The Department of Education (ED) has proposed new regulations concerning student borrower defense claims that would also significantly expand financial responsibility indicators for private nonprofit and for-profit institutions. On August 1, NACUBO responded to a Notice of Proposed Rulemaking published by ED.
Although NACUBO supports the federal government’s goal to strengthen and clarify the current provisions for student borrowers—some of whom have been misled or defrauded by unscrupulous institutions—the association states in its comment letter: "We believe the department exceeded the original intent of the announced rulemaking process and has proposed rules that expand the definition of misrepresentation and alter and augment current financial responsibility regulations in ways that have the potential to be both unduly burdensome to colleges and universities and even possibly harmful to current or prospective students."
Six higher education associations—the Association of Jesuit Colleges and Universities, the Coalition of Higher Education Assistance Organizations, the Council of Independent Colleges, the National Association of Independent Colleges and Universities, the National Association of Student Financial Aid Administrators, and UNCF—signed on in support of NACUBO’s comment letter.
Financial Responsibility
The bulk of NACUBO’s concerns arise with the new proposed rules for institutional accountability and financial responsibility. NACUBO takes issue with the introduction of new requirements as a part of this rulemaking process and with the rules themselves.
NACUBO asserts that the department did not adequately disclose its intention to make significant changes to the financial responsibility regulations. When ED published its intention to establish a negotiated rulemaking committee, there was no indication that it would raise financial responsibility regulations as an issue open for rulemaking. No stakeholders with financial expertise were invited to participate in the process, and no financial experts were included at the table during negotiated rulemaking.
As a result, the proposal includes key thresholds tied to "current assets," amounts nonprofit institutions do not track, and others that are simply not reliable indicators of financial trouble.
ED also attempts to establish a noninvestment-grade bond rating as indicative of inability to repay debt or poor financial standing. NACUBO points out in its letter: "Those that have a rating are arguably in better financial condition than those that do not. Rather than being a trigger for additional scrutiny, the existence of a credit rating and outstanding public debt would, in and of itself, be an indication of financial responsibility."
NACUBO also points out that ED’s current financial responsibility practices are broken and that the department is not correctly calculating financial responsibility ratios for nonprofit institutions. In its letter, NACUBO states, "Before ED imposes a new financial responsibility structure, it should take steps to resolve the problems inherent in its current practice and ensure its ratio calculations adequately and appropriately measure whether an institution has the financial resources to support its mission."
In §668.171(c), which might apply to nonprofit institutions, the department proposes to add 10 new "automatic triggers," which are not comprehensive financial indicators and do not suggest that an institution is about to close precipitously. The proposed triggers would demand that colleges and universities obtain letters of credit, or provide other surety, and require extensive disclosures to enrolled and prospective students.
If an institution is subject to one or more of these triggers, ED will consider it unable "to meet its financial or administrative obligations." As a result, the institution would face multiple sanctions, including:
- Participating in the Title IV programs only under provisional certification.
- Providing to ED a letter of credit or other surety.
- Disclosing to all of its students and prospective students that it failed to show sufficient financial resources.
- Posting a warning on the home page of the institution’s website.
NACUBO argues: "Declines in enrollment and alumni and donor support will force tuition to rise—and could force some colleges to close. Additionally, the disclosures (resulting from the poorly designed triggers) will likely diminish access to capital, which is critical to improving—or even stabilizing—the infrastructure of college campuses."
Borrower Defense
The regulatory proposal was largely spurred by borrowers seeking relief following the demise of the for-profit Corinthian College chain. "Students who may have been victims of fraud or were left in the lurch by the sudden closure of an institution should not be left without recourse," NACUBO states in its letter. The American Council on Education (ACE) also commented on the proposal, firmly stating, "The department should have the means to protect former students who have been harmed by the colleges they attended, while simultaneously continuing to improve its Title IV gatekeeping and subsequent monitoring of participating colleges and universities so that unscrupulous institutions are not allowed to remain part of the Title IV program." NACUBO joined 12 other higher education associations in endorsing the ACE letter. The proposed rules establish a new federal standard for a discharge, or a "borrower defense to repayment," for loans disbursed on or after July 1, 2017.
ED proposes three circumstances to serve as a basis for a claim to be eligible for loan forgiveness:
1. A favorable contested judgment against the school from a court or administrative tribunal for relief, provided the claim relates to the making of the borrower’s direct loan.
2. A breach of contract between the borrower and an institution, in which the school failed to perform its obligations.
3. A substantial misrepresentation by the institution, which the borrower reasonably relied on when he or she decided to attend, or to continue to attend, the school.
The new rule would allow claims to be made by individuals or groups of borrowers. If the department determines that common facts and claims exist that apply to borrowers who have not filed an application, it could include those borrowers in a group, with individuals having the option to opt out.
Whereas ED proposes that there would be no time limitation for borrowers to assert a defense to repayment for amounts still owed on a given loan, NACUBO and ACE called for consideration of a statute of limitations. NACUBO also commented on the time frame for processing claims and an appeals process.
Misrepresentation
The department recommends adding to the definition of "misrepresentation" in §668.71(c) a sentence addressing omissions that would read, "Misrepresentation includes any statement that omits information in such a way as to make the statement false, erroneous, or misleading." NACUBO is quite concerned that this less-specific language would permit claims of misrepresentation even when such misrepresentation occurred unintentionally or inadvertently.
NACUBO asserts in its comments, "The vastly broadened view of misrepresentation will result in a booming business for lawyers and will tie up institutions in governmental red tape."
Final Rule
The official ED comment period has closed. However, interested parties can still weigh in with the Office of Management and Budget’s Office of Information and Regulatory Affairs. Information on submitting written comments or meeting with OIRA can be found on OMB’s website.
The final rule is scheduled to be published before Nov. 1, 2016, to take effect on July 1, 2017. For more information and resources on borrower defense, visit the NACUBO website, and under the "Initiatives" tab, click "Borrower Defense."
NACUBO CONTACT Liz Clark, director of federal affairs, 202.861.2553, @lizclarknacubo, or Bryan Dickson, senior policy analyst, 202.861.2505