[Federal Register Volume 81, Number 211 (Tuesday, November 1, 2016)]
[Rules and Regulations]
[Pages 75926-76089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25448]



[[Page 75925]]

Vol. 81

Tuesday,

No. 211

November 1, 2016

Part II





Department of Education





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34 CFR Parts 30, 668, 674, et al.





Student Assistance General Provisions, Federal Perkins Loan Program, 
Federal Family Education Loan Program, William D. Ford Federal Direct 
Loan Program, and Teacher Education Assistance for College and Higher 
Education Grant Program; Final Rule

Federal Register / Vol. 81 , No. 211 / Tuesday, November 1, 2016 / 
Rules and Regulations

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DEPARTMENT OF EDUCATION

34 CFR Parts 30, 668, 674, 682, 685, and 686

RIN 1840-AD19
[Docket ID ED-2015-OPE-0103]


Student Assistance General Provisions, Federal Perkins Loan 
Program, Federal Family Education Loan Program, William D. Ford Federal 
Direct Loan Program, and Teacher Education Assistance for College and 
Higher Education Grant Program

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary establishes new regulations governing the 
William D. Ford Federal Direct Loan (Direct Loan) Program to establish 
a new Federal standard and a process for determining whether a borrower 
has a defense to repayment on a loan based on an act or omission of a 
school. We also amend the Direct Loan Program regulations to prohibit 
participating schools from using certain contractual provisions 
regarding dispute resolution processes, such as predispute arbitration 
agreements or class action waivers, and to require certain 
notifications and disclosures by schools regarding their use of 
arbitration. We amend the Direct Loan Program regulations to codify our 
current policy regarding the impact that discharges have on the 150 
percent Direct Subsidized Loan Limit. We amend the Student Assistance 
General Provisions regulations to revise the financial responsibility 
standards and add disclosure requirements for schools. Finally, we 
amend the discharge provisions in the Federal Perkins Loan (Perkins 
Loan), Direct Loan, Federal Family Education Loan (FFEL), and Teacher 
Education Assistance for College and Higher Education (TEACH) Grant 
programs. The changes will provide transparency, clarity, and ease of 
administration to current and new regulations and protect students, the 
Federal government, and taxpayers against potential school liabilities 
resulting from borrower defenses.

DATES: These regulations are effective July 1, 2017. Implementation 
date: For the implementation dates of the included regulatory 
provisions, see the Implementation Date of These Regulations section of 
this document.

FOR FURTHER INFORMATION CONTACT: For further information related to 
borrower defenses, Barbara Hoblitzell at (202) 453-7583 or by email at: 
[email protected]. For further information related to false 
certification and closed school loan discharges, Brian Smith at (202) 
453-7440 or by email at: [email protected]. For further information 
regarding institutional accountability, John Kolotos or Greg Martin at 
(202) 453-7646 or (202) 453-7535 or by email at: [email protected] or 
[email protected].
    If you use a telecommunications device for the deaf (TDD) or a text 
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-
800-877-8339.

SUPPLEMENTARY INFORMATION: 

Executive Summary

    Purpose of This Regulatory Action: The purpose of the borrower 
defense regulations is to protect student loan borrowers from 
misleading, deceitful, and predatory practices of, and failures to 
fulfill contractual promises by, institutions participating in the 
Department's student aid programs. Most postsecondary institutions 
provide a high-quality education that equips students with new 
knowledge and skills and prepares them for their careers. 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 final regulations 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 in advertising and promotional 
materials, using plain language issued by the Department, about 
proprietary schools at which the typical student experiences poor loan 
repayment outcomes--defined in these final regulations as a proprietary 
school at which the median borrower has not repaid in full, or made 
loan payments sufficient to reduce by at least one dollar the 
outstanding balance of, the borrower's loans received at the 
institution--so that students can make more informed enrollment and 
financing decisions.
    Section 455(h) of the Higher Education Act of 1965, as amended 
(HEA), 20 U.S.C. 1087e(h), authorizes the Secretary to specify in 
regulation which acts or omissions of an institution of higher 
education a borrower may assert as a defense to repayment of a Direct 
Loan. Section 685.206(c), governing defenses to repayment, has been in 
place since 1995 but, until recently, has rarely been used. Those final 
regulations specify that a borrower may assert as a defense to 
repayment any ``act or omission of the school attended by the student 
that would give rise to a cause of action against the school under 
applicable State law.''
    In response to the collapse of Corinthian Colleges (Corinthian) and 
the flood of borrower defense claims submitted by Corinthian students 
stemming from the school's misconduct, the Secretary announced in June 
2015 that the Department would develop new regulations to establish a 
more accessible and consistent borrower defense standard and clarify 
and streamline the borrower defense process to protect borrowers and 
improve the Department's ability to hold schools accountable for 
actions and omissions that result in loan discharges.
    These final regulations specify the conditions and processes under 
which a borrower may assert a defense to repayment of a Direct Loan, 
also referred to as a ``borrower defense.'' The current standard allows 
borrowers to assert a borrower defense if a cause of action would have 
arisen under applicable State law. In contrast, these final regulations 
establish a new Federal standard that will allow a borrower to assert a 
borrower defense on the basis of a substantial misrepresentation, a 
breach of contract, or a favorable, nondefault contested judgment 
against the school, for its act or omission relating to the making of 
the borrower's Direct Loan or the provision of educational services for 
which the loan was provided. The new standard will apply to loans made 
after the effective date of the proposed regulations. The final 
regulations establish a process for borrowers to assert a borrower 
defense that will be implemented both for claims that fall under the 
existing standard and for later claims that fall under the new, 
proposed standard. In addition, the final regulations establish the 
conditions or events upon which an institution is or may be required to 
provide to the Department financial protection, such as a letter of 
credit, to help protect students, the Federal government, and taxpayers 
against potential institutional liabilities.
    These final regulations also prohibit a school participating in the 
Direct Loan Program from obtaining, through the use of contractual 
provisions or other agreements, a predispute agreement for

[[Page 75927]]

arbitration to resolve claims brought by a borrower against the school 
that could also form the basis of a borrower defense under the 
Department's regulations. The final regulations also prohibit a school 
participating in the Direct Loan Program from obtaining an agreement, 
either in an arbitration agreement or in another form, that a borrower 
waive his or her right to initiate or participate in a class action 
lawsuit regarding such claims and from requiring students to engage in 
internal dispute processes before contacting accrediting or government 
agencies with authority over the school regarding such claims. In 
addition, the final regulations impose certain notification and 
disclosure requirements on a school regarding claims that are the 
subject of a lawsuit filed in court or that are voluntarily submitted 
to arbitration after a dispute has arisen.
    Summary of the Major Provisions of This Regulatory Action: For the 
Direct Loan Program, the final regulations--
     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 (PPAs) that, for claims that may form the 
basis for borrower defenses--
    [ssquf] Prevent schools from requiring that students first engage 
in a school's internal complaint process before contacting accrediting 
and government agencies about the complaint;
    [ssquf] Prohibit the use of predispute arbitration agreements by 
schools;
    [ssquf] Prohibit the use of class action lawsuit waivers;
    [ssquf] 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; and
    [ssquf] Require schools to disclose to and notify the Secretary of 
certain judicial filings and dispositions.
    The final regulations 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 at which the median borrower 
has not repaid in full, or paid down by at least one dollar the 
outstanding balance of, the borrower's loans to provide a Department-
issued plain language warning in 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 final regulations 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.
    Costs and Benefits: As noted in the NPRM, the primary potential 
benefits of these regulations are: (1) An updated and clarified process 
and a Federal standard to improve the borrower defense process and 
usage of the borrower defense process to increase protections for 
students; (2) increased financial protections for taxpayers and the 
Federal government; (3) additional information to help students, 
prospective students, and their families make informed decisions based 
on information about an institution's financial soundness and its 
borrowers' loan repayment outcomes; (4) improved conduct of schools by 
holding individual institutions accountable and thereby deterring 
misconduct by other schools; (5) improved awareness and usage, where 
appropriate, of closed school and false certification discharges; and 
(6) technical changes to improve the administration of the title IV, 
HEA programs. Costs associated with the regulations will fall on a 
number of affected entities including institutions, guaranty agencies, 
the Federal government, and taxpayers. These costs include changes to 
business practices, review of marketing materials, additional employee 
training, and unreimbursed claims covered by taxpayers. The largest 
quantified impact of the regulations is the transfer of funds from the 
Federal government to borrowers who succeed in a borrower defense 
claim, a significant share of which will be offset by the recovery of 
funds from institutions whose conduct gave rise to the claims.
    On June 16, 2016, the Secretary published a notice of proposed 
rulemaking (NPRM) for these parts in the Federal Register (81 FR 
39329). The final regulations contain changes from the NPRM, which are 
fully explained in the Analysis of Comments and Changes section of this 
document.
    Implementation Date of These Regulations: Section 482(c) of the HEA 
requires that regulations affecting programs under title IV of the HEA 
be published in final form by November 1, prior to the start of the 
award year (July 1) to which they apply. However, that section also 
permits the Secretary to designate any regulation as one that an entity 
subject to the regulations may choose to implement earlier and the 
conditions for early implementation.
    The Secretary is exercising his authority under section 482(c) to 
designate the following new regulations included in this document for 
early implementation beginning on November

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1, 2016, at the discretion of each lender or guaranty agency:
    (1) Section 682.211(i)(7).
    (2) Section 682.410(b)(6)(viii).
    Additionally, the Secretary intends to exercise his authority under 
section 482(c) of the HEA to permit the Secretary and guaranty agencies 
to implement the new and amended regulations specific to automatic 
closed school discharges in Sec. Sec.  674.33(g)(3)(ii), 
682.402(d)(8)(ii) and 685.214(c)(2)(ii) as soon as operationally 
possible after the publication date of these final regulations. We will 
publish a separate Federal Register notice to announce this 
implementation date.
    The Secretary has not designated any of the remaining provisions in 
these final regulations for early implementation. Therefore, the 
remaining final regulations included in this document are effective 
July 1, 2017.
    Public Comment: In response to our invitation in the June 16, 2016, 
NPRM, more than 50,000 parties submitted comments on the proposed 
regulations.
    We discuss substantive issues under the sections of the proposed 
regulations to which they pertain. Generally, we do not address 
technical or other minor changes or recommendations that are out of the 
scope of this regulatory action or that would require statutory changes 
in this preamble.

Analysis of Comments and Changes

    An analysis of the comments and of any changes in the regulations 
since publication of the NPRM follows.

General

    Comments: Many commenters supported the Department's proposals to 
improve the borrower defense regulations by establishing a Federal 
standard for permissible defenses to borrower repayment, standardizing 
the defense to repayment claim processes for both borrowers and 
institutions, and strengthening the financial responsibility standards 
for institutions. The commenters also supported granting automatic 
closed school discharges in certain instances and ending the use of 
mandatory, predispute arbitration agreements at schools that receive 
Federal financial aid.
    Other commenters expressed support for the proposed regulations, 
but felt that the Department should further strengthen them. For 
example, these commenters believed that the final regulations should 
provide full loan relief to all defrauded students, eliminate the six-
year time limit to recover amounts that borrowers have already paid on 
loans for which they have a borrower defense based on a breach of 
contract or substantial misrepresentation, and allow automatic group 
discharges without an application in cases where there is sufficient 
evidence of a school's wrongdoing.
    Many commenters agreed with the Department's proposed objectives, 
but believed that the proposed regulations would have the unintended 
consequences of creating a ``cottage industry'' of opportunistic 
attorneys and agents attempting to capitalize on students who have 
been, or believe they have been, victims of wrongdoing by schools and 
unleashing a torrent of frivolous and costly lawsuits, which would 
tarnish the reputation of many institutions. The commenters also 
believed that the proposed Federal standard is so broad that borrowers 
will have nothing to lose by claiming a borrower defense even if they 
are employed and happy with their college experience.
    Many commenters did not support the proposed regulations and stated 
that the Department should completely revise them and issue another 
NPRM and 30-day comment period, or that the proposed regulations should 
be withdrawn completely. The commenters were concerned that the 
projected net budget impact provided in the NPRM would undermine the 
integrity of the Direct Loan Program and that neither American 
taxpayers, nor schools that have successfully educated students, could 
cover these costs if thousands of students or graduates start 
requesting discharges of their loans. Other commenters stated that the 
proposed regulations would create unneeded administrative and financial 
burdens for institutions that work hard to comply with the Department's 
regulations and establish new substantive standards of liability, new 
procedural issues, new burdens of proof, widespread and unwarranted 
``triggering'' of the financial responsibility requirements, and the 
abolition of a ``Congressionally favored'' arbitration remedy, that are 
unnecessary or counterproductive.
    Discussion: We appreciate the commenters' support. In response to 
the commenters requesting that the proposed regulations be 
strengthened, completely revised, or withdrawn, we believe these final 
regulations strike the right balance between our goals of providing 
transparency, clarity, and ease of administration to the current and 
new regulations while at the same time protecting students, the Federal 
government, and taxpayers against potential liabilities resulting from 
borrower defenses. In response to commenters' concerns that the 
proposed regulations will create a ``cottage industry'' of 
opportunistic attorneys attempting to capitalize on victimized students 
and unleash a torrent of frivolous lawsuits, the individual borrower 
defense process described in Sec.  685.222(e) is intended to be a 
simple process that a borrower may access without the aid of counsel. 
Similarly, by providing that only a designated Department official may 
present group borrower claims in the group processes described in Sec.  
685.222(f) to (h), the Department believes that the potential for 
frivolous suits in the borrower defense process will be limited. To 
date, Department staff have generally not received borrower defense 
claims submitted by attorneys, opportunistic or otherwise, and we have 
not observed the filing of frivolous lawsuits against schools. We will 
monitor both situations going forward. We note that we address 
commenters' arguments with respect to specific provisions of the 
regulations in the sections of this preamble specific to those 
provisions.
    Changes: None.
    Comments: One commenter contended that the proposed regulations run 
contrary to Article III (separation of powers) and the Seventh 
Amendment (right to jury trial) of the Constitution, in that it would 
vest the Department with exclusive judicial powers to determine private 
causes of action in the absence of a jury.
    The commenter contended that the proposed regulations do not ensure 
Constitutional due process because they do not ensure that schools 
would have the right to receive notice of all the evidence presented by 
a borrower in the new borrower defense proceedings. The commenter 
stated that the lack of due process also affects the process for 
deciding claims, under which the Department is effectively the 
prosecutor, the judge, the only source of appeal, and the entity tasked 
with executing judgment.
    The commenter also contended that a breach of contract or a 
misrepresentation determination are determinations that normally arise 
in common law claims and defenses and are subject to the expertise of 
the courts, rather than a particular government agency. The commenter 
believes that these determinations are not matters of public right, but 
are instead matters of ``private right, that is, of the liability of 
one individual to another under the law as defined,'' which cannot be 
delegated outside the judiciary. Stern v. Marshall, 564 U.S. 462, 489 
(2011) (quoting Crowell v. Benson, 285 U.S. 22, 50 (1932).
    Discussion: The rights adjudicated in borrower defense proceedings 
are rights

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of the Direct Loan borrower against the government regarding the 
borrower's obligation to repay a loan made by the government, and 
rights of the government to recover from the school for losses incurred 
as a result of the act or omission of the school in participating in 
the Federal loan program. The terms of these rights are governed (for 
loans disbursed prior to July 1, 2017) by common law or State law, but 
in each instance the rights are asserted against or by a Federal 
agency, with respect to obligations incurred by the borrower and the 
school in the course of their voluntary participation in the Federal 
loan program. Those facts give the rights adjudicated in these 
proceedings, both the individual borrower adjudications and the 
adjudications of group claims against the school, the character of 
public rights, even if the resolution of those rights turns on 
application of common law and State law (for current loans), and thus 
giving them some of the characteristics of private rights as well.
    Even if these common law rights of the borrower and the school were 
to be considered simply private rights, Congress could properly consign 
their adjudication to the Department, as it did in committing purely 
private rights of the investor and broker asserted in its reparations 
program to the Commodity Futures Trading Commission for adjudication. 
Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833 (1986). In 
Schor, the competing claims asserted were not creations of Federal law, 
nor were the rights asserted by or against a Federal agency. 
Nevertheless, the Court ruled that Congress properly assigned 
adjudication of those private rights to the agency. Like the claimants 
in Schor, both parties--the Direct Loan borrower, by filing the claim 
for relief, and the Direct Loan-participant school, by entering into 
the Direct Loan Participation Agreement--have consented to 
adjudications of their respective rights by the Federal agency--the 
Department. Moreover, these rights are adjudicated in this context 
precisely because Congress directed the Department to establish by 
regulation which acts or omissions of a school would be recognized by 
the Department as defenses to repayment of the Direct Loan; by so 
doing, and by further requiring the Department to conduct a 
predeprivation hearing before credit bureau reporting, Federal offset, 
wage garnishment, of Federal salary offset, Congress necessarily 
committed adjudication of these claims to the Department. 20 U.S.C. 
1080a(c)(4), 31 U.S.C. 3711(e) (credit bureau reporting); 5 U.S.C. 5514 
(Federal salary offset); 20 U.S.C. 1095, 31 U.S.C. 3720D (wage 
garnishment); 31 U.S.C. 3716, 3720B (Federal payment offset). 
Similarly, by recognizing that acts or omissions of the school in 
participating in the title IV, HEA programs would give rise to a claim 
by the Department against the school that arises not by virtue of any 
statutory requirement, but under common law as discussed elsewhere and 
by requiring the Department to provide a hearing for a school that 
disputes that common law claim for damages, Congress necessarily 
committed adjudication of that common law claim to the Department. 20 
U.S.C. 1094(b) (administrative hearing on appeal of audit or program 
review liability claim). In each of these instances, judicial review of 
these agency adjudications by an Article III court is available under 
the APA. 5 U.S.C. 706. The fact that the borrower, the school, and the 
Department might have pursued their claims solely in a judicial forum 
instead of an administrative forum does not preclude assignment of 
their adjudication to the Department: ``(T)he Congress, in exercising 
the powers confided to it may establish `legislative' courts . . . to 
serve as special tribunals `to examine and determine various matters, 
arising between the government and others, which from their nature do 
not require judicial determination and yet are susceptible of it.' '' 
Atlas Roofing Co. v. Occupational Safety & Health Review Comm'n, 430 
U.S. 442, 452 (1977) (quoting Crowell v. Benson, 285 U.S. 22, 50 
(1932)).
    As to the assertion that committing adjudication of these claims to 
the Department deprives a party of the right to trial by jury, the 
Court has long rejected that argument, as it stated in Atlas Roofing, 
on which the commenter relies:

. . . the Seventh Amendment is generally inapplicable in 
administrative proceedings, where jury trials would be incompatible 
with the whole concept of administrative adjudication. . . . This is 
the case even if the Seventh Amendment would have required a jury 
where the adjudication of those rights is assigned instead to a 
federal court of law instead of an administrative agency.

Atlas Roofing Co, 430 U.S. at 454-55 (quoting Pernell v. Southall 
Realty, 416 U.S. 363, 383 (1974)).
    We address the comment with respect to ensuring due process in the 
sections of this preamble specific to the framework for the borrower 
defense claims process.
    Changes: None.
    Comments: Some commenters asserted that the Department lacks 
authority to recover from the institution losses incurred by reason of 
borrower defenses to repayment. A commenter asserted that nothing in 
section 455(h) of the HEA (20 U.S.C. 1087e(h)) permits the Department 
to seek recoupment from any institution related to defenses to 
repayment. In contrast, the commenter asserted, section 437(c)(1) of 
the HEA (20 U.S.C. 1087) explicitly provides that, in the case of 
closed school discharges, the Secretary shall pursue any claim 
``available to the borrower'' against the institution to recover the 
amounts discharged. The commenter contended that this clear grant of 
authority to pursue claims to recoup funds associated with closed 
school discharges and false certification discharges indicates that 
Congress intended no grant of authority to recover for borrower defense 
losses. The commenter noted that the Department conditions discharge on 
the borrower transferring any claim she has against the institution to 
the Department. The commenter asserted that this assignment does not 
empower the Department to enforce the borrower's claim, because the 
Secretary does not have the ability to acquire a claim from the 
borrower on which it may seek recoupment from a school. The commenter 
based this position on section 437(c) of the HEA, which provides that a 
borrower who obtains a closed school or false certification discharge 
is ``deemed to have assigned to the United States the right to a loan 
refund,'' and the absence of any comparable provision in section 455 of 
the HEA, which authorizes the Secretary to determine which acts or 
omissions of the institution may constitute defenses to repayment of a 
Direct Loan. Given that Congress indicated clear intent that the 
Secretary pursue claims related to closed school and false 
certification discharges, and explicitly provided for an assignment of 
claims, the commenter considered the failure of Congress to give any 
indication it wanted the Department to pursue claims of recoupment 
against institutions for section 455(h) loan discharges, or to acquire 
any claims from borrowers related to section 455(h) discharges, to show 
congressional intent to preclude a recoupment remedy against 
institutions.
    Another commenter questioned whether the Department would have a 
valid right to enforce a collection against an institution in the 
absence of what the commenter called a ``third-party adjudication'' of 
the loan discharge.
    A commenter stated that the Department could not recover from the 
institution losses incurred from

[[Page 75930]]

borrower defense claims because the commenter considered those losses 
to be incurred voluntarily by the Department. The commenter based this 
view on common law, under which a person who voluntarily pays another 
with full knowledge of the facts will not be entitled to restitution. 
The commenter asserted that the Department is further barred from 
recovery from the institution under a theory of indemnity or equitable 
subrogation because, under either theory, a party that voluntarily 
makes a payment or discharges a debt may not seek reimbursement.
    Discussion: We address under ``Group Process for Borrower 
Defenses--Statutory Authority'' comments regarding whether the 
Department has authority to assert against the school claims that 
borrowers may have, and discuss here only the comments that dispute 
whether the Department has a legal right to recover from a school the 
amount of loss incurred by the Department upon the recognition of a 
borrower defense and corresponding discharge of some or all of a Direct 
Loan obtained to attend the school.
    Applicable law gives the Department the right to recover from the 
school losses incurred on Direct Loans for several reasons. First, 
section 437(c) of the HEA gives the Department explicit authority to 
recover certain losses on Direct and FFEL loans. Section 437(c) 
provides that, upon discharge of a FFEL Loan for a closed school 
discharge, false certification discharge, or unpaid refund, the 
Secretary is authorized to pursue any claim of the borrower against the 
school, its principals, or other source, and the borrower is deemed to 
have assigned his or her claim against the school to the Secretary. 20 
U.S.C. 1087(c). Section 487(c)(3)(ii) authorizes the Secretary to 
deduct the amount of any civil penalty, or fine, imposed under that 
section from any amounts owed to the institution, but any claim for 
recovery is not based on authority to fine under that section. Section 
432(a)(6) authorizes the Secretary to enforce any claim, however 
acquired, but does not describe what those claims may be. 20 U.S.C. 
1082(a)(6) (applicable to Direct Loan claims by virtue of section 
455(a)(1), 20 U.S.C. 1078e(a)(1)). In addition, section 498(c)(1)(C) of 
the HEA, 20 U.S.C. 1099c(c)(1)(C), implies that the Secretary has 
claims that the Secretary is expected to enforce and recover against 
the institution for ``liabilities and debts''--the ``liabilities of 
such institution to the Secretary for funds under this title, including 
loan obligations discharged pursuant to section 437.'' 20 U.S.C. 
1099c(c)(3)(A) (emphasis added).\1\ These provisions are meaningless if 
the Secretary can enforce claims against institutions only if the HEA 
or another statute explicitly authorizes such recoveries.
---------------------------------------------------------------------------

    \1\ The Secretary can require the institution to submit ``third-
party financial guarantees'' which third-party financial guarantees 
shall equal not less than one-half of the annual potential 
liabilities of such institution to the Secretary for funds under 
this title, including loan obligations discharged pursuant to 
section 437 [20 U.S.C. 1087], and to students for refunds of 
institutional charges, including funds under this title.'' 20 U.S.C. 
1099c(c)(3)(A).
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    There are two distinct, and overlapping, lines of authority that 
empower the Secretary to recover from the school the amount of losses 
incurred due to borrower defense claims. The first relies on the 
Secretary's longstanding interpretation of the HEA as authorizing such 
recovery. The second relies on the government's rights under common 
law.
    In both the Direct Loan and FFEL programs, the institution plays a 
central role in determining which individuals receive loans, the amount 
of loan an individual receives, and the Federal interest subsidy, if 
any, that an individual qualifies to receive on the loan, a 
determination based on assessment of financial need. In the Direct Loan 
Program, the institution determines whether and to whom the Department 
makes a loan; in the FFEL Program, the institution determines whether 
and to whom a private lender may make a loan that will be federally 
reinsured.
    In Chauffeur's Training School v. Spellings, 478 F.3d 117 (2d Cir. 
2007), the court addressed a challenge by an institution to the 
Department's asserted right to hold the school liable through an 
administrative procedure for losses incurred and to be incurred on FFEL 
Loans that were made by private lenders and federally reinsured and 
subsidized, after the school had wrongly determined that the borrowers 
had proven eligibility for these loans. The court noted that no 
provision of the HEA expressly authorized the Department to determine 
and recover these losses on student loans (as opposed to recovery of 
losses of grant funds, expressly authorized by 20 U.S.C. 1234a)). 
However, the court looked to whether the Department's interpretation of 
the HEA as authorizing the Department to assess a liability for loan 
program violations was reasonable. 478 F.3d at 129. The court concluded 
that the Department had reasonably interpreted the HEA's grant of 
authority to administer the FFEL program to empower the Department to 
``assess liability to recover its guarantee payments'' on loans made as 
a result of the school's ``improper documentation.'' Id.
    Similarly, the Department is authorized under the HEA to administer 
the Direct Loan Program. The HEA directs that, generally, Direct Loans 
are made under the same ``terms, conditions, and benefits'' as FFEL 
Loans. 20 U.S.C. 1087a(b)(2), 1087e(a)(1). In 1994 and 1995, the 
Department interpreted that Direct Loan authority as giving the 
Department authority to hold schools liable for borrower defenses under 
both the FFEL and Direct Loan programs, and stated that, for this 
reason, it was not pursuing more explicit regulatory authority to 
govern the borrower defense process.
    Thus, in Dear Colleague Letter Gen 95-8 (Jan. 1995), the Department 
stated (emphasis in original):

    Finally, some parties warn that Direct Loan schools will face 
potential liability from claims raised by borrowers that FFEL 
schools will not face. . . . The liability of any school--whether a 
Direct Loan or FFEL participant--for conduct that breaches a duty 
owed to its students is already established under law other than the 
HEA--usually state law. In fact, borrowers will have no legal claims 
against Direct Loan schools that FFEL borrowers do not already have 
against FFEL schools. The potential legal liability of schools under 
both programs for those claims is the same, and the Department 
proposes to develop procedures and standards to ensure that in the 
future schools in both programs will face identical actual 
responsibility for borrower claims based on grievances against 
schools.
    The Direct Loan statute creates NO NEW LIABILITIES for schools; 
the statute permits the Department to recognize particular claims 
students have against schools as defenses to the repayment of Direct 
Loans held by the Department. Current Direct Loan regulations allow 
a borrower to assert as a defense any claim that would stand as a 
valid claim against the school under State law.
    . . . Congress intended that schools participating in either 
FFEL or Direct Loan programs should receive parallel treatment on 
important issues, and the Department has already committed during 
negotiated rulemaking to apply the same borrower defense provisions 
to BOTH the Direct Loan and FFEL programs. Therefore, schools that 
cause injury to student borrowers that give rise to legitimate 
claims should and, under these proposals, will bear the risk of 
loss, regardless of whether the loans are from the Direct Loan or 
FFEL Program.

    The Department reiterated this position in a notice published in 
the Federal Register on July 21, 1995 (60 FR 37768, 37769-37770):

    Some members of the FFEL industry have asserted that there will 
be greater liabilities for institutions participating in the Direct 
Loan Program than for institutions participating in the FFEL Program 
as a consequence of differences in borrower

[[Page 75931]]

defenses between the Direct Loan and FFEL Programs. These assertions 
are inaccurate.
    The Department has consistently stated that the potential legal 
liability resulting from borrower defenses for institutions 
participating in the Direct Loan Program will not be significantly 
different from the potential liability for institutions 
participating in the FFEL Program. (59 FR 61671, December 1, 1994, 
and Dear Colleague Letter GEN 95-8 January 1995) That potential 
liability usually results from causes of action allowed to borrowers 
under various State laws, not from the HEA or any of its 
implementing regulations. Institutions have expressed some concern 
that there is a potential for greater liability for institutions in 
the Direct Loan Program than in the FFEL Program under 34 CFR 
685.206. The Secretary believes that this concern is based on a 
misunderstanding of current law and the intention of the Direct Loan 
regulations. The Direct Loan regulations are intended to ensure that 
institutions participating in the FFEL and Direct Loan programs have 
a similar potential liability. Since 1992, the FFEL Program 
regulations have provided that an institution may be liable if a 
FFEL Program loan is legally unenforceable. (34 CFR 682.609) The 
Secretary intended to establish a similar standard in the Direct 
Loan Program by issuing 34 CFR 685.206(c). Consistent with that 
intent, the Secretary does not plan to initiate any proceedings 
against schools in the Direct Loan Program unless an institution 
participating in the FFEL Program would also face potential 
liability. . . .
    Thus, the Secretary will initiate proceedings to establish 
school liability for borrower defenses in the same manner and based 
on the same reasons for a school that participates in the Direct 
Loan Program or the FFEL Program. . . .

    Thus, applying the Chauffeur's Training analysis, this history and 
formal interpretation shows that the Department has, from the inception 
of the Direct Loan Program, considered its administrative authority 
under the HEA for the Direct Loan Program to authorize the Department 
to hold schools liable for losses incurred through borrower defenses, 
and to adopt administrative procedures to determine and liquidate those 
claims.
    Alternatively, common law provides the Department a legal right to 
recover from the school the losses it incurs due to recognition of 
borrower defenses on Direct Loans. Courts have long recognized that the 
government has the same rights under common law as any other party. 
U.S. v. Kearns, 595 F.2d 729 (D.C. Cir. 1978). Even when Congress 
expressly provides a remedy by statute, the government has the remedies 
that ``normally arise out of the relationships authorized by the 
statutory scheme.'' U.S. v. Bellard, 674 F.2d 330 (5th Cir. 1982) 
(finding the Department had a common law right to recover as would any 
other guarantor regardless of an HEA provision describing the 
Department as assignee/subrogor to rights of the private lender whom it 
insured).\2\ In fact, as noted by the Bellard court, statutes must be 
read to preserve common law rights unless the intent to limit those 
rights is ``clearly and plainly expressed by the legislature.'' Id. The 
Bellard court found no such limiting language in the HEA, nor does any 
exist that is relevant to the Direct Loan issue presented here.
---------------------------------------------------------------------------

    \2\ See: U.S. v. Texas, 507 U.S. 529, 534 (1993) (courts may 
take it as a given that Congress has legislated with an expectation 
that the [common law] principle will apply except `when a statutory 
purpose to the contrary is evident.' '').
---------------------------------------------------------------------------

    The school enters into a PPA with the Department in order to 
participate in the Direct Loan Program. 20 U.S.C. 1087(a). The PPA is a 
contract. San Juan City College Inc. v. U.S., 74 Fed. Cl. 448 (2006); 
Chauffeurs Training School v. Riley, 967 F.Supp. 719, 727 (N.D. N.Y. 
1997). In executing the contract, the school ``assume[s] a fiduciary 
relationship with the title IV, HEA Programs.'' Chauffeurs Training 
School v. Paige, C.A. No. 01-CV-02-08 (N.D. N.Y. Sept. 30, 2003), at 7; 
34 CFR 682.82(a). An institution must ``act with the competency and 
integrity necessary to qualify as a fiduciary'' on behalf of taxpayers, 
``in accordance with the highest standard of care and diligence in 
administering the program and in accounting to the Secretary for the 
funds received under [title IV HEA] programs.'' Id.; see 34 CFR 668.82.
    Specifically, under the Direct Loan Program, the HEA describes the 
institution pursuant to its agreement with the Department as 
``originating'' Direct Loans, 20 U.S.C. 1087c(a), 1087d(b), and 
accepting ``responsibility and financial liability stemming from its 
failure to perform its functions pursuant to the agreement.'' 20 U.S.C. 
1087d(a)(3), 34 CFR 685.300(b)(8). The regulations describe the role of 
the institution as ``originating'' Direct Loans. 34 CFR 685.300(c), 
685.301.
    As a loan ``originator'' for the Department, the school is the 
authorized agent of the Department: The school acts pursuant to 
Department direction, the school manifests its intent to act as agent 
by entering into the PPA, and most importantly, the school has power to 
alter the legal relationships between the principal (the Department) 
and third parties (the students). But for the school's act in 
originating the loan, there would be no lender-borrower relationship.
    The interests of the Department as lender and principal in this 
Direct Loan Program relationship with the institution are simple: To 
enable students and parents to obtain Federal loans to pay for 
postsecondary education. 20 U.S.C. 1087a. Congress selected the 
vehicle--a loan, not a grant--under which the borrower repays the loan, 
made with public funds, which in turn enables the making of new loans 
to future borrowers. Acts or omissions by an agent of the Department 
that frustrate repayment by the borrower of the amount the Department 
lends are contrary to the Department's benefit and interest. Acts or 
omissions by the institution, as the Department's loan-making agent, 
that harm the Department's interests in achieving the objectives of the 
loan program violate the duty of loyalty owed by the institution as the 
Department's loan originator, or agent. The Department made clear at 
the inception of the Direct Loan relationship with the institution that 
the institution would be liable for losses caused by its acts and 
omissions, in 1994 and 1995, when the Department publicly and 
unequivocally adopted the ``borrower defense to repayment'' regulation, 
34 CFR 685.206, and, in the Federal Register and other statements 
described earlier, stated the consequences for the institution that 
caused such losses.
    The government has the same protections against breach of fiduciary 
duty that extend under common law to any principal against its agent. 
U.S. v. Kearns, at 348; see also U.S. v. York, 890 F.Supp. 1117 (D.D.C. 
1995) (breach of fiduciary duty to government by contractor, loan 
servicing dealings constituting conflict of interest). The remedies 
available for breach of fiduciary duty are damages resulting from the 
breach of that duty. ``One standing in a fiduciary relation with 
another is subject to liability to the other for harm resulting from a 
breach of duty imposed by the relation.'' Restatement Second, Torts 
Sec.  874.
    Applying this common law analysis to the relationship between the 
Department and the Direct Loan participating institution as it bears on 
the Department's right to recover, we note, first, that the Department 
has the rights available under common law to any other party, without 
regard to whether any statute explicitly confers such rights. Second, 
the institution enters into a contract with the Department pursuant to 
which the institution acts as the Department's agent in the making of 
Direct Loans. The school is the loan ``originator'' for the Department. 
Third, under common law, an agent has a fiduciary duty to act loyally 
for the principal's benefit in all matters connected with the agency. 
Fourth, under common law, an agent's

[[Page 75932]]

breach of its fiduciary duty makes the agent liable to the principal 
for the loss that the breach of duty causes the principal. And last, a 
school that commits an act or omission that gives a Direct Loan 
borrower a defense to repayment that causes the Department loss thereby 
violates its common law fiduciary duty to act loyally for the interests 
of the Department, and is liable to the Department for losses caused by 
that breach of duty.
    The commenter who argued that the Secretary incurs the loss by 
honoring the borrower defense ``voluntarily,'' and is barred by that 
fact from recovery against the institution, misconceives the nature of 
the claim. As early as Bellard, the courts have consistently recognized 
that in its capacity as a loan guarantor under the FFEL Program, the 
Department pays the lender under its contractual obligation as loan 
guarantor, and not as a volunteer. The Department guarantees FFELP 
loans at the request of the borrower who applied for the guaranteed 
loan, as well as the lender. By virtue of payment of the guarantee, the 
Department acquired an implied-in-law right against the borrower for 
reimbursement of the losses it incurred in honoring the guarantee--a 
claim distinct from its claim as assignee from the lender of the 
defaulted loan. Similarly, where the Department incurs a loss under a 
statutory obligation to discharge by reason of closure of the school or 
false certification, the Department does not incur that loss 
voluntarily, but rather under legal obligation imposed by the statute, 
as well as the terms of the federally prescribed promissory note. 
Regardless of whether the HEA explicitly authorized the Secretary to 
recover for that loss, or deemed the borrower's claim against the 
school to be assigned to the Secretary, common law gives the Secretary 
the right to recover from the school for the loss incurred as a result 
of the act or omission of the school. Section 455(h) of the HEA, by 
directing that the Secretary determine by regulation which acts or 
omissions of the school constitute defenses to repayment, requires the 
Department to discharge the borrower's obligation to repay when the 
borrower establishes such a defense. 20 U.S.C. 1087e(h). To the extent 
that the borrower proves that the act or omission of the school gave 
the borrower a defense, the amount not recoverable from the borrower 
was a loss incurred because of the Department's legal obligation to 
honor that defense. That loss, like the loss on payment of a loan 
guarantee on a FFEL Loan, is not one incurred voluntarily, but rather 
is incurred, like the loss on the loan guarantee, by legal obligation. 
By honoring the proven defense of the Direct Loan borrower, like 
honoring the claim of the lender on the government guarantee, the 
Secretary acquires by subrogation the claim of the Direct Loan borrower 
or FFEL lender, as well as a claim for reimbursement from the party 
that caused the loss--the borrower, on the defaulted FFEL Loan, or the 
school, on the Direct Loan defense.
    Changes: None.
    Comments: Several commenters stated that the HEA does not 
authorize, or even contemplate, the sweeping regulatory framework set 
forth in the Department's borrower defense proposals. The commenters 
questioned the three HEA provisions cited by the Department as the 
source of its statutory authority: Section 455(h), which allows the 
Secretary to identify ``acts or omissions . . . a borrower may assert 
as a defense to repayment of a loan;'' Section 487, which outlines 
certain consequences for an institution's ``substantial 
misrepresentation of the nature of its educational program, its 
financial charges, or the employability of its graduates;'' and Section 
454(a)(6), which permits the Department to ``include such . . . 
provisions as the Secretary determines are necessary to protect the 
interests of the United States and to promote the purposes of'' the 
Direct Loan Program in each institution's PPA. The commenters believed 
that section 455(h) of the HEA only empowers the Department to define 
those ``acts or omissions'' that an individual borrower may assert as a 
defense in a loan collection proceeding and noted that none of the 
provisions allows the Department to create a novel cause of action for 
a borrower to levy against her school, which the Department would both 
prosecute and adjudicate in its own ``court.'' Accordingly, the 
commenters believed that the Department should substantially revise the 
rule to be consistent with the regulatory authority granted to the 
Department by Congress. Other commenters stated that the Department 
should withdraw the proposed regulations and instead work jointly with 
Congress to address the issues in the proposed regulations as part of 
the reauthorization of the HEA. The commenters believed that borrower 
defense policy proposals are so substantive and commit such an enormous 
amount of taxpayer dollars that careful consideration by Congress is 
required so that all of the available options are weighed in the 
overall context of comprehensive program changes.
    Discussion: We disagree with the commenters who contended that the 
HEA does not authorize the regulatory framework proposed in the 
Department's borrower defense proposals. As explained above, common law 
and the HEA as interpreted by the Department in adopting the Direct 
Loan regulations, give the Department the right to recover losses 
incurred due to borrower defense claims. The commenters rightly 
identify sections 455(h), 487, and 454(a)(6) of the HEA as some of the 
sources of the Department's statutory authority for these regulations 
as they relate to identification of causes of action that are 
recognized as defenses to repayment, as well as procedures for receipt 
and adjudication of these claims. In addition, the HEA authorizes the 
Secretary to include in Direct Loan PPAs with institutions any 
provisions that are necessary to protect the interests of the United 
States and to promote the purposes of the Direct Loan Program. In 
becoming a party to a Direct Loan PPA, the institution accepts 
responsibility and financial liability stemming from its failure to 
perform its functions pursuant to the agreement. And, as a result, 
students and parents are able to obtain Federal loans to pay for 
postsecondary education. Far from exceeding its statutory authority in 
developing procedures for adjudicating these claims, section 455(h) 
presumes that the Department must recognize in its existing 
administrative collection and enforcement proceedings the very defenses 
that section directs the Department to establish, or create new 
procedures to better address these claims, as we do here.
    In addition, section 410 of the General Education Provisions Act 
(GEPA) provides the Secretary with authority to make, promulgate, 
issue, rescind, and amend rules and regulations governing the manner of 
operations of, and governing the applicable programs administered by, 
the Department. 20 U.S.C. 1221e-3. Further, under section 414 of the 
Department of Education Organization Act, the Secretary is authorized 
to prescribe such rules and regulations as the Secretary determines 
necessary or appropriate to administer and manage the functions of the 
Secretary or the Department. 20 U.S.C. 3474. These general provisions, 
together with the provisions in the HEA and common law explained 
earlier, noted above, authorize the Department to promulgate 
regulations that govern defense to repayment standards, process, and 
institutional liability.
    With regard to the commenters who believe that the Department's 
proposals are so substantive and commit such an

[[Page 75933]]

enormous amount of taxpayer dollars that the Department should work 
with Congress, or defer to Congress, in terms of the development of 
such comprehensive program changes, we do not agree that the Department 
should not take, or should defer, regulatory action on this basis until 
Congress acts. Since the collapse of Corinthian, the Department has 
received a flood of borrower defense claims stemming from the school's 
misconduct. In order to streamline and strengthen this process, we 
believe it is critical that the Department proceed now in accordance 
with its statutory authority, as delegated by Congress, to finalize 
regulations that protect student loan borrowers while also protecting 
the Federal and taxpayer interests.
    Changes: None.
    Comments: Several commenters stated that the proposed regulations 
were arbitrary and capricious and therefore violate the APA. Commenters 
raised this concern both generally and with respect to specific 
elements of the proposed regulations. For example, several commenters 
argued that the Department withheld substantive detail regarding its 
expansion of the loan repayment defenses into offensive causes of 
action and on the process by which borrower defense claims and 
Department proceedings to collect claim liabilities from institutions 
will be adjudicated, thereby depriving institutions and affected 
parties the opportunity to offer meaningful comment on critical parts 
of the rule.
    Discussion: We address commenters' arguments with respect to 
specific provisions of the regulations in the sections of this preamble 
specific to those provisions. However, as a general matter, in taking 
this regulatory action, we have considered relevant data and factors, 
considered and responded to comments and articulated a reasoned basis 
for our actions. Marsh v. Oregon Natural Res. Council, 490 U.S. 360, 
378 (1989); Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. 
Co., 463 U.S. 29, 43 (1983); see also Pub. Citizen, Inc. v. Fed. 
Aviation Admin., 988 F.2d 186, 197 (D.C. Cir. 1993); PPL Wallingford 
Energy LLC v. FERC, 419 F.3d 1194, 1198 (D.C. Cir. 2005).
    Changes: None.
    Comments: Several commenters stated that the negotiated rulemaking 
process, by which the proposed rules were developed, was flawed.
    One commenter stated that input from representatives of publicly 
held proprietary institutions was not included in the public comment 
process prior to the establishment of a negotiated rulemaking 
committee. This commenter also stated that only representatives from 
private, proprietary institutions were represented on the negotiated 
rulemaking committee and that those representatives had no expertise in 
the active management of an institution. The commenter also stated that 
the NPRM 45-day public comment process was too short.
    Several commenters contended that the Department failed to provide 
adequate notice to the public of the scope of issues to be discussed at 
the negotiated rulemaking. The commenters stated that the issues of 
financial responsibility and arbitration clauses were not included in 
the Federal Register notices announcing the establishment of a 
negotiated rulemaking committee or the solicitation of negotiators and 
that, had the higher education community known these issues were within 
the scope of the rulemaking, negotiators more familiar with these 
issues would have been nominated. The commenters believed that the 
Department failed to carry out its statutory mandate under 20 U.S.C. 
1098 to engage the public and receive input on the issues to be 
negotiated. One commenter also expressed dismay at the Department's 
accelerated timetable and intent to publish final regulations one week 
before the general election. The commenter felt that the ``rush to 
regulate'' resulted in a public comment period that did not give the 
public enough time to fully consider the proposals and a timeline that 
did not afford the Department enough time to develop an effective, 
cost-effective rule.
    Discussion: The negotiated rulemaking process ensures that a broad 
range of interests is considered in the development of regulations. 
Specifically, negotiated rulemaking seeks to enhance the rulemaking 
process through the involvement of all parties who will be 
significantly affected by the topics for which the regulations will be 
developed. Accordingly, section 492(b)(1) of the HEA, 20 U.S.C. 
1098a(b)(1), requires the Department to choose negotiators from groups 
representing many different constituencies. The Department selects 
individuals with demonstrated expertise or experience in the relevant 
subjects under negotiation, reflecting the diversity of higher 
education interests and stakeholder groups, large and small, national, 
State, and local. In addition, the Department selects negotiators with 
the goal of providing adequate representation for the affected parties 
while keeping the size of the committee manageable. The statute does 
not require the Department to select specific entities or individuals 
to be on the committee. As there was both a primary and an alternate 
committee member representing proprietary institutions, we believe that 
this group was adequately represented on the committee.
    We note that the Department received several nominations to seat 
representatives from proprietary schools on the committee after 
publication of our October 20, 2015, Federal Register notice. The 
Department considered each applicant to determine their qualifications 
to serve on the committee.
    This process did not result in proprietary sector nominees with the 
requisite qualifications, so we published a second Federal Register 
notice on December 21, 2015, seeking further nominations for the 
negotiated rulemaking committee, including representation from the 
proprietary sector. Dennis Cariello, Shareholder, Hogan Marren Babbo & 
Rose, Ltd., and Chris DeLuca, Founder, DeLuca Law, were selected 
following this second notice. Given the topics under discussion, we 
believe Mr. Cariello and Mr. DeLuca adequately represented the 
proprietary sector.
    We disagree with the commenters who contended that the Department 
failed to provide adequate public notice and failed to engage and 
receive input from the public on the scope of issues to be discussed at 
the negotiated rulemaking, in particular the issues of financial 
responsibility and arbitration clauses. On August 20, 2015, the 
Department published a notice in the Federal Register announcing our 
intention to establish a negotiated rulemaking committee. We also 
announced our intention to accept written comments from and hold two 
public hearings (September 10, 2015 and September 16, 2015, in 
Washington, DC and San Francisco, respectively) at which interested 
parties could comment on the topics suggested by the Department and 
suggest additional topics that should be considered for action by the 
committee. Lastly, we announced our intent to develop proposed 
regulations for determining which acts or omissions of an institution 
of higher education a borrower may assert as a defense to repayment of 
a loan made under the Direct Loan Program and the consequences of such 
borrower defenses for borrowers, institutions, and the Secretary. We 
specifically stated that we would address the issues of defense to 
repayment procedures; the criteria that constitute a defense to 
repayment; the standards and procedures that the Department would use 
to determine institutional liability for amounts based

