This month, in a victory by and for student loan borrowers, a court ordered that the Department of Education had illegally delayed giving effect to an important rule from 2016 designed to protect student loan borrowers and taxpayers from school closures and misconduct. The court’s order meant that the rule—often called the 2016 “Borrower Defense” Rule—went into effect on October 16, 2018. This post describes how we got here and what the order means for student loan borrower rights. A related article geared toward attorneys is available on NCLC’s Digital Library.
Secretary DeVos’s Attempts to Stop Borrower Defense Rule
Under the Obama Administration, the Department of Education published rules on November 1, 2016 that were scheduled to take effect on July 1, 2017. But the administration changed before the July effective date, and the new Trump Administration and Secretary of Education DeVos said the rules made it too easy for borrowers to get student loan relief. So, the Secretary tried to prevent the rules from going into effect using several delay notices while starting work on a replacement rule that would make it much harder for borrowers to get relief.
Court Agrees with Student Borrowers: Department’s Attempts to Stop Rule are Illegal
Student loan borrowers, as well as state attorneys general from 19 states plus Washington D.C. filed suit against Secretary DeVos challenging these delays as illegal. The court agreed, holding that the delays were illegal and ordering that they be vacated (ended), effective October 16, 2018.
Department’s Efforts to Replace Rule with Terrible One Hit a Snag
While this court case has been going on, the Department has continued efforts to create a new rule to replace the 2016 Borrower Defense Rule. It proposed a new rule on July 31, 2018. The legal aid community analyzed the proposed new rule and concluded it would make it much harder to get relief for struggling borrowers whose school closed before they could graduate or lied to them to get them to enroll and take out loans. The civil rights community and a broad coalition of organizations that represent the interests of students, veterans and borrowers agreed and also strongly condemned the proposal.
The Department received thousands of comments opposing the proposal and stated that it will not be able to respond to all the comments and finalize a new rule until after November 1, 2018. This is important because it means that the soonest this proposed rule could go into effect and “replace” the 2016 rule is July 1, 2020, due to a “Master Calendar” law that governs timing of student loan rules. The 2016 rules should likely be the law of the land until at least July 2020.
What the Rule Means for Student Borrower’s Rights
The now formally effective 2016 Borrower Defense Rule should clarify and strengthen student borrowers’ rights to discharge their student loans or to sue their school in court when it cheats them or closes before they can graduate. The sections below highlight some of these changes to student loan borrowers’ rights under the now-effective rule.
But to make these rights real the Department will have to follow the law itself and also require the servicers, debt collectors, and schools that participate in the student loan program to comply with the law. Given the Department’s repeated attempts to delay, rewrite, and otherwise thwart the rule, we will be watching to see what the Department will actually do. With over 100,000 borrower defense applicants waiting for decisions from the Department, it is past time for the Department to step up and do its job of providing relief to cheated borrowers.
Rule Clarifies Process to Raise School-Related Borrower Defenses to Loan Repayment
The law has long allowed students to raise-school related defenses to repayment of their federal student loans, often called “borrower defense” claims, but there has been little clarity on how students may do so and how their claims will be evaluated. The now-effective rules are intended to clarify borrower defense procedures, and provide important borrower protections. The rules provide a process for individual borrowers to submit applications to have their Direct Loans fully or partially discharged based on school misconduct, and clarify that a Department official will evaluate the claim using a preponderance of the evidence standard and decide on relief. The current application form is available on the Department of Education’s website (with separate applications for former students of Everest, Heald, and WyoTech); borrowers should check for any updates to the form in the coming months.
After applying, the borrower will have a number of rights—including rights related to evidentiary submission and review, written decisions, reconsideration and appeals, as well as rights to forbearance and suspension of collection of defaulted loans while borrowers’ applications are awaiting decision or being reconsidered.
The rules also provide a group process through which the Department may provide class-wide relief, without requiring individual applications, in cases of widespread school misconduct. However, borrowers should not hold their breath waiting for group relief—only the Secretary of Education may initiate a group process under the rules, and the current Secretary DeVos has proposed eliminating this provision, making it appear unlikely that she’ll use it to provide relief to borrowers.
Rule Creates New Standards for When Borrower Defenses Should be Approved
For newly disbursed Direct Loans (including Direct Consolidation Loans), students will have a borrower defense if: (a) their school breached a contractual promise; (b) their school made a substantial misrepresentation that the borrower reasonably relied on to his or her detriment in deciding to attend, or to continue attending, or in deciding to take out a Direct Loan; or (c) there is a nondefault, contested court judgment against the school in the borrower’s favor.
