator who noted 
that a borrower may be a senior in high school with the intention of 
graduating when that borrower applies for assistance under title IV. 
The Department recognizes that under section 484(a)(1) of the HEA and 
34 CFR 668.32(b), a student is not eligible to receive assistance under 
title IV if the student is enrolled in an elementary or secondary 
school. Section 437(c) of the HEA provides the authority for a false 
certification discharge, and such a discharge applies only to a 
``borrower

[[Page 49859]]

who received . . . a loan made, insured, or guaranteed under this 
part.'' A borrower will not be eligible for the discharge unless the 
borrower received the loan. Moreover, a school may realize that a 
borrower provided the school with false or discrepant information for 
eligibility of title IV assistance after the origination date of the 
loan but before the loan is disbursed, and the school may revoke its 
certification of eligibility for that borrower prior to disbursement of 
the loan. Accordingly, the date of disbursement of the loan aligns with 
the HEA and serves as a better gauge to determine eligibility for a 
false certification discharge. As noted above, the Department has 
various enforcement mechanisms to address fraud by a school, and a 
school is not permitted to falsely certify a borrower's eligibility to 
receive assistance under title IV.
    Changes: We have revised our proposed changes to Sec.  685.215 to 
clarify that they apply only to loans disbursed on or after July 1, 
2020. Additionally, in the discharge procedures for loans first 
disbursed on or after July 1, 2020, the Department is not rescinding 
the provisions in the 2016 final regulations that provide that the 
Secretary will notify the borrower in writing of its determination on 
the request for a false certification discharge and the reasons for the 
determination, if the Secretary determines that the borrower does not 
qualify for a false certification discharge.\146\ The Department 
includes this provision in these final regulations as Sec.  
685.215(f)(5). If the Secretary determines that a borrower does not 
qualify for a discharge, then under Sec.  685.215(f)(5), the Secretary 
notifies the borrower in writing of that determination and the reasons 
for that determination, and resumes collection. The Department has 
always resumed collection of the loan after the Department denied a 
false certification discharge and is adding the phrase ``and resumes 
collection'' in Sec.  685.215(f)(5) as a technical amendment.
---------------------------------------------------------------------------

    \146\ 83 FR 37251.
---------------------------------------------------------------------------

Additional False Certification Discharge Recommendations

    Comments: Two commenters recommended that the Department retain 
language on automatic false certification discharges for Satisfactory 
Academic Progress (SAP) violations in the 2016 final regulations. One 
of these commenters noted that program reviews would not address the 
purpose of the SAP language in the 2016 final regulations, which was to 
permit loan discharges for the affected borrowers when the Department 
finds evidence of falsification of SAP. The commenter stated that while 
investigations, audits, and reviews of institutional policies and 
practices are necessary to uncover evidence of such falsification, and 
to ensure that the institution is held accountable, the borrower should 
not be held responsible for repaying the loan.
    Discussion: We do not believe that it is appropriate to have a 
specific provision in the regulations providing for a false 
certification discharge based on falsification of SAP. Existing Sec.  
685.215(c)(8) (2016) already provides that the Department may discharge 
a borrower's Direct Loan by reason of false certification without an 
application from the borrower if the Secretary determines, based on 
information in the Secretary's possession, that the borrower qualifies 
for a discharge, and Sec.  685.215(e)(7), will also include such a 
provision. This regulation gives the Secretary broad discretion in 
discharging a loan without an application from the borrower based on 
information in the Secretary's possession. Accordingly, this regulation 
does not preclude the Secretary from considering evidence in her 
possession that the school falsified the SAP progress of its students 
as part of the Secretary's decision to discharge a loan.
    However, we do not think it is appropriate for the regulation to 
specifically include Satisfactory Academic Process as information the 
Secretary would consider, and we do not include that language for loans 
first disbursed on or after July 1, 2020. Evaluation of an 
institution's implementation of their SAP policy is part of an FSA 
program review, and thus, the Department has a mechanism in place to 
identify inappropriate activities in implementing an institution's SAP 
policy. SAP determinations are subject to the internal policies of the 
school, and it would be difficult to determine if a school violated its 
own SAP policies in the context of, and in conjunction with, reviewing 
a false certification discharge application. The Department does not 
wish to single out and elevate evidence that the school has falsified 
the SAP of its students above other information in the Secretary's 
possession that she may use to discharge all or part of a loan without 
a Federal false certification application from the borrower.
    Additionally, we do not have evidence that falsification of SAP is 
widespread. As we stated in the 2016 final regulations, schools have a 
great deal of flexibility both in determining and in implementing SAP 
standards. There are a number of exceptions under which a borrower who 
fails to meet SAP can continue to receive title IV aid. Borrowers who 
are in danger of losing title IV eligibility due to a failure to meet 
SAP standards often request reconsideration of the SAP determination. 
Schools typically work with borrowers in good faith to attempt to 
resolve the situation without cutting off the borrower's access to 
title IV assistance.
    We do not believe that a school should be penalized for legitimate 
attempts to help a student who is not meeting SAP standards, nor do we 
believe a student who has successfully appealed a SAP determination 
should be able to use that initial SAP determination to obtain a false 
certification discharge on his or her student loans. However, a student 
may use a misrepresentation about SAP to successfully allege a borrower 
defense to repayment under 34 CFR 685.206(e), assuming the student 
satisfies the other elements of a borrower defense to repayment claim. 
For these reasons, it is not necessary to expressly state that the 
information the Secretary may consider includes evidence that the 
school has falsified the SAP of its students.
    Changes: None.
    Comments: None.
    Discussion: A disqualifying condition or condition that precludes a 
borrower from meeting State requirements for employment was a basis for 
a false certification discharge prior to the 2016 final regulations and 
remains a basis for a false certification discharge. In the 2016 final 
regulations, the Department added language in 34 CFR 685.215(c)(2) to 
require a borrower to state in the application for a false 
certification discharge that the borrower did not meet State 
requirements for employment (in the student's State of residence) in 
the occupation that the training program for which the borrower 
received the loan was intended because of a physical or mental 
condition, age, criminal record, or other reason accepted by the 
Secretary. The Department in its 2018 NPRM noted that ``the changes in 
the 2016 final regulations did not alter the operation of the existing 
regulation as to disqualifying conditions in any meaningful way, and as 
a result does not propose such added language in these regulations.'' 
\147\ The Department would like to further note that its past guidance 
previously discouraged schools from requesting or relying upon a 
borrower's criminal record.\148\ Some

[[Page 49860]]

State and Federal laws also may discourage or prevent schools from 
requesting information about a student's physical or mental health 
condition, age, or criminal record.\149\ If schools do not have 
knowledge of the disqualifying condition that precludes the student 
from meeting State requirements for employment in the occupation for 
which the training program supported by the loan was intended, then 
schools cannot falsely certify a student's eligibility for Federal 
student aid under title IV. Accordingly, a borrower's statement that 
the borrower has a disqualifying condition, standing alone, will not 
qualify a borrower for a false certification discharge under 34 CFR 
685.215(a)(1)(iv).
---------------------------------------------------------------------------

    \147\ 83 FR 37270.
    \148\ U.S. Dep't of Educ., Beyond the Box: Increasing Access to 
Education for Justice-Involved Individuals (May 9, 2016), available 
at https://www2.ed.gov/documents/beyond-the-box/guidance.pdf.
    \149\ See e.g., Wash. Rev. Code section 28B.160.020 (2018).
---------------------------------------------------------------------------

    Changes: None.

Financial Responsibility, Subpart L of the General Provisions 
Regulations

Section 668.171, Triggering Events
    Comments: Numerous commenters wrote that the Department should 
strengthen the mandatory triggers. They urged the Department to 
strengthen the financial responsibility portion of the proposed rules 
by reinstating the full list of triggers provided in the 2016 final 
rules or by adding additional triggers. Commenters reasoned that, in 
order to protect taxpayer dollars, the Department should strengthen 
school accountability by increasing the number of early warnings of an 
institution's coming financial difficulties. A commenter stated that 
the Department needs ``to develop more effective ways to identify 
events or conditions that signal impending financial problems.'' \150\ 
Without that, the commenters concluded the Department would not truly 
be able to anticipate potential taxpayer liabilities and obtain 
financial protection prior to incurring those liabilities.
---------------------------------------------------------------------------

    \150\ 81 FR 39361. (emphasis in comment).
---------------------------------------------------------------------------

    The commenters believed that the mandatory and discretionary 
triggering events in Sec.  668.171(c) and (d) were inadequate, too 
narrow and less predictive, or late in detecting misconduct by 
institutions compared to the triggering events in the 2016 final 
regulations. The commenters argued that by eliminating or weakening 
several of the 2016 triggering events, or making those triggering 
events discretionary, the Department has made it easier for an 
institution to continue to operate, or operate without consequences or 
accountability, in cases when the institution would likely close or 
incur significant liabilities.
    As a result, the commenters reasoned that the Department would be 
less likely to obtain financial protection, or obtain it on a timely 
basis, leaving taxpayers to bear the costs. In addition, some of these 
commenters noted that the Department's Office of the Inspector General 
issued a report \151\ stating, in part, that (1) the Department would 
receive important, timely information from institutions experiencing 
the triggering events in the 2016 final regulations that would improve 
the Department's processes for identifying institutions at risk of 
unexpected or abrupt closure, and (2) enforcement of the regulations 
would also improve the Department's processes for mitigating potential 
harm to students and taxpayers by obtaining financial protection based 
on broader and more current information than institutions provide in 
their financial statements.
---------------------------------------------------------------------------

    \151\ ED-OIG/I13K0002, available at https://www2.ed.gov/about/offices/list/oig/auditreports/fy2017/a09q0001.pdf.
---------------------------------------------------------------------------

    Many commenters supported the mandatory and discretionary 
triggering events proposed in the 2018 NPRM, noting that they focus on 
known, quantifiable, or material actions. As such, some of these 
commenters believed the triggering events are an improvement over those 
in the 2016 final regulations that could have exacerbated the financial 
condition of an institution with minor and temporary financial issues 
or required an evaluation of the impact that undefined regulatory 
standards (i.e., high drop-out rates, significant fluctuations in title 
IV funding) would have on an institution's financial condition.
    Other commenters were concerned that the proposed triggering events 
exceed the Department's authority, arguing that the triggers include 
factors that are not grounded in accounting principles and do not 
account for an institution's total financial circumstances as required 
under section 498(c) of the HEA. Along the same lines, a few commenters 
were concerned that some of the triggering events were overly broad and 
poorly calibrated to identify situations when an institution is unable 
to meet its obligations and asked the Department to consider whether 
the triggers are necessary.
    Some commenters believed that the Department should apply the 
mandatory and discretionary triggers equally across all institutions. 
In addition, the commenters noted that proprietary institutions must 
already comply with the provisions that a school must receive at least 
10 percent of its revenue from sources other than title IV, HEA program 
funds (also known as the ``90/10'' requirement). In addition, all 
institutions must meet the requirements for a passing composite score 
and cohort default rates and argued that the Department should not 
create new requirements for these provisions exclusively for 
proprietary institutions.
    Discussion: The Department disagrees with the comments that the 
proposed triggering events will diminish our oversight 
responsibilities. These regulations do not change the approach the 
Department currently uses to identify and react contemporaneously to 
actions or events that have a material adverse effect on the financial 
condition or viability of an institution.
    The 2016 final regulations include as triggers (1) events whose 
consequences are uncertain (e.g., estimating the likely outcome and 
dollar value of a pending lawsuit or pending defense to repayment 
claims, or evaluating the effects of fluctuations in title IV funding 
levels), (2) events more suited to accreditor action or increased 
oversight by the Department (e.g., unspecified State violations that 
may have no bearing on an institution's financial condition or ability 
to operate in the State), and (3) results of a yet-undefined test 
(e.g., a financial stress test) that would be akin to the current 
financial responsibility standards and potentially inconsistent with 
the current composite score methodology. The Department acknowledges 
that the composite score methodology should be updated through future 
rulemaking. In these final regulations, we adopt mandatory triggering 
events whose consequences are known, material, and quantifiable (e.g., 
the actual liabilities incurred from lawsuits) and objectively assessed 
through the composite score methodology or whose consequences pose a 
severe and imminent risk (e.g., SEC or stock exchange actions) to the 
Federal interest that warrants financial protection.
    Additionally, based upon our review of the comments, the Department 
has decided to revise the proposed triggers in these final regulations. 
First, the Department has decided not to rescind the high annual drop-
out rates trigger in the 2016 final regulations. Despite our previous 
concerns about whether a threshold has ever been established for this 
trigger and whether it is an event more suited to action by an 
accreditor, we have reconsidered this position, in part based on a 
comment pointing out that Congress has identified drop-out rates as an 
area of such significant

[[Page 49861]]

concern that a high rate should be factored into the Department's 
selection of institutions for program reviews.
    However, we do not adopt this commenter's logic regarding 
significant fluctuations in Pell Grants or loan volume. While 
statutorily appropriate for a program review, we believe that 
additional financial oversight, in the form of a discretionary trigger, 
would be ill-suited to fluctuations in loan volume and Pell grant 
amounts. First, significant fluctuations in loan volume year-over-year 
more readily stem from events that do not indicate financial 
instability, such as through institutional mergers, which the 
Department has reason to believe will continue if not increase in the 
future.\152\ Next, the Department is concerned that linking Pell Grant 
fluctuations to a discretionary trigger would harm low-income students 
and discourage institutions from serving students who rely on Pell 
Grants. Finally, fluctuations in Pell Grants and loan volume may be 
inversely related to national economic conditions--such as a recession 
leading to newly unemployed workers seeking additional training or 
education--rather than the financial health of an institution.
---------------------------------------------------------------------------

    \152\ Kellie Woodhouse, ``Closures to Triple,'' Inside Higher 
Ed, September 28, 2015, https://www.insidehighered.com/news/2015/09/28/moodys-predicts-college-closures-triple-2017; Clayton M. 
Christensen and Michael B. Horn, ``Innovation Imperative: Change 
Everything,'' The New York Times, November 1, 2013, https://www.nytimes.com/2013/11/03/education/edlife/online-education-as-an-agent-of-transformation.html; Abigail Hess, ``Harvard Business 
School Professor: Half of American Colleges Will Be Bankrupt in 10 
to 15 Years,'' CNBC, August 30, 2018, https://www.cnbc.com/2018/08/30/hbs-prof-says-half-of-us-colleges-will-be-bankrupt-in-10-to-15-years.html.
---------------------------------------------------------------------------

    Second, the Department closely considered comments regarding 
whether our proposed triggers were strong enough to identify early 
warning signs of financial difficulty and whether the Department could 
properly and quickly identify events or conditions that signaled 
impending financial problems. As more fully explained below, the 
Department continues to believe that our proposed triggers provide 
necessary protections and are sensitive to early warning signs. 
However, the Department takes its responsibility as stewards of 
taxpayer funds seriously and, as a result, is responsive to community 
concerns regarding whether our oversight of those funds is 
insufficient.
    Based upon numerous comments that we should strengthen the 
financial responsibility regime, as well as our general duty to 
taxpayers, the Department has decided that when two or more unresolved 
discretionary triggers occur at an institution within the same fiscal 
year, those unresolved discretionary triggers will convert into a 
mandatory triggering event, meaning that they will result in a 
determination that the institution is not able to meet its financial or 
administrative obligations.
    Institutions will already have notice of, and be subject to, the 
discretionary triggering events in Sec.  668.171(d). The Department has 
determined that two or more unresolved discretionary triggers may be 
indicators of near-term financial danger that leads to the conclusion 
that an institution is unable to meet its financial or administrative 
obligations. This regulatory change strengthens authority the Secretary 
already possesses, at Sec.  668.171(d), by empowering the Department to 
act when an institution exhibits a pattern of problematic behavior.
    We believe the elevation of multiple discretionary triggers, that 
are unresolved and occur in the same fiscal year, to mandatory triggers 
strengthens the Department's ability to enforce its financial 
responsibility requirements. Institutions that exhibit behavior that is 
likely to have a material adverse effect on the financial condition of 
the institution require the Department to respond to protect taxpayer 
and student interests.
    Despite these changes, our review of the comments does not lead us 
to the conclusion that the Department should adopt the 2016 triggers in 
their entirety. Through these triggers, the Department balances its 
interest in taxpayer protection with institutional stability. In 
particular, the Department seeks to avoid a repeat of prior instances 
in which the Department sought a letter of credit from an institution 
that it triggered a precipitous closure, harmed a large number of 
students who were unable to complete their program of study, and 
required taxpayers to pay an even greater cost in the form of closed 
school discharges. We also seek to avoid the use of triggers, such as 
pending, unsubstantiated claims for borrower relief discharge and non-
final judgements, that do not provide an opportunity for due process, 
invite abuse, and have already resulted in high numbers of 
unsubstantiated claims. The triggers have also proven unduly burdensome 
for institutions that were required to report all litigation, even 
allegations unrelated to claims for borrower defense relief. We view 
the triggers in these final regulations as providing a sound and more 
objective basis than the 2016 triggers for determining whether an 
institution is financially responsible.
    Contrary to the presumption by the commenters that the 2016 
triggers would have identified more financially troubled institutions, 
we note that (1) the potential liabilities arising from pending 
lawsuits or borrower defense claims is far from certain both in timing 
and in amount, and estimating those liabilities for the purpose of 
recalculating the composite score is problematic and could 
inappropriately affect institutions for several years (see the 
discussion under heading ``Mandatory and Discretionary Triggering 
Events.''), and (2) reclassifying some the triggers as discretionary 
will still provide review to identify actions or events that may have a 
material adverse impact on institutions. In addition, while we agree 
with the OIG report that information provided by the triggering events 
will better enable the Department to exercise its oversight 
responsibilities, we disagree with the notion raised by the commenters 
that the triggering events outlined in the 2018 NPRM will dilute the 
Department's ability to do so. To the contrary, we believe the approach 
adopted in these final regulations, together with the revisions 
explained above, will identify those institutions whose post-trigger 
financial condition actually warrants financial protection, rather than 
applying triggers that presumptively result in institutions having to 
provide financial protection and unduly precipitate coordinated legal 
action against an institution that trigger financial protections that 
could have devastating--and in many cases unwarranted--financial and 
reputational impacts on the institution.
    With regard to the comments that the triggers exceed the 
Department's authority, we note that section 498(c) of the HEA directs 
the Secretary to determine whether the institution ``is able . . . to 
meet all of its financial obligations, including (but not limited to) 
refunds of institutional charges and repayments to the Secretary for 
liabilities and debts incurred in programs administered by the 
Secretary.'' \153\ The statute uses the present tense to direct the 
Secretary to assess the ability of the institution to meet current 
obligations. These regulations satisfy that directive by requiring that 
the assessment is performed contemporaneously with the occurrence of a 
triggering event. The use of these triggers for interim evaluations, in 
addition to the composite score calculated from the annual audited 
financial statements, using the financial responsibility ratios, takes 
into

[[Page 49862]]

consideration the total financial circumstances of the institution on 
an ongoing basis.
---------------------------------------------------------------------------

    \153\ 20 U.S.C. 1099c(c)(1).
---------------------------------------------------------------------------

    We disagree with the comment that some of the triggering events are 
overly broad and poorly calibrated. As discussed in this section and 
under the heading ``Mandatory and Discretionary Triggering Events,'' 
the Department recalibrated the triggers from the 2016 final regulation 
to more narrowly focus on actions or events that have or may have a 
direct adverse impact and eliminated the triggers from that final 
regulation that were speculative or not associated directly with making 
a financial responsibility determination.
    In response to the comments that the triggering events should apply 
equally to all institutions, the commenters appear to suggest that the 
Department somehow change or extend existing statutory requirements 
(e.g., impose the 90/10 trigger on all institutions) or not consider 
other agency provisions that apply only to certain institutions (e.g., 
SEC and exchange requirements for publicly traded institutions).
    The Department lacks the authority to apply certain statutory 
requirements to other institutions and cannot ignore for the sake of 
uniformity the risks associated with, or the consequences of, an 
institution that fails to comply with such requirements. With regard to 
the objections for establishing triggers for provisions that already 
have associated sanctions (90/10 and CDR), it is the consequence of 
those sanctions that we are attempting to mitigate by obtaining 
financial protection. An institution that fails 90/10 for one year, or 
has a cohort default rate of 30 percent or more for two consecutive 
years, is one year away from possibly losing all or most of its title 
IV eligibility as well as its ability to continue to operate is a going 
concern. In that event, the financial protection obtained as a result 
of these triggering events would cover some of the debts and 
liabilities that would otherwise be shouldered by taxpayers. However, 
the Department agrees that in instances in which the HEA does not 
designate a specific trigger for a specific type or class of 
institution, the Department will not use its regulatory power to create 
new requirements or sanctions that apply to some but not all 
institutions.
    Changes: The Department revises Sec.  668.171 to include a new 
paragraph at Sec.  668.171(d)(5) to read: ``As calculated by the 
Secretary, the institution has high annual dropout rates; or''. 
Proposed Sec.  668.171(d)(5) is now redesignated Sec.  668.171(d)(6). 
Additionally, the Department adds paragraph Sec.  668.171(c)(3) to 
state that, for the period described in Sec.  668.171(c)(1), when the 
institution is subject to two or more discretionary triggering events, 
as defined in Sec.  68.171(d), those events become mandatory triggering 
events, unless a triggering event is resolved before any subsequent 
event(s) occurs.
    Comments: Some commenters were concerned that the proposed 
framework of mandatory and discretionary triggering events does not 
clearly specify how the Department will manage multiple triggering 
events or specify whether a recalculated composite score is used only 
for determining that an event has a material adverse effect on an 
institution or whether the recalculated score represents a new, 
official composite score. Similarly, other commenters requested that 
the Department explain how it will apply, handle, determine, or view 
specific instances surrounding a triggering event and, for 
discretionary triggering events, how the Department will determine 
whether an event has a material adverse effect on an institution.
    Other commenters noted that the NPRM appears to obligate the 
Department to recalculate the composite score every time a triggering 
event is reported. The commenters suggested that the Department reserve 
the right to forgo a recalculation if the reported liability is deemed 
immaterial.
    The commenters argued that an institution should not be required to 
report every liability arising from a judicial or administrative 
action, without regard to the amount or resulting implications, and the 
Department would not need to perform a recalculation for every reported 
liability. To address these issues, the commenters suggested that the 
Secretary establish a minimum percentage or dollar value above which an 
institution would be required to notify the Department and the 
Department would recalculate the composite score. For example, a 
judicial or administrative action resulting in a liability under 
$10,000 would not require reporting or recalculating the composite 
score and would reduce burden on institutions and the Department.
    Discussion: Based on the actual liability or loss incurred by an 
institution from a triggering event, the Department recalculates the 
institution's composite score to determine whether any additional 
action is needed. As was the case in the 2016 final regulations, if the 
institution's recalculated score is 1.0 or higher, no additional action 
is needed, and there is no change in the institution's official 
composite score.
    For example, assume that an institution's official composite is 
1.8, but as a result of a triggering event, its recalculated score is 
1.4. The institution's official composite score remains at 1.8, even 
though a score of 1.4 would in the normal course require the 
institution to participate in the title IV, HEA programs under the zone 
alternative in 34 CFR 668.175(c). Under the trigger provisions, an 
institution with a recalculated score in the zone would not be required 
to provide a letter of credit, nor would it be subject to any of the 
zone provisions.
    On the other hand, if the institution's recalculated composite 
score was a failing score of less than 1.0 (e.g., a score of 0.7), that 
score becomes the institution's official composite score and remains 
the composite score unless modified by a subsequent triggering event or 
until the Department calculates a new official composite score based on 
the institution's annual audited financial statements for that fiscal 
year. In this case, with a failing score of 0.7, the institution would 
be required to participate in, and be subject to the provisions of, the 
letter of credit or provisional certification alternatives under 34 CFR 
668.175(c) or (f).
    The Department has determined that there is a greater risk to 
taxpayers when an institution has a failing composite score. As was the 
case with the 2016 final regulations, the Department will only take 
action based on interim adjustments that result in a failing composite 
score. The official composite score is based on an institution's annual 
audited financial statements. The interim adjustments are made based on 
triggering events that occurred after the end of the institution's 
fiscal year. These adjustments will show up in a subsequent year and be 
reflected in the audited financial statements for that year. The 
official composite score needs to be based only on the institution's 
audited information. The adjustments that are made to a composite score 
subsequent to the most recently accepted audited financial statements 
are designed to protect the Department, students, and taxpayers.
    Given that a recalculated score does not affect an institution's 
official composite score, unless it is a failing score less than 1.0, 
we believe it is unnecessary to establish a materiality threshold below 
which a triggering event is not reported, as suggested by the 
commenters. A settlement, final judgment, or federal or state final 
determination resulting in a liability of $10,000 may be material for 
an institution whose financial condition is already precarious, but a 
$10 million liability may not have a material impact on a financially 
healthy institution.

[[Page 49863]]

    To objectively assess whether a liability is material to a specific 
institution, we rely on the composite score methodology. Regardless of 
whether an institution is on the cusp of failing the composite score or 
has a high composite score, the relevant issue is whether the liability 
that must be reported results in a failing recalculated score.
    We believe that liabilities arising from minor settlements, final 
judgments, and final determinations by a Federal or State agency are 
not likely to create variability in composite scores that could have 
negative implications, particularly with oversight entities that use or 
rely on the composite score, because composite scores will only be 
changed if the recalculated scores are failing. In the cases where the 
recalculated scores are failing, we believe that the cognizant 
oversight entities should be interested in those outcomes.
    On its own, it is important for the Department to know that an 
institution has incurred liabilities arising from settlements, final 
judgments, and final determinations by Federal or State agencies. 
Although the amount of each liability arising from such instances may 
be a minor amount, the cumulative effect of numerous settlements, final 
judgments, and final Federal or State agency determinations could 
damage the institution's financial stability. The threshold that the 
Department has established is any amount that causes the institution to 
have a failing composite score, and the only way the Department can 
determine if an institution has reached this threshold, is by requiring 
the institution to report the liabilities referenced in paragraph 
(c)(1)(i)(A).
    Regarding the comments about the burden associated with reporting 
all incurred liabilities, we considered this burden in establishing the 
reporting process in these final regulations and believe it adequately 
balances the burden on schools with the Department's ability to obtain 
necessary information. In addition, we discuss more details of the 
reporting requirements under the heading ``Reporting Requirements, 
Sec.  668.161(f)'' below.
    With respect to how the Department will manage and evaluate a 
triggering event or handle multiple events, we believe it is not 
appropriate or feasible to detail the Department's internal review 
process in these final regulations. The outcome for any failing 
composite score recalculation will be available to the reporting 
institution. To the extent that the Department establishes procedures 
for institutions to report and respond to the triggering events or 
develops guidelines regarding how we intend to evaluate certain 
triggering events, the Department will make that information available 
to institutions.
    Generally, the mandatory triggers reflect actions or events whose 
consequences are realized immediately, such as a liability incurred 
through a final judgment after a judicial action or through a final 
administrative action by a Federal or State agency, a withdrawal of 
owner's equity that reduces resources available to the institution to 
meet current needs, or an SEC or exchange violation that diminishes the 
institution's ability to raise capital or signals financial distress. 
For a mandatory trigger whose consequences can be quantified (a 
monetary liability incurred by the institution or withdrawal of owner's 
equity), a failing recalculated score (less than 1.0) evidences an 
adverse material effect. For the other mandatory triggers (SEC and 
exchange violations), given the nature and gravity of those events, we 
presume they will have an adverse material effect on the institution's 
financial condition. In either case, the burden falls on the 
institution to demonstrate otherwise at the time it notifies the 
Department that the event has occurred.
    On the other hand, discretionary triggers generally reflect actions 
or events whose consequences are less immediate and less certain. For a 
discretionary trigger, the Department will need to show that the event 
is likely to have a material adverse effect on the institution's 
financial condition or jeopardize the institution's ability to continue 
to operate as a going concern.\154\ The Department will consider in its 
review any additional information provided by the institution at the 
time it reports that event.
---------------------------------------------------------------------------

    \154\ Note: In the 2016 final regulations, we established that 
for the discretionary triggers, an institution does not meet its 
financial or administrative obligations if the Secretary 
demonstrates that the trigger was ``reasonably likely to have a 
material adverse effect on the financial condition, business, or 
results of operations of the institution,'' and included a non-
exhaustive list of discretionary triggers. 34 CFR 668.171(g) (2017). 
In contrast, in the 2018 proposed regulations, we characterized the 
Secretary's burden as determining if any of the listed events ``is 
likely to have a material adverse effect on the financial condition 
of the institution . . .'' This phrasing is a technical change for 
clarity and as a result, we are retaining this phrasing in the final 
regulations. However, we include a finite list of discretionary 
trigger events, to provide more certainty to institutions and to 
facilitate the Department's ability to administer the regulations.
---------------------------------------------------------------------------

    Changes: None.
    Comments: One commenter criticized the Department's rulemaking with 
respect to financial responsibility, claiming that the Department has 
not analyzed data on the existing financial protection held by the 
Department to assess the degree to which it may fall short of 
institutional liabilities, or provided the public with information 
necessary to establish the extent to which the Department's current 
policies and practices meet the statutory requirement that the 
Department ensure institutions of higher education are financially 
responsible. The commenter submitted a FOIA request related to this 
topic and stated that the request is now the subject of ongoing 
litigation.
    In addition, the commenter contended that the Department failed to 
provide information during the rulemaking process regarding how it sets 
the amount of a required LOC. While acknowledging the Department's 
longstanding regulations that establish a floor for the amount of the 
LOC at 10 percent of the amount of an institution's prior year title IV 
funding, the commenter admonished the Department for failing to (1) 
consider whether to increase the amount of LOC floor in the proposed 
regulations in light of revoking the automatic triggers and (2) provide 
any information on the methodology the Department uses to set the 
amount of an LOC.
    As a result, the commenter said the Department had not provided the 
necessary information to say whether it is adequately protecting 
taxpayers from significant liabilities. The commenter also asserted 
that the Department cannot engage in a reasoned negotiated rulemaking 
and cannot provide a fulsome opportunity to comment as required by both 
the HEA and the APA, without first analyzing the information the 
commenter had requested.
    Other commenters contended that the Department is not adequately 
identifying risks from institutions noting that the majority of the 
letters of credit (LOC) obtained by the Department came from 
institutions with failing composite scores, but only a few LOCs stemmed 
from significant concerns or events like those envisioned by the 2016 
triggers.
    Discussion: First, we note that the sufficiency of the Department's 
response to any individual FOIA request is beyond the scope of this 
rulemaking and decline to comment on conclusions drawn about the 
response or the ongoing litigation.
    With respect to the other aspects of the comment, the commenter 
appears to be confusing LOCs obtained for different purposes. The 
financial protection triggers in these and the 2016 final regulations 
were designed to help

[[Page 49864]]

identify conditions or events that were likely to have a forward-
looking impact on an institution's financial stability. The 2016 final 
regulations were not in effect at the time of the 2018 NPRM and the 
negotiated rulemaking that preceded it, so no triggers were in place at 
the time. Prior to the 2016 final regulations becoming effective, the 
Department's regulations primarily authorized requiring a LOC from an 
institution for failing to satisfy the standards of financial 
responsibility based on its annual audited financial statements, or 
during a change of institutional control, or more recently in the event 
that an institution files for receivership.
    We do not believe that an analysis of LOCs obtained under the 
preexisting regulations based solely on information contained in 
audited financial statements would have facilitated fulsome comment and 
participation about how best to calibrate forward-looking financial 
responsibility triggers because the actions or events relating to the 
triggers may not be evident, or otherwise disclosed, in those 
statements. The Department must walk a fine line between protecting 
taxpayers against sizeable unreimbursed losses through borrower defense 
loan and closed school loan discharges, and forcing the closure by 
establishing LOC requirements that themselves push the institution in 
unreasonable financial duress.
    In addition, we did not propose in the 2018 NPRM to remove the 
concept of automatic triggers altogether. We proposed modifying or 
removing some of the triggers, referred to in the 2018 NPRM and in 
these final regulations as ``mandatory'' instead of ``automatic,'' but 
the concept that certain events trigger a requirement for financial 
protection, absent a compelling response from an institution that the 
triggering event does not and will not have a material adverse effect 
on its financial condition, was not removed from the proposed or these 
final regulations. In the 2018 NPRM and these final regulations, we set 
forth a reasoned basis for the way we propose to structure the 
automatic/mandatory and discretionary triggers, including why and how 
that structure differs from the 2016 final regulations. This basis 
includes our analysis of the rationales specified in the 2016 final 
regulations and the reasons for why our weighing of facts and 
circumstances results in a different approach.\155\
---------------------------------------------------------------------------

    \155\ See e.g., 83 FR 37272.
---------------------------------------------------------------------------

    The analysis of the triggers we incorporate into these final 
regulations is detailed elsewhere in this section. In summary, both at 
negotiated rulemaking and through the 2018 NPRM comment process, the 
public had sufficient information for a fulsome opportunity to comment 
and participate in the discussion about financial protection triggers.
    With regard to how the Department establishes the amount of a LOC, 
as the commenter noted, the amount is, and has historically been, set 
initially at 10 percent of the total amount of the prior year's title 
IV funds received by an institution. We have always had the discretion 
to require a LOC greater than 10 percent, but established in the 2016 
final regulations under Sec.  668.175(f)(4), that the amount of a LOC 
may be any amount over 10 percent that the Department demonstrates is 
sufficient to cover estimated losses. However, in the 2018 NPRM we did 
not propose, and do not adopt in these final regulations, the approach 
in the 2016 final regulations that specifically tied any increase in 
the LOC over 10 percent to the amount needed to cover estimated losses. 
While that approach may be appropriate in some cases, we believe the 
Secretary should have, and historically has had, the flexibility to 
establish the amount of the LOC on a case by case basis, as may be 
warranted by the specific facts of each case.
    With respect to the comment about increasing the LOC floor, if the 
commenter is suggesting that by providing larger LOCs, institutions 
that are not subject to the removed triggers would mitigate the risk to 
taxpayers from institutions that were previously subject to those 
triggers, that arrangement implies the existence of a shared risk pool 
from which the Department could tap to cover liabilities from any 
institution. A LOC is specific to an institution and cannot be used to 
cover the liabilities of any other institution. Consequently, 
increasing the LOC floor would not have the effect the commenter 
intended, but perversely result in inappropriately increasing the LOCs 
of unaffected institutions.
    Changes: None.

Mandatory and Discretionary Triggering Events

Section 668.171(c)(1), Actual Liabilities From Defense to Repayment 
Discharges and Final Judgments or Determinations

    Comments: Some commenters believed that the 2016 final regulations 
unfairly penalized an institution based upon unfounded or frivolous 
accusations in pending lawsuits that, once settled or adjudicated, 
could result in no material financial impact on the institution. These 
and other commenters agreed with the proposal in the 2018 NPRM to hold 
an institution accountable for the actual amount of liabilities from 
settlements, final judgments, or final Federal or State agency 
determinations.
    Similarly, other commenters believed that the proposal to use the 
actual liabilities incurred by an institution in recalculating its 
composite score corrected a significant flaw in the 2016 final 
regulations that could have triggered a reassessment of an 
institution's financial responsibility based on alleged or contingent 
claims that may never come to pass.
    Other commenters believed that the current triggers for pending 
lawsuits and defense to repayment claims under Sec.  668.171(c)(1)(i) 
and (ii) and (g)(7) and (8) should be retained to better protect 
students and taxpayers.
    Discussion: We have determined that the 2016 final regulations 
enumerated certain triggering events that may not serve as accurate 
indicators of an institution's financial condition. To reduce the 
burden on institutions in reporting the triggering events and mitigate 
the possibility that institutions would improperly be required to 
provide financial protection as a consequence of those events, while 
balancing the need to protect the Federal interests, it is our 
objective in these regulations to establish triggers that are more 
targeted and more consistently identify financially troubled 
institutions.
    For example, under existing Sec.  668.171(c)(1)(i)(B) and 
(c)(1)(ii) (2017), an institution is not financially responsible if the 
liabilities from pending lawsuits brought by State or Federal 
authorities, or generally by other parties, result in a recalculated 
composite score of less than 1.0, as provided under Sec.  668.171(c)(2) 
(2017). To perform this calculation, we value the potential liability 
from a pending suit as the amount demanded by the suing party or the 
amount of all of the institution's tuition and fee revenue for the 
period at issue in the litigation. However, we recognize as a 
commonsense matter that some lawsuits may demand unrealistic amounts of 
money at the outset of the proceedings, yet may ultimately be resolved 
for significantly lower amounts or no liability. Because the amount of 
the potential liability from pending suits or borrower defense-related 
claims, however it is determined, is treated as if it were paid in 
recalculating an institution's composite score, the institution could 
be required unnecessarily to provide a letter of credit or other 
financial protection not

[[Page 49865]]

only in the year the suit is brought, or that claims are made, but also 
for any subsequent years in which the suit or claims remain pending. 
This result places a significant burden on the institution for lawsuits 
that ultimately may not have a material adverse effect on its financial 
condition and viability.
    Further, in the brief time since implementing the 2016 final 
regulations, the Department has encountered a significant 
administrative burden and difficulty in monitoring institutions' 
reports of pending litigation, determining whether such litigation 
meets the requirements of the 2016 final regulations, and valuing such 
suits, many of which have not led to a failure of financial 
responsibility due to a recalculated composite score of less than 1.0.
    We reaffirm our position in the preamble to the 2016 final 
regulations that the Department has the authority to review lawsuits 
pending against an institution. However, in view of the burden on 
institutions and the difficulty of accurately valuing the potential 
liability of pending suits, in these regulations, we have instead 
determined that the mere existence of a lawsuit against an institution 
should not qualify as a triggering event and decline to include pending 
suits, whether brought by a Federal or State entity, or by another 
party, as automatic or mandatory triggers, as was the case in the 2016 
final regulations.
    Likewise, valuing the amount of pending borrower defense claims 
under existing Sec.  668.171(g)(7) and (8) (2017), depends in part on 
factors such as whether the claims stem from similarly situated 
borrowers (e.g., claims arising for the same reasons), the timing of 
the valuation (e.g., the valuation may occur after a few claims are 
filed or the Department may look at a pool of claims filed during a 
specified time period), and whether the Department re-values the 
remaining pending claims in a pool after it has adjudicated some of the 
claims.
    As estimates, these valuations could create false-positive outcomes 
(i.e., inaccurately valuing borrower defense claims could result in an 
otherwise financially responsible institution inappropriately providing 
financial protection) and would impose a significant burden on the 
Department to monitor and analyze the potential impact of unanalyzed 
borrower defense claims. Similarly, outside groups could be encouraged 
to manipulate borrowers to file unjustified borrower defense claims, or 
could do so on behalf of borrowers, simply to create a financial 
trigger that will negatively impact the institution, even if the 
borrower defense claims are ultimately found to have no merit. As a 
result, we did not propose adopting either of the discretionary 
triggers related to pending or potential borrower defense claims in the 
2018 NPRM and do not incorporate them into these final regulations.
    In sum, valuing the liability accurately and objectively is 
critical in assessing, through the composite score calculation, whether 
lawsuits or claims have an adverse impact on the financial condition of 
an institution that justifies requiring the institution to secure a 
letter of credit or other financial protection. We believe that 
valuation is best done by using the actual amount of the liability 
incurred by the institution and would appropriately balance the 
Department's administrative burden in monitoring an institution's 
financial condition and safeguard the taxpayers' interest in the 
Federal student aid programs.
    We also accordingly rescind the reporting requirements in the 2016 
final regulations related to pending lawsuits. Instead, we require an 
institution to notify the Department no later than 10 days after it 
incurs a liability arising from a settlement, a final judgement arising 
from a judicial action, or a final determination arising from an 
administrative proceeding initiated by a Federal or State entity. We 
note that in the preamble to 2018 NPRM,\156\ the Department proposed as 
triggering events a liability arising from (1) borrower defense to 
repayment discharges granted by the Secretary or (2) a final judgment 
or determination from an administrative or judicial action or 
proceeding initiated by a Federal or State entity. We clarify in these 
regulations that a judgment or determination becomes final when the 
institution does not appeal, or has exhausted its appeals, of that 
judgement or determination. In addition, we note that the Department 
initiates an administrative action whenever it seeks reimbursement for 
a liability arising from borrower defense to repayment discharges and 
that action results in a final determination. Consequently, we have 
incorporated the proposed borrower defense trigger as part of the 
general trigger for liabilities from final determinations under Sec.  
668.171(c)(1)(i)(A). Finally, in the 2016 Final Regulations, the 
trigger, in Sec.  668.171(c)(1)(i), specifically identified liabilities 
incurred by an institution from settlements. Although settlements were 
not likewise identified in the 2018 NPRM, we intended to account for 
that outcome in proposed Sec.  668.171(c)(1)(i)(B). To avoid confusion, 
we clarify in these regulations that settlements are part of that 
trigger.
---------------------------------------------------------------------------

    \156\ 83 FR 37271.
---------------------------------------------------------------------------

    In the 2018 NPRM, the Department proposed that a liability from a 
final judgment or determination arising from an administrative or 
judicial action or proceeding should constitute a mandatory trigger. 
The Department is revising Sec.  668.171(c)(1)(i)(A) to more 
specifically describe the type of administrative or judicial action or 
proceeding that gives rise to the trigger. As previously noted, an 
administrative or judicial proceeding must be initiated by a Federal or 
State entity. With respect to an administrative action or proceeding 
initiated by a Federal or State entity, the Department further 
specifies that the determination must be made only after an institution 
had notice and an opportunity to submit its position before a hearing 
official because the institution should receive due process protections 
in any such administrative action or proceeding initiated by a Federal 
or State entity.
    Changes: We are revising Sec.  668.171(c)(1) to provide that 
liabilities incurred by an institution include those arising from a 
settlement, final judgment, or final determination from an 
administrative or judicial action or proceeding initiated by a Federal 
or State entity. In addition, we establish that a judgment or 
determination becomes final when the institution does not appeal or has 
exhausted its appeals of that judgment or determination.

Section 668.171(d)(1), Accrediting Agency Actions

    Comments: Many commenters supported the proposed accrediting agency 
trigger in Sec.  668.171(d)(1) of the 2018 NPRM and the Department's 
willingness to work with an institution and its accreditor to determine 
whether an event has or will have a material adverse effect on the 
institution. The commenters agreed that a show cause order that would 
lead to the withdrawal, revocation, or suspension of an institution's 
accreditation was an appropriate discretionary triggering event. Some 
commenters suggested that in addition to a show cause order, the 
trigger should apply to instances where an accrediting agency places an 
institution on probation or similar status. Other commenters believed 
that the accrediting agency trigger should be mandatory instead of 
discretionary.
    Some commenters urged the Department to retain the accrediting 
agency trigger in current Sec.  668.171(c)(1)(iii) where an institution

[[Page 49866]]

is not financially responsible if it is required by its accrediting 
agency to submit a teach-out plan.
    Discussion: We agree with commenters that the trigger should be 
revised to include the phrase ``probation or similar status'' as that 
action by an accrediting agency may have the same effect as a show 
cause order. Instead of presuming the action will have a materially 
adverse effect, as a discretionary trigger, we would first obtain 
information about why the accrediting agency issued the show cause 
order or placed the institution on a probationary status, and the time 
within which the agency requires or allows the institution to come into 
compliance with its standards. The Department would then determine 
whether the accrediting agency action will likely have an adverse 
effect on the institution's financial condition depending on the nature 
or severity of the violations that precipitated that action and the 
compliance timeframe.
    Under the trigger in current Sec.  668.171(c)(1)(iii), where an 
institution notifies the Department whenever its accrediting agency 
requires a teach-out plan for a reason described in Sec.  602.24(c)(1) 
that could result in the institution closing or closing one or more of 
its locations, the Department recalculates the institution's composite 
score based on the loss of title IV funds received by students 
attending the closed location during its most recently completed fiscal 
year, and by reducing the expenses associated with providing programs 
to those students.
    While the Department can determine the amount of the title IV funds 
received by students in those programs, and that amount could serve as 
a reasonable proxy for lost revenue, determining the reduction in 
expenses associated with not providing the programs is less certain.
    Under current appendix C, the associated expense allowance is 
calculated by dividing the Cost of Goods Sold by the Operating Income 
and multiplying that result by the amount of title IV funds received by 
students at the affected location. However, the level of detail needed 
to accurately derive the expenses associated with providing a program, 
particularly at a location of the institution, is typically not 
contained or disclosed in an institution's audited financial 
statements. While the Cost of Goods Sold approximates those expenses at 
the parent level, it does not reflect all of them, and attempting to 
more accurately associate expenses at the location level would require 
additional, unaudited information from the institution.
    As noted in the discussion for pending lawsuits and borrower 
defense claims, incorrectly valuing the amount used in recalculating 
the composite score may result in imposing unnecessary financial 
burdens on an institution that, in this case, could cause the 
institution to forgo providing or executing a teach-out.
    Changes: We are revising Sec.  668.171(d)(1)(iv) to include the 
phrase ``probation order or similar action.''