[[Page 75934]]

on borrower defenses; and, the effect of borrower defenses on 
institutional capability assessments. No representatives of the 
proprietary sector testified at the hearings. One proprietary 
association representing 1,100 cosmetology schools submitted written 
testimony stating that the association was interested in working with 
the Department to determine the institutional liability and capability 
assessments associated with borrower defense claims. In addition, we 
presented issue papers prior to the first day of the first of the three 
negotiating sessions in which we outlined the particular questions to 
be addressed.\3\ These included Issue Paper No. 5, which explicitly 
addresses financial responsibility and letters of credit.\4\ 
Negotiators who had any question about the scope of issues we intended 
to cover were thus given very explicit notice before the first day of 
negotiations, and were free to obtain then, or at any other time during 
the nine days of hearings over three months, any expert advisors they 
wished to engage to inform their deliberations.
---------------------------------------------------------------------------

    \3\ http://www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html.
    \4\ The paper states--
    Questions to be considered by the negotiating committee include:
    1. Should the Department take additional steps to protect 
students and taxpayers from (a) potential borrower defense to 
repayment (DTR) claims, (b) liabilities stemming from closed school 
discharges, and (c) other conditions that may be detrimental to 
students?
    [ssquf] If so, what conditions, triggering events, metric-based 
standards, or other risk factors should the Department consider 
indicative of failing financial responsibility, administrative 
capability, or other standards?
    [ssquf] What should the consequences be for a violation? Letter 
of credit or other financial guarantee? Disclosure requirements and 
student warnings? Other consequences?
     If a letter of credit or other financial guarantee is 
required, how should the amount be determined?
---------------------------------------------------------------------------

    We received written testimony from other parties that supported 
both holding institutions financially accountable for the costs 
associated with borrower defenses and limiting a school's use of 
certain dispute resolution procedures.
    We disagree with the commenter who contended that the Department's 
timetable for developing borrower defense regulations was rushed and 
that the comment period did not give the public enough time to fully 
consider the proposals. We believe that the 45-day public comment 
period provided sufficient time for interested parties to submit 
comments, particularly given that prior to issuing the proposed 
regulations, the Department conducted two public hearings and three 
negotiated rulemaking sessions, where stakeholders and members of the 
public had an opportunity to weigh in on the development of much of the 
language reflected in the proposed regulations. In addition, the 
Department also posted the NPRM on its Web site several days before 
publication in the Federal Register, providing stakeholders additional 
time to view the proposed regulations and consider their viewpoints on 
the NPRM.
    Changes: None.
    Comments: Although the regulations will affect all schools, many 
commenters expressed frustration at their perception that the 
regulations target proprietary schools in particular. The commenters 
noted several provisions of the regulations--for example, financial 
protection triggers related to publicly traded institutions, 
distributions of equity, the 90/10 regulations, and the Gainful 
Employment regulations, and disclosure provisions regarding loan 
repayment rates--as unfairly targeting only proprietary schools with no 
justification or rationale. The commenters noted that that there are 
many private sector career schools and colleges that play a vital role 
in the country's higher education system by providing distinctive, 
career-focused programs and that the Department should develop rules 
that are applied uniformly across all educational institutions that 
offer title IV, HEA funding. Another commenter appreciated the 
distinction made in the NPRM between nonprofit/public institutions and 
proprietary schools as the basis for restricting the loan repayment 
rate disclosure to proprietary schools. The commenter suggested that 
the fundamental differences in the governance structures and missions 
of the public and non-profit sectors versus the for-profit sector 
provide a substantive basis for differentiating this regulation among 
the sectors.
    Several commenters urged the Department to reconsider the changes 
to 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, given their sweeping 
scope and potentially damaging financial impact on historically black 
colleges and universities (HBCUs). The commenters contended that these 
provisions could lead to the closure of HBCUs that are not financially 
robust but provide quality educational opportunities to students and 
noted that HBCUs have not been the focus of Federal and State 
investigations nor have they defrauded students or had false claims 
lawsuits filed against them. These commenters expressed concern about a 
number of the specific financial protection triggers, including, but 
not limited to, the triggers relating to lawsuits, actions by 
accrediting agencies, and cohort default rate.
    Discussion: We agree that there are many proprietary career schools 
and colleges that play a vital role in the country's higher education 
system. We do not agree, however, that either the financial protection 
triggers or the loan repayment rate disclosure unfairly target 
proprietary institutions. We apply the financial protection triggers 
related to publicly traded institutions, the distribution of equity, 
and the 90/10 regulations only to proprietary institutions because, as 
another commenter noted, of the fundamental differences in the 
governance structures and missions of the public and non-profit sectors 
and the unique nature of the business model under which these 
institutions operate. These triggers identify events or conditions that 
signal impending financial problems at proprietary institutions that 
warrant action by the Department. We apply the loan repayment rate 
disclosure only to the for-profit sector primarily because the 
frequency of poor repayment outcomes is greatest in this sector. We 
appreciate the support of the commenter who agreed with this approach.
    We note that we address commenters' arguments with respect to 
specific provisions of the regulations in the sections of this preamble 
specific to those provisions.
    We also note that HBCUs play a vital role in the Nation's higher 
education system. We recognize the concerns commenters raised regarding 
the financial protection provisions of the proposed regulations, which 
they argue would have a damaging financial impact on HBCUs. We note 
that the triggers are designed to identify signs, and to augment the 
Department's tools for detection, of impending financial difficulties. 
If an institution is subject to material actions or events that are 
likely to have an adverse impact on the financial condition or 
operations of an institution, we believe that the Federal government 
and taxpayers should be protected from any resulting losses incurred by 
requiring a letter or credit, regardless of the institution's sector. 
As commenters mentioned, our recent experience suggests that HBCUs have 
not been the subject of government agency suits or other litigation by 
students or others, or of administrative enforcement actions. 
Institutions that do not experience these kinds of claims,

[[Page 75935]]

including HBCUs, will not experience adverse impacts under these 
triggers. In addition, institutions, including HBCUs, will retain their 
existing rights of due process and continue to have the ability to 
present to the Secretary if there is any factual objection to the 
grounds for the required financial protection. Accordingly, the 
Secretary can consider additional information provided by an 
institution before requiring a letter of credit. Even in instances 
where the Department still requires a letter of credit over a school's 
objection, the school could raise such issues to the Department's 
Office of Hearing and Appeals.
    Finally, we have made a number of changes to the proposed triggers 
that address the commenters' specific objections to particular 
triggers, to more sharply focus the automatic triggers on actions and 
events that are likely to affect a school's financial stability. For 
instance, as we stated in other sections of this preamble, in light of 
the significant comments received regarding the potential for serious 
unintended consequences if the accreditation action triggers were 
automatic, we are revising the accreditation trigger so that 
accreditation actions such as show cause and probation or equivalent 
actions are discretionary. We note that we address commenters' 
arguments with respect to additional specific financial protection 
triggers, and any changes we have made in the final regulations, in the 
sections of this preamble specific to those provisions.
    Changes: None.
    Comments: One commenter suggested that the Department ensure that 
its contractors are aware of the basis for borrower defense discharge 
claims and the accompanying process. The commenter noted that 
inconsistent servicing and debt collection standards impede borrowers' 
access to the benefit and other forms of relief. The commenters also 
suggested that the Department update its borrower-facing materials to 
reflect the availability and scope of the borrower defense discharge.
    Discussion: We are committed to ensuring that our contractors and 
any borrower-facing material published by the Department provide 
accurate and timely information on the discharge standards and 
processes associated with a borrower defense to repayment. We have 
begun the process of updating applicable materials to reflect these 
final regulations and will continue working closely with our 
contractors to help ensure that they have the information they need to 
assist borrowers expeditiously and accurately.
    Changes: None.
    Comments: Several commenters requested that the Department make 
information available to the public on the number of borrowers who 
submitted borrower defense applications, the number of borrowers who 
received a discharge, the amount of loans discharged, the basis or 
standard applied by the Department in a successful discharge claim, 
discharged amounts collected from schools, a list of institutions 
against which successful borrower defense claims are made, and any 
reports relevant to the process. The commenters believed that this 
information would provide transparency and facilitate a better 
understanding of how the process is working as well.
    Discussion: We are committed to transparency, clarity and ease of 
administration and will give careful consideration to this request as 
we refine our borrower defense process.
    Changes: None.
    Comments: Several commenters noted that they, as student loan 
borrowers, are taxpayers like every American citizen and that paying 
student loans that were fraudulently made on top of paying taxes is a 
double penalty. The commenters also requested that the Department 
permit a borrower to include all types of student loans--private 
student loans, FFEL, Perkins, Parent Plus--they received to finance the 
cost of higher education in a borrower defense claim.
    Discussion: The Department is committed to protecting student loan 
borrowers from misleading, deceitful, and predatory practices of, and 
failure to fulfill contractual promises by, institutions participating 
in the Federal student aid programs. These final regulations permit a 
borrower to consolidate loans listed in Sec.  685.220(b), including 
nursing loans made under part E of title VIII of the Public Health 
Service Act, to pursue borrower defense relief by consolidating those 
loans, as provided in proposed Sec.  685.212(k). The Department does 
not have the authority to include private student loans in a Direct 
Loan consolidation.
    Changes: None.
    Comments: Several commenters stated that, in order to avoid another 
failure as serious as that of Corinthian, the Department should 
implement strong compliance and enforcement policies to proactively 
prevent institutions that engage in fraudulent activity from continuing 
to receive title IV, HEA funding. The commenters believe that 
institutions that do not meet statutory, regulatory or accreditor 
standards and that burden students with debt without providing a 
quality education should be identified early and subjected to greater 
scrutiny and sanctions so that a borrower defense is a last resort.
    Discussion: The Department is committed to strong compliance and 
enforcement policies to proactively prevent institutions that engage in 
fraudulent activity from continuing to receive title IV, HEA funding. 
These final regulations establish the definitive conditions or events 
upon which an institution is or may be required to provide to the 
Department with financial protection, such as a letter of credit, to 
help protect students, the Federal government, and taxpayers against 
potential institutional liabilities.
    Changes: None.
    Comments: One commenter requested that the Department and the 
Internal Revenue Service develop a determination on the tax treatment 
of discharges of indebtedness for students with successful defense to 
repayment claims. While acknowledging that the Department does not 
administer tax law, the commenter stated that the Department should 
question, or at least weigh in on the matter, of the Internal Revenue 
Service's ``decline to assert'' policy on successful defense to 
repayment claims that currently applies to loans for students who 
attend schools owned by Corinthian, but not to loans for students who 
attend other schools.
    Discussion: As noted by the commenter, the tax treatment of 
discharges that result from a successful borrower defense is outside of 
the Department's jurisdiction. However, the Department recognizes the 
commenter's concern and will pursue the issue in the near future.
    Changes: None.

Borrower Defenses (Sections 668.71, 685.205, 685.206, and 685.222)

Federal Standard

Support for Standard
    Comments: A group of commenters fully supported the Department's 
intent to produce clear and fair regulations that protect student 
borrowers and taxpayers and hold schools accountable for acts and 
omissions that deceive or defraud students. However, these commenters 
suggested that the Department has not fully availed ourselves of 
existing consumer protection remedies and have, instead, engaged in 
overreach to expand our enforcement options.
    Another group of commenters noted that the proposed Federal 
standard is a positive complement to consumer protections already 
provided by State law. Another group of commenters

[[Page 75936]]

offered support for the Federal standard specifically because it 
addresses complexities and inequities between borrowers in different 
States.
    One commenter explicitly endorsed our position that general HEA 
eligibility or compliance violations by schools could not be used a 
basis for a borrower defense.
    Another group of commenters noted that the proposed Federal 
standard provides an efficient, transparent, and fair process for 
borrowers to pursue relief. According to these commenters, the Federal 
standard eliminates the potential for disparate application of this 
borrower benefit inherent with the current rule's State-based standard, 
and enables those who are providing training and support to multiple 
institutions to develop standardized guidance.
    A different group of commenters expressed support for the Federal 
standard, noting that it would be challenging for us to adjudicate 
claims based on 50 States' laws. Yet another group of commenters 
requested that the new Federal standard be applied retroactively when a 
borrower makes a successful borrower defense claim and has loans that 
were disbursed both before and after July 1, 2017.
    Discussion: We appreciate the support of these commenters.
    However, we do not agree with the commenters' contention that we 
are engaging in overreach to expand our enforcement options, nor have 
we disregarded existing consumer protection remedies. The HEA provides 
specific authority to the Secretary to conduct institutional oversight 
and enforcement of the title IV regulations. The borrower defense 
regulations do not supplant consumer protections available to 
borrowers. Rather, the borrower defense regulations describe the 
circumstances under which the Secretary exercises his or her long-
standing authority to relieve a borrower of the obligation to repay a 
loan on the basis of an act or omission of the borrower's school. The 
Department's borrower defense process is distinct from borrowers' 
rights under State law. State consumer protection laws establish causes 
of action an individual may bring in a State's courts; nothing in the 
Department's regulation prevents borrowers from seeking relief through 
State law in State courts. As noted in the NPRM, 81 FR 39338, the 
limitations of the borrower defense process should not be taken to 
represent any view regarding other issues and causes of action under 
other laws and regulations that are not within the Department's 
authority.
    As to the request to make the new Federal standard available to all 
Direct Loan borrowers, we cannot apply the new Federal standard 
retroactively when a borrower makes a successful borrower defense claim 
and has loans that were disbursed both before and after July 1, 2017. 
Loans made before July 1, 2017 are governed by the contractual rights 
expressed in the existing Direct Loan promissory notes. These 
promissory notes incorporate the current borrower defense standard, 
which is based on an act or omission of the school attended by the 
student that would give rise to a cause of action against the school 
under applicable State law. Promissory notes for loans made after July 
1, 2017 will include a discussion of the new Federal standard for 
borrower defense claims.
    Changes: None.

Evidentiary Standard

    Comments: A number of commenters and an individual commenter 
remarked that the proposed Federal standard increases the risk to 
institutions by granting loan discharges when the borrower's case is 
substantiated by a preponderance of the evidence.
    Another commenter expanded on this position, asserting that the 
evidentiary standard in most States for fraudulent misrepresentation is 
clear and convincing evidence. A few commenters echoed these viewpoints 
and suggested that the perceived minimal burden of proof may encourage 
bad actors to entice borrowers into filing false claims.
    A couple of other commenters wrote that the standard is not clear 
enough to preclude students from asserting claims of misrepresentation 
without supporting evidence. These commenters suggested that the 
proposed regulations presume that all proprietary schools engage in 
deliberate misrepresentation.
    Discussion: We do not agree that the ``preponderance of the 
evidence'' standard will result in greater risk to institutions. We 
believe this evidentiary standard is appropriate as it is the typical 
standard in most civil proceedings. Additionally, the Department uses a 
preponderance of the evidence standard in other proceedings regarding 
borrower debt issues. See 34 CFR 34.14(b), (c) (administrative wage 
garnishment); 34 CFR 31.7(e) (Federal salary offset). We believe that 
this evidentiary standard strikes a balance between ensuring that 
borrowers who have been harmed are not subject to an overly burdensome 
evidentiary standard and protecting the Federal government, taxpayers, 
and institutions from unsubstantiated claims. Under the standard, the 
designated Department official may determine whether the elements of 
the borrower's cause of action under the Federal standard for borrower 
defenses have been sufficiently alleged and shown. If the official 
determines that the elements have not been alleged or have not met the 
preponderance of evidence standard, the claim will be denied.
    The Department is aware of unscrupulous businesses that prey upon 
distressed borrowers, charging exorbitant fees to enroll them in 
Federal loan repayment plans that are freely available. On January 28, 
2016, the Department sent cease and desist letters to two third-party 
``debt relief'' companies that were using the Department's official 
seal without authorization. The misuse of the Department's Seal is part 
of a worrying trend. Some of these companies are charging large up-
front or monthly fees for Federal student aid services offered by the 
Department of Education and its student loan servicers for free. In 
April of 2016, the Department launched several informational efforts to 
direct borrowers to the Department's free support resources, as well as 
to share information regarding State and Federal entities that have the 
authority to act against companies that engage in deceptive or unfair 
practices. Although these or similar opportunists may seek to profit 
from filing false claims, the Department will be aggressive in 
curtailing this activity, and will remain vigilant to help ensure that 
bad actors do not profit from this process.
    We do not agree that the Federal standard will incent borrowers to 
assert claims of misrepresentation without sufficient evidence to 
substantiate their claims. As explained in more detail under ``Process 
for Individual Borrowers,'' under Sec.  685.222(a)(2), a borrower in 
the individual process in Sec.  685.222(e) bears the burden of proof in 
establishing that the elements of his or her claim have been met. In a 
group process under Sec.  685.222(f) to (h), this burden falls on the 
designated Department official. Borrower defense claims that do not 
meet the evidentiary standard will be denied. We also disagree with the 
commenters' interpretation of the borrower defense regulations as based 
on a presumption that all proprietary institutions engage in deliberate 
misrepresentation. These borrower defense regulations are applicable to 
and designed to address all institutions of postsecondary education 
participating in the Direct Loan Program; further, they contain no 
presumption regarding the activities of any institution, but instead 
provide a fair process for determining whether

[[Page 75937]]

acts or omissions by any particular institution give rise to a borrower 
defense. We also discuss this issue in more detail under ``Substantial 
Misrepresentation.''
    Changes: None.

Educational Malpractice

    Comments: A group of commenters asked that we clarify the 
difference between educational malpractice and a school's failure to 
provide the necessary aspects of an education (such as qualified 
instructors, appropriately equipped laboratories, etc.).
    Discussion: We do not believe that the regulations should 
differentiate between educational malpractice and a school's failure to 
provide the necessary aspects of an education, such as might be 
asserted in a claim of substantial misrepresentation or breach of 
contract. State law does not recognize claims characterized as 
educational malpractice, and we do not intend to create a different 
legal standard for such claims in these regulations. Claims relating to 
the quality of a student's education or matters regarding academic and 
disciplinary disputes within the judgment and discretion of a school 
are outside the scope of the borrower defense regulations. We recognize 
that there may be instances where a school has made specific 
misrepresentations about its facilities, financial charges, programs, 
or the employability of its graduates, and these misrepresentations may 
function as the basis of a borrower defense, as opposed to a claim 
regarding educational quality. Similarly, a borrower defense claim 
based on a breach of contract may be raised where a school has failed 
to deliver specific obligations, such as programs and services, it has 
committed to by contract.
    Changes: None.

Intent

    Comments: A number of commenters expressed concern that the 
proposed Federal standard does not require intent on the part of the 
institution. These commenters were concerned that inadvertent errors by 
an institution or its employees could serve as the basis for a borrower 
defense claim. Some commenters cited an example of an employee 
misstating or omitting information that is available to the borrower in 
a complete and correct form in publications or electronic media. One of 
these commenters noted that the six-year statute of limitations may 
exacerbate this issue, by permitting borrowers to present claims 
relying on distant memories of oral conversations that may have been 
misunderstood.
    Discussion: Gathering evidence of intent would likely be nearly 
impossible for borrowers. Information asymmetry between borrowers and 
institutions, which are likely in control of the best evidence of 
intentionality of misrepresentations, would render borrower defense 
claims implausible for most borrowers.
    As explained in more detail under ``Substantial 
Misrepresentation,'' we do not believe it is necessary to incorporate 
an element of intent or knowledge into the substantial 
misrepresentation standard. This reflects the Department's longstanding 
position that a misrepresentation does not require knowledge or intent 
on the part of the institution. The Department will continue to operate 
within a rule of reasonableness and will evaluate available evidence of 
extenuating, mitigating, and aggravating factors prior to issuing any 
sanctions pursuant to 34 CFR part 668, subpart F. We will also consider 
the totality of the circumstances surrounding any misrepresentation for 
borrower defense determinations. However, an institution will generally 
be responsible for harm to borrowers caused by its misrepresentations, 
even if they are not intentional. We continue to believe that this is 
more reasonable and fair than having the borrower (or taxpayers) bear 
the cost of such injuries. It also reflects the consumer protection 
laws of many States.
    Similarly, we do not believe it is necessary or appropriate to 
adopt an intent element for the breach of contract standard. Generally, 
intent is not a required element for breach of contract, and we do not 
see a need to depart from that general legal principle here.
    Regardless of the point in time within the statute of limitations 
at which a borrower defense claim is made, the borrower will be 
required to present a case that meets or exceeds the preponderance of 
the evidence standard.
    Changes: None.

State Law Bases for the Federal Standard

    Comments: A number of commenters advocated the continuation of 
State-based standards for future borrower defense claims. These 
commenters put forward several arguments in support of their position.
    Several commenters suggested that the proposed Federal standard 
effectively reduces, preempts, or repeals borrowers' current rights 
under the current, State law-based standard.
    According to another commenter, the proposed acceptance of 
favorable, nondefault, contested judgments based on State law suggests 
that allegations of State law violations should provide sufficient 
basis for a borrower defense claim. Another group of commenters 
contended that, when a Federal law or regulation intends to provide 
broad consumer protections, it generally does not supplant all State 
laws, but rather, replaces only those that provide less protection to 
consumers.
    A group of commenters noted that the HEA's State authorization 
regulations require States to regulate institutions and protect 
students from abusive conduct. According to these commenters, the laws 
States enact under this authority would not be covered by the Federal 
standard unless the borrower obtained a favorable, nondefault, 
contested judgment.
    Additionally, one commenter believed that providing a path to 
borrower defense based on act or omission of the school attended by the 
student that would give rise to a cause of action under applicable 
State law would preserve the relationship between borrower defense, 
defense to repayment, and the ``Holder in Due Course'' rule of the 
Federal Trade Commission (FTC).\5\
---------------------------------------------------------------------------

    \5\ The FTC's ``Holder Rule'' or ``Holder in Due Course Rule'' 
is also formally known as the ``Trade Regulation Rule Concerning 
Preservation of Consumers' Claims and Defenses,'' 16 CFR part 433. 
The Holder Rule requires certain credit contracts to include a 
contractual provision that establishes that the holder of such a 
contract is subject to all claims and defenses which the debtor 
could assert against the seller of the goods or services obtained 
with the proceeds of the contract, with recovery by the debtor being 
limited to the amounts paid by the debtor under the contract.
---------------------------------------------------------------------------

    These commenters stated that the Department has not provided 
sufficient evidence to support its assertions that borrower defense 
determinations based on a cause of action under applicable State law 
results or would result in inequitable treatment for borrowers, or that 
the complexity of adjudicating State-based claims has increased due to 
the expansion of distance education. Further, these commenters also 
stated that the Department has not provided any examples of cases that 
would meet the standard required to base a borrower defense claim on a 
nondefault, contested judgement based on State law.
    A group of commenters contended that State law provides the most 
comprehensive consumer protections to borrowers. Other commenters 
contended that State law provides clarity to borrowers and schools, as 
precedents have been established that elucidate what these laws mean 
with respect to the rights and responsibilities of the parties.

[[Page 75938]]

    Another commenter suggested that providing borrowers comprehensive 
options to claim a borrower defense, including claims based on 
violation of State law, should be an essential precept of borrower 
relief.
    One commenter contended that the elimination of the State standard 
is at odds with the proposed ban on mandatory arbitration, as this ban 
will clear the way for borrowers to pursue claims against their schools 
in State court.
    Several commenters noted that the Department will continue to apply 
State law standards to borrower defense claims for loans disbursed 
prior to July 2017, necessitating the continued understanding and 
application of State laws regardless of whether or not they remain a 
basis for borrower defense claims for loans disbursed after July 2017.
    A group of commenters expressed concern that borrowers with loans 
disbursed before July 2017 can access the Federal standard by 
consolidating their loans; however, borrowers with loans disbursed 
after July 2017 can only avail themselves of the State standard by 
obtaining a nondefault, contested judgment. They contended that 
Department should not introduce this inequity into the Federal student 
loan programs.
    Another group of commenters asserted that defining bases for future 
borrower defense claims based on past institutional misconduct may 
limit the prosecution of future forms of misconduct that are 
unforeseeable.
    Several commenters noted that many borrowers lack the resources 
necessary to obtain a nondefault, contested judgment based on State 
law. Moreover, these borrowers would not have access to the breadth of 
data and evidence available to the Department.
    Several commenters contended that borrowers whose schools have 
violated State law should not have to rely upon their State's Attorney 
General (AG) to access Federal loan relief.
    One commenter wrote that creating multiple paths a borrower may use 
to pursue a borrower defense claim is unnecessarily complex.
    A group of commenters remarked that the proposed Federal standard 
is both too complex and the evidentiary standard too low, suggesting 
that the prior State standard was more appropriate for borrower defense 
claims.
    Discussion: We disagree that the Federal standard effectively 
reduces, preempts, or repeals borrowers' current rights under the State 
standard. Borrowers may still submit a claim based on violation of any 
State or Federal law, whether obtained in a court or an administrative 
tribunal of competent jurisdiction. As also explained in the ``Claims 
Based on Non-Default, Contested Judgments'' section of this document, 
the Department's borrower defense process is distinct from borrowers' 
rights to pursue judicial remedies in other State or Federal contexts 
and nothing in the Department's regulation prevents borrowers from 
seeking relief through State law in State courts.
    We agree, as proposed in the NPRM and reflected in these final 
regulations, that the acceptance of favorable, nondefault, contested 
judgments based on State or Federal law violations may serve as a 
sufficient basis for a borrower defense claim. We believe it is 
important to enable borrowers to bring borrower defense claims based on 
those judgments, but we do not think this means that we should maintain 
the State-based standard.
    We acknowledge that the HEA's State authorization regulations 
require States to regulate institutions and protect students from 
abusive conduct and that the laws States have enacted in this role 
would only be covered by the Federal standard where the borrower 
obtained a favorable, nondefault, contested judgment. However, we do 
not view this as a compelling reason to maintain an exclusively State-
based standard, or a standard that also incorporates State law in 
addition to the Federal standard, for borrower defense.
    We disagree that the Federal standard for borrower defense should 
incorporate the FTC's Holder Rule. We acknowledge that the current 
borrower defense regulation's basis in applicable State law has its 
roots in the Department's history with borrower defense.\6\ However, we 
have decided that it is appropriate that the Department exercise its 
authority under section 455(h) of the HEA to specify ``which acts or 
omissions'' may serve as the basis of a borrower defense and establish 
a Federal standard that is not based in State law, for loans made after 
the effective date of these final regulations.
---------------------------------------------------------------------------

    \6\ As explained in the ``Expansion of Borrower Rights'' 
section, before the Department enacted the borrower defense 
regulations in 1994 as part of its Direct Loan Program regulations, 
59 FR 61664, the Department had preserved borrowers' rights under 
the FFEL Program to bring any claims a borrower may have against a 
school as defenses against the holder of the loan if the school had 
a referral or affiliation relationship with the lender. This was 
done by adopting a version of the FTC's Holder Rule language in the 
FFEL Master Promissory Note in 1994, and was later formalized in 
regulation at 34 CFR 682.209(g) in 2008. As further explained under 
``General,'' in 1995, the Department clarified that the borrower 
defense Direct Loan Program regulation was meant to create rights 
for borrowers, and as to liabilities for schools corresponding to 
those that would arise under the FFEL Program.
---------------------------------------------------------------------------

    We have acknowledged that potential disparities may exist as 
students in one State may receive different relief than students in 
another State, despite having common facts and claims. This concern is 
substantiated, in part, by comments made by non-Federal negotiators and 
members of the public in response to the NPRM, asserting that consumer 
protections laws vary greatly from State to State.
    We have also described how the complexity of adjudicating State-
based claims for borrower defense has increased due to the expansion of 
distance education. As noted in the NPRM (81 FR 39335 to 39336), while 
a determination might be made as to which State's laws would provide 
protection from school misconduct for borrowers who reside in one State 
but are enrolled via distance education in a program based in another 
State, some States have extended their rules to protect these students, 
while others have not.
    Additionally, we have discussed the administrative burden to the 
Department and difficulties Department has experienced in determining 
which States' laws apply to any borrower defense claim and the inherent 
uncertainties in interpreting another authorities' laws. 81 FR 39339.
    We agree that borrower relief should include comprehensive options, 
including claims based on violations of State law. While we believe 
that the proposed standards will capture much of the behavior that can 
and should be recognized as the basis for borrower defenses, it is 
possible that some State laws may offer borrowers important protections 
that do not fall within the scope of the Department's Federal standard. 
To account for these situations, the final regulations provide that 
nondefault, contested judgments obtained against a school based on any 
State or Federal law, may be a basis for a borrower defense claim, 
whether obtained in a court or an administrative tribunal of competent 
jurisdiction. Under these regulations, a borrower may use such a 
judgment as the basis for a borrower defense if the borrower was 
personally affected by the judgment, that is, the borrower was a party 
to the case in which the judgment was entered, either individually or 
as a member of a class. To support a borrower defense claim, the 
judgment would be required to pertain to the making of a Direct Loan or 
the provision of educational services to the borrower.

[[Page 75939]]

    While State law may provide clarity to borrowers and schools 
regarding the rights and responsibilities of the parties under 
established precedents, we believe that the Federal standard for 
borrower defenses more clearly and efficiently captures the full scope 
of acts and omissions that may result in a borrower defense claim.
    We disagree that the elimination of the State standard is at odds 
with the ban on predispute arbitration clauses. Rather, we assert that 
prohibiting predispute arbitration clauses will enable more borrowers 
to seek redress in court and, as appropriate, to submit a nondefault, 
contested judgment in support of their borrower defense claim, 
including a claim based on State law.
    We concur that the Department's continued application of State law 
standards to borrower defense claims for loans disbursed prior to July 
2017, will require the continued interpretation of State law. However, 
the number of loans subject to the State standard will diminish over 
time, enabling the Department to transition to a more effective and 
efficient borrower defense standard and process.
    We understand the commenters' concern that borrowers may be treated 
inequitably based on when their loans were disbursed. However, while it 
is true that borrowers with loans disbursed prior to July 2017 may 
consolidate those loans, as discussed in the NPRM (81 FR 39357), the 
standard that would apply would depend upon the date on which the first 
Direct Loan to which a claim is asserted was made. Therefore, the 
standard applied to these loans does not change by virtue of their 
consolidation.
    We do not agree that the Federal standard supplants all State 
consumer protection laws, as borrowers may still pursue relief based on 
these laws by obtaining a nondefault, contested judgment by a court or 
administrative tribunal of competent jurisdiction.
    We do not agree that the three bases for borrower defenses under 
the Federal standard limit the prosecution of future unforeseeable 
forms of misconduct. We expect that many of the borrower defense claims 
that the Department anticipates receiving will be addressed through the 
categories of substantial misrepresentation, breach of contract, or 
violations of State or Federal law that are confirmed through a 
nondefault, contested judgment by a court or administrative tribunal of 
competent jurisdiction. Additionally, the Department's borrower defense 
process is distinct from borrowers' rights or other Federal, State, or 
oversight agencies' authorities to prosecute or initiate claims against 
schools for wrongful conduct in State or other Federal tribunals. We 
recognize that, while the attainment of a favorable judgment can be an 
effective and efficient means of adjudicating a borrower's claim of 
wrongdoing by an institution, it can also be prohibitively time-
consuming or expensive for some borrowers. The regulation includes a 
provision that enables a borrower to show that a judgment obtained by a 
governmental agency, such as a State AG or a Federal agency, that 
relates to the making of the borrower's Direct Loan or the provision of 
educational services to the borrower, may also serve as a basis for a 
borrower defense under the standard, whether the judgment is obtained 
in court or in an administrative tribunal. We do not agree that 
borrowers whose schools have violated State law will have to rely upon 
their State's AG to access Federal loan relief. These borrowers are 
still able to file borrower defense claims under the substantial 
misrepresentation or breach of contract standards, even if a 
nondefault, contested judgment is not obtained by the government 
entity. Moreover, the prohibition against predispute arbitration 
clauses and class action waivers will enable more borrowers to pursue a 
determination of wrongdoing on the part of an institution individually 
or as part of a class.
    We do not agree that the State standard is less complex than the 
new Federal standard. As discussed, the current State law-based 
standard necessarily involves complicated questions relating to which 
State's laws apply to a specific case and to the proper and accurate 
interpretation of those laws. We believe the elements of the Federal 
standard and the bases for borrower defense claims provide sufficient 
clarity as to what may or may not constitute an actionable act or 
omission on the part of an institution. As discussed earlier, we also 
disagree that the State standard provides a higher evidentiary 
standard. Preponderance of the evidence is the typical standard in most 
civil proceedings. Additionally, the Department uses a preponderance of 
the evidence standard in other processes regarding borrower debt 
issues.
    Changes: None.

Federal Standard as a Minimum Requirement

    Comments: Several groups of commenters recommended that we 
establish a Federal standard that serves as a floor, or minimum 
requirement, to provide additional consumer safeguards to borrowers in 
States that have less robust consumer protection laws. One group of 
commenters suggested that this could assure consistency with the FTC 
Holder Rule. These commenters opined that expansion of the Federal 
standard to include Unfair, Deceptive or Abusive Acts and Practices 
(UDAP)\7\ violations and breaches of contract would benefit borrowers 
and simplify borrower defense claim adjudication, as very few States 
would provide more robust consumer protections.
---------------------------------------------------------------------------

    \7\ Each State has consumer protection laws that prohibit 
certain unfair and deceptive conduct, which are commonly known as 
``unfair and deceptive trade acts and practices'' or ``UDAP'' laws. 
The FTC also enforces prohibitions against unfair and deceptive 
conduct in certain contexts under section 5 of the FTC Act, 15 
U.S.C. 45, which may also be described as Federal ``UDAP'' law.
---------------------------------------------------------------------------

    Another commenter opined that a strong Federal standard as a more 
robust minimum requirement, i.e., one that requires only reasonable 
reliance to prove substantial misrepresentation and includes UDAP 
violations, would eliminate the need to maintain a State law standard.
    Discussion: We disagree that the Federal standard requires 
expansion to include UDAP violations in order to ensure borrowers are 
protected or that the Federal standard should be established as a 
minimum requirement for borrower defense. As noted in the NPRM, 
reliance upon State law not only presents a significant burden for 
Department officials who must apply and interpret various State laws, 
but also for borrowers who must make the threshold determination as to 
whether they may have a claim. We believe that many of the claims the 
Department will receive will be covered by the standards proposed by 
the Department and that those standards will streamline the 
administration of the borrower defense regulations. The Department's 
substantial misrepresentation regulations (34 CFR part 668 subpart F) 
were informed by the FTC's Policy Guidelines on Deception, and we 
believe they are more tailored to, and suitable for, use in the 
borrower defense context. Under the borrower defense regulations, 
certain factors addressing specific problematic conduct may be 
considered to determine whether a misrepresentation has been relied 
upon to a borrower's detriment, thus making the misrepresentation 
``substantial.'' With regard to unfair and abusive conduct, we 
considered the available precedent and determined that it is unclear 
how such principles would apply in the borrower defense context as 
stand-alone standards. Such practices are often alleged in combination 
with misrepresentations and are not often addressed on their own by the 
courts. With this lack of guidance, it is unclear

[[Page 75940]]

how such principles would apply in the borrower defense context.
    Moreover, many of the borrower defense claims the Department has 
addressed or is considering have involved misrepresentations by 
schools. We believe that the standard established in these regulations 
will address much of the behavior arising in the borrower defense 
context, and that this standard appropriately addresses the 
Department's goals of accurately identifying and providing relief to 
borrowers for misconduct by schools; providing clear standards for 
borrowers, schools, and the Department to use in resolving claims; and 
avoiding for all parties the burden of interpreting other Federal 
agencies' and States' authorities in the borrower defense context. As a 
result, we decline to adopt standards for relief based on UDAP.
    As discussed earlier, we also disagree that the Federal standard 
for borrower defense should incorporate the FTC's Holder Rule, 16 CFR 
part 433, and believe that it is appropriate for the reasons discussed 
that the Department exercise its authority to establish a Federal 
standard that is not based in State law.
    Notwithstanding the foregoing discussion, we appreciate that State 
law provides important protections for students and borrowers. Nothing 
in the borrower defense regulations prevents a borrower from seeking 
relief under State law in State court. Moreover, Sec.  685.222(b) 
provides that if a borrower has obtained a nondefault, favorable 
contested judgment against the school under State or other Federal law, 
the judgment may serve as a basis for borrower defense. As explained 
further under ``Claims Based on Non-Default, Contested Judgments,'' we 
believe this strikes the appropriate balance between providing relief 
to borrowers and the Department's administrative burden in accurately 
evaluating the merits of such claims.
    Changes: None.

Additional Grounds

State AGs
    Comments: A number of commenters requested that the final 
regulations include a process for State AGs to petition the Secretary 
to grant relief based on State law violations. One group of commenters 
expanded on this request, suggesting that other law enforcement 
agencies and entities also be permitted to bring forward evidence in 
support of group claims, and to receive from the Department a formal 
response regarding its determination of the claim. Another group of 
commenters contended that State AGs uncover institutional wrongdoing 
before others do, and, accordingly, their direct participation in the 
borrower defense process would provide affected borrowers more timely 
access to relief.
    Discussion: The group process for borrower defenses in Sec.  
685.222(f) provides for a process by which evidence for determinations 
of substantial misrepresentation, breach of contract, or judgments, 
might come from submissions to the Department by claimants, State AGs 
or other officials, or advocates for claimants, as well as from the 
Department's investigations. We recognize that these entities may 
uncover institutional wrongdoing early and may have relevant evidence 
in support of group claims.
    The Department always welcomes cooperation and input from other 
Federal and State enforcement entities, as well as legal assistance 
organizations and advocacy groups. In our experience, such cooperation 
is more effective when it is conducted through informal communication 
and contact. Accordingly, we have not incorporated a provision 
requiring formal written responses from the Secretary, but plan to 
create a point of contact for State AGs to allow for active 
communication channels. We also reiterate that we welcome a 
continuation of cooperation and communication with other interested 
groups and parties. As indicated above, the Department is fully 
prepared to receive and make use of evidence and input from other 
stakeholders, including advocates and State and Federal agencies. We 
also discuss this issue in more detail under ``Group Process for 
Borrower Defense.''
    Changes: None.

Unfair or Deceptive Acts or Practices (UDAP)

    Comments: Several groups of commenters advocated the inclusion of 
State UDAP laws as a stand-alone basis for borrower defense claims.
    One group of commenters opined that UDAP laws, which include 
prohibitions against misrepresentation, along with unfair, fraudulent, 
and unlawful business acts, have been refined by decades of judicial 
decisions, while the proposed substantial misrepresentation basis for 
borrower defense claims remains untested.
    Another group of commenters argued that State UDAP laws incorporate 
the prohibitions and deterrents that the Department seeks to achieve 
and offer the flexibility needed to deter and rectify institutional 
acts or omissions that would be presented as borrower defenses under 
the Department's substantial misrepresentation and breach of contract 
standards. Another group of commenters noted that some acts that may 
violate State laws intended to protect borrowers may not constitute a 
breach of contract or misrepresentation.
    Another commenter noted that multiple State AGs have investigated 
schools and provided the Department with their findings of wrongdoing 
based on their States' UDAP laws.
    One group of commenters suggested that, if the Department did not 
opt to restore the State standard, the inclusion of a similar UDAP law 
provision would become even more important. These commenters assert 
that the additional factors that would favor a finding of a substantial 
misrepresentation would not close the gap between the Federal standard 
and States' UDAP laws. They recommend using State UDAP laws as the 
additional factors that would elevate a misrepresentation to 
substantial misrepresentation.
    Discussion: As discussed above, we disagree that the inclusion of 
UDAP violations as a basis for a borrower defense claims is required to 
assure borrowers are protected by the Federal standard.
    We believe that the Federal standard appropriately addresses the 
Department's interests in accurately identifying and providing relief 
to borrowers for misconduct by schools; providing clear standards for 
borrowers, schools, and the Department to use in resolving claims; and 
avoiding for all parties the burden of interpreting other Federal 
agencies' and States' authorities in the borrower defense context. 
While UDAP laws may play an important role in State consumer protection 
and in State AGs' enforcement actions, we believe the Federal standard 
addresses much of the same conduct, while being more appropriately 
tailored and readily administrable in the borrower defense context. As 
a result, we decline to include UDAP violations as a basis for borrower 
defense claims.
    Changes: None.
    Comments: One commenter stated that by foreclosing HEA violations 
from serving as a basis for borrower defense claims, the proposed 
regulations would effectively preempt State UDAP laws, which the 
commenter argued often use violations of other laws as a basis for 
determining that a practice is unfair or deceptive.
    Discussion: The Department's borrower defense process is distinct 
from borrowers' rights under State law. State UDAP laws establish 
causes of action an individual may bring in a State's courts; nothing 
in the

[[Page 75941]]

Department's regulations prevents borrowers from seeking relief through 
State law in State courts. As noted in the NPRM, the specifics of the 
borrower defense process should not be taken to represent any view 
regarding other issues and causes of action under other laws and 
regulations that are not within the Department's authority.
    Changes: None.

HEA Violations

    Comments: One commenter requested that the regulations make clear 
that borrower defense claims do not include claims based on 
noncompliance with the HEA or sexual or racial harassment allegations, 
as described in the preamble to the NPRM. One commenter suggested that 
the explicit exclusion of sexual or racial harassment as the basis of a 
borrower defense claim is intended to protect public and non-profit 
schools.
    Another commenter believed the current regulations would allow 
borrowers to base a claim for a borrower defense on an institution's 
violations of the HEA where those violations also constitute violations 
under State UDAP law. The commenter viewed the Department's position in 
the NPRM that a violation of the HEA is not, in itself, a basis for a 
borrower defense as a retroactive change to the standard applicable to 
loans made before July 2017. The commenter rejected the Department's 
assertion that this limitation is in fact based on a longstanding 
interpretation of the bases for borrower defense claims.
    Discussion: It is indeed the Department's longstanding position 
that an act or omission by the school that violates an eligibility or 
compliance requirement in the HEA or its implementing regulations does 
not necessarily affect the enforceability of a Federal student loan 
obtained to attend the school, and is not, therefore, automatically a 
basis for a borrower defense. With limited exceptions not relevant 
here, the case law is unanimous that the HEA contains no implied 
private right of action for an individual to assert a claim for 
relief.[hairsp]\8\ The HEA vests the Department with the sole authority 
to determine and apply the appropriate sanction for HEA violations.
---------------------------------------------------------------------------

    \8\ As stated by the Department in 1993:
    [The Department] considers the loss of institutional eligibility 
to affect directly only the liability of the institution for Federal 
subsidies and reinsurance paid on those loans. . . . [T]he borrower 
retains all the rights with respect to loan repayment that are 
contained in the terms of the loan agreements, and [the Department] 
does not suggest that these loans, whether held by the institution 
or the lender, are legally unenforceable merely because they were 
made after the effective date of the loss of institutional 
eligibility.
    58 FR 13,337. See, e.g. Armstrong v. Accrediting Council for 
Continuing Educ. & Training, 168 F.3d 1362 (D.C. Cir. 1999), opinion 
amended on denial of reh'g, 177 F.3d 1036 (D.C. Cir. 1999) 
(rejecting claim of mistake of fact regarding institutional 
accreditation as grounds for rescinding loan agreements); McCullough 
v. PNC Bank, 298 F.3d 1362, 1369 (11th Cir. 2002)(collecting cases).
---------------------------------------------------------------------------

    A school's act or omission that violates the HEA may, of course, 
give rise to a cause of action under other law, and that cause of 
action may also independently constitute a borrower defense claim under 
Sec.  685.206(c) or Sec.  685.222. For example, advertising that makes 
untruthful statements about placement rates violates section 487(a)(8) 
of the HEA, but may also give rise to a cause of action under common 
law based on misrepresentation or constitute a substantial 
misrepresentation under the Federal standard and, therefore, constitute 
a basis for a borrower defense claim. However, this has always been the 
case, and is not a retroactive change to the current borrower defense 
standard under Sec.  685.206(c).
    As explained in more detail under ``Federal Standard,'' it has been 
the Department's longstanding position that sexual and racial 
harassment claims do not directly relate to the making of a loan or 
provision of educational services and are not within the scope of 
borrower defense. 60 FR 37769. We also note, moreover, that sexual and 
racial harassment are explicitly excluded as bases for borrower defense 
claims in recognition of other entities, both within and outside of the 
Department, with the authority to investigate and resolve these 
complaints, and not in an effort to protect public and non-profit 
schools.
    Changes: None.

