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Things Get Real on Student Loan Elimination by Borrower Defense

By on June 13, 2016

The Department of Education has released a massive proposed rule that aims at finalizing a process to allow people who have been defrauded by their schools, a process to eliminate their federal student loans. It also would create a process for student loan borrowers to also seek to get back loan payments they made to schools found to have misled students into loans.

I’ve reported in the past on the borrower defense claim strategy that has the potential to wipe away loads of student loans. Click here to read the articles.

The proposed new rules would amend the regulations of the Direct Loan program to make allowances for this loan forgiveness approach.

The basis of the approach is sound. Why should schools benefit when it can be proven they misled and deceived students into enrolling. It’s a straight up issue surrounding unfair and deceptive practices. It just so happens many students may be able to have their student loans forgiven because there was just that much fraud by both public and private schools.

The new proposed rule asks for consumer feedback and comment. You can comment by going to Go to www.regulations.gov to submit your comments electronically.

The new proposed rules attempt to address several issues like loan fraud and arbitration agreements in student loan agreements.

The proposed rule states, “However, when postsecondary institutions make false and misleading statements to students or prospective students about school or career outcomes or financing needed to pay for those programs, or fail to fulfill specific contractual promises regarding program offerings or educational services, student loan borrowers may be eligible for discharge of their Federal loans.

The proposed regulations would give students access to consistent, clear, fair, and transparent processes to seek debt relief; protect taxpayers by requiring that financially risky institutions are prepared to take responsibility for losses to the government for discharges of and repayments for Federal student loans; provide due process for students and institutions; and warn students, using plain language issued by the Department, about proprietary schools at which the typical student experiences poor loan repayment outcomes–defined in these proposed regulations as a proprietary school with a loan repayment rate that is less than or equal to zero percent, which means that the typical borrower has not paid down at least a dollar on his or her loans–so that students can make more informed enrollment and financing decisions.”

The major provisions of this new proposed rule are:

  • Clarify that borrowers with loans first disbursed prior to July 1, 2017, may assert a defense to repayment under the current borrower defense State law standard;
  • Establish a new Federal standard for borrower defenses, and limitation periods applicable to the claims asserted under that standard, for borrowers with loans first disbursed on or after July 1, 2017;
  • Establish a process for the assertion and resolution of borrower defense claims made by individuals;
  • Establish a process for group borrower defense claims with respect to both open and closed schools, including the conditions under which the Secretary may allow a claim to proceed without receiving an application;
  • Provide for remedial actions the Secretary may take to collect losses arising out of successful borrower defense claims for which an institution is liable; and
  • Add provisions to schools’ Direct Loan program participation agreements that, for claims that may form the basis for borrower defenses–
  • Prevent schools from requiring that students first engage in a school’s internal complaint process before contacting accrediting and government agencies about the complaint;
  • Prohibit the use of mandatory pre-dispute arbitration agreements by schools;
  • Prohibit the use of class action lawsuit waivers; and
  • To the extent schools and borrowers engage in arbitration in a manner consistent with applicable law and regulation, require schools to disclose to and notify the Secretary of arbitration filings and awards.

The proposed regulations would also revise the Student Assistance General Provisions regulations to–

  • Amend the definition of a misrepresentation to include omissions of information and statements with a likelihood or tendency to mislead under the circumstances. The definition would be amended for misrepresentations for which the Secretary may impose a fine, or limit, suspend, or terminate an institution’s participation in title IV, HEA programs. This definition is also adopted as a basis for alleging borrower defense claims for Direct Loans first disbursed after July 1, 2017;
  • Clarify that a limitation may include a change in an institution’s participation status in title IV, HEA programs from fully certified to provisionally certified;
  • Amend the financial responsibility standards to include actions and events that would trigger a requirement that a school provide financial protection, such as a letter of credit, to insure against future borrower defense claims and other liabilities to the Department;
  • Require proprietary schools with a student loan repayment rate that is less than or equal to zero percent to provide a Department-issued plain language warning to prospective and enrolled students and place the warning on its Web site and in all promotional materials and advertisements; and
  • Require a school to disclose on its Web site and to prospective and enrolled students if it is required to provide financial protection, such as a letter of credit, to the Department.