Section 668.171(c)(1)(i)(B), Withdrawal of Owner's Equity

    Comments: Commenters generally supported the mandatory trigger 
relating to the withdrawal of owner's equity.
    One commenter believed that in recalculating the composite score 
for a withdrawal of owner's equity, the Department should, in addition 
to decreasing modified equity by the amount of the withdrawal, also 
adjust the equity ratio by decreasing total assets.
    Discussion: The purpose of this trigger, is to identify instances 
where the withdrawal or use of resources would likely cause an 
institution whose financial condition is already precarious (i.e., an 
institution with a composite of less than 1.5) to fail the composite 
score standard. For this purpose, total assets in the equity ratio 
would not be reduced by any transaction associated with capital 
distributions or related party receivables. For capital distributions, 
the initial accounting transaction recorded in the institution's 
financial records would increase liabilities and reduce equity. 
Consequently, there would be no reduction in assets for these 
transactions.
    The 2016 final regulations were not clear on what the Department 
meant by withdrawal of owner's equity. Withdrawal of owner's equity 
includes distributions of capital and related party transactions for 
the purposes of this trigger. In these regulations, we distinguish 
between two types of capital distributions--the equivalent of wages in 
a sole proprietorship or partnership, and dividends or return of 
capital.
    Under the 2018 NPRM, a sole proprietorship or partnership would be 
required to report every distribution of the equivalent of wages. 
However, in view of the comments relating to the need for, and burden 
associated with, reporting the occurrence of the triggering events, we 
establish in these regulations that, in accordance with procedures 
established by the Secretary, an affected institution must report no 
later than 10 days after it is informed that its composite score is 
below a 1.5, the total amount of wage equivalent distributions it made 
during the fiscal year associated with that composite score. As long as 
the institution does not make wage-equivalent distributions in excess 
of 150 percent of that amount during its current fiscal year and for 
six months into its subsequent fiscal year, we will not require the 
institution to report any of those distributions for that 18-month 
period.
    However, if the institution makes wage-equivalent distributions in 
excess of 150 percent of the reported amount at any time during the 18-
month period, the institution must report the amount of each of those 
distributions within 10 days, and the Department will recalculate the 
institution's composite score based on the cumulative amount of the 
actual distributions. Because a proprietary institution may submit its 
financial statement audits to the Department up to six months after the 
end of its fiscal year, the Department will not know the actual amount 
of wage-equivalent distributions the institution made during its most 
recently completed fiscal year until we receive those audits.
    In addition, like other triggers, we account for the occurrence of 
events that are not yet reflected in an institution's financial 
statement audits. Therefore, the 18-month period consists of the 12 
months in the institution's current fiscal year plus the six months of 
its subsequent fiscal year that transpire before the institution 
submits its financial statement audits. The Department believes this 
approach will reduce, or eliminate entirely, the burden that most 
institutions would have incurred under the 2018 NPRM, while at the same 
time providing the Department the means to assess the actions of those 
institutions that are most likely to fail the composite score standard 
because of this trigger.
    With regard to distributions of dividends or return of capital, an 
institution must report the amount of any dividend once declared, and 
the amount of any return of capital once approved, no later than 10 
days after the respective event occurs. The Department will use that 
amount to recalculate the institution's composite score.
    While we recognize that related party receivables do not impact 
equity, per se, any increase in those receivables reduces the liquid 
assets available to an institution to meet its financial obligations.
    Therefore, in keeping with the purpose of this trigger, except for 
transfers between entities in an affiliated group as provided under 
Sec.  668.171(c), an institution must report

[[Page 49867]]

any increases in the amount of related party receivables that occur 
during its fiscal year, regardless of whether those receivables are 
secured or unsecured. The Department will use the reported amount to 
recalculate the composite score.
    Changes: We have revised Sec.  668.171(c)(1)(i)(B) to include 
capital distributions that are the equivalent of wages in a sole 
proprietorship or partnership as an example of an event under the 
trigger. We also revised Sec.  668.171(f)(1)(ii)(A) to provide that for 
distributions akin to wages, an affected institution must report the 
total amount of wage-equivalent distributions that it made during its 
prior fiscal year and is not required to report any wage-equivalent 
distributions that it makes during its current fiscal year or the first 
six months of its subsequent fiscal year, if the total amount of those 
distributions does not exceed 150 percent of the amount reported by the 
institution. We have also changed the regulation to require that the 
institution report such wage-equivalent distributions, if applicable, 
no later than 10 days after the date the Secretary notifies the 
institution that its composite score is less than 1.5.
    We have clarified in Sec.  668.171(c)(1)(i)(B) that a dividend or a 
return of capital may be an event under the trigger. We similarly 
clarify in Sec.  668.171(f)(1)(B), that a distribution of dividends, or 
a return of capital, must be reported no later than 10 days after the 
dividends are declared, or the return of capital is approved. In 
addition, we establish that an institution must report a related party 
receivable no later than 10 days after it occurs.

Section 668.171(c)(2), SEC and Exchange Violations

    Comments: One commenter contended that the mandatory trigger with 
respect to the SEC does not provide a valid correlation with respect to 
an institution's ability to satisfy its financial obligations. The 
commenter noted that the correlation that ED identified in the 2018 
NPRM is misplaced. This commenter asserted that the SEC may delist the 
stock of an institution as a result of concerns about governance that 
are not indicative of a publicly-traded institution's financial health. 
Similarly, the failure of an institution to file a report does not 
necessarily reflect that the institution is unable to meet its 
financial or administrative obligations as the report may have been 
filed late for reasons unrelated to the institution's financial 
condition or administrative obligations. For these reasons, the 
commenter encouraged the Secretary to avoid classifying the SEC and 
exchange actions as mandatory triggering events and proposed a 
different mandatory trigger.
    Discussion: After careful consideration of the comments, we have 
decided to keep the mandatory triggers for publicly traded 
institutions.
    The commenter raises a valid concern that the failure of an 
institution to file a report does not necessarily reflect that the 
institution is unable to meet its financial or administrative 
obligations, as the filing may have been filed late for reasons 
unrelated to the institution's financial condition. This is 
particularly true where a company files the late report within a 
relatively short time after the original or extended due date and is 
late only with respect to a single report. Filing late could also be 
due to unforeseen circumstances such as the individual required to sign 
the report is unavailable, an unpredictable circumstance with an 
institution's auditors, or the need to address a financial restatement 
done for technical reasons.
    We do not adopt the commenter's suggestions regarding Sec.  
668.171(c)(B)(2)(i) and (c)(B)(2)(ii). The commenters are correct that 
a delisting does not necessarily mean that an institution has financial 
problems, but it could mean that it does. Even more concerning, 
delisting could be a prelude to bankruptcy. These actions are likely to 
impair an institution's ability to raise capital and that potential 
consequence calls into question the viability of the institution.
    We also note that the SEC and stock exchange violations triggers 
existed in the 2016 final regulations, at Sec.  668.171(e) (2017). 
Under those regulations, a warning by the SEC that it may suspend 
trading on the institution's stock would render the institution not 
financially responsible. By limiting, in these regulations, the trigger 
to SEC orders as opposed to warnings, the trigger is more specifically 
tailored to identify institutions with a high likelihood of financial 
difficulties. The exchange action component of the trigger in these 
regulations is similarly more tailored than the 2016 final regulations. 
Under the 2016 final regulations, an institution would not be 
financially responsible if the exchange on which the institution's 
stock is traded notifies the institution that it is not in compliance 
with exchange requirements or the institution's stock is delisted. 
Under these regulations, the Department will limit its determination 
that an institution is not financially responsible to those situations 
where the institution's stock has actually been delisted.
    We note that the occurrence of a mandatory triggering event does 
not automatically precipitate financial protection, as alluded to by 
the commenter in requesting the trigger to be reclassified.
    As a mandatory trigger, the burden is on the institution to 
demonstrate, at the time it reports an SEC or exchange action, that the 
action does not or will not have an adverse material effect on its 
financial condition or ability to continue operations as a going 
concern, and a favorable demonstration would obviate the need for 
financial protection. We see no utility in reclassifying this trigger 
as discretionary because it is reasonable for the Department to rely on 
the expertise of the SEC or exchange about actions stemming from 
violations of their requirements that may have an immediate and severe 
impact on the institution--the responsibility is rightly on the 
institution to demonstrate the contrary to the Department.
    Changes: None.

Section 668.171(d)(4) and (6), 90/10 Revenue and Cohort Default Rate 
(CDR) Triggering Events

    Comments: Some commenters believe that the cohort default rate 
(CDR) and 90/10 triggers are unrelated to an institution's financial 
stability and should be removed. Other commenters urged the Department 
to classify both of these events as mandatory instead of discretionary 
triggers. Along the same lines, another commenter believed that the 
statutory requirements governing the loss of title IV eligibility 
stemming from a 90/10 or cohort default rate failure do not require or 
allow the Department to consider alternative remedies or mitigating 
circumstances. The commenter asserted that there was no reasonable 
basis on which the Department could determine that no risk exists when 
institutions fail the 90/10 or CDR triggers, and, therefore, it would 
be arbitrary for the Department to determine on a case-by-case basis 
which of the failing institutions that would be required to provide 
financial protection. To ensure that the Department upholds the 
statutory requirements for 90/10 and CDR, and financial responsibility 
in the event of closure, the commenter urged the Department to classify 
the failure of both events as mandatory triggers.
    Discussion: We disagree that the triggers are unrelated to an 
institution's financial stability. As discussed previously under the 
heading ``Triggering Events, General,'' if either of these triggering 
events occur, an

[[Page 49868]]

institution may be one year away from losing all or most of its 
eligibility to participate in the title IV programs. That loss would 
likely have a significant adverse impact on the institution's financial 
condition or its ability to continue as a going concern, and either 
outcome may warrant financial protection.
    The current regulations require an institution that fails 90/10 or 
whose cohort default rates are more than 30 percent for two consecutive 
years to provide a letter of credit or other financial protection to 
the Department. However, rather than presuming that financial 
protection is required, we believe it is more appropriate to reclassify 
these triggers as discretionary triggers to allow the Department to 
review the institution's efforts to remedy or mitigate the causes for 
its 90/10 or CDR failure or to assess the extent to which there were 
anomalous or mitigating circumstances precipitating these triggering 
events, before determining whether financial protection for the 
Department in the form of a LOC is warranted. Part of that review is 
evaluating the institution's response to the triggering event to 
determine whether a subsequent failure is likely to occur, based on 
actions the institution is taking to mitigate its dependence on title 
IV funds, the extent to which a loss of title IV funds (from either 90/
10 or CDR failure) will affect its financial condition or ability to 
continue as a going concern, or whether the institution has challenged 
or appealed one or more of its default rates.
    Contrary to the assertion made by the commenter, this case-by-case 
review forms the basis needed for the Department to proceed under these 
regulations with issuing a determination regarding whether the 
institution is financially responsible. We wish to clarify that the 
Department's review or consideration of circumstances relating to 
whether a 90/10 or CDR failure affects an institution's financial 
responsibility has no bearing on how the statutory requirements are 
applied or the consequences of those requirements.
    Changes: None.

Section 668.171(d)(2), Violations of Loan Agreements

    Comments: Some commenters were concerned with the amount of 
discretion the Department has in situations where a creditor has 
affirmatively determined that a loan or credit is not at risk and 
suggested that the Department qualify the trigger so it does not apply 
in cases where the violation is waived by the creditor. Other 
commenters argued that an institution should have ample time to remedy 
a situation with a creditor before reporting it to the Department. On 
the other hand, some commenters questioned why this was a discretionary 
trigger or a trigger at all, noting the requirement that an institution 
be current in its debt payments currently serves as a baseline standard 
for determining whether an institution is financially responsible and 
the Department did not provide any evidence, analysis, or examples of 
existing loan violations that would not constitute a threat to the 
overall financial health of an institution.
    Discussion: A violation of a loan agreement is a discretionary 
trigger under the existing regulations, and we continue to believe that 
this trigger will assist the Department in fulfilling its objective of 
identifying and acting on signs of financial distress. With regard to 
the comments on whether the Department should exempt the reporting of a 
loan violation in cases where the creditor waives the violation or 
provide some time for an institution to remedy a loan violation before 
it reports the violation, we believe that all violations are 
potentially significant and must be reported, regardless of whether 
they are waived or remedied. In cases where the creditor waives a 
violation without imposing new requirements or restrictions, the 
institution simply reports that outcome. Although we decline to define 
the waiver as a cure for the violation, we typically would accept the 
waiver if it was obtained promptly by the institution during the then-
current fiscal year. Institutions that violate a debt provision without 
obtaining a waiver are also at risk that the total debt may be called 
by the creditor. We are concerned about allowing time for an 
institution to remedy a loan violation because that defeats or lessens 
the utility of allowing the Department to act contemporaneously in 
response to potentially significant issues.
    With respect to the comment that instead of establishing a 
discretionary trigger, the Department should retain as a ``baseline 
standard'' the requirement that an institution is current in its debt 
payments, we note that the trigger for loan violations is currently 
discretionary and the proposed provisions for this trigger are the same 
as they are in the current regulations under 668.171(g)(6). The 
baseline standard the commenters refer to was part of regulations that 
were in effect before the 2016 final regulations.
    Nevertheless, the commenters incorrectly presumed that the 
``baseline standard'' is somehow more robust or better than the trigger 
on loan violations. To the contrary, under the ``baseline'' the 
Department would not be aware that an institution violated a loan 
agreement unless: (1) It was identified in a footnote to the 
institution's audited financial statements, which are submitted to the 
Department six to nine months after the institution's fiscal year; or 
(2) the institution failed to make a payment under a loan obligation 
for 120 days and the creditor filed suit to recover its funds. As a 
discretionary trigger, the Department will be aware of a loan violation 
within 10 days of when the creditor notifies the institution, 
regardless of whether the creditor filed suit, and can assess 
contemporaneously the consequences of that violation.
    Changes: None.

Section 668.171(d)(3), State Licensing or Authorization

    Comments: Some commenters argued that the current State licensing 
or authorization trigger under Sec.  668.171(g)(2) (2017) is too broad 
because it requires an institution to report any violation of State 
requirements and concluded that it could have the unintended 
consequence of requiring an institution to close precipitously. The 
commenters believed that the proposed trigger takes a more precise 
approach by requiring an institution to report only those violations 
that could lead to the institution losing its licensing or 
authorization.
    On the other hand, a few commenters believed it was critical for 
the Department to get information on all State actions and review those 
actions on a case-by-case basis to determine whether financial 
protection should be required.
    Other commenters suggested revising the trigger to state that ``the 
institution is notified by a State licensing or authorization agency 
that its license or authorization to operate has been or is likely to 
be withdrawn or terminated for failing to meet one of the agency's 
requirements.'' The commenters note that State authorizing entities 
often include boilerplate language in notices of noncompliance that 
indicates that if the noncompliance is not remedied, authorization can 
be lost. The commenters believed that under proposed language, a notice 
that included a single instance of immaterial noncompliance would still 
have to be reported if the State included that boilerplate language.
    Other commenters asserted that the Department should define ``state 
licensing or authorizing agency'' to only

[[Page 49869]]

refer to the primary State agency responsible for State authorization, 
not specialized State agencies, such as boards of nursing.
    Discussion: Under the 2016 final regulations, at Sec.  
668.171(g)(2), the Department requires institutions to report any 
citation by a State licensing or authorizing agency for failing State 
or agency requirements. As we stated in the 2018 NPRM, we believe that 
a more targeted approach is appropriate for these regulations to better 
identify State or agency actions that are likely to have an adverse 
financial impact on institutions and to reduce reporting burden on 
institutions and burden on the Department in reviewing citations. We 
see little benefit in requiring an institution to report, and for the 
Department to review, violations of State or agency requirements that 
have no bearing on the institution's ability to operate and offer 
programs in the State. Doing so may provide some insight for program 
review risk assessments, but would not have a material adverse effect 
on an institution's ability to operate. A notice from the State 
contemplating the termination of an institution's authorization or 
licensure, which could result in the institution closing or 
discontinuing programs, satisfies that purpose without imposing 
unnecessary burdens on the institution or the Department.
    While we appreciate the commenters' language suggestions, the 
Department must be able to react to any State licensing or authorizing 
agency actions that are required to be reported, regardless of whether 
those actions are qualified or prefaced by boilerplate language. If the 
Department allows an institution to determine that a termination notice 
from the State licensing or authorizing agency stems from immaterial 
noncompliance, as suggested by the commenter, there is a potential that 
significant actions might not be reported if they were misunderstood or 
mischaracterized by the institution as being immaterial. In cases where 
an institution believes that the State or agency action is not 
material, it may provide an explanation to that effect when it reports 
that action to the Department.
    With regard to the suggestion that the Department define the term 
``State licensing or authorizing agency'' to be the only cognizant 
entity, we believe that narrowing the meaning of the term to exclude 
other State agencies, such as boards of nursing, would inappropriately 
weaken the effectiveness of trigger, particularly in cases where 
programs are licensed by those other agencies or boards.
    Changes: None.

Reporting Requirements, Sec.  668.161(f)

    Comments: Many commenters appreciated that the Department proposed 
to allow institutions to provide an explanation or information 
pertaining to a triggering event at the time that event is reported and 
then again in response to a determination made by the Department.
    Some commenters suggested that an institution should be allowed 30 
days, instead of 10 days, to report a triggering event. These 
commenters argued that various offices within an institution might be 
involved and have contemporaneous knowledge of a triggering event, but 
individuals dealing with an unrelated agency action, such as 
renegotiated debt, are unlikely to be cognizant of the Department's 
reporting deadline.
    Discussion: The Department will not adopt the commenters' proposal. 
First, we note that under the existing regulations, institutions also 
have a 10-day reporting window from the date of each of the triggering 
events, except for the 90/10 trigger (which is also the case in these 
regulations). As a result, we believe that institutions will have 
appropriate processes and procedures in place by the time these 
regulations are effective to allow for timely reporting.
    Second, there are a limited number of triggering events, not all of 
which apply to every institution, and institutions should delegate 
authority to one or more individuals to identify triggering events and 
ensure that reporting deadlines are met. The 10-day reporting deadline 
is needed to alert the Department timely of triggering events that may 
have serious consequences for institutions, students, and taxpayers, 
and for the Department to take timely action to mitigate the impact of 
those consequences.
    Third, if, as the commenter asserts, the individuals in various 
campus offices that are responsible for actions related to a triggering 
event would not be aware of the reporting deadline, the institution has 
an obligation to make sure that its staff understand triggering events 
and the reporting deadlines associated with those triggers.
    Changes: None.

Section 668.172, Financial Ratios

Procedural Concerns Regarding the Financial Responsibility Subcommittee
    Comments: A commenter noted that the formation of the Financial 
Responsibility Subcommittee, which consisted of negotiators and 
individuals selected by the Department who were not negotiators, 
departed from typical practice where the negotiators initiate the 
formation of a subcommittee comprised of negotiators during the 
negotiations. The commenter contended that because subcommittee members 
were not seated on the full committee and the subcommittee meetings 
were not open to the public, there was not a fulsome discussion of the 
issues by the full committee.
    The commenter asserted that the Department seemed to have 
acknowledged that the closed-door sessions were inappropriate by 
announcing that the sessions for two future subcommittees would be 
livestreamed. In addition, the commenter was concerned that the 
Department seated an individual with pecuniary interests in financial 
responsibility as both a negotiator and a subcommittee member but did 
not acknowledge that the individual was from an institution that had an 
active issue with the Department on subcommittee matters. The commenter 
asserted that because the individual's institution would receive 
favorable treatment under the proposed regulations, this apparent 
conflict of interest should have been avoided, or clearly identified 
prior to start of the rulemaking. In short, the commenter argued that 
the Department did not follow the appropriate procedures under the APA, 
and other requirements, in promulgating the proposed changes to the 
composite score, and that the Department should withdraw those changes.
    Discussion: Neither the APA nor the HEA stipulates the precise 
procedures the Department must use when conducting negotiated 
rulemaking, and the Department has the discretion to use different 
procedures to fit the contours of different negotiated rulemakings. 
Thus, the fact that the Department's approach to establishing the 
subcommittee differed from past practice is not indicative of 
impropriety or insufficiency.
    In this case, the Department knew prior to commencement of 
negotiations that, in order to facilitate full public participation on 
applicable financial accounting and reporting standards promulgated by 
the Financial Accounting Standards Board, subcommittee members with 
specific expertise in these matters would be needed. For this reason, 
in the Federal Register notice of intent to establish negotiated 
rulemaking committees, we specifically sought the participation of 
individuals with certain knowledge. As in the past, following its 
meetings, the subcommittee presented its recommendations to the main

[[Page 49870]]

negotiated rulemaking committee for a final vote. The evolution of the 
Department's practices in subsequent negotiated rulemakings reflects 
its efforts to best provide for negotiation of the complex issues at 
hand, but does not reduce, or call into question, the legal sufficiency 
of past practices.
    Generally, every institution with a representative has an interest 
in the outcomes of regulations that govern their participation in the 
Federal student aid programs. For the representative that participated 
on the subcommittee, the institution met the financial responsibility 
requirements for prior years by providing a letter of credit while 
raising, along with other institutions, an objection as to the 
Department's calculation of its composite score. There was no 
unresolved issue concerning this institution's compliance with existing 
Department requirements related to the calculation of its composite 
score, and no conflict of interest with respect to the participation by 
that institution's representative both on the committee and in the 
subcommittee.
    Changes: None.

Section 668.91, Initial and Final Decisions

    Comments: None.
    Discussion: As discussed in the 2018 NPRM, the Department's 
proposed regulations would update the regulations to reflect the 
language in proposed 668.175 and generally represent technical changes 
to the 2016 final regulations to track the actions and events in 
proposed Sec.  668.171. In addition, after further review, we have 
determined that an insurer would likely be unable or unwilling to 
provide a statement that an institution is covered for the full or 
partial amount of a liability arising from a triggering event in Sec.  
668.171, as required under the 2016 Final Regulations and the 2018 
NPRM. Therefore, we are revising Sec.  668.91(a)(3)(iii)(A) to provide 
that an institution may demonstrate that it has insurance that will 
cover the risk posed by the triggering event by presenting the 
Department with a copy of the insurance policy that makes clear the 
institution's coverage. Finally, we clarify that an institution may 
demonstrate for a mandatory or discretionary triggering event that the 
amount of the letter of credit or other financial protection demanded 
by the Department is not warranted for a reason described in Sec.  
668.91(a)(3)(iii)(A).
    Changes: We are revising Sec.  668.91(a)(3)(iii)(A) to clarify that 
it applies to mandatory and discretionary triggering events and provide 
than an institution may provide a copy of its insurance policy 
demonstrating that it has insurance to cover or partially cover the 
trigger-associated risk.

Section 668.172(c), Excluded Items, Termination of the Perkins Loan 
Program

    Comments: Commenters noted that, as result of terminating the 
Perkins Loan Program, some institutions may elect to liquidate their 
portfolios and assign all loans to the Department for servicing. The 
commenters believed that a liquidation decision can result in a one-
time loss that a non-profit institution will likely display separately 
or as a non-operating loss on its financial statements (``Statement of 
Activities'').
    Although the commenters asked the Department to clarify how it will 
treat Perkins Loan Program liquidation losses, they argued than an 
institution should not be penalized for the dissolution of the Perkins 
Loan Program and, thus, recommended that the Department consider non-
operating losses related to a Perkins liquidation to be infrequent and 
unusual in nature and, therefore, excluded from the calculation of the 
composite score.
    Discussion: The liquidation of the Perkins Loan portfolio would 
normally not result in a loss to an institution. Generally, a loss 
would only occur if the institution had to purchase loans that were not 
acceptable for assignment. The Department does not believe that the 
administration of title IV, HEA programs should be excluded from the 
composite score computation. The liquidation of the Perkins Loan 
portfolio would result in removal of the receivables by assignment to 
the Department. The cash would be returned to the Department or be 
released from restriction, which would not result in a loss, and only 
loans that are not acceptable for assignment would result in any loss 
to the institution, because it would be required to purchase the loans 
and those losses should be reflected in the composite score.
    Changes: None.

Section 668.172(d), Leases

    Comments: Many commenters supported the proposal that the 
Department could calculate a composite score for an institution under 
the new requirements issued by the Financial Accounting Standards Board 
(FASB ASU 2016-02, ASC 842 (Leases)), and at the institution's request, 
a second composite score that excludes the lease liabilities and right 
to use assets that the institution is otherwise required to report 
under these new requirements.
    Although many commenters appreciated the Department's recognition 
of the complexity and impact of the FASB changes, they encouraged the 
Department to guarantee that it would calculate the two composite 
scores for a minimum of six years, without regard to whether the 
methodology is updated through rulemaking, to provide stability and 
ensure that institutions have time to adjust operations.
    Other commenters urged the Department to simply calculate the two 
composite scores until the methodology is updated.
    Some commenters argued that since the Department did not propose 
any consequences for an institution that fails one of the two composite 
scores and offered no justification for permitting all operating leases 
to be excluded, even those entered into after the rule takes effect, 
the Department should eliminate, or at least shorten, the transition 
period and align the FASB implementation timeline to the effective date 
of the regulations. However, during any transition period the 
Department may offer, the commenters urged the Department to hold 
accountable any institution that fails either of the two composite 
scores. Specifically, any institution with a failing composite score 
under the new FASB requirements should be placed on heightened cash 
monitoring, be required to provide timely financial reporting, and/or 
be required to provide financial protection.
    Commenters also wrote that the Department should eliminate, or at 
least shorten, the transition period and align the FASB implementation 
timeline to the effective date of the regulations. However, during any 
transition period offered, the commenters urged the Department to hold 
any institution accountable that fails either of the two composite 
scores by placing the institution on heightened cash monitoring, 
requiring timely financial reporting, and/or compelling financial 
protection.
    Other commenters noted that the proposed transition for leases 
differed from the Subcommittee recommendation that the six-year 
transition applied only to operating leases in effect during the 
initial reporting period following the effective date of these 
regulations. The commenters stated that since 2010, all institutions 
should have known FASB was preparing to change the lease standards.
    Another commenter objected to the transition period for leases 
arguing that the Department had provided no data to

[[Page 49871]]

support this approach or rationale for why a six-year period was 
appropriate.
    Discussion: In view of the comments regarding the length, or 
application, of the transition period, the use of two composite scores, 
and the need to align the FASB implementation timeline to these 
regulations, we conclude that it is reasonable for the Department to 
calculate one composite score for an institution by grandfathering in 
leases entered into prior to December 15, 2018 (pre-implementation 
leases) and applying Accounting Standards Update (ASU) 2016-02, 
Accounting Standards Codification (ASC) 842 (Leases) to any leases 
entered into on or after that date (post-implementation leases).
    The Department will grandfather in leases if the institution 
provides adequate information to the Department in the Supplemental 
Schedule and a note in, or on the face of, the audited financial 
statements on the leases it entered into prior to December 15, 2018 and 
will treat those leases as they have been treated prior to the 
requirements of ASU 2016-02. That is, the amount of any right of use 
asset and associated liability will be removed from the balance sheet 
or statement of financial position. Because the value of leases entered 
into prior to December 15, 2018, can only decrease, any increase in the 
value of leases will be considered a new lease and ASU 2016-02 
requirements will apply to those leases. Any leases entered into on or 
after December 15, 2018, will be treated as required under ASU 2016-02.
    In establishing this approach, the Department considered three 
factors: That FASB changes an accounting standard when it recognizes 
that the standard is obsolete or no longer addresses the economic 
reality that it seeks to address; that an institution made business 
decisions prior to the requirements of ASU 2016-02; and that changes to 
the standards for leases could have a detrimental impact on an 
institution's composite score even in cases where the underlying 
financial condition of the institution may not have changed.
    The Department believes that calculating the composite score by 
grandfathering in existing leases and applying the FASB standards to 
new leases strikes an appropriate balance between these factors.
    While the subcommittee specified a transition period during which 
the Department would allow leases in existence as of the effective date 
of the regulations to be treated the way leases were treated prior to 
the requirements of ASU 2016-02, doing so would mitigate but not 
eliminate the impact on all institutions for business decisions they 
made prior to the requirements of ASU 2016-02. In addition, the 
Department could not identify an empirical basis to support a six-year 
timeframe, as opposed to a different timeframe, and therefore could not 
include the six-year period in this final rule.
    Rather than a time-limited transition period, the Department 
believes it is reasonable to grandfather in existing leases by 
establishing in these regulations that leases entered into prior to 
December 15, 2018 are treated as they would have been treated prior to 
ASU 2016-02 until the balance of those leases is zero. Because an 
institution is required to value the right-of-use assets and associated 
liabilities based on whether it will exercise options and other lease 
clauses in existence as of the effective date of ASU 2016-02, any 
leases entered into prior to December 15, 2018, and treated as they 
would have been prior to ASU 2016-02 for the composite score, cannot 
increase and would only decrease over time to zero.
    The Department establishes December 15, 2018, as the effective date 
for new leases because that is the first effective date of ASU 2016-02 
for public entities for fiscal years beginning after December 15, 2018. 
The Department recognizes that not all institutions will be required to 
implement ASU 2016-02 for fiscal years beginning after December 15, 
2018, but in an effort to treat all institutions fairly, the Department 
will apply the first required implementation date to all institutions.
    Changes: We are revising 668.172(d) to provide that the Secretary 
accounts for operating leases by applying the new FASB standards to all 
leases the institution has entered into on or after December 15, 2018 
(post-implementation leases), as specified in the Supplemental 
Schedule, and treating leases the institution entered into prior to 
December 15, 2018 (pre-implementation leases), as they would have been 
treated prior to the new FASB requirements. An institution must provide 
information about all leases on the Supplemental Schedule, and in a 
note, or on the face of its audited financial statements. In addition, 
any adjustments, such as any options exercised by the institution to 
extend the life of a pre-implementation lease, are accounted for as 
post-implementation leases.

Section 668.172, Appendix A and B

Format
    Comments: Some commenters found the Appendices confusing and 
difficult to read, suggesting that a consistently formatted layout with 
proper labeling is needed to improve usability. In addition, the 
commenters noted that in Section 3 of Appendix B, the Department 
mistakenly labeled some of the components of the ratios and their 
corresponding line numbers and in Appendix B, Section 1, and that the 
value of property, plant, and equipment (PP&E) is net of depreciation, 
not appreciation.
    A few commenters suggested that the formula for expendable net 
assets begin with ``total net assets'' instead of the proposed 
construction of ``net assets without donor restrictions + net assets 
with donor restrictions'' to alleviate the potential misinterpretation 
about the sub-groupings of ``net assets with donor restrictions.''
    Discussion: We appreciate the comments that identified errors in 
the Appendices, and we will correct those errors. With regard to using 
``Total net assets'' as opposed to ``Net assets with donor restrictions 
plus Net assets without donor restrictions'' to arrive at Expendable 
net assets, the commenters did not explain how any misinterpretations 
could occur. Because Net assets with donor restrictions and Net assets 
without donor restrictions are taken directly from the face of the 
Statement of Financial Position, it is unclear to us how these numbers 
can be misinterpreted.
    Changes: Appendix A and B are revised to correct the labels and 
line numbers noted by the commenters, and to otherwise improve 
usability and clarity.
Long-Term Debt
    Comments: Some commenters disagreed with the proposal that if an 
institution wishes to include debt obtained for long-term purposes in 
total debt, the institution must disclose in its financial statements 
that the debt, including long-term lines of credit, exceeds twelve 
months and was used to fund capitalized assets. Under that proposal, 
the debt disclosure must include the issue date, term, nature of 
capitalized amounts, and amounts capitalized. Otherwise, the Department 
would exclude from debt obtained for long-term purposes the amount of 
any other debt, including long-term lines of credit used to fund 
operations, in calculating the numerator of the Primary Reserve Ratio.
    One commenter believed that a corresponding change needs to be made 
to Total Assets that would allow any cash balances, or assets related 
to the excluded borrowing, to also be excluded. The commenter argued 
that without this change, the composite

[[Page 49872]]

score would be unbalanced and would unfairly penalize an institution 
that utilizes debt to finance capital improvements, ongoing operations, 
and growth opportunities.
    Discussion: The Department believes that a long-term debt 
disclosure is needed because it provides the information necessary to 
ensure that the primary reserve ratio is calculated accurately for all 
institutions and helps to identify and guard against those institutions 
that attempt to manipulate their composite scores. Long-term debt up to 
the value of Property, Plant and Equipment (PP&E) is treated favorably 
in the composite score calculation because that debt is intended to 
reflect investments by an institution in those items.
    The Department disagrees that any adjustment to total assets needs 
to be made, as total assets are not an element of the primary reserve 
ratio. The issue of debt obtained for long-term purposes is central 
only to the primary reserve ratio and for determining the appropriate 
amount of debt obtained for long-term purposes that is related and 
limited to PP&E under that ratio. The Department is establishing how to 
determine the correct amount of debt obtained for long-term purposes 
for calculating the primary reserve ratio.
    Changes: None.
    Comments: Some commenters stated that the proposed treatment of 
long-term debt in the 2018 NPRM was not discussed, or discussed 
thoroughly enough, by the Subcommittee or the main negotiating 
Committee and should be withdrawn.
    Other commenters noted that the discussions with the Subcommittee 
centered on closing a loophole on the use of long-term lines of credit 
that some institutions manipulated to increase their composite scores. 
To this end, the Subcommittee recommended that long-term lines of 
credit may be used to calculate adjusted equity or expendable net 
assets if the lines of credit are identified separately in the 
Supplemental Schedule with accompanying information specifying the 
issue date, term, nature of capitalized amounts, and amounts 
capitalized.
    The commenters argued that instead of adopting the Subcommittee's 
recommendation, the Department's proposal fundamentally changes the 
definition of all debt obtained for long-term purposes, effectively 
repealing the guidance provided in Dear Colleague Letter (DCL) GEN-03-
08.
    Some commenters suggested that the Department phase-in or create a 
transition period before requiring institutions to link long-term debt 
to the acquisition of PP&E. The commenters noted that some institutions 
have large investments in old and newly constructed buildings and hold 
long-term debt that directly or indirectly relates to brick and mortar. 
These commenters asserted that it can be challenging for institutions 
to show a direct relationship between issues of debt within all debt 
obtained for long-term purposes and capitalized asset acquisitions. The 
commenters identified a variety of factors that make this difficult, 
including institutional longevity, contributions that support PP&E 
payment and payout timing, variability in build, renovation, and 
maintenance schedules as well as debt consolidations, restructurings, 
and refinancing over decades.
    Discussion: The discussions in the subcommittee centered around the 
abuse of long-term lines of credit and manipulation of the composite 
score in general. Based on those discussions and in developing these 
regulations, the Department determined that long-term notes payable 
should not be treated differently from long-term lines of credit.
    Both can be used for the purpose of purchasing PP&E, including 
construction-in-progress (CIP), both can be used to fund investments or 
operations, and both can be used to manipulate the composite score if 
the purpose and use of the debt is not known. The Department's goal, as 
discussed in the Subcommittee meetings, is to limit or eliminate 
instances where institutions report long-term debt to manipulate their 
composite scores, and to include long-term debt related to PP&E and 
construction in progress (CIP) to compute an accurate composite score. 
The Department sees no reason to have different requirements for 
different types of debt. We believe the best approach is for all debt 
to be treated the same, except for short-term debt obtained for CIP 
which can be considered debt obtained for long-term purposes up to the 
amount of the CIP.
    These regulations effectively repeal DCL GEN-03-08. Typically, no 
amount of PP&E would be included in a primary reserve ratio. However, 
at the time the financial responsibility regulations were originally 
developed, the community expressed concerns that institutions would be 
discouraged from investing in PP&E. To mitigate that concern, the 
Department provided in the regulations that long-term debt up to the 
amount of PP&E an institution reported would be added to the numerator 
of the primary reserve ratio, effectively crediting the institution for 
the long-term debt associated with a portion of the PP&E that had 
properly been subtracted from the numerator of the primary reserve 
ratio.
    Over time, there has been significant manipulation of the composite 
score in reliance on DCL GEN-03-08, where the reported long-term debt 
was not associated with investments into an institution's PP&E and CIP. 
We believe that reverting back to the original intent of adding debt 
obtained for long-term purposes to the numerator of the primary reserve 
ratio is the proper approach because it results in a more accurate 
portrayal of an institution's financial health.
    The Department agrees with the commenters that some type of phase-
in or transition is appropriate to account for institutions that do not 
have the records to, or otherwise cannot, associate debt to PP&E 
acquired in the past under the guidance provided in DCL GEN-03-08.
    In these regulations, we revise the calculation of the primary 
reserve ratio with regard to the amount of long-term debt that is 
included in debt obtained for long-term purposes and used as an offset 
to PP&E, including CIP and right-of-use assets. Specifically, we will 
consider the PP&E that an institution had prior to the effective date 
of these regulations (pre-implementation) and the additional PP&E it 
has acquired after that date (post-implementation). For this 
discussion, qualified debt refers to any post-implementation debt 
obtained for long-term purposes that is directly associated with PP&E 
acquired with that debt. Any debt obtained for long-term purposes post-
implementation must be qualified debt.
    Since institutions were not required under DCL GEN-03-08 to 
associate debt obtained for long-term purposes with capitalized assets 
and may not have the accounting records pre-implementation to associate 
debt with specific PP&E, in determining the amount of pre-
implementation PP&E that is included in the primary reserve ratio, the 
Department will use the lesser of (1) the PP&E minus depreciation/
amortization or other reductions, or (2) the qualified debt obtained 
for long-term purposes minus any payments or other reductions, as the 
amount of debt obtained for long-term purposes.
    The basis for the pre-implementation PP&E and qualified debt will 
be the amounts reported in the institution's most recently accepted 
financial statement submitted to the Department prior to the effective 
date of these regulations. An institution must adjust the amount of 
pre-implementation debt by any payments or other reductions

[[Page 49873]]

and must also adjust the pre-implementation PP&E by any depreciation/
amortization or other reductions in subsequent years.
    Post-implementation debt is the amount of debt that an institution 
used to obtain PP&E since the end of the fiscal year of its most 
recently accepted financial statement submission to the Department 
prior to the effective date of these regulations less any payments or 
other reductions. An institution must adjust post-implementation debt 
by any debt obtained and associated with PP&E in subsequent years by 
any payments or other reductions. Similarly, the institution must also 
adjust post-implementation PP&E by any PP&E obtained in subsequent 
years and any depreciation/amortization or other reductions in 
subsequent years. Any refinancing or renegotiated debt cannot increase 
the amount of debt associated with previously purchased PP&E. No pre-
implementation debt required to be disclosed can increase. For each 
debt to be considered for the composite score, the individual debts 
must be disclosed as described below.
    The Department is revising the reporting on long-term debt to 
require that an institution must, in a note to its financial 
statements, clearly identify for each debt to be considered in the 
composite score for pre- and post-implementation long-term debt and 
PP&E net of depreciation or amortization and the amount of CIP and the 
related debt.
    An institution must also disclose in a note to its financial 
statements, for each pre- and post-implementation debt, the terms of 
its notes and lines of credit that include the beginning balance, 
actual payments and repayment schedules, ending balance, and any other 
changes in its debt including lines of credit.
    Changes: We are revising the definition of debt obtained for long-
term purposes in Section 1 of Appendices A and B to reflect the amount 
of pre- and post-implementation long-term debt that can be included in 
the primary reserve ratio. The definition also provides that any amount 
of pre- and post-implementation debt obtained for long-term purposes 
that an institution wishes to be considered for the primary reserve 
ratio must be clearly presented or disclosed in the financial 
statements. We have also modified Section 3 of appendices A and B to 
show how the definition of qualified debt obtained for long-term 
purposes will be presented or disclosed by institutions.
    Comments: Some commenters believed that access to a long-term line 
of credit reflects an institution's ability to access credit in the 
open market and argued that the institution should not be penalized for 
having access to credit unless it needs to post collateral to gain 
access to this credit. In addition, the commenters believed that long-
term debt should be specifically tied to PP&E acquisitions in order to 
be added back in the computation of adjusted equity.
    While long-term debt can be used specifically for PP&E 
acquisitions, the commenters noted that some institutions use cash to 
pay for PP&E acquisitions and decide later to obtain long-term debt in 
a future year using the assets purchased as collateral. The commenters 
asked whether this practice creates a disconnect if the assets are not 
acquired in the same year as the occurrence of the debt. In addition, 
if the long-term debt is secured by PP&E, the commenters questioned why 
it matters if the debt was specifically for the purchase of those 
assets. These commenters, and others, believed that the proposed 
changes relating to long-term debt should be removed and discussed as 
part of a broader negotiated rulemaking for the composite score.
    Another commenter stated that the primary reserve ratio is intended 
to measure liquidity and argued that the acquisition of long-term debt 
that is immediately accessible (like a line of credit) is conclusive 
evidence of liquidity up to the amount of line. Therefore, the 
commenter reasoned that it does not matter whether the institution uses 
the funds from that line of credit for property, plant and equipment or 
anything else. The commenter posited that an institution should not 
have to draw down on the line of credit to get the benefit afforded 
long-term debt in the primary reserve ratio. As support for this 
position, the commenter cited a study.\157\
---------------------------------------------------------------------------

    \157\ Filippo Ippolito and Ander Perez, Credit Lines: The Other 
Side of Corporate Liquidity, Barcelona Graduate School of Economics, 
March 2012, available at: https://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/618.pdf.
---------------------------------------------------------------------------

    Discussion: The Department disagrees that an institution would be 
penalized for having access to credit. The question before the 
Department was the appropriate amount to use in the composite score 
calculation for debt obtained for long-term purposes. To the extent 
that the proceeds from a long-term line of credit were used to purchase 
PP&E and the amount used is still outstanding at the end of the 
institution's fiscal year, that amount is included in determining the 
amount of debt obtained for long-term purposes. Where PP&E is used as 
collateral for obtaining debt, that debt would not count as debt 
obtained for long-term purposes unless it is used to purchase other 
PP&E.
    With regard to using cash to purchase PP&E, for the purposes of 
debt obtained for long-term purposes used in the primary reserve ratio, 
there is no long-term debt associated with those assets. When an 
institution later uses the PP&E as collateral, there is still no long-
term debt associated with the purchase of those assets. Additionally, 
none of the debt obtained would count toward the primary reserve ratio 
unless the proceeds from the borrowing were used to purchase PP&E.
    There is a difference in long-term debt being used to purchase PP&E 
and PP&E being used to secure long-term debt. For example, a long-term 
line of credit may be used to purchase furniture. There is no security 
interest by the creditor in the furniture, but the long-term line of 
credit was used to purchase PP&E and the amounts from the line of 
credit used to purchase the furniture that are still outstanding at the 
end of the institution's fiscal year would be considered debt obtained 
for long-term purposes. Conversely, an institution secures a loan using 
a building as collateral for the loan and then uses the proceeds to pay 
salaries and taxes. In this case, there is no debt obtained for long-
term purposes because the proceeds of the loan were not used for the 
purchase of PP&E, a long-term purpose.
    The Department does not agree that the issues surrounding long-term 
debt need to be part of a broader negotiated rulemaking for the 
composite score because the approach established in these regulations 
does not penalize institutions for decisions made prior to this 
regulation. We are grandfathering in existing long-term debt as 
reported under DCL GEN-03-08 and requiring only that new long-term debt 
must be associated with and used for PP&E.
    The study cited by the commenter specifically states, ``Credit 
lines have a predetermined maturity. This implies that any drawn amount 
has to be repaid before the credit line matures, thus limiting the use 
of lines of credit for example for long term investments.'' The authors 
also state that lines of credit ``are normally issued with a stated 
purpose which restricts their possible uses.'' The primary reserve 
ratio, as a measure of liquidity, would normally not include any PP&E 
and no amount of debt obtained for long-term purposes would normally be 
added back to the numerator in determining Adjusted Equity or 
Expendable Net Assets. The original recommendation from the KPMG study 
which formed the basis for the Department's current financial

[[Page 49874]]

responsibility regulations excluded net PP&E from the Primary Reserve 
Ratio and had no provision for adding back debt obtained for long-term 
purposes. Regarding net PP&E and the Primary Reserve Ratio the KPMG 
study provided the following: ``The logic for excluding net investment 
in plant (net of accumulated depreciation) is twofold. First, plant 
assets are sunk costs to be used in future years by an institution to 
fulfill its mission. Plant assets will not normally be sold to produce 
cash since they will presumably be needed to support ongoing programs. 
In some instances, there is a lack of ready market to turn the assets 
into cash, even if they are not needed for operations. Second, 
excluding net plant assets is necessary to obtain a reasonable measure 
of liquid equity available to the institution on relatively short 
notice.''