Claims Based on Non-Default, Contested Judgments

    Comments: A group of commenters requested that the Department 
explain how, if continuing to operate under the State standard results 
in potentially inequitable treatment for borrowers, it is still 
reasonable to rely upon State law when judgments have been obtained, 
thereby providing borrower protections that vary by State.
    Several commenters suggested that a borrower should be required to 
obtain a favorable judgment under State law in order to obtain a loan 
discharge. One commenter suggested that borrowers pursuing State law 
judgments receive forbearance on their Direct Loans while their cases 
are proceeding.
    Discussion: When the Department relies upon a nondefault, contested 
judgment to affirm a borrower defense, it is not required to interpret 
State law. Rather, it relies upon the findings of a court or 
administrative tribunal of competent jurisdiction.
    Although we expect that the prohibition against certain mandatory 
arbitration clauses will enable more borrowers to pursue a 
determination of wrongdoing on the part of an institution, we do not 
agree that it is appropriate to require borrowers to obtain a favorable 
judgment in order to obtain a loan discharge.
    While the attainment of a favorable judgment can be an effective 
and efficient means of adjudicating a borrower's claim of wrongdoing by 
an institution, it can also be prohibitively time-consuming or 
expensive for some borrowers. We have included a provision under which 
a judgment obtained by a governmental agency, such as a State AG or a 
Federal agency, that relates to the making of the borrower's Direct 
Loan or the provision of educational services to the borrower, may also 
serve as a basis for a borrower defense under the standard, whether the 
judgment is obtained in court or in an administrative tribunal.
    We agree that borrowers should receive forbearance on their Direct 
Loans while their cases are proceeding. Borrowers may use the General 
Forbearance Request form to apply for forbearance in these 
circumstances; we would grant the borrower's request, and the final 
regulations also will require FFEL Program loan holders to do the same 
upon notification by the Secretary. In addition, a borrower defense 
loan discharge based on a nondefault, contested judgment may provide 
relief for remaining payments due on the loan and recovery of payments 
already made.
    Changes: None.
    Comments: Several commenters stated that the Department's proposal 
to allow borrower defenses on the basis of ``nondefault, favorable 
contested judgments'' was unrealistic, and argued that such judgments 
are unlikely to occur. These commenters argued that both plaintiffs 
(either government agencies or students themselves) as well as 
institutions are under substantial pressure to settle lawsuits, and 
pointed to the lack of any current judgments against institutions that 
would meet this standard. One commenter argued that the lack of such 
nondefault favorable contested judgments effectively barred State 
causes of action and would force borrowers to rely on the Department's 
Federal standard as the only basis for relief.
    Discussion: The Department recognizes that nondefault, favorable 
contested judgments may not be common, relative to the number of

[[Page 75942]]

lawsuits that are filed. The Department includes this basis for relief 
as a way for borrowers to avoid having to re-litigate claims actually 
decided on the merits. If no such determination against the institution 
has yet occurred, borrowers may bring claims to the Department for 
evaluation that satisfy the standards described for a substantial 
misrepresentation under Sec.  685.222(d) or breach of contract under 
Sec.  685.222(c). The Department will thus continue to recognize State 
law causes of action under Sec.  685.222(b), but will require a 
tribunal of competent jurisdiction to decide the legal and factual 
basis for the claim.
    Changes: None.
    Comments: Several commenters stated that the proposed standard for 
nondefault, favorable contested judgments effectively narrows State law 
causes of action by putting what the commenters argued was a 
significant and unrealistic burden on borrowers to litigate claims to 
judgment. These commenters argued that the Department should not 
effectively remove these bases for relief. One of the commenters asked 
that the Department recognize settlements with the institution as a 
basis for relief, while another proposed that the Department recognize 
class action settlements in which the settlement has been approved by a 
judge or in which the plaintiff(s) have survived a motion for summary 
judgment. Another asked that claim preclusive court judgments and 
findings of fact and admissions in settlements should likewise serve as 
a basis for relief.
    Discussion: As stated in the NPRM, 81 FR 39340, we decline to adopt 
a standard based on applicable State law due, in part, to the burden to 
borrowers and the Department in interpreting and applying States' laws. 
However, we recognize that State law may provide important protections 
for borrowers and students. We believe that a standard recognizing 
nondefault, favorable, contested judgments strikes a balance between 
recognizing causes of action under State or other Federal law and 
minimizing the Department's administrative burden in accurately 
evaluating the merits of such claims. For the reasons discussed here 
and in the NPRM, we decline to recognize settlements as a way to 
satisfy the standard in Sec.  685.222(b). However, we welcome the 
submission of, and will consider, any orders, court filings, 
admissions, or other evidence from a borrower for consideration in the 
borrower defense process.
    Changes: None.
    Comments: One commenter stated that the Department's proposed 
language leaves it unclear whether the judgment against the institution 
must include a specific determination regarding the act or omission 
forming the basis of the borrower defense, and urged the Department to 
explicitly require such a determination. Another commenter argued that 
the carve-outs of certain claims that the Department would not consider 
to be borrower defenses are not explicitly included for judgments 
obtained against an institution, and urged that the Department include 
such carve-outs.
    Discussion: For a judgment to form the basis of a borrower defense, 
it must include a determination that an act or omission that would 
constitute a defense to repayment under State or Federal law occurred 
and that the borrower would be entitled to relief under such applicable 
law. That said, the overarching principles established in Sec.  
685.222(a) apply to claims under all the standards established in Sec.  
685.222, including to judgments under Sec.  685.222(b). Thus, under 
Sec.  685.222(a)(3), the Department will not recognize a violation by 
the school of an eligibility or compliance requirement in the HEA or 
its implementing regulations as a basis for borrower defense under 
Sec.  685.222 or Sec.  685.206(c) unless the violation would otherwise 
constitute a basis for borrower defense. Similarly, borrower defense 
claims must be based upon an act or omission of the school attended by 
the student that relates to the making of a Direct Loan or the 
provision of educational services for which the loan was provided, 
under Sec.  685.222(a)(5).
    If a borrower, a class of consumers, or a government agency made a 
claim against a school regarding the provision of educational services 
and receives a favorable judgment that entitles the borrower to 
restitution or damages, but the borrower only obtained a partial 
recovery from the school on this judgment, under Sec.  685.222(i)(8), 
we would recognize any unpaid amount of the judgment in calculating the 
total amount of relief that could be provided on the Direct Loan. If 
the borrower, a class of consumers, or a government agency obtained a 
judgment holding that the school engaged in wrongful acts or omissions 
regarding the provision of private loans, the borrower could 
demonstrate to the Department whether the findings of fact on which the 
judgment rested also established acts or omissions relating to the 
educational services provided to the borrower or the making of the 
borrower's Direct Loan that could be the basis of a borrower defense 
claim under these regulations. This borrower defense claim would be a 
basis for relief independent of the judgment that related exclusively 
to the private loans, and such relief would be calculated without 
reference to any relief obtained through that private loan judgment.
    Changes: None.
    Comments: Several commenters raised concerns about a student's 
ability to bring a borrower defense claim based on judgments obtained 
by government agencies. One of the commenters stated that it is not 
always clear when an agency is acting on behalf of the students.
    Discussion: The final regulation recognizes that judgments obtained 
by governmental agencies may not be brought on the behalf of specific 
students, as opposed to having been brought, for example, on the behalf 
of a State or on the behalf of the United States. As described in the 
final regulation, a judgment under the standard brought by a 
governmental agency must be a favorable contested judgment obtained 
against the school. As discussed previously, such judgments must also 
meet the requirements of Sec.  685.222(a).
    Changes: None.
    Comments: One commenter argued that the Department's judgment 
standard should only apply with respect to loans disbursed, or 
judgments obtained, after July 1, 2017.
    Discussion: We believe that the standard does not represent any 
change from current practice. If a borrower submitted a nondefault, 
contested judgment from a court or administrative tribunal of competent 
jurisdiction deciding a cause of action under applicable State law for 
a loan first disbursed before July 1, 2017, the Department would apply 
principles of collateral estoppel to determine if the judgment would 
bar a school from disputing the cause of action forming the basis of 
the borrower's claim under 34 CFR 685.206(c).
    Changes: None.
    Comments: One commenter urged the Department to specify that the 
judgments referenced in Sec.  685.222(b) must be obtained in court 
cases and not merely through administrative proceedings.
    Discussion: As set forth in in Sec.  685.222(b), the judgment must 
be obtained ``in a court or administrative tribunal of competent 
jurisdiction.'' The Department continues to believe that administrative 
adjudications serve an important role in determining the factual and 
legal basis for claims that could serve as borrower defenses. We do

[[Page 75943]]

not believe further clarification is necessary on this point.
    Changes: None.
    Comments: One commenter stated that the Department should add 
language to the final regulations stating that it will also respect 
judgments in favor of the school as precluding a borrower defense 
claim.
    Discussion: We will not incorporate an absolute bar on borrower 
defense claims where the borrower has already lost in a State 
proceeding because different underlying legal or factual bases may have 
been involved in the prior litigation. For example, a student might 
lose a breach of contract suit in State court premised on an 
institution's failure to provide job placement services, but have a 
valid claim that the institution misrepresented whether credits would 
be transferrable. The Department will, however, follow established 
principles of collateral estoppel in its determination of borrower 
defense claims.
    Changes: None.
    Comments: One commenter stated that the Department's proposed 
regulatory language would disrupt the adversarial process because 
institutions would be more likely to settle cases than risk a judgment 
that could lead to borrower defense liabilities, and also that 
institutions may be forced not to settle if the opposing party insists 
on admission of liability in the settlement that could form the basis 
of borrower defense liabilities. The commenter also argued that it 
would be unfair for the Department to consider past settlements 
retroactively. Another commenter argued that the Department should 
recognize default judgments against institutions obtained by a law 
enforcement agency such as the FTC, the Consumer Financial Protection 
Bureau (CFPB), or a State AG.
    Discussion: We appreciate the concern that the new standard may 
cause disruptions to the strategy and risk calculus in other litigation 
by private parties as well as government agencies. The Department's 
purpose in this rulemaking is to create a Federal standard that will 
more efficiently and fairly determine whether a borrower is entitled to 
relief, and we consider this purpose to outweigh the concern raised 
about altering litigation strategies. We do not intend either to 
dissuade or encourage settlements between borrowers and institutions, 
and will give settlements and admissions in previous litigation the 
weight to which they are entitled. That said, a default judgment does 
not involve any determination of the merits, and therefore will require 
the Department to make an independent assessment of the underlying 
factual and legal basis for the claim. Settlements prior to July 1, 
2017 will not be considered under this standard.
    Changes: None.

Claims Based on Breach of Contract

    Comments: Several commenters questioned why the Department would 
permit a breach of contract claim, but not any other State law claims. 
One commenter noted that evaluation of a breach of contract claim would 
require substantial Department resources, including choice-of-law 
decisions that may be especially complicated in cases of distance 
education. One commenter said that other contract-related causes of 
action should be open to borrowers, such as lack of consideration, lack 
of formation due to lack of capacity, and contract contrary to public 
policy, among others. Another commenter said that borrowers should be 
able to assert contract-related claims under State UDAP laws for 
signing forms saying they received materials that they never received.
    Discussion: The comments suggest some confusion about the 
Department's standard for evaluating breach of contract claims. For 
loans first disbursed prior to July 1, 2017, the Department will 
continue to recognize any applicable State-law causes of action, in 
accordance with the State of the law prior to these regulations. That 
standard requires the Department to evaluate State law questions, 
including choice-of-law questions. For loans first disbursed after July 
1, 2017, however, the Department will move to a Federal standard for 
misrepresentation and breach of contract claims, and will cease to 
recognize State-law bases that may exist for those causes of action. 
Some commenters appeared to question why the Department drew the line 
at accepting breach of contract claims but rejecting other traditional 
State law contract-related causes of action. As we explained in the 
NPRM, 81 FR 39341, breach of contract is a common allegation against 
schools, and the underlying facts for a breach of contract claim may 
very well not fit into the Department's substantial misrepresentation 
standard. Furthermore, breach of contract is a cause of action 
established in common law recognized across all States, and its basic 
elements are likewise uniform across the States. Developing a Federal 
standard in the particularized area of student-institution contracts 
will ultimately lead to better consistency and greater predictability 
in this area. That said, the Department will continue to recognize a 
borrower defense based on any applicable State law cause of action, 
provided that such a claim is litigated to a non-default, favorable 
contested judgment under Sec.  685.222(b). Thus, we believe the final 
regulations strike an appropriate balance between the efficiency and 
predictability of a Federal standard, while still providing sufficient 
bases upon which a borrower entitled to debt relief may seek it.
    Changes: None.
    Comments: Several commenters asked the Department to incorporate 
the covenant of good faith and fair dealing when evaluating breach of 
contract claims. One commenter argued that these doctrines could be 
used to prevent institutions from relying on fine print disclaimers, 
``job placement assistance'' that does not provide any targeted advice 
for students but instead refers them to Internet job-posting sites, and 
other tactics the commenter believes are unfair to students. Another 
commenter attached examples of current institutional agreements that 
seek to disclaim any promises beyond what are made in the enrollment 
agreement, and urged the Department not to honor such disclaimers.
    Discussion: The Department's position on this issue is that it will 
rely on general, widely accepted principles of contract law in 
developing a Federal standard in this area. We decline to elaborate 
further on what specific types of contract claims might or might not be 
successful at this time. We believe that a Federal standard for breach 
of contract cases within the education context will ultimately be more 
helpful if developed on a case-by-case basis.
    Changes: None.
    Comments: Several commenters weighed in on the Department's 
position that documents beyond the enrollment agreement might serve as 
part of the contract. Some of these commenters noted that this position 
may lead to inconsistent results, since different State laws and 
circumstances may or may not allow a student to rely on other documents 
beyond the enrollment agreement. Some of the commenters argued for more 
clarity from the Department on which materials we would consider to 
constitute the contract, and one of these commenters pointed to cases 
varying on the treatment of such materials. One commenter invited us to 
specify that a contract would include any promise the borrower 
reasonably believed would be the institution's commitment to them. 
Other commenters argued that, by raising the possibility that a student 
might be able to point to course catalogues and similar documents as

[[Page 75944]]

part of the ``contract,'' the Department's rule would have the effect 
of limiting the information schools provide to students. These 
commenters said that the uncertainty could pose practical obstacles for 
large institutions in particular, and asked the Department to 
explicitly exclude such material from the definition of contract. One 
commenter said that the ultimate effect of the current uncertainty 
might be to reduce recruitment from under-served student populations.
    Discussion: We understand the concerns from both the student 
advocates and the institutional advocates regarding the lack of 
certainty in the NPRM language. However, the Department is unable to 
draw a bright line on what materials would be included as part of a 
contract because that determination is necessarily a fact-intensive 
determination best made on a case-by-case basis. The Department intends 
to make these determinations consistent with generally recognized 
principles applied by courts in adjudicating breach of contract 
claims.\9\ To the extent that Federal and State case law has resolved 
these issues, we will be guided by that precedent. Application of the 
standard will thus be guided but not controlled by State law. Moreover, 
the Department will continue to evaluate claims as they are received 
and may issue further guidance on this topic as necessary.
---------------------------------------------------------------------------

    \9\ Section 455(h)of the HEA clearly gives the Secretary the 
power to create legal defenses, which until now has been done by 
adopting State law; this rulemaking adopts a Federal standard, the 
interpretation and application of which will require consideration 
of principles developed by Federal and State courts in deciding 
cases brought on claims for breach of contract or misrepresentation, 
as distilled, for example, in the restatements of the law.
---------------------------------------------------------------------------

    Changes: None.
    Comments: A commenter argued that allowing breach of contract as a 
basis for borrower defense claims will not be effective. The commenter 
said that most contracts in the for-profit education sector are written 
to bind the student and not the institution. The commenter also argued 
that the NPRM preamble failed to cite any successful breach of contract 
suits students have made against schools, arguing that the Department's 
citation to Vurimindi v. Fuqua Sch. Of Business, 435 F. App'x 129 (3d 
Cir. 2011) is inapposite.
    Discussion: The Department appreciates this concern, and intends to 
follow general fairness and contract principles in its analysis of 
whether other promises made to a student beyond the enrollment 
agreement should be considered.
    Changes: None.
    Comments: A commenter argued that the Department should not refer 
to ``specific obligations'' in its preamble discussion of how a 
borrower could make out a breach of contract theory, saying it was 
unnecessarily confusing in light of well-developed State law on what 
kind of promises are sufficient to make out a breach of contract claim.
    Discussion: We believe the phrase ``specific obligations'' is 
consistent with general contract principles that a breach of contract 
cannot be based on promises that are so abstract as to be 
unenforceable, and believe that determinations regarding an 
institution's obligations under a contract with a student will be 
highly fact-specific. Given that many borrowers may not be legally 
sophisticated regarding what constitutes an enforceable promise, we do 
not believe that any modification to the language is necessary.
    Changes: None.
    Comments: Several commenters were concerned that the proposed rule 
did not include a ``materiality'' element that a borrower would need to 
show in order to make out a breach of contract claim, which they 
worried might lead to numerous, frivolous claims as well as wide 
uncertainty as to potential future liabilities. One commenter further 
invited the Department to explain in the final rule what would 
constitute a ``de minimis'' claim that would lead a judge to dismiss a 
case. Other commenters asked that the Department focus on systemic 
problems and material breaches, and identify the standards it will use 
to make determinations. A group of commenters suggested the Department 
adopt the standards used for such cases in New York.
    Discussion: We appreciate the concerns, first raised during the 
negotiated rulemaking, about the lack of a materiality element in the 
standard for a breach of contract borrower defense. As explained in the 
NPRM, 81 FR 39341, we believe it is appropriate that the regulations 
allow borrowers to assert a borrower defense based on any breach of 
contract that would entitle them to any relief--including relatively 
minor breaches--and thus do not include a materiality requirement. The 
Department will consider whether any alleged breach of contract by an 
institution is material in its assessment of whether the borrower would 
be entitled to relief, as well as whether such relief would be full or 
partial.
    Changes: None.
    Comments: Several commenters expressed concern that the proposed 
regulation contains an exception to the bar on using HEA violations for 
borrower defense claims if ``the violation would otherwise constitute a 
basis for a borrower defense.'' These commenters stated that this 
exception could swallow the rule to the extent a compliance violation 
could be restated as a borrower defense, and further noted that the HEA 
does not contain a private right of action. These commenters urged the 
Department to bar compliance violations asserted as breach of contract.
    Discussion: We agree that the HEA does not itself contain a private 
right of action, but note that the underlying conduct constituting a 
violation of the HEA may also be a cognizable borrower defense. For 
example, the Department has the authority to prohibit and penalize 
substantial misrepresentations under the HEA, but such 
misrepresentations may also serve as the basis for a borrower defense 
which a borrower is undoubtedly entitled to pursue with the Department 
if the borrower can demonstrate proof of substantial misrepresentation 
under Sec.  685.222(d), which also requires that a borrower demonstrate 
actual, reasonable reliance to their detriment for relief. For that 
reason, the final regulations strike a balance between allowing 
borrowers to pursue defenses based on misconduct that might also 
constitute HEA violations, but only so long as the underlying 
misconduct also satisfies a standard under which borrower defense 
claims may be brought as noted at Sec.  685.222(a)(3).
    Changes: None.
    Comments: A commenter argued that the lack of a reliance element on 
a contractual promise could lead to borrower relief that is 
unwarranted. Other commenters argued the same for lack of an injury 
element.
    Discussion: The Department will analyze breach of contract defenses 
under general and well established contract principles shared by State 
law. At this time, the Department has not set forth more fulsome 
details for what elements a borrower must show in the Federal standard 
to allow the standard to develop on a case-by-case basis. We believe 
that the Federal standard will ultimately be more useful if developed 
in light of actual student claims.
    Changes: None.
    Comments: Several commenters urged the Department to exclude any 
claims related to academic considerations, such as the quality of 
instructional materials, because such matters should be left to the 
institution or the institution's accreditor or State licensing agency.
    Discussion: We do not see any present need for categorical 
exemptions. The Department will evaluate claims in accordance with 
well-established

[[Page 75945]]

principles of contract law. Claims related to academic consideration 
may well be beyond the scope of a cognizable borrower defense or even 
the Department's jurisdiction, but that is something the Department 
will consider on a case-by-case basis in evaluating the borrower 
defense applications.
    Changes: None.
    Comments: One commenter argued that the Department should recognize 
defenses an institution could raise, such as compliance with contract 
terms, economic hardship, or that the borrower not be entitled to 
refund of monies already paid.
    Discussion: The final regulations, like the proposed regulations, 
do not put limits on the defenses an institution can make in a 
proceeding before the Department.
    Changes: None.
    Comments: One commenter noted that the Department's proposed 
language was ambiguous as to whether the act or omission must give rise 
to the breach of contract or itself constitute a breach of contract.
    Discussion: Consistent with the Department's interpretation of its 
authorizing statute, the act or omission by the school must be the 
breach of contract itself. We believe, however, that this reading is 
clear from the language in the final rule.
    Changes: None.
    Comments: One commenter asked the Department to clarify what kinds 
of actions it would consider to be within the scope of a borrower 
defense based on a breach of contract.
    Discussion: We do not believe further detail or elaboration is 
necessary of helpful at this time, given the wide variety of 
allegations the Department expects to receive. Under the regulations, 
the Department will recognize as a borrower defense any breach of 
contract claim that reasonably relates to the student loan.
    Changes: None.

Claims Based on Substantial Misrepresentation

    Comments: A group of commenters expressed concern that the 
Department's substantial misrepresentation standard is too narrow. 
These commenters believed that the standard would allow schools to 
engage in problematic behavior, so long as they did not make untrue 
statements.
    Discussion: We appreciate the concerns that the substantial 
misrepresentation standard does not capture all actions that may form 
causes of action under standards in State or other Federal law. 
However, as noted in the NPRM, 81 FR 39340, we believe that the 
standard appropriately addresses the Department's interests in 
accurately identifying and providing relief for borrowers and in 
providing clear standards for borrowers, schools, and the Department in 
resolving claims. We believe that Sec.  668.71(c), which is referenced 
in Sec.  685.222(d), will address much of the behavior the Department 
anticipates arising in the borrower defense context.
    We disagree that the substantial misrepresentation standard would 
not necessarily capture institutional misconduct that did not involve 
untrue statements. As revised in these final regulations, Sec.  
668.71(c) defines a ``misrepresentation'' as including not only false 
or erroneous statements, but also misleading statements that have the 
likelihood or tendency to mislead under the circumstances. The 
definition also notes that omissions of information are also considered 
misrepresentations. Thus, a statement may still be misleading, even if 
it is true on its face. As explained in the NPRM, 81 FR 39342, we 
revised the definition of ``misrepresentation'' to add the words 
``under the circumstances'' to clarify that the Department will 
consider the totality of the circumstances in which a statement 
occurred, to determine whether it constitutes a substantial 
misrepresentation. We believe the Department has the ability to 
properly evaluate whether a statement is misleading, but otherwise 
truthful, to a degree that it becomes an actionable borrower defense 
claim.
    Changes: None.
    Comments: Several commenters expressed concern that the substantial 
misrepresentation standard would apply only to proprietary 
institutions. One commenter stated that the standard should apply to 
all institutions of higher education, stating that many public colleges 
and universities also misrepresent the benefits and outcomes of the 
education provided. Another commenter stated that the proposed addition 
of misrepresentation through omissions would target only borrower 
defense claims that would be made by students attending proprietary 
institutions, and not students at traditional schools.
    Other commenters stated that by limiting the subject matter covered 
by the substantial misrepresentation standard to just those related to 
loans, in their view, the standard would target only proprietary 
schools and exclude issues facing students at traditional colleges, 
such as campus safety or sexual discrimination in violation of title IX 
of the HEA.
    Discussion: There appears to be some confusion about the 
institutions covered under the scope of both 34 CFR part 668, subpart F 
and proposed Sec.  685.222(d). Even prior to the proposed changes in 
the NPRM, Sec.  668.71 was applicable to all institutions, whether 
proprietary, public, or private non-profit. Similarly, the current 
borrower defense regulation at Sec.  685.206(c) does not distinguish 
between types of schools. The proposed and final regulations do not 
represent a change in these positions.
    As discussed under the ``Making of a Loan and Provision of 
Educational Services'' section of this document, the Department's long-
standing interpretation has been that a borrower defense must be 
related to the making of a loan or to the educational services for 
which the loan was provided. As a result, the Department has stated 
consistently since 1995 that it does not does not recognize as a 
defense against repayment of the loan a cause of action that is not 
directly related to the loan or to the provision of educational 
services, such as personal injury tort claims or actions based on 
allegations of sexual or racial harassment. 60 FR 37768, 37769. Such 
issues are outside of the scope of these regulations, and we note that 
other avenues and processes exist to process such claims. We also 
disagree with commenters that such issues are the only types of issues 
that may be faced by students at public and private non-profit 
institutions. While the Department acknowledges that the majority of 
claims presently before it are in relation to misconduct by Corinthian, 
we believe that scope of claims that may be brought as substantial 
misrepresentations that relate to either the making of a borrower's 
loan, or to the provision of educational services, is objectively broad 
in a way that will capture borrower defense claims from any type of 
institution.
    Changes: None.
    Comments: A few commenters opposed the proposed changes and argued 
that the proposed substantial misrepresentation standard either exceeds 
the Secretary's authority under the law or is contrary to Congressional 
intent. One commenter argued that the Department's proposal to use 
Sec.  668.71 as the basis for borrower defense exceeds the Department's 
statutory authority under section 487 of the HEA, 20 U.S.C. 
1094(c)(3)(A), which authorizes the Department to bring an enforcement 
action for a substantial misrepresentation for a suspension, 
limitation, termination, or fine action. The commenter also argued that 
the HEA does not authorize the Department

[[Page 75946]]

to seek recoupment from schools for relief granted for a borrower 
defense claim based on substantial misrepresentation. Another commenter 
suggested that the borrower defense standard should be based only on 
contract law.
    Other commenters stated that the substantial misrepresentation 
standard was in violation of the Congressional intent in the HEA, as 
proposed. One commenter said that, in its view, Congress' intent in 
Section 455(h) was that borrower defenses should be allowed only for 
acts or omissions that are fundamental to the student's ability to 
benefit from the educational program and at a level of materiality that 
would justify the rescission of the borrower's loan obligation. In 
discussing the use of Sec.  668.71 for borrower defense purposes, 
another commenter acknowledged that, while misrepresentation is not 
defined in the HEA, the penalties assigned to misrepresentation by 
statute are severe. From its perspective, the commenter stated that 
this indicates that Congress did not intend for the misrepresentation 
standard to be as low as negligence and suggested keeping the original 
language of Sec.  668.71.
    A few commenters argued that the Department lacks justification for 
the proposed changes to Sec.  668.71, given that the Department last 
changed the definition in a previous rulemaking.
    Discussion: We disagree that the Department lacks the statutory 
authority to designate what acts or omissions may form the basis of a 
borrower defense. Section 455(h) of the HEA clearly authorizes the 
Secretary to ``specify in regulations which act or omissions of an 
institution of higher education a borrower may assert as a defense to 
repayment under this part,'' without any limitation as to what acts or 
omissions may be so specified. As explained previously, we believe that 
the substantial misrepresentation standard, with the added requirements 
listed in Sec.  685.222(d), will address not only much of the behavior 
that we anticipate arising in the borrower defense context, but also 
our concerns in accurately identifying and providing relief for 
borrowers. We believe it is within the Department's discretion to adopt 
the substantial misrepresentation standard for loans first disbursed 
after July 1, 2017 in Sec.  685.222(d), with the added requirements of 
that section, to address borrower defense claims. No modification has 
been proposed to Sec.  668.71(a), which establishes that the Department 
may bring an enforcement action for a substantial misrepresentation for 
a suspension, limitation, termination, or fine action. We discuss the 
Department's authority to recover from schools on the basis of borrower 
defense under ``General.''
    We do not agree that the Department lacks authority to similarly 
specify the scope of the acts or omissions that may form the basis of a 
borrower defense. The Department understands that, generally, the 
rescission of a contract refers to the reversal of a transaction 
whereby the parties restore all of the property received from the 
other,\10\ usually as a remedy for a material or significant breach of 
contract.\11\ However, in stating that ``in no event may a borrower 
recover . . . an amount in excess of the amount such borrower has 
repaid on the loan,'' section 455(h) clearly contemplates that an 
amount may be recovered for a borrower defense that is less than the 
amount of a borrower's loan, as opposed to a complete rescission of a 
borrower's total loan obligation. This position also echoes the 
Department's consistent approach to borrower defenses to repayment. The 
Direct Loan borrower defense regulation that was promulgated in 1994 
clearly established that a borrower may assert a borrower defense claim 
based upon ``any act or omission of the school. . .that would give rise 
to a cause of action against the school under applicable State law,'' 
without qualification as to whether the act or omission warrants a 
rescission of the borrower's loans. 34 CFR 685.206(c)(1). The 
regulation also stated that relief may be awarded as either ``all or 
part of the loan.'' Id. at Sec.  685.206(c)(2). As explained by the 
Department in 1995, the Direct Loan borrower defense regulations were 
intended to continue the same treatment for borrowers and the same 
potential liability for institutions that existed in the FFEL Program. 
60 FR 37769-37770. Under the FFEL Program at the time, a borrower was 
allowed to assert a defense to repayment on the ground that all or part 
of his or her FFEL Loan was unenforceable. Id. at 37770.
---------------------------------------------------------------------------

    \10\ See Restatement (Third) of Restitution and Unjust 
Enrichment Sec.  54 (2011).
    \11\ See Restatement (Third) of Restitution and Unjust 
Enrichment Sec.  37, comment c (2011) (``Any breach of contract that 
results in quantifiable injury gives the plaintiff a remedy in 
damages, but the remedy of rescission is available only in cases of 
significant default. Short of a repudiation, the defendant's breach 
must be `material,' `substantial,' `essential,' or `vital'; it must 
`go to the root' of the defendant's obligation, or be `tantamount to 
a repudiation.' To replace this familiar catalogue of adjectives, 
both Restatements of Contracts employ the expression `total breach.' 
'').
---------------------------------------------------------------------------

    We also disagree that the HEA does not give the Department the 
discretion to define ``substantial misrepresentation,'' whether for the 
Department's enforcement purposes in Sec.  668.71 or for use for the 
borrower defense process. As noted, the HEA does not define 
``substantial misrepresentation,'' thus giving the Secretary discretion 
to define the term. With regard to the commenter who expressed concern 
that the proposed revisions to the definition of ``misrepresentation'' 
constitute a lessening of the standard to negligence,\12\ we note that 
even absent the proposed revisions, a misrepresentation under Sec.  
668.71 does not look to the actor's intent or the materiality of the 
statement, but considers whether the statement is false, erroneous, or 
misleading.
---------------------------------------------------------------------------

    \12\ Generally, ``negligence'' refers to a failure to exercise a 
reasonable duty of care and does not consider whether the failure 
was intentional. See Restatement (Third) of Torts: Phys. & Emot. 
Harm Sec.  3 (2010).
---------------------------------------------------------------------------

    We disagree that there is no justification for the changes to 34 
CFR part 668, subpart F. Since the Department's last negotiated 
rulemaking in 2010 on 34 CFR part 668, subpart F, the Department 
utilized its authority in 2015 under the substantial misrepresentation 
enforcement regulations to issue a finding that Corinthian had 
misrepresented its job placement rates. The subsequent closure of 
Corinthian led to thousands of claims relating to the 
misrepresentations at issue by Corinthian borrowers under borrower 
defense. These claims prompted, in part, this effort by the Department 
to establish rules and procedures for borrower defense, which in turn 
led to a review of and the proposed changes to the Department's 
regulations at 34 CFR part 668, subpart F. These changes were discussed 
extensively as part of the negotiated rulemaking process for borrower 
defense where reasons for each specific change to Sec.  668.71 were 
explained and discussed.
    Changes: None.
    Comments: Many commenters generally stated that the proposed 
standard for substantial misrepresentation is vague and suggested that 
the regulation include an element of intent or distinguish between 
intentional and unintentional acts. These commenters expressed concern 
that inadvertent and innocent, but erroneous, statements or mistakes 
would lead to a large number of frivolous claims by borrowers and 
result in significant financial liabilities for schools. Another 
commenter stated that the standard, absent intent, is 
unconstitutionally vague and does not give fair notice of the conduct 
that is being required or prohibited.

[[Page 75947]]

    Other commenters stated that students' own misunderstandings may 
lead to claims, even for schools that provide training and inspections 
to ensure compliance with pertinent guidelines, regulations, and 
standards. One commenter expressed concern that unavoidable changes to 
instructional policies and practices could lead to borrower defense 
claims for substantial misrepresentation. Another commenter expressed 
concern that the proposed standard would lead to allegations of 
substantial misrepresentation by students, even where a variety of 
reasons unrelated to the alleged misrepresentation may have contributed 
to a student outcome, which may not yet be apparent.
    Several commenters supported using Sec.  668.71 as a basis for 
borrower defense, but objected to the proposed changes to the 
definition in Sec.  668.71(c), that would change the word ``deceive'' 
in the sentence, ``A misleading statement includes any statement that 
has the likelihood or tendency to deceive,'' to ``mislead under the 
circumstances.'' These commenters stated that the proposed change would 
give the same weight to inadvertent or unintentional misrepresentations 
as to a willful deception by a school. Some such commenters appeared to 
believe that, without the revisions reflected in proposed subpart F of 
part 668, the standard for substantial misrepresentation is a standard 
for fraud and requires proof of intentional deception.
    One commenter stated that the borrower defense process does not 
provide for a contextualized analysis of whether a statement is 
misleading in the same manner as the FTC, and argued that this would 
lead to significant consequences for schools and would undercut FTC 
precedent.
    Several commenters agreed with the Department that the standard 
should not require an element of institutional intent generally, 
stating that the Department's approach is consistent with existing 
State and other Federal law, citing the FTC's definition of deception 
as an example. One commenter stated that institutions should be 
responsible for the harm to borrowers caused by misrepresentations, 
even absent intent, and that proving intent would be very difficult for 
borrowers.
    Other commenters supported the specific amendment of the definition 
to include ``mislead under the circumstances.'' One commenter stated 
that the amendment was appropriate to provide more context as to 
whether a statement is misleading. Another commenter stated that the 
Department's amendments are consistent with State consumer protection 
law and cited examples of States where courts consider an individual's 
or the target audience's circumstances in assessing whether an act is 
deceptive or unfair. The commenter also noted that the amendments are 
in keeping with the approaches used by other Federal agencies, such as 
the FTC, the CFPB, and the Office of the Comptroller of the Currency. 
The commenter noted that in its experience working with student loan 
borrowers, consideration of the circumstances of a misrepresentation is 
important, because many schools target borrowers in specific 
circumstances who may be more likely to trust a school's 
representations and rely upon promises tailored to such students. 
Another commenter noted that the Department's proposed rule is in 
keeping with well-established consumer protection legal precedent under 
State law, which is that schools are liable for deceptive and unfair 
trade practices, including a failure to deliver educational services of 
the nature and quality claimed. This commenter supported the 
Department's preamble statement, 81 FR 39337 to 39338, that educational 
malpractice is not a tort recognized by State law, but also stated that 
educational malpractice is to be narrowly construed.
    One commenter supported the Department's reasoning for including 
omissions among misrepresentations for borrower defense purposes, but 
stated that intent should be a factor for the Department's enforcement 
actions based upon Sec.  668.71. The commenter agreed that a school 
should be responsible for even an unintentional error that harms 
borrowers, but believed that that intent or knowledge of the school 
should be a required factor for the purposes of institutional 
eligibility and penalties.
    One commenter stated that substantial misrepresentation should be 
limited to false and erroneous statements, and not include true but 
misleading statements. The commenter raised concerns about the adequacy 
of the Department's process for gathering evidence and the Department's 
experience and expertise in making such determinations.
    Discussion: We disagree with the commenters who opined that the 
proposed regulations are broad, vague or subjective. As explained 
previously, section 455(h) of the HEA provides that the Secretary shall 
specify in regulations which acts or omissions of an institution of 
higher education a borrower may assert as a defense to repayment of a 
loan made under this part. The regulations in Sec.  685.222(d), which 
adopt the regulations in subpart F of part 668 and establish certain 
other requirements, set forth the types of activities that constitute 
misrepresentation by an institution and describe the process and 
procedure by which borrowers may receive relief based upon a 
substantial misrepresentation by a school. The regulations in Sec.  
685.222 also set forth the process by which the Secretary will evaluate 
borrower defenses and recover such losses from the institutions at 
issue. The proposed changes to the regulations strengthen the 
Department's regulatory authority to evaluate and determine borrower 
defense claims. Further, they not only establish what constitutes a 
misrepresentation for borrower defense claims, but they also clarify 
the definition for the Department's enforcement purposes under part 
668, subpart F. We believe that aligning the definition and types of 
substantial misrepresentations for borrower defense with the 
Department's long-held authority to bring enforcement actions under 
part 668, subpart F, will provide more clarity for schools and reduce 
their burden in having to interpret and adjust for the new borrower 
defense standards.
    There appears to be some confusion as to whether the definition for 
misrepresentation in part 668, subpart F, requires a demonstration of 
intent, as would be required in common law fraud. In proposing to 
replace the word ``deceive'' with ``mislead under the circumstances'' 
in Sec.  668.71(c), the Department is not seeking to remove any intent 
element, but rather to clarify the definition to more accurately 
reflect the position it expressed in 2010 as to part 668, subpart F. As 
noted in the NPRM, 81 FR 39342, the word ``deceive'' may be viewed as 
implying knowledge or intent. However, in the Department's 2010 
rulemaking on part 668, subpart F, we explicitly declined to require 
that a substantial misrepresentation under the regulation require 
knowledge or intent by the school. 75 FR 66915. We believe that an 
institution is responsible for the harm to borrowers caused by its 
misrepresentations, even if such misrepresentations cannot be 
attributed to institutional intent or knowledge and are the result of 
inadvertent or innocent mistakes. Similarly, we believe this is the 
case even for statements that are true, but misleading. We believe this 
is more reasonable and fair than having the borrower, or the Federal 
government and taxpayers, bear the cost of such injuries. As noted by 
some commenters, this approach is in accord with other

[[Page 75948]]

Federal and State consumer protection law regarding misrepresentation, 
and we believe it is appropriate for not only the Department's 
enforcement purposes, but also for borrower defense. As explained later 
in this preamble, we believe that we have the capability to evaluate 
borrower defense claims based upon substantial misrepresentations and 
anticipate establishing procedural rules that will provide schools with 
the opportunity to present evidence and arguments in accordance with 
due process, similar to what is available in the Department's 
proceeding in part 668, subparts G and H.
    In 2010, the Department stated that, in deciding to bring an 
enforcement action under part 668, subpart F, it would operate within a 
rule of reasonableness and consider the circumstances surrounding any 
misrepresentation before determining an appropriate response. 75 FR 
66914. In response to the comment that the proposed standard does not 
view the misrepresentation in context, the Department's addition of the 
words ``under the circumstances'' is intended to clarify and make 
explicit the Department's long-standing position that 
misrepresentations should be viewed in light of all of the available 
underlying facts. As explained in the NPRM, 81 FR 39342 to 39343, this 
also echoes the approach taken by the FTC with regard to deceptive acts 
and practices.\13\ In determining whether a statement is a 
misrepresentation, the Department will consider the totality of the 
circumstances in which the statement occurred, including the specific 
group at which the statement or omission was targeted. The Department 
will also consider whether the situation was such that the borrower 
would have had reason to believe he or she could rely on the 
information being given to the borrower's detriment, such as because 
the statement was made by an individual by whom the borrower believed 
could be trusted to give accurate information, such as a school 
admissions officer.
---------------------------------------------------------------------------

    \13\ See FTC Policy Statement on Deception, 103 F.T.C. 110, 174 
(1984) (appended to Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)), 
available at www.ftc.gov/bcp/policystmt/ad-decept.htm.
---------------------------------------------------------------------------

    Changes: None.
    Comments: Some commenters supported the proposed inclusion of 
omissions in the definition under Sec.  668.71. One commenter stated 
that the inclusion of omissions, as well as the additional factors 
listed in Sec.  685.222(d)(2), would improve the information provided 
to students. One commenter stated that, in their experience, the 
inclusion of omissions was needed, to prevent schools from taking 
advantage of the asymmetry of information and bargaining power between 
themselves and students. This commenter emphasized that omissions 
should be considered in the context of the specific audience targeted 
and cited schools that may target immigrants with little experience 
with the United States' higher education system and limited English 
ability as an example. Another commenter emphasized that the amendment 
would benefit first generation and low income students, who may not 
know what information is important or what questions to ask prior to 
enrolling at an institution. One commenter specifically supported the 
proposed language providing that a misrepresentation include omissions 
of ``information'' in such a way as to make a statement false, 
erroneous, or misleading.
    Other commenters disagreed with the inclusion of omissions of 
information as part of the definition of substantial misrepresentation. 
One commenter stated that such language provides assistance to students 
attending career colleges, but not students attending traditional 
schools. One commenter stated that amending the standard to include 
omissions would create a strict liability standard that would not 
account for a school's actions or intent, and that the standard should 
distinguish minor and unintentional claims from material and purposeful 
misrepresentations.
    Other commenters stated that the inclusion of omissions would not 
benefit students. One commenter stated that amending the definition of 
misrepresentation to include omissions could cause schools to provide 
students with numerous and confusing qualifications or to provide 
students with minimal information to avoid making misrepresentations. 
Another commenter stated that the inclusion of omissions would hinder 
the flow of advice to students and cause schools to expend time and 
money reviewing materials for misrepresentations.
    One commenter stated that the Department's proposal to amend the 
definition to include omissions runs counter to the position the 
Department expressed in its 2010 rulemaking on 34 CFR part 668, subpart 
F, when it rejected commenters' suggestions that omissions be included 
in the definition.
    One commenter stated that the Department's proposed amendment to 
include omissions, absent an intent element, runs counter to the limit 
established by the D.C. Circuit in the case Ass'n of Private Sector 
Colls. & Univs. v. Duncan, 681 F.3d 427, 452 (D.C. Cir. 2012) that a 
substantial misrepresentation under part 668, subpart F cannot include 
true and nondeceitful statements that have only the tendency or 
likelihood to confuse.
    One commenter requested clarification regarding the effect of 
disclosures posted on the school's Web site or in printed materials. 
The commenter inquired about whether the school needed to disclose 
information about investigations, pending civil rights or legal 
matters; information about the qualifications and availability of 
faculty to teach certain courses or levels of students; and how a 
school's compliance with a State's required disclosures would be 
evaluated. This commenter also asked whether the Department would 
consider limiting the application of the new standard to only schools 
governed by States without a reasonable oversight mechanism. This 
commenter also asked for clarification as to what constitutes 
``information,'' and asked whether information would include 
aspirational goals or speculative plans; subjective beliefs or internal 
questions about the school's educational programs, financial charges, 
or the employability of its graduates; concerns about, the possibility, 
or existence of an upcoming audit; items listed in a title IV Audit 
Corrective Action Plan; items identified by the institution or an 
accreditor for improvement; or an institution's efforts to seek 
voluntary accreditation.
    One commenter expressed concern that the inclusion of omissions in 
the standard would place schools with high default rates at risk. The 
commenter cited news articles calling for schools with default rates 
higher than graduation rates, which would include some HBCUs and 
community colleges, to lose their title IV eligibility. The commenter 
stated that students could argue that a failure to disclose such a 
measure constitutes a substantial misrepresentation under the proposed 
standard.
    Discussion: We appreciate the support received from some commenters 
and agree with these commenters who stated that the inclusion of 
omissions will improve the information provided by schools.
    As discussed earlier in this section, the commenters who stated 
that the revision to Sec.  668.71 would apply only to proprietary 
institutions are incorrect. The final regulation applies to all 
schools. We also discuss our reasons for not including an intent 
element earlier in this section and our reasons for not including a 
materiality element later in this section.

