Title IV Update: New Guidance on Borrower Defense

Guidance on Borrower Defense from a Title IV Specialist

One of the most impactful regulatory updates affecting all sectors of higher learning is the new guidance on Borrower Defense. The rules governing borrower defense have been on the books since 1993 when the Direct Loan program started. This rule gives students a way to make a claim to not pay their student loans.

If you do an internet search for borrower defense to repayment, you will see how easy it is to access an application to assert a claim to discharge a loan. The Department of Education reviews applications submitted by students and determines whether the claims have merit to be discharged. Up until 2015, there were a minimal number of claims annually.

The collapse of Corinthian College and numerous smaller schools resulted in over 118,000 claims being filed and $2.4 billion in potential loan discharges by the end of 2017.  As a result of this avalanche of discharges, the Department of Education through the negotiated rulemaking process revised the borrower defense rules and the new borrower defense rules were established with a July 1, 2017 effective date.  The current administration postponed the enactment date, but several lawsuits restored the new rules in October of 2018.

Which Borrower Defense Rules Are in Effect?

Any loans disbursed before July 1, 2017 will continue to follow the prior rules (BDR-1) related to borrow defense.  This is over 95% of the student loans that are currently in repayment.

On March 15, 2019, the U.S. Department of Education released guidance detailing how the agency would implement its 2016 “borrowers defense” (BDR-2).  The hot button issue with the new rules is the expanded scope of the borrower defense framework.  The following topics were added under the borrowers defense framework:

• financial responsibility triggers,
• provision for closed school discharges,
• false certification discharges,
• misrepresentation,
• arbitration agreements, and
• responsibility for repayment rates (proprietary schools).

Financial Responsibility Triggers

For this article, we will focus primarily on the financial responsibility triggers that will become part of all audits moving forward. Misrepresentation, false certification and school closings without teaching out or transferring students are clear examples where students need protections.

The new rules allow institutions due process rights, so these claims have to be legitimate. For arbitration agreements, we strongly advise you have legal counsel (who specialize in education) review your enrollment agreements, especially but not limited to, any arbitration clauses in the enrollment agreement. There are some opinions that the mere inclusion of an arbitration clause is a deceitful attempt to take advantage of a student.

Potential Unintended Consequences of the New Rule

The financial responsibility reporting requirements are the biggest area of potential unintended consequences of the new rule.

Financial responsibility is determined through financial audits conducted in accordance with generally accepted governmental accounting standards by an independent eligible certified public accounting firm. A composite score of greater than 1.5 results in an institution achieving financial responsibility in addition to sufficient cash resources, no qualifications and no unresolved past performance measures.

The new rule added that institutions must meet financial obligations and provide administrative resources necessary to comply with the financial aid requirements. An institution may not satisfy this standard if it is subject to one or more triggering events if they occur after 7/1/2017 (34 CFR 668.171(b)(3).

Three Buckets of Triggering Events

There are three buckets of triggering events that could affect your financial responsibility status:

The first bucket is (34 CFR 668.171(c)) “automatic” triggering events for which a projected composite score would be calculated and used as the basis for a financial responsibility determination. Judgments and settlements, agency BDR litigation, other qualifying litigation, accreditor teach-out notice and qualifying withdrawal of owner’s equity are the examples of qualifying events that trigger a recalculation of the composite score.

The second bucket is (34 CFR 668.171(d)-(f)) “automatic” triggering events which result in designating the school not financially responsible. 90/10 failure, failing cohort default rates, and publicly traded institution triggers are the three examples of events that would instantly cause an institution to not be financially responsible.

The third bucket is (34 CFR 668.171(g)) “discretionary” triggering events that ED may determine will have a material on financial responsibility. This most likely would be the result of a program review. If the composite score falls below 1.0 as a result of a triggering event, the institution will be required to post an irrevocable letter of credit with the Department of Education.  These funds will be available to satisfy student loan discharges and other liabilities in the event an institution closes.

Summary

Institutions are required to notify the Department of Education within 10 days of a triggering event. You can expect to ask to make representations to auditors that notifications have been made timely if required to do so. When in doubt whether a notification is required, you should immediately consult with legal counsel to establish if notification is required.