(Methodology for Regulatory Test of Financial Responsibility Using 
Financial Ratios--December 1997)

    In response to comments from the community that this treatment 
would influence institutions not to invest in PP&E, the Department 
provided that to the extent debt obtained for long-term purposes was 
used for PP&E, the Department would add such amounts back to Adjusted 
Equity or Expendable Net Assets up to the total amount of PP&E to 
encourage institutions to reinvest in themselves. To the extent that a 
long-term line of credit is allowed to be used for, and is used, for 
the purchase of PP&E, although there are limits to the use of lines of 
credit for long-term investments, that amount will be added back to 
Adjusted Equity or Expendable Net Assets as provided for in the 
regulations.
    While a line of credit does provide resources for an institution to 
use to meet its needs prior to being drawn on, it is not reflected in 
the institution's financial statements. When a line of credit is drawn 
on, it is reflected as a liability in the financial statements. At the 
point that a line of credit is drawn on, that amount becomes a drain on 
other liquid resources of the institution. The mere existence of a line 
of credit is not proof of liquidity. If the line of credit is 
exhausted, there is no liquidity associated with that line of credit. 
An option for the Department given the manipulation of the Composite 
Score through the use of debt obtained for long-term purposes would 
have been to return to the original KPMG methodology and the way 
Primary Reserve Ratios are normally calculated in the financial 
community by excluding Net PP&E from Adjusted Equity or Expendable Net 
Assets and not adding back any debt obtained for long-term purposes 
associated with the Net PP&E. The Department wants to encourage 
institutions to reinvest in themselves, but also wants to curb 
manipulation of the composite score. The Department believes that its 
approach to debt obtained for long-term purposes accomplishes both 
goals.
    Changes: None.
    Comments: A few commenters believed the Department should consider 
any long-term debt obtained by an institution for the primary reserve 
ratio.
    Discussion: The Department does not agree with the commenter's 
proposal. As discussed more thoroughly in the preamble to the NPRM, the 
Department's Office of Inspector General and the Government 
Accountability Office have both identified the use of long-term debt as 
one of the primary means of manipulating the composite score and these 
regulations are intended to reduce or eliminate that manipulation.
    Changes: None.

Appendix A and B, Related Parties

    Comments: For non-profit institutions, some commenters suggested 
that related party contributions receivables from board members should 
be included in secured related party receivables if there is no 
``business relationship'' with board members.
    Discussion: The commenters are asking the Department to change the 
regulatory requirements for related party transactions under 34 CFR 
668.23(d). The requirements under those regulations were not included 
in the notice announcing the formation of the Subcommittee and, thus, 
are beyond the scope of these regulations.
    Changes: None.

Appendix A and B, Construction in Progress

    Comments: One commenter disagreed that CIP should be included as 
PP&E in the computation of adjusted equity unless the corresponding 
debt associated with the CIP is also included. The commenter argued 
that if the corresponding debt is not included, this could create a 
significant issue if the construction loan is deemed to be a short-term 
line of credit. While the construction loan is specifically for the 
building project, the commenter believed that a short-term line of 
credit would be excluded as debt in the primary reserve ratio since it 
is not considered to be long-term, and only when the construction loan 
is termed-out as permanent long-term financing upon the project's 
completion would the debt be included in the primary reserve ratio. The 
commenter argued that this disconnect could cause a composite score 
issue for an institution that has a significant multi-year building 
project. In addition, the commenter stated the CIP is not placed in-
service until the project is completed and, therefore, not usable by 
the institution.
    For these reasons, the commenter recommended that the composite 
score continue to exclude construction-in-progress assets until they 
are completed and placed in service as PP&E.
    Discussion: To the extent that an institution is using short-term 
financing for CIP and clearly shows in the notes to the financial 
statements the amount of short-term financing that is directly related 
to CIP, it would be appropriate to include that amount as debt obtained 
for long-term purposes because the Department considers construction 
projects to serve a long-term purpose for the institution. The 
Department agrees that CIP has not been placed in service. However, CIP 
is not an expendable asset and most closely resembles PP&E therefore, 
the Department is including it and its associated debt in the primary 
reserve ratio.
    Changes: We are revising the Appendices to reflect that short-term 
financing for CIP will be considered debt obtained for long-term 
purposes up to the value of CIP and only to the extent that the short-
term financing is directly related to the CIP.

Appendix A and B, Net Pension Liability

    Comments: One commenter noted that the primary reserve ratio treats 
the net pension liability as short-term, which reduces the net assets 
available for short-term obligations. As a result, the commenter argues 
that her specific institution cannot achieve a composite score higher 
than a 1.4, which over time triggers the requirement that the 
institution provide a letter of credit to the Department. The commenter 
urged the Department to eliminate the net pension liability from the 
calculation of the primary reserve ratio and treat it instead as a 
long-term liability.
    Discussion: The commenter is mistaken--the Department has never 
made a distinction between short-term and long-term pension 
liabilities.
    Changes: None.

Appendix A and B, Supplemental Schedule and Financial Statement 
Disclosures

    Comments: Some commenters believed that to satisfy the reporting

[[Page 49875]]

requirements in these regulations and avoid conflicts with GAAP, any 
additional information the Department seeks about leases, long-term 
lines of credit, related-party receivables, split-interest gifts, or 
other items should be provided in the Supplemental Schedule rather than 
in the notes to the financial statements. The commenters argued that 
because the Supplemental Schedule identifies all the financial elements 
needed to calculate the composite score, and those elements are cross-
referenced to the financial statements and reviewed by the 
institution's auditor in relation to the financial statements as a 
whole, there is no need to alter GAAP. Consequently, the commenters 
recommend that the Department remove the proposed additional disclosure 
requirements in the financial statements.
    Other commenters believed that including the Supplemental Schedule 
as part of an institution submission to the Department should eliminate 
any differences between the composite score calculated by the 
institution and the score calculated by the Department. To further 
minimize any differences, the commenters recommended that the 
Supplemental Schedule include the elements used to calculate the pre-
ASU 2016-02 composite score so that the Department has both 
calculations at the time of the institution's submission.
    Discussion: Under section 498(c)(5) of the HEA, the Department must 
use the audited financial statements of an institution to determine 
whether it is financially responsible. As the commenters note, the 
Supplemental Schedule is not part of the audited financial statements 
but any notes to the financial statements are part of the audited 
financial statements. Consequently, the Department cannot rely on the 
information contained in the Supplemental Schedule as the commenters 
suggest.
    In addition, we do not believe that the notes to the financial 
statements required under these regulations alter GAAP because the 
Department is not requiring that the information needed to calculate 
the composite score must be provided in the notes to the financial 
statements. Rather, it is up to an institution to determine the level 
of aggregation or disaggregation it uses in preparing its financial 
statements. Therefore, a note will need to be included only when the 
required information is not readily identifiable in any other part of 
the audited financial statements.
    We agree with the suggestion that the Department revise the 
Supplemental Schedule to include the elements needed to calculate the 
composite score for leases, but note that an institution is not 
required to include or report to the Department any composite score 
that it chooses to calculate based on the Supplemental Schedule.
    Changes: We are revising the Supplemental Schedules to identify the 
elements relating to leases that are needed to calculate the composite 
scores.

Financial Protection--Sec.  668.175(h)

    Comments: Many commenters supported the Department's efforts to 
expand the types of financial protection that an institution may 
provide.
    One commenter argued that the Department did not comply with 
applicable law to support the provision in Sec.  668.175(h)(1) that it 
would publish in the Federal Register other acceptable forms of surety 
or financial protection. The commenter stated that this provision is 
nothing more than a proposal to make a future proposal on unspecified 
future action and, thus, should be withdrawn.
    Another commenter objected to this provision arguing that it allows 
the Department to concoct any new kind of financial protection with no 
standards or requirements in place to ensure that it serves its purpose 
of paying for liabilities and debts that would otherwise be incurred by 
taxpayers. The commenter concluded that because the Department failed 
to demonstrate that there is a specific need for this flexibility and 
provided no restrictions to ensure that alternatives would be on par 
with a letter of credit, this provision should be removed.
    Discussion: The Department disagrees with the contention that its 
proposal to publish in the Federal Register other acceptable forms of 
surety or financial protection does not comply with the law. Announcing 
our intent to accept such form of surety would not change the substance 
of these final regulations, as it would merely provide an additional 
method by which institutions could comply with the rule. In addition, 
the Department would not concoct a form of financial protection that 
offers no financial protection. As discussed in the NPRM (83 FR 37263) 
and the 2016 final regulations (81 FR 76008), we understand that 
obtaining irrevocable letters of credit can be costly, but are not 
aware of other surety instruments that that would provide the 
Department with same the level of financial protection or ready access 
to funds. However, if surety instruments become available that are more 
affordable to institutions but offer the same benefits to the 
Department, we wish to retain the flexibility to consider accepting 
those instruments in the future.
    Changes: None.
    Comments: None.
    Discussion: In the 2016 final regulations, we revised 668.175 to 
provide that an institution that fails to meet the financial 
responsibility standards as a result of the new triggering events in 
Sec.  668.171(c)-(g), as opposed to just as a result of Sec.  
668.171(b), may begin or continue to participate in the title IV, HEA 
programs through the alternate standards set forth in Sec.  668.175. 
The 2016 final regulations also established under Sec.  
668.175(h)(2017) that if the institution did not provide a letter of 
credit within 45 days of the Secretary's request, the Department would 
offset the amount of the title IV, HEA program funds the institution is 
eligible to receive in a manner that ensured that, over a nine-month 
period, the total amount of offset would equal the amount of financial 
protection the institution was requested to provide. For the 
regulations proposed in the 2018 NPRM, and in these final regulations, 
we adopt the same concept, but with technical changes to track the new 
triggers in Sec.  668.171(c) and (d). We also amend Sec.  668.175(h) to 
incorporate the possibility of additional types of financial protection 
in the future, to be identified in a Federal Register notice, allow for 
cash as an alternative form of financial protection, and modify the 
nine-month set-off period to be six to twelve months. As we explained 
in the preamble of the 2018 NPRM, these changes were made to provide 
the Department with flexibility to assess what time period might be 
appropriate as an off-set period and to accommodate the possibility of 
future financial instruments or surety products that may satisfy the 
Department's requests for financial protection.
    In addition, we codify current practice in these regulations that 
the Department may use a letter of credit or other financial protection 
provided by an institution to cover costs other than title IV, HEA 
program liabilities. Under current practice, we notify an institution 
that the Department may use the letter of credit or other protection to 
pay, or cover costs, for refunds of institutional or non-institutional 
charges, teach-outs, or fines, penalties, or liabilities arising from 
the institution's participation in the title IV, HEA programs.
    Changes: We are revising Sec.  668.175(h) to provide that under 
procedures established by the Secretary or as part of an agreement with 
an institution, the Secretary may use the funds from a letter of credit 
or other financial protection to satisfy the debts,

[[Page 49876]]

liabilities, or reimbursable costs owed to the Secretary that are not 
otherwise paid directly by the institution including costs associated 
with teach-outs as allowed by the Department.

Section 668.41(h) and (i), Loan Repayment Rate and Financial Protection 
Disclosures

    Comments: Some commenters believed that establishing early warning 
triggering events that require an institution to provide disclosures to 
students and financial protection to the Department, as promulgated in 
the 2016 final regulations, would offer critical information to 
students and help protect taxpayers from financial risk.
    Some of these commenters argued that removing disclosures to 
students runs counter to the Department's stated goal of enabling 
students to make informed decisions on the front-end of college 
enrollment. For these reasons, the commenters urged the Department to 
maintain the disclosure requirements in the 2016 final regulations.
    Similarly, other commenters believed that providing disclosures to 
students about institutions that are required to submit letters of 
credit to the Department, or after consumer testing, disclosures 
relating to triggering events, is important for alerting current and 
prospective students as well as the general public about potential 
financial problems at those institutions.
    Some of these commenters stated that rather than presuming that 
prospective students would not understand letters of credit or the 
triggering events, as discussed in the preamble to the 2018 NPRM, the 
Department should leave those presumptions aside and require the 
disclosures. Other commenters likened the situation where a student 
does not understand the calculation of the debt to earnings rate but 
benefits nonetheless from the information that it provides about a 
program's quality to the letter of credit disclosure providing greater 
knowledge about the financial condition of the institution.
    With regard to the disclosure associated with the loan repayment 
rate for proprietary institutions, some commenters agreed with the 
Department's proposal to rescind that disclosure, but other commenters 
cited research or analysis that they alleged supported maintaining the 
disclosure. Some of these commenters contend that a recent research 
paper found that almost 50 percent of the borrowers who attend 
proprietary institutions default on their loans within five years of 
entering repayment and that another paper shows that the relatively 
poor outcomes of students at for-profit institutions remain even after 
controlling for differences in family income, age, race, academic 
preparation, and other factors. Other commenters cited research showing 
that, among for-profit institutions, there were almost no schools with 
repayment rates above 20 percent. In addition, some commenters noted 
that in the preamble to the NPRM, the Department argued that repayment 
rates reflect financial circumstances and not educational quality, but 
did not cite any research, analysis, or data to support that claim. 
These commenters believed that repayment rates are a critical measure 
for safeguarding $130 billion in Federal aid and supported that belief 
by citing various reports raising concerns over rising default and 
delinquency rates and linking repayment outcomes to other metrics of 
educational outcomes. Other commenters argued that the focus on 
proprietary institutions is justified and cited research from the 
Brookings Institution, showing that among non-degree certificate 
students, those in for-profit programs earned less per year than their 
counterparts at public institutions despite taking out more in loans. 
Another commenter voiced similar concerns for proprietary institutions 
in New York, noting particularly that only seven percent of students 
enroll at those institutions but account for one in four New Yorkers 
who default on their loans within three years of entering repayment.
    Discussion: We note that the loan repayment rate warning and 
financial protection disclosures were discussed during the Gainful 
Employment (GE) negotiated rulemaking and associated NPRM along with 
GE-related disclosures. However, we are including these disclosures in 
these final regulations because they were part of the 2016 final 
regulations we are proposing to revise.
    In the 2016 final regulations, we explained that we were requiring 
repayment rate disclosures that relied upon a repayment rate 
calculation based on the data provided to the Department by 
institutions through the GE regulations and on the repayment 
calculation in those regulations. However, on July 1, 2019, the 
Department published a final rule that rescinds those 
requirements.\158\ As a result, providing the same repayment rate 
disclosure as required in the 2016 final regulations is no longer 
feasible and we do not maintain this disclosure in these final 
regulations.
---------------------------------------------------------------------------

    \158\ 81 FR 31392.
---------------------------------------------------------------------------

    As a general matter, we consider repayment rates to be an important 
factor students and their families may consider when choosing an 
institution and the Department intends to continue to make comparable 
information about repayment rates, as well as other information, for 
all institutions publicly available on the Department's College 
Scorecard website.\159\ This information is a useful resource because 
it includes repayment rate information, not only for proprietary 
institutions, but also for nonprofit and public institutions of higher 
education.
---------------------------------------------------------------------------

    \159\ See: https://collegescorecard.ed.gov/.
---------------------------------------------------------------------------

    We believe that any benefit that a student may derive from knowing 
the loan repayment rate for a proprietary institution is negated by not 
knowing the comparable loan repayment rate at a non-profit or public 
institution, because the student may rely on the limited repayment rate 
information available and end up enrolling at an institution whose 
repayment rate is the same or even worse than the proprietary 
institution.
    With respect to the financial protection disclosures, we 
acknowledge that some prospective students may find this information 
helpful, but on balance, we believe that the disclosures, if viewed 
without proper context, could tarnish the reputation of an institution 
that otherwise satisfies title IV provisions, and thus jeopardize or 
diminish the credential, or employment or career opportunities, of 
enrolled students and prior graduates.
    Changes: None.

Guaranty Agency (GA) Collection Fees (Sec. Sec.  682.202(b)(1), 
682.405(b)(4)(ii), 682.410(b)(2) and (4))

    Comments: Some commenters supported the proposed changes in 
Sec. Sec.  682.202(b)(1), 682.405(b)(4)(ii), and 682.410(b)(4), 
providing that a guaranty agency may not capitalize unpaid interest 
after a defaulted FFEL Loan has been rehabilitated, and that a lender 
may not capitalize unpaid interest when purchasing a rehabilitated FFEL 
Loan.
    One commenter proposed that the Department retain in Sec.  
682.402(e)(6)(iii) a provision of the 2016 final regulations that 
deleted a reference to a guaranty agency capitalizing interest.
    One commenter strongly opposed the changes to Sec.  682.410(b)(2), 
asserting that section 484F of the HEA explicitly permits a guarantor 
to charge a borrower who enters into a rehabilitation agreement 
reasonable collection costs up to 16 percent. The commenter further 
asserted that section 484A(b) of the HEA provides that a defaulted 
borrower must pay reasonable collection costs and that there are no 
exceptions

[[Page 49877]]

under which the borrower is not required to pay such costs. The 
commenter argued that the regulatory change raises equal protection 
concerns because it ties the Rehabilitation Fee to a 60-day interval 
that does not have any discernable or rational relationship to 
borrowers, guarantors, default, or anything else related to loan 
rehabilitation.
    The commenter further asserted that the regulation creates due 
process concerns because it calls for the elimination of a statutorily-
conferred right to payment that is often guarantors' only real 
compensation for fulfilling their fiduciary obligation to the 
Department and helping borrowers rehabilitate defaulted loans. The 
commenter expressed concern that the regulatory change could create 
perverse incentives and harm borrowers, the federal government, and 
taxpayers by inhibiting creative outreach tactics that have proven 
successful bringing defaulted borrowers back into repayment. This 
commenter also drew a distinction between a defaulted borrower entering 
into an ``acceptable repayment plan'' and a defaulted borrower entering 
into a Rehabilitation Agreement. This commenter noted that it is a 
common practice for guarantors to dispense with per-payment collection 
fees when borrowers enter an acceptable repayment plan within 60 days 
of receiving a default notice, even though they are required to do so. 
They reiterate that loan rehabilitation is a unique process that is 
defined and mandated by the HEA and controlled by detailed regulations.
    Discussion: We thank the commenters who are supportive of the 
proposed revisions of the guaranty agency collection fee regulatory 
provisions. We will retain the 2016 final regulations, which are 
currently effective, with respect to Sec. Sec.  682.202(b)(1), 682.405, 
and 682.410(b)(4) because the 2016 final regulations effectively 
accomplish the same policy objective as the proposed amendatory 
language in the 2018 NPRM.
    We agree with the comment about 34 CFR 682.402(e)(6)(iii) and 
retain the change made in the 2016 final regulations to remove the 
sentence regarding capitalization of interest.
    We disagree with the commenter who raised legal objections to the 
Department's proposed regulation. The changes in Sec.  682.410(b)(2) 
are consistent with the regulatory interpretation and position that the 
Department outlined in Dear Colleague Letter (DCL) GEN-15-14 (July 10, 
2015). We withdrew that DCL to allow for public comment on a regulatory 
change rather than rely solely on our interpretation of existing 
regulations.
    The Department has considered the commenter's objections but 
believes that the proposed change is consistent with the HEA and the 
existing regulations. We note that the United States Court of Appeals 
for the Seventh Circuit accepted the Department's statutory and 
regulatory interpretation in Bible v. United Student Aid Funds, 
Inc.\160\
---------------------------------------------------------------------------

    \160\ 799 F.3d. 633 (7th Cir. 2015).
---------------------------------------------------------------------------

    Section 484A(a) of the HEA provides that defaulted borrowers 
``shall be required to pay, in addition to other charges specified in 
this subchapter . . . reasonable collection costs.'' Section 428F(a) of 
the HEA requires the guarantor to offer the borrower an opportunity to 
have a defaulted loan ``rehabilitated,'' and the default status cured, 
by making nine timely payments over 10 consecutive months, after which 
the loan may be sold to a FFEL Program lender or assigned to the 
Department, and the record of default as reported by the guarantor is 
removed from the borrower's credit history. Under the HEA and the 
Department's regulations, the installment amounts payable under a 
rehabilitation agreement must be ``reasonable and affordable based on 
the borrower's total financial circumstances.''
    The regulations direct the guarantor to charge the borrower 
``reasonable'' collection costs incurred to collect the loan.\161\ 
Generally, the charges cannot exceed the lesser of the amount the 
borrower would be charged as calculated under 34 CFR 30.60 or the 
amount the Department would charge if the Department held the loan. 
Before the guarantor reports the default to a credit bureau or assesses 
collection costs against a borrower, the guarantor must provide the 
borrower written notice that explains the nature of the debt, and the 
borrower's right to request an independent administrative review of the 
enforceability or past-due status of the loan and to enter into a 
repayment agreement for the debt on terms satisfactory to the 
guarantor.\162\
---------------------------------------------------------------------------

    \161\ 34 CFR 682.410(b)(2).
    \162\ 34 CFR 682.410(b)(5)(ii).
---------------------------------------------------------------------------

    Thus, the regulations direct the guaranty agency to charge the 
borrower collection costs, but only after the guaranty agency provides 
the borrower the opportunity to dispute the debt, to review the 
objection, and to agree to repay the debt on terms satisfactory to the 
guarantor. If the borrower agrees within that initial period to repay 
the debt under terms satisfactory to the guarantor and consistent with 
the requirements, the borrower cannot be charged collection costs at 
any time thereafter unless the borrower later fails to honor that 
agreement.
    We also disagree with the commenter's suggestion that the 
imposition of collection costs is intended to compensate the guaranty 
agencies and provide them an incentive to offer loan rehabilitation. A 
guaranty agency is permitted to charge the borrower for the reasonable 
collection costs it incurs in collecting on loans. It is not reasonable 
for the guaranty agency to charge collection costs for collection 
activities it does not need to take because the borrower entered into 
and met the requirements of a loan rehabilitation agreement. Collection 
costs are not intended to be a funding source for guaranty agencies or 
an incentive for them to offer a statutorily required opportunity to 
borrowers.
    Changes: The Department retains the 2016 regulations, which are 
currently effective, with respect to Sec. Sec.  682.202(b)(1), 682.405, 
and 682.410(b)(4) because the 2016 final regulations effectively 
accomplish the same policy objective as the proposed amendatory 
language in the 2018 NPRM. The Department will proceed to revise Sec.  
682.410(b)(2) as proposed in the 2018 NPRM.
    The Department also retains the change made in Sec.  
682.402(e)(6)(iii) as a result of the 2016 final regulations.
    Comments: A group of commenters stated that the preamble to the 
2018 NPRM specified that collection costs are not assessed if the 
borrower enters into a repayment agreement with the guaranty agency 
within 60 days from ``receipt'' of the initial notice, while the 
regulatory language was less specific about when the 60-day time period 
would commence. These commenters requested a change to the regulatory 
language to make clear that the 60-day period begins when the guaranty 
agency ``sends'' the initial notice described in paragraph (b)(6)(ii), 
since this is the only date that can be determined by the guaranty 
agency.
    Discussion: We agree with the commenters who noted that that it is 
appropriate that the 60-day period be determined from the date the 
guaranty agency sends the notice to the borrower, because the guaranty 
agency cannot reasonably establish when a borrower receives the notice.
    Changes: We have modified Sec.  682.410(b)(2)(i) by replacing the 
word ``following'' with ``after the guaranty agency sends''.

[[Page 49878]]

Subsidized Usage Period and Interest Accrual (Sec.  685.200)

    Comments: A group of commenters wrote in support of the regulations 
that provide a recalculation of the subsidized usage period and 
restoration of subsidies when any discharge occurs. They noted that 
this action assures that harmed borrowers are made more completely 
whole.
    Discussion: We thank the commenters for their support of the 
proposed revisions to the regulations governing subsidized usage 
periods and interest accrual. The Department is not rescinding the 
revisions that the 2016 final regulations made to Sec.  685.200, which 
concerns the subsidized usage period and interest accrual. 
Additionally, the borrower defense to repayment provisions in these 
final regulations expressly state that further relief may include 
eliminating or recalculating the subsidized usage period that is 
associated with the loan or loans discharged, pursuant to Sec.  
685.200(f)(4)(iii).
    Changes: The changes proposed to Sec.  685.200 in the 2018 NPRM 
were effectuated by the 2016 final regulations, so no additional 
changes are necessary at this point. The Department revised Sec.  
685.206(e)(12)(ii)(B), which describes the relief that a borrower may 
receive, to expressly reference Sec.  685.200(f)(4)(iii), which 
addresses the subsidized usage period.

Regulatory Impact Analysis (RIA)

    Under Executive Order 12866, the Office of Management and Budget 
(OMB) determines whether this regulatory action is ``significant'' and, 
therefore, subject to the requirements of the Executive Order and 
subject to review by the Office of Management and Budget (OMB). Section 
3(f) of Executive Order 12866 defines a ``significant regulatory 
action'' as an action likely to result in a rule that may--
    (1) Have an annual effect on the economy of $100 million or more, 
or adversely affect a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State, local, or 
tribal governments or communities in a material way (also referred to 
as an ``economically significant'' rule);
    (2) Create serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impacts of entitlement grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles stated in the 
Executive Order.
    This final regulatory action will have an annual effect on the 
economy of more than $100 million because changes to borrower defense 
to repayment and closed school discharge provisions impact transfers 
among borrowers, institutions, and the Federal Government and changes 
to paperwork requirements increase costs. Therefore, this final action 
is ``economically significant'' and subject to review by OMB under 
section 3(f)(1) of Executive Order 12866. Notwithstanding this 
determination, we have assessed the potential costs and benefits of 
this final regulatory action and have determined that the benefits 
justify the costs.
    Under Executive Order 13771, for each new regulation that the 
Department proposes for notice and comment or otherwise promulgates 
that is a significant regulatory action under Executive Order 12866 and 
that imposes total costs greater than zero, it must identify two 
deregulatory actions. For FY 2019, no regulations exceeding the 
agency's total incremental cost allowance will be permitted, unless 
required by law or approved in writing by the Director of OMB. Much of 
the effect of these final regulations involves reducing transfers 
between the Federal Government and affected borrowers, but, as 
described in the Paperwork Reduction Act section, we expect annualized 
burden reductions of approximately $4.7 million when discounted to 2016 
dollars as required by Executive Order 13771. These final regulations 
are a deregulatory action under Executive Order 13771 and therefore the 
two-for-one requirements of Executive Order 13771 do not apply.
    We have also reviewed these regulations under Executive Order 
13563, which supplements and explicitly reaffirms the principles, 
structures, and definitions governing regulatory review established in 
Executive Order 12866. To the extent permitted by law, Executive Order 
13563 requires that an agency--
    (1) Propose or adopt regulations only on a reasoned determination 
that their benefits justify their costs (recognizing that some benefits 
and costs are difficult to quantify);
    (2) Tailor its regulations to impose the least burden on society, 
consistent with obtaining regulatory objectives and taking into 
account--among other things and to the extent practicable--the costs of 
cumulative regulations;
    (3) In choosing among alternative regulatory approaches, select 
those approaches that maximize net benefits (including potential 
economic, environmental, public health and safety, and other 
advantages; distributive impacts; and equity);
    (4) To the extent feasible, specify performance objectives, rather 
than the behavior or manner of compliance a regulated entity must 
adopt; and
    (5) Identify and assess available alternatives to direct 
regulation, including economic incentives--such as user fees or 
marketable permits--to encourage the desired behavior, or provide 
information that enables the public to make choices.
    Executive Order 13563 also requires an agency ``to use the best 
available techniques to quantify anticipated present and future 
benefits and costs as accurately as possible.'' The Office of 
Information and Regulatory Affairs of OMB has emphasized that these 
techniques may include ``identifying changing future compliance costs 
that might result from technological innovation or anticipated 
behavioral changes.''
    We are issuing these final regulations only on a reasoned 
determination that their benefits justify their costs.
    Consistent with these Executive Orders, we assessed all costs and 
benefits of available regulatory alternatives, including the 
alternative of not regulating. Our reasoned bases for rulemaking 
include the non-quantified benefits of our chosen regulatory approach 
and the negative effects of not regulating in this manner. The 
information in this RIA measures the effect of these policy decisions 
on stakeholders and the Federal government as required by and in 
accordance with Executive Orders 12866 and 13563.\163\ Based on the 
analysis that follows, the Department believes that these final 
regulations are consistent with the principles in Executive Orders 
12866 and 13563.
---------------------------------------------------------------------------

    \163\ Although the Department may designate certain classes of 
scientific, financial, and statistical information as influential 
under its Guidelines, the Department does not designate the 
information in this Regulatory Impact Analysis as influential and 
provides this information to comply with Executive Orders 12866 and 
13563. U.S. Dep't of Educ., Information Quality Guidelines (Oct. 17, 
2005), available at https://www2.ed.gov/policy/gen/guid/iq/iqg.html.
---------------------------------------------------------------------------

    We also have determined that this regulatory action does not unduly 
interfere with State, local, and tribal governments in the exercise of 
their governmental functions. State, local, and tribal governments will 
be able to continue to take actions to protect borrowers at 
institutions of higher education, and these final regulations do not 
interfere with other government's actions. As explained in the 
preamble, actions taken by State Attorneys General

[[Page 49879]]

may provide evidence for borrowers to use in making claims, but nothing 
in the regulations requires or limits such investigations or other 
state government action.
    As required by OMB circular A-4, we compare the final regulations 
to the current regulations, which are the 2016 final regulations. In 
this regulatory impact analysis, we discuss the need for regulatory 
action, the potential costs and benefits, net budget impacts, 
assumptions, limitations, and data sources, as well as the regulatory 
alternatives we considered.
    As further detailed in the Net Budget Impacts section, this final 
regulatory action is expected to have an annual effect on the economy 
of approximately $550 million in transfers among borrowers, 
institutions, and the Federal Government related to defense to 
repayment and closed school discharges, as well as $1.15 million in 
costs to comply with paperwork requirements. This economic estimate was 
produced by comparing the proposed regulation to the current regulation 
under the President's Budget 2020 baseline (PB2020) budget estimates. 
The required Accounting Statement is included in the Net Budget Impacts 
section.
    Elsewhere, under the Paperwork Reduction Act of 1995, we identify 
and explain burdens specifically associated with the information 
collection requirements included in this regulation.
    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as a ``major rule'', as defined by 5 U.S.C. 804(2).
1. Need for Regulatory Action
    These final regulations address a significant increase in burden 
resulting from the vast increase in borrower defense claims since 2015. 
These final regulations reduce this burden in a number of ways, as 
discussed further in the Costs, Benefits, and Transfers section of this 
RIA.
    Although the borrower defense to repayment regulations have 
provided an option for borrower relief since 1995, in 2015, the number 
of borrower defense to repayment claims increased dramatically when 
certain institutions filed for bankruptcy. Students enrolled at those 
campuses and those who had left the institution within 120 days of its 
closure were eligible for a closed school loan discharge. The 
Department decided to also provide student loan discharge to additional 
borrowers who did not qualify for a closed school loan discharge, but 
could qualify under the defense to repayment regulation (34 CFR 
685.206(c)). The Department encouraged impacted borrowers to submit 
defense to repayment claims, which it agreed to consider for all 
institutional-related loans. This resulted in a significant increase in 
claim volume compared to the prior years: 7,152 claims received by 
September 30, 2015; 82,612 claims received by September 30, 2016, 
165,880 applications received by June 30, 2018; 200,630 applications 
received by September 30, 2018; 218,366 applications by December 31, 
2018; 239,937 by March 31, 2019.
    This growth significantly expanded the potential cost to the 
Federal budget.
    In addition, provisions in the 2016 final regulations enable the 
Secretary to initiate defense to repayment claims on behalf of entire 
classes of borrowers. Initiating the group discharge process is 
extremely burdensome on the Department and results in inefficiency and 
delays for individual borrowers. It also has the potential of providing 
loan forgiveness to borrowers who were not subject to a 
misrepresentation, did not make a decision based on the 
misrepresentation, or did not suffer financial harm as a result of 
their decision. The 2016 final regulations impose onerous 
administrative burdens on the Department. Indeed, the Department must: 
Identify the members of the group; determine that there are common 
facts and claims that apply to borrowers; designate a Department 
official to present the group's claim in a fact-finding process; 
provide each member of the group with notice that allows the borrower 
to opt out of the proceeding; if the school is still open, notify the 
school of the basis of the group's borrower defense, the initiation of 
the fact-finding process, and of any procedure by which the school may 
request records and respond; and bear the burden of proving that the 
claim is valid.\164\ This process is cumbersome and does not provide an 
efficient approach.
---------------------------------------------------------------------------

    \164\ 34 CFR 685.222(g) and (h); U.S. Dep't of Educ., Student 
Assistance General Provisions, Final Regulations, 81 FR 75926, 75955 
(Nov. 1, 2016).
---------------------------------------------------------------------------

    The group discharge process, which we are not including in these 
final regulations for loans first disbursed on or after July 1, 2020, 
may otherwise create large and unnecessary liabilities for taxpayer 
funds. To make a determination as to a borrower defense to repayment 
claim under these final regulations, it is necessary to have a 
completed application from each individual borrower, to consider 
information from both the borrower and the institution, and to examine 
the facts and circumstances of each borrower's individual situation. 
Presuming borrowers' reliance on a school's misrepresentation would not 
properly balance the Department's responsibilities to protect students 
as well as taxpayer dollars. Schools are still subject to the 
consequences of their misrepresentations under this standard and, if 
necessary, the Secretary retains the discretion to establish facts 
regarding misrepresentation claims put forward by a group of borrowers.
    These final regulations also eliminate the pre-dispute arbitration 
and class action waiver ban in the 2016 final regulations, reflecting 
the Department's position that arbitration can be a beneficial process 
for students and recent court decisions holding that such bans violate 
the Federal Arbitration Act (FAA).\165\ Instead, the final regulations 
favor disclosure and transparency by requiring schools relying upon 
mandatory pre-dispute arbitration agreements to provide plain language 
about the meaning of the restriction and the process for accessing 
arbitration. With the clear disclosures on institutions' admissions 
information web page, in the admissions section of the institution's 
catalogue, and discussion in entrance counseling, the Department 
believes students can make informed decisions about enrolling at 
institutions that require such pre-dispute mandatory arbitration 
agreements versus those that do not. The final regulations also 
eliminate requirements for institutions to submit arbitration 
documentation to the Department.
---------------------------------------------------------------------------

    \165\ Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018).
---------------------------------------------------------------------------

    The increased number of school closures in recent years has 
prompted the Department to review regulations related to closed schools 
and make changes to them. Under the 2016 final regulations, students 
who are enrolled at institutions that close, as well as those who left 
the institution no more than 120 days prior to the closure, are 
entitled to a closed school loan discharge, provided that the student 
does not transfer credits from the closed school and complete the 
program at another institution. To allow more borrowers to make better 
informed decisions regarding whether to continue attending the school 
while also allowing them to benefit from the intended purpose of the 
regulations without the need for a determination as to whether 
exceptional circumstances exist, the Department extends the closed 
school discharge window for Direct Loan borrowers from 120 days to 180 
days

[[Page 49880]]

prior to the school's closure. In these final regulations, a borrower 
would qualify for a closed school discharge as long as the borrower did 
not transfer to complete their program, or accept the opportunity to 
complete his or her program through an orderly teach-out at the closing 
school or through a partnership with another school. Borrowers who 
choose the option of participating in a teach-out would not qualify for 
a closed school discharge, unless the closing institution or other 
institution conducting the teach-out failed to meet the material terms 
of the closing institution's teach-out plan, such that the borrower was 
unable to complete the program of study in which the borrower was 
enrolled. This mirrors the existing regulations that disallow students 
who transferred credits from the closed school to another school, or 
who finished the program elsewhere, to qualify for the closed school 
loan discharge.
    These regulations also revise the current regulations providing for 
automatic closed school loan discharge for eligible Direct Loan 
borrowers who do not re-enroll in another title IV-eligible institution 
within three years of their school's closure to apply to schools that 
closed on or after November 1, 2013, and before July 1, 2020. This is 
in line with the Department's preference for opt-in requirements rather 
than opt-out requirements, such as in the case of Trial Enrollment 
Periods. (https://ifap.ed.gov/dpcletters/GEN1112.html).
    The automatic closed school discharge provision also increases the 
cost to the taxpayer, including for borrowers who are not seeking 
relief, because default provisions typically capture a much larger 
population than opt-in provisions. For this and the other reasons 
articulated in the preamble, the final regulations require borrowers to 
submit an application to receive a closed school loan discharge.
    The final regulations also update the Department's regulations 
regarding false certification loan discharges. Under these final 
regulations, if a student does not obtain or provide the school with an 
official high school transcript, but attests in writing under penalty 
of perjury that he or she has completed a high school degree, the 
borrower may receive title IV financial aid, but will not then be 
eligible for a false certification discharge if the borrower had 
misstated the truth in signing the attestation.
    These final regulations also address several provisions related to 
determining the financial responsibility of institutions and requiring 
letter of credit or other financial protection in the event that the 
school's financial health is threatened. The Financial Accounting 
Standards Board (FASB) recently issued updated accounting standards 
that change the way that leases are reported in financial statements 
and thus considered by the Department in determining whether an 
institution is financially responsible. To align with these new 
standards and current practice, these regulations update the definition 
of terms used in 34 CFR part 668, subpart L, appendices A and B, which 
are used to calculate an institution's composite score. The Department 
intends to recalibrate the composite score methodology to better align 
it with FASB standards in a future rulemaking, but in the meantime, 
these regulations mitigate the impact of changes in the accounting 
standards and accounting practice by updating the definition of terms 
and not penalizing institutions for business decisions they made 
regarding leases or long-term debt.
    In addition, the final regulations adjust the financial 
responsibility requirements to account for certain triggering events 
that occur between audit cycles. As in the 2016 final rule, instead of 
relying solely on information contained in an institution's audited 
financial statements, which are submitted to the Department six to nine 
months after the end of the institution's fiscal year, we will continue 
to determine at the time that certain events occur whether those events 
have a material adverse effect on the institution's financial 
condition. In cases where the Department determines that an event poses 
a material adverse risk, this approach will enable us to address that 
risk quickly by taking the steps necessary to protect the Federal 
interest.
    These final regulations take a similar approach to the 2016 final 
regulations which are currently in effect, but here we focus on known 
and quantifiable debts or liabilities. For example, instead of relying 
on speculative liabilities stemming from pending lawsuits or defense to 
repayment claims, under these final regulations, only actual 
liabilities incurred from lawsuits or defense to repayment discharges 
could trigger surety requirements. As explained in the preamble, we are 
revising some of the triggering events for which surety may be required 
if the potential consequences of those events pose a severe and 
imminent risk to the Federal interest (for example, SEC or stock 
exchange actions).
    We have also revised or reclassified some of the triggering events, 
such as high cohort default rates, State agency violations, and 
accrediting agency actions, that could have a material adverse effect 
on an institution's operations or its ability to continue operating. 
These final regulations direct the Department to fully consider the 
circumstances surrounding those events before making a determination 
that the institution is not financially responsible. In that regard, 
these final regulations do not contain certain mandatory triggering 
events that were included in the 2016 final regulations because the 
cost and burden of seeking surety is significant. In many cases the 
2016 final regulations specified speculative events as triggering 
events such as pending litigation or pending defense to repayment 
claims, that can in many cases be resolved with no or minimal financial 
impact on the institution. As discussed in the preamble, these final 
regulations also do not include as a mandatory triggering event the 
results of a financial stress test, which was included in the 2016 
final regulations without an explanation of what that stress test would 
be and on what empirical basis it would be developed.
2. Summary of Comments and Changes From the NPRM
    Changes from the NPRM generally fall into two categories: borrower 
defense claims and closed school discharges. Table 1 expands further 
upon these changes.