[[Page 75949]]

    We disagree that the revision is contrary to the Department's 
purpose in revising part 668, subpart F, in its 2010 rulemaking. We 
believe that amending the definition to include ``any statement that 
omits information in such a way as to make the statement false, 
erroneous, or misleading'' merely clarifies the Department's original 
intent, aligns the definition of misrepresentation used for the 
Department's enforcement actions with the standard to be used in 
evaluating borrower defense claims, and is appropriate given the 
Department's experiences since 2010.
    In 2010, the Department declined to include omissions in the 
definition of misrepresentation during its rulemaking on part 668, 
subpart F, on the basis that the Department's regulations require 
schools to provide accurate disclosures of certain information. 75 FR 
66917 to 66918. The Department emphasized that the purpose of the 
regulations was to ensure that all statements made by an institution 
are truthful, id., and that whether such a statement was a 
misrepresentation would be viewed in context of the circumstances. Id. 
at 66914. As noted earlier, however, the Department has had more 
experience with omissions in the context of its substantial 
misrepresentation regulations at part 668, subpart F, since that 2010 
rulemaking. In 2014, the Department issued a fine of $29,665,000 to 
Heald College, of the Corinthian Colleges, in part, as a result of a 
finding that Heald College had omitted essential and material 
information concerning the methodology used to calculate job placement 
rates.\14\ This same finding, concerning omissions, has resulted in 
thousands of borrower defense claims filed with the Department. As 
noted by some commenters, given the close connection between borrower 
defense and the Department's purpose of ensuring truthful statements by 
schools when viewed in the entirety of a situation, we believe it is 
appropriate to adopt the regulations at part 668, subpart F, with some 
added requirements, for the borrower defense regulations and to revise 
the definition at Sec.  668.71 to better meet that purpose and enact 
the Department's long-standing purpose for part 668, subpart F, 
enforcement actions.
---------------------------------------------------------------------------

    \14\ See Dept. of Educ., Notice of Intent to Fine Heald College, 
OPE-ID: 00723400 (Apr. 14, 2015), available at www2.ed.gov/documents/press-releases/heald-fine-action-placement-rate.pdf.
---------------------------------------------------------------------------

    We disagree with the commenter that the inclusion of omissions in 
the definition, absent an intent element, runs counter to the limit 
established by the D.C. Circuit in Ass'n of Private Sector Colls. & 
Univs., 681 F.3d 427. In that case, the court held that a substantial 
misrepresentation under part 668, subpart F, cannot include true and 
non-deceitful statements that have only the tendency or likelihood to 
confuse. However, the court also stated that it agreed with the 
Department that a misrepresentation can be a true statement that is 
deceitful, and specifically disagreed with the appellant that an intent 
element should be a required part of the definition. Id. We believe 
that the inclusion of omissions of information that may make a 
statement false, erroneous, or misleading clarifies the context under 
which a misrepresentation may be a true statement that is deceitful and 
does not infringe upon the court's ruling regarding statements with a 
likelihood to confuse. We also note that it is our understanding that 
many States' laws and other Federal consumer protection law also 
include omissions of information within prohibitions on deceptive acts 
and practices, and the proposed revision is in keeping with such 
precedent.
    With respect to the commenters who expressed concern about how 
these regulations may affect schools' behaviors in their provision of 
certain types of information to students and prospective students, 
including information regarding investigations, pending civil rights or 
legal matters, faculty qualifications or availability, the school's 
compliance with State law, or a school's default rates, among others, 
the final regulation explicitly states that the Department will 
consider whether the statement omitting any such information is 
misleading ``under the circumstances.'' As noted earlier, the 
Department will consider the totality of the circumstances to determine 
whether a statement is misleading--including whether the school is or 
is not under an affirmative legal obligation to disclose such 
information, or whether concerns such as privacy requirements prevent 
the disclosure or disclosure in full of such information. For borrower 
defense, Sec.  685.222(d) also requires that the Department consider 
the reasonableness of the borrower's detrimental reliance on the 
misrepresentation.
    We note, however, that it should not matter where or how a 
misrepresentation, whether as an omission or an affirmative statement, 
takes place, particularly as it pertains to the nature of a school's 
educational program, its financial charges, or the employability of its 
graduates. As we stated in 2010, 75 FR 66918, what is important is to 
curb the practice of misleading students regarding an eligible 
institution. We continue to strongly believe that institutions should 
be able to find a way to operate in compliance with these regulations. 
As discussed later in this section, disclosures made by a school in 
publications or on the Internet may be probative evidence as to the 
reasonableness of a borrower's reliance on an alleged 
misrepresentation, depending on the totality of the circumstances.
    Changes: None.
    Comments: One commenter argued that it would be inappropriate to 
apply the FTC Policy Statement on Deception to cases of 
misrepresentation in higher education. The commenter stated that the 
FTC policy focuses specifically on deception perpetrated through 
advertising and is not aimed at establishing individual claims. The 
commenter noted that borrowers have more extensive interactions with 
their schools that may constitute fraud, and that absent the elements 
of materiality, reliance, and harm, the proposed Federal standard would 
fail to provide adequate protection.
    Discussion: We disagree that the substantial misrepresentation 
standard in either part 668, subpart F, or in Sec.  685.222(d) is the 
same as the FTC's prohibition on deceptive acts and practices. We 
considered a wide variety of both State and Federal legal precedents in 
developing the ``substantial misrepresentation'' definition in Sec.  
668.71 and have added specific elements, such as a reasonable reliance 
requirement, to address specific borrower defense claims in Sec.  
685.222(d).
    Changes: None.
    Comments: Some commenters stated that, for borrower defense 
purposes, the standard should specify that misrepresentations must be 
material, in order to avoid frivolous claims or claims based upon 
inadvertent errors or omissions. One commenter stated that such a 
materiality standard should not capture small deviations from the 
truth. Another commenter stated that the standard should allow only 
claims at a level of materiality that would justify the rescission of 
the loan at issue. One commenter expressed concern that under the 
standard without an accompanying materiality requirement, inadvertent 
or partial omissions of information would give rise to borrower claims.
    One commenter stated that the Department should incorporate an 
express materiality requirement, emphasizing that the lack of such a 
standard is of particular concern because the standard does not 
incorporate an element of intent. The

[[Page 75950]]

commenter also stated that the need for a materiality standard is 
enhanced, because the Department's proposed standard does not seem to 
require proof of detriment to a student as a result of his or her 
actual, reasonable reliance. The commenter stated that the definition 
in Sec.  668.71 only requires that an individual show that he or she 
could have relied on a misrepresentation and expressed concern about 
the Department's proposal to include a presumption of reliance for 
group claims, in the absence of a materiality requirement.
    Several commenters stated that the inclusion of omissions, related 
to the provision of any educational service, is too broad without an 
accompanying materiality requirement in the regulation. These 
commenters expressed concern that students would be able to present 
claims for substantial misrepresentation by claiming that schools had 
failed to provide contextual information, such as how faculty-student 
ratio information works.
    Discussion: As discussed in the NPRM, 81 FR 39344, we do not 
believe that a materiality element is required in either the proposed 
amendments to the definition for the Department's enforcement authority 
under Sec.  668.71 or as the definition is adopted for the substantial 
misrepresentation borrower defense standard under Sec.  685.222(d). We 
believe that the regulatory definition of ``substantial 
misrepresentation'' is clear and can be easily used to evaluate alleged 
violations of the regulations. See 75 FR 66916; 81 FR 39344. Generally, 
under both Federal deceptive conduct prohibitions and common law, 
information is considered material if it would be important to the 
recipient, or likely to affect the recipient's choice or conduct.\15\ 
By noting specifically in section 487(c)(3) of the HEA, 20 U.S.C. 
1094(c)(3), that the Department may bring an enforcement action against 
a school for a substantial misrepresentation of the nature of its 
educational program, its financial charges, or the employability of its 
graduates, Congress indicated its intent that information regarding the 
nature of a school's educational program, its financial charges, or the 
employability of its graduates should be viewed as material information 
of certain importance to students. See Suarez v. Eastern Int'l Coll., 
50 A.3d 75, 89-90 (N.J. Super. 2012).
---------------------------------------------------------------------------

    \15\ See, e.g., F.T.C. Policy Statement on Deception, 103 F.T.C. 
at 182; see also Restatement (Second) of Torts Sec.  538 (1977) 
(``The matter is material if (a) a reasonable man would attach 
importance to its existence or nonexistence in determining his 
choice of action in the transaction in question; or (b) the maker of 
the representation knows or has reason to know that its recipient 
regards or is likely to regard the matter as important in 
determining his choice of action, although a reasonable man would 
not so regard it.'').
---------------------------------------------------------------------------

    As also noted in the NPRM, 81 FR 39344, we believe that by 
requiring that students demonstrate actual, reasonable reliance to the 
borrower's detriment under Sec.  685.222(d), the borrower defense 
regulations incorporate similar concepts to materiality. As discussed, 
materiality refers to whether the information in question was 
information to which a reasonable person would attach importance in 
making the decision at issue. By requiring reasonable reliance to the 
borrower's detriment, the Department would consider whether the 
misrepresentation related to information to which the borrower would 
reasonably attach importance in making the decision to enroll or 
continue enrollment at the school and whether this reliance was to the 
borrower's detriment. This would be the case both for individual 
claims, and for the presumption of reliance applied in the process for 
group claims under Sec.  685.222(f)(3). We discuss the rebuttable 
presumption of reasonable reliance in greater detail in the ``Group 
Process'' section of this document. As a result, we disagree it should 
include a materiality element in the standard.
    Changes: None.
    Comments: Many commenters expressed concerns about the requirement 
for borrowers to assert reliance under the substantial 
misrepresentation standard. One commenter expressed concern that a 
borrower could establish that a substantial misrepresentation had 
occurred by providing evidence of the misrepresentation and showing 
that he or she could have reasonably relied upon it to his or her 
detriment, notwithstanding the requirement in Sec.  685.222(d) that the 
borrower demonstrate actual reasonable reliance upon the 
misrepresentation.
    One commenter supported the use of a reasonable reliance standard, 
given that the standard may allow claims for statements, particularly 
unintentional statements, that are not accurate or complete.
    A couple of commenters suggested that the Department should not 
require that borrowers actually and reasonably rely upon 
misrepresentations to obtain relief for borrower defense purposes, but 
rather that borrowers should be entitled to relief so long as actual 
reliance is demonstrated without regard for the reasonableness of that 
reliance. Alternatively, one commenter suggested that if a reasonable 
reliance standard were maintained, then the reasonableness of the 
reliance should be judged according to the circumstances of the 
misrepresentation and the characteristics of the audience targeted by 
the misrepresentation, which the commenter stated would be in keeping 
with State consumer protection law.
    One group of commenters suggested that the Department use the same 
standard for reliance for the Department's enforcement activities under 
Sec.  668.71, as for borrower defenses under Sec.  685.222(d), so that 
a borrower may assert a claim for borrower defense without having to 
show that he or she actually relied on the misrepresentation at issue. 
These commenters stated that neither State nor Federal consumer 
protection law typically requires actual reliance and that requiring 
actual reliance would increase the burden on both the borrower and the 
trier of fact without serving the purpose of deterring 
misrepresentations. The commenters also stated that actual reliance is 
not needed to protect schools from frivolous claims given the fact-
finding process and separate proceedings that would be initiated by the 
Department to recover from schools under the proposed rule.
    Another commenter also supported using a standard that did not 
require actual reliance, as opposed to showing that a borrower could 
have reasonably relied upon the misrepresentation. However, the 
commenter stated that in the alternative, borrowers should only be 
required to certify that they relied upon the misrepresentation, 
without any further proof, to satisfy the reliance requirement of the 
standard.
    Discussion: There appears to be some confusion as to whether the 
substantial misrepresentation standard for borrower defense would 
require actual, reasonable reliance to a borrower's detriment. Although 
the definition of substantial misrepresentation in Sec.  668.71 
requires that, for a misrepresentation to be substantial, it must be 
one upon which a person ``could reasonably be expected to rely, or has 
reasonably relied, to that person's detriment,'' the standard for 
substantial misrepresentation under Sec.  685.222(d) requires that the 
borrower show that he or she ``reasonably relied on'' the 
misrepresentation at issue--in other words, that the borrower actually 
and reasonably relied upon the misrepresentation. As discussed later in 
this section, the Department acknowledges that the language of Sec.  
685.222(d) is confusing as to whether the borrower must also prove that 
he or she actually relied upon the misrepresentation to his or her 
detriment. As a result, we will to modify the language of proposed 
Sec.  685.222(d) to

[[Page 75951]]

clarify that actual, reasonable reliance to the borrower's detriment 
must be demonstrated under the borrower defense substantial 
misrepresentation standard.
    We disagree that the purpose of the borrower defense regulations 
would be served if an actual reliance standard (without a 
reasonableness component) or a standard that did not require actual 
reliance was adopted. As explained in the NPRM, 81 FR 39343, a standard 
that does not require actual reliance serves the Department's interest 
in the public enforcement of its regulations: The Department requires 
title IV-participating institutions not to make false statements on 
which borrowers could reasonably rely to their detriment, and the 
Department appropriately will impose consequences where an institution 
fails to meet that standard. However, the Department will grant 
borrower defenses to provide relief to borrowers who have been harmed 
by an institution's misrepresentation, not borrowers who could have 
been harmed but were not; and an actual, reasonable reliance 
requirement is the mechanism by which borrowers demonstrate that they 
were indeed actually reasonably relied upon the misrepresentation to 
their detriment. The requirement also allows the Department to consider 
the context and facts surrounding the misrepresentation to determine 
whether other similar students and prospective students would have 
acted similarly.\16\ We believe that the actual, reasonable reliance 
requirement for a borrower defense based upon a substantial 
misrepresentation enables the Department to provide relief for 
borrowers while properly avoiding discharges and payments by the 
Federal government, taxpayers, and institutions. What may be deemed 
sufficient evidence to prove whether a borrower has reasonably relied 
upon a misrepresentation to his or her detriment will differ from case 
to case. As a result, we reject the suggestion that a certification of 
reliance should necessarily and in all cases by itself be found to be 
adequate proof of reliance for all borrower defense claims the 
Department may receive in the future.
---------------------------------------------------------------------------

    \16\ It is our understanding that several other Federal agencies 
charged with consumer protection, such as the FTC and the CFPB, when 
bringing enforcement actions for violations of prohibitions of 
deceptive acts and practices, are not required to prove actual 
reliance by consumers upon alleged misrepresentations. However, we 
note that such agencies have prosecutorial discretion in bringing 
such cases, and are not charged with evaluating and deciding 
individual claims for relief by consumers as the Department is 
seeking to do with these regulations. Furthermore, such agencies 
obtain relief for consumers from the culpable actor, while the 
Department will be providing relief through public resources, with a 
possibility of recovery from the actor in some cases. In contrast to 
the laws these other Federal agencies enforce, many, if not all, 
States allow consumers to bring private actions under their consumer 
protection laws. However, it is the Department's understanding that 
the requirements as to whether reliance is required at all, or if 
the courts will consider the reasonableness of such reliance, 
varies. See, e.g., National Consumer Law Center, Consumer Protection 
in the States: A 50-State Report on Unfair and Deceptive Acts and 
Practices Statutes, at 20, 22 (2009); Schwartz & Silverman, 
Commonsense Construction of Consumer Protection Acts, 54 U. Kan. L. 
Rev. 1, 18-19 (Oct. 2005).
---------------------------------------------------------------------------

    Changes: We have revised Sec.  685.222(d) to clarify that a 
borrower must have relied upon a substantial misrepresentation to his 
or her detriment.
    Comments: One commenter expressed concern that the Department's 
proposed standard does not require that the borrower allege injury or 
damages as a requirement to assert substantial misrepresentation. 
Another commenter stated that students should be required to establish 
the extent of their injuries or damages, so that discharges are not 
granted where students received what they bargained for and so that 
claims are not filed for harmless errors by schools. Another commenter 
stated that the standard should require the borrower to show proof of 
detriment sufficient to deprive the student of the intended benefits of 
the tuition funded by the loan at issue.
    Discussion: To assert a borrower defense under proposed Sec.  
685.222(d), the borrower must demonstrate that they reasonably relied 
upon a substantial misrepresentation in accordance with 34 CFR part 
668, subpart F, in deciding to attend, or continue attending, the 
school. A ``substantial misrepresentation'' is defined in Sec.  668.71 
as a 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 Department understands that, generally, ``detriment'' refers to 
any loss, harm, or injury suffered by a person or property.\17\ When 
Sec. Sec.  668.71 and 685.222(d) are read together, a borrower may 
assert a borrower defense for a misrepresentation, if also in 
accordance with the other requirements of 34 CFR part 668, subpart F, 
if he or she can demonstrate that the misrepresentation was one on 
which the borrower actually reasonably relied, to the borrower's 
detriment, in deciding to attend, or continue attending, the school at 
issue. However, we acknowledge that the language of Sec.  685.222(d) 
may be confusing. For this reason, we are clarifying in Sec.  
685.222(d) that the borrower must show reasonable detrimental reliance.
---------------------------------------------------------------------------

    \17\ See Black's Law Dictionary (10th ed. 2014).
---------------------------------------------------------------------------

    In contrast to detriment, ``damages'' refers to money claimed by, 
or ordered to be paid to, a person as compensation for loss or 
injury.\18\ We do not believe that the term ``damages'' is appropriate 
in the context of borrower defense, because the Department is limited 
by statute to providing relief to the borrower on his or her Direct 
Loan and may not provide a borrower with the complete amount or types 
of compensation that might traditionally be considered to be damages at 
law.
---------------------------------------------------------------------------

    \18\ See Black's Law Dictionary (10th ed. 2014).
---------------------------------------------------------------------------

    There is no quantum or minimum amount of detriment required to have 
a borrower defense claim, and the denial of any identifiable element or 
quality of a program that is promised but not delivered due to a 
misrepresentation can constitute such a detriment. In contrast, 
proposed Sec.  685.222(i) provides that the trier-of-fact, who may be a 
designated Department official for borrower defenses determined through 
the process in Sec.  685.222(i) or a hearing official for borrower 
defenses decided through the processes in Sec.  685.222(f) to (h), will 
determine the appropriate amount of relief that should be afforded the 
borrower under any of the standards described in Sec.  685.222 and 
Sec.  685.206(c), including substantial misrepresentation. We explain 
the considerations for triers-of-fact for relief determinations under 
the ``Borrower Relief'' section of this document.
    Changes: We have revised Sec.  685.222(d) to clarify that a 
borrower must have relied upon a substantial misrepresentation to his 
or her detriment.
    Comments: Several commenters expressed concern about the factors 
listed in proposed Sec.  685.222(d)(2). A couple of commenters 
suggested that all of the additional factors listed in Sec.  
685.222(d)(2) should be removed. One commenter argued that the factors 
do not establish the falsity or misleading nature of a substantial 
misrepresentation claim. Another commenter stated that the factors are 
subjective and would be difficult to prove or disprove and thus should 
be removed in their entirety.
    A couple of commenters disagreed with specific factors listed in 
proposed Sec.  685.222(d)(2). One commenter stated that the factor 
pertaining to failure to respond to information was unnecessary, 
because passive and requested disclosures are already enforceable 
through existing consumer compliance requirements. Another

[[Page 75952]]

commenter stated that the factors should not include failures to 
respond to information, or that this factor should be revised to 
include only purposeful failures to provide requested information. The 
commenter argued that a failure to respond promptly may be due to 
routine events or extraneous factors, such as an enrollment officer's 
vacation or workload issues, or a student's own delay of enrollment. A 
commenter also requested clarification as to the ``unreasonable 
emphasis on unfavorable consequences of delay'' language. This 
commenter argued that under this factor, routine, truthful provisions 
of information regarding timelines and possible late fees or other 
consequences as a result of actions such as late enrollment or making 
late housing arrangements may be viewed as improper conduct.
    One commenter expressed support for the factors listed in Sec.  
685.222(d)(2), stating that it agreed with the Department that 
misrepresentations should be viewed in the context of circumstances, 
including the possible use of high pressure enrollment tactics.
    One commenter expressed concern that decision makers would expect 
to see one or more of the newly added factors before finding that a 
substantial misrepresentation exists. This commenter suggested that the 
Department clarify that a borrower need not show the factors to have a 
claim for substantial misrepresentation under borrower defense.
    Several commenters stated that the factors listed in proposed Sec.  
685.222(d)(2) were insufficient as part of the standard for substantial 
misrepresentation, as many problematic practices relating to high 
pressure and abusive sales practices do not necessarily involve 
misrepresentations as opposed to puffery or abusive or unfair 
practices.
    Discussion: We disagree with the commenters' suggestion to remove 
the non-exhaustive list of factors in Sec.  685.222(d)(2). We 
appreciate the concerns that the factors do not necessarily prove 
whether a statement was erroneous, false, or misleading. However, as 
explained in the NPRM, 81 FR 39343, we believe it is appropriate to 
consider factors that may have influenced whether a borrower's or 
student's reliance upon a misrepresentation to his or her detriment is 
reasonable, thus elevating the misrepresentation to a substantial 
misrepresentation under Sec.  668.71 and Sec.  685.222(d) for the 
purposes of evaluating a borrower defense claim. We recognize that such 
factors consider the viewpoint of the borrower as to his or her 
reliance on a misrepresentation and may be subjective. However, in 
evaluating whether a statement is a misrepresentation, the Department 
will consider whether the statement is a misrepresentation ``under the 
circumstances'' and consider the totality of the situation, in addition 
to the reasonable reliance factors listed in Sec.  685.222(d)(2). We 
also disagree with commenters that the factors are insufficient as part 
of the substantial misrepresentation standard. As discussed earlier in 
this section, we decline to include standards such as unfair or abusive 
acts or practices, which some commenters have stated would address 
issues such as puffery and abusive sales practices that may occur 
absent a misrepresentation, because of a lack of clear precedent and 
guidance. We believe that consideration of the factors, if the trier-
of-fact determines that they are warranted under Sec.  685.222(d)(2), 
strikes a balance between the Department's interests in establishing 
consistent standards by which the Department may evaluate borrower 
defenses; providing borrowers and schools with clear guidance as to 
conduct that may form the basis of a borrower defense claim, and 
providing appropriate relief to borrowers who have been harmed.
    We understand the concern raised by commenters that a failure to 
respond to a borrower's requests for more information, including 
regarding the cost of the program and the nature of any financial aid, 
34 CFR 685.222(d)(iv), may be due to unintentional and routine events 
such as an employee's oversight and vacation schedule. However, as 
discussed earlier in this section, we disagree that the substantial 
misrepresentation standard should include an element of intent. We also 
disagree that the factor is unnecessary, as different States and 
oversight entities may have differing disclosure standards and 
institutions' compliance with such standards may vary.
    Section 685.222(d)(2)(ii) notes that in considering whether a 
borrower's reliance was reasonable, that an ``unreasonable'' emphasis 
on the unfavorable consequence of a delay may be considered. Generally, 
we do not believe that routine and truthful provisions of information 
such as timelines and fees to a borrower are unreasonable. However, as 
discussed, the standard requires that a consideration of any of the 
factors listed in Sec.  685.222(d)(2) also include consideration of 
whether a statement is a misrepresentation under the circumstances or, 
in other words, in the context of the situation.
    We also disagree that further modification of the regulations is 
needed to clarify that the factors do not need to exist for a borrower 
to have a borrower defense under Sec.  685.222(d). We believe that in 
stating that the Secretary ``may consider, if warranted'' whether any 
of the factors listed in Sec.  685.222(d)(2) were present, that the 
Department's intent is clear that the factors do not need to be alleged 
for a substantial misrepresentation to be established.
    Changes: None.
    Comments: One commenter stated that the preponderance of evidence 
standard established in the regulation, combined with the lower proof 
standard of preponderance of the evidence for misrepresentation, would 
open the door to frivolous claims. One commenter expanded on this 
position, asserting that the evidentiary standard in most States for 
fraudulent misrepresentation is clear and convincing evidence.
    One commenter requested clarification regarding the reasonable 
reliance and the preponderance of evidence standard for the purposes of 
the substantial misrepresentation, raising as an example, that an error 
or oversight in one publication should not satisfy the preponderance of 
the evidence standard for substantial misrepresentation, if the 
statement was otherwise correct and complete in all of the school's 
other publications.
    Discussion: We disagree that a ``preponderance of the evidence'' is 
a lesser standard of proof than what is used currently. As explained in 
the NPRM, 81 FR 39337, we believe that this evidentiary standard is 
appropriate as it is both the typical standard in most civil 
proceedings, as well as the standard used by the Department in other 
processes regarding borrower debt issues. See 34 CFR 34.14(b), (c) 
(administrative wage garnishment); 34 CFR 31.7(e) (Federal salary 
offset).
    We understand that some commenters have concerns about baseless 
charges and frivolous claims that may be brought by borrowers as 
borrower defenses and lead to liabilities for schools. However, as 
established in Sec.  685.222(e)(7) and (h), in determining whether a 
school may face liability for a borrower defense claim or a group of 
borrower defense claims, the school will have the opportunity to 
present evidence and arguments in a fact-finding process in accordance 
with due process. If, for example, during the course of such a fact-
finding process, the school provides proof that a misstatement or 
oversight in one publication was otherwise correct and complete in the 
school's other

[[Page 75953]]

publications, such evidence may be determinative as to whether a 
borrower's reliance on the original misrepresentation was reasonable 
under the circumstances, as required under Sec.  668.71 and Sec.  
685.222(d). However, the probative value of such evidence will vary 
depending on the facts and circumstances of each case. We also discuss 
comments relating to the evidentiary standard under ``General.''
    Changes: None.
    Comments: Several commenters suggested that we provide schools with 
specific safe harbors or defenses to substantial misrepresentation 
borrower defense claims. One commenter suggested such safe harbors 
could include a demonstration that an alleged misstatement is found to 
be true and not misleading when made; proof that a student participated 
in Student Loan Entrance counseling despite a claim that the student 
did not understand repayment requirements; proof that a borrower failed 
to obtain a professional license due to his or her own behavior despite 
having been provided with information on professional licensing 
requirements; a showing that the student has been made whole by the 
school; proof that the student has signed acknowledgements as to the 
information about which the student is claiming to have been misled; or 
underlying circumstances that are based on standard operational or 
institutional changes.
    Another commenter stated that schools should be provided with 
defenses in the form of proof that the misrepresentation had been 
subsequently corrected by the school or that the institution had 
policies, procedures, or training in place to prevent the 
misrepresentation at issue.
    Discussion: We disagree with commenters that specific defenses or 
safe harbors should be included in the regulations. Many of the factors 
listed by commenters, such as whether a student participated in 
entrance or exit counseling, proof of the availability of or receipts 
of accurate information by a student, or proof of underlying 
circumstances that are based on standard operational or institutional 
changes that should have been apparent to the borrower or student may 
be important evidence in the Department's consideration of whether a 
borrower's reliance upon an alleged misrepresentation is reasonable, as 
required by Sec.  685.222(d). However, determinations as to the impact 
of such factors may vary significantly depending on the type of 
allegations made and the facts and circumstances at issue. As a result, 
we do not believe that the inclusion of such factors is appropriate.
    Similarly, other factors noted by commenters, such as a showing 
that a student has already been made whole by the school may, depending 
on the specific circumstances, be important considerations for the 
Department in its determination of whether a borrower may be entitled 
to relief or to the determination of the amount of relief under Sec.  
685.222(i), which in turn will affect the amount of liability a school 
may face in either the separate proceeding for recovery under Sec.  
685.222(e)(7) or in the group process described in Sec.  685.222(h). 
Given that the importance of such factors will vary depending on the 
circumstances of each case, we also do not believe that the inclusion 
of such factors is appropriate for the regulations.
    Section 668.71 defines a ``misrepresentation'' as any false, 
erroneous, or misleading statement. If an alleged misstatement can be 
proven to be true statement of fact when made, not false or erroneous, 
and it is not misleading when made, then such statements would not be 
actionable misrepresentations under the standard. However, as explained 
previously in this section, to determine whether a statement that was 
true at the time of its making was misleading, the Department will 
consider the totality of the situation to determine whether the 
statement had ``the likelihood or tendency to mislead under the 
circumstances'' or whether it ``omit[ted] information in a way as to 
make the statement false, erroneous, or misleading.'' The Department 
will also look to whether the reliance by the borrower was reasonable. 
This would include a consideration of whether a misrepresentation has 
been corrected by the school in such a way or in a timeframe so that 
the borrower's reliance was not reasonable. This would also mean that, 
generally, claims based only on the speaker's opinion would not form 
the basis of a borrower defense claim under the standard, if it can be 
determined that under the circumstances borrowers would understand the 
source and limitations of the opinion.\19\ For the same reason, it is 
our understanding that claims based on exaggerated opinion claims, also 
known as ``puffery,'' would also generally not be able to form the 
basis of a misrepresentation under State or Federal consumer protection 
law.\20\ However, the determination of whether a statement is an 
actionable misrepresentation will necessarily involve consideration of 
the circumstances under which the representation was made and the 
reasonableness of the borrower's reliance on the statement.
---------------------------------------------------------------------------

    \19\ It should be noted, however, that a claim phrased as an 
opinion may still form the basis of a substantial misrepresentation, 
if the borrower reasonably interpreted the statement as an implied 
statement of fact, see, e.g., FTC Policy Statement on Deception, 103 
F.T.C. at 184, or if any of the factors listed in Sec.  
685.222(d)(2) existed so as to affect the reasonableness of the 
borrower's reliance on the misrepresentation.
    \20\ See, e.g., Rasmussen v. Apple Inc., 27 F. Supp. 3d 1027 
(N.D. Cal. 2014); FTC Policy Statement on Deception, 103 F.T.C. 110.
---------------------------------------------------------------------------

    We do not believe that the existence of policies, procedures, or 
training to be a defense to the existence of a substantial 
misrepresentation. As discussed earlier in this section, the Department 
does not consider intent in determining whether a substantial 
misrepresentation was made and believes that a borrower should receive 
relief if the borrower reasonably relied upon a misrepresentation to 
his or her detriment.
    Changes: None.
    Comments: Several commenters expressed concerns regarding the 
subject matter or topics upon which a substantial misrepresentation may 
be based. A few commenters expressed concerns that the substantial 
misrepresentation standard narrows the scope of borrower defenses by 
not including claims relating to campus safety and security, as well as 
those for sexual or racial harassment. One commenter expressed the view 
that not including such non-loan related issues is inconsistent with 
the purpose of the HEA and the borrower defense regulations. Another 
commenter said that by excluding such topics, the substantial 
misrepresentation standard targets just proprietary institutions and 
excludes traditional colleges.
    Another commenter asked whether statements about topics such as 
cafeteria menu items, speakers hosted by a school, or opponents on a 
team's athletic schedule would be considered substantial 
misrepresentations.
    One commenter supported using 34 CFR part 668, subpart F, as the 
basis for borrower defense claims, including limiting substantial 
misrepresentation claims to the categories listed in subpart F.
    Discussion: We explain earlier our reasons for why subjects that do 
not relate the making of a borrower's loan or the provision of 
educational services for which the loan was provided, such as sexual or 
racial harassment and campus safety or security, are included within 
the scope of the borrower defense regulations.

[[Page 75954]]

    As also discussed earlier in this section, we disagree that the 
substantial misrepresentation standard targets proprietary institutions 
and excludes issues facing public and private non-profit schools.
    In response to questions about whether misrepresentations on 
specific topics may form the basis of a borrower defense, we note such 
determinations will necessarily be fact and situation specific-
dependent inquiries. As proposed, the substantial misrepresentation 
standard considers a number of factors in determining whether a 
borrower defense claim may be sustained. Proposed Sec.  685.222(d) 
specifies that the borrower defense asserted by the borrower must be a 
substantial misrepresentation in accordance with 34 CFR part 668, 
subpart F, that the borrower reasonably relied on when the borrower 
decided to attend, or to continue attending, the school. 34 CFR part 
668, subpart F, specifically limits the scope of substantial 
misrepresentation to misrepresentations concerning the nature of an 
eligible institution's educational program, 34 CFR 668.72; the nature 
of an eligible institution's financial charges, id. at Sec.  668.73; 
and the employability of an eligible institution's graduates, id. at 
Sec.  668.74. If a misrepresentation falls within one of these 
categories, then it may be a misrepresentation upon which a borrower 
may assert a borrower defense claim. However, as required by the 
revised language of Sec.  668.71, the Department would consider the 
totality of the situation to determine whether the statement was false, 
erroneous, or misleading ``under the circumstances.'' Additionally, the 
borrower would have to show that he or she reasonably relied upon the 
misrepresentation to his or her detriment in deciding to attend the 
school or in continuing his or her attendance at the institution under 
proposed Sec.  685.222(d). If such requirements are met, then it is 
possible that a substantial misrepresentation may form the basis of a 
borrower defense claim.
    Changes: None.
    Comments: Several commenters expressed concern that the standard 
would result in schools being held liable for misrepresentations of 
contractors and others acting on their behalf. According to one 
commenter, this standard is acceptable for enforcement activities 
conducted by and guided by the Department in its discretion, but is not 
suitable for borrower defense. Another commenter stated that, as 
proposed, Sec.  685.222 is unclear, because under Sec.  685.222(a), a 
borrower defense is limited to the act or omission of the school, 
whereas under Sec.  685.222(d), it does not appear to be clear that the 
act or omission may be by the school's representatives.
    Discussion: In response to concerns in 2010 that institutions may 
be held accountable for false or misleading statements made by persons 
with no official connection to a school, the Department narrowed the 
scope of substantial misrepresentation to statements made by the 
school, the school's representatives, or any ineligible institution, 
organization, or person with whom the eligible institution has an 
agreement to provide educational programs or those that provide 
marketing, advertising, recruiting, or admissions services. 75 FR 
66916. As explained in 2010, such persons actually either represent the 
school or have an agreement with the school for the specific purposes 
of providing educational programs, marketing, advertising, recruiting, 
or admissions services. Section Sec.  685.222(d) similarly names the 
persons and entities making a substantial misrepresentation upon which 
a borrower may assert a claim and echoes the official relationships in 
Sec.  668.71. We believe the definition provided in proposed Sec.  
685.222(d) does not need further clarification. We also believe that 
the specific persons and entities identified in Sec.  685.222(d) upon 
whose substantial misrepresentation a borrower may assert a borrower 
defense claim is appropriate for the same reasons stated in 2010 as to 
their appropriateness for Sec.  668.71 and decline to make any changes 
in this regard.
    Changes: None.
    Comments: One commenter requested that borrower defense claims 
extend to guaranty agencies and, specifically, suggested that Sec.  
685.222(d)(2) be revised to enable the Secretary to consider certain 
factors, listed in Sec.  685.222(d)(2), to determine whether a guaranty 
agency's reliance on a substantial misrepresentation is reasonable.
    Discussion: The Department's authority to regulate borrower 
defenses arises from Section 455(h) of the HEA, which describes 
borrower defenses that may be asserted by a borrower to the Department 
for loans made under the Direct Loan Program. We do not believe that it 
is appropriate to include guaranty agencies, which are not participants 
in the Direct Loan Program, in the borrower defense regulations and 
decline the commenter's suggestion.
    Changes: None.
    Comments: One commenter concurred with the Department's goal of 
deterring misrepresentations, but requested that the Department exempt 
foreign institutions with relatively small numbers of American students 
from the regulation. The commenter stated that eligible foreign 
institutions are governed by different countries' laws and oversight 
regimes, and that there are no indicators that the issues giving rise 
to borrower defense claims have affected Americans enrolled in foreign 
institutions.
    Discussion: We do not agree that it would be appropriate to ignore 
any potential harm to students that may constitute the basis of a 
borrower defense from schools participating in the Direct Loan Program, 
whether such institutions are foreign or domestic. The standards 
proposed in Sec.  685.222 for borrower defense were drafted for the 
purpose of ensuring that students receive consistent and uniform 
treatment for borrower defense claims, regardless of the type of 
institution. Exempting some institutions from the borrower defense 
process, whether partially or fully, would undermine the effectiveness 
of the regulation in providing relief for borrowers and providing the 
Department with information on misconduct forming the basis of borrower 
defenses among institutions participating the Direct Loan Program.
    Changes: None.

Limitations on Department Actions To Recover

    Comments: Commenters objected to the proposal to remove the 
limitations period in current Sec.  685.206(c) to Department action to 
recover from the school for losses arising from borrower defense claims 
on both loans made before July 1, 2017, and those made thereafter. 
Section 685.206(c) refers to Sec.  685.309(c), which in turn refers to 
the three-year record retention requirement in Sec.  668.24. The 
current regulations also provide that the three-year limitation would 
not apply if the school received actual notice of the claim within the 
three-year period. Commenters objected for a variety of reasons.
    Several commenters argued that it would be unduly burdensome and 
expensive for institutions to retain records beyond the mandatory 
three-year record retention period. These commenters also argued that 
it would be unfair for an institution to have to defend itself if it no 
longer has records from the time period in question. One commenter also 
noted that it would be difficult for the Department to assess claims in 
the absence of records. One commenter disagreed with the Department's 
statements in the NPRM that institutions have not previously

[[Page 75955]]

relied on the three-year limitations period and student-specific files 
are likely unnecessary to a borrower defense claim. A commenter 
asserted that the records to which the current record retention rule 
applies--including the Student Aid Report (SAR), documentation of each 
borrower's loan eligibility, documentation of each borrower's receipt 
of funds, documentation of exit counseling, documentation of the 
school's completion rates, among numerous other categories of 
documents--would be relevant and that the Department had failed to 
demonstrate that resolution of borrower defense claims would rarely, if 
ever, turn on the records to which the three-year record retention rule 
now applies. The commenter contended that these records will likely go 
to the heart of borrower claims concerning misrepresentation regarding 
student loans.
    Some commenters stated that schools have tied their general record 
retention policies to the three-year student aid record retention 
regulation. Other commenters contended that the proposal would place an 
unfair, and unnecessary burden on schools by requiring them to retain 
records indefinitely, even though a borrower would reasonably be 
expected to know within a few years after attendance whether the 
student had a claim regarding the training he or she had received. Some 
commenters argued that due process requires a defined limitations 
period so that borrowers and schools would know how long to retain 
relevant records. These commenters also suggested that a defined 
limitation period would promote early awareness of claims, and proposed 
a six-year period for recovery actions on both misrepresentation and 
contract claims.
    A commenter asserted that periods of limitation are enacted not 
merely to reduce the risk of failing memories and stale evidence, but 
to promote finality of transactions and an understanding of the 
possible risks that may arise from transactions. This proposed change, 
the commenter asserts, frustrates these objectives served by periods of 
limitation. One commenter contended that an unlimited record retention 
period would increase the risk that data security lapses could occur.
    One commenter suggested that the limitation period for recovery 
actions should be tied to the rule adopted by the school's accreditor, 
or to the statute of limitations in the State, as even non-student 
specific records, such as catalogs (which the Department noted are 
likely be the basis of borrower defense claims), are likely to be 
destroyed at the end of these retention periods. Another commenter 
viewed the proposal as an impermissible retroactive regulation, by 
converting what was enacted as defense to repayment into an affirmative 
recovery claim, available to the Department for recovery for losses 
from actions of the school that occurred before the new regulation took 
effect.
    Discussion: We fully address in the NPRM at 81 FR 39358 the 
contention that removing or extending a limitation period is 
unconstitutional and beyond the power of the Department.\21\ As to the 
objections that the change would be unfair because schools in fact 
relied on the record retention rules, we note first that these record 
retention rules require the school to retain specific, particular 
student-aid related records. We include the specific records that must 
be maintained in order to provide the context in which to address the 
commenters' assertion that these records would go to the heart of 
borrower defense claims. 34 CFR 668.24. The commenters identify no 
lawsuits in which resolution of the dispute actually turned on any of 
the records listed here and, with minor exceptions, we are aware of no 
lawsuits against schools by borrowers or government entities, or 
borrower defense claims presented to the Department, in which the 
records described here are dispositive. In a handful of instances, 
recognition of borrower defenses under Sec.  685.206 turned on records 
showing whether refunds owed to students had in fact been made, a 
requirement ordinarily examined in the routine required compliance 
audit and in Department program reviews. In a few other cases, 
Department reviews have identified instances in which the school 
falsified determinations of satisfactory academic progress, another 
matter commonly examined in routine audits and program reviews, and we 
are amending the false certification discharge provisions to ensure 
that the Department can implement relief when this particular failure 
is identified. In contrast, even a cursory review of claims raised by 
students and student borrowers over the years that would constitute 
potential borrower defense claims have turned not on the individualized 
aid-specific records itemized in the Department's record retention 
regulations, but on broadly disseminated claims regarding such matters 
as placement rates,\22\ accreditation status,\23\ and employment 
prospects.\24\
---------------------------------------------------------------------------

    \21\ We add only that statutes of limitation applicable to 
government actions to collect these claims affect only the ability 
to recover by a particular action, and do not extinguish claims. 
Thus, a suit by the government to collect a liability arising in 
title IV, HEA program remains governed by the limitation periods in 
28 U.S.C. 2415(a), while actions to collect by Federal offset have 
not, since subsection (i) was added to Sec.  2415 by the 1982 Debt 
Collection Act to exempt actions to collect by administrative offset 
under 31 U.S.C. 3716, which originally imposed a 10-year statute of 
limitations, until amended in 2008 to remove any limitation period 
from collection by Federal offset.
    \22\ See Armstrong v. Accrediting Council for Continuing Educ. & 
Training, Inc., 168 F.3d 1362, 1369 (D.C. Cir. 1999), opinion 
amended on denial of reh'g, 177 F.3d 1036 (D.C. Cir. 1999)
    \23\ California v. Heald Coll., No. CGC-13-534793, Sup. Ct. Cty 
of San Francisco (March 23, 2016); Consumer Fin. Prot. Bureau v. 
Corinthian Colls., Inc., No. 1:14-CV-07194, 2015 WL 10854380 (N.D. 
Ill. Oct. 27, 2015); Ferguson v. Corinthian Colls., Inc., 733 F.3d 
928 (9th Cir. 2013); Moy v. Adelphi Inst., Inc., 866 F. Supp. 696, 
706 (E.D.N.Y. 1994) (upholding claim of common law misrepresentation 
based on false statements regarding placement rates.); Lilley v. 
Career Educ. Corp., 2012 IL App (5th) 100614-U (Oct. 25, 2012); Fed. 
Trade Comm'n v. DeVry Educ.Group, Inc., C.A. No. 15-CF-00758 (S.D. 
Ind. Filed Jan. 17, 2016).
    \24\ Suarez v. E. Int'l Coll., 428 N.J. Super. 10, 50 A.3d 75 
(App. Div. 2012).
---------------------------------------------------------------------------

    Whether a school actually retains records relevant to the 
borrower's claim does not determine the outcome of any claim, because 
the borrower--and in group claims, the Department--bears the burden of 
proving that the claim is valid. The borrower, or the Department, must 
therefore have evidence to establish the merit of the claim, a prospect 
that becomes more unlikely as time passes. If the borrower or the 
Department were to assert a claim against the school, the school has 
the opportunity to challenge the evidence proffered to support the 
claim, whether or not the school itself retains contradictory records.
    We acknowledge, however, that institutions might well have 
considered their potential exposure to direct suits by students in 
devising their record retention policies for records that may in fact 
be relevant to borrower defense type claims. Although we consider 
applicable law to support collection of claims by offset without regard 
to any previously applicable limitation period, we recognize that the 
burden of doing so may be unwarranted after the limitation period 
otherwise applicable had expired and the institution had no reason to 
expect that claims would arise later. Under current regulations, there 
is no limit on the time in which the Department could take recovery 
action if the institution received notice of a claim within the three-
year period. Under the current regulation, an institution must have 
``actual notice of a claim'' to toll the three-year period. An 
institution would in fact have ample warning that the claims may arise 
from other events besides receipt of a claim from an individual, such 
as lawsuits

[[Page 75956]]

involving the same kind of claim, law enforcement agency 
investigations, or Department actions. State law, moreover, already 
commonly recognizes that the running of limitation periods may be 
suspended for periods during which the claimant had not yet discovered 
the facts that would support a claim, and may impose no limit on the 
length of the suspension, effectively allowing a claim to be asserted 
long after the otherwise applicable limitation period had run. The 
limitation period applicable to a particular recovery claim will thus 
depend--for current loans--on the limitation period State law would 
impose on an action by the student against the institution for the 
cause of action on which the borrower seeks relief, as that period may 
be affected by a discovery rule, as well as whether an event has 
occurred within that period to give the institution notice. The current 
three-year limit would be retained, subject to the notice provisions, 
if that limit exceeded the applicable State law limitation. For new 
loans, the applicable periods would be those in Sec.  685.222(e)(7) and 
Sec.  685.222(h)(5); for actions based on judgments, no limitation 
would apply.
    We recognize that the retention of records containing personally 
identifiable information poses data security risks. However, the school 
already faces the need to secure such information, and we expect the 
school to have already adopted steps needed to do so. The regulation 
does not impose any new record retention requirement.
    Changes: We have amended Sec.  685.206(c) to remove the provision 
that the Secretary does not initiate a recovery action later than three 
years after the last year of attendance, and we have modified Sec.  
685.206(c)(3) to provide that the Department may bring a recovery 
action against the school within the limitation period that would apply 
to the cause of action on which the borrower defense is based, unless 
within that period the school received notice of the borrower's claim. 
We have further modified the regulations to state that notice of the 
borrower's claim includes actual notice from the borrower, a 
representative of the borrower, or the Department, of a claim, 
including notice of an application filed pursuant to Sec.  685.222 or 
Sec.  685.206(c); receipt of a class action complaint asserting relief 
for a class that may include the borrower for underlying facts that may 
form the basis of the borrower defense claim; and notice, including a 
civil investigative demand or other written demand for information, 
from a Federal or State agency that it is initiating an investigation 
into conduct of the school relating to specific programs, periods, or 
practices that may affect the student for underlying facts that may 
form the basis of the borrower defense claim.
    We have also revised Sec.  685.222(h)(5) and (e)(7) to provide that 
the Department may bring a recovery action against the school for 
recovery of claims brought under Sec.  685.222(b) at any time, and may 
bring a recovery action for recovery of claims brought under Sec.  
685.222(c) or (d) within the limitation period that would apply to the 
cause of action on which the borrower defense is brought, unless within 
that period the school received notice of the borrower's claim. The 
Department further modifies Sec.  685.222(h)(5) to include the same 
description of events that constitute notice as described above.
    Comments: One commenter requested that the Department continue the 
three-year statute of limitations period for loans disbursed prior to 
July 1, 2017. Another commenter suggested it would be unfair for the 
Department to hold an institution accountable for claims going back 
more than ten years.
    Discussion: As noted in the NPRM, the Department will continue to 
apply the applicable State statute of limitations to claims relating to 
loans disbursed prior to July 1, 2017. We also note that we will apply 
all aspects of relevant State law related to the statute of limitations 
as appropriate, including discovery rules and equitable tolling. 
However, these comments may reflect a drafting error in the NPRM that 
suggested loans disbursed prior to July 1, 2017, would be subject to 
the new limitations period established by the final regulations.
    Changes: We have revised Sec.  685.222(a)(5) to make clear that the 
six-year statute of limitations period established under that section 
does not apply to claims under Sec.  685.206(c).

Expansion of Borrower Rights

    Comments: A number of commenters noted that the regulations in 
proposed Sec.  685.206(c) expand the rights of borrowers by allowing 
borrowers to assert defenses regardless of when the loan was disbursed. 
Under the current regulations, a defense to repayment is available only 
when collection on a Direct Loan has been initiated against a borrower, 
such as wage garnishment or tax offset proceedings. The commenters 
asserted that the revisions to the borrower defense regulations have 
reconstituted current defenses to collection, so they now serve as the 
bases for expanded borrower rights to initiate an action for 
affirmative debt relief at any time.
    Discussion: We disagree that proposed Sec.  685.206(c) would be an 
expansion of borrowers' rights as to the context in which a borrower 
defense may be raised. As explained by the Department in 1995, 60 FR 
37769-37770, the Direct Loan borrower defense regulations were intended 
to continue the same treatment for borrowers and the same potential 
liability for institutions that existed in the FFEL Program--which 
allowed borrowers to assert both claims and defenses to repayment, 
without regard as to whether such claims or defenses could only be 
brought in the context of debt collection proceedings. Specifically, 
FFEL borrowers' ability to raise such a claim was pursuant the 
Department's 1994 inclusion in the FFEL master promissory note for all 
FFEL Loans a loan term \25\--that remains in FFEL master promissory 
notes to this day--stating that for loans provided to pay the tuition 
and charges for a for-profit school, ``any lender holding [the] loan is 
subject to all the claims and defenses that [the borrower] could assert 
against the school with respect to [the] loan'' (emphasis added).\26\ 
See also Dept. of Educ., Dear Colleague Letter Gen 95-8 (Jan. 1995) 
(stating the Department's position that borrower defense claims would 
receive the same treatment as they were given in the FFEL program, 
which allowed borrowers to not only assert defenses but also claims 
under applicable law).
---------------------------------------------------------------------------

    \25\ This loan term was adapted from a similar contract 
provision, also known as the Holder Rule, required by the Federal 
Trade Commission (FTC) in certain credit contracts. See 40 FR 
533506.
    \26\ The substance of this loan term was also adopted as part of 
the FFEL Program regulations at 34 CFR 682.209(g) in 2009.
---------------------------------------------------------------------------

    We also disagree that the revisions to Sec.  685.206(c) expand any 
timeframe for a borrower to assert a borrower defense. As explained 
above, the Department's borrower defense regulation at Sec.  685.206(c) 
was based upon the right of FFEL borrowers to bring claims and 
defenses, which in turn was adopted from the FTC's Holder Rule 
provision. The FTC has stated that applicable State law principles, 
such as statutes of limitations as well as any principles that would 
permit otherwise time-barred claims or defenses against the loan 
holder, apply to claims and defenses brought pursuant to a Holder Rule 
provision.\27\ The Department's position on the application of any 
applicable statutes of limitation or principles that

[[Page 75957]]

may permit otherwise time-barred claims is the same as the FTC's. We do 
not seek to change this position in revising Sec.  685.206(c), which 
would apply to loans first disbursed before July 1, 2017.
---------------------------------------------------------------------------

    \27\ Letter from Stephanie Rosenthal, Chief of Staff, Division 
of Financial Practices, Bureau of Consumer Protection, FTC to Jeff 
Appel, Deputy Under Secretary, U.S. Dep't. of Educ. (April 7, 2016), 
available at www.ftc.gov/policy/advisory-opinions/letter-stephanie-rosenthal-chief-staff-division-financial-practices-bureau.
---------------------------------------------------------------------------

    Changes: None.

Administrative Burden

    Comments: A group of commenters questioned the validity of the 
Department's argument that maintaining a State-based standard would be 
administratively burdensome. The commenters suggested that the 
Department could establish a system for determining which State's laws 
would pertain to students enrolled in distance education programs.
    Several commenters criticized the Federal standard as being too 
broad and vague to provide sufficient predictability to institutions. 
One of these commenters asserted that the proposed regulations could 
encourage borrowers to file unsubstantiated claims. Many commenters 
noted that borrowers have existing avenues to resolve issues with their 
schools, using the complaint systems provided by institutions, 
accrediting agencies, and States, as well as judicial remedies.
    One commenter suggested that the implementation of the proposed 
regulations would hamper interactions between school employees and 
students by creating an environment where any interaction could be 
misconstrued and used as a basis for borrower defense. The commenter 
concluded that this dynamic would increase the burden on schools as 
they seek to implement means of communicating to and interacting with 
borrowers that mitigate risk.
    Several commenters recommend that the Federal standard describe the 
specific acts and omissions that would and would not substantiate a 
borrower defense claim. Another commenter suggested that the final rule 
include examples of serious and egregious misconduct that would violate 
the Federal standard.
    Discussion: Reliance upon State law not only presents a significant 
burden for Department officials who must apply and interpret various 
State laws, but also for borrowers who must make the threshold 
determination as to whether they may have a claim. Contrary to the 
commenter's assertion, this challenge cannot be resolved through the 
Department's determination as to which State's laws would provide 
protection from school misconduct for borrowers who reside in one State 
but are enrolled via distance education in a program based in another 
State. Some States have extended their rules to protect these students, 
while others have not.
    We agree with commenters that the Federal standard does not provide 
significant predictability to institutions regarding the number or type 
of borrower defense claims that may be filed or the number of those 
claims that will be granted. However, the purpose of the Federal 
standard is not to provide predictability, but rather, to streamline 
the administration of the borrower defense regulations and to increase 
protections for students as well as taxpayers and the Federal 
government. That being said, the bases for borrower defense claims 
under the new Federal standard--substantial misrepresentation, breach 
of contracts, and nondefault, contested judgments by a court or 
administrative tribunal of competent jurisdiction for relief--do 
provide specific and sufficient information to guide institutions 
regarding acts or omissions pertaining to the provision of Direct Loan 
or educational services that could result in a borrower defense claim 
against the institution.
    We do not agree that implementation of the Federal standard will 
hamper interactions between school personnel and students. Institutions 
that are providing clear, complete, and accurate information to 
prospective and enrolled students are exceedingly unlikely to generate 
successful borrower defense claims. While individuals may continue to 
misunderstand or misconstrue the information they are provided, a 
successful borrower defense claim requires the borrower to demonstrate 
by a preponderance of the evidence that a substantial misrepresentation 
or breach of contract has occurred.
    We decline to describe the specific acts and omissions that would 
and would not substantiate a borrower defense claim, as each claim will 
be evaluated according to the specific circumstances of the case, 
making any such description illustrative, at best. We believe the 
elements of the Federal standard and the bases for borrower defense 
claims provide sufficient clarity as to what may or may not constitute 
an actionable act or omission on the part of an institution.
    Changes: None.