For previously disbursed loans, the prior standard will remain—allowing borrowers to assert a borrower defense based on any act or omission of the school that violates state law and relates to the making of the Direct loan or the provision of educational services for which the loan was provided that would. This could include state unfair and deceptive practices laws, false advertising laws, refund laws, and contract law.
Time Limits on Borrower Defenses
Unfortunately, the new rule imposes time limits on the recovery of amounts already paid or collected from the borrower. For newly disbursed loans, a six-year limitations period will apply to refunds if the borrower’s defense is based on a breach of contract or a substantial misrepresentation, with the limitations period for substantial misrepresentation claims running from the time the borrower discovered or could have reasonably discovered the information constituting the misrepresentation. There is no time limit for raising these borrower defenses to discharge of amounts that borrowers still owe, and no time limits apply if there is a relevant judgment against the school.
For previously disbursed loans, the Department will use the “limitation period under the law applicable to the claim on which relief was granted.” Although state law generally permits borrowers to raise defenses to offset outstanding amounts due on loans so long as the loan is collectable, the Department may interpret this new rule to allow it to limit refunds of amounts already paid on outstanding loans. Equity should counsel against penalizing current borrowers for not “timely” asserting borrower defenses before there was even a process to do so, and such equity-based arguments may be available under applicable state law.
Borrower Defense Provisions Apply Only to Direct Loans
The new borrower-defense rights apply to students and parents with Direct Loans. The rules state that borrowers with Federal Family Education Loans (FFELs) and Perkins Loans may apply through the Direct Loan borrower defense process if they agree to consolidate their loans into a new Direct Consolidation Loan (for those eligible to so consolidate), but they will not be able to recover amounts already paid on their FFEL and Perkins loans through this process. Borrowers with FFEL loans may alternatively assert a defense under existing FFEL borrower defense regulations and the terms of their promissory notes, but the rules do not clarify the process for FFEL borrowers to assert borrower defenses.
Rule Provides New Rights for Students Harmed by School Closures or False Aid Eligibility Certification
Students have a right to have their federal loans discharge if their school closed before the student completed their program or the school falsely certified the student’s eligibility for federal student loans. The newly effective 2016 rules strengthen these protections.
Most importantly, the rules require the Department to provide closed school discharges automatically—without requiring the student to apply—for certain eligible borrowers. The closed school discharge should automatically be provided to eligible borrowers whose schools closed before they could complete their program on or after November 1, 2013 and who did not re-enroll in another school within three years of their school’s closure. This means that thousands of borrowers whose schools closed between November 1, 2013 and October 25, 2015 are already entitled to an automatic discharge of their student loans.
False certification discharges are also clarified, for example by making it clear that borrowers qualify for discharges where the school falsified the borrower’s high school graduation or diploma or referred the student to a third party to obtain a falsified high school diploma.
Rule Protects Students’ Right to Go to Court
Importantly, the rules also bar schools that rely on federal tax dollars from shutting off student access to the courthouse through forced arbitration clauses—at least when students are making claims about the type of school misconduct that the borrower defense rule covers (e.g., false advertising, deceptive recruiting, breaches of contract, etc.). The rules do this by requiring schools that wish to participate in the Direct Loan program to agree not to use pre-dispute arbitration clauses and class action bans that cover these types of claims in agreements with students, and to agree not to rely on any existing pre-dispute agreements with current or former students to stop them from bringing these types of claims in court.
This should mean that student borrowers are now free to sue their schools and to bring class actions for misconduct that led them to take out burdensome student loans. If students sue, their attorneys should seek amended agreements in writing from the school agreeing they will not attempt to rely on the arbitration clauses.
This change is very important for protecting the rights of student loan borrowers, who have been unfairly stopped from raising their claims against predatory schools due to the arbitration clauses that most for-profit schools slip into their student enrollment agreements. (In contrast, public and non-profit schools rarely require their students to waive their right to go to court). It is also a win for future students and for taxpayers. As NCLC has explained in urging the Department and other government actors to bar these clauses, forced arbitration silences legitimate complaints about illegal conduct, forcing complaints into secretive arbitration systems or suppressing cases before they’re even filed. By bringing these complaints into the open and allowing students to band together in asserting classwide claims, school misconduct should be made public much earlier on—helping prospective students and the government to decide whether a school deserves their dollars.