[[Page 49881]]



                     Table 1--Summary of Key Changes in the Final Regulations From the NPRM
----------------------------------------------------------------------------------------------------------------
           Provision                      Regulation section                Description of change from NPRM
----------------------------------------------------------------------------------------------------------------
Defense to repayment...........  685.206(e)(2)......................  Establishes a preponderance of the
                                                                       evidence standard with requirements for
                                                                       reasonable reliance and financial harm.
                                                                       Establishes that borrowers may submit an
                                                                       application, regardless of the status of
                                                                       their loans.
Borrower Defense Period of       685.206(e)(6)......................  Places a three-year limitation on borrower
 limitation.                                                           defense claims relating to loans first
                                                                       disbursed on or after July 1, 2020. For
                                                                       borrowers subject to a pre-dispute
                                                                       arbitration agreement, arbitration
                                                                       suspends the comments of the three-year
                                                                       limitations period from the time
                                                                       arbitration is requested until the final
                                                                       outcome. Exceptions also possible for
                                                                       consideration of new evidence when a
                                                                       final arbitration ruling or a final,
                                                                       contested, non-default judgment on the
                                                                       merits by a State or Federal Court that
                                                                       establishes that the institution made a
                                                                       misrepresentation.
Borrower defenses--Adjudication  685.206(e)(9)(ii) and (10).........  Permits the Secretary to consider evidence
 Process.                                                              in her possession provided that the
                                                                       Secretary permits the borrower and the
                                                                       institution to review and respond to this
                                                                       evidence and to submit additional
                                                                       evidence. Establishes that a borrower
                                                                       will have the opportunity to review a
                                                                       school's submission and to respond to
                                                                       issues raised in that submission.
Borrower defense partial relief  685.206(e)(4)......................  Clarifies that the Secretary shall
 for approved claims.                                                  estimate the financial harm experienced
                                                                       by the borrower.
Defense to Repayment--Role of    685.206(e)(10).....................  Clarifies what evidence constitutes
 the School in the Adjudication                                        financial harm.
 Process.
Process for asserting or         682.402, 685.212...................  Establishes an application process for
 requesting a discharge.                                               borrower defense claims, suspension of
                                                                       collection during processing of said
                                                                       claim, adjudication of borrower defense
                                                                       claims, notification requirements post-
                                                                       adjudication. Clarifies that borrower
                                                                       defense standards and Departmental
                                                                       process apply to loans repaid by a Direct
                                                                       Consolidation Loan.
Borrower Defenses--Adjudication  685.206, 685.212...................  Revises the circumstances when the
 Process.                                                              Secretary may extend the time period when
                                                                       a borrower may assert a defense to
                                                                       repayment or may reopen the borrower's
                                                                       defense to repayment application to
                                                                       consider evidence that was not previously
                                                                       considered. Automatically grants
                                                                       forbearance on the loan for which a
                                                                       borrower defense to repayment has been
                                                                       asserted, if the borrower is not in
                                                                       default on the loan, unless the borrower
                                                                       declines such forbearance.
Closed school discharges.......  685.214............................  Changes the eligibility criteria to
                                                                       exclude borrowers who continue their
                                                                       education through a teach-out or by
                                                                       transferring credits, as opposed to those
                                                                       who have been offered a teach-out by a
                                                                       closing school.
Closed school discharges.......  674.33 and 682.402.................  No longer making closed school discharge
                                                                       changes to FFEL or Perkins regulations.
Financial Responsibility.......  668.171, 668.172, 668.175..........  Revised provision related to withdrawal of
                                                                       owner's equity and the treatment of
                                                                       capital distributions equivalent to
                                                                       wages. Included new discretionary trigger
                                                                       for institutions with high annual dropout
                                                                       rates. Revised treatment of discretionary
                                                                       triggers so that when the institution is
                                                                       subject to two or more discretionary
                                                                       triggering events in the period between
                                                                       composite score calculations, those
                                                                       events become mandatory triggering events
                                                                       unless a triggering event is cured before
                                                                       the subsequent event occurs. Leases
                                                                       entered into on or after December 15,
                                                                       2018, will be treated as required under
                                                                       ASU 2016-02 while those entered before
                                                                       then will be grandfathered. Please see
                                                                       Table 2 for further description of
                                                                       financial responsibility triggers.
----------------------------------------------------------------------------------------------------------------

    Additionally, after further consideration, we are keeping many of 
the regulatory changes that were included in the 2016 final 
regulations. Some of the revisions the Department proposed in the 2018 
NPRM were essentially the same as or similar to the revisions made in 
the 2016 final regulations, which are currently in effect. The 
Department is not rescinding or further amending the following 
regulations in title 34 of the Code of Federal Regulations, even to the 
extent we proposed changes to those regulations in the 2018 NPRM: 
Sec. Sec.  668.94, 682.202(b)--guaranty agency collection fees, 
Sec. Sec.  682.211(i)(7), 682.405(b)(4)(ii), 682.410(b)(4) and 
(b)(6)(viii), and 685.200--subsidized usage period and interest 
accrual.
    Comments: Some commenters assert that the proposed regulations 
would limit the circumstances in which a borrower may seek loan 
cancellation based on school misconduct to ``defensive,'' post-default 
administrative collection proceedings, and that this is demonstrated by 
its incorporation into the Department's analysis. The NPRM identifies 
the 2016 final regulations as the baseline for the impact analysis in 
its three options. The commenters argue that the option of using the 
1995 regulations as a more lenient option is invalid because it is the 
same as the baseline with respect to the Department's acceptance of 
affirmative claims. Likewise, the Department's option of limiting 
consideration of borrower defenses to repayment to post-default 
collection proceedings would be a change not only from the 2016 final 
regulations, but from the pre-2016 practice as well. As a result, the 
commenter claims it represents a new scenario. The commenters assert 
that these inaccuracies undermine the compliance of this NPRM with 
Executive Orders 12866 and 13563.
    Another commenter asserted that using the 2016 final regulations as 
a baseline for the impact analysis is problematic because the 
Department's conclusion that borrowers will benefit from increased 
transparency with respect to the required disclosures is contingent 
upon a regulatory environment in which pre-dispute arbitration 
agreements and class action waivers are permitted, but not subject to

[[Page 49882]]

robust disclosures. Additionally, this commenter notes that the 
Department is not ``assuming a budgetary impact resulting from 
prepayments attributable to the possible availability of funds from 
judgments or settlement of claims related to Federal student loans.'' 
\166\ This commenter contends this assumption does not support the 
Department's assertion that borrower may recover more from schools in 
arbitration than through a lawsuit.
---------------------------------------------------------------------------

    \166\ 83 FR 37299.
---------------------------------------------------------------------------

    Discussion: We thank the commenters for their submissions on the 
types of claims the Department should accept. Upon further 
consideration, the Department changed its position on the posture 
(i.e., defensive and affirmative) from which borrowers may submit 
borrower defense to repayment applications. Affirmative claims are 
permitted in these final regulations, and that is reflected in the 
Regulatory Impact Analysis. These regulations include a three-year 
limitations period for both affirmative and defensive claims. These 
regulations also promulgate a different Federal standard than the 2016 
final regulations. The limitations period and Federal standard in these 
regulations limit the circumstances in which a borrower's loan may be 
cancelled with respect to a defensive claim during a post-default 
administrative collection proceeding.
    We disagree with commenters who state that we used the wrong 
baseline or were inconsistent in our application of the baseline. The 
Regulatory Impact Analysis, per OMB Circular A-4, is required to 
compare to the world without the proposed regulations, which would be 
the 2016 final regulations. This baseline is clearly stated in the 
Regulatory Alternatives Considered section and in various sections 
throughout the analysis. Further, the Department computed various 
impact scenarios and discussed other regulatory options that were 
considered. With respect to the discussion of pre-dispute arbitration 
agreements in the Costs, Benefits and Transfers section of this RIA, 
the Department does describe the change compared to the 2016 final 
regulations but also points out the benefits of the required 
disclosures. Accordingly, the Department believes it is in compliance 
with Executive Orders 12866 and 13563.
    Changes: None.
    Comments: A commenter stated that methods by which the Department 
estimates lifetime default rates under Alternative A overestimate the 
share of borrowers who could raise a defensive claim under this rule, 
even if strategic defaults would occur. The commenter also noted that 
borrowers with defensive claims would only be able to file a claim 
during the timeframe governing a collections action and only after that 
action has been initiated--but those actions are not universally 
applied, nor are those timeframes well understood by borrowers. 
Further, the Department received numerous comments recommending that 
defense to repayment be made available to all borrowers, including 
those in regular repayment status, default and collections. According 
to these commenters, in all cases of collection proceedings, 
administrative hurdles such as filing claims within the timeframe for 
filing an affirmative defense will disproportionately affect borrowers 
with valid claims, as those borrowers are unlikely to be notified of 
their rights under the proposed rules, causing them financial harm. In 
order to avoid this, commenters suggested that the Department should 
examine data on the initiation of collection processes to determine for 
how many borrowers per year it initiates debt collection proceedings 
like those described in Alternative A; reduce the share of defensive 
claims to parallel the share the defaulters per year placed in those 
proceedings with an opportunity to challenge its initiation; and 
consider whether a small inflation is appropriate to account for 
borrowers who default strictly to file a claim. In the final 
regulations, commenters suggested that the Department should detail the 
revision it makes to these numbers and publish those data to better 
inform stakeholders of the underlying information informing the budget 
estimates.
    Discussion: The Department appreciates the commenter's concern that 
the defensive claims percentage overstates the share of borrowers who 
would be able to file a claim. The suggestions about analysis based on 
the share of defaulters in collections proceedings who present a 
defense are appreciated, but the Department did not have that data 
available and the changes to the final regulations make that analysis 
less relevant to the final regulations we adopt here. The final 
regulations do allow those in all repayment statuses to apply for a 
borrower defense discharge. If we did reduce the defensive claims 
percentage as the commenter suggests, we know the transfers from the 
Federal government to affected borrowers would be reduced, as shown in 
the sensitivity analyses presented in the 2018 NPRM and in these final 
regulations. As discussed in the Net Budget Impact section, the 
defensive claims percentage has been replaced by the Allowable Claims 
percentage based on the number of claims filed within the three-year 
timeframe applicable under these final regulations.
    As detailed in the preamble section on Affirmative and Defensive 
Claims, the Department agreed with commenters that it is appropriate to 
accept both affirmative and defensive claims and this approach balances 
concerns about incentivizing strategic defaults, effects on borrowers, 
and administrative burden on the Department.
    As described in the Borrower Defenses--Limitations Period for 
Filing a Borrower Defense Claim section of the preamble, the Department 
has determined that a three-year limitations period for both 
affirmative and defensive claims is appropriate. In order to mitigate 
the risk that borrowers with a valid claim will not be notified of 
their rights in time to file a borrower defense to repayment 
application, the final regulations provide that the Secretary may 
extend the time period for filing a borrower defense to repayment if 
there is a final, non-default judgment on the merits by a State or 
Federal court that has not been appealed or that is not subject to 
further appeal and that establishes the institution made a 
misrepresentation as defined in Sec.  685.206(e)(3). The Secretary also 
may extend the limitations period for a final decision by a duly 
appointed arbitrator or arbitration panel that establishes the 
institution made a misrepresentation as defined in Sec.  685.206(e)(3).
    Changes: The Department revised Sec.  685.206(e)(7) to provide for 
the circumstances in which the Secretary may extend the limitations 
period to file a borrower defense to repayment application.
    Comments: One commenter cites Executive Order 12291 which requires 
both that agencies describe potential benefits of the rule, including 
any beneficial effects that cannot be quantified in monetary terms, 
identify those likely to receive the benefits, and ensure that the 
potential benefits to society for the regulation outweigh the potential 
costs to society. In order to accomplish this, the commenter asserted 
the Department should add several components to the regulatory impact 
analysis of these final regulations, including: Quantifying the total 
share of loan volume and the total share of borrowers affected by 
institutional misconduct that meets the standard it expects will 
receive relief on their loans; detailing the average share of relief it 
expects borrowers in each

[[Page 49883]]

sector to receive; and conducting a quantitative analysis that directly 
compares the benefits under this rule against the costs (particularly 
to borrowers), to create a true cost-benefit analysis. The commenters 
said that the RIA also needs to address the non-monetary component of 
the benefit-cost analysis, and one component of this analysis should be 
the fairness of the rule to borrowers. For example, the Department 
indicates that some borrowers who should be eligible for claims based 
on the misconduct of their institutions will be unable to have their 
loans discharged due to the way the Department has designed the 
process.
    Discussion: First, we note that Executive Order 12291 was revoked 
by Executive Order 12866 on September 30, 1993, though E.O. 12866 
contains similar provisions as 12291 for these purposes. The monetized 
estimates in the Regulatory Impact Analysis are based on the budget 
estimates, which can be found in the Net Budget Impacts section. The 
assumptions described there are based on a percent of loan volume and, 
like the 2016 final regulations, do not specify a number or percent of 
borrowers affected as the share of loan volume affected could be 
reached under a range of scenarios and involve many borrowers with 
relatively small balances or a mix of borrowers with higher balances. 
Other impacts, including expected burdens and benefits are discussed in 
the Costs, Benefits, and Transfers and Paperwork Reduction Act of 1995 
sections. The Department believes its NPRM and these final regulations 
are in compliance with Executive Order 12866.
    The Department addresses the cost-benefit analysis of these 
regulations extensively in the preamble. The Department explains why 
the Federal standard in these final regulations is more appropriate 
than the Federal standard in the 2016 final regulations and also how 
the adjudication process provides more robust due process protections 
for both borrowers and schools. These final regulations provide a fair 
process for borrowers while also protecting a Federal asset and 
safeguarding the interests of the Federal taxpayers.
    Changes: None.
    Comments: Some commenters argued that an estimated tax burden 
between $2 billion and $40+ billion over ten years is of such a large 
range that it indicates the Department is unsure of the tax burden that 
these regulations will have. In fact, some commenters suggested that 
the Department withdraw the NPRM and resubmit it with an accurately 
stated baseline and budget impact scenarios, and allow the public 
additional time to comment on the proposed regulation.
    Discussion: We disagree with the commenters who state that the 
regulations would result in between $2 and $40 billion increased burden 
on taxpayers. The range presented by the commenter refers to the 2016 
NPRM,\167\ and that range was narrowed for the 2016 final regulations. 
The Department has always acknowledged uncertainty in its borrower 
defense estimates, as reflected in the additional scenarios presented 
in the Net Budget Impacts section of this RIA. Further, the Accounting 
Statement contained in the NPRM shows a savings to taxpayer funds of 
$619.2 million annually. The final regulations revise this estimate to 
$549.7 million.
---------------------------------------------------------------------------

    \167\ 81 FR 39394. Net Budget Impact section of NPRM published 
June 16, 2016 presented a number of scenarios with a range of 
impacts between $1.997 to $42.698 billion.
---------------------------------------------------------------------------

    Changes: None.
    Comments: One commenter noted that the Department should clarify 
the assumptions in each component of the net budget impact, i.e., 
determine the degree to which the Department accounted for data on 
collections proceedings within the default rates it examined for the 
defensive applications percent to account for the share of defaulted 
borrowers who experienced a given collection proceeding in a year and 
the narrow timeframe (30-65 days) in which borrowers will have to file 
a defense to repayment claim. Also, commenters asked that the 
Department clarify how the RIA accounts for the elimination of a group 
process; how it evaluates the evidence requirements associated with 
demonstrating how a misrepresentation meets the standard of having been 
made with reckless disregard or intent; and how it accounts for 
recoveries of discharged funds through a proceeding with the 
institution as opposed to the financial protection triggers. To do 
this, commenters suggested that the Department could conduct additional 
sensitivity analyses to show how each aspect of the proposed rule 
interacts with the remainder of the rule, and the implications 
estimates. Current sensitivity analyses do not test all of these items; 
and neither the sensitivity analyses nor the alternative scenarios 
account for how a group process would alter the benefits to borrowers 
under this rule. The commenters also stated that the Department should 
clarify that the net budget impact, not the annualized figures 
presented in the classification of expenditures, is the primary budget 
estimate and clarify the total impact it expects this rule to have on 
borrowers.
    Discussion: The Department thanks the commenters for identifying an 
area of the analysis that may have been unclear. The Department has 
clarified the impacts of eliminating the borrower defense to repayment 
group discharge process in the Costs, Benefits, and Transfers and 
Regulatory Alternatives Considered sections. The Department also notes 
that the Federal standard and the definition of misrepresentation no 
longer require intent, as discussed in the ``Federal Standard'' and 
``Misrepresentation'' sections of the Preamble. Requests for additional 
sensitivity analysis and clarifications about the budget assumptions 
are addressed within the Net Budget Impacts section of this RIA.
    Changes: Additional discussion and sensitivity runs regarding 
borrower defense estimates were added to the Net Budget Impacts 
section.
    Comments: One commenter stated that because the two large 
institutions that closed used forced arbitration, the Department does 
not have the data on offsetting funds so it cannot account for the 
reduced likelihood that injured students will recover any damages when 
their only option for bringing a claim is in arbitration. The 
Department's statements about students' likely recovery also do not 
show that those few students who do prevail in arbitration are more 
likely to obtain greater awards. At a minimum, the commenters asserted 
that the Department must contend with available evidence regarding 
these students' experiences in arbitration, which show that arbitration 
does not provide meaningful relief. They also said that the Department 
should justify the assertion that lawsuits are any less likely to have 
merit than arbitration demands.
    Discussion: This commenter erroneously assumed that allowing 
institutions to use pre-dispute arbitration agreements prevents 
borrowers from accessing the Department's borrower defense to repayment 
process. A borrower's only option is not arbitration if a borrower 
signs a pre-dispute arbitration agreement. Under these final 
regulations, even if a borrower signs an agreement for pre-dispute 
arbitration, the borrower has access to the Department's borrower 
defense to repayment process. The borrower may file a borrower defense 
to repayment application before the arbitration begins, during the 
arbitration, or after the arbitration as long as the borrower

[[Page 49884]]

otherwise meets the requirements for submitting a borrower defense to 
repayment application under these final regulations. Additionally, 
these final regulations suspend the commencement of the limitations 
period for submitting a borrower defense to repayment application for 
the time period beginning on the date that a written request for 
arbitration is filed and concluding on the date the arbitrator submits, 
in writing, a final decision, final award, or other final determination 
to the parties.
    The Department disagrees that what occurred at certain institutions 
should determine the Department's policy regarding pre-dispute 
arbitration agreements. What occurred at one or two schools does not 
bind the Department's policy determinations and is not indicative of 
what occurs at schools throughout the country.
    The Department has not asserted that lawsuits are less likely to 
have merit than arbitration demands or that borrowers who do prevail in 
arbitration will, in all cases, receive greater awards. The Department 
has asserted that arbitration may be more accessible to borrowers since 
it does not require legal counsel and can be carried out more quickly 
than a legal process that may drag on for years.\168\ Even if 
arbitration does not provide meaningful relief, borrowers may still 
submit a borrower defense to repayment application and obtain 
additional relief.
---------------------------------------------------------------------------

    \168\ 83 FR 37265.
---------------------------------------------------------------------------

    The Department has clarified the impacts of mandatory, pre-dispute 
arbitration relative to borrower defense to repayment in the Costs, 
Benefits, and Transfers section. Specifically, the Department's 
analysis now centers around the strong public policy preference in 
favor of arbitration as set forth in statute and in Supreme Court 
jurisprudence. As explained at length in the Preamble, arbitration 
provides significant advantages over traditional litigation in court, 
including: Party control over the process; typically lower cost and 
shorter resolution time; flexible process; confidentiality and privacy 
controls; awards that are fair, final, and enforceable; qualified 
arbitrators with specialized knowledge and experience; and broad user 
satisfaction. Requests for clarification about what is accounted for in 
the budget estimates are addressed in the Net Budget Impact section of 
this RIA.
    Changes: None.
    Comments: One commenter expressed concerns that inconsistent 
standards were used throughout the NPRM with regard to comparison with 
the pre-2016 regulations and 2016 final regulations. The commenter 
asserted that this inconsistency of positions, inconsistent use of 
existing data, and inconsistent reliance on different regulations are 
indicative of arbitrary decision making. They also asserted that the 
Department did not provide a strong rationale for the assertion that 
the small number of claims data from prior to 2015 are acceptable to 
guide policy, yet the more recent experience with larger numbers of 
claims is not, specifically in terms breach of contract. Furthermore, 
the commenter stated that the Department provided no empirical evidence 
that an easy claims process may result in borrowers filing claims due 
to dissatisfaction as opposed to misrepresentation, but dismisses data 
as useful evidence to guide decision making.
    This commenter asserts that the Department has not conducted any 
data analysis on existing claims to indicate the share of claims that 
were defensive or affirmative. This commenter also requests that the 
Department address concerns raised by the Project on Predatory Student 
Lending,\169\ demonstrating that the Department has accepted 
affirmative claims since at least 2000. Additionally, this commenter 
asserts that the Department has not provided a reasoned explanation for 
the elimination of a group claims process. The commenter contends that 
the Department provides no evidence for or analysis of the claim that 
the group discharge process may create large and unnecessary 
liabilities for taxpayer funds.
---------------------------------------------------------------------------

    \169\ https://predatorystudentlending.org/press-releases/department-educations-borrower-defense-includes-fundamental-lie-documents-show-press-release/.
---------------------------------------------------------------------------

    Discussion: We disagree with the commenters who state that the 
standards we applied in the Regulatory Impact Analysis were 
inconsistent. The Regulatory Impact Analysis, per OMB Circular A-4, 
requires the agency compare impacts of the proposed regulation to the 
world without the proposed regulations, which in this case would have 
been the 2016 final regulations. This baseline is clearly stated in the 
Alternatives Considered section and in various sections throughout the 
analysis. Further, the Department analyzed data from its Borrower 
Defense database and made them available during the negotiating 
sessions.\170\ Although 22 percent of claims had been completed as of 
November 2017 (29,780/135,050), they were not a representative sample 
of the universe of all claims. The data in 2017 was skewed because so 
many of the claims were from a very small number of institutions. This 
remains the case today. For that reason, the Department's data were 
insufficient for use in decision-making relative to claim outcomes.
---------------------------------------------------------------------------

    \170\ www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefensedataanalysis11118.docx.
---------------------------------------------------------------------------

    Additionally, it is reasonable to conclude that borrowers are more 
likely to submit a borrower defense to repayment claim if the standard 
governing these claims is lower. The commenter acknowledges that there 
have been a larger number of borrower defense to repayment 
applications. The great volume of borrower defense to repayment 
applications submitted under the 2016 final regulations, which provides 
a more lenient standard than these final regulations, may indicate that 
borrowers are more likely to submit a borrower defense to repayment 
claim if the standard governing these claims is lower. While the 
Department has not yet processed all of the filed claims, of the total 
number of applications reviewed so far, over 9,000 applications have 
been denied, for reasons that include: Borrowers who attended the 
institution, but not during the time period of the institution's 
misrepresentation; claims submitted without evidence; and claims that 
were made without any basis for relief.
    The Department agrees with commenters regarding the affirmative 
claims received prior to 2015. We intend to update the Borrower Defense 
Database to include older records not received through an application.
    The Department acknowledges that it accepted affirmative claims in 
the past. An analysis on the number of claims that were affirmative or 
defensive or of the correlation between an affirmative claim and a 
finding against the borrower is not necessary as the Department will 
continue to allow both affirmative and defensive claims to be filed. As 
discussed earlier in the preamble to these final regulations, the 
Department is adopting the approach in both instances of Alternative B 
from its proposed regulatory text for loans first disbursed on or after 
July 1, 2020, which will allow for both affirmative and defensive 
claims, and those changes are reflected in the Regulatory Impact 
Analysis.
    The Department's reasoned explanation for eliminating the group 
claims process is in the relevant sections of the preamble.
    Changes: Changes regarding the Department's decision to accept both 
affirmative and defensive claims are reflected in the assumptions used 
for

[[Page 49885]]

the Net Budget Impact section of this analysis.
    Comments: Some commenters expressed concern that the proposed 
regulations would lead to costly and frivolous lawsuits at the expense 
of taxpayers, while doing little to help students by comparison. 
Another commenter stated that the NPRM provided no evidence of students 
who, under current borrower defense rules, asserted a defense to 
repayment simply because they regretted their educational choices. One 
the other hand, another commenter felt that the proposed regulations 
would save taxpayers several billions of dollars from false claims over 
the next decade, while also providing necessary accountability in the 
system to prevent fraud.
    Discussion: The Department appreciates the support of the commenter 
who asserts that these final regulations will result in a significant 
savings to Federal taxpayers.
    The Department's decision to accept both affirmative and defensive 
borrower defense to repayment applications may reduce lawsuits between 
borrowers and institutions. More borrowers will be able to file defense 
to repayment applications than if the Department accepted only 
defensive claims. The school has an opportunity to respond to the 
borrower's allegations, and the borrower also has an opportunity to 
address the issues and evidence raised in the school's response. The 
Department's borrower defense to repayment process is more accessible 
and less costly than litigation for a borrower who seeks relief. 
Through the Department's process, the borrower will receive any 
evidence the school may have against the borrower's allegations and 
will be better able to assess whether to pursue litigation if they are 
unsatisfied with the result of their borrower defense to repayment 
claim. The Department has clarified the impacts of lawsuits relative to 
borrower defense to repayment and also its assumptions regarding 
borrower motivation in the Costs, Benefits, and Transfers section.
    Additionally, in the 2018 NPRM, the Department did not assert that 
borrowers are seeking a defense to repayment because they regret their 
educational choices. The Department stated: ``The Department has an 
obligation to enforce the Master Promissory Note, which makes clear the 
students are not relieved of their repayment obligations if they later 
regret the choices they made.'' \171\ The Department does not weigh the 
motives of students who file a borrower defense to repayment 
application. The Department is implementing regulations that will more 
rigorously enforce the terms and conditions in the Master Promissory 
Note.
---------------------------------------------------------------------------

    \171\ 83 FR 37243.
---------------------------------------------------------------------------

    Changes: As noted in the Net Budget Impacts section, we have 
revised the assumptions to include affirmative as well as defensive 
claims.
    Comments: One commenter expressed concern that the proposed 
regulations would narrow the standards under which claims would be 
adjudicated. The reduction of claims that result would not be the 
result of changes in institutional behavior due to disincentives to 
misbehave, but rather from process changes imposed on borrowers. 
Commenters also suggested that defensive claims would provide greater 
advantages to students in a collections proceeding than a student who 
has continued to pay her loan since the student in repayment would not 
be able to seek relief through defense to repayment.
    Discussion: Based upon the Department's revised position relative 
to which borrowers may submit borrower defense to repayment 
applications, the period of limitation, and the revised evidentiary 
standard, we increased our estimate of the percent of loan volume 
subject to a potential claim as compared to the NPRM, as reflected in 
the Allowable Claims percentage in Table 3 compared to the Defensive 
Claims percentage in Table 5 of the NPRM. We do still expect that the 
annual number will be less than that anticipated under the 2016 final 
regulations. The Department believes its final regulations protect 
borrowers, whether in default or not, from institutional 
misrepresentation while holding institutions accountable for their 
actions.
    The Department discusses why its Federal standard and adjudication 
process are appropriate and will sufficiently address institutional 
misconduct in the preamble and more specifically in the Federal 
Standard and Adjudication Process sections of the Preamble.
    We agree with the commenter that borrowers who are in default and 
are filing defensive claims should not have greater advantages than 
borrowers who have been paying off their loans and who are making 
affirmative claims. Accordingly, these final regulations provide the 
same limitations period of three years for both affirmative and 
defensive claims in Sec.  685.206(e)(6).
    Changes: As discussed above, we made revisions to the Allowable 
Claims percentage in Table 3, as compared to the Defensive Claims 
percentage in Table 5 of the NPRM. Additionally, the Department revised 
Sec.  685.206(e)(6) to provide a three-year limitations period for both 
affirmative and defensive claims.
    Comments: Another commenter noted that the Department needs to 
account for the costs to students and justify how the regulations will 
improve conduct of schools by holding individual institutions 
accountable and thereby deterring misconduct by other schools. Another 
commenter stated that the Department does not indicate what economic 
analysis justifies placing on students the burden of showing schools' 
intentional deception. Another commenter mentioned that the 
Department's estimates in the net budget impact do not contain the 
potential for significant institutional liabilities, as the proposed 
regulations have fewer financial protection triggers, resulting in 
lower levels of recovery. Accordingly, the Department's assumption that 
these proposed regulations will have the same deterrent effect is 
impractical and unreasonable.
    Through other departmental actions unrelated to this rule, the 
commenter stated it is likely that the frequency of unlawful conduct 
will actually increase.
    An additional commenter stated that assumptions underlying this 
forecast that students could be left with ``narrowed educational 
options as a result of unwarranted school closures'' appear without 
basis in fact or reason. The commenter asserts that not only would 
putting primary responsibility for purveying accurate information on 
schools be no more of a burden than is normally expected of any honest 
commercial enterprise, but it would improve overall free market 
competition by enabling honest schools to flourish in a reliably 
transparent marketplace at the expense of the dishonest ones. 
Commenters asserted that the Department needs to show why it would be 
too burdensome on schools' potential productivity to require them to 
take the precautions needed to assure their provision of accurate 
information to prospective students and why students should be expected 
to be efficient and effective evaluators of the accuracy of schools' 
promotional efforts.
    Discussion: We disagree with commenters who state that we did not 
account for costs to borrowers. These are covered in the Costs, 
Benefits, and Transfers, Net Budget Impacts, and Paperwork Reduction 
Act of 1995 sections. Further, in response to comments, the final 
regulations revise our proposed borrower defense to repayment standard, 
which now

[[Page 49886]]

requires an application and a preponderance of the evidence showing the 
borrower relied upon the misrepresentation of the school and that the 
reliance resulted in financial harm to the borrower. The standard in 
these final regulations does not require students to prove schools' 
intent to deceive. We agree with commenters that all institutions 
should bear the burden of their misrepresentations, which is why the 
Department intends to recoup its losses from institutions due to 
borrower defense discharges. Despite the commenter's concern, the 
financial triggers we have included in the final regulations are better 
calibrated to link the triggering events to a precise and accurate 
picture of an institution's financial health. The pattern and maximum 
rate of recoveries is reduced from the PB2020 baseline, but the 
recovery rate remains significant and will reduce help offset borrower 
defense discharges.
    The comments about the specific budget assumptions and the 
potential deterrent effect of the regulations are addressed in the Net 
Budget Impacts section of this RIA.
    Other Departmental actions unrelated to this rule are not at issue 
in promulgating these final regulations. The commenter is welcome to 
submit comments in response to other proposed regulations if the 
commenter believes that the Department's other actions will somehow 
increase unlawful conduct. While it is true that the Department's 
regulations may have interactive effects, the Department does not agree 
that the proposed changes to the accreditation regulations described in 
the NPRM published June 12, 2019, will lead to a substantial increase 
in conduct that could generate borrower defense claims. Even if an 
influx of bad actors were to occur and go unchecked as suggested by the 
commenter, we believe the range of outcomes described in the Net Budget 
Impact sensitivity runs capture the potential effects.
    The Department agrees with commenters that institutions should be 
held accountable for making a misrepresentation, as defined in these 
final regulations. The Department does not believe that it is too 
burdensome for institutions to provide accurate information to their 
students. Borrowers have choices in the education marketplace, and 
these final regulations seek to eliminate, prevent, and address 
unlawful conduct. The Department explains why its Federal standard, the 
definition of misrepresentation, and the adjudication process 
adequately address unlawful conduct in the applicable sections of the 
preamble.
    Changes: None.
    Comments: One commenter mentioned that lifting the ban on pre-
dispute arbitration clauses, class action waivers, and internal dispute 
processes and deleting provisions that would require reporting on the 
number of arbitrations and judicial proceedings, award sizes, and 
status of students would allow institutions to limit the flow of 
information regarding abuses, misrepresentations, and fraudulent 
activity. The resulting delay of information would add costs to the 
taxpayer and burden to borrowers. In fact, another commenter opines 
that the Department does not state key costs and overstates relative 
benefits of rescinding the 2016 provisions restricting funds to schools 
that use forced arbitration and class-action waivers and replacing them 
with an ``information-only'' approach. Although the NPRM claims that 
borrowers will benefit due to transparency, the data would be helpful 
to law enforcement and future student loan borrowers.
    Another commenter contends that the Department has no support for 
the assertion that permitting forced arbitration will reduce the cost 
impact of unjustified lawsuits. This commenter also contends that the 
Department does not acknowledge one of the benefits of the 2016 final 
regulations in deterring misconduct of schools and recommends that the 
Department assess the reduction in deterrence as a cost.
    Discussion: The Department supports the use of internal dispute 
resolution processes as a way for disputes to be resolved 
expeditiously, which was not prohibited by the 2016 final regulations. 
An internal dispute resolution process is often a vehicle for a 
borrower to receive relief directly from an institution, in a cost-
effective and timely manner. The use of an internal dispute resolution 
process can be a vehicle for potential resolution, without placing the 
burden on the Department to adjudicate.
    The Department also reminds the commenters that borrowers who have 
entered into a pre-dispute arbitration agreement or endorsed a class 
action waiver may still avail themselves of the borrower defense to 
repayment process offered in these final regulations. Indeed, the 
Department will toll the limitations period for filing a borrower 
defense to repayment application until the final arbitration award is 
entered. As previously stated, the borrower, however, may file a 
borrower defense to repayment application before the arbitration 
proceeding, during the proceeding, or after the proceeding. The 
Department does not wish to create a burden in requiring institutions 
to report the number of arbitrations and judicial proceedings, award 
sizes, and various other matters. As detailed in the Paperwork 
Reduction Act discussion of Section 685.300, these changes are 
estimated to reduce burden by 179,362 hours and $6.56 million annually.
    Additionally, the final regulations on financial responsibility 
standards do require institutions to report the occurrence of risk 
events that may have a material impact on their financial stability or 
ability to operate.
    The Department does not assert that arbitration will reduce the 
cost impact of unjustified lawsuits only but instead that arbitration 
generally eases burdens on the overtaxed U.S. court system.\172\ The 
section on ``Pre-Dispute Arbitration Agreements, Class Action Waivers 
and Internal Dispute Processes'' in the preamble provides a more 
fulsome justification for the Department's policy determinations.
---------------------------------------------------------------------------

    \172\ 83 FR 37265.
---------------------------------------------------------------------------

    Finally, the Department believes that these final regulations also 
deter unlawful conduct by an institution, and the commenter does not 
provide any evidence to support the assumption that these final 
regulations will not do so. Accordingly, the Department will not assess 
the reduction in deterrence as a cost. However, in response to the 
commenter's points about reduced deterrence, the Department added a 
sensitivity scenario assuming no deterrent effect on institutional 
conduct in the Net Budget Impacts section of this RIA.
    Changes: As mentioned above, we added a sensitivity scenario 
assuming no deterrent effect on institutional conduct in the Net Budget 
Impacts section of this RIA.
    Comments: One commenter noted that the Department's analysis of 
benefits to borrowers makes unsupported assertions regarding the 
advantages of arbitration relative to litigation in court. The 
commenter said that available evidence in the higher education context 
does not support the Department's predictions. Another commenter stated 
that the NPRM provides no explanation for decreasing the estimate of 
students at proprietary schools that would be impacted by arbitration 
clauses from 66 percent to 50 percent. The impact of both in costs to 
students and to the number of students directly affected needs to be 
reevaluated.
    Discussion: We thank the commenters who provided counter-analysis 
on mandatory arbitration clauses. We disagree with commenters who state 
the budget estimate is poorly explained; a

[[Page 49887]]

specific estimate for students affected by the provision identified by 
the commenter is not included in either the 2016 budget estimate or the 
NPRM budget estimate. We believe the commenter is referring to the 
Paperwork Reduction Act burden calculation that in the 2016 final rule 
that assumed 66 percent of students would receive the notices required 
in Sec.  685.300(e) or (f).\173\ No specific basis was described for 
the 66 percent. In the NPRM published July 31, 2018, the Department 
used the percent of students who use the Department's online entrance 
counseling as a basis for its assumption that 50 percent of students 
would be affected by pre-dispute arbitration agreements.\174\ 
Additional detail about the burden calculation is provided in the 
Paperwork Reduction Act discussion related to arbitration disclosures.
---------------------------------------------------------------------------

    \173\ 81 FR 76067. See burden calculation for Sec.  685.300(e) 
and (f).
    \174\ 83 FR 37306. See burden calculation for Sec.  658.304.
---------------------------------------------------------------------------

    The Department's reasons for allowing borrowers and schools to 
enter into a pre-dispute arbitration agreement and class action 
waivers, and the benefits of this policy are explained more fully in 
the ``Pre-dispute Arbitration Agreements, Class Action Waivers and 
Internal Dispute Processes'' section in the Preamble.
    Changes: No change necessary.
    Comment: One commenter noted that the Department's definition of 
small businesses under the Regulatory Flexibility Act does not make 
sufficient use of Department data, defines a small institution in an 
arbitrary manner, and that this definition is not in line with the 
definition used by the Small Business Administration. The commenter 
asserted that the Department should rely on the IPEDS finance survey to 
identify institutions with less than $7 million in annual revenue. The 
commenter stated that the Department should consider the typical size 
of nonprofit institutions in evaluating whether they qualify as 
dominant in their fields by calculating the median for four-year and 
less-than-four-year nonprofits. They also said that this definition 
would be more responsive going forward, by reflecting potential changes 
in the education marketplace through adjustments to the median in 
future calculations. For public institutions, the commenter said the 
Department should explain why it chose to measure them based on student 
enrollment, when the proposed regulations noted that public 
institutions are usually determined to be small organizations based on 
the population size overseen by their operating government. If a 
justification cannot be made for Department's determinations, the 
commenter said it should revert to the definition it has historically 
used until it can work with institutions of higher education to find a 
more accurate threshold.
    Discussion: We disagree with the commenter who stated that the 
Department's reasons for proposing a definition of small institutions 
are unclear. While the Department did use the IPEDS finance survey to 
identify proprietary institutions that were considered small for 
previous regulations including the 2016 final regulations, we believe 
the enrollment-based definition provides a better standard that can be 
applied consistently across types of institutions. As we stated in the 
NPRM, the Department does not have data to apply the Small Business 
Administration's definition for institutions; specifically, we do not 
have data to identify which private nonprofit institutions are dominant 
in their field nor do we have data on the governing body for public 
institutions. We disagree with commenters who suggest that a 
``typical'' size of nonprofit institutions should be used to determine 
whether the institution is dominant in its field. Further, we disagree 
with the commenter's suggestion to use median (50th percentile) 
enrollment as the threshold for identifying small institutions; no 
evidence presented by the commenter suggests that the bottom 50 percent 
of institutions are small. In fact, selecting a percentile threshold 
without an analytical basis for selection of that threshold would be an 
unsupported conclusion.
    We disagree with the commenter who stated that the definition of 
small institutions proposed by the Department was arbitrary and 
capricious. As stated in the NPRM, the definition was based upon IPEDS 
data from 2016, and we used statistical clustering techniques to 
identify the smallest enrollment groups. Specifically, coverage of and 
correlations between revenue, title IV volume, FTE enrollment, and 
number of students enrolled were evaluated for all institutions that 
responded to the 2016 IPEDS survey. Because this definition should work 
for all institutions, and not just title IV participating institutions, 
title IV funds were rejected as a variable to measure size. Further, 
research found that revenue had poor coverage and was not well 
correlated with enrollment in the public and private nonprofit sectors, 
so it was also rejected as a variable to measure size. Department data 
do have good coverage, for all institutions, in enrollment data. 
Therefore, enrollment data were selected as the variable to measure 
size. Additionally, data were grouped into two-year and four-year 
institutions based on visual differences in data distribution.
    We used a k-means model to identify optimal numbers of clusters by 
determining local maxima in the pseudo F statistic (SAS Support, Usage 
Note 22540, available at: support.sas.com/kb/22/540.html and SAS 
Community, Tip: K-means clustering in SAS--comparing PROC FASTCLUS and 
PROC HPCLUS, available at: https://communities.sas.com/t5/SAS-Communities-Library/Tip-K-means-clustering-in-SAS-comparing-PROC-FASTCLUS-and-PROC/ta-p/221369). We then used a centroid method to 
identify clusters (SAS Institute Inc, 2008, Introduction to Clustering 
Procedures: SAS/STAT[supreg] 9.2 User's Guide, Cary, NC: SAS Institute 
Inc. available at: support.sas.com/documentation/cdl/en/statugclustering/61759/PDF/default/statugclustering.pdf) and confirmed 
visually. The smallest cluster of four (0-505) was used for the two-
year institutions' definition, and the two smallest clusters of six (0-
425 and 425-1015) were used for the four-year institutions' definition. 
The thresholds were rounded to the nearest 100 for simplicity and to 
allow for annual variation. Further, the results were deemed sufficient 
by visual inspection for each control (public, private, and 
proprietary). Finally, the four-year definition further confirms the 
existing IPEDS definition for a small institution.
    Changes: None.
    Comments: One commenter stated that given policy changes in the 
proposed regulations, the Department assumes too high a recovery rate 
from institutions. This commenter contends that the assumptions should 
be revisited and the percentage for recovery should be reduced. They 
also note that the proposed regulations include fewer financial 
protections than what the Department laid out in the 2016 final 
regulations, many of which were early-warning indicators. The commenter 
asserted that the financial triggers included in the proposed 
regulations are much less predictive of problems and will apply to very 
few colleges than those included in the 2016 final regulations. They 
also asserted that these triggering events constitute such significant 
evidence of concern that it may well be too late to prevent further 
damage and liabilities for taxpayers will likely not provide enough 
financial protection to explain the difference between the recovery 
percentages

[[Page 49888]]

estimated in the 2016 final regulations and those included in the 2018 
NPRM. Accordingly, the commenter said that use of the triggers will not 
increase the effectiveness of financial protection over time. Thus, 
they said there is little reason to believe the share of borrower 
defense discharges recovered from institutions will increase over time 
at all; it may even decrease, since some of these events will likely 
lead to the closure of the school and the removal of the riskiest 
institutions from the marketplace.
    Discussion: The Department appreciates the commenter's detailed 
comments about the recovery rate assumption and addresses the comment 
in the Net Budget Impacts section of this RIA. The top recovery rate in 
the main scenario was reduced to 20 percent. Additionally, the 
sensitivity run related to recovery rates and the no-recovery scenario 
described after Table 4 are designed to reflect the possibility that 
recoveries will be lower than anticipated in the main estimate, and the 
Department believes this is appropriate to address the concerns raised 
by the commenter about the level of recoveries.
    Changes: Recovery rate assumption updated as described in Net 
Budget Impacts section.ne.
3. Costs, Benefits, and Transfers
    These final regulations will affect all parties participating in 
the title IV, HEA programs. In the following sections, the Department 
discusses the effects these proposed regulations may have on borrowers, 
institutions, guaranty agencies, and the Federal government.
3.1. Borrowers
    These final regulations would affect borrowers through borrower 
defense to repayment applications, closed school discharges, false 
certification discharges, loan rehabilitation, and institutional 
disclosures. Borrowers may benefit from an ability to appeal to the 
Secretary if a guaranty agency denies their closed school discharge 
application, from lower tuition and increased campus stability 
associated with longer leases, and from a more generous ``look back'' 
period with regard to closed school loan discharges.
    In response to comments, the Department will provide the 
opportunity to seek loan relief through borrower defense to repayment 
to all borrowers, regardless of that borrower's repayment status. Some 
borrowers may incur burden to review institutional disclosures on 
mandatory arbitration and class action waivers or complete applications 
for loan discharges, and there could be additional burden to borrowers 
who would otherwise, through no affirmative action on their part, be 
included in a class-action proceeding.
3.1.1. Borrower Defenses
    Upon further consideration and in response to comments, the 
Department will provide the opportunity to seek loan relief through 
borrower defense to repayment to all borrowers, regardless of that 
borrower's repayment status. However, the Federal defense to repayment 
standard for loans first disbursed on or after July 1, 2020, includes 
certain limits and conditions to prevent frivolous or stale claims, 
including a three-year period within which to apply after exiting the 
institution and a requirement that borrowers demonstrate both reliance 
and harm. The Department estimates this change will result in more 
applications relative to the NPRM, but fewer than that expected under 
the 2016 final regulations. Borrowers are more likely to have their 
borrower defense to repayment applications processed and decided more 
quickly if the Department has a smaller volume of claims.
    Relative to the 2016 regulations, the final regulations do not 
include a group claim process because the evidence standard and the 
fact-based determination of the borrower's harm that the Department is 
requiring in these final regulations necessitates that each claim be 
adjudicated separately to determine the borrower's reliance on the 
institution's alleged misrepresentation. The definition of 
misrepresentation in these final regulations would make borrowers who 
may have been included in the group determination that cannot prove 
individual reliance and harm ineligible for borrower defense loan 
discharges.
    When borrower defense to repayment discharge applications are 
successful, dollars are transferred from the Federal government to 
borrowers because borrowers are relieved of an obligation to pay the 
government for the loans being discharged. As further detailed in the 
Net Budget Impacts section, the Department estimates that annualized 
transfers from the Federal Government to affected borrowers, partially 
reimbursed by institutions, would be reduced by $512.5 million. This is 
based on the difference in cashflows associated with loan discharges 
when these final regulations are compared to the 2016 final regulations 
as estimated in the President's Budget 2020 baseline and discounted at 
7 percent. To the extent borrowers with successful defense to repayment 
claims have subsidized loans, the elimination or recalculation of the 
borrowers' subsidized usage periods could relieve them of their 
responsibility for accrued interest and make them eligible for 
additional subsidized loans.
    A defense to repayment discharge is one remedy available to 
students, among other available avenues for relief. Students harmed by 
institutional misrepresentations continue to have the right to seek 
relief directly from the institution through arbitration, lawsuits in 
State court, or other available means. Borrowers would possibly receive 
quicker and more generous financial remedies from institutions through 
these means since schools may be more motivated to make students whole 
through the arbitration process in order to avoid defense to repayment 
claims. The 2016 final regulations prohibited mandatory pre-dispute 
arbitration agreements, and while institutions may have continued to 
provide voluntary arbitration, schools may not have made it obvious to 
students how to avail themselves of arbitration opportunities. The 
final regulations do not prohibit institutions from including mandatory 
pre-dispute arbitration clauses and class action waivers in enrollment 
agreements, but require institutions to provide the borrower with 
information about the meaning of mandatory arbitration clauses, class 
action waivers, and how to use the arbitration process in the event of 
a complaint against the institution. The benefit of arbitration is that 
it is more accessible and less costly to students and institutions than 
litigation. For borrowers who seek relief from a court, there may be 
additional advantages since courts can award damages beyond the loan 
value, which the Department cannot do; although, this could be offset 
by the expense in both time and dollars of a lawsuit. In addition, 
borrowers who seek relief through arbitration may also be awarded 
repayment of tuition charges that were paid in cash or through other 
forms of credit, which the Department cannot do.
3.1.2. Closed School Discharges
    Some borrowers may be impacted by the changes to the closed school 
discharge regulations. These final regulations would, for a loan first 
disbursed on or after July 1, 2020, extend the window for a Direct Loan 
borrower's eligibility for a closed school discharge from 120 to 180 
days from the date the school closed. Under the final regulations, a 
borrower whose school closed would qualify for a closed school 
discharge unless the borrower accepted a teach-out opportunity approved 
by the institution's accrediting agency and, if