Authority

    Comments: A group of commenters expressed concern that the proposed 
Federal standard exceeds the Department's statutory authority. This 
same group of commenters opined that the proposed Federal standard 
violates the U.S. Constitution.
    Two commenters suggested that the proposed regulations have 
exceeded the Department's authority to promulgate regulations for 
borrowers' defenses to repayment on their Federal student loans when 
advanced collection activity has been initiated. One of these 
commenters suggested that loan discharges based on institutional 
misconduct should be pursued only when the Department has court 
judgments against a school, final Department program review and audit 
determinations, or final actions taken by other State or Federal 
regulatory agencies, after the school has been afforded its due process 
opportunities.
    Discussion: The Department's authority for this regulatory action 
is derived primarily from Sections 454, 455, 487, and 498 of the Higher 
Education Act, as discussed in more detail in the NPRM. Section 454 of 
the HEA authorizes the Department to establish the terms of the Direct 
Loan Program Participation Agreement, and section 455(h) of the HEA 
authorizes the Secretary to specify in regulation which acts or 
omissions of an institution of higher education a borrower may assert 
as a defense to repayment of a Direct Loan. Sections 487 and 498 
authorize the adoption of regulations to assess whether an institution 
has the administrative capability and financial resources needed to 
participate in the title IV, HEA programs.\28\
---------------------------------------------------------------------------

    \28\ This discussion addresses the Department's authority to 
issue regulations in the areas described below. As discussed 
earlier, the Department's authority to recoup losses rests on common 
law as well as HEA provisions included among those cited here.
---------------------------------------------------------------------------

    Support for regulating in particular areas is also found in Section 
432(a) of the HEA, which authorizes the Secretary to issue regulations 
for the FFEL program, enforce or compromise a claim under the FFEL 
Program; section 451(b) provides that Direct Loans are made under the 
same terms and conditions as FFEL Loans; and section 468(2) authorizes 
the Secretary to enforce or compromise a claim on a Perkins Loan.
    Section 452(j) of the GEPA authorizes certain compromises under 
Department programs, and the Administrative Dispute Resolution Act, 31 
U.S.C. 3711, authorizes a Federal agency to compromise or terminate 
collection of a debt, subject to certain conditions.
    The increased debt resolution authority is provided in Public Law 
101-552 and authorizes the Department to resolve debts up to $100,000 
without approval from the Department of Justice (DOJ).
    The HEA vests the Department with the sole authority to determine 
and

[[Page 75958]]

apply the appropriate sanction for HEA violations. The Department's 
authority for the regulations is also informed by the legislative 
history of the provisions of the HEA, as discussed in the NPRM.
    Changes: None.

Making of a Loan and Provision of Educational Services

    Comments: Several commenters expressed support for the Department's 
efforts to limit the scope of borrower defense claims by focusing the 
proposed regulations on acts or omissions that pertain to the provision 
of educational services. However, these commenters also suggested that 
the phrase, ``provision of educational services'' was open to 
interpretation and, as such, may not effectively constrain potential 
claims. One commenter suggested revising the phrase to read, 
``provision of educational services related to the program of study.''
    A number of commenters requested that the clarification included in 
the preamble to the NPRM, explaining that claims pertaining to personal 
injury, allegations of harassment, educational malpractice, and 
academic or disciplinary actions are not related to the making of a 
borrower's Direct loan or the provision of educational services be 
included in the regulatory text, as they viewed these specific examples 
as particularly helpful clarifications.
    Two commenters listed a number of specific circumstances that may 
or may not fall within the scope of providing educational services, and 
requested that the Department provide an analysis of these acts and 
omissions.
    Another commenter remarked that the Department's efforts to limit 
the scope of borrower defense claims by focusing the proposed 
regulations on acts or omissions that pertain to the provision of 
educational services fell short of its objective. Similar to other 
commenters, this commenter requested that the Department provide 
explicit descriptions of the claims that would and would not meet the 
proposed standard.
    Another commenter who shared this view suggested the Department 
include in the final regulations a discussion of the factors that would 
be considered in determining whether a borrower defense claim pertained 
to the provision of educational services.
    Discussion: We appreciate the support for our efforts to 
appropriately limit the scope of borrower defense claims to those that 
are related specifically to the provision of educational services or 
the making of a Direct Loan. We understand the commenters' interest in 
further clarification. However, we do not believe it is appropriate to 
provide detailed institutional-borrower scenarios, or a hypothetical 
discussion of the analytic process the Department would undertake to 
ascertain whether a specific borrower's claim related to the provision 
of educational services or the making of a Direct Loan at this time. As 
is often the case in matters that address an individual's experience as 
part of the Federal Student Aid process, the Department's determination 
of whether a claim pertains to the provision of educational services or 
the making of a Direct Loan will depend greatly upon the specific 
elements of that claim.
    For example, while it may appear to be a relatively straightforward 
clarifying change to amend the regulatory language to read, ``provision 
of educational services related to the program of study,'' such a 
change could be interpreted to mean that claims related to more general 
concerns associated with the institution's provision of educational 
services would not be considered. That is not our intent, and we 
believe the regulatory language as proposed best captures the intended 
scope of borrower defense claims.
    Similarly, we do not believe that including in the regulatory 
language specific examples of acts or omissions that would not be 
considered in a borrower defense is appropriate at this time. These 
circumstances may evolve over time, necessitating a re-evaluation of 
their relevance. The Department can provide additional clarification, 
as needed, through other documents, such as a Dear Colleague Letter, 
Electronic Announcement, or the FSA Handbook.
    Changes: None.
    Comments: One commenter recommended that the phrase ``making of a 
Direct Loan'' be revised to include the phrase ``for enrollment at the 
school,'' to ensure consistency with the proposed regulatory language 
in Sec.  685.222(a)(5). The commenter suggested that this modification 
would be required to ensure that all Direct Loans a borrower has 
obtained attend a school are covered by the regulation.
    Discussion: We agree with the commenter that such a change would 
ensure consistency throughout the regulation.
    Changes: We have revised Sec.  685.206(c) to include the qualifying 
phrase, ``for enrollment at the school'' when referring to the ``making 
of the loan.''
    Comments: Several commenters expressed concern that the proposed 
borrower defense regulations would limit borrower defense claims to 
acts or omissions that occurred during the same academic year in which 
the borrower obtained a Direct Loan for which he or she is now seeking 
a loan discharge. One commenter suggested this concern could be 
ameliorated by amending the regulatory language in Sec.   685.222(a)(5) 
to include acts and omissions that occur prior to enrollment (e.g., 
marketing, recruitment) and after the borrower has left the school 
(e.g., career placement).
    Another commenter expressed concern that the limitation of scope 
would create of discrepancy between loan proceeds that were used to pay 
for tuition and loan proceeds used to pay for other elements of the 
institution's cost of attendance.
    Discussion: The preamble to the NPRM explicitly acknowledged that 
the proposed standard described in Sec.  685.206(c) and Sec.  
685.222(b), (c), and (d), would include periods of time prior to the 
borrower's enrollment, such as when the borrower was being recruited by 
the school, and periods of time after the borrower's enrollment, such 
as when the borrower was seeking career advising or placement services. 
81 FR 39337.
    The regulatory language in Sec.  685.222(a)(5) refers to the making 
of a Direct Loan that was obtained in conjunction with enrollment at 
the school. This would include all eligible elements of the school's 
cost of attendance for which a Direct Loan can be obtained. The 
language in Sec.  685.222 does not restrict potential borrower relief 
to the portion of a Direct Loan used to pay for tuition.
    Changes: None.
    Comments: None.
    Discussion: In further reviewing proposed Sec.  685.222(a)(6), the 
Department has determined that including an affirmative duty upon the 
Department to notify the borrower of the order in which his or her 
objections, if he or she asserts other objections in addition to 
borrower defense, to his or her loan will be determined is too 
burdensome because it would require the expenditure of administrative 
resources and time, even if not desired by the borrower. The borrower 
may contact the Department to find out the status of his or her 
objections, including borrower defense, if desired.
    Changes: We have revised Sec.  685.222(a)(6) to remove the 
requirement that the Department notify the borrower of the order in 
which his or her objections to a loan will be determined.

Limitation Periods (Statute of Limitations)

    Comments: Several commenters requested that the Department allow

[[Page 75959]]

students to recoup loan funds already paid beyond the proposed six-year 
statute of limitations. These commenters argued that students often do 
not know that they are entitled to relief for many years. Some 
commenters stated that the beginning of the time limit would be 
difficult for borrowers to determine, since it could vary depending on 
the specifics of the alleged misconduct. Another commenter stated that 
some institutions have been defrauding borrowers for decades. One 
commenter stated that since there is no time limit for false 
certification discharges, there should not be a time limit for borrower 
defenses. A group of commenters argued that since there is no limit on 
the Department's ability to collect student debt, there should not be a 
limit on the ability of borrowers to recover. Other commenters pointed 
to the relatively smaller number of borrower applications, as opposed 
to numbers of borrower estimated to be eligible for relief, from 
Corinthian as evidence that many borrowers do not know they have 
claims.
    Discussion: As noted in the NPRM, the six-year statute \29\ of 
limitations is only applicable to students' claims for amounts already 
paid on student loans. A borrower may assert a defense to repayment at 
any time. This rule comports with the FTC Holder Rule \30\ and general 
State law principles, as well as general principles relating to the 
defense of recoupment. See, e.g., Bull v. United States, 295 U.S. 247, 
262 (1935) (``Recoupment is in the nature of a defense arising out of 
some feature of a transaction upon which the plaintiff's action is 
grounded. Such a defense is never barred by the statute of limitations 
so long as the main action itself is timely.'') We understand that 
students may not always be in a position to bring borrower defense 
claims immediately, but believe the final regulations strike a balance 
between allowing borrowers sufficient time to bring their claims and 
ensuring that the claims are brought while there is still evidence 
available to assess the claims.
---------------------------------------------------------------------------

    \29\ In the NPRM, we explain our reasoning for establishing a 
six-year statute of limitations for the breach of contract and 
substantial misrepresentation standards under Sec.  685.222(c) and 
(d). Further, we note that six-year period echoes the period 
applicable to non-tort claims against the United States under 28 
U.S.C. 2401(a). See also 31 U.S.C. 3702.
    \30\ The FTC Holder Rule is explained in more detail elsewhere 
in the ``State Standard'' and ``Expansion of Borrower Rights'' 
sections.
---------------------------------------------------------------------------

    Changes: None.

General Process

    Comments: Many commenters and groups of commenters expressed 
concerns about potential due process issues with the process proposed 
in Sec.  685.222(e) for individual borrowers to pursue borrower defense 
claims. These commenters asserted that the Department should allow 
institutions to actively participate in all aspects of the process, 
starting with a right to be notified of the claim and an opportunity to 
review the claimant's assertions and supporting documentation. These 
commenters further proposed that the Department's hearing official 
should advise the institution about the specific arguments and 
documents used in the fact-finding process. Some commenters offered 
proposed timeframes for each step in the review process, while 
emphasizing that most determinations should be made based solely on 
document review.
    Some of these commenters acknowledged the value of not establishing 
a purely adversarial process, but emphasized the need to balance the 
interests of providing relief to students who were treated unfairly 
with the rights of schools to defend themselves, especially in light of 
the possible financial and legal exposure to institutions and 
potentially taxpayers.
    Several commenters also contended that the exclusion of school 
participation in the individual process is especially problematic 
because of the fact-specific nature of such claims. These commenters 
expressed their belief that most individual cases cannot be thoroughly 
investigated without school input. Some commenters suggested that the 
proposed regulations flip the presumption of innocence that applies in 
many processes on its head and unfairly burdens institutions without an 
adequate process to vindicate their claims.
    While many commenters emphasized that the proposed process tilts 
too favorably toward claimants, a few commenters asserted that it may 
not always fully protect the rights of adversely affected borrowers. 
Additionally, they noted that the Department's proposal removed not 
only the option of arbitration, but also the borrower's choice in the 
makeup of and the representation for the group. These commenters 
asserted that the rights of an individual claimant could be adversely 
affected because of some defect in a group claim that the Department 
interprets will cover the affected individual. They further stated that 
borrowers have no recourse to challenge the Department official's 
determination, who they allege will be acting under a set of obtuse and 
poorly defined rules, resulting in determinations benefitting borrowers 
who were not wronged and possibly denying relief to deserving 
claimants.
    Discussion: Schools will not be held liable for borrower defense 
claims until after an administrative proceeding that provides them due 
process. The Department already runs such proceedings in its Office of 
Hearings and Appeals on matters such as assessing a school's liability 
to the Department or limiting, suspending, or terminating a school's 
title IV participation.
    We disagree that moving a claimant from the individual process into 
the group process negatively impacts the borrower. In fact, we believe 
the borrower may receive a faster decision using the group process. 
Additionally, the borrower maintains the ability to request 
reconsideration if there is new evidence that was not previously 
considered. Finally, the borrower retains the right to ``opt-out'' of 
the group process.
    The Department will outline specific procedures, including other 
details requested by the commenters, in a separate procedural rule. We 
believe this is the most appropriate place for such detail.
    Changes: None.
    Comments: Many commenters expressed concerns relating to proposed 
Sec.  685.222(e)(3), which provides for a Department official to 
administer the individual borrower process. Many of these commenters 
were concerned that these officials would have too much authority in 
deciding what evidence to review and use in decision making. Some of 
these commenters also argued that giving the Department's official the 
sole discretion over disposition of the claims actually denies 
borrowers certain rights.
    Several commenters claimed that the Department official would be 
subject to political influence and not necessarily the unbiased, 
independent, and impartial party needed in this role.
    Discussion: Department officials make independent decisions daily 
regarding the merit of objections to loan enforcement raised by 
borrowers who default on their loans, and borrower defense would be no 
different. Department officials also make decisions regarding 
institutional liabilities to the Department and enforcement actions 
against institutions. These officials do so in accordance with 
established standards in the APA for such decisions made by 
administrative agencies, such as ensuring that decision makers do not 
report to individuals responsible for managing or protecting the funds 
of an agency.

[[Page 75960]]

    As discussed during negotiated rulemaking, the Department also 
plans to outline more specific details about the process for schools 
and borrowers in forthcoming procedural rules.
    Changes: None.
    Comments: Commenters argued that the Department's proposed 
structure in Sec.  685.222(e) places too much authority with the 
Department and its officials, creating a conflict of interest. These 
commenters had misgivings about designating an official who would have 
the ability to perform multiple functions, including adjudicating 
cases, creating groups from individual claims, as well as advocating on 
behalf of the group. Several commenters called for separation between 
the investigative and adjudicative functions.
    Many of these commenters expressed concern that the entire process 
created conditions that would inevitably lead to unfair treatment of 
schools. This argument is based on the hypothesis that the inherent 
conflicts in the proposed investigative and adjudication processes will 
result in a high number of vindicated claims and the cost associated 
with high levels of loan forgiveness will force the Department to seek 
indemnification from schools regardless of the legitimacy of the 
claims.
    Numerous commenters also expressed concerns that some of the 
Department officials hearing cases may not have the requisite 
experience to properly and dispassionately evaluate and decide these 
cases. Several commenters specifically offered alternatives to the 
Department's officials, including using independent hearing officials, 
administrative law judges, or a third party such as a member of the 
American Arbitration Association to decide cases. Some commenters 
specifically suggested this separation to ensure the decision maker 
would be more insolated form political pressures.
    One commenter also noted that the proposed rule does not provide 
for review of determinations by the Secretary, which specifically 
limits the Secretary's authority.
    Discussion: As we make clear elsewhere here, the Department will 
undertake any action to recover against a school under specific 
procedures that are being developed and will ensure an opportunity for 
the school to present its defenses and be heard. The process will be 
comparable to that provided under part 668, subpart G for actions to 
fine, or to limit, suspend or terminate participation of, a school, and 
under part 668, subpart H for audit and program review appeals. The 
hearing will be conducted by a Department official who is independent 
of the component of the Department bringing the action. This is 
currently done for appeals under subparts G and H, and like those 
procedures, the new procedures would include an opportunity for an 
appeal to the Secretary. Any final decision reached in these 
proceedings would be reviewable under section 706 of the APA, 5 U.S.C. 
706, as are final decisions under subparts G and H. The separation of 
functions under those subparts fully complies with the requirements 
that would apply under the APA, to which some commenters have alluded, 
and would be mirrored in the procedure used for recoveries against 
schools. However, neither the APA nor other applicable law requires the 
Department to provide an appeal from an administrative decision maker 
to the Secretary or other senior authority, and the decision of the 
official designated the authority to adjudicate individual claims is 
final agency action, similarly reviewable in an action brought under 
section 706 of the APA. The Department has conducted a great number of 
such individual adjudications of borrower objections to Federal payment 
offset and wage garnishment over the past decades, and neither those 
procedures, nor those used for Federal salary offset, include any 
provision for an appeal from the decision of the designated official to 
the Secretary. 34 CFR 30.33, 34 CFR part 31, 34 CFR part 34.
    Changes: None.
    Comments: One commenter expressed support for restricting borrowers 
from receiving relief where relief was already granted for the same 
complaint through a separate source. Conversely, another commenter 
requested additional legal recourse to collect damages beyond the 
borrower defense to repayment process.
    Discussion: The individual application process in Sec.  
685.222(e)(1)(i)(C) requires the borrower to inform the Department of 
any other claim based on the same information and any payments or 
credits received resulting from such a claim. The NPRM included 
performance bond holders and tuition recovery programs as examples of 
sources of these payments or credits. The statutory authority in 
section 455(h) of the HEA provides for defense to repayment of a Direct 
Loan. The Department's ability to provide relief for borrowers is 
predicated upon the existence of the borrower's Direct Loan, and that 
relief is limited to the extent of the Department's authority to take 
action on such a loan. By providing relief appropriate to the 
borrower's loss, and based on the amount borrowed, the Department would 
provide relief under the relevant statutory authority. A borrower may 
pursue the payment of other damages for costs not covered by the Direct 
Loan in court or via other available avenues without restriction.
    Changes: None.
    Comments: Several commenters expressed concern for frivolous, 
false, exaggerated, or politically driven claims and the accompanying 
administrative burden and cost this process will place on institutions 
and the Department. Commenters suggested a firm statute of limitations 
for filing claims, increasing the burden of proof for the student, 
limiting opportunities to reopen cases, and a prominently stated 
penalty for filing false claims on the application form to prevent 
false or exaggerated claims.
    Discussion: We believe the commenters' suggestions, though well 
intentioned, would do little to reduce any potential frivolous claims. 
As outlined earlier, we believe we have established a strong position 
for the limitations periods and the burden of proof in these 
regulations.
    Additionally, an individual borrower may only request 
reconsideration of an application when he or she introduces new 
information not previously considered. The borrower defense application 
form includes a certification statement that the borrower must sign 
indicating that the information contained on the application is true 
and that making false or misleading statements subjects the borrower to 
penalties of perjury. We believe these protections against false or 
frivolous claims are sufficient.
    Changes: None.
    Comments: Several commenters and groups of commenters contended 
that the Department should provide equal relief to Direct Loan and FFEL 
borrowers. These commenters objected to the Department's proposed 
process in Sec.  685.206, which would require FFEL borrowers who want 
to apply for a borrower defense to consolidate their FFEL Loans into 
the Direct Consolidation Loans. These commenters noted that over 40 
percent of borrowers with outstanding Federal loans have FFEL Loans and 
conveyed that borrowers were typically not able to choose among Federal 
loan programs. One commenter noted the inequities pertain not only to 
borrowers, but also to schools. Institutions with significant FFEL 
volume face reduced risk of Department efforts to recover funds. One 
commenter specifically indicated that requiring FFEL borrowers to 
consolidate obliterates the use of the group process because FFEL 
borrowers

[[Page 75961]]

cannot be automatically included in the group without further action on 
their part.
    These commenters also noted inequities in relief for FFEL 
borrowers, which includes no mechanism to seek refund of amounts 
already paid by the borrower. Thus, the commenters asked the Department 
to stop all collection activities upon receipt of a FFEL borrower's 
application to at least reduce the amount the borrower pays on the 
loan. Additionally, these commenters requested that the Department 
apply forbearance to FFEL borrowers in the same manner as with Direct 
Loan borrowers.
    While expressing a strong preference for identical treatment of 
Direct Loan and FFEL borrowers, one commenter also recognized that this 
might not be possible, and suggested that the Department could lessen 
the imbalance by specifying that a referral relationship existed 
between lenders and institutions when a large number of borrowers at a 
school had the same lender. Another commenter suggested that the 
Department make findings of groups of borrowers entitled to discharge 
of their loans and require FFEL lenders to comply with them.
    One commenter articulated that the Department could take additional 
steps to assist FFEL borrowers in multiple ways. First, the commenter 
suggested that the Department could compel a lender or guaranty agency 
to discharge a loan. This commenter further suggested that borrowers 
who dispute a FFEL Loan who are denied can appeal a lender or guaranty 
agency's decision to the Secretary, giving the Department final 
authority in each case. Finally, the commenter indicated that the 
Department could move groups of loans under the Department's 
responsibility as it would in cases where a guaranty agency closes. The 
commenter claimed that the Department previously took such action for 
false certification and closed school discharges.
    Discussion: We seek to provide an effective process for all 
borrowers within the Department's ability under applicable laws and 
regulations.
    Current regulations do not require a FFEL lender to grant 
forbearance under these circumstances except with regard to a FFEL 
borrower who seeks to pay off that FFEL Loan with a Consolidation Loan, 
and that requirement provides a time-limited option. 34 CFR 
682.211(f)(11). Because the Secretary has designated that section of 
the final regulations for early implementation, lenders may implement 
this provision before it becomes a requirement on July 1, 2017. Thus, 
when these borrower defense regulations take effect on July 1, 2017, 
FFEL Program lenders must grant administrative forbearance when the 
Department makes a request on behalf of a borrower defense claimant, 
pursuant to Sec.  682.211(i)(7).
    We also do not believe we have adequate data to identify those 
lenders and schools that established a referral relationship.
    We believe we have outlined the best possible path to relief for 
the remaining FFEL borrowers within our legal abilities. We appreciate 
the commenters' suggestions for other ways to assist FFEL borrowers in 
pursuing borrower defenses, but do not believe those suggestions are 
practicable. We recognize that this process requires additional steps 
for FFEL borrowers. To mitigate this, as described in the preamble to 
the NPRM, we will provide FFEL borrowers with a preliminary 
determination as to whether they would be eligible for relief on their 
borrower defense claims under the Direct Loan regulations, were they to 
consolidate their FFEL Loans into a Direct Consolidation Loan. FFEL 
borrowers may receive such a determination without having to establish 
a referral relationship between the lender of the underlying FFEL 
Program Loan and the school. The notice of preliminary determination 
will provide information on the Loan Consolidation process and 
instructions on how to begin the process. As described in Sec.  
685.212(k), after the borrower consolidates into the Direct Loan 
program, he or she may receive an appropriate amount of relief on the 
principal balance.
    Changes: None.

Process for Individual Borrowers (Sec.  685.222(e))

    Comments: Multiple commenters and groups of commenters suggested 
that the Department unfairly limited the rights of institutions and 
exceeded its authority to recoup funds resulting from borrower defense 
claims. They noted that they believe that the HEA grants no such 
authority. Moreover, these commenters pointed out the difference 
between such silence and the specific authority in the HEA regarding 
closed school discharges, false certification discharges, and regarding 
Perkins Loans.
    The same commenters who asserted that the Department exceeded its 
authority with recoupment of successful borrower defense claims stated 
that the Department should outline the details of its process if it 
proves it has such authority. Several commenters requested more 
information about the recovery process from schools, focusing on the 
institution's involvement in the process. Furthermore, some commenters 
requested a specific appeal process for attempts to recover funds from 
schools.
    Discussion: As discussed more fully elsewhere in this preamble, the 
Department has ample legal authority to recover losses on borrower 
defenses from schools, and the absence of explicit statutory provision 
authorizing such recovery does not affect its authority. We are 
developing specific procedures for conducting such recovery actions 
that will reflect current regulations for appeals of audit and program 
review claims and actions to fine the school, or to limit, suspend, or 
terminate its participation.
    Changes: None.
    Comments: Multiple groups of commenters supported the preponderance 
of evidence standard in the Department's individual process proposed in 
Sec.  685.222(e) and appreciated that borrowers would not need legal 
counsel to pursue a borrower defense. Multiple commenters also 
commented on the desire that the process not penalize borrowers for the 
absence of written documentation. They noted that many borrowers may 
not have items such as enrollment agreements or other items that might 
assist the Department in reviewing their claims. The commenters added 
that this should not be held against the borrowers, as schools 
frequently do not provide borrowers with copies of such documents, and 
borrowers may encounter difficulties in obtaining them.
    One commenter suggested that, when documents are not available 
because of the school's failure to provide the borrower with proper 
documentation, the burden should shift to the school to disprove the 
claims from the borrower's attestation.
    Another commenter suggested that the Department specify that it 
will accept a student's sworn testimony, absent independent 
corroborating evidence contradicting it, as fulfilling the 
preponderance of the evidence standard (which requires the borrower to 
persuade the decision maker that it is more likely than not that events 
happened or did not happen as claimed). In other words, the commenter 
suggested that, when a borrower submits sworn testimony but does not 
submit corroborating evidence, the Department should not take this to 
mean that there was no substantial misrepresentation or breach of 
contract. Another group of commenters suggested that the Department 
track similar claims and consider those claims as evidence when 
reviewing applications.

[[Page 75962]]

    Another group of commenters recommended that the Department accept 
information on the application form as sufficient for the claim, 
requesting additional information only when necessary. This group of 
commenters pointed out that misrepresentations were often from oral 
statements made to the borrower that did not include any written 
evidence. Furthermore, this group of commenters requested that the 
Department fully use all available information it and other Federal 
agencies possess, rather than requesting it from borrowers.
    Discussion: We disagree that the final regulations should specify 
what weight might be given to different types of evidence, such as 
borrower testimony or statements, under the preponderance of the 
evidence standard specified in Sec.  685.222(a)(2) for borrower 
defenses under the Federal standard for loans first disbursed after 
July 1, 2017. Under Sec.  685.222(a)(2), the borrower has the burden of 
demonstrating, by a preponderance of the evidence, that it is more 
likely than not that the facts on which his or her borrower defense 
claim rests have been met. However, Sec.  685.222(e)(3) provides that 
for individually filed borrower defense applications, the designated 
Department official will also consider other information as part of his 
or her review of the borrower's claim. As noted in the NPRM, 81 FR 
39337, in practice, the decision maker in a borrower defense proceeding 
would assess the value, or weight, of all of the evidence relating to 
the borrower's claim that has been produced to prove that the borrower 
defense claim as alleged is true. The kind of evidence that may satisfy 
this burden will necessarily depend on the facts and circumstances of 
each case, including factors such as whether the claimant's assertions 
are corroborated by other evidence. Accordingly, we decline to 
elaborate further on what specific types of evidence may or may not be 
viewed as satisfying the preponderance of evidence standard.
    Changes: None.
    Comments: Several groups of commenters encouraged the Department to 
adopt a simple, accessible, and transparent process for borrowers. 
These commenters indicated support for a process that reduces 
inequities in resources so that borrowers interact only with the 
Department, even when additional information is needed from the school. 
In particular, numerous commenters expressed appreciation that, under 
the proposed regulations, borrowers would not be pitted against 
institutions, which generally possess significantly more resources.
    While generally supportive of the Department's process, another 
group of commenters expressed concern for the potentially overwhelming 
number of applications that would be filed in connection with potential 
borrower defense claims and questioned the Department's capacity to 
employ enough capable staff to handle the large workload. The same 
group noted the benefits of specifying timeframes for actions within 
the process, despite recognizing the difficulty in doing so.
    Discussion: With these regulations, the Department works toward 
evening the playing field for students. Individual claims will be 
decided in a non-adversarial process managed by a Department official, 
and group claims would be brought by the Department against the school, 
not by students. Thus, the process does not require students to 
directly oppose schools. We appreciate the support that some commenters 
expressed for these processes.
    As we discussed in the NPRM, the Department may incur 
administrative costs and may need to reallocate resources depending on 
the volume of applications and whether a hearing is required.
    After having received only a few borrower defense claims in over 20 
years, the Department has now received more than 80,000 claims in just 
over two years. We responded by building an entirely new process and 
hiring a new team to resolve these claims. Our ability to resolve 
claims quickly and efficiently has grown and will continue to grow. 
Particularly because we are still growing our capacity, we are unable 
to establish specific timeframes at this point for processing claims. 
Additionally, processing time is considerably affected by the varied 
types and complexities of claims.
    Changes: None.
    Comments: One group of commenters strongly supported the 
Department's pledge to provide written determinations to borrowers who 
submit borrower defense claims.
    Discussion: We appreciate the support of these commenters.
    Changes: None.
    Comments: Another group of commenters noted the difficulty that 
many borrowers face in completing even seemingly simple forms and in 
explaining wrongdoing in a way that clearly makes a complex legal 
argument.
    Discussion: We appreciate the commenters' concern and do not expect 
borrowers to submit a complicated, lengthy narrative requiring any 
legal analysis by the borrower to apply for relief. We specifically set 
out to design a process that would not be onerous for borrowers and 
that would not require third-party assistance, such as but not limited 
to an attorney.
    Changes: None.
    Comments: Two commenters suggested using existing school complaint 
processes to resolve borrower defense claims prior to a Department 
review to reduce administrative burden on the Department and on 
institutions.
    Discussion: Nothing in these regulations prohibits a borrower from 
directly contacting an institution to resolve a complaint. 
Additionally, a borrower may pursue other paths to relief, such as 
filing a claim with a State consumer bureau or filing a lawsuit. 
However, at the point where a borrower approaches the Department for 
assistance, we take seriously the obligation to review the claim and to 
respond to the borrower. We believe this process provides the best 
avenue for relief when a borrower applies for a borrower defense claim. 
In addition to using data collected from the Department's ``FSA 
Feedback System,'' the Department will also continue to partner with 
other Federal agencies that are engaged in the important work aimed of 
protecting the rights of students. Depending on the specifics of the 
case, these agencies may include the CFPB, DOJ, FTC, the SEC, and the 
Department of Defense among others. The Department will also look to 
State officials and agencies responsible for education quality, student 
financial assistance, law enforcement, civil rights, and consumer 
protection.
    Changes: None.
    Comments: Multiple commenters expressed support for the proposed 
prohibition on capitalization of interest when the Department suspends 
collection activity following receipt of a borrower defense 
application. However, one of these commenters objected to the 
Department prohibiting interest capitalization when collection resumes 
as a result of the borrower's failure to submit appropriate 
documentation. The commenter believed this could lead to false claims 
by borrowers seeking to avoid repayment.
    Discussion: We appreciate the commenters' support for the 
prohibition of interest capitalization and believe it is in line with 
our concept of the appropriate use of capitalization, as the borrower 
is not newly entering repayment. Accordingly, we disagree with the 
commenter who objected to prohibiting capitalization upon resumption of 
collection activity where a borrower did not submit appropriate 
documentation. We believe more legitimate avenues exist for struggling

[[Page 75963]]

borrowers to postpone or reduce payment rather than filing false 
borrower defense claims, and do not believe that the prohibition of 
interest capitalization in this narrow circumstance provides 
significant incentive for borrowers to incur the significant risks 
associated with filing false claims.
    Changes: None.
    Comments: One group of commenters noted the importance of 
reconsideration of borrower defense claims, especially for borrowers 
completing applications without assistance. This group, however, 
encouraged the Department to clearly explain the borrower's right to 
reconsideration, rather than merely allowing borrowers to request 
reconsideration with the Department having discretion on whether to 
consider the application.
    Multiple commenters and groups of commenters expressed concern with 
the borrower's ability to introduce new evidence for reconsideration in 
proposed Sec.  685.222(e)(5). Specifically, these commenters noted 
concerns that individual claims could continue indefinitely. These 
commenters indicated that the Department should include reasonable time 
limitations for reconsideration of claims.
    Another commenter suggested that the Department official who made 
the determination of the original claim should not be permitted to 
review a request for reconsideration and suggested using a panel or 
board for such claims.
    Discussion: We highlight the distinction between reconsideration of 
an application and an appeal process. A borrower must submit new 
evidence in order for the Department to reconsider an application, and 
there is no appeal process. We believe it is important to allow a 
borrower to submit new evidence, which he or she may have only recently 
acquired. We do not intend to limit borrowers' rights. However, there 
needs to be finality in the borrower defense process as well, and we do 
not believe it is appropriate to consider applications regarding claims 
that have already been decided unless there is clear demonstration that 
new evidence warrants that reconsideration. We will consider the 
commenters' suggestions regarding the explanation of the 
reconsideration process in our communications with borrowers.
    We believe the limitations periods for borrower defense claims 
adequately address the concern about time limits and do not agree with 
imposing an artificial limitation on borrower applications for 
reconsideration for new evidence based on a specific number or time 
period.
    We see no basis for requiring this evaluation of new evidence to be 
made by an individual other than the original decision maker. This is a 
reconsideration, not an appeal, and the original decision maker is in a 
position to efficiently make that decision.\31\ Therefore, we do not 
prohibit the same official from hearing the reconsideration claim.
---------------------------------------------------------------------------

    \31\ This is hardly unusual: Under Social Security regulations, 
the hearing officer who conducts the disability hearing ordinarily 
conducts the reconsideration determination. 20 CFR 404.917(a). In 
addition, requests for relief from judgments--a somewhat comparable 
plea to the request for reconsideration at issue here are routinely 
considered by the judge that issued the original decision. Fed. R. 
Civ. P. 60.
---------------------------------------------------------------------------

    Changes: None.
    Comments: One commenter asked that we restrict a borrower's ability 
to present new evidence in support of a claim already rejected. The 
commenter said that borrowers should be required to show good cause for 
why the evidence was not previously available.
    Discussion: We disagree that borrowers should be required to show 
good cause for why evidence was not previously available. We recognize 
that borrowers may not have the same access to information that the 
Department or the school may have. Furthermore, we believe that the 
requirements for ``new evidence'' provide clear guidelines for what is 
required. Section 685.222(e)(5)(i) specifies that ``new evidence'' must 
be evidence that the borrower did not previously provide, but also must 
be relevant to the borrower's claim, and was not identified by the 
decision-maker as being relied upon for the final decision. For ``new 
evidence'' to meet this standard, the evidence cannot just be 
cumulative of other evidence in the record at the time, but must also 
be relevant and probative evidence that might change the outcome of the 
decision being reconsidered.
    Changes: None.
    Comments: Multiple commenters suggested that the Department 
specifically permit schools to appeal decisions on any individual 
claim. One commenter added that schools would not file frivolous 
appeals, as the resulting workload is too time-consuming. The commenter 
further suggested that if schools are not provided with an appeal 
process, that the Department should provide schools with an opportunity 
to challenge the Department official's decision during any related 
recoupment action.
    Discussion: We do not include an appeals procedure in the 
individual borrower claim process. We believe the reconsideration 
process adequately allows borrowers to submit new evidence. However, as 
one commenter requested, the regulations do afford an opportunity to 
present a defense when the Department seeks to hold a school liable and 
recover funds in both the individual and group claim processes.
    Changes: None.
    Comments: Although the Department outlined a separate process to 
recover funds from an institution, a group of commenters stated that 
the Department needed to include the borrower to ensure a fair process 
for the institution.
    Discussion: We believe that using a separate proceeding to 
determine whether a group of borrowers have meritorious claims, and if 
so, to recover from the school for losses on those claims, is an 
appropriate method to achieve a fair result. The procedure will accord 
the institution the right to confront witnesses on whom the Department 
would rely, and to call witnesses on its own, as it currently has under 
procedures under subpart G of part 668. We also note that under Sec.  
685.222(j), borrowers are required to reasonably cooperate with the 
Secretary in any such separate proceeding.
    Changes: None.
    Comments: One commenter suggested that borrowers should not be 
permitted to bring individual claims when the facts and circumstances 
have already been considered by hearing official in a group claim. The 
commenter expressed concern that proposed Sec.  685.222(h) would allow 
for this to happen, effectively providing borrowers a second bite at 
the apple and violating the legal principle of res judicata.
    Discussion: We discuss the treatment of individual claims from a 
student who opted out of a group proceeding, or who disputes the 
outcome of the group proceeding decision as it pertains to his or her 
claim, in our discussion of the group process.
    Changes: None.
    Comments: A group of commenters suggested that the Department 
modify language in proposed Sec.  685.222(e)(1)(i)(A) so that 
references to the school more clearly emphasize that we mean the school 
named on the borrower defense to repayment application.
    Discussion: We agree that the commenter's suggested change 
clarifies the intent of the regulation.
    Changes: We revised Sec.  685.222(e)(1)(i)(A) to reference ``the'' 
named school.
    Comments: One commenter suggested that the Department make 
available on an annual basis a list of all borrower

[[Page 75964]]

defense applications submitted (minus any personally identifiable 
information) along with outcome of the request. The goal of this list 
would be to provide transparent information to borrowers.
    Discussion: We support transparency in this process and will 
consider this suggestion as we move forward with implementation of the 
individual and group processes.
    Changes: None.
    Comments: One commenter suggested that the Department proactively 
conduct a review of all federally guaranteed loans back to 1995 (when 
the commenter considers the regulations to have been last considered) 
to determine potentially eligible loans for a defense to repayment. The 
commenter recommended that the Department identify loans for which 
there is a high likelihood of granting a discharge stemming from 
lawsuits, investigations, etc.
    Discussion: We do not believe that the Department possesses 
adequate information to accurately identify potentially eligible loans 
on such a large scale. As borrowers have had the ability to bring 
borrower defense claims under the current regulations for some time, we 
do not believe a review of data over more than 20 years is warranted. 
Additionally, the Department cannot determine through such a review 
whether specific students were subjected to misrepresentation, for 
example, whether they relied on such misrepresentations, and how they 
were affected if they did so. The Department must determine if relief 
is warranted, and merely obtaining a loan to attend an institution is 
not adequate to suggest relief is due.
    Changes: None.
    Comments: None.
    Discussion: In further reviewing proposed Sec.  685.222(e)(3)(ii), 
we have determined that including an affirmative duty upon the 
Department to identify to the borrower records that may be relevant to 
the borrower's borrower defense claim is too burdensome because it 
would require the expenditure of administrative resources and time, 
even if not desired by the borrower. As a result, we have revised the 
Sec.  685.222(e)(3)(ii) to provide that the Department will identify 
records upon the borrower's request.
    We note that we expect that consideration of individual borrower 
defense claims will lead to information gathering as part of 
enforcement investigations. When such an investigation is ongoing, we 
may defer release of records obtained in that investigation to 
individual claimants to protect the integrity of the investigation. If 
requested, records will be made available to individual claimants after 
the investigation is complete and prior to the borrower defense 
decision. We may defer consideration of individual claims where we 
determine that releasing potentially relevant records prior to the 
completion of the investigation would be undesirable.
    We have also determined that the parallel identification of records 
to schools, which under the proposed regulations was permissive, would 
also cause unnecessary administrative delay, given that the fact-
finding process described in Sec.  685.222(e) will not decide any 
amounts schools must pay the Secretary for losses due to the borrower 
defense at issue. The school will have the right and opportunity to 
obtain such evidence, and present evidence and arguments, in the 
separate proceeding initiated by the Secretary under Sec.  
685.222(e)(7) to collect the amount of relief resulting from the 
individually filed borrower defense claim.
    Changes: We have revised Sec.  685.222(e)(3)(ii) to provide that 
the designated Department official will identify to the borrower the 
records the Department official considers relevant to the borrower 
defense upon request. We have also revised Sec.  685.222(e)(3)(ii) to 
remove the identification of records to schools.
    Comments: One commenter expressed support for the Department's 
proposal to allow claims made by individuals as well as groups. 
However, the commenter suggested that a right of appeal for both 
institutions and borrowers be provided in the individual claims process 
as to open schools.
    Discussion: During the negotiated rulemaking sessions, the 
Department heard from negotiators as to the importance of a timely and 
streamlined process for borrower defense claims. In consideration of 
such concerns, the Department believes that it is appropriate that 
decisions made by the designated Department official presiding over the 
fact-finding process for individually filed applications be final 
agency decisions to avoid delays that may be caused by an appeals 
process. Borrowers are able to seek judicial review of final agency 
decisions in Federal court if desired. See 5 U.S.C. 702 & 704. 
Additionally, the borrower will also be able to request that the 
Secretary reconsider his or her claim upon the identification of new 
evidence under Sec.  685.222(e)(5).
    Although the fact-finding process described in Sec.  685.222(e) 
provides schools with an opportunity to submit information and a 
response, as discussed in the NPRM, 81 FR 39347, the fact-finding 
process for individually filed applications do not determine the merits 
of any resulting claim by the Department for recovery from the school. 
Rather, Sec.  685.222(e)(7) provides that the Secretary may bring a 
separate proceeding for recovery, in which the school will be afforded 
due process similar to what schools receive in the Department's other 
administrative adjudications for schools. Given that the institution's 
potential liability for the Department's recovery is to be adjudicated 
in this separate process, the Department does not believe that an 
appeal right for schools should be included in the Sec.  685.222(e) 
fact-finding process. As discussed earlier in this section, the 
Department is developing rules of agency practice and procedure for 
borrower defenses that will be informed by the Department's rules and 
protections for its other administrative adjudications.
    Changes: None.
    Comments: None.
    Discussion: In further reviewing proposed Sec.  685.222(e)(5), the 
Department has determined that if a borrower defense application is 
under review because a request for reconsideration by the Secretary has 
been granted under Sec.  685.222(e)(5)(i) or because a borrower defense 
application has been reopened by the Secretary under Sec.  
685.222(e)(5)(ii), the borrower should be granted forbearance or, if 
the borrower is in default on the loan at issue, then the procedure for 
a defaulted loan should be followed, as when the borrower filed an 
initial borrower defense to repayment application.
    Changes: We have revised Sec.  685.222(e)(5) to provide that the 
forbearance and defaulted loan procedures will be followed when the 
Secretary has granted a request for reconsideration or has reopened a 
borrower defense application.

Group Process for Borrower Defenses

Statutory Authority

    Comments: Some commenters argued that the Department's proposed 
group borrower defense process would violate the HEA. These commenters 
stated that section 455(h) of the HEA specifically limits the 
Department's authority to specifying acts or omissions that an 
individual borrower, as opposed to a group, may assert as a defense to 
repayment. These commenters argued that the creation of a process that 
would award relief to a borrower who has not asserted a defense to 
repayment exceeds the Department's statutory authority. A few 
commenters also stated that the HEA does not authorize the Department

[[Page 75965]]

to act as a class action attorney, and stated that such authority 
requires specific statutory authorization. One commenter suggested that 
any provision providing that the Secretary may identify borrowers who 
have not filed a borrower defense application as part of a group 
process for borrower defense should be removed.
    One commenter stated a recent recommendation from the 
Administrative Conference of the United States found that, while the 
APA does not specifically provide for aggregate adjudication, it does 
not foreclose the possibility of such procedures. The recommendation 
also stated that agencies generally have broad discretion in formal and 
informal adjudications to aggregate claims.
    Discussion: We disagree with commenters' assertion that the 
proposed group process is in violation of the HEA. The Department's 
statutory authority to enact borrower defense regulations is derived 
from section 455(h) of the HEA, 20 U.S.C. 1087e(h), which states that 
``the Secretary shall specify in regulations which acts or omissions of 
an institution of higher education a borrower may assert as a defense 
to repayment of a loan. . . .'' While the language of the statute 
refers to a borrower in the singular, it is common default rule of 
statutory interpretation that a term includes both the singular and the 
plural, absent a contrary indication in the statute. See 1 U.S.C. 1. We 
believe that, in giving the Secretary the discretion to ``specify which 
acts or omissions'' may be asserted as a defense to repayment of loan, 
Congress also gave the Department the authority to determine such 
subordinate questions of procedure, such as the scope of what acts or 
omissions alleged by borrowers meet the Department's requirements, how 
such claims by borrowers should be determined, and whether such claims 
should be heard contemporaneously as a group or successively, as well 
as other procedural issues. See FCC v. Pottsville Broad. Co., 309 U.S. 
134, 138 (1940).
    We believe that this discretion afforded the Secretary under the 
statute not only allows it to determine borrower defense claims on a 
group basis and to establish such processes and procedures, but also 
authorizes the Department to proactively identify and contact borrowers 
who may qualify for relief under the borrower defense regulations based 
upon information in its possession. As described in Sec.  685.222(f), 
the Department would notify such borrowers of the opportunity to 
participate in the group process, and inform such borrowers that by 
opting out, the borrower may choose to not assert a borrower defense. 
By such notice and opt-out, borrowers who had not previously filed an 
application for borrower relief may assert a borrower defense for 
resolution in the group borrower defense process.
    In response to comments that the Department is not authorized to 
act as a class action attorney, we note that, in bringing cases before 
a hearing official in the processes described in Sec.  685.222(f), (g), 
and (h), the Department would not be bringing claims as the 
representative of the borrowers. Although the Department would be 
presenting borrower defense claims for borrowers, with their consent as 
described above, the Department official would be bringing claims on 
its own behalf as the administrator of the Direct Loan Program, or 
alternatively as a beneficiary of the fiduciary relationship between 
the school and the Department as explained earlier in ``Borrower 
Defenses--General.'' See also Chauffeur's Training School v. Spellings, 
478 F.3d 117 (2d Cir. 2007). We believe that the group process we adopt 
here will facilitate the efficient and timely adjudication of not only 
borrower defense claims for large numbers of borrowers with common 
facts and claims, but will also conserve the Department's 
administrative resources by also adjudicating any contingent claim the 
Department may have for recovery from an institution.
    Changes: None.

