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I’ve been periodically writing about the U.S. Dept. of Education’s attempts to create a process for addressing borrowers who were defrauded by predatory for-profit institutions and who are seeking relief through Defense to Repayment. As I have previously written, while thousands of borrowers have applied for relief (and the administration has granted some relief to borrowers already), there is no regulatory structure in place to guide the government in deciding who should be eligible for relief, and how to make those determinations. As a result, the vast majority of Defense to Repayment applications submitted by student loan borrowers have been sitting in limbo.
When I last checked in with you all, the U.S. Dept. of Education was involved in what’s called “negotiated rulemaking,” whereby various stakeholders are invited to hash out the details about what a regulatory regime for student debt relief would look like.
Earlier this week, the Department issued proposed regulations for borrowers asserting Defense to Repayment. Here are the details:
The proposed regulations define specific school-related violations that can give rise to a viable Defense to Repayment claim. Right now, the limited and somewhat unclear language of the Defense to Repayment clause in existing federal student loan contracts limits relief to situations where a school engaged in activity that gave rise to a cause of action under state law. The Department has defined and expanded this definition in a bit more detail to include breach of contract; state or federal judgments against the school that are related to the school’s educational services; and “substantial misrepresentations” made by the school about academic programs, costs, or career prospects. That last one in particular is a big deal, in my opinion.
More-generous statute of limitations
The Department’s original position was that borrowers should only have two years from the discovery of a school’s violation to file a claim for relief. Advocates argued that this was tremendously unfair, since private student loans typically have a statute of limitations of six years or more, there is no statute of limitations whatsoever on the collection of federal student loans, and state-based consumer protection laws typically have a statute of limitations of three to six years. The Department seems to have relented, and it is now proposing a six-year window for student loan borrowers to request relief.
Clearer definition of qualifying loans
There are three general types of student loans that borrowers may receive to attend an educational institution: Direct federal loans that are originated by the federal government; older FFEL-program loans that are guaranteed by the federal government (these loans are no longer issued as of 2010); and private student loans. There was some concern that Defense to Repayment would be limited only to Direct federal student loans. However, the regulations do seem to allow for relief for FFEL program borrowers, as well. The regulations do not govern private student loan relief, however.
Ban on arbitration
Many for-profit school enrollment agreements include mandatory arbitration clauses, which can limit a student’s rights in seeking relief for deceptive and fraudulent practices. The Department proposes to ban mandatory arbitration clauses, gag orders, class action waivers, and other contractual provisions that limit the rights of students to fight back when they have been wronged.
Right now, Defense to Repayment has been viewed as an all-or-nothing form of relief. You either get all of your applicable federal student loans forgiven, or you don’t. However, the proposed regulations seem to allow for determinations of partial relief or partial loan forgiveness, depending on the amount of “harm” to the borrower. It is not entirely clear how such determinations about the level of harm would be made – but some advocates are concerned that a student who winds up doing well despite the harm inflicted by a predatory school could be denied full relief.
These rules are obviously imperfect, but they are substantially better than what I feared they would be, and the fact that the administration is moving forward on creating a concrete procedure to evaluate Defense to Repayment claims is encouraging.
We’re not done yet, though. This process is a slow one. Before the regulations can go into effect, there must be a public comment period on these proposed regulations. That comment period lasts through July. After that, the regulations have to be finalized and published – and then there’s a waiting period before they go into effect. Look to the late fall of 2016 for the final publication of the rules, followed by full implementation hopefully by the summer of 2017. Fingers crossed.
To read the proposed regulations yourself, or to find out how to participate in public comments, click here.