[[Page 49889]]

applicable, the institution's State authorizing agency; unless the 
school failed to meet the material terms of the teach-out plan approved 
by the school's accrediting agency and, if applicable, the school's 
State authorizing agency, such that borrower was unable to complete the 
program of study in which the borrower was enrolled. The final 
regulations also provide that borrowers who transfer their credits to 
another institution would not be eligible for a closed school 
discharge. These final regulations also revise the provision in the 
2016 Direct Loan regulations that provides for an automatic closed 
school discharge without an application for students that did not 
receive a closed school discharge or re-enroll at a title IV 
participating institution within three years of a school's closure to 
apply to schools that closed on or after November 1, 2013 and before 
July 1, 2020. While the automatic discharge would have benefitted some 
students who no longer would need to submit an application to receive 
relief, it may have disadvantaged students who wish to continue their 
education at a later time or provide proof of credit completion to 
future employers. There could also be tax implications associated with 
closed school loan discharges, and borrowers should be aware of those 
implications and given the opportunity to make a decision according to 
their needs and priorities.
    The expansion of the eligibility period for a closed school 
discharge will increase the number of students eligible under this 
provision and encourage institutions to provide opportunities for 
students to complete their programs in the event that a school plans to 
close. The reduced availability of closed school discharges because of 
the elimination of the three-year automatic discharge for schools that 
close on or after July 1, 2020 may reduce debt relief for students. As 
further detailed in the Net Budget Impacts section, the Department 
estimates that annualized closed school discharge transfers from the 
Federal Government to affected borrowers would be reduced by $37.2 
million. This is based on the difference in cashflows associated with 
loan discharges when the final regulations are compared to the 2016 
final regulations as estimated in the President's Budget 2020 baseline 
(PB2020) and discounted at 7 percent.
    The Department's accreditation standards \175\ require accreditors 
to approve teach-out plans at institutions under certain circumstances, 
which emphasizes the importance of these plans to ensuring that 
students have a chance to complete their program should their school 
close. Teach-out plans that would require extended commuting time for 
students or that do not cover the same academic programs as the closing 
institution likely would not be approved by accreditors. In addition, 
an institution whose financial position is so degraded that it could 
not provide adequate instructional or support services would similarly 
likely not have their teach-out plan approved. In the case of the 
precipitous closures of certain institutions in 2015 and 2016, it is 
possible that enabling those institutions to offer teach-out plans to 
their current students--including by arranging teach-outs plans 
delivered by other institutions or under the oversight of a qualified 
third party--could have benefited students and saved hundreds of 
millions of dollars of taxpayer funds.
---------------------------------------------------------------------------

    \175\ 34 CFR 602.24(c).
---------------------------------------------------------------------------

    Large numbers of small, private non-profit colleges could close in 
the next 10 years, which could significantly increase the number of 
borrowers applying for closed school discharges if these institutions 
are not encouraged to provide high quality teach-out options to their 
students.\176\ For example, Mt. Ida College announced \177\ that it 
would close at the end of the Spring 2018 semester and while the 
institution had considered entering into a teach-out arrangement with 
another institution, this did not materialize. While there may be other 
institutions that have accepted credits earned at Mt. Ida, due to the 
distance between Mt. Ida and other campuses, it may be impractical for 
the student to attend another institution.\178\ A proper teach-out plan 
may have allowed more students to complete their program. The 
requirement of accreditors to approve such options ensures protection 
for borrowers to ensure that a teach-out plan provides an accessible 
and high-quality option for students to complete the program.
---------------------------------------------------------------------------

    \176\ www.insidehighered.com/news/2017/11/13/spate-recent-college-closures-has-some-seeking-long-predicted-consolidation-taking.
    \177\ www.insidehighered.com/news/2018/04/09/mount-ida-after-trying-merger-will-shut-down.
    \178\ www.insidehighered.com/news/2018/04/23/when-college-goes-under-everyone-suffers-mount-idas-faculty-feels-particular-sense.
---------------------------------------------------------------------------

3.1.3. False Certification Discharges
    Some borrowers may be impacted by the changes to the false 
certification discharge regulations, although this provision of the 
final regulations simply updates the regulations to codify current 
practice required as a result of the removal of the ability to benefit 
option as a pathway to eligibility for title IV aid. In the past, a 
student unable to obtain a high school diploma could still receive 
title IV funds if he or she could demonstrate that he or she could 
benefit from a college education.
    With that pathway eliminated by a statutory change, prospective 
students unable to obtain their high school transcripts when applying 
for admission to a postsecondary institution would be allowed to 
certify to their institutions that they graduated from high school or 
completed a home school program and qualify for Federal financial aid. 
At the same time, it will disallow students who misrepresent the truth 
in signing such an attestation from subsequently seeking a false 
certification discharge. Although the Department has not seen an 
increase in false certification discharges as a result of the 
elimination of the ability to benefit option, given the increased 
awareness of various loan discharge programs, the Department believes 
it is prudent to set forth in regulation that if a student falsely 
attests to having received a high school diploma, the student would not 
be eligible for a false certification discharge. Codifying this 
practice will not have a significant impact, but will ensure that 
students who completed high school but are unable to obtain an official 
diploma or transcript will retain the opportunity to participate in 
postsecondary education. The Department does not believe that there are 
significant numbers of students who are unable to obtain an official 
transcript or diploma, but recent experiences related to working with 
institutions following natural disasters demonstrates that this 
alternative for those unable to obtain an official transcript is 
important.
3.1.4. Institutional Disclosures of Mandatory Arbitration Requirements 
and Class Action Waivers
    Borrowers, students, and their families would benefit from 
increased transparency from institutions' disclosures of mandatory 
arbitration clauses and class action lawsuit waivers in their 
enrollment agreements. Under the final regulations, institutions would 
be required to disclose that their enrollment agreements contain class 
action waivers and mandatory pre-dispute arbitration clauses. 
Institutions would be required to make these disclosures to students, 
prospective students, and the public on institutions' websites and in 
the admission's section of their catalogue. Further, borrowers would be 
notified of these during entrance counselling. As further discussed in 
the Paperwork Reduction Act section, we estimate there is 5 minutes of 
burden to 342,407 borrowers

[[Page 49890]]

annually at $16.30 \179\ per hour to review these notifications during 
entrance counseling, for an annual burden of $446,506.
---------------------------------------------------------------------------

    \179\ Students' hourly rate estimated using BLS for Sales and 
Related Workers, All Other, available at: www.bls.gov/oes/2017/may/oes_nat.htm#41-9099.
---------------------------------------------------------------------------

    As institutions began preparing to implement the 2016 final 
regulations, some eliminated both mandatory and voluntary arbitration 
provisions to be sure they would be in compliance with the letter and 
spirit of the regulations. Under the newly finalized regulations, 
institutions would be able to include these provisions in their 
enrollment agreements. The effect will be to allow schools to require 
borrowers to redress their grievances through a quicker and less costly 
process, which we believe will benefit both the institution and the 
borrower by introducing the judgment of an impartial third party, but 
at a lower cost and burden than litigation. Arbitration may be in the 
best interest of the student because it could negate the need to hire 
legal counsel and result in adjudication of a claim more quickly than 
in a lawsuit or the Department's 2016 borrower defense claim 
adjudication process. Mandatory arbitration also reduces the cost 
impact of unjustified lawsuits to institutions and to future students, 
since litigation costs may be ultimately passed on to current and 
future students through tuition and fees. As discussed in more depth in 
the preamble, arbitration also increases the likelihood that damages 
will be paid directly to students, rather than used to pay legal fees.
    However, with the removal of the requirement to report certain 
arbitration information to the Department, if more disputes are 
resolved in arbitration there may be less feedback to the Department, 
the public and prospective students about potential issues at 
institutions. This may extend the period that misrepresentation by 
institutions may go undetected, potentially exposing more borrowers and 
increasing taxpayer exposure to potential claims.
3.2. Institutions
    Institutions will be impacted by the final regulations in the areas 
of borrower defenses, closed school discharges, false certification 
discharges, FASB accounting standards, financial responsibility 
standards, and information disclosure. The benefits to institutions 
include a decrease in the number of reimbursement requests resulting 
from Department-decided loan discharges based on borrower defenses, 
closed school, and false certification; an increased involvement in the 
borrower defense adjudication process; the ability to continue to 
receive the benefit from the cost savings associated with existing 
longer-term leases and reduced relocation costs until such time as the 
composite score methodology can be updated through future negotiated 
rulemaking; and the ability to incorporate arbitration and class action 
waivers in enrollment agreements. Institutions may incur costs from 
increased arbitration and internal dispute resolution processes, 
providing teach-out plans in the event of a planned school closure, and 
compliance with required disclosure and reporting requirements.
3.2.1. Borrower Defenses
    Many institutions, those that do not have a significant number of 
claims filed against them would not incur additional burden as a result 
of the final regulatory changes in the borrower defense to repayment 
regulations. Those institutions against which claims are filed will be 
given the opportunity to provide evidence to the Department during 
claim adjudication. Further, these final regulations include a three-
year period of limitations, which aligns with institutions' records 
retention requirements. We further estimate that successful defense to 
repayment applications under the Federal standard and process will 
affect only a small proportion of institutions. The Department expects 
that the changes in these regulations would result in fewer successful 
defense to repayment applications as compared to the 2016 final 
regulations, and therefore fewer discharges of loans. Therefore, the 
Department expects to request fewer repayment transfers from 
institutions to cover discharges of borrowers' loans. Under the main 
budget estimate explained further in the Net Budget Impacts section, 
the Department estimates an annual reduction of reimbursements of 
borrower defense claims from institutions to the government of $153.4 
million under the seven percent discount rate.
    However, the Department believes that by requiring institutions 
that utilize mandatory arbitration clauses and class action waivers to 
provide plain language disclosures along with additional information at 
entrance counseling, more students may utilize arbitration to settle 
disputes. As a result, institutions may have increased costs related to 
increased use of internal dispute processes; although, the Department 
was unable to monetize those costs as it has limited information about 
the procedures used in different institutions and the associated costs.
3.2.2. Closed School Discharges
    A small percentage of institutions close annually, with 630 
closures at the 8-digit OPEID branch level in 2018. Some institutions 
provide teach-out opportunities to enable students to complete their 
programs and others leaving students to navigate the closure on their 
own, resulting in their eligibility for closed school loan discharges. 
The final regulations expand the eligibility window for students with 
Direct loans first disbursed on or after July 1, 2020, who left the 
institution but are still eligible to receive closed school loan 
discharges from 120 to 180 days. The final regulations also clarify 
that a borrower who accepts a teach-out plan would not qualify for a 
closed school discharge, unless the institution failed to meet the 
material terms of the teach-out plan, such that the borrower was unable 
to complete the program of study in which the borrower was enrolled.
    The Department has worked with a number of schools that have 
successfully completed teach-out plans. As additional schools close in 
the future, the Department wants to encourage them to offer orderly 
teach-outs rather than close without making arrangements to protect 
their students. We believe the final regulations will encourage 
institutions to provide teach-out opportunities, despite their 
potential high cost, if doing so would reduce the total liability that 
could result from having to reimburse the Secretary for losses due to 
closed school discharges. Title IV-granting institutions are required 
by their accreditors \180\ to have an approved teach-out plan on file 
and to update that plan with more specific information in the event 
that the institution is financially distressed, is in danger of losing 
accreditation or State authorization, or is considering a voluntary 
teach-out for other reasons. Accreditors, and in some cases, State 
authorizing agencies, must approve teach-out plans and carefully 
monitor teach-out activities. Students who opt to participate in an 
approved teach-out plan and who are provided that opportunity as 
outlined in the plan will not be eligible for a closed school loan 
discharge under this provision. As in the current regulation, students 
who transfer their credits will also not be eligible for a closed 
school discharge.
---------------------------------------------------------------------------

    \180\ 34 CFR 602.24(c).
---------------------------------------------------------------------------

    The Department is revising the regulatory provision that provides 
automatic closed school discharges for Direct Loan borrowers who do not 
complete their program within three years after the school closed to 
apply to

[[Page 49891]]

schools that closed on or after November 1, 2013 and before July 1, 
2020. This is expected to reduce closed school discharges and the 
potential institutional liability associated with them.
3.2.3. False Certification Discharges
    A small percentage of institutions are affected by false 
certification discharges annually. The final regulations would permit 
institutions to obtain a written assurance from prospective students 
who completed high school but are unable to obtain their high school 
transcripts when applying for admission and Federal financial aid, 
without exposing themselves to financial liabilities should those 
students misrepresent the truth in their attestations. To ensure that 
the unintended consequence of this policy change is not an increase in 
the frequency or cost of false certification discharges, the Department 
believes it is necessary to specify that a student who misrepresents 
his or her high school completion status under penalty of perjury 
cannot then receive a false certification loan discharge due to non-
completion of high school or a home school program. The final 
regulations will protect institutions as they seek to serve students 
who are pursuing postsecondary education but cannot obtain an official 
diploma or transcript. We believe this final regulation will not have a 
significant impact on institutions because the Department receives very 
few false certification discharge requests and, as discussed further in 
the Net Budget Impacts section, the Department does not include any 
false certification discharge recoupment transfers in its estimate.
3.2.4. Financial Responsibility Standards
    Both the 2016 final regulations and these final regulations include 
conditions under which institutions would have to provide a letter of 
credit or other form of financial protection in order to continue to 
participate in the title IV, HEA programs. The following table compares 
the financial responsibility triggers established by the 2016 final 
regulations and in these final regulations. Mandatory events or actions 
automatically result in a determination that the institution is not 
financially responsible and trigger a request for a letter of credit or 
other financial protection from the institution, whereas discretionary 
events or actions give the Secretary the discretion to make that 
determination at the time the event or action may occur. In a change 
from the NPRM, if an institution is subject to two discretionary events 
within the period between calculation of composite scores, the events 
will be treated as mandatory events unless a triggering event is 
resolved before any subsequent event(s) occurs. These final regulations 
also keep high annual dropout rates as a discretionary trigger, as was 
the case in the 2016 final rule, with the specific threshold to be 
determined in the future.

                                   Table 2--Financial Responsibility Triggers
----------------------------------------------------------------------------------------------------------------
   Financial responsibility trigger        2016 regulation          Final regulation          Change summary
----------------------------------------------------------------------------------------------------------------
                         Mandatory Actions or Events: Recalculated Composite Score <1.0
----------------------------------------------------------------------------------------------------------------
Action or Event triggers Secretary     Actual or projected      Actual expense incurred  Eliminates projected
 decision and may result in a letter    expenses incurred from   from a triggering        expenses.
 of credit or other financial           a triggering event.      event.
 protection to Department.
Defense to repayment that does or      Department has received  Department has           Changed from
 could lead to an institution           or adjudicated claims    discharged loans         Discretionary to
 repaying government for discharges.    associated with the      resulting from           Mandatory or reduced
                                        institution.             adjudicated claims.      to actual discharges
                                                                                          only.
Lawsuits and Other Actions that leads  Final judgment in a      Final judgment or        Reduced to final
 or could lead to institution paying    judicial proceeding,     determination in a       judgments or
 a debt or incurring a liability.       administrative           judicial or              determinations with
                                        proceeding or            administrative           public records.
                                        determination, or        proceeding or action.
                                        final settlement;
                                        legal action brought
                                        by a Federal or State
                                        Authority pending for
                                        120 days; or other
                                        lawsuits that have
                                        survived a motion for
                                        summary judgment or
                                        the time for such a
                                        motion has passed.
Withdrawal of Owner's Equity at        Excludes transfers       Excludes transfers to    Revised, clarifies the
 proprietary institutions.              between institutions     affiliated entities      most common types of
                                        with a common            included in composite    withdrawals.
                                        composite score.         score, reduces
                                                                 reporting of wage-
                                                                 equivalent
                                                                 distributions.
----------------------------------------------------------------------------------------------------------------
                                           Mandatory Actions or Events
----------------------------------------------------------------------------------------------------------------
Non-Title IV Revenue (90/10): Fails    At proprietary           At proprietary           Reclassified as a
 in most recent fiscal year.            institutions.            institutions.            discretionary trigger.
Cohort Default Rates.................  Two most recent rates    Two most recent rates    Reclassified as a
                                        are 30 percent or        are 30 percent or        discretionary trigger.
                                        above after any          above after any
                                        challenges or appeals.   challenges or appeals.
SEC or Exchange Actions regarding the  Warned SEC may suspend   SEC suspends trading or  Changed from an SEC
 institution's stock (Publicly Traded   trading; failed to       stock delisted.          warning, which does
 Institutions).                         file required report                              not require
                                        with SEC on-time;                                 shareholder
                                        notified of                                       notification, to
                                        noncompliance with                                events in which
                                        Stock exchange                                    shareholder
                                        requirements; or Stock                            notification is
                                        delisted.                                         required.

[[Page 49892]]

 
Accreditor Actions--Teach-Outs.......  Accreditor requires      Removed................  Regulatory update.
                                        institution to submit
                                        a teach-out plan for
                                        closing the
                                        institution, a branch,
                                        or additional location.
Gainful Employment...................  Programs one year away   Removed................  Regulatory update.
                                        from losing their
                                        eligibility for title
                                        IV, HEA program funds
                                        due to GE metrics.
----------------------------------------------------------------------------------------------------------------
                                         Discretionary Actions or Events
----------------------------------------------------------------------------------------------------------------
Accreditor Actions--probation, show-   Accreditor takes action  Institutional            Limits trigger to
 cause, or other equivalent or          on institution.          accreditor issues a      accreditor actions
 greater action.                                                 show-cause order that,   that do or could
                                                                 if not resolved, would   imminently lead to
                                                                 result in the loss of    loss of institutional
                                                                 institutional            accreditation and/or
                                                                 accreditation;           closure of the school.
                                                                 accreditation is
                                                                 removed.
Security or Loan Agreement violations  Creditor requires an     Creditor requires an     No Change.
                                        increase in              increase in
                                        collateral, a change     collateral, a change
                                        in contractual           in contractual
                                        obligations, an          obligations, an
                                        increase in interest     increase in interest
                                        rates or payments, or    rates or payments, or
                                        other sanctions,         other sanctions,
                                        penalties, or fees.      penalties, or fees.
Cited for Failing State licensing or   Notified of              Notified of              Reduced reporting of
 authorizing agency requirements.       noncompliance with any   noncompliance relating   State actions.
                                        provision.               to termination or
                                                                 withdrawal of
                                                                 licensure or
                                                                 authorization if
                                                                 institution does not
                                                                 take corrective action.
Significant Fluctuations in Pell       Changes in consecutive   Removed................  None, not directly
 Grant and Direct Loan funds.           award years, or over a                            relevant.
                                        period of award years,
                                        not due to title IV
                                        program changes.
Financial Stress Test developed or     Institution fails the    Removed................  None because test never
 adopted by the Secretary.              test but specific                                 created.
                                        stress test never
                                        proposed or developed.
High Drop-Out Rates, as defined by     Institution has high     Included, a revision     None.
 the Secretary.                         annual drop-out rate     from the NPRM.
                                        but Specific threshold
                                        never developed.
Anticipated Borrower Defense Claims..  Secretary predicts       Removed................  Reduced Liability.
                                        claims as a result of
                                        a lawsuit, settlement,
                                        judgment, or finding
                                        from a State or
                                        Federal administrative
                                        proceeding.
----------------------------------------------------------------------------------------------------------------

    Some institutions may incur burden from the requirement to report 
any action or event described in Sec.  668.171(e) within the specified 
number of days after the action or event occurs. As further explained 
in the Paperwork Reduction Act of 1995 section, the Department 
estimates the burden for reporting these events to the Secretary would 
be 720 hours annually for private schools and 2,274 hours for 
proprietary institutions for a total burden of 2,994 hours. Using an 
hourly rate of $44.41,\181\ we estimate that the costs incurred by this 
regulatory change would be $132,964 annually ($44.41 * 2,994).
---------------------------------------------------------------------------

    \181\ Hourly wage data uses the Bureau of Labor Statistics, 
available at swww.bls.gov/ooh/management/postsecondary-education-administrators.thm.
---------------------------------------------------------------------------

    FASB is a standard-setting body that establishes generally accepted 
accounting principles and the Department requires that institutions 
participating in the title IV, HEA programs file audited financial 
statements annually, with the audits performed under FASB standards. 
Therefore, financial statements will begin to contain elements that are 
either new or reported differently, including long-term lease 
liabilities. This topic was not addressed in the 2016 final 
regulations, but was included in the 2018 NPRM.
    Changes in the definition of terms used under the financial 
responsibility standards will align the regulations with current 
practice and FASB standards.\182\ However, the new FASB lease standard 
could negatively affect or cause an institution to fail the composite 
score and the Department has no mechanism to make a timely adjustment 
to the composite score calculation to accommodate this change. The 
Department also has no data to understand what the impact of this 
change will be on institutional composite scores. Therefore, the 
Department must obtain audited financial statements prepared in 
accordance with FASB standards, and will calculate one composite score 
for an institution by grandfathering in leases entered into prior to 
December 15, 2018 (pre-implementation leases) and applying the new 
standard to any leases entered into on or after that date (post-
implementation leases).
---------------------------------------------------------------------------

    \182\ www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805317350.
---------------------------------------------------------------------------

    The Department may use the data it will collect under the final 
regulations to conduct analyses that might inform future rulemaking to 
update the composite score methodology. As explained further in the 
Paperwork Reduction Act of 1995 section, 1,896 proprietary institutions 
and 1,799 private institutions will each need 1 hour annually to 
prepare a

[[Page 49893]]

Supplemental Schedule to post along with their annual audit ((1,896 + 
1,799) x 1 hour x $44.41). This will result in an additional annual 
burden of $164,095. The Department is not yet receiving these data on 
institutions' financial statements, so it is unable to quantify 
anticipated changes.
3.2.5. Enrollment Agreements
    The final regulations would permit institutions to include 
mandatory arbitration clauses and class action waivers in enrollment 
agreements they have with students receiving title IV financial aid. 
These provisions were prohibited by the 2016 regulations. The recent 
Supreme Court decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 
(2018) held that arbitration clauses in employment contracts must be 
enforced by the courts as written, in essence confirming the right of 
private parties to sign contracts that compel arbitration and waive 
class action rights. Institutions may benefit from arbitration in that 
it is a faster and less expensive way to resolve disputes, while 
reducing reputational effects; however, they may incur costs resulting 
from an increased use of arbitration under the final regulations.
3.2.6. Institutional Disclosures
    Some institutions will incur costs under the proposed disclosure 
requirements. Institutions that include mandatory pre-dispute 
arbitration clauses or class action waivers in their enrollment 
agreements would be required to make certain disclosures. As further 
explained in the Paperwork Reduction Act of 1995 section, the 
Department estimates the burden for making these disclosures would 
affect 944 proprietary institutions for a total of 4,720 hours 
annually. Using an hourly rate of $44.41,\183\ we estimate the costs 
incurred by this regulatory change would be $209,615. Also as discussed 
in the Paperwork Reduction Act of 1995 section, we estimate these same 
institutions would be required to include this information to borrowers 
during entrance counseling, for a further burden of 3 hours each 
annually, totaling $125,769 annually (944 * 3 * 44.41). Therefore, we 
estimate the total burden for disclosures would be $335,384 annually 
($209,615 + $125,769).
---------------------------------------------------------------------------

    \183\ Hourly wage data uses the Bureau of Labor Statistics, 
available at www.bls.gov/ooh/management/postsecondary-education-administrators.thm.
---------------------------------------------------------------------------

3.3. Guaranty Agencies
    In the 2018 NPRM, the Department estimated one-time costs of 
$14,922 and annual costs of $3,286 for systems updates and reporting 
related to borrowers eligible for closed school discharges and for 
forwarding escalated review requests to the Secretary. As noted in the 
preamble discussion of Departmental Review of Guaranty Agency Denial of 
Closed School Discharge Requests, these provisions are currently in 
effect from the 2016 Final Rule and are not included in these final 
regulations. Therefore, the estimated costs from the NPRM are not 
included in this Regulatory Impact Analysis. The Department does not 
have data on interest capitalization and collection costs for 
rehabilitated loans to estimate the impact of the changes in the final 
regulations.
3.4. Federal Government
    These final regulations would affect the Federal government's 
administration of the title IV, HEA programs. The Federal government 
would benefit in several ways, including reductions in student loan 
discharge transfers, reduced administrative burden, and increased 
access to data. The Federal government would incur costs to update its 
IT systems to implement the changes. The changes to the financial 
responsibility triggers may reduce recoveries relative to the 2016 
final rule. The Department believes that it has retained many of the 
key triggers, but, as noted in the Net Budget Impacts section, these 
changes could increase the costs to taxpayers.
3.4.1. Borrower Defenses
    The final regulations permit borrowers to submit claims to the 
Department regardless of loan status but impose a statute of 
limitations. It is more likely that the cost of misrepresentation would 
be incurred by institutions committing the act or omission than the 
taxpayer, because the Department would recoup defense to repayment 
discharge transfers from institutions. Further, because the Department 
estimates it will receive fewer borrower defense applications under the 
final regulations than under the 2016 regulations, the Department 
expects a reduction in administrative burden.
3.4.2. Loan Discharges
    Under the final regulations, the Department would expect to process 
and award fewer closed school and potentially fewer false certification 
loan discharges than it would have under the 2016 regulations. To the 
extent defense to repayment, closed school, and false certification 
loan discharges are not reimbursed by institutions, Federal Government 
resources that could have been used for other purposes will be 
transferred to affected borrowers. As further detailed in the Net 
Budget Impacts section, the Department estimates that annualized 
transfers from the Federal government to affected borrowers, partially 
reimbursed by institutions, would be reduced by $512.5 million for 
borrower defenses and $37.2 million for closed school discharges with 
reductions in reimbursement from institutions of $153.4 million 
annually. This is based on the difference in cashflows associated with 
loan discharges when the final regulation is compared to the 
President's Budget 2020 baseline (PB2020) and discounted at 7 percent.
    The Department has also determined that it is the appropriate party 
to provide affected students with a closed school discharge application 
and a written disclosure describing the benefits and consequences of a 
closed school discharge. When institutions were expected to fill this 
role, the estimated burden was approximately $70,000. As the Department 
already is in contact with affected students and has the relevant 
materials, we do not expect a significant increase in administrative 
burden after some initial set up costs.
3.4.3. Financial Responsibility Standards
    The Department will benefit from receiving updated financial 
statements consistent with FASB standards and therefore would have data 
necessary for developing updated composite score regulations through 
future rulemaking. The financial responsibility disclosures will enable 
the Department to receive the information necessary to calculate the 
composite score.
    The Department would incur one-time costs for modifying eZ-Audit 
and other systems to collect the data needed to calculate composite 
scores under the new FASB reporting requirements and other systems to 
collect financial responsibility disclosures. The Department has not 
yet conducted the Independent Government Cost Estimate (IGCE) to 
determine the costs for making these system changes. However, the 
Department has not yet developed its internal process for implementing 
the final regulations, which may necessitate a software modification or 
individually-generated calculations; consequently, it is unable to 
estimate the change in administrative burden. Therefore, the Department 
is unable to estimate its burden for implementing the regulatory 
changes in the financial responsibility provisions.

[[Page 49894]]

4. Net Budget Impacts
    These final regulations are estimated to have a net Federal budget 
impact over the 2020-2029 loan cohorts of $-11.075 billion in the 
primary estimate scenario, including $-9.812 billion for changes to the 
defense to repayment provisions and $-1.262 billion for changes related 
to closed school discharges. A cohort reflects all loans originated in 
a given fiscal year. Consistent with the requirements of the Credit 
Reform Act of 1990, budget cost estimates for the student loan programs 
reflect the estimated net present value of all future non-
administrative Federal costs associated with a cohort of loans. Several 
comments were received about the assumptions for the budget estimate 
presented in the NPRM and those are addressed in the Discussion portion 
of this Net Budget Impact section.
    The Net Budget Impact compare these regulations to the 2016 final 
regulations as estimate in the 2020 President's Budget baseline 
(PB2020). This baseline assumed that the borrower defense regulations 
published by the Department on November 1, 2016, would go into effect 
and utilized the primary estimate scenario,\184\ described in the final 
rule published February 14, 2018.\185\ The primary difference with the 
PB2019 baseline was the effective date and the cohorts subject to the 
Federal standard established by the 2016 final rule with cohorts 2017 
to 2019 being subject to the 2016 Federal standard in the PB2020 
baseline. Several commenters objected to the use of the PB2019 baseline 
as the basis for the budget estimate in the NPRM and the discrepancy 
with the framing of the regulation in comparison to the 1995 regulation 
in other sections of the NPRM and believed it could violate the APA. 
The Department maintains that the most recent budget baseline, now 
PB2020, is the appropriate baseline for estimating the net budget 
impact of these final regulations. In the absence of these regulations, 
the 2016 final regulations would go into effect and that is reflected 
in the PB2020 baseline. We believe this comparison is appropriate and 
accurately captures that these final regulations are expected to reduce 
the amount of claims paid to students by the Federal government and 
reduce the institutional liability for reimbursing those claims.
---------------------------------------------------------------------------

    \184\ See 81 FR 76057 published November 1, 2016, available at 
ifap.ed.gov/fregisters/attachments/FR110116.pdf.
    \185\ See 83 FR 6468, available at www.gpo.gov/fdsys/pkg/FR-2018-02-14/pdf/2018-03090.pdf.
---------------------------------------------------------------------------

    The final regulatory provisions with the greatest impact on the 
Federal budget are those related to the discharge of borrowers' loans. 
Borrowers may pursue closed school, false certification, or defense to 
repayment discharges. The precise allocation across the types of 
discharges will depend on the borrower's eligibility and ease of 
pursuing the different discharges, and we recognize that some 
applications may be fluid in classification between defense to 
repayment and the other discharges, particularly closed school. In this 
analysis, we assign any estimated effects from defense to repayment 
applications to the defense to repayment estimate and the remaining 
effects associated with eligibility and process changes related to 
closed school discharges to the closed school discharge estimate.
4.1. Defense to Repayment Discharges
    As noted previously, the Department had to incorporate the changes 
to the defense to repayment provisions related to the 2016 final 
regulations into its ongoing budget estimates, and changes described 
here are evaluated against that baseline. In our main estimate, based 
on the assumptions described in Table 3, we present our best estimate 
of the impact of the changes to the defense to repayment provisions in 
the final regulation.
4.1.1. Assumptions and Estimation Process
    The net present value of the reduced stream of cash flows compared 
to what the Department would have expected from a particular cohort, 
risk group, and loan type generates the expected cost of the proposed 
regulations. We applied an assumed level of school misconduct, 
allowable claims, defense to repayment applications success, and 
recoveries from institutions (respectively labeled as Conduct Percent, 
Allowable Applications Percent, Borrower Percent, and Recovery Percent 
in Table [3]) to loan volume estimates to generate the estimated net 
number of borrower defense applications for each cohort, loan type, and 
sector. Table [3] presents the assumptions for the main budget estimate 
with the budget estimate for each scenario presented in Table [4]. We 
also estimated the impact if the Department received no recoveries from 
institutions, the results of which are discussed after Table 4.
    The model can be described as follows: To generate gross claims 
(gc), loan volumes (lv) by sector were multiplied by the Conduct 
Percent (cp), the Allowable Applications Percent (aap) and the Borrower 
Percent (bp); to generate net claims (nc) processed in the Student Loan 
Model, gross claims were then multiplied by the Recovery Percent (rp). 
That is, gc = (lv * cp * aap * bp) and nc = gc - (gc * rp). The Conduct 
Percent represents the share of loan volume estimated to be affected by 
institutional behavior resulting in a defense to repayment application. 
The Borrower Percent captures the percent of loan volume associated 
with approved defense to repayment applications, with factors such as 
an individual claims process, proof of reliance and financial harm 
requirement being key determinants of the reduced level compared to the 
PB2020 baseline. The Recovery Percent estimates the percent of gross 
claims reimbursed by institutions. The Allowable Applications Percent 
replaces the Defensive Claims Percent from the NPRM and captures the 
share of applications estimated to be made within the 3-year timeframe 
for borrowers in all repayment statuses to apply for defense to 
repayment. The numbers in Table 3 are the percentages applied for the 
main estimate and PB2020 baseline scenarios for each assumption for 
cohorts 2020-2029.

                                        Table 3--Assumptions for Main Budget Estimate Compared to PB2020 Baseline
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          PB2020 baseline                                   Final rule
                         Cohort                          -----------------------------------------------------------------------------------------------
                                                                Pub            Priv            Prop             Pub            Priv            Prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Conduct Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2020....................................................             1.7             1.7            11.6            1.62            1.62           11.02
2021....................................................             1.5             1.5             9.8            1.43            1.43            9.31
2022....................................................             1.4             1.4             8.8            1.33            1.33            8.36

[[Page 49895]]

 
2023....................................................             1.3             1.3             8.4            1.24            1.24            7.98
2024....................................................             1.2             1.2               8            1.14            1.14             7.6
2025....................................................             1.2             1.2             7.8            1.14            1.14            7.41
2026....................................................             1.1             1.1             7.7            1.05            1.05            7.32
2027....................................................             1.1             1.1             7.7            1.05            1.05            7.32
2028....................................................             1.1             1.1             7.7            1.05            1.05            7.32
2029....................................................             1.1             1.1             7.7            1.05            1.05            7.32
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Allowable Applications Percent (Not in PB2020 Baseline)
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Cohorts.............................................  ..............  ..............  ..............              70              70              70
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Borrower Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2020....................................................            42.4            42.4            54.6             3.3             3.3            4.95
2021....................................................            46.7            46.7              60            3.75            3.75           5.475
2022....................................................              50              50              63           4.125           4.125           5.925
2023....................................................              50              50              65             4.5             4.5             6.3
2024....................................................              50              50              65             4.8             4.8            6.75
2025....................................................              50              50              65            5.25            5.25           6.975
2026....................................................              50              50              65            5.25            5.25             7.5
2027....................................................              50              50              65            5.25            5.25             7.5
2028....................................................              50              50              65            5.25            5.25             7.5
2029....................................................              50              50              65            5.25            5.25             7.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Recovery Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2020....................................................              75            28.8            28.8              75              16              16
2021....................................................              75           31.68           31.68              75              20              20
2022....................................................              75           33.26           33.26              75              20              20
2023....................................................              75           34.93           34.93              75              20              20
2024....................................................              75           36.67           36.67              75              20              20
2025....................................................              75            37.4            37.4              75              20              20
2026....................................................              75            37.4            37.4              75              20              20
2027....................................................              75            37.4            37.4              75              20              20
2028....................................................              75            37.4            37.4              75              20              20
2029....................................................              75            37.4            37.4              75              20              20
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As in previous estimates, the recovery percentage reflects the fact 
that public institutions are not subject to the changes in the 
financial responsibility triggers because of their presumed backing by 
their respective States, which has never depended upon or been linked 
to a specific provision of any borrower defense regulation. Therefore, 
the PB2020 baseline and main recovery scenarios are the same for public 
institutions and set at a high level to reflect the Department's 
confidence in recovering amounts from the expected low number of claims 
against public institutions. The decrease in the recovery percentage 
assumption for private and proprietary institutions compared to the 
PB2020 baseline reflects the removal or modification of some financial 
responsibility triggers as described in Table 2. We do not specify how 
many institutions are represented in the estimate as the assumptions 
are based on loan volumes and the scenario could represent a 
substantial number of institutions engaging in acts giving rise to 
defense to repayment applications or could represent a small number of 
institutions with significant loan volume subject to a large number of 
applications. According to Federal Student Aid data center loan volume 
reports, the five largest proprietary institutions in loan volume 
received 25.7 percent of Direct Loans disbursed in the proprietary 
sector in award year 2017-18 and the 50 largest proprietary 
institutions represent 70.7 percent of Direct Loans disbursed in that 
same time period.\186\ We were conservative in our estimates of the 
share of volume captured in the conduct percentage and the number of 
applications submitted in the Allowable Applications percentage as we 
did not want to underestimate costs associated with changes to the 
borrower defense regulations. Due to the similarities between the 
conduct covered by the standard in the proposed regulations and the 
standard in the 2016 final regulations, as described in the Discussion 
segment, the Conduct Percent did not change from the PB2020 Baseline as 
much as the Borrower Percent. Changes to the definition of 
misrepresentation to require reasonable reliance and a materiality 
threshold, as further described in the Analysis of Comments and 
Changes--Evidentiary Standard for Asserting a Borrower Defense section 
of this preamble are reflected in the changes to the Borrower Percent 
as part of the likelihood of the borrower succeeding with their defense 
to repayment. As recent loan cohorts progress further in their 
repayment cycles, if future data indicate that the percent of volume 
affected by conduct that meets the standard that would give rise to 
defense to repayment applications differs from current estimates, that 
difference will be reflected in future baseline re-estimates.
---------------------------------------------------------------------------

    \186\ Federal Student Aid, Student Aid Data: Title IV Program 
Volume by School Direct Loan Program AY2015-16, Q4, available at 
studentaid.ed.gov/sa/about/data-center/student/title-iv accessed 
August 22, 2016.

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

[[Page 49896]]

4.1.2. Discussion
    The Department has some additional experience with processing 
defense to repayment applications and data on the approximately 230,000 
applications received since 2015, but while this information has helped 
inform these estimates, it does not eliminate the uncertainty about 
institutional and borrower response to the final regulations. As noted 
earlier, given the limited number of applications that the Department 
has adjudicated, both in number and sector of institutions that are 
represented in this number, our data may not reflect the final results 
of the Department's review and approval process.
    As a result of comments received and the Department's continued 
internal deliberations, a number of changes were made from the proposed 
regulation in the NPRM published July 31, 2018. Several commenters 
suggested allowing affirmative claims, expanding the timeframe for 
borrowers to make claims, and not requiring student borrowers to prove 
an institution's intent to mislead them. A number of commenters 
expressed concern that the Department's alternative in the proposed 
rule, which would provide relief to borrowers in a collection 
proceeding, could encourage students to engage in strategic defaults 
and would give preferential treatment to borrowers in default as 
compared to those in repayment. The Department agrees with these 
concerns and therefore is removing the references to affirmative or 
defensive claims. Instead, these final regulations provide a borrower--
regardless of whether that borrower is in repayment, forbearance, 
deferment, default, or collection--an opportunity to submit a borrower 
defense to repayment application for loan forgiveness. Other commenters 
expressed concern that affirmative claims could lead to an increase in 
frivolous claims, which could increase the cost of responding to these 
claims on the part of the institution and the Department. In order to 
reduce the number of unjustified claims, the Department has included in 
these final regulations that borrowers must prove reasonable reliance 
on the institution's misrepresentation, that the misrepresentation 
caused financial harm to the borrower, and that the borrower submitted 
a borrower defense to repayment application three years from the date 
of graduation or withdrawal from the institution. The Department 
believes that a borrower would know within three years of departing the 
institution whether the institution had made a misrepresentation to the 
borrower and caused the borrower financial harm. This three-year period 
also aligns with the Department's records retention policies, which is 
important since the final regulation seeks to enable the Department to 
review a complete record, including the institution's response to the 
student's allegations of misrepresentation. That change is reflected in 
the Allowable Applications Percent and would likely reduce the 
estimated savings from the proposed regulations in the NPRM, although 
the precise outcome depends upon the balance between the 3-year 
timeframe for filing and removing the limitation to defensive claims 
only. Although some commenters supported the use of a preponderance of 
evidence standard in adjudicating claims, others commented that given 
the tendency for institutional misrepresentations to be referred to as 
fraud, the Department's standard should more closely align with that 
required by most states in adjudicating claims of consumer fraud. The 
Department has decided to retain the preponderance of evidence standard 
to provide a reasonable opportunity for a borrower to seek and receive 
student loan relief. Therefore, more borrowers, including those not in 
default or collections, will have an opportunity to prove their defense 
to repayment application should be approved, but the borrowers will 
have to prove more elements of misrepresentation including materiality, 
with the budget effects of the two changes going in opposite 
directions. Nothing in this regulation interferes with other rights of 
the borrower, including during a collections procedure, to assert 
equitable defenses, such as equitable recoupment. By itself, the 
Federal standard is not expected to significantly change the percent of 
loan volume subject to conduct that might give rise to a borrower 
defense claim. The changes in the misrepresentation definition and 
removal of the breach of contract claims will have some downward 
effect, so the conduct percent is assumed to be 95 percent of the 
PB2020 baseline level.
    In addition, some commenters addressed specific aspects of the 
Department's assumptions and budget estimate or provided additional 
information for the Department to consider. These comments are 
addressed below in the discussion relevant to the specific assumptions.
    As has been estimated previously, we are incorporating a deterrent 
effect of the borrower defense to repayment provisions on institutional 
behavior as is reflected in the decrease in the conduct percent in 
Table [3]. One commenter challenged the inclusion of a deterrent effect 
as unreasonable because several of the mechanisms that would act as a 
deterrent under the 2016 rule would not be included in these final 
regulations. The commenter argued that the prohibition of pre-dispute 
arbitration and increased financial responsibility triggers in the 2016 
rule would result in higher liabilities and increased transparency with 
respect to institutional misrepresentation and form a basis for a 
deterrent effect on institutional conduct in the 2016 rule. According 
to the commenter, allowing pre-dispute mandatory arbitration and the 
reduced applications and resulting liabilities reduces the reputational 
risk to institutions and makes the inclusion of a deterrent effect 
unreasonable. This commenter also asserts that there will likely be an 
increase in the percentage of unlawful conduct due to the elimination 
of the gainful employment rule in addition to these final regulations. 
The Department acknowledges that the financial responsibility triggers 
have changed and the mechanisms to influence institutional conduct are 
different under these final regulations, but we still believe that the 
potential liability, political risk, and some reputational risk will 
continue to have some deterrent effect. We recognize that the timing or 
extent of this effect may vary from that under the 2016 rule and have 
developed an alternative scenario with no deterrent effect in the 
additional scenarios presented in Table 4 to capture the possibility 
raised by the commenter that institutions will not modify their 
behavior. A commenter also questioned the recovery percentage applied 
given the changes in the financial protection triggers compared to the 
2016 rule. In particular, the commenter pointed to the increased 
timeframe for recovery and the increased number of more predictive 
financial responsibility triggers in the 2016 rule as reasons for 
higher recovery rates that increased over time from about 25 percent to 
37 percent. The Department appreciates the comment and agrees with the 
commenter that the changes in the timeframe for recovery and changes in 
the triggers in the final regulations will reduce the percentage of 
gross claims recovered from institutions, as was reflected in the 
reduced recovery percentage in the NPRM of 16 percent to 25 percent 
compared to the PB2020 baseline of 28 to 37 percent. As there is 
limited information about recoveries related to borrower defense claims 
currently being processed, the exact percentage that will be recovered 
is uncertain, as it was for the 2016 final regulations, and the

[[Page 49897]]

Department and the commenter disagree on the extent to which recoveries 
will be reduced by the timeframe and the changes in triggers that the 
Department supports for the reasons detailed in the Analysis of 
Comments and Changes related to the Financial Responsibility 
provisions. These final regulations also revise the treatment of 
discretionary events so that they are treated as mandatory events if 
multiple events occur in the period between the calculation of 
composite scores, unless a triggering event is resolved before 
subsequent events occur. The discretionary trigger related to high 
dropout rates was also included after being removed in the NPRM. We 
believe these changes support the recovery level the Department has 
assumed for its estimates. Additionally, the sensitivity run related to 
recovery rates and the no-recovery scenario described after Table 4 are 
designed to reflect the possibility that recoveries will be lower than 
anticipated in the main estimate, and the Department believes this is 
appropriate to address the concerns raised by the commenter about the 
level of recoveries. Upon consideration, the Department does agree that 
the ramp-up in recovery rates is likely aggressive compared to the 2016 
final regulations which included triggering events at earlier stages 
that the Department now considers an overreach. The ramp-up in 
recoveries has been modified to reflect this reconsideration, as 
demonstrated in Table 3.
    Overall, we expect that the changes in the final regulations that 
will reduce the anticipated number of borrower defense applications are 
related more to changes in the process, not due to changes in the type 
of conduct on the part of an institution that would result in a 
successful defense, as demonstrated by the 95 percent overlap compared 
to the PB2020 baseline.
    The final regulations modify the framework in which borrower 
defense to repayment applications are submitted in response to certain 
collection activities initiated by the Department, specifically 
administrative wage garnishment, Treasury offset, credit bureau default 
reporting, and Federal salary offset. As has always been the case, 
borrowers will be able to seek relief from their institutions in State 
or Federal courts or from State or Federal agencies, or through 
arbitration, but defense to repayment applications through the 
Department will be reserved to applications made in the first three 
years after the borrower leaves the institution. In the estimate for 
the NPRM, the Department used the assumed default rates by student loan 
model risk group to estimate the percent of loan volume associated with 
borrowers who, over the life of the loan, might be in a position to 
raise a defense to repayment. As the final regulations allow 
applications within three years of leaving an institution, the 
Department looked at existing borrower defense claims by time to 
submission from the date the borrower completed or exited the program. 
Approximately 30 percent of existing claims were submitted within 3-
years or less. The Department anticipates that this share will increase 
when borrowers have the incentive to file within the 3-year timeframe 
established by the final regulations. Therefore, we used the 
approximately 67 percent of existing claims filed within 5 years as the 
basis for the 70 percent assumed for the Allowable Applications Percent 
in Table [3] to capture the potential effect of this incentive.
    Several process changes contribute to the reduction in the Borrower 
Percent compared to the PB2020 baseline assumption. A separate 
assumption for the allowable applications provision was explicitly 
included so it could be varied in sensitivity runs or in response to 
comments. Specifically, the final regulations modify the definition of 
misrepresentation. This requires borrowers to prove reliance upon the 
misrepresentation and the financial harm they experienced. Another 
significant factor is the emphasis on determinations of individual 
applications and the lack of an explicit process for aggregating like 
applications. The Department will be able to group like applications 
against an institution for more efficient processing, but, even if 
there is a finding that covers multiple borrowers, relief will be 
determined on an individual basis and be related to the level of 
financial harm proven by the borrower. Together, these changes could 
require more effort on the part of individual borrowers to submit a 
borrower defense application, which is reflected in the change in the 
Borrower Percent assumption.
    The net budget impact of the emphasis on other avenues for relief 
is complicated by the potential for amounts received in lawsuits, 
arbitration, or agency actions to reduce the amount borrowers would be 
eligible to receive through a defense to repayment filing. While it 
would be prudent for borrowers to use any funds received with respect 
to the Federal loans in such proceedings to pay off the loans, there is 
no mechanism in the proposed regulations to require this. This offset 
of funds received in other actions was also a feature in the 2016 final 
regulations, but the majority of applications processed did not have 
offsetting funds to consider due to the precipitous closure of two 
large institutions. Accordingly, we are not assuming a budgetary impact 
resulting from prepayments attributable to the possible availability of 
funds from judgments or settlement of claims related to Federal student 
loans. Another factor that could affect the number of defense 
applications presented is the role of State Attorneys General or State 
agencies in pursuing actions or settlements with institutions about 
which they receive complaints. The level of attention paid to this area 
of consumer protection could alert borrowers in a position to apply for 
a defense to repayment and result in a different number of applications 
than the Department anticipates. Evidence developed in such proceedings 
could be used by borrowers to support their individual applications. 
However, unlike in the 2016 final regulations, final judgments on the 
merits of such lawsuits or other allegations made by State Attorneys 
General will not provide an automatic basis for a successful borrower 
defense application, further contributing to the reduction of the 
assumed borrower percent.
    The Department has used data available on defense to repayment 
applications, associated loan volumes, Departmental expertise, the 
discussions at negotiated rulemaking, information about past 
investigations into the type of institutional acts or omissions that 
would give rise to defense to repayment applications, and decisions of 
the Department to create new sanctions and apply them to institutions 
thus instigating precipitous closures to develop the main estimate and 
sensitivity scenarios that we believe will capture the range of net 
budget impacts associated with the defense to repayment regulations.
4.1.3. Additional Scenarios
    The Department recognizes the uncertainty associated with the 
factors contributing to the main budget assumption presented in Table 
3. For example, allowing institutions to present evidence may result in 
fewer unjustified findings of misrepresentation that lead to an 
adjudicated claim. We have not included the impact of this potential 
evidence in our calculations as we have no basis for determining the 
impact that an institutional defense will have on the adjudication of 
applications. The uncertainty in the defense to repayment estimate, 
given the unknown level of future school conduct that could give

[[Page 49898]]

rise to claims; institutions' reaction to the regulations to eliminate 
such activities; the impact of allowing institutions to present 
evidence in response to borrowers' applications; the expansion of 
College Scorecard data to include program level outcomes, potentially 
reducing the opportunity for misrepresentation by providing information 
on outcomes on a common basis; the extent of full versus partial relief 
granted; the level of State activity are reflected in additional 
analyses that demonstrate the effect of changes in the specific 
assumption being tested. Some commenters suggested additional runs that 
would single out individual aspects of the assumptions like the 
individual versus group processing of claims, a factor the commenter 
correctly points out is a major contributor to the reduction in the 
borrower percentage. However, the borrower defense assumptions have 
never been specified by individual components and the data to do so is 
limited, so the sensitivity runs are designed to capture the effect of 
changes in the assumptions, whatever the combination of factors that 
may cause the change. The Department believes this is appropriate and 
avoids a false sense of precision about the effect of changes to 
specific components of the assumptions.
    The Department designed the following scenarios to isolate the 
assumption being evaluated and adjust it in the direction that would 
increase costs, increasing the Allowable Applications or Borrower 
Percent and decreasing the recovery percent. The first scenario the 
Department considered is that the Allowable Applications Percent will 
increase by 15 percent (AAP15). This could occur if economic conditions 
or strategic behavior by borrowers increase defaults or more borrowers 
than anticipated file applications within the 3-year window. In the 
second scenario the Department increased the Borrower Percent by 25 
percent (Bor25) to reflect the possibility that outreach, model 
applications, or other efforts by students may increase the percent of 
loan volume associated with successful defense to repayment 
applications. As the gross borrower defense claims are generated by 
multiplying the estimated volumes by the Conduct Percent, Allowable 
Applications Percent, and the Borrower Percent, the scenarios capture 
the impact of a 15 percent or 25 percent change in any one of those 
assumptions. The Recovery Percentage is applied to the gross claims to 
generate the net claims, so the RECS scenario reduces recoveries by 
approximately 40 percent to demonstrate the impact of that assumption. 
We also included the combined scenario that includes those changes 
together as they may likely occur simultaneously. In response to 
commenter concerns about the potential absence of a deterrent effect on 
institutional behavior, we have added a scenario that keeps the highest 
level of the conduct percentage across all cohorts in the No Deter 
scenario. The final scenario (Bor50) takes a different approach and 
recognizes that the borrower percent changed significantly from the 
2016 final rule. As we have discussed throughout the Net Budget Impact 
section, the impact associated with the changes made in these final 
regulations is speculative, so this run assumes a 50 percent reduction 
in the borrower percent from the 2016 final rule assumptions that are 
in the PB2020 budget baseline. This would reflect a scenario where many 
borrowers who may have been brought in through a group claim submit 
applications and are able to provide the information to support their 
application. The net budget impacts of the various additional scenarios 
compared to the PB2020 baseline range from $-7.97 billion to $-9.70 
billion and are presented in Table 4.