Independence of Hearing Officials

    Comments: Many commenters expressed concerns that the group 
borrower defense process would present conflict of interest or 
separation of powers issues and would be unfair, given that the 
proposed process involves a Department-designated employee presenting 
evidence to a hearing official who also has been appointed by the 
Secretary, with appeals to be decided by the Secretary. Several 
commenters stated that this issue was of particular concern, given the 
limited or unclear role afforded to institutions to participate in the 
borrower defense process and to appeal decisions proposed by the 
Department. One commenter acknowledged that while other Federal 
agencies, such as the FTC, allow agencies to act as both prosecutor and 
judge, such proceedings are governed by the APA, 5 U.S.C. 554. The 
commenter stated that the APA provides statutory safeguards that ensure 
fair proceedings, such as prohibitions on ex parte communications and 
prosecutorial supervision of the employee presiding over the 
proceeding. This commenter suggested that group borrower defense claims 
be presided over by the Department's Office of Hearings and Appeals.
    One commenter stated that determinations in the group process 
should be made by a representative who is not affiliated with the 
Department. Another commenter stated that the office responsible for 
presenting the claim on behalf of a group in a group borrower defense 
proceeding should not be the same office that decides the group claim. 
Several commenters suggested specifically that determinations be made 
by administrative law judges or their equivalent, who have a level of 
expertise and independence from the Department. One commenter stated 
that the regulations should provide for determinations in group 
borrower defense processes to be made by an administrative judge.
    One commenter stated that the Department should seek and use 
independent hearing officials with experience in handling complex 
disputes, given the large numbers of students that may be impacted by 
such proceedings.
    One commenter stated that the Department's proposed group borrower 
defense process violates both the separation of powers doctrine in 
Article III and the jury trial requirement of the Seventh Amendment of 
the Constitution, by vesting in the Department exclusive judicial power 
to determine private causes of action without a jury.
    Discussion: The Department understands the concerns raised by 
commenters regarding the objectivity and independence of the hearing 
official in group borrower defense cases. However, administrative 
agencies commonly combine both investigatory and adjudicative 
functions, see Winthrow v. Larkin, 421 U.S. 35 (1975), and due process 
does not require a strict adherence to the separation of those 
functions, see Hortonville Joint School District No. 1 v. Hortonville 
Educ. Ass'n., 426 U.S. 482, 493 (1976). The Department is no different 
and performs both investigative and adjudicative functions in other 
contexts, including

[[Page 75966]]

those that involve borrower debts \32\ and institutional 
liabilities.\33\
---------------------------------------------------------------------------

    \32\ For example, the Department provides both schools and 
borrowers the opportunity to request and obtain an oral evidentiary 
hearing in both offset and garnishment actions against a borrower 
and in an offset action against a school. See 34 CFR 30.25 
(administrative offset generally); 34 CFR 30.33 (federal payment 
offset); 34 CFR 34.9 (administrative wage garnishment).
    \33\ See 34 CFR part 668, subparts G and H (proceedings for 
limitation, suspension, termination and fines, and appeal procedures 
for audit determinations and program review determinations).
---------------------------------------------------------------------------

    We disagree that the regulations should specify that the hearing 
official presiding over the fact-finding processes in Sec.  685.222(f) 
to (h) must be an administrative law judge or an administrative judge. 
As explained in the NPRM, 81 FR 39340, the Department uses the term 
``hearing official'' in its other regulations, such as those at 34 CFR 
part 668, subparts G and H. In those contexts, hearing officials make 
decisions and determinations independent of the Department employees 
initiating and presenting evidence and arguments in such proceedings. 
Similarly, the Department would structure the group borrower defense 
fact-finding processes so that they are presided over by hearing 
officials that are independent of the employees performing 
investigative and prosecutorial functions for the Department.
    As stated in the NPRM, 81 FR 39349, the group borrower defense 
process involving an open school \34\ under Sec.  685.222(h) would be 
structured to provide the substantive and procedural due process 
protections both borrowers and the school are entitled to under 
applicable law, including any required under the APA, 5 U.S.C. 554. The 
Department is developing rules of agency procedure and practice 
governing the fact-finding processes described in both Sec.  685.222(e) 
and Sec.  685.222(f) to (h), which will be informed by the procedures 
and protections established by the Department in its other 
administrative proceedings, such as 34 CFR part 668, subparts G and H.
---------------------------------------------------------------------------

    \34\ As described in Sec.  668.222(g), the ``closed school'' 
group borrower defense process would apply only when the school in 
question has both closed and provided no financial protection 
available to the Secretary from which to recover losses arising from 
borrower defenses, and for which there is no entity from which the 
Secretary may recover such losses. Or, in other words, when there is 
no entity from whom the Department may obtain a recovery.
---------------------------------------------------------------------------

    As explained under ``General,'' we also disagree that the proposed 
regulations violate Article III and the Seventh Amendment of the 
Constitution. The rights at issue in the proposed borrower defense 
proceedings have the character of public rights, which may be consigned 
by Congress to the Department for adjudication.
    Changes: None.

Single Fact-Finding Process

    Comments: One commenter stated that the Department's proposed 
single fact-finding process for group claims described in Sec.  
685.222(f) to (h), where a hearing official makes determinations as to 
both institutional liability and relief for borrower defense claims, is 
not justified. This commenter stated that the Department had not 
presented a factual basis for the change from the approach in Sec.  
685.206(c), which states that the Department may initiate a proceeding 
to require the school to pay the amount of the loan to which a 
successful borrower defense lies.
    A group of commenters stated that the Department should not engage 
in a single fact-finding process for group claims. These commenters 
suggested that the Department should gather and consider evidence 
regarding borrower defenses, render a decision on borrower relief, and 
then initiate a separate proceeding for recovery from schools. The 
commenters stated that this approach would be similar to the 
Department's proceedings for group borrower defense claims against 
closed schools and for individually filed applications, as well as the 
Department's proposed processes for closed school and false 
certification discharges.
    Discussion: We disagree with commenters that relief for borrower 
defense claims should be determined in a separate proceeding from the 
Department's right to recovery from schools for the open school group 
borrower defense process described in Sec.  685.222(h). For borrower 
defenses asserted as to an open school, the Department is not only 
responsible for making determinations on relief for claims, but may 
also be entitled to recover against the school. This right to recover, 
which will also turn on the facts of the borrower defense claim, must 
be decided in a proceeding where the school is afforded procedural and 
substantive due process protections. Particularly in situations where 
the Department has determined that there are multiple claims against a 
school with common facts and claims, we believe that a single fact-
finding proceeding to determine both borrowers' rights to relief, the 
amount of relief to be provided, and the Department's contingent right 
of recovery against an institution will better serve the interests of 
adjudicative efficiency and of conserving agency resources than 
individual borrower defense determinations followed by separate 
proceedings against the school.
    Changes: None.

Group Process: Bifurcation

    Comments: One commenter suggested that the Department use a 
bifurcated process so that the group process is used to resolve comment 
questions of fact and law, and then require borrowers in the putative 
group to file individual claims to determine the appropriate amount of 
relief. Such bifurcated proceedings, argued the commenter, would avoid 
windfalls to borrowers who would not have otherwise sought out relief 
and provide exact damages to students seeking relief.
    Discussion: Section 685.222(f)(1) provides the Department with the 
discretion to form groups that may be composed only of borrowers who 
have filed applications through the process in Sec.  685.222(e) or who 
the Department has identified from other sources, as well as groups 
that may include borrowers with common facts and claims who have not 
filed applications. In situations when groups may be composed only of 
borrower defense applicants, or if the hearing official determines that 
relief for a group with non-applicants can be ascertained without more 
individualized evidence, bifurcated proceedings may not be necessary or 
suitable. However, we believe that the regulations do not prevent a 
hearing official from using his or her discretion to structure a fact-
finding process under Sec.  685.222(g) or (h) as necessary based upon 
the circumstances of each group case, and including ordering a 
bifurcated process if appropriate.
    Changes: None.

Meet and Confer Prior to Initiation of Group Process

    Comments: Several commenters suggested the Department require or 
allow borrowers to confer with institutions to allow schools to remedy 
claims, prior to a borrower's participation in the Department's 
borrower defense process.
    Discussion: We acknowledge that borrowers and schools may 
communicate and confer outside of the formal processes established for 
borrower defense. However, we do not believe it is necessary that the 
regulations include a specific requirement for schools and borrowers to 
meet and confer prior to a borrower's participation in a group borrower 
defense process under Sec.  685.222(f) to (h).
    Changes: None.

[[Page 75967]]

Initiation of Group Process: Secretarial Discretion

    Comments: Many commenters supported the inclusion of a group 
borrower defense process. However, these commenters objected to the 
Department's proposal in Sec.  685.222(f) that the initiation of a 
group borrower defense process be at the discretion of the Secretary. 
Some commenters argued that the discretion to initiate a group borrower 
defense process should not be given to the Secretary, whose decision 
may be influenced by policy or political considerations. These 
commenters also objected to the Department's proposal that the decision 
to initiate a group process would consider fiscal impact as a possible 
factor for consideration, stating that the decision to grant relief to 
large numbers of students should not be based upon cost.
    Other commenters stated that the Department should provide clear 
guidelines, triggers, or conditions for requiring the initiation of a 
group process, particularly for groups of borrowers who have not filed 
applications with the Department (also referred to as automatic group 
discharges). A group of commenters suggested that such conditions 
should include petitions presenting plausible prima facie cases, 
evidence found by the Department that might present plausible prima 
facie cases, or some threshold number of cases. One commenter suggested 
that the regulation include provisions whereby multiple individual 
claims would be grouped together if the borrowers had attended the same 
school or trigger an investigation by the Department as the claims and 
the feasibility of initiating a group process. Another commenter 
suggested that the regulation include a non-exhaustive list of 
situations that would require the initiation of a group process, absent 
a written explanation from the Department as to why such a group 
process is not appropriate, or why borrowers who had not filed an 
application were not included if a group process was initiated.
    One commenter stated that borrowers should be allowed to initiate 
group borrower defense claims, either for themselves or through 
representation by consumer advocates, legal aid organizations, or other 
entities, in addition to the Secretary. This commenter stated that 
possible concerns that allowing independent representation would give 
rise to an industry seeking to take advantage of borrowers, do not 
apply if claims are submitted by entities such as legal aid 
organizations, consumer advocates, and law enforcement agencies.
    A few commenters stated that borrowers should be allowed to access 
borrower defense discharges as a group on the bases of actions by 
local, State, and Federal entities.
    One commenter stated that to protect taxpayers, group claims should 
be initiated only in extreme cases, and should only come after a final, 
non-appealable decision has been made by a Federal or State agency or 
court in a contested proceeding.
    Discussion: We disagree with commenters that factors or conditions 
mandating the initiation of a group process should be included in the 
regulation. As explained in the NPRM, 81 FR 39348, we believe that the 
Department is best positioned to make a determination as to whether the 
circumstances at hand would warrant the initiation of a group process. 
We also believe that it is also appropriate for the Department to 
consider the factors listed in Sec.  685.222(f), such as the existence 
of common facts and claims among a putative group of borrowers, fiscal 
impact, and the promotion of compliance. As explained earlier in this 
section and elsewhere in this preamble, the group process will not only 
determine relief for borrower defenses for the group, but will also 
serve as the method by which the Department will receive an 
adjudication as to its right of recovery against a school on the basis 
of its losses from any relief awarded to borrowers in the group. We 
believe that it is important that the Department retain the discretion 
to decide if the circumstances warrant the initiation of a group 
process to decide its right of recovery from a school. However, we do 
not believe that the initiation of the group process will prevent 
borrowers from being able to proactively seek relief. Borrowers may 
choose to file individual applications for relief under Sec.  
685.222(e) or, even if their applications are identified by a 
designated Department official for a group process, choose to opt-out 
of the group process and receive determinations through the individual 
application process if desired. As noted in the NPRM, 81 FR 39348, the 
Department welcomes information from any source, including State and 
other Federal enforcement agencies, as well as legal aid organizations, 
that may assist it in deciding whether to initiate group borrower 
defense process under Sec.  685.222(f), (g), and (h).
    We explain our reasoning as to the different standards that may 
form the basis of a borrower defense in the respective sections for 
those standards. We believe it is appropriate that group proceedings 
should be initiated for claims based upon any of the allowed standards, 
as opposed to just one of the standards or standards outside of those 
described in the regulations.
    Changes: None.

Third-Party Petitions for Initiation of Group Process

    Comments: Many commenters stated that outside entities, such as 
student advocates, State AGs, and legal aid attorneys should be given a 
formal role in the group borrower defense process. Some of these 
commenters urged the Department to adopt language proposed at the third 
session of negotiated rulemaking in March 2016, which would have 
explicitly established that State or Federal enforcement agencies, or 
legal aid organization, may submit a written request to the Department 
identifying a group of borrowers for the initiation of a group borrower 
defense process. Under this proposed language, the Department would 
have responded to such requests in writing. These commenters argued 
that such entities have direct contact with borrowers and are likely to 
have necessary information for proving borrower defense claims. 
Commenters also stated that allowing third party petitions is 
important, given that the borrower defense process only allows an 
individual borrower to dispute a group borrower defense decision in the 
proposed regulation by filing an individual application. One commenter 
stated that allowing such third party requests will result in faster 
adjudications for borrowers and administrative cost-savings for 
taxpayers. Another commenter stated that a formal referral process 
would recognize both the states' role in the triad of higher education 
oversight and the States' efforts to protect consumers through State 
general consumer protection laws.
    A group of commenters argued that a right for such outside entities 
should be included given that group determinations will result in the 
most widespread relief, will be the easiest way for borrowers to access 
relief, and are the only proposed method by which borrowers who have 
not filed applications may access relief.
    In response to the Department's reasoning in the NPRM, 81 FR 39348, 
that informal communication facilitates cooperation with such entities, 
one commenter stated that providing such third parties with a formal 
petition in the regulation would not preclude informal contact and 
communication, but would rather increase transparency and efficiency. 
The commenter also

[[Page 75968]]

suggested that, to address any concerns that parties that may take 
advantage of borrowers, that the final rule should allow the Secretary 
to decline to respond to a petition if the organization does not appear 
to be a bona fide organization that represents borrowers.
    Discussion: We disagree that a formal right of petition for 
entities such as State AGs, advocacy groups, or legal aid organizations 
should be included in the regulations. As explained in the NPRM, 81 FR 
39348, in the Department's experience, cooperation with such outside 
entities has been best facilitated through informal communication, 
which allows for more candor and flexibility between the Department and 
interested groups and parties. The Department always welcomes 
cooperation and input from other Federal and State enforcement 
entities, as well as legal assistance organizations and advocacy 
groups. To this end, the Department anticipates creating a designated 
point of contact for State AGs to allow for active communication on 
borrower defense issues and also actively encourages a continuation of 
cooperation and communication with other interested groups and parties. 
As also reiterated in the NPRM, id., the Department is ready to receive 
and make use of evidence and input from any interested party, including 
advocates and State and Federal agencies.
    We also reiterate our position that the determinations arising from 
the borrower defense process should not viewed as having any binding 
effect on issues, such as causes of actions that borrowers may have 
against schools under State or other Federal law, that are not properly 
within the purview of the Department. We also encourage borrowers and 
their representatives to weigh all available avenues for relief, 
whether it is through the borrower defense process or through avenues 
outside of the Department.
    Changes: None.

Challenges to the Initiation of a Group Process

    Comments: Many commenters expressed concern that the group borrower 
defense process would not include an opportunity for schools to dispute 
the initiation of a group process and the formation of the group. One 
commenter stated that the lack of a provision for schools to contest 
the formation of the group was in violation of due process. Several 
commenters expressed concern that schools are not given a right to 
contest the Department's decision as to whether there are ``common 
facts and claims'' to initiate a group process and requested 
clarification of that factor. Several commenters stated that the 
Department's proposal effectively would allow the Department to certify 
a class, without any of the procedural protections available to 
defendants in a class proceeding under Federal Rule of Civil Procedure 
23. One commenter expressed concern that the proposed regulation does 
not require that the Department initiate a group process only where 
common facts and claims are found among the borrowers in the group, but 
rather gives the Secretary discretion to consider a nonexclusive list 
of factors. One commenter stated that the Department should define the 
sources of information the Department would use to identify borrowers 
for inclusion in a group process.
    One commenter stated that by not providing a review of the 
Department's initiation or group certification decision by the hearing 
official or allowing a challenge by the school, and by proposing that 
the Department's decision to initiate a group process may consider the 
factor of ``compliance by the school or other Title IV participants,'' 
that the purpose of the group borrower defense process is to hold 
schools accountable and make them examples to the industry, and not to 
efficiently handle claims before the Department.
    Discussion: We disagree that the regulations should include an 
explicit step by which an institution may dispute the formation or 
composition of a group under Sec.  685.222(f). As discussed previously 
in this section, the Department is developing agency rules of practice 
and procedure for borrower defense, which will be informed by the legal 
requirements for administrative adjudications and the due process 
protections provided in the Department's other administrative 
adjudications. For instance, we will consider the proceedings including 
those under 34 CFR part 668, subparts G and H, which allow for standard 
motion practice and interlocutory appeals. We believe that, as 
proposed, Sec.  685.222(f), (g), and (h) provides hearing officials 
with the flexibility and discretion to allow motions by parties as is 
deemed appropriate.
    We believe that it is appropriate that Sec.  685.222(f) notes that 
the Department may generally consider a nonexhaustive list of factors 
in deciding to initiate a group claim. As described earlier, we believe 
it is important for the Department to retain discretion in deciding 
whether to initiate a proceeding to adjudicate its right of recovery 
from a school, as a contingent claim to a hearing official's relief 
determination for the borrower defense claims of a group of borrowers 
in the same process. Similarly, we believe that it is important for the 
Department to retain the flexibility to bring groups of varying sizes 
or types before a hearing official in a group process, including groups 
that are formed in a manner more akin to a joinder of parties under 
Federal Rule of Civil Procedure 20 than to a class action under Federal 
Rule of Civil Procedure 23.
    Regarding the sources of information the Department will use to 
identify borrowers for inclusion in a group process, as explained in 
the NPRM, in addition to applications submitted through the process in 
Sec.  685.222(e), the Department also may identify borrowers from 
records within its possession or from information that may be provided 
to the Department by outside sources. We do not believe further 
clarification as to such sources of the information is necessary.
    We disagree that consideration of the compliance impact of a group 
borrower defense claim is inappropriate for the initiation of a group 
process and also disagree that this factor lends an appearance of bias 
or unfairness to the fact-finding processes described in Sec.  
685.222(f), (g), and (h). As discussed above, the procedure we will use 
for the group process will provide the institution with due process 
protections very similar to those that the Department now uses when it 
fines an institution or terminates the eligibility of an institution to 
participate in the title IV, HEA programs, which are found in current 
subpart G of part 668. These rules do not preclude motion practice, nor 
will the rules we develop. Moreover, given that such proceedings will 
involve the Department's right of recovery against schools, we believe 
that is appropriate for the regulations to reflect that the Department 
will consider a number of factors in its decision whether to initiate a 
process for the adjudication of such recovery by the Department. As 
stated in the NPRM, the group borrower defense process is intended to 
provide simple, accessible, and fair avenues to relief for borrowers, 
and to promote greater efficiency and expediency in the resolution of 
borrower defense claims, and we believe this structure furthers that 
goal.
    Changes: None.

Members of the Group

    Comments: Many commenters supported the Department's proposal under 
Sec.  685.222(f)(1)(ii) that borrowers who may not have filed an 
application for borrower defense may be included as

[[Page 75969]]

members of a group for a determination of relief. Such commenters urged 
the Department to establish criteria requiring the initiation of such a 
group process.
    A number of other commenters opposed the proposal and suggested 
that only borrowers who have filed an individual claim be included in 
the group process. These commenters stated that limiting group members 
to applicants would ensure that only borrowers who have actually been 
harmed would receive relief. Other commenters also argued that non-
applicants should not be included in the group process, due to concerns 
about the use of borrowers' personal information and consent.
    Other commenters stated that borrowers should only be allowed to 
participate in the group process if they affirmatively opt-in to the 
process. Several of these commenters also cited concerns about the use 
of borrowers' personal information and consent if an opt-out method is 
used.
    Discussion: We appreciate the commenters' support for the use of a 
group process to resolve claims for a group with non-applicant 
borrowers as described in Sec.  685.222(f)(1)(ii). However, as 
discussed earlier in this section, we believe that it is appropriate 
that the Department retain the discretion to initiate the group 
process, given that the Department will have the most information 
regarding the circumstances and the Department's contingent interest in 
the proceedings.
    We disagree with the commenters that suggested that the group 
processes described in Sec.  685.222(f), (g), and (h) should only 
include borrower defense applicants or that we should require borrowers 
to affirmatively opt-in to the process. We believe that, where the 
Department has decided to bring a group borrower defense proceeding and 
non-applicant borrowers with common facts and claims can be identified, 
such borrowers should also be entitled to the benefits of the 
designated Department official's advocacy and the opportunity to obtain 
relief and findings in such proceedings. Additionally, providing such 
borrowers with an opportunity to opt-out of the proceedings, given 
sufficiency of the notice to be provided by the Department to such 
borrowers, follows well-established precedent in class action law. See, 
e.g., Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985).
    The Department will continue to safeguard borrowers' personal 
information in this process, according to its established procedures.
    Changes: None.
    Comments: None.
    Discussion: In further reviewing proposed Sec.  685.222(f)(2), the 
Department has determined that if a group process for borrower defense 
is initiated, and the Secretary has identified a borrower who has not 
filed a borrower defense application pursuant to Sec.  
685.222(f)(1)(ii), the borrower should be granted forbearance or, if 
the borrower is in default on the loan at issue, then the procedure for 
a defaulted loan should be followed, as if the borrower had filed a 
borrower defense to repayment application under Sec.  685.222(e)(2).
    Changes: We have revised Sec.  685.222(f)(2) to provide that the 
forbearance and defaulted loan procedures will be followed for members 
of a group identified by the Secretary who have not filed a borrower 
defense application.

Opt-Out for Group Discharge; Reopening by the Secretary After 
Determination Is Made

    Comments: A number of commenters objected to the Department's 
proposal in Sec.  685.222(i)(2) that borrowers would be given an 
opportunity to opt-out of a group determination of relief. One 
commenter stated that providing borrowers with an opt-out would provide 
borrowers with the ability to bring successive, identical claims in the 
group and individual processes, and would create unpredictability and 
administrative inefficiencies. The commenter stated that borrowers who 
have agreed to be part of the group process should be bound by any 
resulting decision. One commenter stated that allowing only one 
opportunity for a borrower to opt-out of the group process would be 
consistent with Federal Rule of Civil Procedure 23, prevent uncertainty 
and inconsistency, and would further the purpose of the group borrower 
defense process to promote efficiency and expediency in the resolution 
of claims.
    Other commenters stated that allowing borrowers to opt-out of a 
denial of a group claim, to file an individual claim, would place an 
undue burden on schools to defend the same claim multiple times. Some 
of these commenters stated that this situation would deprive schools of 
protection from double jeopardy. These commenters expressed concern 
that the financial resources schools would have to expend to defend 
such claims would lead to tuition increases for students. Several 
commenters stated that allowing such an opt-out would allow students to 
file multiple, unjustified claims for the purpose of delaying 
repayment.
    One commenter also suggested that a time limit be imposed upon the 
Secretary's ability to reopen a borrower's application is bound by any 
applicable limitation periods. Several commenters stated that relief in 
the group process should be opt-out only.
    Discussion: We appreciate the concern raised by commenters that 
allowing an opt-out for borrowers after a determination for relief has 
been made will subject schools to continuing litigation risk and 
uncertainty. As a result, we will modify Sec.  685.222(i) to remove the 
post-determination opt-out opportunity for borrowers in group 
proceedings.
    We disagree that a time limit should be placed on the Secretary's 
ability to reopen a borrower's application. We believe that if the 
Department becomes aware of new evidence that would entitle a borrower 
to relief under the regulations, then the borrower is entitled to 
relief regardless of the passage of time.
    Changes: We have revised Sec.  685.222(i) to remove the opportunity 
for a borrower to opt-out of the proceedings after a determination for 
relief has been made in a group proceeding.
    Comments: None.
    Discussion: In further reviewing proposed Sec.  685.222(g)(4) and 
(h)(4), the Department has determined that if a borrower defense 
application is under review because a borrower defense application has 
been reopened by the Secretary under Sec.  685.222(e)(5)(ii), the 
borrower should be granted forbearance or, if the borrower is in 
default on the loan at issue, then the procedure for a defaulted loan 
should be followed, as when the borrower filed an initial borrower 
defense to repayment application.
    Changes: We have revised Sec.  685.222(g)(4) and (h)(4) to provide 
that the forbearance and defaulted loan procedures will be followed 
when the Secretary has reopened a borrower defense application.

Due Process Proceedings

    Comments: Several commenters stated that the proposed regulations 
do not provide details of how and what schools may dispute in the group 
borrower defense fact-finding process, and requested clarification in 
the final regulations. Other commenters expressed concern that the 
proposed group fact-finding process does not provide sufficient due 
process protections for schools. These commenters emphasized that 
participation by schools would create a more fair process and increase 
the reliability of the results.

[[Page 75970]]

    One commenter stated that the limited protections in the proposed 
group borrower defense process does not provide schools with an 
opportunity to confront and cross-examine adverse witnesses and thus 
does not satisfy the due process requirements established in Mathews v. 
Eldridge, 424 U.S. 319 (1976); Goldberg v. Kelly, 397 U.S. 254 (1970); 
and Greene v. McElroy, 360 U.S. 474 (1959) for depriving schools of 
their property rights to funds already received. Several commenters 
suggested that the Department use the procedures in 34 CFR part 668, 
subpart H, to ensure due process protections for schools.
    Commenters expressed concern about institutions' opportunities to 
receive notice and evidence in the proposed group borrower defense 
process. Many of these commenters expressed concern and requested 
clarification regarding the Department's proposal in Sec.  
685.222(f)(2)(iii) that notice to the school of the group process would 
occur ``as practicable.'' One commenter suggested that we include 
language specifying that no notice will be provided if notice is 
impossible or irrelevant due to a school's closure. Other commenters 
expressed concern that the proposed regulations do not specify whether 
the scope of a group will be disclosed to schools and stated that 
schools must be aware of the members of the group in order to be able 
to raise a defense. Another commenter expressed concern that the 
proposed regulations do not require the Department to notify the school 
as to the basis of the group; the initiation of the borrower defense 
process; of any procedure or timeline for requesting records, providing 
information to the Department, or making responses; or provide schools 
with an opportunity to appear at a hearing.
    Several commenters stated that institutions should be provided with 
notice and copies of all the evidence presented underlying the borrower 
defense claims in a group process. Another commenter stated that the 
proposed regulation gives the Department complete discretion as to what 
evidence the trier of fact will use to make decisions. This commenter 
stated that, when combined with the proposal that the persons 
advocating for students, as well as the persons making decisions, in 
the group borrower defense process are all chosen by the Department, 
this discretion appears to favor students over schools in the group 
process.
    Several commenters also stated that institutions should be given an 
opportunity to provide a written response to the substance of the group 
borrower defense claim within a certain number of days (45 or 60) after 
the resolution of any appeal on the Department's basis for a group 
claim or of the notification to the school of the group process if no 
challenge to the group is filed, provided with copies of any evidence 
and records to be considered or deemed relevant by the hearing 
official, be allowed to present oral argument before the hearing 
official, and provided with a copy of the hearing official's decision 
in the group process. One commenter emphasized that the decision should 
identify the calculation used by the hearing official for the amount of 
relief given by the decision. These commenters also stated that 
institutions should be provided with a right of appeal to the hearing 
official's decision in both the closed and open school group processes. 
One commenter expressed concern that the proposed process does not 
include any process for how an appeal may be filed.
    Several commenters expressed concerns that the process does not 
appear to provide to any opportunities for schools to conduct discovery 
or to cross-examine witnesses. Some of these commenters expressed the 
view that, in cases where the rebuttable presumption proposed in Sec.  
685.222(f)(3) applies, schools will need to be able to question 
borrowers in order to rebut the presumption.
    One commenter stated that the group borrower defense process should 
allow for both students to present their own claims and institutions to 
have the same opportunity to present a defense, including any 
affirmative defenses, and to appeal adverse decisions. The commenter 
stated that both the school and the borrower should have such 
opportunities to present evidence and arguments in any proceeding or 
process to determine claims, not just proceedings where recovery 
against the school is determined. The commenter emphasized that 
permitting school participation would lead to correct results, since 
schools often have information as to any alleged wrongdoing.
    Discussion: The Department understands commenters' concerns 
regarding the broad guidelines for the group fact-finding process 
established in Sec.  685.222(f), (g), and (h). As noted throughout this 
section, the group borrower defense process involving an open school 
\35\ in Sec.  685.222(h) would be structured to provide the substantive 
and procedural due process protections both borrowers and schools are 
entitled to under applicable law, including those provided under the 
APA, 5 U.S.C. 554, and under the Department's other administrative 
proceedings. Such protections would include those regarding notice; the 
opportunity for an oral evidentiary hearing where the parties may 
confront and cross-examine adverse witnesses if warranted,); or those 
for the submission and exchange written material, as provided under 
enforcement procedures at 34 CFR part 668, subpart G. The Department is 
developing procedural rules to govern the fact-finding processes 
described in both Sec.  685.222(e) and (f) to (h), which will establish 
these details more firmly and be informed by the procedures and 
protections established by the Department in its other administrative 
proceedings, such as 34 CFR part 668, subparts G and H.
---------------------------------------------------------------------------

    \35\ As described in Sec.  668.222(g), the ``closed school'' 
group borrower defense process would apply only when the school has 
both closed and provided no financial protection available to the 
Secretary from which to recover losses arising from borrower 
defenses, and for which there is no entity from which the Secretary 
may recover such losses. Or, in other words, when there is no entity 
from whom the Department may obtain a recovery.
---------------------------------------------------------------------------

    We appreciate the concern that Sec.  685.222(f)(2)(iii) is not 
clear as to the Department's intent that notice of a group proceeding 
will occur unless there is no party available to receive such notice--
in other words, as would be the case under the closed school group 
borrower defense process described in Sec.  685.222(g). We are revising 
Sec.  685.222(f)(2)(iii) to clarify that no notice will be provided if 
notice is impossible or irrelevant due to a school's closure.
    Changes: We have revised Sec.  685.222(f)(2)(iii) to clarify that 
no notice will be provided if notice is impossible or irrelevant due to 
a school's closure.

Rebuttable Presumption of Reliance

    Comments: A number of commenters objected to Sec.  685.222(f)(3), 
which provides that a rebuttable presumption of reasonable reliance by 
members of the group applies if a group borrower defense claim involves 
a substantial misrepresentation that has been widely disseminated. One 
commenter stated that reliance cannot be presumed any more than the 
occurrence of a misrepresentation can be presumed, and that such an 
approach does not comply with general legal principles. Another 
commenter expressed concern that the rebuttable presumption of 
reasonable reliance would impermissibly preclude schools from 
presenting evidence as to the main fact of a group borrower defense 
case. These commenters expressed concern that the presumption

[[Page 75971]]

would be difficult or impossible for schools to rebut. One commenter 
expressed concern that a school would be unable to rebut the 
presumption for borrowers who are unknown or not named as being part of 
the group for the group borrower defense process. One commenter 
expressed concern that the rebuttable presumption of reliance would be 
difficult for schools to disprove, particularly in situations where 
disproving a claim would require documentation that falls outside of 
the record retention requirements.
    One commenter stated that the presumption would set up a system by 
which omissions by school employees or agents or misunderstandings by 
students may be considered substantial misrepresentations, without the 
Department needing to show reliance or that the misconduct caused the 
harm at issue. The commenter expressed general concern that the 
Department has proposed a negligence standard that is not contemplated 
by the HEA, and that this expansion in the standard has not been 
justified by the Department. The commenter argued that the presumption 
would allow claims based on accusations of omissions or 
misunderstandings on which the borrower did not rely.
    One commenter stated that the presumption would threaten 
institutions with high liability and impose high costs on taxpayers. A 
couple commenters stated that the presumption is unfair, absent an 
intent or materiality requirement.
    One commenter stated that it objected to the establishment of the 
rebuttable presumption generally, but requested clarification as to 
what the Department means by ``widely disseminated,'' specifically the 
size of the audience that would be required for a statement to be 
considered to have been widely disseminated and methods of 
dissemination that would trigger the presumption.
    Several commenters supported the inclusion of a presumption of 
reasonable reliance on a widely disseminated misrepresentation is 
consistent with existing consumer protection law. One commenter stated 
that the presumption recognizes that it is unfair and inefficient to 
require cohorts of borrowers to individually assert claims against an 
actor engage in a well-documented pattern of misconduct.
    Discussion: We disagree that the presumption established in Sec.  
685.222(f)(3) does not comport with general legal principles. It is a 
well-established principle that administrative agencies may establish 
evidentiary presumptions, as long as there is a rational nexus between 
the proven facts and the presumed facts. Cole v. U.S. Dep't of Agric., 
33 F.3d 1263, 1267 (11th Cir. 1994); Chem. Mfrs. Ass'n v. Dep't of 
Transp., 105 F.3d 702, 705 (D.C. Cir. 1997). As explained in the NPRM, 
81 FR 39348, we believe that if a representation that is reasonably 
likely to induce a recipient to act is made to a broad audience, it is 
logical to presume that those audience members did in fact rely on that 
representation. We believe that there is a rational nexus between the 
wide dissemination of the misrepresentation and the likelihood of 
reliance by the audience, which justifies the rebuttable presumption of 
reasonable reliance upon the misrepresentation established in Sec.  
685.222(f)(3). A similar presumption exists in Federal consumer law. 
See, e.g., F.T.C. v. Freecom Commc'ns, Inc., 401 F.3d 1192, 1206 (10th 
Cir. 2005); F.T.C. v. Sec. Rare Coin & Bullion Corp., 931 F.2d 1312, 
1315-16 (8th Cir. 1991).
    We disagree that the rebuttable presumption establishes a different 
standard than what is required under the current regulations. As 
explained under ``Substantial Misrepresentation,'' the Department's 
standard at part 668, subpart F, has never required intent or knowledge 
as an element of the substantial misrepresentation standard. 
Additionally, the current standard for borrower defense allows ``any 
act or omission of the school . . . that would give rise to a cause of 
action under applicable State law.'' 34 CFR 685.206(c)(1). As explained 
under ``Federal Standard'' and ``Substantial Misrepresentation,'' under 
many States' consumer protection laws, knowledge or intent is not a 
required element of proof for relief as to an unfair or deceptive trade 
practice or act. Moreover, we disagree with any characterization that 
the rebuttable presumption would remove the reliance requirement for 
substantial misrepresentation in group proceedings. The rebuttable 
presumption does not change the burden of persuasion, which would still 
be on the Department. As Sec.  685.222(f)(3) states, the Department 
would initially have to demonstrate that the substantial 
misrepresentation had been ``widely disseminated.'' Only upon such a 
demonstration and finding would the rebuttable presumption act to shift 
the evidentiary burden to the school, requiring the school to 
demonstrate that individuals in the identified group did not in fact 
rely on the misrepresentation at issue. This echoes the operation of 
the similar presumption of reliance for widely disseminated 
misrepresentations under Federal consumer law described above. See 
Freecom Commc'ns, Inc., 401 F.3d at 1206. A school would be entitled to 
introduce any relevant evidence to rebut the presumption and what may 
constitute relevant evidence may vary depending on the facts of each 
case. Similarly, what may be viewed as ``wide dissemination'' may also 
vary from case to case.
    There appears to be confusion as to whether schools would be 
required to rebut the presumption of reliance as to ``unknown'' or 
``unidentified'' members of the group. Under Sec.  685.222(f)(1)(ii), 
the Department will identify all members of the group. Although the 
group may include borrowers who did not file an application through the 
process in Sec.  685.222(e), the members of the group will be known in 
the group process.
    We appreciate the support of commenters supporting the 
establishment of a rebuttable presumption. As discussed earlier, one of 
the reasons we are establishing a rebuttable presumption in cases of a 
widely disseminated substantial misrepresentation is that we believe 
that there is a rational nexus between a well-documented pattern of 
misconduct in the instance of a wide dissemination of the 
misrepresentation and the likelihood of reliance by the audience.
    We also disagree that a materiality or intent element is necessary, 
as explained earlier under ``Claims Based on Substantial 
Misrepresentation.''
    Changes: None.

Representation in the Group Process

    Comments: Many commenters expressed concern that the Department 
would designate a Department official to present borrower claims in the 
group borrower defense fact-finding process, when schools would be 
permitted to obtain their own representation in the process. These 
commenters stated that they should be allowed to obtain their own 
outside representation. Some commenters stated that such outside 
representation should be either paid for by the Department, or that 
schools should not be allowed to participate in the group process until 
after the school's liability has been determined.
    One commenter stated that borrowers should be allowed to have their 
own representatives in the group borrower defense process, either at 
their own expense or pro bono. This commenter stated that borrowers 
should at least be allowed to act as ``intervenors'' in a group 
borrower defense process, with separate representation, to protect 
their interests.

[[Page 75972]]

    One commenter suggested that the Department establish procedures 
for individual borrowers and their legal representatives to petition 
the Department to initiate a group proceeding or, in the alternative, 
establish a point of contact for borrowers to notify the Department of 
potential candidates for group claims. The commenter also suggested 
that borrowers be allowed to file appeals to the Secretary in group 
proceedings, given borrowers' vested interest in obtaining favorable 
adjudications that will make obtaining relief easier for borrowers.
    Discussion: We disagree that borrowers should be allowed to 
initiate group borrower defense claims or be able to retain their own 
counsel and present evidence and arguments before a hearing official in 
a group borrower defense process. As explained earlier in this section, 
we acknowledge that the designated Department official responsible for 
presenting the group borrower defense claim and initiating a group 
borrower defense process would not be the borrower's legal 
representative. However, as the holder of a claim to recovery that is 
contingent upon the relief awarded to a group's borrower defense 
claims, we believe that the Department is the appropriate party to 
present both the group's borrower defense claims and the Department's 
claim for recovery against the institution in question. As explained in 
the NPRM, 81 FR 39348, we also believe that the Department's 
fulfillment of this role will reduce the likelihood of predatory third 
parties seeking to take advantage of borrowers unfamiliar with the 
borrower defense process. Additionally, we note that, under Sec.  
685.222(f)(2)(ii), borrowers may also choose to opt-out of a group 
process and participate in the process established in Sec.  685.222(e), 
if they are not satisfied with the Department's role in the group 
proceeding. Borrowers may also reach out to the designated Department 
official if they have questions about the process.
    As discussed earlier in this section, in consideration of 
borrowers' desire for timely and efficient adjudications, we disagree 
that borrowers should be provided with a right of appeal to the 
Secretary. However, we note that borrowers may also seek judicial 
review in Federal court of the Department's final decisions or request 
a reconsideration of their claims by the Department upon the 
identification of new evidence under Sec.  685.222(e)(5).
    Changes: None.

Appeals

    Comments: Several commenters expressed concern that, in the group 
borrower defense process, liability will be automatically assigned to a 
school, and that schools will have no opportunity to dispute the 
liability. One commenter stated this is unfair to school owners, and to 
principals and affiliates of schools, from whom the Department proposes 
to seek repayment in certain situations.
    Discussion: The commenters are incorrect. Section 685.222(h)(2) 
provides both schools and the designated Department official in the 
open school group hearing process with the opportunity to file an 
appeal with the Secretary from a hearing official's decision. Further, 
Sec.  685.222(g), which does not provide for such an appeal, applies 
only if a school has closed and has provided no financial protection 
available to the Secretary from which to recover losses arising from 
borrower defenses, and for which there is no other entity from which 
the Secretary can otherwise practicably recover such losses. If the 
Secretary seeks to recover borrower defense losses from the principal 
or affiliate of a ``closed school,'' the open school process in Sec.  
685.222(h) would apply.
    Changes: None.

Open and Closed School Group Processes

    Comments: Several commenters expressed concern about schools' 
participation in the closed school group process. One commenter 
expressed concern that in the group process for closed schools 
described in proposed Sec.  685.222(g), that the hearing official 
deciding the claims at issue may consider additional information or 
responses from the school that the designated Department official 
considers to be necessary. This commenter stated that if there are 
persons affiliated with the school who are prepared to participate, 
then those persons should be given full rights of participation in the 
closed school group borrower defense process. One commenter stated that 
institutions should be provided with a right of appeal to the hearing 
official's decision in both the closed and open school group processes.
    One commenter requested clarification as to claims filed by 
borrowers who have attended a school that has since closed, but where 
the school has posted a letter of credit or other surety with the 
Department.
    Another commenter supported the distinction between the open school 
and closed school group processes.
    Discussion: The commenters are incorrect about the nature of the 
closed school borrower defense group process described in Sec.  
685.222(g). As described, the standard provides that Sec.  685.222(g) 
will apply only if a school is closed, there is no financial protection 
available to the Secretary from which to recover losses from borrower 
defense claims, and there is no other entity from which the Secretary 
may recover. If there is a letter of credit or some other surety that 
the school has posted to the Department and that is currently available 
to pay losses from borrower defense claims, the open school, borrower 
defense group process under Sec.  685.222(h) will apply. If there is no 
ability for the Department to recover on any losses resulting from an 
award of relief in the closed school, group borrower defense process, 
then the Department will be unable to exercise its right to recovery 
against a school and the school will not face any possible deprivation 
of property. As a result, we believe it is appropriate that schools do 
not receive a right of administrative appeal in the closed school group 
process. If there are persons affiliated with the school who disagree 
with the final decision resulting from the process, however, such 
persons may still seek judicial review in Federal court under 5 U.S.C. 
702 and Sec.  704.
    Changes: None.

Public Databases

    Comments: A group of commenters suggested that decision makers be 
required to document decisions so that they may be appealed and 
reviewed in Federal court. These commenters and others also requested 
that the regulations require public reporting of borrower defense 
adjudications and that the Department maintain a public, online 
database of decisions resulting from any group process or individual 
application. The commenters stated that such public reporting would 
allow political representatives and advocates to review such decisions, 
suggest improvements, and ensure consistency in the Department's 
decision making.
    One commenter also stated that the Department should develop a 
publicly available information infrastructure, such as a docketing 
system, to allow users to identify and track cases that may be 
candidates for group proceedings or informal aggregation and to allow 
users to learn from Departmental decisions.
    Discussion: We appreciate the commenters' concerns regarding 
transparency and consistency in the borrower defense process, and will 
consider their suggestions as we move

[[Page 75973]]

forward with the implementation of these regulations. All of the 
Department's administrative determinations are presumptively available 
for public disclosure, subject to privacy concerns. We will contemplate 
and evaluate appropriate methods for the release of information about 
borrower defense claims on an ongoing basis as the processes and 
procedures in the regulations take effect.
    Changes: None.

Informal Aggregation

    Comments: One commenter suggested that, in addition to the group 
borrower defense process, the Department allow hearing officials to 
informally aggregate, or to allow borrowers to petition for informal 
aggregation of, separate but related cases to be heard in front of the 
same trier of fact. The commenter stated that such informal aggregation 
would expedite the resolution of similar claims, enhance consistency, 
and conserve resources.
    Discussion: We appreciate the suggestion by the commenter, but do 
not believe it is necessary to modify the regulations to provide for 
informal aggregation. Such aggregation would be within the discretion 
of the hearing officials presiding over the group processes as part of 
their routine caseload management responsibilities.
    Changes: None.

FFEL Borrowers

    Comments: Several commenters stated that FFEL borrowers should be 
included in any group discharges for borrower defense. One commenter 
suggested that the Department allow FFEL borrowers to participate in 
the group and individual borrower defense processes without having to 
consolidate FFEL Loans into Direct Consolidation Loans or by having to 
prove any relationship between the borrowers' schools and lenders. This 
commenter argued that not all FFEL borrowers are eligible for Direct 
Consolidation Loans, and that the proposed regulations do not address 
the needs of such FFEL borrowers.
    Discussion: We disagree with the suggestion that FFEL borrowers be 
included in any group discharges for borrower defense. As explained 
under ``Expansion of Borrower Rights,'' FFEL Loans are governed by 
specific contractual rights and the process adopted here is not 
designed to address those rights. We can address potential relief under 
these procedures for only those FFEL borrowers who consolidate their 
FFEL Loans into Direct Consolidation Loans. As cases are received, the 
Department may consider whether to conduct outreach to FFEL borrowers 
who may be eligible for borrower defense relief by consolidating their 
loans into Direct Consolidation Loans under Sec.  685.212(k) as 
appropriate.
    Changes: None.

Abuse by Plaintiffs' Attorneys

    Comments: Several commenters expressed concern that the group 
process would create opportunities for plaintiffs' attorneys. The 
commenters stated that the proposed regulations would encourage 
attorneys to have borrowers file suspect claims with the Department, 
while also bringing class actions in court. The commenters stated that 
this would result in the Department initiating a group process, 
identifying members of a putative class for the court proceeding, and 
obtaining determinations that class action attorneys would then be able 
to use in court to their advantage, while collecting attorneys' fees.
    Discussion: We disagree that the regulations will create 
opportunities for plaintiffs' attorneys. Under the regulations, the 
Department has the discretion to decide whether a group borrower 
defense process will be initiated, and the filing of individual claims 
may not necessarily lead to the initiation of a group borrower defense 
process. Additionally, we recognize that borrowers may seek to utilize 
other avenues for relief outside of the borrower defense process and 
provide in Sec.  685.222(k) that if the borrower has received relief 
through other means, the Department may reinstate the borrower's 
obligation to repay the loan to protect the Federal fiscal interest and 
avoid receipt by the borrower of multiple recoveries for the same harm.
    Changes: None.

Borrower Relief

Process Arbitrary and Outside the Scope of Department Authority

    Comments: Some commenters argued that the proposal for calculation 
of borrower relief is arbitrary and that the Department is neither 
qualified nor authorized to conduct this calculation. According to one 
commenter, implementation of the proposed framework for calculating 
relief would constitute arbitrary agency adjudication under relevant 
case law. One commenter cited 20 U.S.C. 3403(b) and section 
485(h)(2)(B) of the HEA as imposing statutory limits on the 
Department's authority to direct or control academic content and 
programming, and argued that the Department would be exceeding its 
authority by attempting to assess the value of an education by 
including the quality of academic programming among the factors to be 
considered in carrying out an adjudication on any borrower defense 
claim.
    Discussion: We disagree that the Department's proposal to 
adjudicate or calculate borrower relief is arbitrary. By directing the 
Secretary to designate acts and omissions that constitute borrower 
defenses to repayment in section 455(h) of the HEA, Congress has 
explicitly charged the Department, under the current and new 
regulations, to adjudicate the merits of claims brought alleging such 
acts and omissions. Such adjudications necessarily require the 
Department to determine the relief warranted by a proven claim against 
an institution. If a court adjudicating a borrower's cause of action 
against the institution would assess the value of the education 
provided in order to determine relief, section 455(h) requires and 
authorizes the Department to do so as well.
    Further, we do not agree that the Department's adjudications on 
borrower defense claims will involve an ``exercise [of] any direction, 
supervision, or control over the curriculum, program of instruction, 
administration, or personnel of any educational institution, school, or 
school system . . . or over the selection or content of library 
resources, textbooks, or other instructional materials by any 
educational institution or school system, except to the extent 
authorized by law.'' 20 U.S.C. 3403(b). As described above earlier, the 
Department's adjudications will determine whether a school's alleged 
misconduct constitutes an ``act[] or omission[] of an institution of 
higher education a borrower may assert as a defense to repayment of a 
loan . . .'', 20 U.S.C. 1087e(h), and provide relief to borrowers and a 
right of recovery to the Department from schools, in a manner that is 
explicitly authorized by statute. Notwithstanding, we believe that the 
provision of relief, as the result of and after any conduct by the 
school, through the borrower defense process is not the same as the 
active ``exercise [of] any direction, supervision, or control'' over 
any of the prohibited areas.
    Changes: None.