The proposed regulations would also–

  • Expand the types of documentation that may be used for the granting of a discharge based on the death of the borrower (“death discharge”) in the Perkins, FFEL, Direct Loan, and TEACH Grant programs;
  • Revise the Perkins, FFEL, and Direct Loan closed school discharge regulations to ensure borrowers are aware of and able to benefit from their ability to receive the
    discharge;

  • Expand the conditions under which a FFEL or Direct Loan borrower may qualify for a false certification discharge;
  • Codify the Department’s current policy regarding the impact that a discharge of a Direct Subsidized Loan has on the 150 Percent Direct Subsidized Loan Limit; and
  • Make technical corrections to other provisions in the FFEL and Direct Loan Program regulations and to the regulations governing the Secretary’s debt compromise authority.

While some may be outraged that some students may be able to have their student loans eliminated under this program we can’t lose sight that this program is designed to help the government also recover money that was disbursed to postsecondary education entities that misled students and took advantage of taxpayer money.

For example, the new proposed rule says when a postsecondary entity entices students using advertising that makes untruthful statements about placement rates that it would give rise to a borrower defense claim.

The new proposed rule also limits the school from using agreement language that would prevent students from engaging in class action lawsuits. That’s important since a class action victory could be used as a basis for a borrower defense claim.

I agree there are problems with class action lawsuits and attorneys can win big fees. But class action lawsuits also allow people to seek relief who would have never been able to afford to go up against their school.

But the rule does not limit misrepresentation to just placement rates. It says, ” a borrower would have a borrower defense if the school or any of its representatives, or any institution, organization, or person with whom the school has an agreement to provide educational programs, or to provide marketing, advertising, recruiting, or admissions services, made a substantial misrepresentation that the borrower reasonably relied on when the borrower decided to attend, or to continue attending, the school.”

Substantial misrepresentation is defined as “any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person’s detriment.”

“The definition would also be expanded to specify that a misrepresentation includes any statement that omits information in such a way as to make the statement false, erroneous, or misleading.”

But another claim that could be made, outside of misrepresentation is if the schools actually breeched the enrollment agreement or contract that promised a certain level of service or statements made in school catalogs, student handbooks, or student regulations.

For now, I’ll leave you to enjoy the 530 page proposed rule document to read. I’ll cover this in more depth when the final rule is published.


If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

READ  Is This the Beginning of the End for the Borrower Defense?

About Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

5 Comments

  1. Steve Rhode

    July 26, 2016 at 12:03 pm

    Nothing in the Borrower Defense for federal loans has any impact on any private loan.

    • JMinneapolis

      July 27, 2016 at 10:44 am

      If the DOE dismissed loans as fraudulent, could a student then challenge the private loans or are they stuck having to repay them?

      Most of my issues are with the private loans – my school never made any differentiation between private and federal and kept telling everyone to take out what they needed – that your payments would all be eligible for IBR – so no matter what job you got later, you would not have to worry about the higher payments on paper.

      Then, after I graduated, I find out that only the Federal are eligible for IBR, but added with my private loans, my total student loan payments are close to 40% of my income. (Higher than my rent.)

      • Steve Rhode

        July 27, 2016 at 1:58 pm

        You could file suit in state court and certainly make the claim, but I wonder if you’d find any attorney to take on that case without a huge retainer. The cost of fighting an unfair and deceptive claim against both a school and a major lender would be expensive. However, maybe an attorney out there would be willing to jump to the challenge. Let me know if you find one. Please.

  2. JMinneapolis

    July 25, 2016 at 3:54 pm

    Is there any word on how the IRS would handle these dismissed loans? Also, would a student that had the DOE confirm their Defense to Repayment still have to repay private loans?

    • Steve Rhode

      July 25, 2016 at 4:23 pm

      They are proposed to be eliminated tax-free. Yes on private loans. Only applies to federal loans.

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