   Table 4--Budget Estimates for Additional Borrower Defense Scenarios
------------------------------------------------------------------------
                                                             Estimated
                                                             costs for
                                                           cohorts 2020-
                        Scenario                           2029 (outlays
                                                             in $mns)
 
------------------------------------------------------------------------
Main Estimate...........................................         $-9,812
AAP15...................................................          -9,699
Bor25...................................................          -9,656
Recs40..................................................          -9,690
No deterrence...........................................          -9,567
Combined................................................          -9,047
Bor50...................................................          -7,972
------------------------------------------------------------------------

    The transfers among the Federal government, affected borrowers, and 
institutions associated with each scenario above are included in Table 
5, with the difference in amounts transferred to borrowers and received 
from institutions generating the budget impact in Table 3. The amounts 
in Table 4 assume the Federal Government will recover from institutions 
some portion of amounts discharged. In the absence of any recovery from 
institutions, taxpayers would bear the full cost of approved defense to 
repayment applications. For the primary budget estimate, the annualized 
costs with no recovery are approximately $498 million at a 3 percent 
discount rate and $512.5 million at a 7 percent discount rate. This 
potential increase in costs demonstrates the effect that recoveries 
from institutions have on the net budget impact of the final defense to 
repayment regulations.
4.2. Closed School Discharges
    In addition to the provisions previously discussed, the final 
regulations also would make two changes to the closed school discharge 
process that are expected to have an estimated net budget impact of -
$1.2621 billion, of which -$187 million is a modification to past 
cohorts related to the elimination of the automatic three-year 
discharge for schools that close on or after July 1, 2020. The combined 
effect of the elimination of the three-year automatic discharge and the 
expansion of the eligibility window to 180 days for Direct Loan 
borrowers is -$1,075 million for cohorts 2020-2029. In the NPRM 
version, students offered a teach-out opportunity approved by the 
institution's accrediting agency and State authorizing agency were not 
eligible for a closed school discharge. In the final regulations, 
students are eligible to receive a closed school loan discharge unless 
they transfer their credits, or participate in an approved teach-out 
plan. Once a borrower chooses to participate in an approved teach-out 
plan, they are no longer eligible for a closed school loan discharge 
unless the institution fails to materially meet the requirements of the 
approved teach-out plan. As with the estimates related to the borrower 
defense to repayment provisions, the net budget impact estimates for 
the closed school discharge provisions are developed from the PB2020 
budget baseline that accounted for the delayed implementation of the 
2016 final regulations and assumed the 2016 final regulations would 
take effect on July 1, 2019.
    As described in the regulation, the standard path to such a 
discharge will require borrowers to submit an application. The savings 
from eliminating the three-year automatic closed school discharge 
provisions offset the costs of expanding the eligibility window to 180 
days for cohorts 2020-2029. The precise interaction between the two 
effects is uncertain as outreach and better information for borrowers 
about the closed school loan discharge process may increase the rate of 
borrowers who submit applications. In estimating the effect of the 2016 
final regulations, the Department looked at all Direct Loan

[[Page 49899]]

borrowers at schools that closed from 2008-2011 to see the percentage 
of loan volume associated with borrowers that had not received a closed 
school discharge and had no NSLDS record of title-IV aided enrollment 
in the three years following their school's closure and found it was 
approximately double the amount of those who received a discharge. This 
could be because the students received a teach-out or transferred 
credits and completed their program without additional title IV aid, or 
it could be that the students did not apply for the discharge because 
of a lack of awareness or other reasons. Whatever the reason, in 
estimating the potential cost of the 3-year automatic discharge 
provision in the PB2020 baseline, the Department applied this increase 
to the closed school discharge rate. For these final regulations, we 
have reversed the increase attributed to the 3-year automatic 
discharge.
    The volume of additional discharges that might result from the 
expansion of the window is also difficult to predict. The Department 
analyzed borrowers who were enrolled within 180 days of the closure 
date for institutions that closed between July 1, 2011 and February 13, 
2018 and found that borrowers who withdrew within the 121 to 180-day 
time frame would increase loan volumes eligible for discharge by 
approximately nine percent. However, it is possible that some borrowers 
who complete their programs in that window or the current 120-day 
window for eligibility would choose to withdraw and pursue a closed 
school loan discharge instead of completing the program if the school 
closure is known in advance. The likelihood of this is unclear as it 
might depend on the relative length of the program, the time the 
borrower has remaining in the program, and the borrower's perception of 
the value of the credential versus the burden of starting the program 
over again as compared to the prospect of debt relief. Further, if the 
student knows that the school plans to close, it is likely because the 
school has implemented a teach-out plan, which would negate the 
borrower's ability to claim a closed school discharge if borrower 
accepts the teach-out. For these reasons, the Department did not adjust 
for this strategic withdrawal factor in estimating the impact of the 
expansion of the eligibility window.
    The incentives in the final regulations with respect to teach-outs 
are similar to the existing regulations for both institutions and 
borrowers, so the Department has reversed the 65 percent reduction in 
the baseline closed school discharges estimated in the NPRM, reducing 
the overall savings estimated for the closed school discharge 
provision. As is demonstrated by the estimated net savings from the 
closed school discharge changes, the removal of the three-year 
automatic discharge provisions is still expected to reduce the 
anticipated closed school discharge claims significantly more than the 
expansion of the window to 180 days increases them.
4.3. Other Provisions
    The final regulations will also make a number of changes that are 
not estimated to have a significant net budget impact including changes 
to the financial responsibility standards and treatment of leases, 
false certification discharges, guaranty agency collection fees and 
capitalization, and the calculation of the borrower's subsidized usage 
period process. The false certification discharge changes update the 
regulations to reflect current practices. The proposed regulations 
would also make borrowers who provide a written attestation of high 
school completion in place of an earned but unavailable high school 
diploma ineligible for a false certification discharge. In FY2017, 
false certification discharges totaled approximately $7 million. As 
before, we do not expect a significant change in false certification 
discharge claims that would result in a significant budget impact from 
this change in terms or use of an application that has been available 
at least ten years in place of a sworn statement. False certification 
discharges may decrease due to the ineligibility of borrowers who 
submit a written attestation in place of a high school diploma, but 
given the low level of false certification discharges in the baseline, 
even if a large share were eliminated, it would not have a significant 
net budget impact. Therefore, we do not estimate an increase in false 
certification discharge claims or their associated discharge value.
    Some borrowers may be eligible for additional subsidized loans and 
no longer be responsible for accrued interest on their subsidized loans 
as a result of their subsidized usage period being eliminated or 
recalculated because of a closed school, false certification, unpaid 
refund, or defense to repayment discharge. As in the 2016 final 
regulations, we believe the institutions primarily affected by the 150 
percent subsidized usage regulation are not those expected to generate 
many of the applicable discharges, so this reflection of current 
practice is not expected to have a significant budget impact.
5. Accounting Statement
    As required by OMB Circular A-4 we have prepared an accounting 
statement showing the classification of the expenditures associated 
with the provisions of these regulations (see Table 5). This table 
provides our best estimate of the changes in annual monetized transfers 
as a result of these proposed regulations. The amounts presented in the 
Accounting Statement are generated by discounting the change in 
cashflows related to borrower discharges for cohorts 2020 to 2029 from 
the PB2020 baseline at 7 percent and 3 percent and annualizing them. 
This is a different calculation than the one used to generate the 
subsidy cost reflected in the net budget impact, which is focused on 
summarizing costs at the cohort level. As the life of a cohort is 
estimated to last 40 years, the discounting does have a significant 
effect on the impact of the difference in cashflows in the outyears. 
Expenditures are classified as transfers from the Federal Government to 
affected student loan borrowers.

 Table 5--Accounting Statement: Classification of Estimated Expenditures
                              [In millions]
------------------------------------------------------------------------
                                                     Benefits
                Category                 -------------------------------
                                                7%              3%
------------------------------------------------------------------------
Disclosure to borrowers about use of
 mandatory pre-dispute arbitration
 clauses and potential increase in
 settlements between borrowers and
 institutions...........................          Not Quantified
------------------------------------------------------------------------
Reduced administrative burden related to
 processing defense to repayment
 applications...........................          Not Quantified
------------------------------------------------------------------------

[[Page 49900]]

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


 
                                                     Transfers
                Category                 -------------------------------
                                                7%              3%
------------------------------------------------------------------------
Reduced defense to repayment discharges          $-512.5         $-498.0
 from the Federal Government to affected
 borrowers (partially borne by affected
 institutions, via reimbursements.......
Reduced reimbursements of borrower                -153.4          -149.0
 defense claims from affected
 institutions to affected student
 borrowers, via the Federal government..
Reduced closed school discharges from              -37.2           -40.6
 the Federal Government to affected
 borrowers..............................
------------------------------------------------------------------------

    Previous Accounting Statements by the Department, including for the 
2016 final regulations, presented a number that was the average cost 
for a single cohort. If calculated in that manner, the reduced 
transfers for defense to repayment from the Federal government to 
affected borrowers would be $-1,377.0 billion, reimbursements would be 
reduced $-414.08 million, and closed school discharge transfers would 
be reduced $-140.61 million at a 7 percent discount rate.
6. Regulatory Alternatives Considered
    In response to comments received and the Department's further 
internal consideration of these final regulations, the Department 
reviewed and considered various changes to the final regulations 
detailed in this document. The changes made in response to comments are 
described in the Analysis of Comments and Changes section of this 
preamble. We summarize below the major proposals that we considered but 
which we ultimately declined to implement in these regulations.
    In particular, the Department extensively reviewed the financial 
responsibility provisions and related disclosures and arbitration 
provisions of these final regulations. In developing these final 
regulations, the Department considered the budgetary impact, 
administrative burden, and effectiveness of the options it considered.

                                       Table 6--Comparison of Alternatives
----------------------------------------------------------------------------------------------------------------
              Topic                    Baseline          Alternatives          Proposal              Final
----------------------------------------------------------------------------------------------------------------
Borrower Defense claims accepted  Affirmative and     Defensive only,     Defensive only....  Claims from any
                                   defensive.          Affirmative and                         borrower within
                                                       defensive,                              three years after
                                                       Affirmative and                         leaving the
                                                       defensive with a                        institution,
                                                       limitation period.                      regardless of the
                                                                                               borrower's
                                                                                               repayment status,
                                                                                               with some
                                                                                               extension for
                                                                                               those who are
                                                                                               involved in
                                                                                               arbitration
                                                                                               hearings.
Party that adjudicates borrower   Department........  Department, State   Department........  Department.
 defense claims.                                       court or arbiter.
Standard for borrower defense     Federal Standard..  State laws,         Federal standard..  Federal standard.
 claims.                                               Federal standard.
Borrower defense application      Application.......  Submit judgment     Select borrower     Application.
 process.                                              from state court    defense in
                                                       or similar using    response to wage
                                                       application,        garnishment or
                                                       Submit sworn        similar actions.
                                                       attestation or
                                                       application,
                                                       select borrower
                                                       defense in
                                                       response to wage
                                                       garnishment or
                                                       similar actions,
                                                       and Application.
Loans associated with BD claims.  Forbearance during  Forbearance during  Forbearance not     Forbearance during
                                   adjudication and    adjudication        necessary.          adjudication and
                                   interest accrues.   process and                             interest accrues.
                                                       interest accrues,
                                                       forbearance not
                                                       necessary.
Closed school discharge           120 days..........  120, 150, and 180   180 days..........  180 days.
 eligibility window.                                   days.
Closed school discharge           Borrower completed  Borrower completed  School offered a    Borrower completed
 exclusions.                       teach-out or        teach-out or        teach-out plan.     teach-out or
                                   transferred         transferred                             transferred
                                   credits.            credits; School                         credits.
                                                       offered a teach-
                                                       out plan.

[[Page 49901]]

 
Composite score calculation and   No FASB updates...  No changes until    Higher of current   Current leases
 timeline.                                             full negotiation    or FASB-updated     grandfathered;
                                                       of composite        score forever.      FASB applies on
                                                       score; no grace                         renewal.
                                                       period or phase-
                                                       in for FASB
                                                       updates; higher
                                                       of current or
                                                       FASB-updated
                                                       score forever;
                                                       and higher of
                                                       current or FASB-
                                                       updated score for
                                                       6 years, then
                                                       FASB-updated
                                                       score.
Financial responsibility          Reporting that      New reporting that  New reporting that  New reporting that
 triggers.                         automatically       may result in       may result in       may result in
                                   results in surety   surety request,     surety request.     surety request.
                                   request.            new reporting
                                                       that
                                                       automatically
                                                       results in surety
                                                       request.
Notification of mandatory         Prohibits           On website, during  Notification of     Notification of
 arbitration and class action      mandatory           entrance and exit   students on         students on
 waivers.                          arbitration         counseling, and     website and         website and
                                   clauses and class   annually by email   entrance            during entrance
                                   action waivers.     to students; no     counseling.         counseling.
                                                       required
                                                       notification
                                                       beyond the
                                                       enrollment
                                                       agreement;
                                                       notification of
                                                       students on
                                                       website and
                                                       during entrance
                                                       counseling.
----------------------------------------------------------------------------------------------------------------

6.2. Summary of Final Regulations
    The final regulations amend the baseline regulations to update 
composite score calculations to comply with new FASB standards, but 
provide a grandfathering period for existing leases; require 
institutions to disclose fewer adverse events to the Department; 
require notification regarding mandatory pre-dispute arbitration 
clauses or agreements or class-action prohibitions; expand the closed 
school discharge eligibility period; modify the conditions under which 
a Direct Loan borrower may qualify for false certification and closed 
school discharges; eliminate the automatic closed school discharge for 
schools that closed on or after July 1, 2020; revise the Federal 
standard for borrower defense claims for loans disbursed on or after 
July 1, 2020; eliminate the borrower defense group application 
provision for loans disbursed on or after July 1, 2020; and request 
evidence from institutions prior to completing adjudication of any 
borrower defense claims. Finally, there are changes to the regulations 
collection costs charged by guaranty agencies.
6.3. Discussion of Alternatives
    The Department considered a broad range of provisions relative to 
borrower defenses to repayment. One option would require borrowers to 
submit a judgment from a Federal or State court or arbitration panel to 
qualify for a defense to repayment discharge, which would not include a 
process for the Department to adjudicate claims because claimants would 
already have obtained a decision from a court or arbitrator at the 
State level. This alternative would place an increased burden on 
borrowers if they decide to hire a lawyer in order to present their 
claims to a State court or incur costs associated with an arbitration 
proceeding. Moreover, because consumer protection laws vary by State, a 
borrower filing a claim in one State may be subject to different 
criteria compared to a borrower filing a defense to repayment claim in 
another State. It may also be unclear as to which State serves as the 
relevant jurisdiction for a given borrower. A second option would be to 
rescind the 2016 regulations on borrower defenses and go back to the 
1995 regulations. In this alternative the Department would accept only 
defensive borrower defense claims to repayment applications or 
attestations and adjudicate them, applying a State law standard. Under 
this alternative, borrowers could elect to have loans placed in 
forbearance while their claims are adjudicated.
    The Department considered keeping the closed school discharge 
eligibility window at 120 days or expanding it to 150 or 180 days. 
Further, one option excludes students whose institutions offer them a 
teach-out plan from such a discharge, while another option excludes 
borrowers who complete a teach-out or transfer credits. One alternative 
considered for the false certification discharge provisions included 
rescission of the technical changes in the 2016 final regulations.
    Relative to pre-dispute arbitration and class-action waiver 
policies, alternatives included requiring an institution to notify 
current and potential students on its website, at entrance and exit 
counselling for all title IV borrowers, and annually to all enrolled 
students by email; and requiring no notification beyond the enrollment 
agreement.
    Lastly, alternatives were considered related to financial 
responsibility. One option would implement revisions to FASB standards 
in the calculation of an institution's composite score without a 
transition period and would prevent an institution from appealing the 
composite score calculation while others provided for a transition 
period or made no changes at all. Whether the Department would require 
(automatically, discretionarily, or at all) that the institution 
automatically provide a surety in the event that a financial 
responsibility risk event occurs was considered.
7. Regulatory Flexibility Act
    Section 605 of the Regulatory Flexibility Act (5 U.S.C. 603(a)) 
allows an agency to certify a rule if the rulemaking does not have a 
significant economic impact on a substantial number of small entities. 
This certification was revised from the NPRM

[[Page 49902]]

based upon public comment to improve its clarity.
    Comments: The Small Business Association Office of Advocacy 
expressed concern that the Department has certified that the proposed 
rule will not have a significant economic impact on a substantial 
number of small entities without providing a sufficient factual basis 
for the certification as required by the Regulatory Flexibility Act. 
The commenter stated that, at a minimum, the factual basis should 
include: (1) Identification of the regulated small entities based on 
the North American Industry Classification System; (2) the estimated 
number of regulated small entities; (3) a description of the economic 
impact of the rule on small entities; and (4) an explanation of why 
either the number of small entities is not substantial or the economic 
impact is not significant under the RFA. They noted that the 
Department's estimated costs are assumed to be the same for large and 
small entities, which the commenter objected to on the basis that small 
institutions have reduced economies of scale. The commenter objected to 
the Department's statement that potential economic impacts would be 
minimal and entirely beneficial to small institutions, and claimed the 
Department lacked data to support the statement. The commenter 
suggested that the Department should analyze significant alternatives, 
including: An early claim resolution process to minimize the potential 
cost of borrower defense claims; allowing borrowers to bring 
affirmative claims against institutions up to three years after the 
date of graduation; and applying a clear and convincing evidentiary 
standard.
    The commenter also points out that, currently, the Department 
requires institutions to maintain student data for three years after a 
student's graduation, but if a borrower may bring a claim at any point 
in repayment, schools must maintain student data for decades. 
Nevertheless, the record contains no information on how high this cost 
could be. The commenter expressed concern that the need to maintain 
student data will impose significant liability on small institutions 
for cybersecurity and student privacy. The commenter stated that these 
costs to smaller institutions should be analyzed, and recommended that 
the Department publish for public comment either a supplemental 
certification with a valid factual basis or an Initial Regulatory 
Flexibility Analysis (IRFA) before proceeding with this rulemaking.
    Discussion: We disagree that the Department did not provide 
sufficient factual basis for the Regulatory Flexibility Act 
certification. Specifically, the Department proposed in the Federal 
Register and requested comment on a definition of small institutions 
that it is capable of computing using its own data (see: SBA Office of 
Advocacy, August 2017, A Guide for Government Agencies: How to Comply 
with the Regulatory Flexibility Act, p. 15, available at: www.sba.gov/sites/default/files/advocacy/How-to-Comply-with-the-RFA-WEB.pdf). We 
have revised our certification to increase clarity and to account for 
changes in the final regulations, including a three-year period of 
limitations on borrower defense to repayment applications, including 
affirmative claims, from the date the borrower is no longer enrolled at 
the institution. Finally, the Department defines significant economic 
impact as a burden or cost to small institutions, and its estimates 
build upon those from the Net Budget Impacts and Paperwork Reduction 
Act of 1995 sections. As compared to the PB2020 baseline that assumed 
implementation of the 2016 final rule, the impacts of the borrower 
defense changes are benefits or reduced recoupments, and zero dollars 
are estimated as impacts of closed school and false certification 
discharges. Compliance costs for changes to financial responsibility 
reporting of risk events, disclosure of forced arbitration clauses is 
minimal. Specifically, the annual costs per entity were estimated at 
$178 to $266 and $489 the first year with $133 in subsequent years, 
respectively. Further, the two latter costs only occur at institutions 
that either have documented risks to their financial responsibility or 
that are proactively choosing to require mandatory pre-dispute 
arbitration agreements or class action waivers. While economies of 
scale may exist for larger institutions, the Department does not have 
information on the cost differential between types of institutions. The 
Department does not assume different costs for small institutions, 
especially for data storage for which additional options are being 
developed on a regular basis.
    As to proposed alternatives, the Department notes that claim 
resolution can occur between borrowers and institutions freely without 
the Department's involvement, via mediation or arbitration, or through 
other avenues if the parties so choose. These final regulations permit 
claims within a three-year limitation period with limited exceptions 
for borrowers engage in proceedings that would involve the institution 
and therefore indefinite records retention will not be required. 
Additionally, for reasons discussed at greater length above, the final 
rule adopts a preponderance of the evidence standard.
    Changes: Added information about percent of small proprietary 
institutions under $7 million threshold previously used by the 
Department for informational purposes.
    This rule directly affects all public nonprofit and proprietary 
institutions participating in title IV programs relative to the 
proposed financial responsibility provisions; it also affects a small 
proportion of institutions participating in title IV programs in each 
sector relative to the loan discharge requirements. As found in the 
Paperwork Reduction Act of 1995 section, there are currently 5,868 
institutions participating in title IV programs, of which 1,799 are 
private nonprofit and 1,896 are proprietary. Table 6 presents an 
estimated number and percent of small institutions using the 
Department's enrollment based definition for small institution. This 
definition applies equally across control categories and defines a 
small institution as one with under 500 FTE for 2-yr or less 
institutions, and 1,000 FTE for 4-year institutions.

[[Page 49903]]



                          Table 6--Small Institutions Under Enrollment-Based Definition
----------------------------------------------------------------------------------------------------------------
                 Level                            Type                 Small           Total          Percent
----------------------------------------------------------------------------------------------------------------
2-year................................  Public..................             342           1,240              28
2-year................................  Private.................             219             259              85
2-year................................  Proprietary.............           2,147           2,463              87
4-year................................  Public..................              64             759               8
4-year................................  Private.................             799           1,672              48
4-year................................  Proprietary.............             425             558              76
                                                                 -----------------------------------------------
    Total.............................  ........................           3,996           6,951              57
----------------------------------------------------------------------------------------------------------------

    In previous regulations, the Department used the small business 
definitions based on tax status that defined ``non-profit 
institutions'' as ``small organizations'' if they are independently 
owned and operated and not dominant in their field of operation, or as 
``small entities'' if they are institutions controlled by governmental 
entities with populations below 50,000. Compared to those definitions 
of small institutions which resulted in the Department considering all 
private nonprofit institutions as small and no public institutions as 
small, we think the enrollment-based approach establishes a reasonable 
framework applicable to all postsecondary institutions. Under the 
previous definition, proprietary institutions were considered small if 
they are independently owned and operated and not dominant in their 
field of operation with total annual revenue below $7,000,000. Using 
FY2017 IPEDs finance data for proprietary institutions, 50 percent of 
four-year and 90 percent of two-year or less proprietary institutions 
would be considered small. The enrollment-based definition captures a 
similar share of proprietary institutions will having the benefit of 
allowing comparison to other types of institutions on a consistent 
basis.
    Table 7 summarizes the summarizes number of institutions affected 
by these final regulations.

  Table 7--Estimated Count of Small Institutions Affected by the Final
                               Regulations
------------------------------------------------------------------------
                                               Small
                                           institutions   As % of  small
                                             affected       institutions
------------------------------------------------------------------------
Borrower Defense........................             355               9
Closed School...........................              57               1
False Certification.....................             183               5
Composite Score.........................           2,565              64
Composite Score Recalculation:
  Risk Event Reporting..................             641              16
  Mandatory.............................             417              10
Arbitration Disclosure..................             806              20
------------------------------------------------------------------------

    The Department has determined that the negative economic impact on 
small entities affected by the regulations will not be significant. As 
further explained in the Net Budget Impacts section, the Department 
estimates a reduction in recoupment due to borrower defense provisions 
and zero change in recoupment for closed school and false certification 
provisions. As further explained in the Paperwork Reduction Act of 1995 
section, compliance costs associated with the financial responsibility 
reporting and disclosure requirement changes are minimal and occur only 
at institutions that either have documented risks to their financial 
responsibility or that require pre-dispute mandatory arbitration 
agreements or class-action waivers. Table 8 captures estimated 
compliance costs per entity and across small institutions.

                                Table 8--Compliance Costs for Small Institutions
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Compliance area                                                   Small
                                                           institutions
                                                               affected     Cost range per
                                                                              institution
                                                          Estimated overall
                                                             cost range
----------------------------------------------------------------------------------------------------------------
Financial responsibility reporting.....................             417   $            $266   $        $110,922
                                                                          1                   7
                                                                          7                   4
                                                                          8                   ,
                                                                                              2
                                                                                              2
                                                                                              6
Mandatory arbitration disclosure.......................             806               * 489   1         394,134
                                                                          1                   0
                                                                          3                   7
                                                                          3                   ,
                                                                                              1
                                                                                              9
                                                                                              8
----------------------------------------------------------------------------------------------------------------

    Accordingly, the Secretary hereby certifies that these regulations 
will not have a significant economic impact on a substantial number of 
small entities.
8. Paperwork Reduction Act of 1995
    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department provides the general public and Federal agencies 
with an opportunity to comment on proposed and continuing collections 
of information in accordance with the Paperwork Reduction Act of 1995 
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps ensure that: The public 
understands the Department's collection instructions, respondents can 
provide the requested data in the desired format, reporting burden 
(time and financial resources) is minimized, collection instruments are 
clearly understood, and the Department can properly assess the impact 
of collection requirements on respondents.

[[Page 49904]]

    Sections 668.41, 668.171, appendices A & B to part 668, subpart L, 
and Sec. Sec.  685.206, 685.214, 685.215, and 685.304 of these final 
regulations contain information collection requirements. Additionally, 
burden assessed in Sec. Sec.  668.14, 668.41, 668.172, 674.33, 682.402, 
and 685.300 from the 2016 final regulations and 2018 NPRM is being 
removed based on these final regulations. Under the PRA, the Department 
has or will at the required time submit a copy of these sections and an 
Information Collections Request to OMB for its review.
    A Federal agency may not conduct or sponsor a collection of 
information unless OMB approves the collection under the PRA and the 
corresponding information collection instrument displays a currently 
valid OMB control number. Notwithstanding any other provision of law, 
no person is required to comply with, or is subject to penalty for 
failure to comply with, a collection of information if the collection 
instrument does not display a currently valid OMB control number.
    In these final regulations, we have displayed the control numbers 
assigned by OMB to any information collection requirements proposed in 
the NPRM and adopted in the final regulations.

Section 668.14 Program Participation Agreement

    Requirement: In the 2016 final regulations, Sec.  668.14(b)(32) 
required that an institution, as part of the program participation 
agreement, provide all enrolled students with a closed school discharge 
application and a written disclosure describing the benefits and 
consequences of a closed school discharge after the Department 
initiated any action to terminate the participation of the school or 
any occurrence of events specified in Sec.  668.14(b)(31) requiring the 
institution submit a teach out plan. The Department has since 
determined that it is the Department's, not the school's, 
responsibility to provide this information to students, and we are 
rescinding this regulatory requirement.
    Burden Calculation: The Department removes the associated burden of 
1,953 hours under the OMB Control Number 1845-0022 and will remove the 
hours on or after the effective date of the regulations.

                      Student Assistance General Provisions--OMB Control Number: 1845-0022
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $36.55
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                     from 2016
                                                                                                    Final Rule
----------------------------------------------------------------------------------------------------------------
Private.........................................              -8          -1,912            -340        $-12,427
Proprietary.....................................             -38          -9,082          -1,613         -58,955
                                                 ---------------------------------------------------------------
    Total.......................................             -46         -10,994          -1,953         -71,382
----------------------------------------------------------------------------------------------------------------

Section 668.41 Reporting and Disclosure of Information

    Requirements: Under the final changes in Sec. [thinsp]668.41(h), an 
institution that uses pre-dispute arbitration agreements and/or class 
action waivers will be required to disclose that information in a 
written plain language disclosure available to enrolled and prospective 
students, and the public. The regulatory language also prescribes the 
font size and location of the information on its website on the same 
page where admissions information is made available as well as in the 
admissions section of the institution's catalog.
    This replaces the previous ``Loan repayment warning for proprietary 
institutions'' regulatory text from the 2016 final regulations.
    Burden Calculation: There will be burden on schools to make 
additional disclosures of the institution's use of a pre-dispute 
arbitration agreement and/or class action waiver to students, 
prospective students, and the public under this final regulation. Based 
on informal conversations held with proprietary institutions during 
negotiated rulemaking and conferences, the Department believes such 
agreements are currently used primarily by proprietary institutions. Of 
the 1,888 proprietary institutions participating in the title IV, HEA 
programs, we estimate that 50 percent or 944 will use a pre-dispute 
arbitration agreement and/or class action waiver and will provide the 
required information electronically. We anticipate that it will take an 
average of 5 hours to develop, program, and post the required 
information to the websites where admission and tuition and fees 
information is made available. The estimated burden would be 4,720 
hours (944 x 5 hours) under OMB Control Number 1845-0004.

        Student Assistance General Provisions--Student Right To Know (SRK)--OMB Control Number: 1845-0004
----------------------------------------------------------------------------------------------------------------
                                                                                                   Cost  $44.41
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                     from 2018
                                                                                                       NPRM
----------------------------------------------------------------------------------------------------------------
Proprietary.....................................             944             944           4,720        $209,615
                                                 ---------------------------------------------------------------
    Total.......................................             944             944           4,720         209,615
----------------------------------------------------------------------------------------------------------------

    Due to these final regulatory text changes in 668.41(h), the 
previous burden assessed under the 2016 final regulations will be 
removed upon the effective date of these regulations. 5,346 hours will 
be deleted from OMB Control Number 1845-0004 on or after the effective 
date of the regulations.

[[Page 49905]]



        Student Assistance General Provisions--Student Right to Know (SRK)--OMB Control Number: 1845-0004
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $36.55
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                     from 2016
                                                                                                    Final Rule
----------------------------------------------------------------------------------------------------------------
Proprietary.....................................            -972          -1,949          -5,346       $-195,396
                                                 ---------------------------------------------------------------
    Total.......................................            -972          -1,949          -5,346        -195,396
----------------------------------------------------------------------------------------------------------------

Section 668.171 General

    Requirements: Under the final Sec.  668.171(f), in accordance with 
procedures to be established by the Secretary, an institution will 
notify the Secretary of any action or event described in the specified 
number of days after the action or event occurred. In the notice to the 
Secretary or in the institution's preliminary response, the institution 
may show that certain of the actions or events are not material or that 
the actions or events are resolved.
    Burden Calculation: There will be burden on institutions to provide 
the notice to the Secretary when one of the actions or events occurs. 
We estimate that an institution will take two hours per action to 
prepare the appropriate notice and to provide it to the Secretary. We 
estimate that 180 private institutions may have two events annually to 
report for a total burden of 720 hours (180 institutions x 2 events x 2 
hours). We estimate that 379 proprietary institutions may have three 
events annually to report for a total burden of 2,274 hours (379 
institutions x 3 events x 2 hours). This total burden of 2,994 hours 
will be assessed under OMB Control Number 1845-0022.

                      Student Assistance General Provisions--OMB Control Number: 1845-0022
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $44.41
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                  from 2018 NPRM
----------------------------------------------------------------------------------------------------------------
Private.........................................             180             360             720         $31,975
Proprietary.....................................             379           1,137           2,274         100,988
                                                 ---------------------------------------------------------------
    Total.......................................             559           1,497           2,994         132,963
----------------------------------------------------------------------------------------------------------------

Section 668.172 Financial Ratios

    Requirements: The proposed changes to Sec.  [thinsp]668.172(d) from 
the NPRM have been deleted from these final regulations.
    Burden Calculation: The proposed burden is being deleted from the 
Information Collection Request that was filed with the NPRM. There is 
no longer an estimated increase in burden of 232 hours based on changes 
to Sec.  668.172 under the OMB Control Number 1845-0022.

                      Student Assistance General Provisions--OMB Control Number: 1845-0022
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $44.41
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                  from 2018 NPRM
----------------------------------------------------------------------------------------------------------------
Private.........................................            -450            -450            -113         $-5,018
Proprietary.....................................            -474            -474            -119          -5,285
                                                 ---------------------------------------------------------------
    Total.......................................            -924            -924            -232         -10,303
----------------------------------------------------------------------------------------------------------------

Appendix A and B for Section 668--Subpart L--Financial Responsibility

    Requirements: Under final Section 2 for appendix A and B, 
proprietary and private institutions will be required to submit a 
Supplemental Schedule as part of their audited financial statements. 
With the update from the FASB, some elements needed to calculate the 
composite score will no longer be readily available in the audited 
financial statements, particularly for private institutions. With the 
updates to the Supplemental Schedule to reference the financial 
statements, this issue will be addressed in a convenient and 
transparent manner for both the schools and the Department by showing 
how the composite score is calculated.
    Burden Calculation: There will be burden on institutions to provide 
the Supplemental Schedule to the Department. During the negotiations, 
the members of the negotiated rulemaking subcommittee indicated that 
they believed that as the information will be readily available upon 
completion of the required audit the burden would be minimal. We 
estimate that it will take each proprietary and private institution one 
hour to prepare the Supplemental Schedule and have it made available 
for posting along with the annual audit. We estimate that 1,799 private 
schools will require 1 hour of burden to prepare the Supplemental 
Schedule and have it made available for posting along with the annual 
audit for a total burden of 1,799 hours (1,799

[[Page 49906]]

institutions x 1 hour). We estimate that 1,888 proprietary schools will 
require 1 hour of burden to prepare the Supplemental Schedule and have 
it made available for posting along with the annual audit for a total 
burden of 1,888 hours (1,888 institutions x 1 hour). This total burden 
of 3,695 hours will be assessed under OMB Control Number 1845-0022.
    The total additional burden under OMB Control Number 1845-0022 will 
be 6,921 hours.

                      Student Assistance General Provisions--OMB Control Number: 1845-0022
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $44.41
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                  from 2018 NPRM
----------------------------------------------------------------------------------------------------------------
Private.........................................           1,799           1,799           1,799         $79,894
Proprietary.....................................           1,896           1,896           1,896          84,201
                                                 ---------------------------------------------------------------
    Total.......................................           3,695           3,695           3,695         164,095
----------------------------------------------------------------------------------------------------------------

Section 682.402 Death, Disability, Closed School, False Certification, 
Unpaid Refunds, and Bankruptcy Payments

    Requirements: The proposed changes to Sec.  [thinsp]682.402 
regarding the requirement that a guaranty agency provide information to 
a borrower about how to request a review of the guaranty agency's 
denial of a closed school discharge from the Secretary from the NPRM 
are not included in the final regulations.
    Burden Calculation: The proposed burden is being deleted from the 
Information Collection Request that was filed with the NPRM. There is 
no longer an estimated increase in burden of 410 hours based on the 
changes to Sec.  682.402(d)(6)(ii)(F) under OMB Control Number 1845-
0020.

                Federal Family Education Loan Program Regulations--OMB Control Number: 1845-0020
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $44.41
                                                                                                        per
        Institution type guaranty agency            Respondent       Responses     Burden hours     institution
                                                                                                  from 2018 NPRM
----------------------------------------------------------------------------------------------------------------
Private.........................................             -11             -89            -188         $-8,349
Public..........................................             -13            -105            -222          -9,859
                                                 ---------------------------------------------------------------
    Total.......................................             -24            -194            -410         -18,208
----------------------------------------------------------------------------------------------------------------

Section 685.206 Borrower Responsibilities and Defenses

    Requirements: Under final Sec.  [thinsp]685.206(e), a defense to 
repayment discharge claim on a Direct Loan disbursed after July 1, 
2020, will be evaluated under the Federal standard using an application 
approved by the Secretary. Under final Sec.  [thinsp]685.206(e), a 
defense to repayment must be submitted within three years from the date 
the student is no longer enrolled at the institution.
    Burden Calculation: We believe that the burden will be associated 
with the new form that the borrower receives that accompanies the 
notice of action from the Department. The new form will be completed 
and made available for comment through a full public clearance package 
before being made available for use.

Section 685.214 Closed School Discharge

    Requirements: Under final Sec.  685.214(c), the number of days that 
a borrower must have withdrawn from a closed school to qualify for a 
closed school discharge will be extended from 120 days to 180 days, for 
loans first disbursed on or after July 1, 2020. Additionally, if a 
closed school provided a borrower an opportunity to complete his or her 
academic program through a teach-out plan approved by the school's 
accrediting agency and, if applicable, the school's State authorizing 
agency, the borrower will not qualify for a closed school discharge. 
The final regulation further provides that the Secretary may extend 
that 180 days further if there is a determination that exceptional 
circumstances justify an extension.
    Burden Calculation: The extension from 120 days to 180 days for 
withdrawal prior to the closing of the school will require an update to 
the current closed school discharge application form with OMB Control 
Number 1845-0058. We do not believe that the language update will 
change the amount of time currently assessed for the borrower to 
complete the form from those which has already been approved. The form 
update will be completed and made available for comment through a full 
public clearance package before being made available for use by the 
effective date of the regulations.

Section 685.215 Discharge for False Certification of Student 
Eligibility or Unauthorized Payment

    Requirements: Under final Sec.  [thinsp]685.215, the application 
requirements for false certification discharges will be amended to 
reflect the current practice of requiring a borrower to apply for the 
discharge using a Federal application form instead of a sworn 
statement. The final regulations also will remove the term ``ability to 
benefit'' to reflect changes to the HEA. Under the final regulatory 
changes, a Direct Loan borrower will not qualify for a false 
certification discharge based on not having a high school diploma in 
cases when the borrower did not obtain an official transcript or 
diploma from the high school, and the borrower provided an attestation 
to the institution that the borrower was a high school graduate.

[[Page 49907]]

    Burden Calculation: The clarification to require the submission of 
a Federal application to receive a discharge and updating of the form 
to remove ``ability to benefit'' language will require an update to the 
current false certification application form with OMB Control Number 
1845-0058. We do not believe that the language update will change the 
amount of time currently assessed for the borrower to complete the 
form, nor an increase in the number of borrowers who may qualify, to 
complete the form from those that have already been approved. The form 
update will be completed and made available for comment through a full 
public clearance package before being made available for use by the 
effective date of the regulations.

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

    Requirements: Under final Sec.  [thinsp]685.300, paragraphs (d) 
through (i) finalized in the 2016 final regulations covering borrower 
defense claims in an internal dispute process, class action bans, pre-
dispute arbitration agreements, submission of arbitral records, 
submission of judicial records, and definitions are removed from the 
regulations.
    Burden Calculation: Due to these final regulatory text changes, the 
previous burden assessed under paragraphs (e) through (h) in the 2016 
final regulation will be removed upon the effective date of these 
regulations. 179,362 hours will be deleted from OMB Control Number 
1845-0143 on or after the effective date of these regulations.