Presume Full Relief

    Comments: A number of commenters argued in favor of a presumption 
of full relief for borrowers. These commenters recommended that 
Appendix A be either deleted or modified to eliminate or alter the 
proposed partial relief calculations. The commenters contended that the 
proposed partial

[[Page 75974]]

relief calculation process would be complex and subjective and 
potentially deny relief to deserving borrowers.
    Multiple commenters argued that calculating partial relief would be 
excessively complicated, expensive, and time consuming. According to 
these commenters, the process of calculating relief would lead to the 
waste of Department resources and cause unnecessary delays in the 
provision of relief to borrowers. Additionally, commenters were 
concerned about the possibility that this process would be confusing 
and difficult for borrowers to navigate.
    Some commenters argued that the proposed partial relief calculation 
process would unfairly subject borrowers who had already succeeded on 
the merits of their claims to a burdensome secondary review process. 
Commenters noted that, in the case of a claim based on a school's 
substantial misrepresentation, borrowers would have already 
demonstrated entitlement to relief by meeting the substantial 
misrepresentation standard. Consequently, these commenters suggested 
that the relief calculation process would create an unnecessary hurdle 
to the appropriate relief for these borrowers. The commenters argued 
that, after being defrauded by their schools, student borrowers should 
not be required to undergo an extensive process of calculating the 
value of their education. Further, these commenters argued that the 
partial relief system would be unfair because it affords a culpable 
school the presumption that its education was of some value to the 
borrower.
    Other commenters suggested that it would be unfair for the borrower 
to bear the burden of demonstrating eligibility for full relief. 
Instead, these commenters proposed that the Secretary should bear the 
burden of demonstrating why full relief is not warranted. The 
commenters proposed that full relief be automatic for borrowers when 
there is evidence of wrongdoing by the school. These commenters 
suggested either eliminating partial relief or limiting it to cases in 
which compelling evidence exists that the borrower's harm was limited 
to some clearly delimited part of their education.
    Commenters suggested that, in addition to being difficult to 
calculate, partial relief would be insufficient to make victimized 
borrowers whole. To support the argument in favor of a presumption of 
full relief, these commenters asserted that many Corinthian students 
never would have enrolled had the institution truthfully represented 
its job placement rates.
    Some commenters raised concerns about the subjectivity of the 
process for calculating partial relief for borrowers. These commenters 
were concerned that the methods proposed in Appendix A for calculating 
relief are too vague, afford excessive discretion to officials, and 
could lead to potential inconsistencies in the treatment of borrowers. 
Some commenters suggested that Appendix A should prescribe one 
particular method for calculating relief, rather than providing 
multiple options in order to increase certainty and consistency.
    Some commenters raised concerns about the potential impact of 
resource inequities between schools and borrowers on the partial relief 
calculation process. Specifically, these commenters argued that because 
schools will be able to afford expensive legal representation, schools 
would likely be able to find technicalities in the relief calculation 
process, potentially resulting in the denial of relief to deserving 
borrowers. These commenters were particularly concerned about 
disadvantages faced by borrowers who cannot afford legal 
representation. Commenters also noted that borrowers may feel pressure 
to retain legal counsel, which they contended would frustrate the 
Department's intent to design a process under which borrowers do not 
need legal representation, and are shielded from predatory third-party 
debt relief companies.
    One commenter suggested that the provision of partial relief would 
lead to an excessive number of claims, particularly when implemented in 
conjunction with what was described as a low threshold for qualified 
claims.
    Several commenters also supported the presumption of full relief by 
stating that this approach would be consistent with existing legal 
approaches to relief for fraudulent inducement or deceptive practices. 
Some commenters urged the Department to adopt the approach used for 
false certification and closed school discharges--providing full 
discharges for all meritorious claims, including cancellation of 
outstanding balances and refunds of amounts already paid.
    As an alternative to fully eliminating partial relief, some 
commenters suggested limiting the availability of partial relief to 
claims based on breach of contract, based on the proposition that when 
a school breaches a contractual provision, it is possible that a 
borrower nevertheless received at least a partial benefit from his or 
her education.
    Several commenters argued that Appendix A should be fully removed 
because it adds confusion to the process and it is not clear when or 
how it should be applied. Some commenters argued that we should remove 
Appendix A and revise proposed Sec.  685.222(i) so that full relief is 
provided upon approval of a borrower defense, except where the 
Department explains its reasoning and affords the borrower the 
opportunity to respond.
    Discussion: As noted in the NPRM, the Department has a 
responsibility to protect the interests of Federal taxpayers as well as 
borrowers. We discuss below that while the borrowers' cost of 
attendance (COA), as defined in section 472 of the HEA, 20 U.S.C. 
1087ll, is the starting point in cases based on a substantial 
misrepresentation for determining relief, we do not believe, in 
proceedings other than those brought under Sec.  685.222(h), that 
establishing a legal presumption of full relief is justified when 
losses from borrower defenses may be borne by the taxpayer. While the 
Department's other loan discharge processes for closed school 
discharges, 34 CFR 685.214; false certification, 34 CFR 685.215; and 
unpaid refunds, 34 CFR 685.216, do provide for full loan discharges and 
recovery of funds paid on subject loans, the factual premises for such 
discharges are clearly established in statute and are relatively 
straightforward. In contrast, we anticipate that determinations for 
borrower defense claims will involve more complicated issues of law and 
fact. Generally under civil law, determinations as to whether the 
elements of a cause of action have been met so as to state a claim for 
relief and then to establish liability are determinations separate from 
those for the amount or types of relief the plaintiff may receive. To 
balance the Department's interest in protecting the taxpayer with its 
interest in providing fair outcomes to borrowers, when a borrower 
defense based in misrepresentation has been established, the Department 
will determine the appropriate relief by factoring in the borrower's 
COA to attend the school and the value of the education provided to the 
borrower by the school. Importantly, the COA reflects the amount the 
borrower was willing to pay to attend the school based on the 
information provided by the school about the benefits or value of 
attendance. The Department may also consider any other relevant 
factors. In determining value, the Department may consider the value 
that the education provided to the borrower, or would have provided to 
a reasonable person in the position of the borrower. Moreover, in some 
circumstances, the Department

[[Page 75975]]

will consider the actual value of the education in comparison to the 
borrower's reasonable expectation, or to what a reasonable person in 
the position of the borrower would have expected under the 
circumstances given the information provided by the institution. 
Accordingly, any expectations that are not reasonable will not be 
incorporated into the assessment of value.
    We acknowledge commenters' concerns that references to 
``calculations'' or ``methods'' in the regulations may be confusing. As 
a result, we are revising Sec.  685.222(i) to remove such references. 
Additionally, to address concerns that the proposed relief 
determination requirements appear complicated, we are also revising 
Sec.  685.222(i) to directly establish the factors to be considered by 
the trier-of-fact: The COA paid by the borrower to attend the school; 
and the value of the education. The Department will incorporate these 
factors in a reasonable and practicable manner. In addition, the 
Department may consider any other relevant factors. In response to 
concerns that the proposed methods in Appendix A are confusing, we have 
also replaced the methods with conceptual examples intended to serve as 
guidance to borrowers, schools, and Department employees as to what 
types of situations may lead to different types of relief 
determinations. As it receives and evaluates borrower defense cases 
under the Federal standard, the Department may issue further guidance 
as to relief as necessary.
    The Department emphasizes that in some cases the value of the 
education may be sufficiently modest that full relief is warranted, 
while in other cases, partial relief will be appropriate. In certain 
instances of full or substantial value, no relief will be provided. 
Thus, it is possible a borrower may be subject to a substantial 
misrepresentation, but because the education provided full or 
substantial value, no relief may be appropriate. As revised, Sec.  
685.222(i) states that the starting point for any relief determination 
for a substantial misrepresentation claim is the full amount of the 
borrower's COA incurred to attend the institution. As explained later, 
the COA includes all expenses on which the loan amount was based under 
section 472 of the HEA, 20 U.S.C. 1087ll. Taken alone, these costs 
would lead to a full discharge and refund of amounts paid to the 
Secretary. Section 685.222(i) then provides that the Department will 
consider the value of the education in the determination of relief and 
how it compares to the value the borrower could have reasonably 
expected based on the information provided by the school. In some 
cases, the Department expects that this analysis will not result in 
reduction of the amount of relief awarded. This could be because the 
evidence shows that the school provided value that was sufficiently 
modest to warrant full relief or what the school provided was 
substantially different from what was promised such that the value 
would not be substantially related to the value the school represented 
it would provide. The presence of some modest value does not mean full 
relief is inappropriate.
    We also note that the revised regulations require value to be 
factored in to determinations for relief, but do not prescribe any 
particular approach to that process. Because there will be cases where 
the determination of value will be fact-specific to an individual or 
group of individuals--and the determination of value may pose more 
significant difficulties in certain situations than in others--the 
Department believes that the official needs substantial flexibility and 
discretion in determining how to incorporate established factors into 
the assessment of value. The fact that the case has reached the phase 
of relief determination necessarily means that a borrower has 
experienced some detriment and that a school has engaged in substantial 
misrepresentation or breached a contract, or was found culpable in 
court of some legal wrong. At that point in the process, we intend that 
the Official be able to employ a practicable and efficient approach to 
assessing value and determining whether the borrower should be granted 
relief and if so how much. Relief will be determined in a reasonable 
and practicable manner to ensure harmed borrowers receive relief in a 
timely and efficient manner.
    We have also revised Sec.  685.222(i) to provide that in a group 
borrower defense proceeding based on a substantial misrepresentation 
brought against an open school under Sec.  685.222(h), the school has 
the burden of proof as to showing any value or benefit of the 
education. The Department will promulgate a procedural rule that will 
explain how evidence will be presented and considered in such 
proceedings, taking full account of due process rights of any parties. 
We believe that these revisions address many of the concerns that 
borrower defense relief determinations may be confusing or complicated.
    We also note that the process for determining relief in a borrower 
defense claim has no bearing on the Department's authority or processes 
in enforcing the prohibition against misrepresentation under 34 CFR 
668.71. Schools may face an enforcement action by the Department for 
making a substantial misrepresentation under part 668, subpart F. As 
described under ``Substantial Misrepresentation,'' for the purposes of 
borrower defense, absent the presumption of reliance in a group claim, 
actual, reasonable, detrimental reliance is required to establish a 
substantial misrepresentation under Sec.  685.222(d). However, for the 
purposes of the Department's enforcement authority under part 668, 
subpart F, the scope of substantial misrepresentation is broader in 
that it includes misrepresentations that could have reasonably been 
relied upon by any person, as opposed to misrepresentations that were 
actually reasonably relied upon by a borrower. It is also conceivable 
that there could be a case in which a borrower did experience detriment 
through reasonably relying on a misrepresentation--for example, by 
having been induced to attend a school he or she would not have 
otherwise--yet the school provided sufficient value to the borrower or 
would have provided sufficient value to a reasonable student in the 
position of the borrower so as to merit less than full, or no, relief. 
Nevertheless, the school in such a case may still face fines or other 
enforcement consequences by the Department under its enforcement 
authority in part 668, subpart F, because a borrower reasonably relied 
on the school's misrepresentation to his or her detriment.
    We disagree that the relief determination process would be 
subjective. Agency tribunals and State and Federal courts commonly make 
determinations on relief. We do not believe the process proposed 
provides a presiding designated Department official or hearing official 
presiding, as applicable, with more discretion than afforded triers-of-
fact in other adjudicative forums.
    We also disagree with commenters who expressed concerns that 
borrowers may be disadvantaged due to resource inequities between 
students and schools. As discussed under ``Process for Individual 
Borrowers (Sec.  685.222(e)),'' under the individual application 
process, a borrower will not be involved in an adversarial process 
against a school. In the group processes described in Sec.  685.222(f) 
to (h), the Department will designate a Department official to present 
borrower claims, including through any relief phase of the fact-finding 
process. If a borrower does not wish to have the Department official

[[Page 75976]]

assert his or her claim in the group borrower defense process, the 
borrower may opt-out of the process and pursue his or her claim under 
the individual borrower defense process under Sec.  685.222(e).
    We note that, in determining relief for a borrower defense based on 
a judgment against the school, where the judgment awards specific 
financial relief, the relief will be the amount of the judgment that 
remains unsatisfied, subject to the limitation provided for in Sec.  
685.222(i)(8) and any other reasonable considerations. Where the 
judgment does not award specific financial relief, the Department will 
rely on the holding of the case and applicable law to monetize the 
judgment, subject to the limitation provided for in Sec.  685.222(i)(8) 
and any other reasonable considerations. In determining relief for a 
borrower defense based on a breach of contract, relief in such a case 
will be determined according to the common law of contract subject to 
the limitation provided for in Sec.  685.222(i)(8) and any other 
reasonable considerations.
    Changes: We have revised Sec.  685.222(i) to remove references to 
methods or calculations for relief. We have included factors that will 
be incorporated by a designated Department official or hearing official 
deciding the claim, including the COA paid by the borrower to attend 
the school, as well as the value of the education to the borrower. In 
addition, the Department official or hearing official deciding the 
claim may consider any other relevant factors.
    We have revised Sec.  685.222(i) to clarify how relief is 
determined for a borrower defense based upon a judgment against the 
school or a breach of contract by the school.
    We include that for group borrower defense claims under Sec.  
685.222(h), the school has the burden of proof as to any value or 
benefit of the education.
    We have also revised Appendix A to describe conceptual examples for 
relief.

Calculation of Relief

    Comments: Some commenters raised concerns about the appropriateness 
of the specific factors for consideration, and methods to be applied, 
in calculating partial relief. Specifically, some commenters were 
concerned about relying on student employment outcomes to determine the 
value of a borrower's education. These commenters noted that graduates 
exercise substantial discretion in determining what type of employment 
to pursue after graduation, which would likely impact relevant 
calculations. These commenters also cited variations in median income 
throughout the country as another factor that could potentially 
complicate the calculation process. One commenter objected to 
consideration of the expected salary for the field, because expected 
salaries in certain professions are so low. These commenters 
recommended that earnings benchmarks not be considered in the 
calculation of relief because of the risk of discrepancies associated 
with those considerations.
    Some commenters were concerned about the reliability of the 
proposed methods for calculating relief in Appendix A. Specifically, 
commenters raised concerns about the method for calculating relief in 
paragraph (A). Under this method, relief would be provided in an amount 
equivalent to the difference between what the borrower paid, and what a 
reasonable borrower would have paid absent the misrepresentation. These 
commenters suggested that this assessment would be unreliable because 
it would involve speculation by the official tasked with valuing a 
counterfactual.
    In addition, some commenters disapproved of the method in paragraph 
(C), which would cap the amount of economic loss at the COA. These 
commenters suggested that legally cognizable losses often exceed the 
COA. Some commenters also disapproved of the proposal to discount 
relief when a borrower acquires transferrable credits or secures a job 
in a related field. According to these commenters, the discounted 
relief would not reflect the true harm experienced by the borrowers. 
These commenters stated that transferrable credits often lose their 
value because they are either not used, or used at another predatory or 
low-value school. These commenters also argued that discounting relief 
based on transferrable credits could penalize borrowers with otherwise 
meritorious defenses who opt to take a teach out. Some commenters also 
argued that discounting relief when a borrower obtains a job in the 
field with typical wages may penalize borrowers who succeed at finding 
work despite the failings of their programs. One commenter was 
concerned that the method in paragraph (C) may be read to place a 
burden on the borrower to produce evidence that the education he or she 
received lacks value.
    One commenter suggested minimizing the potential for subjectivity 
by replacing the proposed methods of calculation with a system for 
scheduling relief based on the nature of the claim. This commenter 
recommended providing a table outlining the percentage of loan 
principal to be relieved for each of a series of specific enumerated 
claims. Another commenter suggested that the Department specify a 
single theory for calculating damages that would apply in each class of 
borrower defense cases.
    Some commenters requested additional information about the 
circumstances that may impact partial relief determinations.
    Discussion: We acknowledge commenters' concerns with the various 
methods in proposed Appendix A, some of which highlighted specific 
concerns about different methods' applicability to various fact-
specific scenarios. As discussed earlier, we also appreciate that 
references to calculations or methods for relief may be confusing. As a 
result, we have revised Appendix A to reflect conceptual examples to 
provide guidance to borrowers, schools, and Department employees as to 
different scenarios that might lead to full, partial, or no relief. As 
stated in revised Sec.  685.222(i), the examples are not binding on the 
Department or hearing official presiding over a borrower defense claim. 
Rather, they are meant to be simple, straight-forward examples 
demonstrating possible relief scenarios, and the outcomes of any 
borrower defense case may vary from the examples depending on the 
specific facts and circumstances of each case.
    Changes: We have revised Appendix A to describe conceptual examples 
for relief.
    Comments: Some commenters were concerned that the proposed 
regulations would grant Department officials the authority to make 
determinations for which they are not qualified. Specifically, 
commenters were concerned that the proposed regulations do not require 
the Department to rely on expert witnesses for certain calculations, 
despite the fact that they may be necessary in some cases.
    Commenters also stressed the importance of ensuring the 
independence of the officials involved in making relief determinations. 
Similarly, some commenters requested more specificity and transparency 
regarding who will be calculating relief and how they will be 
conducting those calculations.
    Discussion: We believe that Department officials designated to hear 
individual claims, and the Department hearing officials who preside 
over the group claim proceedings have the capability to evaluate 
borrower defense claims based upon the Federal standard, similar to how 
Department employees perform determinations in other agency 
adjudications.
    As discussed under ``General'' and ``Group Process for Borrower 
Defense,''

[[Page 75977]]

the Department will structure the borrower defense proceedings in ways 
to ensure the independence and objectivity of the Department employees 
presiding over such processes. With regard to commenters' concerns 
about transparency and specificity, as established in Sec.  685.222(e), 
(g) and (h), the decisions made in the proceedings will be made 
available to involved parties and will specify the basis of the 
official's determination. All of the Department's administrative 
determinations are presumptively available for public disclosure, 
subject to privacy concerns.
    Changes: None.

Group Relief

    Comments: Some commenters argued that group relief should be 
limited to situations in which a preponderance of the evidence shows 
that no member of the group received any identifiable benefit from his 
or her education. These commenters suggested that group relief would 
frustrate the Department's efforts to ensure that borrowers receive 
only the relief to which they are entitled. These commenters suggested 
that in the limited circumstances where group relief is provided, the 
amount should be determined based on a statistically valid sample of 
students. Some commenters also opposed the Department's proposal to 
consider potential cost to taxpayers in making group relief 
determinations.
    Discussion: Section 685.222(a)(2), for loans first disbursed after 
July 1, 2017, explicitly states that borrower defenses must be 
established by a preponderance of evidence. This requirement applies 
regardless of whether the borrower defenses at issue are raised in the 
procedure for an individual borrower in Sec.  685.222(e) or in the 
group processes under Sec.  685.222(f) to (h). However, for group 
claims, Sec.  685.222(f) establishes that the group process may be 
initiated upon the consideration of factors including the existence of 
common facts and claims among the members of the group. How the 
preponderance of evidence requirement may apply in group borrower 
defenses cases may vary from case to case. Additionally, as discussed 
earlier, for cases of substantial misrepresentation, the starting point 
for any relief determination is the full amount of the borrower's costs 
incurred to attend the institution. We have revised Sec.  685.222(i) to 
provide that in such cases against an open school, the burden shifts to 
the school to prove the existence of any offsetting value to the 
borrowers provided by the education paid for with the proceeds of the 
loans at issue.
    We disagree with commenters that the regulation should specify that 
relief should be based upon a statistically valid sample of students at 
this time. While a statistically valid sample may be appropriate for 
some cases, we believe the determination of what may be the criteria 
for an appropriate sample for group borrower defense cases should be 
developed on a case by case basis.
    We discuss our reasons for including fiscal impact as a factor for 
consideration in the initiation of group processes under ``Group 
Process for Borrower Defense.'' Section 685.222(i), which pertains to 
the relief awarded for either a group or individual borrower defense 
claim, does not include a consideration of fiscal impact.
    Changes: We have revised Sec.  685.222(i) to provide that in group 
borrower defense cases against an open school, the burden shifts to the 
school to prove the existence of any offsetting value to the students 
provided by the education paid for with the proceeds of the loans at 
issue.

Expand the Scope of Available Relief

    Comments: Some commenters argued that full relief must extend 
beyond loans, costs, and fees to account for other expenses associated 
with school attendance. These commenters cited expenses such as travel 
expenses, costs of not pursuing other opportunities, child care 
expenses, consequential losses, and nonfinancial harms including pain 
and suffering. Commenters also noted that borrowers who attend 
fraudulent schools often lose out on portions of their lifetime Federal 
loan and grant eligibility, effectively losing several thousands of 
dollars in Pell grants that could be used towards other educational 
opportunities. To support the expansion of relief, one commenter cited 
State unfair and deceptive practices laws, under which all types of 
harms--direct and consequential, pecuniary and emotional--may provide 
the basis for relief.
    Some commenters argued that relief should include updates to 
consumer reporting agencies to remove adverse credit reports. Citing 
the impact of negative credit reports on borrowers' ability to find 
employment, own a home, etc., commenters urged the Department to adopt 
language clarifying that any adverse credit history pertaining to any 
loan discharged through a borrower defense will be deleted. Some 
commenters suggested that the language in proposed Sec.  
685.222(i)(4)(ii) conform to the language in proposed Sec.  
685.206(c)(2)(iii), which requires the Department to fix adverse credit 
reports when it grants discharges. Additionally, some commenters argued 
that relief should include a determination that the borrower is not in 
default on the loan and is eligible to receive assistance under title 
IV.
    One commenter requested simplification of the language describing 
available relief, specifically, removal of the portion of Sec.  
685.222(i)(5) describing the unavailability of non-pecuniary relief on 
the basis that the provision would cause confusion.
    Discussion: The Department's ability to provide relief for 
borrowers is predicated upon the existence of the borrower's Direct 
Loan, and the Department's ability to provide relief for a borrower on 
a Direct Loan is limited to the extent of the Department's authority to 
take action on such a loan. Section 455(h) of the HEA, 20 U.S.C. 
1087e(h), gives the Department the authority to allow borrowers to 
assert ``a defense to repayment of a [Direct Loan],'' and discharge 
outstanding amounts to be repaid on the loan. However, section 455(h) 
also provides that ``in no event may a borrower recover from the 
Secretary . . . an amount in excess of the amount the borrower has 
repaid on such loan.'' As a result, the Department may not reimburse a 
borrower for amounts in excess of the payments that the borrower has 
made on the loan to the Secretary as the holder of the Direct Loan.
    Additionally, Sec.  685.222(i)(8) also clarifies that a borrower 
may not receive non-pecuniary damages such as damages for 
inconvenience, aggravation, emotional distress, or punitive damages. We 
recognize that, in certain civil lawsuits, plaintiffs may be awarded 
such damages by a court. However, such damages are not easily 
calculable and may be highly subjective. We believe that excluding non-
pecuniary damages from relief under the regulations would help produce 
more consistent and fair results for borrowers.
    The Department official or the hearing official deciding the claim 
would afford the borrower such further relief as the Department 
official or the hearing official determines is appropriate under the 
circumstances. As specifically noted in Sec.  685.222(i)(7), that 
relief would include, but not be limited to, determining that the 
borrower is not in default on the loan and is eligible to receive 
assistance under title IV of the HEA, and updating reports to consumer 
reporting agencies to which the Secretary previously made adverse 
credit reports with regard to the borrower's Direct Loan. We do not

[[Page 75978]]

believe a modification of this provision to conform with Sec.  
685.206(c)(2)(iii) is necessary.
    Changes: None.
    Comments: Some commenters suggested that the proposed regulations 
could result in excessive institutional liability. These commenters 
argued that institutions should be liable under a successful claim only 
for costs related to tuition and fees, rather than all amounts 
borrowed. Commenters supported limiting claims for relief to the 
payment of loans issued under title IV, and only the portion of loans 
directly related to the costs of the education. Some commenters 
proposed that relief be limited to funds actually received by the 
institution. One commenter cited the measure of student loan debt 
contained in the Department's Gainful Employment regulations to support 
this proposed cap on relief. In support of this position, several 
commenters argued that some students borrow excessively, and 
institutions play a limited role in determining the level or purpose of 
student borrowing. These commenters opposed holding institutions liable 
for loans borrowed to support a student's living expenses because of 
the attenuated nature of the nexus between any act or omission 
underlying a valid borrower defense claim and a student's living 
expenses while enrolled. These commenters were concerned that assigning 
responsibility to schools in excess of tuition and fees would 
constitute an unjustifiable, unprecedented expansion of potential 
institutional liability.
    Discussion: Since their inception, the Federal student loan 
programs were designed to support both tuition and fees and living 
expenses in recognition of the fact that students need resources such 
as food and housing when they are pursuing their educations. Indeed, 
the HEA's definition of cost of attendance, 20 U.S.C. 1087ll, includes 
tuition, fees, books, supplies, transportation, miscellaneous personal 
expenses including a reasonable allowance for the documented rental or 
purchase of a personal computer, room and board, childcare, and 
expenses related to a student's disability if applicable. When a 
student makes the choice to attend an institution, he is also choosing 
to spend his time in a way that may require him to take out Federal 
loans for living expenses, and very likely to forgo the opportunity to 
work to defray those costs from earnings. If he had not chosen to 
attend the institution, he would not have taken out such loans for 
living expenses: His Federal aid eligibility depends on his attendance 
at the institution. Therefore we believe that an institution's 
liability is not limited to the loan amount that the institution 
received, since it does not represent the full Federal loan cost to 
students for the time they spent at the institution.\36\ Regarding 
comments suggesting that some students borrow excessively and that 
institutions play a limited role in determining borrowing levels, it is 
important to note that institutions have the discretion to determine a 
reasonable COA based on information they have about their students' 
circumstances. Limiting gainful employment measurements to amounts 
borrowed for tuition and fees was reasonable for the context in which 
that approach was taken--measurement of eligibility of an entire 
program, based on borrowing decisions made by an entire cohort of 
completers. That context is not the paradigm for considering actual 
loss to individual borrowers. As discussed here, an institution may 
already face exposure in a private lawsuit for amounts greater than the 
amount the institution charged and received as tuition and fees, and 
the commenter offers no reason, and we see none, why a different rule 
should apply to determining the extent of the institution's liability 
for the same kinds of claims if successfully proven in the borrower 
defense context.
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    \36\ Common law recognizes that a party who may rescind a 
transaction and obtain restitution from the defendant of amounts 
paid to the defendant may also assert a claim for related 
expenditures made in reliance on the rescinded transaction.
    Compensation of such loss by an award of damages is a remedy 
different in kind from rescission and restitution, but the remedies 
are not necessarily inconsistent when the claimant's basic 
entitlement is to be restored to the status quo ante. Damages 
measured by the claimant's expenditure can be included in the 
accounting that accompanies rescission, in order to do complete 
justice in a single proceeding. Recovery of what are commonly called 
``incidental damages'' may thus be allowed in connection with 
rescission, consistent with the remedial objective of restoring the 
claimant to the precontractual position.
    Restatement (Third) of Restitution and Unjust Enrichment, Sec.  
54 note (i).
---------------------------------------------------------------------------

    Changes: None.

Fiscal Impact Considerations Inappropriate

    Comments: Commenters argued that full relief should be provided 
without consideration of fiscal concerns. Some commenters were 
concerned that consideration of fiscal impact would lead to groups of 
borrowers being denied relief to which they are entitled because of 
financial concerns. These commenters acknowledged taxpayer interests, 
but stated that taxpayers would benefit in the long term from a 
presumption of full relief because the presumption would deter fraud 
and increase institutional accountability. Some commenters also 
suggested that partial relief would negatively impact Department 
incentives and conduct by, for example, reducing the Department's 
incentive to monitor schools appropriately on the front end. One 
commenter opposed consideration of fiscal impact because of concerns 
about the Department's potential to profit off of the student loan 
program.
    Discussion: We discuss our reasons for including fiscal impact as a 
factor for consideration in the initiation of group processes under 
``Group Process for Borrower Defense.'' Section 685.222(i), which 
pertains to the relief awarded for either a group or individual 
borrower defense claim, does not include a consideration of fiscal 
impact.
    Changes: None.

Institutional Accountability

Financial Responsibility

General Standards Sec.  668.171
Scope of Rulemaking
Retroactivity and Authority
    Comments: Commenters argued that the proposed financial protection 
triggers exceeded the Department's authority under the HEA to assess 
financial responsibility on the ground that the proposed regulations 
would be impermissibly retroactive. In particular, commenters objected 
to the proposed requirement in Sec.  668.171(c)(3) that a school is not 
financially responsible if it has been required by its accreditor to 
submit a teach-out plan because of a Department action to limit, 
suspend, or terminate the school, or if its accreditor has taken 
certain actions due to failure to meet accreditor standards and not 
later notified the Department that the failure has been cured.
    Others objected that proposed Sec.  668.171(c)(1)(i)(A) is also 
impermissibly retroactive by providing that a school that, currently or 
during the three most recently completed award years, is or was 
required to pay a debt or liability arising from a Federal, State, or 
other oversight entity audit or investigation, based on claims related 
to the making of a Federal loan or the provision of educational 
services, or that settles or resolves such an amount that exceeds the 
stated threshold, is not financially responsible. Under proposed Sec.  
668.175(f)(1)(i), an institution affected by either Sec.  
668.171(c)(1)(i)(A) or (c)(3) could continue to participate in the 
title IV, HEA programs only under provisional certification and by 
providing financial protection in an amount not less than 10 percent of 
the amount of Direct Loan funds or title IV,

[[Page 75979]]

HEA funds, respectively, received in the most recently completed fiscal 
year.
    Discussion: None of the litigation or other provisions of the 
regulation are impermissibly retroactive. They attach no new liability 
to an event or transaction that was permissible at the time it occurred 
and that occurred prior to the effective date of the regulations. They 
simply address the risk that certain events that occurred prior to the 
effective date of the regulations create risks that warrant protection 
now. The risks in these instances are that these suits, and the other 
events included in Sec.  668.171(c), can cause the institution to close 
or so substantially reduce operations as to generate closed school 
discharge claims, borrower defense claims, or both, from the students 
who are directly affected by the action at issue. The school is liable 
for borrower defense claims and closed school discharge claims; the 
requirement that the school provide financial protection does not 
increase any liability that would otherwise attach, but merely provides 
a resource that the Department may access to meet liabilities that 
would already arise if borrowers were to seek discharges on either 
ground. In either case, the Department would establish any such 
liability in the same manner in which it would were there no protection 
provided, and would release or refund any portion of the financial 
protection that was not needed to satisfy any claims established under 
those procedures, in which the school would have the same opportunity 
to object to the claims and be heard on those objections as it would 
have if no protection had been provided.
    Regulated parties have repeatedly challenged Department rules that 
attached particular new consequences to actions that have already 
occurred. Courts have regularly rejected claims that regulations that 
operate like the regulations adopted here are impermissibly 
retroactive. A regulation is unconstitutionally retroactive if it 
``alter[s] the past legal consequences of past actions'' \37\ or, put 
another way, if it ``would impair rights a party possessed when he 
acted, increase a party's liability for past conduct, or impose new 
duties with respect to transactions already completed.'' \38\ Thus, 
whether a regulation ``operates retroactively'' turns on ``whether the 
new provision attaches new legal consequences to events completed 
before its enactment.'' \39\ It is, however, well settled that ``[a] 
statute is not rendered retroactive merely because the facts or 
requisites upon which its subsequent action depends, or some of them, 
are drawn from a time antecedent to the enactment.'' \40\ Nor is a 
statute impermissibly retroactive simply because it ``upsets 
expectations based in prior law.'' \41\ Like each of the regulations 
challenged in these cases, the present regulations in some instances 
would attach prospectively consequences for certain actions that 
occurred prior to the effective date of the regulations, but would not 
attach any new liability to those actions or transactions that were 
permissible when the events occurred.
---------------------------------------------------------------------------

    \37\ Ass'n of Private Sector Colleges & Universities v. Duncan, 
110 F. Supp. 3d 176, 196 (D.D.C. 2015), aff'd sub nom. Ass'n of 
Private Sector Colleges & Universities v. Duncan, 640 F. App'x 5 
(D.C. Cir. 2016) (internal citations removed)
    \38\ Ass'n of Proprietary Colleges v. Duncan, 107 F. Supp. 3d 
332, 356 (S.D.N.Y. 2015) (gainful employment measured by using debt 
and earnings incurred prior to effective date of new rule); see 
also: Ass'n of Accredited Cosmetology Sch. v. Alexander, 774 F. 
Supp. 655, 659 (D.D.C. 1991), aff'd, 979 F.2d 859 (D.C. Cir. 1992), 
and order vacated in part sub nom. Delta Jr. Coll., Inc. v. Riley, 1 
F.3d 45 (D.C. Cir. 1993) and Ass'n of Accredited Cosmetology Sch. v. 
Alexander, 979 F.2d 859, 864 (D.C. Cir. 1992) (application of cohort 
default rate to eligibility using pre-rule data).
    \39\ Id.
    \40\ Ass'n of Proprietary Colleges v. Duncan, 107 F. Supp. 3d at 
356.
    \41\ Id.
---------------------------------------------------------------------------

    Moreover, we have clarified that the regulations apply to any 
triggering events that occur on or after July 1, 2017. We have also 
removed the two triggers highlighted by these commenters as looking to 
certain past events in a way that mitigates almost all of the 
commenters' concerns. First, we modified the accrediting agency actions 
trigger substantially, to assess as an automatic trigger \42\ only the 
effect of a closure of a school or location pursuant to a teach-out 
requirement, and consider other accreditor actions occurring in the 
past three years only as a discretionary trigger. There is no three-
year look-back in the automatic trigger. For this and other 
discretionary triggers, there is an opportunity for further review of 
the impact of those events. We have removed the three-year look-back in 
the lawsuits and other actions trigger. These changes are described in 
more detail in the sections specific to these triggers. Finally, as we 
have described, the final regulations permit an institution to 
demonstrate, either when it reports the occurrence of a triggering 
event or in an action for failure to provide a required letter of 
credit or other financial protection, that an event or condition no 
longer exists or has been resolved or that it has insurance that will 
cover the debts and liabilities that arise at any time from that 
triggering event.
---------------------------------------------------------------------------

    \42\ Under the proposed regulations, an institution would not be 
financially responsible for at least one year if it was subject to a 
triggering event that exceeded a materiality threshold or for a 
State or accrediting agency action, three years after that action. 
In these final regulations, an institution is not financially 
responsible if an automatic triggering event such as a lawsuit or 
loss of GE program eligibility produces a recalculated composite 
score of less than 1.0 or for a 90/10 or CDR violation or SEC 
action, the occurrence of that violation or action. In both the NPRM 
and these final regulations, discretionary triggers refer to 
actions, conditions, or events that are evaluated by the Department 
on a case-by-case basis to determine whether they have a material 
adverse impact on the financial condition or operations of the 
institution.
---------------------------------------------------------------------------

    Changes: We have revised Sec. Sec.  668.90(a)(iii) and 668.171(h) 
to include consideration of insurance; we have removed the three-year 
period for review from Sec.  668.171(c); we have revised the teach-out 
provisions in Sec.  668.171(c)(1)(iii) to consider only the effect on 
the overall institutional financial capability of closures of locations 
or institutions as determined by recalculating the institution's 
composite score, as discussed more fully under the heading ``Teach-out 
Plan''; and we have revised Sec.  668.171(b) to provide that the 
regulations address only those triggering events or conditions listed 
in Sec.  668.171(c) through (g) that occur after July 1, 2017.
    Comments: Several commenters contended that the proposed triggers 
in Sec.  668.171(c) fail to take into account the provisions in section 
498(c)(3) of the HEA that require the Secretary to determine that an 
institution is financially responsible if the school can show, based on 
an audited and certified financial statement, that it has sufficient 
resources to ensure against precipitous closure, including the ability 
to meet all of its financial obligations. To support this contention, 
the commenters stated that the proposed regulations do not provide a 
process or procedural mechanism for an institution to make this 
statutory showing before the Department would require the institution 
to submit a letter of credit in response to running afoul of an 
automatic trigger.
    Similarly, some commenters stated that requiring financial 
protection by reason of the occurrence of a single triggering event was 
contrary to the requirement in section 498(c)(1) of the HEA that the 
Department assess the financial responsibility of the institution in 
light of the total financial circumstances of the institution.
    Other commenters stated that section 498(c) of the HEA requires the 
Department to assess financial responsibility based solely on the 
audited financial statements provided by the institution under section 
487(c) of the HEA.

[[Page 75980]]

    Discussion: Section 498(c) of the HEA directs the Secretary to 
determine whether the institution ``is able . . . to meet all of its 
financial obligations, including (but not limited to) refunds of 
institutional charges and repayments to the Secretary for liabilities 
and debts incurred in programs administered by the Secretary.'' 20 
U.S.C. 1099c(c)(1). The statute uses the present tense to direct the 
Secretary to assess the ability of the institution to meet current 
obligations. The statute then provides that the Secretary shall also 
develop criteria based on financial ratios, which are to be measured 
and reported in audited financial statements. 20 U.S.C. 1099c(c)(2), 
(5). Obligations that accrued in the past may be reflected in financial 
statements showing the institution's financial status as of the close 
of the most recent institutional fiscal year, which are to be submitted 
to the Department ``no later than six months after the last day of the 
institution's fiscal year.'' 34 CFR 668.23(a)(4). Obligations that 
accrue after the close of that fiscal year are not included in those 
statements, and those losses that are considered probable may receive 
limited recognition in those statements. Potential losses from pending 
litigation that are not yet considered probable are not included in 
those statements.
    Thus, as the commenters state, the statute directs the Secretary to 
take into account ``an institution's total financial circumstances in 
making a determination of its ability to meet the standards herein 
required.'' 20 U.S.C. 1099c(c)(2). Far from precluding the Secretary 
from giving controlling weight to a single significant occurrence in 
making this determination, the statute recognizes that the Secretary 
may do so if certain enumerated single adverse events have occurred in 
the past two to five years (e.g., audit liabilities exceeding five 
percent of the institution's prior year title IV, HEA funding, or a 
limitation, suspension or termination action or settlement of such an 
action). 20 U.S.C. 1099c(e). The Secretary has since, at least the 1994 
regulations, consistently considered even one such ``past performance'' 
event as sufficient grounds to render an institution not financially 
responsible even if it met or exceeded the requisite composite 
financial score, and if the Secretary nevertheless permitted the 
institution to participate, the institution was required to do so under 
provisional certification with financial protection. 34 CFR 668.174(a), 
668.175(f), (g). The current regulations have also considered an 
institution not financially responsible if the institution is currently 
delinquent by at least 120 days on trade debt, and at least one 
creditor has sued. 34 CFR 668.171(b)(3). Thus, in considering the 
institution's total financial circumstances, the Secretary has 
consistently regarded a single such occurrence as a sufficient threat 
to the institution's ability ``to meet . . . its financial 
obligations'' as to make the institution not financially responsible. 
In so doing, the current regulations do not delegate to the suing 
creditor, or to the guarantor that brought the limitation, suspension, 
or termination action, the determination of the financial 
responsibility of the institution. To the contrary, the current 
regulations already identify particular past or present events as 
raising significant threats to the institution's ability to meet 
current obligations to creditors, to students, and to the taxpayer. The 
changes to the financial responsibility regulations articulate a more 
comprehensive list of adverse events that similarly call into question 
the institution's ability to meet current and impending obligations.
    Changes: None.
    Comments: Some commenters argued that under the APA, the Department 
cannot enact regulations applicable to time periods prior to the 
enactment of those regulations and therefore should remove the proposed 
Sec.  668.171(c)(3), which would impose penalties on an institution 
that is currently, or was any time during the three most recently 
completed award years, subject to an action by its accrediting agency.
    Discussion: As discussed above, in response to the commenters' 
objection that the rules are impermissibly retroactive, they are not 
because they affect only future participation. In light of the adoption 
of the composite score methodology, in this section, we evaluate risks 
under that methodology as they affect the current financial 
responsibility of the institution. We evaluate on a three-year look-
back period, as a discretionary triggering event, only certain 
accreditor actions.
    Changes: We have revised Sec.  668.171(c)(1)(i) so that it does not 
include events that occurred in the prior three years, we have revised 
Sec.  668.171 to apply to events occurring on or after July 1, 2017, 
and we have relocated accreditor actions regarding probation and show 
cause to Sec.  668.171(g)(5) as discretionary triggers.
Penalty-Financial Protection
    Comments: A commenter stated that requiring the institution to 
provide financial protection constituted a penalty on the institution, 
and that requiring the institution to provide such protection from its 
own funds constituted a deprivation of the institution's property 
interest in those institutional funds. The commenter stated that the 
requirement would also deprive the institution of its liberty interest 
by stigmatizing it. The commenter stated that the proposed requirement 
offered the institution no opportunity to dispute the requirement prior 
to the deprivation of these interests, and thus the deprivation would 
be imposed without the due process required by applicable law. The 
commenter stated that Congress requires the Department to provide 
schools with meaningful procedures before the imposition of a 
significant penalty. Specifically, the commenter stated that section 
487 of the HEA requires the Department to afford schools ``reasonable 
notice and opportunity for hearing'' before imposing a ``civil 
penalty.'' This requirement applies when the Department seeks to limit, 
suspend, or terminate the school's participation in any title IV, HEA 
program; determine that a school has made a substantial 
misrepresentation; or determine that a school has violated statutes or 
regulations concerning the title IV, HEA programs, each of which carry 
severe penalties. The commenter asserted that the required financial 
protection under this rule constitutes a civil penalty under the HEA, 
and is in fact far more onerous than the other examples in the HEA. 
Accordingly, the commenter contended that the Department must afford 
parties the same process that Congress contemplated in analogous 
circumstances.
    Discussion: The requirement that the school provide financial 
protection is not a ``penalty'' under the HEA, which clearly labels as 
``civil penalties'' what the regulations refer to as ``fines.'' 20 
U.S.C. 1094(c)(3)(B); 34 CFR 668.84. In contrast, section 498(c) of the 
HEA refers to financial protections using completely different terms: 
``third party guarantees,'' ``performance bonds,'' and ``letters of 
credit.'' The fact that the financial protections may inconvenience or 
burden the school in no way makes their requirement a ``penalty.'' 
However, current regulations already require the Department to provide 
the school with the procedural protections that the commenter seeks. 34 
CFR 668.171(e) requires that the Department enforce financial 
responsibility standards and obligations using the procedures pertinent 
to the school's participation status; for fully certified schools, the 
regulations require the Department to use termination or limitation 
actions under subpart G of

[[Page 75981]]

part 668 to enforce the requirement that the school's participation be 
terminated for lack of financial responsibility, or that the school's 
continued participation be reduced to provisional participation status 
and further conditioned on the provision of financial protection. 
Current regulations already assure that the school will receive all the 
procedural protections to which the HEA entitles it, not because the 
Department would deprive the school of its property right in its funds 
(which the financial standards would not do), but because the method of 
enforcing the financial responsibility obligation is through a 
termination or limitation action, subject to the procedural protections 
of an administrative hearing. 34 CFR part 668, subpart G. These 
requirements will not change under the new regulations.
    Section 668.90(a) affords the school the opportunity to 
demonstrate, in the administrative proceeding, that a proposed 
limitation or termination is ``unwarranted.'' That same regulation, 
however, includes some 14 specific circumstances in which the hearing 
official has no discretion but to find that the proposed action is 
``warranted'' if certain predicate facts are proven. Among these 
restrictions is a provision that, in a proposed enforcement action 
based on failure to provide ``surety'' in an amount demanded, the 
hearing official must find the action warranted unless the hearing 
official concludes that the amount demanded is ``unreasonable.'' In 
addition, Sec.  668.174 provides explicit, detailed, curative or 
exculpatory conditions that must be met for a school subject to a past 
performance issue to participate. However, these substantive 
requirements are not incorporated in subpart G of part 668, the 
regulations regarding the conduct of limitation or termination 
proceedings. This may have created the impression that an institution 
subject to the requirements of Sec.  668.174 could raise a challenge to 
those requirements in an administrative action to terminate or limit 
the institution that does not meet the requirements of Sec.  668.174. 
This was never the intent of the Department. We therefore revise the 
regulations in Sec.  668.90 governing hearing procedures to make clear 
that the requirements in current Sec.  668.174 that limit the type and 
amount of permitted curative or exculpatory matters apply in any 
administrative proceeding brought to enforce those requirements. As for 
the restriction in the final regulations on challenges to a requirement 
that the school provide the ``surety'' or other protection, the 
Department is updating and expanding one of the existing 14 provisions 
in which an action must be found warranted if a predicate fact is 
proven--in this case, the occurrence of certain triggering events, 
established through notice-and-comment rulemaking, that pose 
significant risk warranting the provision of adequate financial 
protection, in a minimum amount also established as sufficient through 
this same notice-and-comment rulemaking, with any added amount demanded 
and justified on a case-by-case basis. The Department is significantly 
revising the triggers proposed in the NPRM to simplify and reduce the 
number of conditions or occurrences that qualify as automatic triggers. 
As we discuss in adopting the composite score methodology, we measure 
the effect of most of the triggering events not in isolation, but only 
as each may affect the overall financial strength of the institution, 
as that strength was most recently assessed under the financial ratio 
analysis adopted in current regulations. Sec.  668.172. And, for all 
discretionary triggers, the Department undertakes to assert a demand 
for protection only on a case-by-case basis, with full articulation of 
the reasons for the requirement.\43\ For these discretionary triggers, 
a school may contest not only whether the predicate facts have actually 
occurred, but also whether the demanded ``surety''--financial 
protection--is reasonable.
---------------------------------------------------------------------------

    \43\ As discussed with regard to determining the appropriate 
amount of financial protection, ordinarily the expected result of 
closure or a significant reduction in operations is closed school 
discharge claims. We recognize that in some instances financial 
protection may be warranted for an institution that does not 
participate in a title IV, HEA loan program, and its closure thus 
cannot generate closed school claims. Such an institution remains 
subject to a demand based on a discretionary assessment of other 
potential losses, and we have revised Sec.  668.90(a)(3) to ensure 
that such an institution can object to a demand for financial 
protection if that demand was based solely on the 10 percent minimum 
requirement generally applicable.
---------------------------------------------------------------------------

    Changes: We have revised Sec.  668.90(a)(3) to incorporate the 
limitations contained in current Sec.  668.174, as well as the limits 
on challenges to demands for financial protection based on the 
automatic triggers in Sec.  668.171(c)-(f) as modified in these final 
regulations.