 Agreements Between and Eligible School and the Secretary To Participate in the Direct Loan Program--OMB Control
                                                Number: 1845-0143
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $36.55
                                                                                                        per
                Institution type                    Respondent       Responses     Burden hours     institution
                                                                                                     from 2016
                                                                                                    Final rule
----------------------------------------------------------------------------------------------------------------
Proprietary.....................................          -1,959      -1,010,519        -179,362     $-6,555,681
                                                 ---------------------------------------------------------------
    Total.......................................          -1,959      -1,010,519        -179,362      -6,555,681
----------------------------------------------------------------------------------------------------------------

Section 685.304 Counseling Borrowers

    Requirements: Under final Sec.  [thinsp]685.304 there are changes 
to the requirements to counsel Federal student loan borrowers prior to 
making the first disbursement of a Federal student loan (entrance 
counseling). Institutions that use pre-dispute arbitration agreements 
and/or class action waivers will be required to include in mandatory 
entrance counseling plain-language information about the institution's 
process for initiating arbitration and dispute resolution, including 
who the borrower may contact regarding a dispute related to educational 
services for which the loan was made. Institutions that require 
borrowers to accept a pre-dispute arbitration agreement and/or class 
action waiver will be required to provide information in writing to the 
student borrower about the plain language meaning of the agreement, 
when it would apply, how to enter into the process, and who to contact 
with questions.
    Burden Calculation: We believe there will be burden on the 
institutions to create any institution specific pre-dispute arbitration 
agreement and/or class action waivers and provide that information in 
addition to complying with the current entrance counseling 
requirements. Of the 1,888 participating proprietary institutions, we 
estimate that 50 percent or 944 institutions will need to create 
additional entrance counseling information regarding the use of the 
pre-dispute arbitration agreement and/or class action waivers to 
provide to their student borrowers. We anticipate that it will take an 
average of 3 hours to adapt the information provided in Sec.  
[thinsp]668.41 as a part of the required entrance counseling, to 
identify staff who will be able to answer additional questions, and to 
obtain evidence indicating the provision of the material for a total of 
2,832 hours (944 x 3 hours).
    Additionally, we believe that there will be minimum additional 
burden for borrowers to review the information when completing the 
required entrance counseling and provide the required evidence that the 
borrowers received the information. In calendar year 2017, 684,813 
Direct Loan borrower completed entrance counseling using the 
Department's on-line entrance counseling. Assuming the same 50 percent 
of borrowers attend a school that uses pre-dispute arbitration 
agreements and/or class action waivers will require five minutes to 
review the material and provide evidence of receipt of the information, 
we estimate a total of 27,393 hours of additional burden (342,407 
borrowers time .08 (5 minutes) = 27,393 hours). There will be a total 
increase in burden of 30,225 hours under OMB Control Number 1845-0021.

           William D. Ford Federal Direct Loan Program (DL) Regulations--OMB Control Number: 1845-0021
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cost $44.41
                                                                                                        per
                                                                                                   institution;
                Institution type                    Respondent       Responses     Burden hours     $16.30 per
                                                                                                    individual
                                                                                                     from 2018
                                                                                                       NPRM
----------------------------------------------------------------------------------------------------------------
Proprietary.....................................             944             944           2,832        $125,769
Individual......................................         342,407         342,407          27,393         446,506
                                                 ---------------------------------------------------------------
    Total.......................................         343,351         343,351          30,225         572,275
----------------------------------------------------------------------------------------------------------------


[[Page 49908]]

    Consistent with the discussions above, the following chart 
describes the sections of the final regulations involving information 
collections, the information being collected and the collections that 
the Department will submit to OMB for approval and public comment under 
the PRA, and the estimated costs associated with the information 
collections. The monetized net cost of the burden for institutions, 
lenders, guaranty agencies and students, using wage data developed 
using Bureau of Labor Statistics data, available at https://www.bls.gov/ooh/management/postsecondary-education-administrators.htm 
is $1,078,948 for all positive entries as shown in the chart below. 
With the deletion of certain regulations, there will be a corresponding 
savings of $-6,850,970 upon the effective date of these regulations. 
This cost is based on an estimated hourly rate of $44.41 for 
institutions, lenders, and guaranty agencies and $16.30 for students 
unless otherwise noted in the table.

----------------------------------------------------------------------------------------------------------------
                                                                            OMB control No.
                                                                             and estimated
    Regulatory  section                 Information collection             burden (change in    Estimated costs
                                                                                burden)
----------------------------------------------------------------------------------------------------------------
Sec.   [thinsp]668.14......  In the 2016 final regulations, Sec.          1845-0022; -1,953.  $-71,382. This
                              668.14(b)(32) required that an               The Department      amount was based
                              institution, as part of the program          will remove the     on the 2016 cost
                              participation agreement, provide all         hours on or after   of 36.55/hr for
                              enrolled students with a closed school       the effective       institutions.
                              discharge application and a written          date of the
                              disclosure describing the benefits and       regulations.
                              consequences of a closed school discharge
                              under certain circumstance. The Department
                              has since determined that it is the
                              Department's, not the school's,
                              responsibility to provide this information
                              to students, and we are rescinding this
                              regulatory requirement.
Sec.   [thinsp]668.41......  Under the final regulatory language in Sec.  1845-0004; +4,720   $209,615.
                                668.41(h) institutions that use pre-       hours.
                              dispute arbitration agreements and/or
                              class action waivers will be required to
                              disclose that information in a plain
                              language disclosure available to enrolled
                              and prospective students, and the public
                              on its website where admissions and
                              tuition and fees information is made
                              available.
                             Additionally due to the changes in the       The Department      $-195,396. This
                              final regulatory text for Sec.               will remove the     amount was based
                              668.41(h), the burden of 5,346 hour          hours on or after   on the 2016 cost
                              previously assessed in the 2016 final        the effective       of 36.55/hr for
                              regulations will be deleted from this        date of the         institutions.
                              information collection upon the effective    regulations. -
                              date of this regulatory package.             5,346 hours.
Sec.   [thinsp]668.171.....  Under the final regulatory language in Sec.  1845-0022; +2,994   $132,964.
                                668.171(f) in accordance with procedures   hours.
                              to be established by the Secretary, an
                              institution will notify the Secretary of
                              any action or event described in the
                              specified number of days after the action
                              or event occurs. In the notice to the
                              Secretary or in the institution's
                              response, the institution may show that
                              certain of the actions or events are not
                              material or that the actions or events are
                              resolved.
Sec.   [thinsp]668.172.....  The proposed changes to Sec.                 1845-0022; -232     $-10,303.
                              [thinsp]668.172(d) from the NPRM have been   hours.
                              deleted from the Final rule.
Appendix A & B of 668        Under final Section 2 for appendix A and B,  1845-0022; +3,695   $164,095.
 subpart L.                   proprietary and private institutions will    hours.
                              be required to submit a Supplemental
                              Schedule as part of their audited
                              financial statements. With the update from
                              the Financial Standards Accounting Board
                              (FASB) some elements needed to calculate
                              the composite score will no longer be
                              readily available in the audited financial
                              statements, particularly for private
                              institutions. With the updates to the
                              Supplemental Schedule to reference the
                              financial statements, this issue will be
                              addressed in a convenient and transparent
                              manner for both the institutions and the
                              Department by showing how the composite
                              score is calculated.
Sec.   682.402.............  The final regulations no longer incorporate  1845-0020; -410     -$18,208.
                              the proposed change requiring guaranty       hours.
                              agencies to provide information to a
                              borrower about how to request a review of
                              an agency's denial of a closed school
                              discharge from the Secretary. This removes
                              the proposed burden.
Sec.   [thinsp]685.206.....  Under final Sec.   [thinsp]685.206(e), a     A new collection    $0.
                              borrower defense claim related to a direct   will be filed
                              loan disbursed after July 1, 2020 will be    closer to the
                              evaluated under the Federal standard.        implementation of
                              Under final Sec.   [thinsp]685.206(e), a     this requirement;
                              borrower defense must be submitted within    +0 hours.
                              three years from the date the borrower is
                              no longer enrolled at the institution.
Sec.   [thinsp]685.214.....  Under the final regulations, the number of   1845-0058; +0       $0.
                              days that a borrower may have withdrawn      hours.
                              from a closed institution to qualify for a
                              closed school discharge will be extended
                              from 120 days to 180 days for loans first
                              disbursed after July 1, 2020. The final
                              language further allows that the Secretary
                              may extend that 180 days further if there
                              is a determination that exceptional
                              circumstances justify an extension.

[[Page 49909]]

 
Sec.   [thinsp]685.215.....  Under the final regulatory language in Sec.  1845-0058; +0       $0.
                                [thinsp]685.215, the application           hours.
                              requirements for false certification
                              discharges are amended to reflect the
                              current practice of requiring a borrower
                              to apply for the discharge using a
                              completed application form instead of a
                              sworn statement. The final regulatory
                              language removed the use of term ``ability
                              to benefit'' to bring the definition in
                              line with the current HEA language. Under
                              final regulatory language, a Direct Loan
                              borrower will not qualify for a false
                              certification discharge based on not
                              having a high school diploma provide that
                              in cases when they did not obtain an
                              official transcript or diploma from the
                              high school, and the borrower provided an
                              attestation to the institution that the
                              borrower was a high school graduate. The
                              attestation will have to be provided under
                              penalty of perjury.
Sec.   [thinsp]685.300.....  Under final Sec.   [thinsp]685.300 previous  1845-0143; -        $-6,555,681. This
                              paragraphs (d) through (i) which covered     179,362. The        amount was based
                              borrower defense claims in an internal       Department will     on the 2016 cost
                              dispute process, class action bans, pre-     remove the hours    of 36.55/hr for
                              dispute arbitration agreements, submission   on or after the     institutions.
                              of arbitral records, submission of           effective date of
                              judicial records, and definitions are        the regulations.
                              removed from regulation.
Sec.   [thinsp]685.304.....  Under final Sec.   [thinsp]685.304 there     1845-0021; +30,225  Total: $572,275.
                              are changes to the requirements to counsel   hours (2,832        Inst. 125,769;
                              Federal student loan borrowers prior to      institutions        Indiv. 446,506.
                              making the first disbursement of a Federal   +27,393
                              student loan. Institutions that use pre-     individual hours).
                              dispute arbitration agreements and/or
                              class action waivers include in the
                              required entrance counseling information
                              on the institution's internal dispute
                              resolution process and who the borrower
                              may contact regarding a dispute related to
                              educational services for which the loan
                              was made. Institutions that require a pre-
                              dispute arbitration agreement and/or class
                              action waiver will be required to review
                              with the student borrower the agreement
                              and when it will apply, how to enter into
                              the process and who to contact with
                              questions.
----------------------------------------------------------------------------------------------------------------

Collections of Information

    The total burden hours and change in burden hours associated with 
each OMB Control number affected by the regulations as of the effective 
date of the regulations are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                              Total proposed    Proposed change
                                Control No.                                    burden hours     in burden hours
----------------------------------------------------------------------------------------------------------------
1845-0004.................................................................             23,390               -626
1845-0020.................................................................          8,249,520               -410
1845-0021.................................................................            739,746            +30,225
1845-0022.................................................................          2,286,015             +4,504
1845-0143.................................................................                  0           -179,362
                                                                           -------------------------------------
    Total.................................................................         11,298,671           -145,669
----------------------------------------------------------------------------------------------------------------

    Accessible Format: Individuals with disabilities can obtain this 
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audiotape, or compact disc) on request to the person listed under FOR 
FURTHER INFORMATION CONTACT.
    Electronic Access to This Document: The official version of this 
document is the document published in the Federal Register. You may 
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by the Department.

List of Subjects

34 CFR Part 668

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

34 CFR Parts 682 and 685

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

    Dated: September 3, 2019.
Betsy DeVos,
Secretary of Education.

    For the reasons discussed in the preamble, the Secretary of 
Education amends parts 668, 682, and 685, of title 34 of the Code of 
Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

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


[[Page 49910]]


    Authority:  20 U.S.C. 1001-1003, 1070g, 1085, 1088, 1091, 1092, 
1094, 1099c, 1099c-1, 1221-3, and 1231a, unless otherwise noted.
    Section 668.14 also issued under 20 U.S.C. 1085, 1088, 1091, 
1092, 1094, 1099a-3, 1099c, and 1141.
    Section 668.41 also issued under 20 U.S.C. 1092, 1094, 1099c.
    Section 668.91 also issued under 20 U.S.C. 1082, 1094.
    Section 668.171 also issued under 20 U.S.C. 1094 and 1099c and 
section 4 of Pub. L. 95-452, 92 Stat. 1101-1109.
    Section 668.172 also issued under 20 U.S.C. 1094 and 1099c and 
section 4 of Pub. L. 95-452, 92 Stat. 1101-1109.
    Section 668.175 also issued under 20 U.S.C. 1094 and 1099c.


Sec.  668.14  [Amended]

0
2. Section 668.14 is amended:
0
a. In paragraph (b)(30)(ii)(C), by adding the word ``and'' after ``by 
the institution;'';
0
b. In paragraph (b)(31)(v), by removing ``; and'' and adding a period 
in its place;
0
c. Removing paragraph (b)(32); and
0
d. Removing the parenthetical authority citation at the end of the 
section.

0
3. Section 668.41 is amended:
0
a. In paragraph (a), in the definition of ``Undergraduate students,'' 
by adding the words ``at or'' before ``below'', and adding the word 
``level'' after ``baccalaureate'';
0
b. In paragraph (c)(2) introductory text, by removing ``or (g)'' and 
adding in its place ``(g), or (h)'';
0
c. By revising paragraph (h); and
0
d. By removing paragraph (i) and the parenthetical authority citation 
at the end of the section.
    The revision reads as follows:


Sec.  668.41  Reporting and disclosure of information.

* * * * *
    (h) Enrolled students, prospective students, and the public--
disclosure of an institution's use of pre-dispute arbitration 
agreements and/or class action waivers as a condition of enrollment for 
students receiving title IV Federal student aid. (1)(i) An institution 
of higher education that requires students receiving title IV Federal 
student aid to accept or agree to a pre-dispute arbitration agreement 
and/or a class action waiver as a condition of enrollment must make 
available to enrolled students, prospective students, and the public, a 
written (electronic) plain language disclosure of those conditions of 
enrollment. This plain language disclosure also must state that: The 
school cannot require the borrower to participate in arbitration or any 
internal dispute resolution process offered by the institution prior to 
filing a borrower defense to repayment application with the Department 
pursuant to Sec.  685.206(e); the school cannot, in any way, require 
students to limit, relinquish, or waive their ability to pursue filing 
a borrower defense claim, pursuant to Sec.  685.206(e) at any time; and 
any arbitration, required by a pre-dispute arbitration agreement, tolls 
the limitations period for filing a borrower defense to repayment 
application pursuant to Sec.  685.206(e)(6)(ii).
    (ii) All statements in the plain language disclosure must be in 12-
point font on the institution's admissions information web page and in 
the admissions section of the institution's catalogue. The institution 
may not rely solely on an intranet website for the purpose of providing 
this notice to prospective students or the public.
    (2) For the purposes of this paragraph (h), the following 
definitions apply:
    (i) Class action means a lawsuit or an arbitration proceeding in 
which one or more parties seeks class treatment pursuant to Federal 
Rule of Civil Procedure 23 or any State process analogous to Federal 
Rule of Civil Procedure 23.
    (ii) Class action waiver means any agreement or part of an 
agreement, regardless of its form or structure, between a school, or a 
party acting on behalf of a school, and a student that relates to the 
making of a Direct Loan or the provision of educational services for 
which the student received title IV funding and prevents an individual 
from filing or participating in a class action that pertains to those 
services.
    (iii) Pre-dispute arbitration agreement means any agreement or part 
of an agreement, regardless of its form or structure, between a school, 
or a party acting on behalf of a school, and a student requiring 
arbitration of any future dispute between the parties relating to the 
making of a Direct Loan or provision of educational services for which 
the student received title IV funding.
* * * * *

0
4. Section 668.91 is amended by revising paragraph (a)(3) and removing 
the parenthetical authority citation.
    The revisions read as follows:


Sec.  668.91  Initial and final decisions.

    (a) * * *
    (3) Notwithstanding the provisions of paragraph (a)(2) of this 
section--
    (i) If, in a termination action against an institution, the hearing 
official finds that the institution has violated the provisions of 
Sec.  668.14(b)(18), the hearing official also finds that termination 
of the institution's participation is warranted;
    (ii) If, in a termination action against a third-party servicer, 
the hearing official finds that the servicer has violated the 
provisions of Sec.  668.14(b)(18), the hearing official also finds that 
termination of the institution's participation or servicer's 
eligibility is warranted;
    (iii) In an action brought against an institution or third-party 
servicer that involves its failure to provide a letter of credit, or 
other financial protection under Sec.  668.15 or Sec.  668.171(c) or 
(d), the hearing official finds that the amount of the letter of credit 
or other financial protection established by the Secretary under Sec.  
668.175 is appropriate, unless the institution demonstrates that the 
amount was not warranted because--
    (A) For financial protection demanded based on events or conditions 
described in Sec.  668.171(c) or (d), the events or conditions no 
longer exist, have been resolved, or the institution demonstrates that 
it has insurance that will cover all potential debts and liabilities 
that arise from the triggering event or condition. The institution can 
demonstrate it has insurance that covers risk by presenting the 
Department with a copy of the insurance policy that makes clear the 
institution's coverage;
    (B) For financial protection demanded based on the grounds 
identified in Sec.  668.171(d), the action or event does not and will 
not have a material adverse effect on the financial condition, 
business, or results of operations of the institution;
    (C) The institution has proffered alternative financial protection 
that provides students and the Department adequate protection against 
losses resulting from the risks identified by the Secretary. Adequate 
protection may consist of one or more of the following--
    (1) An agreement with the Secretary that a portion of the funds due 
to the institution under a reimbursement or heightened cash monitoring 
funding arrangement will be temporarily withheld in such amounts as 
will meet, no later than the end of a six to 12 month period, the 
amount of the required financial protection demanded; or
    (2) Other form of financial protection specified by the Secretary 
in a notice published in the Federal Register.
    (iv) In a termination action taken against an institution or third-
party servicer based on the grounds that the institution or servicer 
failed to comply with the requirements of Sec.  668.23(c)(3), if the 
hearing official finds that the

[[Page 49911]]

institution or servicer failed to meet those requirements, the hearing 
official finds that the termination is warranted;
    (v)(A) In a termination action against an institution based on the 
grounds that the institution is not financially responsible under Sec.  
668.15(c)(1), the hearing official finds that the termination is 
warranted unless the institution demonstrates that all applicable 
conditions described in Sec.  668.15(d)(4) have been met; and
    (B) In a termination or limitation action against an institution 
based on the grounds that the institution is not financially 
responsible--
    (1) Upon proof of the conditions in Sec.  668.174(a), the hearing 
official finds that the limitation or termination is warranted unless 
the institution demonstrates that all the conditions in Sec.  
668.175(h)(2) have been met; and
    (2) Upon proof of the conditions in Sec.  668.174(b)(1), the 
hearing official finds that the limitation or termination is warranted 
unless the institution demonstrates that all applicable conditions 
described in Sec.  668.174(b)(2) or Sec.  668.175(h)(2) have been met.
* * * * *

0
5. Section 668.171 is revised to read as follows:


Sec.  668.171  General.

    (a) Purpose. To begin and to continue to participate in any title 
IV, HEA program, an institution must demonstrate to the Secretary that 
it is financially responsible under the standards established in this 
subpart. As provided under section 498(c)(1) of the HEA, the Secretary 
determines whether an institution is financially responsible based on 
the institution's ability to--
    (1) Provide the services described in its official publications and 
statements;
    (2) Meet all of its financial obligations; and
    (3) Provide the administrative resources necessary to comply with 
title IV, HEA program requirements.
    (b) General standards of financial responsibility. Except as 
provided under paragraphs (c), (d), and (h) of this section, the 
Secretary considers an institution to be financially responsible if the 
Secretary determines that--
    (1) The institution's Equity, Primary Reserve, and Net Income 
ratios yield a composite score of at least 1.5, as provided under Sec.  
668.172 and appendices A and B to this subpart;
    (2) The institution has sufficient cash reserves to make required 
returns of unearned title IV, HEA program funds, as provided under 
Sec.  668.173;
    (3) The institution is able to meet all of its financial 
obligations and provide the administrative resources necessary to 
comply with title IV, HEA program requirements. An institution is not 
deemed able to meet its financial or administrative obligations if--
    (i) It fails to make refunds under its refund policy or return 
title IV, HEA program funds for which it is responsible under Sec.  
668.22;
    (ii) It fails to make repayments to the Secretary for any debt or 
liability arising from the institution's participation in the title IV, 
HEA programs; or
    (iii) It is subject to an action or event described in paragraph 
(c) of this section (mandatory triggering events), or an action or 
event that the Secretary determines is likely to have a material 
adverse effect on the financial condition of the institution under 
paragraph (d) of this section (discretionary triggering events); and
    (4) The institution or persons affiliated with the institution are 
not subject to a condition of past performance under Sec.  668.174(a) 
or (b).
    (c) Mandatory triggering events. An institution is not able to meet 
its financial or administrative obligations under paragraph (b)(3)(iii) 
of this section if--
    (1) After the end of the fiscal year for which the Secretary has 
most recently calculated an institution's composite score, one or more 
of the following occurs:
    (i)(A) The institution incurs a liability from a settlement, final 
judgment, or final determination arising from an administrative or 
judicial action or proceeding initiated by a Federal or State entity. A 
determination arising from an administrative action or proceeding 
initiated by a Federal or State entity means the determination was made 
only after an institution had notice and an opportunity to submit its 
position before a hearing official. A final determination arising from 
an administrative action or proceeding initiated by a Federal entity 
includes a final determination arising from any administrative action 
or proceeding initiated by the Secretary. For purposes of this section, 
the liability is the amount stated in the final judgment or final 
determination. A judgment or determination becomes final when the 
institution does not appeal or when the judgment or determination is 
not subject to further appeal; or
    (B) For a proprietary institution whose composite score is less 
than 1.5, there is a withdrawal of owner's equity from the institution 
by any means (e.g., a capital distribution that is the equivalent of 
wages in a sole proprietorship or partnership, a distribution of 
dividends or return of capital, or a related party receivable), unless 
the withdrawal is a transfer to an entity included in the affiliated 
entity group on whose basis the institution's composite score was 
calculated; and
    (ii) As a result of that liability or withdrawal, the institution's 
recalculated composite score is less than 1.0, as determined by the 
Secretary under paragraph (e) of this section.
    (2) For a publicly traded institution--
    (i) The U.S. Securities and Exchange Commission (SEC) issues an 
order suspending or revoking the registration of the institution's 
securities pursuant to Section 12(j) of the Securities and Exchange Act 
of 1934 (the ``Exchange Act'') or suspends trading of the institution's 
securities on any national securities exchange pursuant to Section 
12(k) of the Exchange Act; or
    (ii) The national securities exchange on which the institution's 
securities are traded notifies the institution that it is not in 
compliance with the exchange's listing requirements and, as a result, 
the institution's securities are delisted, either voluntarily or 
involuntarily, pursuant to the rules of the relevant national 
securities exchange.
    (iii) The SEC is not in timely receipt of a required report and did 
not issue an extension to file the report.
    (3) For the period described in (c)(1) of this section, when the 
institution is subject to two or more discretionary triggering events, 
as defined in paragraph (d) of this section, those events become 
mandatory triggering events, unless a triggering event is resolved 
before any subsequent event(s) occurs.
    (d) Discretionary triggering events. The Secretary may determine 
that an institution is not able to meet its financial or administrative 
obligations under paragraph (b)(3)(iii) of this section if any of the 
following events is likely to have a material adverse effect on the 
financial condition of the institution--
    (1) The accrediting agency for the institution issued an order, 
such as a show cause order or similar action, that, if not satisfied, 
could result in the withdrawal, revocation or suspension of 
institutional accreditation for failing to meet one or more of the 
agency's standards;
    (2)(i) The institution violated a provision or requirement in a 
security or loan agreement with a creditor; and
    (ii) As provided under the terms of that security or loan 
agreement, a monetary or nonmonetary default or delinquency event 
occurs, or other events occur, that trigger or enable the creditor to 
require or impose on the

[[Page 49912]]

institution, an increase in collateral, a change in contractual 
obligations, an increase in interest rates or payments, or other 
sanctions, penalties, or fees;
    (3) The institution's State licensing or authorizing agency 
notified the institution that it has violated a State licensing or 
authorizing agency requirement and that the agency intends to withdraw 
or terminate the institution's licensure or authorization if the 
institution does not take the steps necessary to come into compliance 
with that requirement;
    (4) For its most recently completed fiscal year, a proprietary 
institution did not receive at least 10 percent of its revenue from 
sources other than title IV, HEA program funds, as provided under Sec.  
668.28(c);
    (5) As calculated by the Secretary, the institution has high annual 
dropout rates; or
    (6) The institution's two most recent official cohort default rates 
are 30 percent or greater, as determined under subpart N of this part, 
unless--
    (i) The institution files a challenge, request for adjustment, or 
appeal under that subpart with respect to its rates for one or both of 
those fiscal years; and
    (ii) That challenge, request, or appeal remains pending, results in 
reducing below 30 percent the official cohort default rate for either 
or both of those years, or precludes the rates from either or both 
years from resulting in a loss of eligibility or provisional 
certification.
    (e) Recalculating the composite score. The Secretary recalculates 
an institution's most recent composite score by recognizing the actual 
amount of the liability, or cumulative liabilities, incurred by an 
institution under paragraph (c)(1)(i)(A) of this section as an expense 
or accounting for the actual withdrawal, or cumulative withdrawals, of 
owner's equity under paragraph (c)(1)(i)(B) of this section as a 
reduction in equity, and accounts for that expense or withdrawal by--
    (1) For liabilities incurred by a proprietary institution--
    (i) For the primary reserve ratio, increasing expenses and 
decreasing adjusted equity by that amount;
    (ii) For the equity ratio, decreasing modified equity by that 
amount; and
    (iii) For the net income ratio, decreasing income before taxes by 
that amount;
    (2) For liabilities incurred by a non-profit institution--
    (i) For the primary reserve ratio, increasing expenses and 
decreasing expendable net assets by that amount;
    (ii) For the equity ratio, decreasing modified net assets by that 
amount; and
    (iii) For the net income ratio, decreasing change in net assets 
without donor restrictions by that amount; and
    (3) For the amount of owner's equity withdrawn from a proprietary 
institution--
    (i) For the primary reserve ratio, decreasing adjusted equity by 
that amount; and
    (ii) For the equity ratio, decreasing modified equity by that 
amount.
    (f) Reporting requirements. (1) In accordance with procedures 
established by the Secretary, an institution must notify the Secretary 
of the following actions or events--
    (i) For a liability incurred under paragraph (c)(1)(i)(A) of this 
section, no later than 10 days after the date of written notification 
to the institution of the final judgment or final determination;
    (ii) For a withdrawal of owner's equity described in paragraph 
(c)(1)(i)(B) of this section--
    (A) For a capital distribution that is the equivalent of wages in a 
sole proprietorship or partnership, no later than 10 days after the 
date the Secretary notifies the institution that its composite score is 
less than 1.5. In response to that notice, the institution must report 
the total amount of the wage-equivalent distributions it made during 
its prior fiscal year and any distributions that were made to pay any 
taxes related to the operation of the institution. During its current 
fiscal year and the first six months of its subsequent fiscal year (18-
month period), the institution is not required to report any 
distributions to the Secretary, provided that the institution does not 
make wage-equivalent distributions that exceed 150 percent of the total 
amount of wage-equivalent distributions it made during its prior fiscal 
year, less any distributions that were made to pay any taxes related to 
the operation of the institution. However, if the institution makes 
wage-equivalent distributions that exceed 150 percent of the total 
amount of wage-equivalent distributions it made during its prior fiscal 
year less any distributions that were made to pay any taxes related to 
the operation of the institution at any time during the 18-month 
period, it must report each of those distributions no later than 10 
days after they are made, and the Secretary recalculates the 
institution's composite score based on the cumulative amount of the 
distributions made at that time;
    (B) For a distribution of dividends or return of capital, no later 
than 10 days after the dividends are declared or the amount of return 
of capital is approved; or
    (C) For a related party receivable, not later than 10 days after 
that receivable occurs;
    (iii) For the provisions relating to a publicly traded institution 
under paragraph (c)(2) of this section, no later than 10 days after the 
date that--
    (A) The SEC issues an order suspending or revoking the registration 
of the institution's securities pursuant to Section 12(j) of the 
Exchange Act or suspends trading of the institution's securities on any 
national securities exchange pursuant to Section 12(k) of the Exchange 
Act; or
    (B) The national securities exchange on which the institution's 
securities are traded involuntarily delists its securities, or the 
institution voluntarily delists its securities, pursuant to the rules 
of the relevant national securities exchange;
    (iv) For an action under paragraph (d)(1) of this section, 10 days 
after the date on which the institution is notified by its accrediting 
agency of that action;
    (v) For the loan agreement provisions in paragraph (d)(2) of this 
section, 10 days after a loan violation occurs, the creditor waives the 
violation, or the creditor imposes sanctions or penalties in exchange 
or as a result of granting the waiver;
    (vi) For a State agency notice relating to terminating an 
institution's licensure or authorization under paragraph (d)(3) of this 
section, 10 days after the date on which the institution receives that 
notice; and
    (vii) For the non-title IV revenue provision in paragraph (d)(4) of 
this section, no later than 45 days after the end of the institution's 
fiscal year, as provided in Sec.  668.28(c)(3).
    (2) The Secretary may take an administrative action under paragraph 
(i) of this section against an institution, or determine that the 
institution is not financially responsible, if it fails to provide 
timely notice to the Secretary as provided under paragraph (f)(1) of 
this section, or fails to respond, within the timeframe specified by 
the Secretary, to any determination made, or request for information, 
by the Secretary under paragraph (f)(3) of this section.
    (3)(i) In its notice to the Secretary under this paragraph, or in 
its response to a preliminary determination by the Secretary that the 
institution is not financially responsible because of a triggering 
event under paragraph (c) or (d) of this section, in accordance with 
procedures established by the Secretary, the institution may--
    (A) Demonstrate that the reported withdrawal of owner's equity 
under paragraph (c)(1)(i)(B) of this section was used exclusively to 
meet tax liabilities

[[Page 49913]]

of the institution or its owners for income derived from the 
institution;
    (B) Show that the creditor waived a violation of a loan agreement 
under paragraph (d)(2) of this section. However, if the creditor 
imposes additional constraints or requirements as a condition of 
waiving the violation, or imposes penalties or requirements under 
paragraph (d)(2)(ii) of this section, the institution must identify and 
describe those penalties, constraints, or requirements and demonstrate 
that complying with those actions will not adversely affect the 
institution's ability to meet its financial obligations;
    (C) Show that the triggering event has been resolved, or 
demonstrate that the institution has insurance that will cover all or 
part of the liabilities that arise under paragraph (c)(1)(i)(A) of this 
section; or
    (D) Explain or provide information about the conditions or 
circumstances that precipitated a triggering event under paragraph (c) 
or (d) of this section that demonstrates that the triggering event has 
not or will not have a material adverse effect on the institution.
    (ii) The Secretary will consider the information provided by the 
institution in determining whether to issue a final determination that 
the institution is not financially responsible.
    (g) Public institutions. (1) The Secretary considers a domestic 
public institution to be financially responsible if the institution--
    (i)(A) Notifies the Secretary that it is designated as a public 
institution by the State, local, or municipal government entity, tribal 
authority, or other government entity that has the legal authority to 
make that designation; and
    (B) Provides a letter from an official of that State or other 
government entity confirming that the institution is a public 
institution; and
    (ii) Is not subject to a condition of past performance under Sec.  
668.174.
    (2) The Secretary considers a foreign public institution to be 
financially responsible if the institution--
    (i)(A) Notifies the Secretary that it is designated as a public 
institution by the country or other government entity that has the 
legal authority to make that designation; and
    (B) Provides documentation from an official of that country or 
other government entity confirming that the institution is a public 
institution and is backed by the full faith and credit of the country 
or other government entity; and
    (ii) Is not subject to a condition of past performance under Sec.  
668.174.
    (h) Audit opinions and disclosures. Even if an institution 
satisfies all of the general standards of financial responsibility 
under paragraph (b) of this section, the Secretary does not consider 
the institution to be financially responsible if, in the institution's 
audited financial statements, the opinion expressed by the auditor was 
an adverse, qualified, or disclaimed opinion, or the financial 
statements contain a disclosure in the notes to the financial 
statements that there is substantial doubt about the institution's 
ability to continue as a going concern as required by accounting 
standards, unless the Secretary determines that a qualified or 
disclaimed opinion does not have a significant bearing on the 
institution's financial condition, or that the substantial doubt about 
the institution's ability to continue as going concern has been 
alleviated.
    (i) Administrative actions. If the Secretary determines that an 
institution is not financially responsible under the standards and 
provisions of this section or under an alternative standard in Sec.  
668.175, or the institution does not submit its financial and 
compliance audits by the date and in the manner required under Sec.  
668.23, the Secretary may--
    (1) Initiate an action under subpart G of this part to fine the 
institution, or limit, suspend, or terminate the institution's 
participation in the title IV, HEA programs; or
    (2) For an institution that is provisionally certified, take an 
action against the institution under the procedures established in 
Sec.  668.13(d).

0
6. Section 668.172 is amended by:
0
a. Adding paragraphs (d) and (e).
0
b. Removing the parenthetical authority citation.
    The additions read as follows:


Sec.  668.172  Financial ratios.

* * * * *
    (d) Accounting for operating leases. The Secretary accounts for 
operating leases by--
    (1) Applying FASB Accounting Standards Update (ASU) 2016-02, Leases 
(Topic 842) to all leases the institution has entered into on or after 
December 15, 2018 (post-implementation operating/financing leases), as 
specified in the Supplemental Schedule (see Section 2 of Appendix A to 
this subpart and Section 2 of Appendix B to this subpart);
    (2) Treating leases the institution entered into prior to December 
15, 2018 (pre-implementation operating/financing leases), as they would 
have been treated prior to the requirements of ASU 2016-02, as long as 
the institution provides information about those leases on the 
Supplemental Schedule and a note in, or on the face of, its audited 
financial statements; and
    (3) Accounting for any adjustments, such as any options exercised 
by the institution to extend the life of a pre-implementation 
operating/finance lease, as post-implementation operating/finance 
leases.
    (e) Incorporation by Reference. (1) The material required in this 
section is incorporated by reference into this section with the 
approval of the Director of the Federal Register under 5 U.S.C. 552(a) 
and 1 CFR part 51. All approved material is available for inspection at 
U.S. Department of Education, Office of the General Counsel, 202-401-
6000, and is available from the sources indicated below. It is also 
available for inspection at the National Archives and Records 
Administration (NARA). For information on the availability of this 
material at NARA, email [email protected] or go to 
www.archives.gov/federal-register/cfr/ibr-locations.html.
    (2) Financial Accounting Standards Board (FASB), 401 Merritt 7, 
P.O. Box 5116, Norwalk, CT 06856-5116, (203) 847-0700, www.fasb.org.
    (i) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), 
(February 2016).
    (ii) [Reserved]
* * * * *

0
7. Section 668.175 is amended by revising paragraphs (a) through (c), 
(f) and (h) and removing the parenthetical authority citation.
    The revisions read as follows:


Sec.  668.175  Alternative standards and requirements.

    (a) General. An institution that is not financially responsible 
under the general standards and provisions in Sec.  668.171, may begin 
or continue to participate in the title IV, HEA programs by qualifying 
under an alternate standard set forth in this section.
    (b) Letter of Credit or surety alternative for new institutions. A 
new institution that is not financially responsible solely because the 
Secretary determines that its composite score is less than 1.5, 
qualifies as a financially responsible institution by submitting an 
irrevocable letter of credit that is acceptable and payable to the 
Secretary, or providing other surety described under paragraph 
(h)(2)(i) of this section, for an amount equal to at least one-half of 
the amount of title IV, HEA program funds that the Secretary determines 
the institution will receive during its initial year of participation. 
A new institution is an institution that seeks to participate for the 
first time in the title IV, HEA programs.

[[Page 49914]]

    (c) Financial protection alternative for participating 
institutions. A participating institution that is not financially 
responsible either because it does not satisfy one or more of the 
standards of financial responsibility under Sec.  668.171(b), (c), or 
(d), or because of an audit opinion or going concern disclosure 
described under Sec.  668.171(h), qualifies as a financially 
responsible institution by submitting an irrevocable letter of credit 
that is acceptable and payable to the Secretary, or providing other 
financial protection described under paragraph (h) of this section, for 
an amount determined by the Secretary that is not less than one-half of 
the title IV, HEA program funds received by the institution during its 
most recently completed fiscal year, except that this requirement does 
not apply to a public institution.
* * * * *
    (f) Provisional certification alternative. (1) The Secretary may 
permit an institution that is not financially responsible to 
participate in the title IV, HEA programs under a provisional 
certification for no more than three consecutive years if--
    (i) The institution is not financially responsible because it does 
not satisfy the general standards under Sec.  668.171(b), its 
recalculated composite score under Sec.  668.171(e) is less than 1.0, 
it is subject to an action or event under Sec.  668.171(c), or an 
action or event under paragraph (d) that has an adverse material effect 
on the institution as determined by the Secretary, or because of an 
audit opinion or going concern disclosure described in Sec.  
668.171(h); or
    (ii) The institution is not financially responsible because of a 
condition of past performance, as provided under Sec.  668.174(a), and 
the institution demonstrates to the Secretary that it has satisfied or 
resolved that condition; and
    (2) Under this alternative, the institution must--
    (i) Provide to the Secretary an irrevocable letter of credit that 
is acceptable and payable to the Secretary, or provide other financial 
protection described under paragraph (h) of this section, for an amount 
determined by the Secretary that is not less than 10 percent of the 
title IV, HEA program funds received by the institution during its most 
recently completed fiscal year, except that this requirement does not 
apply to a public institution that the Secretary determines is backed 
by the full faith and credit of the State;
    (ii) Demonstrate that it was current on its debt payments and has 
met all of its financial obligations, as required under Sec.  
668.171(b)(3), for its two most recent fiscal years; and
    (iii) Comply with the provisions under the zone alternative, as 
provided under paragraph (d)(2) and (3) of this section.
    (3) If at the end of the period for which the Secretary 
provisionally certified the institution, the institution is still not 
financially responsible, the Secretary may again permit the institution 
to participate under a provisional certification but the Secretary--
    (i) May require the institution, or one or more persons or entities 
that exercise substantial control over the institution, as determined 
under Sec.  668.174(b)(1) and (c), or both, to provide to the Secretary 
financial guarantees for an amount determined by the Secretary to be 
sufficient to satisfy any potential liabilities that may arise from the 
institution's participation in the title IV, HEA programs;
    (ii) May require one or more of the persons or entities that 
exercise substantial control over the institution, as determined under 
Sec.  668.174(b)(1) and (c), to be jointly or severally liable for any 
liabilities that may arise from the institution's participation in the 
title IV, HEA programs; and
    (iii) May require the institution to provide, or continue to 
provide, the financial protection resulting from an event described in 
Sec.  668.171(c) and (d) until the institution meets the requirements 
of paragraph (f)(4) of this section.
    (4) The Secretary maintains the full amount of financial protection 
provided by the institution under this section until the Secretary 
first determines that the institution has--
    (i) A composite score of 1.0 or greater based on a review of the 
audited financial statements for the fiscal year in which all 
liabilities from any event described in Sec.  668.171(c) or (d) on 
which financial protection was required; or
    (ii) A recalculated composite score of 1.0 or greater, and any 
event or condition described in Sec.  668.171(c) or (d) has ceased to 
exist.
* * * * *
    (h) Financial protection. (1) In accordance with procedures 
established by the Secretary or as part of an agreement with an 
institution under this section, the Secretary may use the funds from 
that financial protection to satisfy the debts, liabilities, or 
reimbursable costs, including costs associated with teach-outs as 
allowed by the Department, owed to the Secretary that are not otherwise 
paid directly by the institution.
    (2) In lieu of submitting a letter of credit for the amount 
required by the Secretary under this section, the Secretary may permit 
an institution to--
    (i) Provide the amount required in the form of other surety or 
financial protection that the Secretary specifies in a document 
published in the Federal Register;
    (ii) Provide cash for the amount required; or
    (iii) Enter into an arrangement under which the Secretary offsets 
the amount of title IV, HEA program funds that an institution has 
earned in a manner that ensures that, no later than the end of a six to 
twelve-month period selected by the Secretary, the amount offset equals 
the amount of financial protection the institution is required to 
provide. The Secretary provides to the institution any funds not used 
for the purposes described in paragraph (h)(1) of this section during 
the period covered by the agreement, or provides the institution any 
remaining funds if the institution subsequently submits other financial 
protection for the amount originally required.
* * * * *

0
8. Appendix A to subpart L of part 668 is revised to read as follows:

Appendix A to Subpart L of Part 668--Ratio Methodology for Propriety 
Institutions

BILLING CODE 4001-01-P

[[Page 49915]]

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[[Page 49919]]


[GRAPHIC] [TIFF OMITTED] TR23SE19.006


0
9. Appendix B to Subpart L of part 668 is revised to read as follows:

Appendix B to Subpart L of Part 668--Ratio Methodology for Private Non-
Profit Institutions
[GRAPHIC] [TIFF OMITTED] TR23SE19.007


[[Page 49920]]


[GRAPHIC] [TIFF OMITTED] TR23SE19.008

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[[Page 49921]]


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[[Page 49924]]


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[[Page 49925]]


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[GRAPHIC] [TIFF OMITTED] TR23SE19.016

BILLING CODE 4000-01-C

[[Page 49926]]

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

0
10. The authority citation for part 682 is revised to read as follows:

    Authority: 20 U.S.C. 1071-1087-4, unless otherwise noted.
    Section 682.410 also issued under 20 U.S.C. 1078, 1078-1, 1078-
2, 1078-3, 1080a, 1082, 1087, 1091a, and 1099.


0
11. Section 682.410 is amended by revising paragraph (b)(2) and 
removing the parenthetical authority citation at the end of the 
section.
    The revision reads as follows:


Sec.  682.410  Fiscal, administrative, and enforcement requirements.

* * * * *
    (b) * * *
    (2) Collection charges. (i) Whether or not provided for in the 
borrower's promissory note and subject to any limitation on the amount 
of those costs in that note, the guaranty agency may charge a borrower 
an amount equal to the reasonable costs incurred by the agency in 
collecting a loan on which the agency has paid a default or bankruptcy 
claim unless, within the 60-day period after the guaranty agency sends 
the initial notice described in paragraph (b)(6)(ii) of this section, 
the borrower enters into an acceptable repayment agreement, including a 
rehabilitation agreement, and honors that agreement, in which case the 
guaranty agency must not charge a borrower any collection costs.
    (ii) An acceptable repayment agreement may include an agreement 
described in Sec.  682.200(b) (Satisfactory repayment arrangement), 
Sec.  682.405, or paragraph (b)(5)(ii)(D) of this section. An 
acceptable repayment agreement constitutes a repayment arrangement or 
agreement on repayment terms satisfactory to the guaranty agency, under 
this section.
    (iii) The costs under this paragraph (b)(2) include, but are not 
limited to, all attorneys' fees, collection agency charges, and court 
costs. Except as provided in Sec. Sec.  682.401(b)(18)(i) and 
682.405(b)(1)(vi)(B), the amount charged a borrower must equal the 
lesser of--
    (A) The amount the same borrower would be charged for the cost of 
collection under the formula in 34 CFR 30.60; or
    (B) The amount the same borrower would be charged for the cost of 
collection if the loan was held by the U.S. Department of Education.
* * * * *

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

0
12. The authority citation for part 685 is revised to read as follows:

    Authority: 20 U.S.C. 1070g, 1087a, et seq., unless otherwise 
noted.
    Section 685.205 also issued under 20 U.S.C. 1087a et seq.
    Section 685.206 also issued under 20 U.S.C. 1087a et seq.
    Section 685.212 also issued under 20 U.S.C. 1087a et seq.; 28 
U.S.C. 2401.
    Section 685.214 also issued under 20 U.S.C. 1087a et seq.
    Section 685.215 also issued under 20 U.S.C. 1087a et seq.
    Section 685.222 also issued under 20 U.S.C. 1087a et seq.; 28 
U.S.C. 2401; 31 U.S.C. 3702.
    Section 685.300 also issued under 20 U.S.C. 1087a et seq., 1094.
    Section 685.304 also issued under 20 U.S.C. 1087a et seq.
    Section 685.308 also issued under 20 U.S.C. 1087a et seq.


Sec.  685.205  [Amended]

0
13. Section 685.205 is amended:
0
a. In paragraph (b)(6)(i), by removing the citation ``Sec.  
685.206(c)'' and adding, in its place, the citation ``Sec.  685.206(c), 
(d) and (e)''; and
0
b. By removing the parenthetical authority citation at the end of the 
section.
0
14. Section 685.206 is amended:
0
a. In paragraph (c), by revising the subject heading;
0
b. By adding paragraphs (d) through (e); and
0
c. Removing the parenthetical authority citation at the end of the 
section.
    The revision and additions read as follows:


Sec.  685.206  Borrower responsibilities and defenses.

* * * * *
    (c) Borrower defense to repayment for loans first disbursed prior 
to July 1, 2017. * * *
* * * * *
    (d) Borrower defense to repayment for loans first disbursed on or 
after July 1, 2017, and before July 1, 2020. For borrower defense to 
repayment for loans first disbursed on or after July 1, 2017, and 
before July 1, 2020, a borrower asserts and the Secretary considers a 
borrower defense in accordance with Sec.  685.222.
    (e) Borrower defense to repayment for loans first disbursed on or 
after July 1, 2020. This paragraph (e) applies to borrower defense to 
repayment for loans first disbursed on or after July 1, 2020.
    (1) Definitions. For the purposes of this paragraph (e), the 
following definitions apply:
    (i) A ``Direct Loan'' means a Direct Subsidized Loan, a Direct 
Unsubsidized Loan, or a Direct PLUS Loan.
    (ii) ``Borrower'' means
    (A) The borrower; and
    (B) In the case of a Direct PLUS Loan, any endorsers, and for a 
Direct PLUS Loan made to a parent, the student on whose behalf the 
parent borrowed.
    (iii) A ``borrower defense to repayment'' includes--
    (A) A defense to repayment of amounts owed to the Secretary on a 
Direct Loan, or a Direct Consolidation Loan that was used to repay a 
Direct Loan, FFEL Program Loan, Federal Perkins Loan, Health 
Professions Student Loan, Loan for Disadvantaged Students under subpart 
II of part A of title VII of the Public Health Service Act, Health 
Education Assistance Loan, or Nursing Loan made under part E of the 
Public Health Service Act; and
    (B) Any accompanying request for reimbursement of payments 
previously made to the Secretary on the Direct Loan or on a loan repaid 
by the Direct Consolidation Loan.
    (iv) The term ``provision of educational services'' refers to the 
educational resources provided by the institution that are required by 
an accreditation agency or a State licensing or authorizing agency for 
the completion of the student's educational program.
    (v) The terms ``school'' and ``institution'' may be used 
interchangeably and include an eligible institution, one of its 
representatives, or any ineligible institution, organization, or person 
with whom the eligible institution has an agreement to provide 
educational programs, or to provide marketing, advertising, recruiting, 
or admissions services.
    (2) Federal standard for loans first disbursed on or after July 1, 
2020. For a Direct Loan or Direct Consolidation Loan first disbursed on 
or after July 1, 2020, a borrower may assert a defense to repayment 
under this paragraph (e),if the borrower establishes by a preponderance 
of the evidence that--
    (i) The institution at which the borrower enrolled made a 
misrepresentation, as defined in Sec.  685.206(e)(3), of material fact 
upon which the borrower reasonably relied in deciding to obtain a 
Direct Loan, or a loan repaid by a Direct Consolidation Loan, and that 
directly and clearly relates to:
    (A) Enrollment or continuing enrollment at the institution or
    (B) The provision of educational services for which the loan was 
made; and

[[Page 49927]]

    (ii) The borrower was financially harmed by the misrepresentation.
    (3) Misrepresentation. A ``misrepresentation,'' for purposes of 
this paragraph (e), is a statement, act, or omission by an eligible 
school to a borrower that is false, misleading, or deceptive; that was 
made with knowledge of its false, misleading, or deceptive nature or 
with a reckless disregard for the truth; and that directly and clearly 
relates to enrollment or continuing enrollment at the institution or 
the provision of educational services for which the loan was made. 
Evidence that a misrepresentation defined in this paragraph (e) may 
have occurred includes, but is not limited to:
    (i) Actual licensure passage rates materially different from those 
included in the institution's marketing materials, website, or other 
communications made to the student;
    (ii) Actual employment rates materially different from those 
included in the institution's marketing materials, website, or other 
communications made to the student;
    (iii) Actual institutional selectivity rates or rankings, student 
admission profiles, or institutional rankings that are materially 
different from those included in the institution's marketing materials, 
website, or other communications made to the student or provided by the 
institution to national ranking organizations;
    (iv) The inclusion in the institution's marketing materials, 
website, or other communication made to the student of specialized, 
programmatic, or institutional certifications, accreditation, or 
approvals not actually obtained, or the failure to remove within a 
reasonable period of time such certifications or approvals from 
marketing materials, website, or other communication when revoked or 
withdrawn;
    (v) The inclusion in the institution's marketing materials, 
website, or other communication made to the student of representations 
regarding the widespread or general transferability of credits that are 
only transferrable to limited types of programs or institutions or the 
transferability of credits to a specific program or institution when no 
reciprocal agreement exists with another institution or such agreement 
is materially different than what was represented;
    (vi) A representation regarding the employability or specific 
earnings of graduates without an agreement between the institution and 
another entity for such employment or sufficient evidence of past 
employment or earnings to justify such a representation or without 
citing appropriate national, State, or regional data for earnings in 
the same field as provided by an appropriate Federal agency that 
provides such data. (In the event that national data are used, 
institutions should include a written, plain language disclaimer that 
national averages may not accurately reflect the earnings of workers in 
particular parts of the country and may include earners at all stages 
of their career and not just entry level wages for recent graduates.);
    (vii) A representation regarding the availability, amount, or 
nature of any financial assistance available to students from the 
institution or any other entity to pay the costs of attendance at the 
institution that is materially different in availability, amount, or 
nature from the actual financial assistance available to the borrower 
from the institution or any other entity to pay the costs of attendance 
at the institution after enrollment;
    (viii) A representation regarding the amount, method, or timing of 
payment of tuition and fees that the student would be charged for the 
program that is materially different in amount, method, or timing of 
payment from the actual tuition and fees charged to the student;
    (ix) A representation that the institution, its courses, or 
programs are endorsed by vocational counselors, high schools, colleges, 
educational organizations, employment agencies, members of a particular 
industry, students, former students, governmental officials, Federal or 
State agencies, the United States Armed Forces, or other individuals or 
entities when the institution has no permission or is not otherwise 
authorized to make or use such an endorsement;
    (x) A representation regarding the educational resources provided 
by the institution that are required for the completion of the 
student's educational program that are materially different from the 
institution's actual circumstances at the time the representation is 
made, such as representations regarding the institution's size; 
location; facilities; training equipment; or the number, availability, 
or qualifications of its personnel; and
    (xi) A representation regarding the nature or extent of 
prerequisites for enrollment in a course or program offered by the 
institution that are materially different from the institution's actual 
circumstances at the time the representation is made, or that the 
institution knows will be materially different during the student's 
anticipated enrollment at the institution.
    (4) Financial harm. Financial harm is the amount of monetary loss 
that a borrower incurs as a consequence of a misrepresentation, as 
defined in Sec.  685.206(e)(3). Financial harm does not include damages 
for nonmonetary loss, such as personal injury, inconvenience, 
aggravation, emotional distress, pain and suffering, punitive damages, 
or opportunity costs. The Department does not consider the act of 
taking out a Direct Loan or a loan repaid by a Direct Consolidation 
Loan, alone, as evidence of financial harm to the borrower. Financial 
harm is such monetary loss that is not predominantly due to intervening 
local, regional, or national economic or labor market conditions as 
demonstrated by evidence before the Secretary or provided to the 
Secretary by the borrower or the school. Financial harm cannot arise 
from the borrower's voluntary decision to pursue less than full-time 
work or not to work or result from a voluntary change in occupation. 
Evidence of financial harm may include, but is not limited to, the 
following circumstances:
    (i) Periods of unemployment upon graduating from the school's 
programs that are unrelated to national or local economic recessions;
    (ii) A significant difference between the amount or nature of the 
tuition and fees that the institution represented to the borrower that 
the institution would charge or was charging and the actual amount or 
nature of the tuition and fees charged by the institution for which the 
Direct Loan was disbursed or for which a loan repaid by the Direct 
Consolidation Loan was disbursed;
    (iii) The borrower's inability to secure employment in the field of 
study for which the institution expressly guaranteed employment; and
    (iv) The borrower's inability to complete the program because the 
institution no longer offers a requirement necessary for completion of 
the program in which the borrower enrolled and the institution did not 
provide for an acceptable alternative requirement to enable completion 
of the program.
    (5) Exclusions. The Secretary will not accept the following as a 
basis for a borrower defense to repayment--
    (i) A violation by the institution of a requirement of the Act or 
the Department's regulations for a borrower defense to repayment under 
paragraph (c) or (d) of this section or under Sec.  685.222, unless the 
violation would otherwise constitute the basis for a successful 
borrower defense to repayment under this paragraph (e); or

[[Page 49928]]

    (ii) A claim that does not directly and clearly relate to 
enrollment or continuing enrollment at the institution or the provision 
of educational services for which the loan was made, including, but not 
limited to--
    (A) Personal injury;
    (B) Sexual harassment;
    (C) A violation of civil rights;
    (D) Slander or defamation;
    (E) Property damage;
    (F) The general quality of the student's education or the 
reasonableness of an educator's conduct in providing educational 
services;
    (G) Informal communication from other students;
    (H) Academic disputes and disciplinary matters; and
    (I) Breach of contract, unless the school's act or omission would 
otherwise constitute the basis for a successful defense to repayment 
under this paragraph (e).
    (6) Limitations period and tolling of the limitations period for 
arbitration proceedings. (i) A borrower must assert a defense to 
repayment under this paragraph (e) within three years from the date the 
student is no longer enrolled at the institution. A borrower may only 
assert a defense to repayment under this paragraph (e) within the 
timeframes set forth in Sec.  685.206(e)(6)(i) and (ii) and (e)(7).
    (ii) For pre-dispute arbitration agreements, as defined in Sec.  
668.41(h)(2)(iii), the limitations period will be tolled for the time 
period beginning on the date that a written request for arbitration is 
filed, by either the student or the institution, and concluding on the 
date the arbitrator submits, in writing, a final decision, final award, 
or other final determination, to the parties.
    (7) Extension of limitation periods and reopening of applications. 
For loans first disbursed on or after July 1, 2020, the Secretary may 
extend the time period when a borrower may assert a defense to 
repayment under Sec.  685.206(e)(6) or may reopen a borrower's defense 
to repayment application to consider evidence that was not previously 
considered only if there is:
    (i) A final, non-default judgment on the merits by a State or 
Federal Court that has not been appealed or that is not subject to 
further appeal and that establishes the institution made a 
misrepresentation, as defined in Sec.  685.206(e)(3); or
    (ii) A final decision by a duly appointed arbitrator or arbitration 
panel that establishes that the institution made a misrepresentation, 
as defined in Sec.  685.206(e)(3).
    (8) Application and Forbearance. To assert a defense to repayment 
under this paragraph (e), a borrower must submit an application under 
penalty of perjury on a form approved by the Secretary and sign a 
waiver permitting the institution to provide the Department with items 
from the borrower's education record relevant to the defense to 
repayment claim. The form will note that pursuant to paragraph 
(b)(6)(i) of this section, if the borrower is not in default on the 
loan for which a borrower defense has been asserted, the Secretary will 
grant forbearance and notify the borrower of the option to decline 
forbearance. The application requires the borrower to--
    (i) Certify that the borrower received the proceeds of a loan, in 
whole or in part, to attend the named institution;
    (ii) Provide evidence that supports the borrower defense to 
repayment application;
    (iii) State whether the borrower has made a claim with any other 
third party, such as the holder of a performance bond, a public fund, 
or a tuition recovery program, based on the same act or omission of the 
institution on which the borrower defense to repayment is based;
    (iv) State the amount of any payment received by the borrower or 
credited to the borrower's loan obligation through the third party, in 
connection with a borrower defense to repayment described in paragraph 
(e)(2) of this section;
    (v) State the financial harm, as defined in paragraph (e)(4) of 
this section, that the borrower alleges to have been caused and provide 
any information relevant to assessing whether the borrower incurred 
financial harm, including providing documentation that the borrower 
actively pursued employment in the field for which the borrower's 
education prepared the borrower if the borrower is a recent graduate 
(failure to provide such information results in a presumption that the 
borrower failed to actively pursue employment in the field); whether 
the borrower was terminated or removed for performance reasons from a 
position in the field for which the borrower's education prepared the 
borrower, or in a related field; and whether the borrower failed to 
meet other requirements of or qualifications for employment in such 
field for reasons unrelated to the school's misrepresentation 
underlying the borrower defense to repayment, such as the borrower's 
ability to pass a drug test, satisfy driving record requirements, and 
meet any health qualifications; and
    (vi) State that the borrower understands that in the event that the 
borrower receives a 100 percent discharge of the balance of the loan 
for which the defense to repayment application has been submitted, the 
institution may, if allowed or not prohibited by other applicable law, 
refuse to verify or to provide an official transcript that verifies the 
borrower's completion of credits or a credential associated with the 
discharged loan.
    (9) Consideration of order of objections and of evidence in 
possession of the Secretary. (i) If the borrower asserts both a 
borrower defense to repayment and any other objection to an action of 
the Secretary with regard to a Direct Loan or a loan repaid by a Direct 
Consolidation Loan, the order in which the Secretary will consider 
objections, including a borrower defense to repayment, will be 
determined as appropriate under the circumstances.
    (ii) With respect to the borrower defense to repayment application 
submitted under this paragraph (e), the Secretary may consider evidence 
otherwise in the possession of the Secretary, including from the 
Department's internal records or other relevant evidence obtained by 
the Secretary, as practicable, provided that the Secretary permits the 
institution and the borrower to review and respond to this evidence and 
to submit additional evidence.
    (10) School response and borrower reply. (i) Upon receipt of a 
borrower defense to repayment application under this paragraph (e), the 
Department will notify the school of the pending application and 
provide a copy of the borrower's request and any supporting documents, 
a copy of any evidence otherwise in the possession of the Secretary, 
and a waiver signed by the student permitting the institution to 
provide the Department with items from the student's education record 
relevant to the defense to repayment claim to the school, and invite 
the school to respond and to submit evidence, within the specified 
timeframe included in the notice, which shall be no less than 60 days.
    (ii) Upon receipt of the school's response, the Department will 
provide the borrower a copy of the school's submission as well as any 
evidence otherwise in possession of the Secretary, which was provided 
to the school, and will give the borrower an opportunity to submit a 
reply within a specified timeframe, which shall be no less than 60 
days. The borrower's reply must be limited to issues and evidence 
raised in the school's submission and any

[[Page 49929]]

evidence otherwise in the possession of the Secretary.
    (iii) The Department will provide the school a copy of the 
borrower's reply.
    (iv) There will be no other submissions by the borrower or the 
school to the Secretary, unless the Secretary requests further 
clarifying information.
    (11) Written decision. (i) After considering the borrower's 
application and all applicable evidence, the Secretary issues a written 
decision--
    (A) Notifying the borrower and the school of the decision on the 
borrower defense to repayment;
    (B) Providing the reasons for the decision; and
    (C) Informing the borrower and the school of the relief, if any, 
that the borrower will receive, consistent with paragraph (e)(12) of 
this section, and specifying the relief determination.
    (ii) If the Department receives a borrower defense to repayment 
application that is incomplete and is within the limitations period in 
Sec.  685.206(e)(6) or (7), the Department will not issue a written 
decision on the application and instead will notify the borrower in 
writing that the application is incomplete and will return the 
application to the borrower.
    (12) Borrower defense to repayment relief. (i) If the Secretary 
grants the borrower's request for relief based on a borrower defense to 
repayment under this paragraph (e), the Secretary notifies the borrower 
and the school that the borrower is relieved of the obligation to repay 
all or part of the loan and associated costs and fees that the borrower 
would otherwise be obligated to pay or will be reimbursed for amounts 
paid toward the loan voluntarily or through enforced collection. The 
amount of relief that a borrower receives may exceed the amount of 
financial harm, as defined in Sec.  685.206(e)(4), that the borrower 
alleges in the application pursuant to Sec.  685.206(e)(8)(v). The 
Secretary determines the amount of relief and awards relief limited to 
the monetary loss that a borrower incurred as a consequence of a 
misrepresentation, as defined in Sec.  685.206(e)(3). The amount of 
relief cannot exceed the amount of the loan and any associated costs 
and fees and will be reduced by the amount of refund, reimbursement, 
indemnification, restitution, compensatory damages, settlement, debt 
forgiveness, discharge, cancellation, compromise, or any other 
financial benefit received by, or on behalf of, the borrower that was 
related to the borrower defense to repayment. In awarding relief, the 
Secretary considers the borrower's application, as described in Sec.  
685.206(e)(8), which includes information about any payments received 
by the borrower and the financial harm alleged by the borrower. In 
awarding relief, the Secretary also considers the school's response, 
the borrower's reply, and any evidence otherwise in the possession of 
the Secretary, which was previously provided to the borrower and the 
school, as described in Sec.  685.206(e)(10). The Secretary also 
updates reports to consumer reporting agencies to which the Secretary 
previously made adverse credit reports with regard to the borrower's 
Direct Loan or loans repaid by the borrower's Direct Consolidation 
Loan.
    (ii) The Secretary affords the borrower such further relief as the 
Secretary determines is appropriate under the circumstances. Further 
relief may include one or both of the following, if applicable:
    (A) Determining that the borrower is not in default on the loan and 
is eligible to receive assistance under title IV of the Act and
    (B) Eliminating or recalculating the subsidized usage period that 
is associated with the loan or loans discharged pursuant to Sec.  
685.200(f)(4)(iii).
    (13) Finality of borrower defense to repayment decisions. The 
determination of a borrower's defense to repayment by the Department 
included in the written decision referenced in paragraph (e)(11) of 
this section is the final decision of the Department and is not subject 
to appeal within the Department.
    (14) Cooperation by the borrower. The Secretary may revoke any 
relief granted to a borrower under this section who refuses to 
cooperate with the Secretary in any proceeding under paragraph (e) of 
this section or under 34 CFR part 668, subpart G. Such cooperation 
includes, but is not limited to--
    (i) Providing testimony regarding any representation made by the 
borrower to support a successful borrower defense to repayment; and
    (ii) Producing, within timeframes established by the Secretary, any 
documentation reasonably available to the borrower with respect to 
those representations and any sworn statement required by the Secretary 
with respect to those representations and documents.
    (15) Transfer to the Secretary of the borrower's right of recovery 
against third parties. (i) Upon the grant of any relief under this 
paragraph (e), the borrower is deemed to have assigned to, and 
relinquished in favor of, the Secretary any right to a loan refund (up 
to the amount discharged) that the borrower may have by contract or 
applicable law with respect to the loan or the provision of educational 
services for which the loan was received, against the school, its 
principals, its affiliates and their successors, or its sureties, and 
any private fund, including the portion of a public fund that 
represents funds received from a private party. If the borrower asserts 
a claim to, and recovers from, a public fund, the Secretary may 
reinstate the borrower's obligation to repay on the loan an amount 
based on the amount recovered from the public fund, if the Secretary 
determines that the borrower's recovery from the public fund was based 
on the same borrower defense to repayment and for the same loan for 
which the discharge was granted under this section.
    (ii) The provisions of this paragraph (e)(15) apply notwithstanding 
any provision of State law that would otherwise restrict transfer of 
those rights by the borrower, limit or prevent a transferee from 
exercising those rights, or establish procedures or a scheme of 
distribution that would prejudice the Secretary's ability to recover on 
those rights.
    (iii) Nothing in this paragraph (e)(15) limits or forecloses the 
borrower's right to pursue legal and equitable relief arising under 
applicable law against a party described in this paragraph (e)(15) for 
recovery of any portion of a claim exceeding that assigned to the 
Secretary or any other claims arising from matters unrelated to the 
claim on which the loan is discharged.
    (16) Recovery from the school. (i) The Secretary may initiate an 
appropriate proceeding to require the school whose misrepresentation 
resulted in the borrower's successful borrower defense to repayment 
under this paragraph (e) to pay to the Secretary the amount of the loan 
to which the defense applies in accordance with 34 CFR part 668, 
subpart G. This paragraph (e)(16) would also be applicable for 
provisionally certified institutions.
    (ii) The Secretary will not initiate such a proceeding more than 
five years after the date of the final determination included in the 
written decision referenced in paragraph (e)(11) of this section. The 
Department will notify the school of the borrower defense to repayment 
application within 60 days of the date of the Department's receipt of 
the borrower's application.
* * * * *

0
15. Section 685.212 is amended by revising paragraph (k) and removing 
the parenthetical authority citation at the end of the section.

[[Page 49930]]

    The revision reads as follows:


Sec.  685.212  Discharge of a loan obligation.

* * * * *
    (k) Borrower defenses. (1) If a borrower defense is approved under 
Sec.  685.206(c) or under Sec.  685.206(d) and Sec.  685.222--
    (i) The Secretary discharges the obligation of the borrower in 
whole or in part in accordance with the procedures in Sec. Sec.  
685.206(c) and 685.222, respectively; and
    (ii) The Secretary returns to the borrower payments made by the 
borrower or otherwise recovered on the loan that exceed the amount owed 
on that portion of the loan not discharged, if the borrower asserted 
the claim not later than--
    (A) For a claim subject to Sec.  685.206(c), the limitation period 
under applicable law to the claim on which relief was granted; or
    (B) For a claim subject to Sec.  685.222, the limitation period in 
Sec.  685.222(b), (c), or (d), as applicable.
    (2) In the case of a Direct Consolidation Loan, a borrower may 
assert a borrower defense under Sec.  685.206(c) or Sec.  685.222 with 
respect to a Direct Loan, FFEL Program Loan, Federal Perkins Loan, 
Health Professions Student Loan, Loan for Disadvantaged Students under 
subpart II of part A of title VII of the Public Health Service Act, 
Health Education Assistance Loan, or Nursing Loan made under part E of 
the Public Health Service Act that was repaid by the Direct 
Consolidation Loan.
    (i) The Secretary considers a borrower defense claim asserted on a 
Direct Consolidation Loan by determining--
    (A) Whether the act or omission of the school with regard to the 
loan described in this paragraph (k)(2), other than a Direct 
Subsidized, Unsubsidized, or PLUS Loan, constitutes a borrower defense 
under Sec.  685.206(c), for a Direct Consolidation Loan made before 
July 1, 2017, or under Sec.  685.222, for a Direct Consolidation Loan 
made on or after July 1, 2017, and before July 1, 2020; or
    (B) Whether the act or omission of the school with regard to a 
Direct Subsidized, Unsubsidized, or PLUS Loan made on after July 1, 
2017, and before July 1, 2020, that was paid off by the Direct 
Consolidation Loan, constitutes a borrower defense under Sec.  685.222.
    (ii) If the borrower defense is approved, the Secretary discharges 
the appropriate portion of the Direct Consolidation Loan.
    (iii) The Secretary returns to the borrower payments made by the 
borrower or otherwise recovered on the Direct Consolidation Loan that 
exceed the amount owed on that portion of the Direct Consolidation Loan 
not discharged, if the borrower asserted the claim not later than--
    (A) For a claim asserted under Sec.  685.206(c), the limitation 
period under the law applicable to the claim on which relief was 
granted; or
    (B) For a claim asserted under Sec.  685.222, the limitation period 
in Sec.  685.222(b), (c), or (d), as applicable.
    (iv) The Secretary returns to the borrower a payment made by the 
borrower or otherwise recovered on the loan described in this paragraph 
(k)(2) only if--
    (A) The payment was made directly to the Secretary on the loan; and
    (B) The borrower proves that the loan to which the payment was 
credited was not legally enforceable under applicable law in the amount 
for which that payment was applied.
    (3) If a borrower's application for a discharge of a loan based on 
a borrower defense is approved under Sec.  685.206(e), the Secretary 
discharges the obligation of the borrower, in whole or in part, in 
accordance with the procedures described in Sec.  685.206(e).
* * * * *

0
16. Section 685.214 is amended:
0
a. In paragraph (c)(1) introductory text, by removing the word ``In'' 
at the beginning of the paragraph and adding in its place ``For loans 
first disbursed before July 1, 2020, in'';
0
b. By redesignating paragraph (c)(2) as paragraph (c)(3);
0
c. By adding new paragraph (c)(2);
0
d. In newly redesignated paragraph (c)(3)(ii), by adding ``and before 
July 1, 2020,'' after ``on or after November 1, 2013,'';
0
e. By adding introductory text to paragraph (f);
0
f. By adding paragraph (g); and
0
g. By removing the parenthetical authority citation at the end of the 
section.
    The additions read as follows:


Sec.  685.214  Closed school discharge.

* * * * *
    (c) * * *
    (2) For loans first disbursed on or after July 1, 2020, in order to 
qualify for discharge of a loan under this section, a borrower must 
submit to the Secretary a completed application, and the factual 
assertions in the application must be true and made by the borrower 
under penalty of perjury. The application explains the procedures and 
eligibility criteria for obtaining a discharge and requires the 
borrower to--
    (i) Certify that the borrower (or the student on whose behalf a 
parent borrowed)--
    (A) Received the proceeds of a loan, in whole or in part, on or 
after July 1, 2020 to attend a school;
    (B) Did not complete the program of study at that school because 
the school closed on the date that the student was enrolled, or the 
student withdrew from the school not more than 180 calendar days before 
the date that the school closed. The Secretary may extend the 180-day 
period if the Secretary determines that exceptional circumstances 
related to a school's closing justify an extension. Exceptional 
circumstances for this purpose may include, but are not limited to: The 
revocation or withdrawal by an accrediting agency of the school's 
institutional accreditation; revocation or withdrawal by the State 
authorization or licensing authority to operate or to award academic 
credentials in the State; the termination by the Department of the 
school's participation in a title IV, HEA program; the teach-out of the 
student's educational program exceeds the 180-day look-back period for 
a closed school loan discharge; or the school responsible for the 
teach-out of the student's educational program fails to perform the 
material terms of the teach-out plan or agreement, such that the 
student does not have a reasonable opportunity to complete his or her 
program of study or a comparable program; and
    (C) Did not complete the program of study or a comparable program 
through a teach-out at another school or by transferring academic 
credits or hours earned at the closed school to another school;
    (ii) Certify that the borrower (or the student on whose behalf the 
parent borrowed) has not accepted the opportunity to complete, or is 
not continuing in, the program of study or a comparable program through 
either an institutional teach-out plan performed by the school or a 
teach-out agreement at another school, approved by the school's 
accrediting agency and, if applicable, the school's State authorizing 
agency.
* * * * *
    (f) Discharge procedures. The discharge procedures in this 
paragraph (f) apply to loans first disbursed before July 1, 2020.
* * * * *
    (g) Discharge procedures. The discharge procedures in this 
paragraph (g) apply to loans first disbursed on or after July 1, 2020.

[[Page 49931]]

    (1) After confirming the date of a school's closure, the Secretary 
identifies any Direct Loan borrower (or student on whose behalf a 
parent borrowed) who appears to have been enrolled at the school on the 
school closure date or to have withdrawn not more than 180 days prior 
to the closure date.
    (2) If the borrower's current address is known, the Secretary mails 
the borrower a discharge application and an explanation of the 
qualifications and procedures for obtaining a discharge. The Secretary 
also promptly suspends any efforts to collect from the borrower on any 
affected loan. The Secretary may continue to receive borrower payments.
    (3) If the borrower's current address is unknown, the Secretary 
attempts to locate the borrower and determines the borrower's potential 
eligibility for a discharge under this section by consulting with 
representatives of the closed school, the school's licensing agency, 
the school's accrediting agency, and other appropriate parties. If the 
Secretary learns the new address of a borrower, the Secretary mails to 
the borrower a discharge application and explanation and suspends 
collection, as described in paragraph (g)(2) of this section.
    (4) If a borrower fails to submit the application described in 
paragraph (c) of this section within 60 days of the Secretary's 
providing the discharge application, the Secretary resumes collection 
and grants forbearance of principal and interest for the period in 
which collection activity was suspended. The Secretary may capitalize 
any interest accrued and not paid during that period.
    (5) If the Secretary determines that a borrower who requests a 
discharge meets the qualifications for a discharge, the Secretary 
notifies the borrower in writing of that determination.
    (6) If the Secretary determines that a borrower who requests a 
discharge does not meet the qualifications for a discharge, the 
Secretary notifies that borrower in writing of that determination and 
the reasons for the determination, and resumes collection.
* * * * *

0
17. Section 685.215 is amended:
0
a. In paragraph (a)(1) introductory text, by removing the word ``The'' 
at the beginning of the paragraph and adding in its place ``For loans 
first disbursed before July 1, 2020, the'';
0
b. In paragraph (a)(1)(ii) introductory text, by removing the word 
``Certified'' and adding in its place ``For loans first disbursed 
before July 1, 2020, certified'';
0
c. In paragraph (a)(1)(iv), removing the word ``or'' at the end of the 
paragraph;
0
d. Removing the period at the end of paragraph (a)(v) and adding in its 
place ``; or'';
0
e. Adding paragraph (a)(1)(vi);
0
f. Revising paragraph (c) introductory text;
0
g. Adding introductory text to paragraph (d);
0
h. Adding paragraphs (e) and (f); and
0
i. Removing the parenthetical authority citation at the end of the 
section.
    The revisions and additions read as follows:


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

    (a) * * *
    (1) * * *
    (vi) For loans first disbursed on or after July 1, 2020, certified 
eligibility for a Direct Loan for a student who did not have a high 
school diploma or its recognized equivalent and did not meet the 
alternative eligibility requirements described in 34 CFR part 668 and 
section 484(d) of the Act applicable at the time of disbursement.
* * * * *
    (c) Borrower qualification for discharge. This paragraph (c) 
applies to loans first disbursed before July 1, 2020. To qualify for 
discharge under this paragraph, the borrower must submit to the 
Secretary an application for discharge on a form approved by the 
Secretary. The application need not be notarized but must be made by 
the borrower under penalty of perjury; and in the application, the 
borrower's responses must demonstrate to the satisfaction of the 
Secretary that the requirements in paragraph (c)(1) through (7) of this 
section have been met. If the Secretary determines the application does 
not meet the requirements, the Secretary notifies the applicant and 
explains why the application does not meet the requirements.
* * * * *
    (d) Discharge procedures. This paragraph (d) applies to loans first 
disbursed before July 1, 2020.
* * * * *
    (e) Borrower qualification for discharge. This paragraph (e) 
applies to loans first disbursed on or after July 1, 2020. In order to 
qualify for discharge under this paragraph, the borrower must submit to 
the Secretary an application for discharge on a form approved by the 
Secretary, and the factual assertions in the application must be true 
and made under penalty of perjury. In the application, the borrower 
must demonstrate to the satisfaction of the Secretary that the 
requirements in paragraphs (e)(1) through (6) of this section have been 
met.
    (1) High School diploma or equivalent. (i) In the case of a 
borrower requesting a discharge based on not having had a high school 
diploma and not having met the alternative eligibility requirements, 
the borrower must certify that the borrower (or the student on whose 
behalf a parent borrowed)--
    (A) Received a disbursement of a loan, in whole or in part, on or 
after January 1, 1986, to attend a school; and
    (B) Received a Direct Loan at that school and did not have a high 
school diploma or its recognized equivalent and did not meet the 
alternative to graduation from high school eligibility requirements 
described in 34 CFR part 668 and section 484(d) of the Act applicable 
at the time of disbursement.
    (ii) A borrower does not qualify for a false certification 
discharge under this paragraph (e)(1) if--
    (A) The borrower was unable to provide the school with an official 
transcript or an official copy of the borrower's high school diploma or 
the borrower was home schooled and has no official transcript or high 
school diploma; and
    (B) As an alternative to an official transcript or official copy of 
the borrower's high school diploma, the borrower submitted to the 
school a written attestation, under penalty of perjury, that the 
borrower had a high school diploma.
    (2) Unauthorized loan. In the case of a borrower requesting a 
discharge because the school signed the borrower's name on the loan 
application or promissory note without the borrower's authorization, 
the borrower must--
    (i) State that he or she did not sign the document in question or 
authorize the school to do so; and
    (ii) Provide five different specimens of his or her signature, two 
of which must be within one year before or after the date of the 
contested signature.
    (3) Unauthorized payment. In the case of a borrower requesting a 
discharge because the school, without the borrower's authorization, 
endorsed the borrower's loan check or signed the borrower's 
authorization for electronic funds transfer, the borrower must--
    (i) State that he or she did not endorse the loan check or sign the 
authorization for electronic funds transfer or authorize the school to 
do so;
    (ii) Provide five different specimens of his or her signature, two 
of which must be within one year before or after the date of the 
contested signature; and

[[Page 49932]]

    (iii) State that the proceeds of the contested disbursement were 
not delivered to the student or applied to charges owed by the student 
to the school.
    (4) Identity theft. (i) In the case of an individual whose 
eligibility to borrow was falsely certified because he or she was a 
victim of the crime of identity theft and is requesting a discharge, 
the individual must--
    (A) Certify that the individual did not sign the promissory note, 
or that any other means of identification used to obtain the loan was 
used without the authorization of the individual claiming relief;
    (B) Certify that the individual did not receive or benefit from the 
proceeds of the loan with knowledge that the loan had been made without 
the authorization of the individual;
    (C) Provide a copy of a local, State, or Federal court verdict or 
judgment that conclusively determines that the individual who is named 
as the borrower of the loan was the victim of a crime of identity 
theft; and
    (D) If the judicial determination of the crime does not expressly 
state that the loan was obtained as a result of the crime of identity 
theft, provide--
    (1) Authentic specimens of the signature of the individual, as 
provided in paragraph (e)(2)(ii) of this section, or of other means of 
identification of the individual, as applicable, corresponding to the 
means of identification falsely used to obtain the loan; and
    (2) A statement of facts that demonstrate, to the satisfaction of 
the Secretary, that eligibility for the loan in question was falsely 
certified as a result of the crime of identity theft committed against 
that individual.
    (ii)(A) For purposes of this section, identity theft is defined as 
the unauthorized use of the identifying information of another 
individual that is punishable under 18 U.S.C. 1028, 1028A, 1029, or 
1030, or substantially comparable State or local law.
    (B) Identifying information includes, but is not limited to--
    (1) Name, Social Security number, date of birth, official State or 
government issued driver's license or identification number, alien 
registration number, government passport number, and employer or 
taxpayer identification number;
    (2) Unique biometric data, such as fingerprints, voiceprint, retina 
or iris image, or unique physical representation;
    (3) Unique electronic identification number, address, or routing 
code; or
    (4) Telecommunication identifying information or access device (as 
defined in 18 U.S.C. 1029(e)).
    (5) Claim to third party. The borrower must state whether the 
borrower (or student) has made a claim with respect to the school's 
false certification or unauthorized payment with any third party, such 
as the holder of a performance bond or a tuition recovery program, and, 
if so, the amount of any payment received by the borrower (or student) 
or credited to the borrower's loan obligation.
    (6) Cooperation with Secretary. The borrower must state that the 
borrower (or student)--
    (i) Agrees to provide to the Secretary upon request other 
documentation reasonably available to the borrower that demonstrates 
that the borrower meets the qualifications for discharge under this 
section; and
    (ii) Agrees to cooperate with the Secretary in enforcement actions 
as described in Sec.  685.214(d) and to transfer any right to recovery 
against a third party to the Secretary as described in Sec.  
685.214(e).
    (7) Discharge without an application. The Secretary discharges all 
or part of a loan as appropriate under this section without an 
application from the borrower if the Secretary determines, based on 
information in the Secretary's possession, that the borrower qualifies 
for a discharge.
    (f) Discharge procedures. This paragraph (f) applies to loans first 
disbursed on or after July 1, 2020.
    (1) If the Secretary determines that a borrower's Direct Loan may 
be eligible for a discharge under this section, the Secretary provides 
the borrower the application described in paragraph (e) of this 
section, which explains the qualifications and procedures for obtaining 
a discharge. The Secretary also promptly suspends any efforts to 
collect from the borrower on any affected loan. The Secretary may 
continue to receive borrower payments.
    (2) If the borrower fails to submit a completed application within 
60 days of the date the Secretary suspended collection efforts, the 
Secretary resumes collection and grants forbearance of principal and 
interest for the period in which collection activity was suspended. The 
Secretary may capitalize any interest accrued and not paid during that 
period.
    (3) If the borrower submits a completed application, the Secretary 
determines whether to grant a request for discharge under this section 
by reviewing the application in light of information available from the 
Secretary's records and from other sources, including, but not limited 
to, the school, guaranty agencies, State authorities, and relevant 
accrediting associations.
    (4) If the Secretary determines that the borrower meets the 
applicable requirements for a discharge under paragraph (c) of this 
section, the Secretary notifies the borrower in writing of that 
determination.
    (5) If the Secretary determines that the borrower does not qualify 
for a discharge, the Secretary notifies the borrower in writing of that 
determination and the reasons for the determination, and resumes 
collection.
* * * * *

0
18. Section 685.222 is amended:
0
a. By revising the section heading;
0
b. In paragraph (a)(2), by adding the words ``and before July 1, 
2020,'' after the words ``after July 1, 2017,'';
0
c. In paragraph (b), by adding the words ``under this section'' after 
the words ``The borrower has a borrower defense'';
0
d. In paragraph (c), by adding the words ``under this section'' after 
the words ``The borrower has a borrower defense'';
0
e. In paragraph (d)(1), by adding the words ``under this section'' 
after the words ``A borrower has a borrower defense'';
0
f. In paragraph (e)(2) introductory text, by adding the words ``under 
this section'' after the words ``Upon receipt of a borrower's 
application'';
0
g. In paragraph (e)(3) introductory text, by adding the words 
``submitted under this section'' after the words ``review the 
borrower's application'';
0
h. In paragraph (e)(3)(ii), by removing the word ``Upon'' and adding in 
its place the words, ``For borrower defense applications under this 
section, upon'';
0
i. In paragraph (e)(4) introductory text, by adding the words ``under 
this section'' after the words ``fact-finding process'';
0
j. In paragraph (e)(5) introductory text, by adding the words ``under 
this section'' after the words ``Department official'';
0
k. In paragraph (f)(1) introductory text, by adding the words ``under 
this section'' after the words ``has a borrower defense'';
0
l. In paragraph (g) introductory text, by adding the words ``under this 
section'' after the words ``for which the borrower defense'';
0
m. In paragraph (h) introductory text, by adding the words ``under this 
section'' after the words ``for which the borrower defense''; and
0
n. By removing the parenthetical authority citation at the end of the 
section.

[[Page 49933]]

    The revision reads as follows:


Sec.  685.222  Borrower defenses and procedures for loans first 
disbursed on or after July 1, 2017, and before July 1, 2020, and 
procedures for loans first disbursed prior to July 1, 2017.

* * * * *

Appendix A to Subpart B of Part 685 [Amended]

0
19. Appendix A to subpart B of part 685 is amended by removing the word 
``The'' at the beginning of the introductory text and adding in its 
place the words ``As provided in 34 CFR 685.222(i)(4), the''.
0
20. Section 685.300 is amended by:
0
a. Revising paragraph (b)(8);
0
b. Removing paragraph (b)(11);
0
c. Removing ``and'' after ``any benefits associated with such a loan;'' 
from paragraph (b)(10);
0
d. Redesignating paragraph (b)(12) as paragraph (b)(11);
0
e. Adding ``; and'' after ``the purposes of Part D of the Act'' in 
newly redesignated paragraph (b)(11);
0
f. Adding a new paragraph (b)(12);
0
g. Removing paragraphs (d) through (i); and
0
h. Removing the parenthetical authority citation at the end of the 
section.
    The revision and addition read as follows:


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

* * * * *
    (b) * * *
    (8) Accept responsibility and financial liability stemming from its 
failure to perform its functions pursuant to the agreement;
* * * * *
    (12) Accept responsibility and financial liability stemming from 
losses incurred by the Secretary for repayment of amounts discharged by 
the Secretary pursuant to Sec. Sec.  685.206, 685.214, 685.215, 
685.216, and 685.222.
* * * * *
0
21. Section 685.304 is amended by:
0
a. Adding paragraphs (a)(3)(iii)(A) and (B);
0
b. Revising paragraph (a)(5);
0
c. Removing the word ``and'' after the words ``conditions of the 
loan;'' in paragraph (a)(6)(xii);
0
d. Redesignating paragraph (a)(6)(xiii) as paragraph (a)(6)(xvi) and 
adding new paragraph (a)(6)(xiii) and paragraphs (a)(6)(xiv) and (xv); 
and
0
e. Removing the parenthetical authority citation at the end of the 
section.
    The additions and revision read as follows:


Sec.  685.304  Counseling borrowers.

    (a) * * *
    (3) * * *
    (iii) * * *
    (A) Online or by interactive electronic means, with the borrower 
acknowledging receipt of the information.
    (B) If a standardized interactive electronic tool is used to 
provide entrance counseling to the borrower, the school must provide to 
the borrower any elements of the required information that are not 
addressed through the electronic tool:
    (1) In person; or
    (2) On a separate written or electronic document provided to the 
borrower.
* * * * *
    (5) A school must ensure that an individual with expertise in the 
title IV programs is reasonably available shortly after the counseling 
to answer the student borrower's questions. As an alternative, in the 
case of a student borrower enrolled in a correspondence, distance 
education, or study-abroad program approved for credit at the home 
institution, the student borrower may be provided with written 
counseling materials before the loan proceeds are disbursed.
    (6) * * *
    (xiii) For loans first disbursed on or after July 1, 2020, if, as a 
condition of enrollment, the school requires borrowers to enter into a 
pre-dispute arbitration agreement, as defined in Sec.  
668.41(h)(2)(iii) of this chapter, or to sign a class action waiver, as 
defined in Sec.  668.41(h)(2)(i) and (ii) of this chapter, the school 
must provide a written description of the school's dispute resolution 
process that the borrower has agreed to pursue, including the name and 
contact information for the individual or office at the school that the 
borrower may contact if the borrower has a dispute relating to the 
borrower's loans or to the provision of educational services for which 
the loans were provided;
    (xiv) For loans first disbursed on or after July 1, 2020, if, as a 
condition of enrollment, the school requires borrowers to enter into a 
pre-dispute arbitration agreement, as defined in Sec.  
668.41(h)(2)(iii) of this chapter, the school must provide a written 
description of how and when the agreement applies, how the borrower 
enters into the arbitration process, and who to contact if the borrower 
has any questions;
    (xv) For loans first disbursed on or after July 1, 2020, if, as a 
condition of enrollment, the school requires borrowers to sign a class-
action waiver, as defined in Sec.  668.41(h)(2)(i) and (ii) of this 
chapter, the school must explain how and when the waiver applies, 
alternative processes the borrower may pursue to seek redress, and who 
to contact if the borrower has any questions; and
* * * * *
0
22. Section 685.308 is amended by revising paragraph (a) and removing 
the parenthetical authority citation at the end of the section.
    The revision reads as follows:


Sec.  685.308  Remedial actions.

    (a) General. The Secretary may require the repayment of funds and 
the purchase of loans by the school if the Secretary determines that 
the school is liable as a result of--
    (1) The school's violation of a Federal statute or regulation;
    (2) The school's negligent or willful false certification under 
Sec.  685.215; or
    (3) The school's actions that gave rise to a successful claim for 
which the Secretary discharged a loan, in whole or in part, pursuant to 
Sec.  685.206, Sec.  685.214, Sec.  685.216, or Sec.  685.222.
* * * * *
[FR Doc. 2019-19309 Filed 9-20-19; 8:45 am]
BILLING CODE 4000-01-P