Composite Score and Triggering Events

General
    Comments: Some commenters believed that the Department should not 
promulgate new financial responsibility requirements, or have otherwise 
engaged in a rulemaking to do so, without reviewing and making changes 
to the composite score methodology used in the current financial 
responsibility standards in subpart L of part 668, particularly in view 
of changing accounting standards, and the manner in which the 
Department applies, calculates, and makes adjustments to the composite 
score.
    Similarly, other commenters contrasted the process used to develop 
these financial responsibility amendments with the process used by the 
Department to develop the subpart L standards. The commenters noted 
that, in developing the subpart L standards, the Department engaged in 
systematic, sustained efforts to study the issue and develop its 
methodology through the formal engagement and aid of KPMG, an expert 
auditing firm, with significant community involvement. That process 
took approximately two years, and began with empirical studies by KPMG 
into the potential impact of the rule over a year before the issuance 
of any proposed language. The commenters stated that, in this case, the 
Department is rushing out these revisions without the necessary and 
appropriate analysis. Commenters noted that the Department produced 
draft language on the triggers and letter of credit requirements in the 
second negotiated rulemaking session, but with no significant 
accompanying analysis or basis for its proposal, and did not consult 
effectively or sufficiently with affected parties or prepare sufficient 
information and documentation to convey, or for the negotiated 
rulemaking panel to understand, the impact of this portion of the 
proposed regulations.
    Some commenters were concerned that the Department did not 
harmonize the proposed financial responsibility provisions with the 
current composite score requirements and questioned whether it was 
reasonable for the Department to require an institution with the 
highest composite score of 3.0 to secure one or more letters of credit 
based on triggering events. The commenters further questioned why the 
Department proposed numerous and overlapping requirements, if the 
Department believes that the current composite score is a valid 
indicator of an institution's financial health.
Overlapping Triggers
    Some commenters argued that it would be unnecessarily punitive to 
list as separate triggering events, and thereby impose stacking letter 
of credit requirements for, items that may be connected to the same 
underlying facts or allegations. For example, a lawsuit or

[[Page 75982]]

administrative proceeding settled with a government oversight agency 
for an amount exceeding a set threshold could lead an institution's 
accrediting agency to place the institution on probation, or an 
institution that fails the 90/10 revenue requirement might thereby 
violate a loan covenant.
    As another example, commenters noted that an institution could be 
subject to a lawsuit or multiple lawsuits about the same underlying 
allegations, an accrediting agency may take action against the 
institution in connection with the same allegations, and a State agency 
may cite the institution for failing State requirements that relate to 
those same allegations. The commenters stated that multiple triggering 
events did not necessarily warrant additional financial protection and 
believed that this ``stacking'' of triggers is especially punitive to 
publicly traded institutions, which may be required to or voluntarily 
elect to disclose certain triggering events, such as lawsuits in 
reports to the SEC where making such disclosures is then itself an 
independent trigger. In this case, the commenters believed it was 
unfair to penalize a publicly traded institution twice, while any other 
institution with fewer shareholders or one that opts to raise capital 
privately would be subject to only one letter of credit requirement.
    Commenters objected that it would be theoretically possible that a 
school could be required to post letters of credit exceeding 100 
percent of the title IV, HEA funds the school receives, effectively 
crippling the school. The commenters cautioned that the Department 
should not require multiple letters of credit stemming from the same 
underlying facts or allegations--rather, the rules should reflect a 
more refined approach for setting an appropriate level of financial 
protection for each unique set of facts or allegations. The commenters 
suggested that to ensure that an institution provides the amount of 
financial protection that relates specifically to its ability to 
satisfy its obligations, the Department should evaluate each triggering 
event that occurs to determine whether any additional financial 
protection is needed.
    A few commenters suggested that, rather than applying the proposed 
triggering events in a one-size-fits-all manner, the Department should 
consider other institutional metrics that serve to mitigate concerns 
about institutional viability and title IV, HEA program risks. For 
example, the commenters suggested that the Department could 
presumptively exclude from many of the new triggers those institutions 
that have low and stable cohort default rates, consistently low 90/10 
ratios, a general lack of accrediting or State agency actions, or any 
combination of these items. The commenters reasoned that, in the 
context of the NPRM, these attributes would generally indicate strong 
student outcomes and less likelihood of borrower defense claims arising 
from the institution. Or, the Department could provide that 
institutions with cohort default rates and 90/10 ratios below specified 
thresholds would not be required to post cumulative letters of credit 
under the new general standards of financial responsibility. Similarly, 
the commenters urged the Department to assess the circumstances of each 
triggering event to determine whether any additional protection is 
needed rather than requiring cumulative letters of credit for each of 
the triggering events. The commenters believed that by taking these 
alternate approaches, the financial responsibility regulations could be 
tailored to assess institutional risk profiles on a more holistic 
basis, rather than in the generally non-discerning manner reflected by 
the NPRM.
    Other commenters requested that the Department specify in the final 
regulations the duration of each letter of credit for each triggering 
event, noting that in the preamble to the NPRM, the Department stated 
that schools subject to an automatic trigger would not be financially 
responsible for at least one year based on that trigger, and in some 
instances, for as long as three years after the event.
    A commenter asserted that the institution should be provided the 
opportunity to demonstrate by audited financial statements that it had 
the resources to ensure against precipitous closure pursuant to section 
498(c)(3)(C) of the HEA.
    Discussion: After carefully considering the comments, the objective 
of the changes that we proposed, and the availability of other 
measures, we are changing the method of assessing the effect of many of 
the triggering events. We explain here briefly the composite 
methodology currently used to evaluate financial strength, and how we 
will use the composite score methodology to evaluate whether, and how 
much, those triggering events actually affect the financial capability 
of the particular institution. In addition, as discussed later in this 
preamble, we are revising and refining the triggers to consider as 
discretionary triggering events several of the events included as 
automatic triggers in the NPRM.
    The composite score methodology in subpart L used under current 
regulations is the product of a comprehensive study of the issue and of 
numerous financial statements of affected institutions, as well as 
substantial industry involvement. The 1997 rulemaking that adopted this 
method established a basic model for evaluating financial 
responsibility that was intended to serve as the core of the 
Department's evaluation process for proprietary and private non-profit 
institutions, replacing a piecemeal approach still reflected in Sec.  
668.15(b)(7), (8), and (9). The regulations in subpart L were adopted 
to replace the prior structure, in which an institution was required to 
satisfy a minimum standard in each of three independent tests. The 
Department replaced that with ``a ratio methodology under which an 
institution need only satisfy a single standard--the composite score 
standard. This new approach is more informative and allows a relative 
strength in one measure to mitigate a relative weakness in another 
measure.'' 62 FR 62831 (Nov. 25, 1997).\44\ However, we note that even 
the prior financial responsibility standards considered whether the 
school was subject to a pending administrative action or suit by a 
Federal agency or State entity. Sec.  668.15(d)(2)(ii)(C). Section 
668.15 contained, and still contains, provisions addressing matters 
that may well occur after the audited period--for example, delinquency 
on an existing debt obligation, and a suit by at least one creditor, 
Sec.  668.15(b)(4)(ii), as well as the same familiar past performance 
standards regarding parties with substantial control over the 
institution or the institution itself. 34 CFR 668.15(c).\45\
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    \44\ The composite score methodology assesses three aspects of 
financial strength but, unlike the prior method, assigns relative 
weights to each of the three assessments to produce a single, 
``composite'' score.
    \45\ The 1994 financial responsibility regulations implemented 
the provision of section 498(c)(3)(C) of the HEA that would have 
allowed an institution that failed other financial responsibility to 
demonstrate by audited financial statements that it would not pose a 
risk of ``precipitous closure.'' Sec.  668.15(d)(2)(ii). The 1997 
regulations supplanted the standards in Sec.  668.15 with new 
subpart L, which centered the assessment of financial responsibility 
on the composite score methodology. The Department there adopted the 
``zone'' assessment to assess ``precipitous closing'' rather than 
the separate audited financial statement showing previously 
permitted. 62 FR 62860-62862 (1997).
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    Although the 1997 regulations replaced the three independent 
financial ratio tests with the new composite score methodology as the 
core measure of financial responsibility,

[[Page 75983]]

those regulations retained most of the accompanying provisions dealing 
with examples of financial risks that would not necessarily or even 
ordinarily be reflected in the audited financial statements on which 
the composite score rests. The Department made clear in the NPRM that, 
despite requests to revisit or modify the composite score component of 
the financial responsibility regulations, we were not doing so. 81 FR 
31359. Thus, we retain here unchanged the methodology that the 
commenters laud as the product of careful, comprehensive, and engaged 
development.
    In these final regulations the Department addresses the 
significance of new events that occur after the close of an audited 
period, or that are not recognized, or not fully recognized, and 
reflected in audited financial statements, to assess whether the 
school, regardless of its composite score, ``is able to provide the 
services described in its publications and statements, to provide the 
administrative resources necessary to comply with the requirements of 
this title [title IV of the HEA], and to meet all its financial 
obligations. . . .'' 20 U.S.C. 1099c(c)(1). In doing so, we are 
expanding the consideration of events that would make a school not 
financially responsible in the near term--from the single example in 
current regulations (commercial creditor lawsuits) to other major 
lawsuits and other events that pose a potential material adverse risk 
to the financial viability of the school. In the negotiated rulemaking 
meetings, and in the NPRM, we articulated the adverse events that 
recent history indicates pose a significant risk to the continued 
ability of an institution to meet these several obligations. We address 
elsewhere in this preamble comments directed at events that pose 
particular risks, but discuss here the manner in which these events 
will be evaluated.
    The composite score methodology, as commenters stressed and as we 
acknowledge, is designed to measure the viability of an institution 
from three different aspects and develop a score that assigns relative 
weight to each aspect to produce a score showing the relative financial 
health and viability of the institution. In general, institutions with 
a composite score of 1.5 or more are financially responsible; those 
with a score between 1.0 and 1.5 are in the ``zone'' and subject to 
increased reporting and monitoring; those with a score below 1.0 are 
not financially responsible, and may participate only on conditions 
that include providing financial protection to the Department. However, 
the limitations of the existing composite score methodology are two-
fold: The score is calculated based on the audited financial statements 
for the most recent fiscal year of the institution, and the audited 
financial statements recognize threatened risks only if accounting 
rules require the institution to recognize those events. If those 
events are recognized, however, the composite score can readily assess 
their effect on the viability of the institution, with due regard for 
the actual financial resources of the institution, including its 
ability to meet exigencies with internal resources and to borrow to 
meet them. The institution's composite score in each instance has 
already been calculated; to assess the effect of a threat or event 
identified in these regulations, the institution's financial statements 
on which that composite score was calculated will be adjusted to 
reflect the amount of loss attributed to, and other impacts of, that 
threat, and based on the adjusted statements, the Department will 
recalculate the institution's composite score. This recalculation will 
occur regularly as threats or events identified in these regulations 
are identified. By adopting this approach, the final regulations 
provide an individualized assessment rather than the one-size-fits-all 
method proposed in the NPRM that commenters found unrealistic. Unless 
other conditions apply, under the current regulations, an institution 
that undergoes a routine assessment of financial responsibility and 
achieves a composite score of 1.5 or greater may continue to 
participate without providing financial protection; an institution with 
a score between 1.0 and 1.5 may participate subject to heightened 
reporting and scrutiny; and an institution with a composite score below 
1.0 is not financially responsible and may participate only with 
financial protection.\46\ Sec. Sec.  668.171(b)(1), 668.175(c), 
668.175(f). Under the approach we adopt here, where the recognition of 
the triggering event produces a recalculated composite score of 1.0 or 
greater, we will regard the event as not posing a risk that makes or is 
likely to make the institution not financially responsible, and will 
therefore not require financial protection. If the recognition of the 
event or risk produces a failing composite score--less than 1.0--the 
institution is required to provide financial protection.\47\
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    \46\ As provided under Sec.  668.175(f)(3), an institution that 
has a composite score of less than 1.0 is not financially 
responsible until it achieves a composite score of 1.5 or higher. In 
other words, if an institution with a composite score of less than 
1.0 has in the following year a composite score between 1.0 and 1.5, 
the institution is still subject to the requirements under the 
provisional certification alternative, including the letter of 
credit provisions, even though it scores in the zone.
    \47\ As the Department stated in the 1997 rulemaking, ``However, 
an analysis of data of closed institutions indicates that 
institutions that fail the ratio test should not be allowed to 
continue to participate without some additional surety to protect 
the Federal interest.''
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    For the purpose of recalculating an institution's composite score, 
as detailed in Appendix C to these regulations, the Department will 
make the following adjusting entries to the financial statements used 
to calculate an institution's most recent composite score. For clarity, 
the adjusting entries refer to the line items in the balance sheet and 
income statements illustrated in Appendix A for proprietary 
institutions and Appendix B for non-profit institutions.
    For a proprietary institution, for events relating to borrower-
defense lawsuits, other litigation, or debts incurred as a result of a 
judicial or administrative proceeding or determination, or for a 
withdrawal of owner's equity, the Department will debit Total Expenses, 
line item #32, and credit Total Assets, line item #13, for the amount 
of the loss--the amount of relief claimed, the debt incurred, the 
amount withdrawn, or other amount as determined under Sec.  
668.171(c)(2). Except for the withdrawal of owner's equity, the 
corresponding entries for a non-profit institution are a debit to Total 
Expenses, line item 38b (unrestricted), and a credit to Total Assets, 
line item #12, for the amount of the loss.
    For a proprietary institution, for events relating to a closed 
location or institution or the potential loss of eligibility for GE 
programs, the Department will debit Total Income, line item #27, and 
credit Total Assets, line item #13, for the amount of the loss. The 
loss is the amount of title IV, HEA funds the institution received in 
the most recently completed fiscal year for the location or institution 
that is closing or for the GE programs that are in jeopardy of losing 
their eligibility for title IV, HEA funds in the next year. In 
addition, the Department will debit Total Assets, line #13, and credit 
Total Expenses, line #32, for an amount that approximates the 
educational costs that the institution would not have incurred if the 
programs at the closing location or the affected GE programs were not 
offered. We believe it is reasonable that this reduction in costs is 
proportional to the ratio of Cost of Goods Sold (line item #28) to 
Operating Income (line item #25)--that is, the amount it cost the 
institution to provide all of its

[[Page 75984]]

educational programs divided by the revenue derived from offering those 
programs.
    The corresponding entries for a non-profit institution are, for the 
loss, a debit to Total Revenue, line item #31b, and a credit to Total 
Assets, line item #12. The reduction in costs is calculated by dividing 
Operating Expenses, line item #32, by Tuition and Fees, line item #27, 
and multiplying the result by the amount of the loss, the amount of 
title IV, HEA funds received by the location or affected GE programs. 
To account for the reduction in costs, the Department will debit Total 
Assets, line item #12, and credit Total Expenses, line item 38b.
    Recognition of recent or threatened events can be appropriately 
measured under the composite score methodology if the event causes or 
is likely to cause a loss that can be quantified. All but two of the 
events that we retain as automatic triggers pose risks that we can 
quantify in order to assess their impact on the institution's composite 
score. Lawsuits, new debts of any kind, borrower defense discharge 
claims, closure of a location, loss of eligibility of gainful 
employment programs, and withdrawal of owner equity all have effects 
that may be quantified so that their effects can be assessed using the 
composite score methodology.
    In at least two instances, there is no need to attempt to quantify 
the loss, because the loss is self-evident. An institution that fails 
the requirement to derive at least 10 percent of its revenues from non-
title IV sources is so dependent on title IV, HEA funds as to make the 
loss of those funds almost certainly fatal, and we see no need to 
quantify that amount through the composite score methodology. That risk 
requires financial protection regardless of the most recent composite 
score achieved by the institution. Similarly, an institution whose 
cohort default rate exceeds 30 percent in two consecutive years is at 
risk of losing title IV, HEA eligibility the following year and 
requires no composite score calculation. These risks require financial 
protection regardless of the most recent composite score achieved by 
the institution.
    An action taken by the SEC to suspend trading in, or delist, an 
institution's stock directly impairs an institution's ability to raise 
funds--creditors may call in loans or the institution's credit rating 
may by downgraded. However, unlike lawsuits and other threats, it is 
difficult to quantify readily the amount of risk caused by that action 
and assess that new risk using the prior year's financials and the 
composite score derived from those statements. Nevertheless, because 
the impaired ability to raise funds caused by these actions is 
potentially significant, that risk warrants financial protection 
without the reassessment of financial health that can be readily 
performed for more quantifiable risks. Nevertheless, because the 
impaired ability to raise funds caused by these actions is potentially 
significant, that risk warrants financial protection without the 
reassessment of financial health that can be readily performed for more 
quantifiable risks.
    We recognize that the institution's current year financial strength 
may differ from that reported and analyzed for the prior fiscal year. 
That difference, however, can be favorable or unfavorable, and would be 
difficult to reliably determine in real time. Given that uncertainty, 
we consider it a reasonable path to use as the baseline the data in the 
most recent audited financials for which we have computed a composite 
score, and adjust that data to reflect the new debt or pending threat. 
Any disadvantage this may cause an institution will be temporary, 
because the baseline will be corrected with submission, evaluation, and 
scoring of the current year's audited financial statements. In 
assessing the composite score of the new financial statements for 
purposes of these standards, we will continue to recognize, for 
purposes of requiring financial protection, any threats from triggering 
events that would not yet be fully recognized under accounting 
standards. However, improvements in positions demonstrated in the new 
audited financials may offset the losses recognized under these 
regulations. If those improved positions produce a composite score of 
1.0 or more, despite the loss recognized under these regulations, the 
institution may no longer be required to provide financial protection.
    With regard to the suggestion by the commenters that the Department 
allow an institution to submit new month-end or partial-year audited 
financial statements from which the composite score would be 
recalculated, we believe that doing so would be costly and unworkable, 
because those financial statements do not reflect a full year's 
transactions, and would potentially recognize only new debts, or 
partially recognize new litigation or other claims for which the 
institution determines that a loss is probable. We note that the 
composite score methodology was designed to measure the financial 
performance of an institution over an entire 12-month operating cycle, 
the institution's fiscal year, and believe that attempting to calculate 
a composite score for a partial year would produce anomalous results. 
In addition, it is not clear how an institution could produce audited 
financial statements by the end of the month in which a triggering 
event occurred. Further, the suggestion does not appear to offer a 
realistic approach because separate actual or threatened losses may 
occur throughout the year, and for each event, this proposal would 
require a new set of financial statements.
    This approach will affect only institutions that have a 
recalculated composite score of less than 1.0. If recognition of the 
event produces a recalculated composite score of between 1.0 and 1.5 
for an institution that had a routine composite score of 1.5 or more, 
the recalculated score does not change the existing score to a zone 
score, so the institution is not required to comply with the zone 
requirements. Sec.  668.175(d). For some institutions, a single event 
or threat may produce a failing composite score, while for others, a 
series of actions or events may together place the institution at 
substantial risk. Using the composite score methodology to assess new 
or threatened risks, instead of using a dollar- or percentage-based 
materiality threshold for individual triggering events, allows the 
Department to assess the cumulative effect on the institution of 
individual threats or events regardless. Thus, we will require 
financial protection only when the recalculated composite score is 
failing and the cumulative effect produces a failing score.
    In response to the commenters who objected that the proposed 
triggering scheme would arbitrarily ``stack'' protection requirements, 
the composite score methodology distinguishes among levels of financial 
strength, and as we explain below, permits the Department to align the 
amount of protection required with the relative risk or weakness posed 
by successive triggering events or conditions. We agree with the 
commenters that an institution should not be required to provide 
financial protection for every automatic triggering event for which the 
underlying facts or circumstances are the same or where a direct causal 
relationship exists between two or more events, like the circumstance 
noted by the commenters where a 90/10 violation causes a loan agreement 
violation, or a settlement generates an accreditor sanction.
    In response to the objection that these regulations could require 
financial protection equal to all of the title IV, HEA funds received 
in the prior year,

[[Page 75985]]

we adopt here an approach that tailors the amount of protection 
required to a minimum amount we consider sufficient to cover the losses 
to the government reasonably likely to occur upon closure, plus any 
additional amount that we estimate is reasonable to expect based on the 
circumstances presented by the risks posed for the particular 
institution. Under current regulations, an institution that does not 
meet financial responsibility standards may participate under 
provisional certification requirements by providing a letter of credit 
equal to at least 10 percent of the prior fiscal year title IV, HEA 
program funds received. Sec.  668.175(f)(2)(i). This restriction 
applies to any institution that no longer qualifies for continued 
participation in the zone, or, as particularly pertinent here, achieves 
anything less than a score of 1.0--for example, a score of .90. Because 
the composite score makes these kinds of distinctions among scores, 
current regulations give dispositive weight to its results in critical 
determinations regarding an institution's ability to participate. Thus 
current regulations have long attached controlling significance to what 
may be relatively slight differences in composite score outcomes. We 
adopt here a rule that an institution that receives an adjusted 
composite score of less than 1.0 must provide financial protection in 
an amount not less than 10 percent of the prior fiscal year's title IV, 
HEA funding, and, as the composite score decreases, the institution may 
be required to provide an added amount of protection where supported by 
the particular facts and circumstances--including the history of the 
institution, the nature of the risks posed, the presence of existing 
liabilities to the Department, the presence, amount, and rate at which 
borrower defense claims are being filed, and the likelihood that the 
risk will result in increases in borrower defense claims.
    The requirement to provide at least a 10 percent letter of credit 
is rooted in the 1994 regulations regarding provisional certification 
of institutions that did not meet generally applicable financial 
responsibility standards. 34 CFR 668.13(d)(1)(ii)(1994). We adopt here 
this 10 percent as a minimum requirement because we consider financial 
protection in the amount of 10 percent of prior year title IV, HEA 
funding to be the minimum amount needed to protect the taxpayer from 
losses reasonably expected from an institution's closing. These losses 
include, at a minimum, costs of closed school discharges. Closed school 
discharges can affect all loans--including PLUS loans--obtained to 
finance attendance at the closing institution. This includes any loans 
obtained for enrollment in years before the year in which the 
institution closes, not merely those loans received by students for 
attendance at the institution in the year in which it closes. Thus, a 
closure could, in some instances, generate closed school discharge 
losses in amounts exceeding the total amount of Direct Loan funds that 
the institution received in the year preceding the year of that 
closure.
    Liabilities of an institution could also include liabilities for 
funds unaccounted for by audit, because the institution as a fiduciary 
is liable for the costs of title IV, HEA funds it received unless it 
affirmatively demonstrates by the required compliance audit that it 
spent those funds properly. An institution that closes may have neither 
the resources nor the incentive to secure an audit of its expenditures 
of these funds. The liability of an institution that fails to account 
for those funds includes the full amount of Pell Grant funds received, 
and, for loans that are received for that period and are not 
discharged, the subsidy costs for those loans, which varies from year 
to year among loan types.\48\ An institution that closes may also owe 
liabilities to the Department for debts arising from audits, program 
reviews, or fine actions, or from borrower defense claims. Closure of 
the institution would also jeopardize recovery of all these 
liabilities, and the risk to the taxpayer in those instances is 
considerably greater than the costs of closed school discharges.
---------------------------------------------------------------------------

    \48\ Because every institution must affirmatively account for 
the title IV, HEA funds it has caused to be awarded during an entire 
fiscal year as properly spent, an institution receiving funds on the 
cash monitoring or reimbursement method does not meet this 
obligation simply by having payments approved under the requirements 
applicable to funding under those methods, which do not necessarily 
involve the comprehensive examination conducted in an audit. 
Similarly, because the institution must make this accounting on a 
fiscal year basis, the fact that an institution may offer short 
programs several of which may be completed within a fiscal year does 
not limit the potential loss in the case of a precipitous closure to 
the amount of funds received for a program that may be curtailed by 
such a closure, rather than all the funds for which it was 
responsible for the entire fiscal year.
---------------------------------------------------------------------------

    We have already experienced closed school discharge claim losses in 
one of the most recent and significant school closures, that of 
Corinthian, that permits development of estimates of liabilities. 
Corinthian was composed of three chains of some 37 separate 
institutions, operating at 107 campuses, with 65,000 students enrolled 
in 2014. It received $1.439 billion in title IV, HEA funding in FY 
2013, the last full fiscal year preceding its closure. During the year 
preceding its closure, Corinthian sold 50 campuses, with some 30,000 
students enrolled, to a new entity, a transaction that allowed a major 
portion of Corinthian students to complete their training. In addition, 
under agreement with the Department, Corinthian continued training at 
the campuses it retained until its closure in April 2015.
    The Department has to date granted closed school discharges of some 
$103.1 million for some 7,858 Corinthian borrowers, with the average 
discharge some $13,114.\49\ Additionally, the Department has thus far 
approved 3,787 borrower defense discharges, totaling $73.1 million. 
Together, Corinthian's liabilities through both closed school and 
borrower defense total more than $176 million, with additional claims 
expected to be approved later. A letter of credit at the level of 10 
percent of prior year title IV, HEA funding would have been $143 
million--enough to cover the estimated total closed school discharges 
and far too little to cover the school's total liabilities on 
individual student loan losses.\50\
---------------------------------------------------------------------------

    \49\ As of October 2016.
    \50\ The Department also fined Corinthian $30 million.
---------------------------------------------------------------------------

    From this history, we estimate that an institution that closes in 
an orderly wind down, under which the majority of the students are able 
to continue their education by transfer or otherwise, will generate 
closed school discharge claims of at least 10 percent of the amount of 
all title IV, HEA funding received in the last complete fiscal year 
prior to the year in which the institution finally closes. Therefore, 
we adopt 10 percent of prior year title IV, HEA funding as the minimum 
amount of financial protection required of an institution that achieves 
a recalculated composite score of less than 1, or otherwise faces the 
risks (90/10, cohort default rates, SEC action) for which we do not 
recalculate a composite score. This is consistent with many years of 
Department practice.
    Obviously, not all closures will arise in such fortuitous 
situations. It is realistic to expect that for other closures, 
including those that are more precipitous, a far greater percentage of 
borrowers will qualify for closed school discharges. Moreover, these 
regulations are expected to increase the number of instances in which 
we will give a closed school discharge by providing relief without an 
application where we have sufficient information to determine 
eligibility. In addition, based on the Corinthian experience, we expect 
that

[[Page 75986]]

the law enforcement agency actions that can constitute triggering 
events will generate borrower defense claims as well.\51\ Other 
liabilities to the Department may already exist or are expected to 
arise. Under these regulations, therefore, the Department demands 
greater financial protection in cases in which these risks are 
identified, in addition to the minimum 10 percent. We include other 
conditions as discretionary triggering events, but in particular 
circumstances, those conditions can separately indicate that the 
potential losses that may arise warrant levels of financial protection 
greater than 10 percent. If the Department demands greater financial 
protection than the 10 percent level, the Department articulates the 
bases on which that added protection is needed, which can include any 
of the considerations discussed here. If an institution has already 
arranged financial protection, the Department credits the amount of 
protection already provided toward the amount demanded, if the 
protection already provided has the same terms and extends for the 
duration of the period for which protection is required pursuant to 
these regulations. In determining the proper amount of financial 
protection, then, we intend to look closely at any evidence that these 
kinds of liabilities may ensue from the risk posed by adverse events to 
a particular institution. We note, in particular, that section 
498(e)(4) of the HEA, by indicating which specific histories of 
compliant behavior are enough to bar the Department from requiring 
personal guarantees from owners or institutions, has identified those 
histories that indicate future risk. 20 U.S.C. 1099c(e). Since 1994, 
the Department has implemented the statute in precisely this way, by 
adopting these histories as per se financial responsibility failures, 
warranting surety and provisional certification. Sec. Sec.  668.174(a), 
668.175(f)(1)(ii).
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    \51\ These losses can be very substantial. The Department has 
already granted $73 million in borrower defense discharge relief to 
some 3800 Corinthian Direct Loan borrowers under Sec.  685.206, and 
thousands of Corinthian borrower claims are pending. The average 
amount of loan indebtedness discharged for these 3800 was $19,300; 
many thousands of other Corinthian borrowers may have valid claims 
for relief, and the Department has been reaching out to some 335,000 
of these individuals. See: United States Department of Education 
Fourth Report of the Special Master for Borrower Defense to the 
Under Secretary, June 29, 2016. If even 20 percent of these other 
borrowers qualify for relief, the loss to the Federal taxpayer would 
add another billion dollars to the $73 million in losses already 
experienced.
---------------------------------------------------------------------------

    Similarly, section 498(c)(1)(C) of the HEA specifically directs the 
Secretary to consider whether the institution is able to meet its 
refund obligations to students and the Department. 20 U.S.C. 
1099c(c)(1)(C). The Department has implemented this provision by 
requiring an institution that has a performance rate of less than 95 
percent in either of the two most recently completed fiscal years to 
provide surety in an amount of 25 percent of the amount of refunds owed 
during the most recently completed fiscal year. Sec.  668.173(d). We 
intend to apply these long-standing and statutorily sanctioned 
predictors of potential liabilities in determining the amount of 
financial protection that we may require over and above that minimum 
amount to cover the costs of closed school discharges. Thus, we may 
determine that the potential loss to the taxpayer of the closure or 
substantial reduction in operations of an institution that has failed 
the 95 percent refund performance standard to be 25 percent of refund 
obligations in the prior year, in addition to the 10 percent of prior 
year title IV, HEA funding needed to cover closed school discharges. We 
may determine that the potential loss to the taxpayer of the closure or 
substantial reduction in operations of an institution that has had 
audit or program liabilities in either of the two preceding fiscal 
years of five percent or more of its title IV, HEA funds to present a 
potential loss of that same percent of its most recent title IV, HEA 
funding, in addition to the 10 percent of funding needed to defray 
closed school discharge losses. We may determine that the closure or 
substantial reduction in operations of an institution that has been 
cited in any of the preceding five years for failure to submit in a 
timely fashion required acceptable compliance and financial statement 
audits presents a potential loss of the full amount of title IV, HEA 
funds for which an audit is required but not provided, in addition to 
any other potential loss identified using these predictors.
    Relying on the composite score methodology also helps clarify how 
long financial protection for risks or conditions should be maintained, 
because some events have already occurred, and will necessarily be 
assessed in the next audited financial statements and the composite 
score, which is routinely calculated. Others, such as pending suits or 
borrower defense claims, will not be reflected in the new financial 
statements, and those risks may still warrant continuing the financial 
protection already in place. Along these lines, we will maintain the 
full amount of the financial protection provided by the institution 
until the Department determines that the institution has (1) a 
composite score of 1.0 or greater based on the review of the audited 
financial statements for the fiscal year in which all losses from any 
triggering event on which the financial protection was required have 
been fully recognized, or (2) a recalculated composite score of 1.0 or 
greater, and that any triggering event or condition that gave rise to 
the financial protection no longer applies.
    We believe it is reasonable to require an institution to maintain 
its financial protection to the Department as noted above until the 
consequences of those events are reflected in the institution's audited 
financial statements or until the institution is no longer subject to 
those events or conditions. If the institution is not financially 
responsible based on those audited statements, or the triggering events 
continue to apply, then the financial protection on hand can be used to 
cover all or part of the amount of protection that would otherwise be 
required. Doing so minimizes the risks to the Federal interests by 
having financial protection in place in the event that an institution 
does not sufficiently recover from the impact of a triggering event--
any cash or letter of credit on hand would be retained and any funds 
under a set-aside arrangement would reduce or eliminate the need to 
offset current draws of the title IV, HEA funds.
    With regard to the comment that a letter of credit could exceed 100 
percent of the title IV, HEA funds received by an institution, we note 
that the regulations adopted here set 10 percent of prior year title 
IV, HEA funding as the minimum financial protection required for an 
institution that achieves a recalculated score below a 1, or fails the 
90/10, cohort default rate, or SEC triggers, and permit the Department 
to demand greater protection when the Department demonstrates that the 
risk to the Department is greater.
    Changes: We have revised Sec.  668.171(c)(1) to provide that losses 
from events or risks listed as triggering events are generally 
evaluated by determining whether the amount of loss recognized for this 
purpose, if included in the financial statements for which a composite 
score was most recently calculated under Sec.  668.172, would produce a 
composite score less than 1.0. In Sec.  668.171(c)(2) we have specified 
that the actual or potential losses from the actions or events in Sec.  
668.171(c)(1) are accounted for by revising an institution's most 
recent audited financial statements and that the Secretary recalculates 
the institution's composite score based on the revised statements 
regularly. If the recalculated

[[Page 75987]]

composite score is less than 1.0, the institution is not financially 
responsible and must provide financial protection.

Triggering Events

    Comment: Some commenters objected that the Department had produced 
no data to support the assertion that the triggering events in fact 
pose the risks that would warrant their use. Other commenters stated 
that the requirement to provide financial protection based on the mere 
filing of a lawsuit seeking the proposed recoveries was speculative, 
not based on actual data showing that an adverse result was reasonably 
expected to result from that suit and was thus arbitrary and lacked a 
reasonable basis. Another commenter asserted that the Department's 
reference to the Corinthian situation does not support adopting the 
rule proposed here, and that current regulations were sufficient to 
enable the Department to obtain from Corinthian the protections needed 
to mitigate or eliminate the risks now cited to justify the new rules. 
The commenter asserted that Corinthian failed financial responsibility 
tests in FY 2011, could have been required to post a letter of credit, 
but was not required to do so, nor was it required to post a letter of 
credit for FY 2014, when Corinthian again failed the tests.
    Discussion: As discussed for each of the triggers, each reflects a 
new financial obligation already incurred and not yet reflected in the 
composite score for the institution, or a new financial risk that is 
realistically imminent, whether or not yet recognized in the audited 
financial statements. Current regulations permit the Department to 
demand 10 percent or more financial protection, but provide no 
structured scheme to assess whether a particular event actually 
jeopardizes the institution, and if so, by how much, and what amount of 
protection is needed beyond that 10 percent minimum described in the 
regulations. We described in the NPRM the history of Corinthian's 
evaluation under the existing financial responsibility scheme.\52\ Even 
if Corinthian's financial statements had been accurate when presented, 
they would not have accounted for the risk posed by the pending 
California attorney general action, that ended in a judgment for $1.1 
billion, and the LOC that would likely have been demanded--a small 
fraction of the title IV, HEA funding for the prior year--would barely 
have covered the liabilities already established by the Department 
against Corinthian. The Corinthian experience highlighted the need to 
identify events that posed realistic jeopardy in the short term, and to 
secure financial protection before the loss was incurred and the 
institution on account that that loss no longer had the ability to 
provide that protection. Similarly, current standards would not require 
protection where an institution was on the very cusp of loss of title 
IV, HEA eligibility, as with cohort default rate and 90/10 sanctions.
---------------------------------------------------------------------------

    \52\ Applying the routine tests under current regulations did 
not result in financial protection, because Corinthian appeared at 
the time it provided the Department with its audited financial 
statements to pass those tests. Only later--too late to secure 
financial protection--did further investigation reveal that 
Corinthian in fact had failed the financial tests in current 
regulations. 81 FR 39361.
---------------------------------------------------------------------------

    Changes: None.

Automatic Triggering Events

Lawsuits and Other Actions Sec.  668.171(c)(1)(i)

Lawsuits Settlements/Resolutions
    Comments: Under proposed Sec.  668.171(c)(1)(i)(B), (ii), and 
(iii), a school may not be financially responsible if it is currently 
being sued by a State, Federal, or other oversight entity, or by 
private litigants in actions, including qui tam suits under the False 
Claims Act, that have survived a motion for summary judgment.
    Some commenters objected that requiring financial protection based 
on suits by private parties was unreasonable because the commenters 
considered those suits to have no bearing on the financial 
responsibility and administrative capability of the institution. Others 
considered reliance on the filing of suits that had not yet resulted in 
judgments against the institution to constitute an unreasonable 
standard that deprived the institution of its due process rights to 
contest the lawsuits. A commenter objected to the inclusion of 
government suits because the commenter considered proprietary 
institutions to often be the target of ill-planned and discriminatory 
suits by State and Federal agencies. A commenter stated that suits 
filed by State AGs have been shown in some cases to be politically 
motivated and argued that such suits should not be the basis for a 
letter of credit as they may unfairly target unpopular members of the 
higher education industry, depending on the party affiliation of the 
AG. The commenter stated that the suits are not required to be based in 
fact and rarely lead to a finding, that the judicial process should be 
allowed to follow its usual course, and that requiring schools to post 
letters of credit prior to a judicial ruling in the case amounts to 
finding a school guilty and requiring the school to prove innocence. 
The commenter stated that the risk posed by the filing of a suit cannot 
be determined simply from the complaint filed in the suit, and the 
actual risk posed by such suits, some commenters urged, could be 
reasonably determined only after determining the merits of the suit.
    Commenters objected that these triggering events would require a 
school to submit a letter of credit before there was any determination 
of merit or wrongdoing by an independent arbiter, and stated that such 
suits should not be taken into account until judgment. The commenters 
stated that they believed that, contrary to the Department's statement 
in the preamble that suits by State and Federal agencies are likely to 
be successful, most cases settle due to the outsized leverage of the 
government, despite their merits. In addition, the commenters believed 
that suits filed by State AGs should not be the basis for a letter of 
credit because these suits have been shown in some cases to be 
politically motivated and to unfairly target institutions.
    Another commenter urged the Department to remove the lawsuit 
triggers, arguing that the mere filing of an enforcement action by a 
State, Federal, or other oversight entity based on the provision of 
educational services should not be considered a trigger. The commenter 
stated that lawsuits are easy to file, allegations are not facts, and, 
even assuming good faith on the part of State and Federal regulatory 
agencies, sometimes mistakes are made. The commenter contended that the 
litigation process creates the incentive for sweeping allegations that 
may or may not be verifiable, or there may be cases filed by an agency 
in the hope of making new law or establishing a new standard for 
liability or mode of recovery beyond that applied by courts in ruling 
on such claims. A commenter was concerned that an ``other oversight 
agency'' could refer to a town or county zoning board or land use 
agency that could threaten to file a multi-million dollar suit for 
pollution, or a nuisance suit like a violation of a local sign 
ordinance, or failure to recycle soda cans, as a way to leverage 
concession from the institution for other reasons. These suits would be 
covered under proposed Sec.  668.171(c)(1)(ii) even though they have 
nothing to do with the educational mission of the school. The commenter 
contended that giving such unbridled power to non-State, non-Federal, 
non-education-related oversight entities would effectively place the 
``sword of Damocles'' over the head of every college president who 
needs to negotiate a dorm or a new parking facility.

[[Page 75988]]

    Many commenters objected to consideration of settlements with 
government agencies under proposed Sec.  668.171(c)(1). As proposed, 
the regulation might make a school not financially responsible if 
during the current or three most recently completed award years it was 
required to pay a debt to a government agency, including a debt 
incurred under a settlement. Commenters viewed this provision as overly 
broad and punitive, and suggested that settlements be excluded from 
this provision. A commenter believed that an institution under 
investigation will have a strong incentive to avoid a settlement that 
would precipitate the triggering event in proposed Sec.  
668.171(c)(1)(i)(A), which would require it to provide the Department a 
potentially expensive or unobtainable letter of credit. A commenter 
noted that bringing suit can be an important tool in facilitating 
settlement, and cited a case where a State AG filed a consumer fraud 
suit against an institution. The parties were able to negotiate a 
settlement that provided $2.1 million in loan forgiveness and $500,000 
in refunds for students. Imposing a letter of credit in such situations 
would deter such favorable settlements. Commenters asserted that many 
businesses settle claims with the government due to the cost of 
litigation and the outsized leverage of the government, regardless of 
the merits of the underlying claims.
    Commenters objected to consideration of debts already paid, 
asserting that if a school pays a liability as a result of an agency 
action, the school has already paid an amount that was deemed 
appropriate by the agency and should not be subject to the additional 
punitive requirement of posting a letter of credit. The commenters 
argued that this is especially true if the school's payment resulted in 
repayments to students such that a letter of credit is no longer 
necessary to provide for possible student claims.
    Similarly, other commenters claimed that lawsuit triggers would 
create every incentive for borrowers who get behind in their loan 
payments to file claims or suits against an institution, regardless of 
how frivolous those suits or claims may be, and therefore these 
triggers should not be part of the borrower defense rulemaking.
Evaluation
    A commenter urged the Department to make the lawsuit and 
investigation triggers in Sec.  668.171(c)(1) evaluative instead of 
automatic, so that the Department would evaluate the type of suit, the 
merit of the claims, the amount of money at stake, and the likelihood 
of success. With this system in place, only institutions with a serious 
financial risk would be required to obtain a letter of credit, leaving 
other institutions room to negotiate with State AGs or other 
enforcement entities.
    Other commenters objected to assessing the value of the lawsuits 
(in proposed Sec.  668.171(c)(v)) by using ``the tuition and fees the 
institution received from every student who was enrolled at the 
institution during the period for which the relief is sought'' as 
wrongly presuming that every student in the period (or three years if 
none is stated) would receive a full refund, and may have no relation 
to the event on which suit was brought. While the commenters do not 
suggest using the damages proposed in any complaint, which they claim 
are often speculative and designed to grab media attention rather than 
reflect a true damage calculation, a better way to assess value would 
be an analysis of the merits of the specific litigation at issue, 
guided by past recoveries and settlements for similar actions. Some 
commenters objected that State AGs and private litigants will likely 
include demands for relief in pleadings that equal or exceed the 
thresholds set by the Department in order to gain additional leverage 
over an institution. Other commenters objected that State AG suits will 
also exceed the thresholds because they will state no dollar amount of 
relief, and thus be deemed to seek restitution in the amount of all 
tuition received for a period.
    Some commenters believed that an institution should be afforded the 
opportunity to demonstrate, by an independent analysis, that the actual 
amount at issue is below the thresholds set for the applicable action 
and therefore the action is not material. Some commenters suggested 
that the Department allow an institution to seek an independent 
appraisal from a law firm, accounting firm, or economist that would 
state the actual amount at issue in the lawsuit. Others stated that 
this analysis could be accomplished as part of an appeal process with a 
hearing official deciding the amount based on evidence from the 
institution and the Department.
Threshold
    Some commenters stated that it is common for plaintiffs suing 
colleges and universities to allege damages far exceeding any amount 
that could feasibly be obtained in either a settlement or final 
judgment, as a tactic to maximize any final settlement amount and 
contingency fees to the attorney. For this reason, the commenters 
argued that requiring a letter of credit based solely on a claim 
exceeding 10 percent of an institution's assets is arbitrary and 
unwarranted, as the claimed amounts often have little factual basis or 
legal support. Further, the commenters were concerned that enacting 
this new standard would lead to plaintiffs' attorneys stating claims in 
excess of the 10 percent threshold to create negotiating leverage.
    Other commenters believed that the $750,000 and 10 percent of 
current assets thresholds were arbitrary because they do not take into 
account that the size of schools varies significantly and, as such, 
their exposure may vary significantly. The commenters reasoned that a 
larger school that serves a greater number of students may be subject 
to a larger liability, but may also be able to adequately withstand 
that liability. For these reasons, the commenters suggested that the 
triggering events in Sec.  668.171(c)(1) should be removed entirely, 
but if they are not removed, the commenters urged the Department to 
exclude the settlement provisions and the $750,000 threshold because 
debts of that size are not indicative of the financial stability of the 
school.
    Some commenters noted that Federal and State settlements are often 
very small, and therefore believed those settlement amounts would not 
likely reach or exceed the proposed threshold of 10 percent of current 
assets. The commenters urged the Department to eliminate the 10 percent 
threshold in the final regulations, arguing that a settlement, in and 
of itself, should be sufficient to trigger a letter of credit. Other 
commenters believed that the threshold of $750,000 for the lawsuit 
triggers was so low that an auditor would not consider that amount to 
be material and therefore would not include the lawsuit in the 
footnotes of an institution's financial statements. They suggested that 
the Department set the materiality threshold as the higher, rather than 
the lesser, of $750,000 or 10 percent of current assets. The commenters 
reasoned that the lesser amount would almost always be the audit 
threshold ($750,000) which, in the case of any large school, will not 
be material. Alternatively, the commenters suggested that the 
Department remove the audit-based threshold and simply rely on the 10 
percent of current assets threshold.
No Amount Claimed
    Objecting to the method of calculating a claim in a suit in which 
the plaintiff does not state a dollar amount of relief, a commenter 
noted that in a number of

[[Page 75989]]

State courts--in New York, Maryland, and Maine, for example--a specific 
dollar-amount demand is not permitted in many civil actions. In such 
cases, proposed Sec.  688.171(c)(1)(v)(A) would require that the amount 
be calculated ``by totaling the tuition and fees the institution 
received from every student who was enrolled at the institution during 
the period for which relief was sought, or if no period is stated, the 
three award years preceding. . . .'' The commenter feared that applying 
this principle would result in a ``deemed'' ad damnum of at least three 
years' total revenue--and it would be a fortunate institution that 
maintained sufficient current assets to keep the made-up ``deemed'' ad 
damnum below 10 percent of current assets. In addition, the commenter 
notes that other States, like Virginia, do not permit recovery in 
excess of the written ad damnum, regardless of what a jury may award--
for example, if the demand is $10,000 and the jury awards ten million 
dollars, only the demanded amount is awarded. The commenter opined that 
in those States, the incentive is to massively over-plead the value of 
the case, so that an attorney's client is not forced to accept less 
money after encountering a generous jury. The underlying point is the 
same: Neither a stated ad damnum in any lawsuit nor the ``deemed'' ad 
damnum of proposed Sec.  688.171(c)(1)(v)(A) bears any necessary 
relationship to the actual value of the suit, to the likely range of 
recovery, or to the effect of the suit on the financial responsibility 
of the educational institution.
    Second, the commenter argued that a pending private lawsuit seeking 
large damages should not be considered a trigger event, as proposed in 
Sec.  688.171(c)(1)(iii). The commenter cautioned that considering 
filed-but-not-decided litigation to impair the financial responsibility 
of an institution would overly empower opportunistic or idealistic 
members of the plaintiff's bar. The commenter asserted that the 
proposed position would give every lawyer with a draft lawsuit 
containing enormous damage claims a chokehold on any school. The 
commenter noted that although proposed Sec.  688.171(c)(1)(iii)(A) is 
intended to restrict this triggering event to only those claims that 
survive summary judgment, the commenter asserted that in some States, 
this restriction would be ineffective. The commenter asserted that, for 
example, in New York State courts, a plaintiff can file a ``Motion For 
Summary Judgment in Lieu of Complaint,'' under CPLR Section 3213, to 
initiate the case. A plaintiff can demand a response on the date an 
answer would otherwise be due; if the defendant were to file a cross-
motion for summary judgment as a response, the court ostensibly would 
deny both and treat the cross-motions as an answer and complaint, and 
the case would go forward. But the case would have ``survived a motion 
for summary judgment by the institution,'' and would then constitute a 
trigger event at its outset.
    The commenter further asserted that California State courts permit 
not only summary judgment, but also a separate procedure for resolution 
of entire claims by ``summary disposition.'' Cal. Code of Civ. Pro. 
Section 437c. The grant of judgment to the institution on any relevant 
claim by summary disposition would not seem to affect whether a trigger 
event has occurred, even if the only relevant claim was disposed of. 
The commenter asserted as well that in Virginia, summary judgment is 
technically available, but, as a practical matter, the commenter states 
that it is never granted because a motion for summary judgment cannot 
procedurally be supported by documents, affidavits, depositions, or 
other similar evidence. Moreover, the real effect of this provision 
would be to deter institutions from ever moving for summary judgment, 
fearing that the motion would be denied therefore generating a 
triggering event.
    For these reasons, the commenter concluded that institutions would 
have to bring every covered private case to trial, at much greater 
financial and emotional expense not only to the school but also to the 
opposing parties. The commenter expressed concern that the proprietary 
school sector was a target for enterprising trial lawyers, and that 
because of the heightened scrutiny faced by financial institutions 
making lending decisions, it would be impossible for many institutions 
facing one of these triggering events to obtain a sufficient letter of 
credit to comply with the regulations. The commenter cautioned that an 
institution in such a circumstance would have little choice but to 
cease operations, even if its financial basis remained fundamentally 
sound--and even if the claims represented by the proposed triggering 
events were insubstantial or frivolous.
    Similarly, another commenter stated that in litigation, plaintiffs 
are able to survive a motion for summary judgment due to a variety of 
factors. The commenter said that judges may decline to dispose of a 
case on summary judgment because there remains an issue of material 
fact that may have little to do with the underlying false claim or 
provision of educational services. The commenter offered that a final 
judgment requires a higher level of proof than a motion for summary 
judgment and would therefore be a fairer threshold. In addition, the 
commenter noted that private rights of action are fundamentally 
different than agency or government actions that are subject to well-
established policies and procedures. Further, the commenter anticipated 
that private parties will likely request relief in excess of the 
proposed thresholds of $750,000 or 10 percent of current assets to gain 
additional leverage in seeking a settlement.
    With regard to proposed Sec.  668.171(c)(1)(iii), some commenters 
asked the Department to clarify whether the mere filing of a False 
Claims Act case is a triggering event or if paragraphs (A) and (B) 
apply to that case (as well as private litigation). The commenters 
offered that the mere filing of a False Claims Act case should not 
subject an institution to a letter of credit. While the commenters 
recognized the seriousness of a False Claims Act case, they stated that 
these cases do not garner intervention from the Federal government and 
are typically settled for amounts that are dramatically less than the 
stated damages in the complaint. Further, while the commenters 
appreciated the Department's attempt to ensure it was only capturing 
meritorious private litigation under Sec.  668.171(c)(1), they believed 
that the provision would penalize an institution for settling a case 
for nuisance value or harming a school for filing a motion for summary 
judgment which it ultimately loses.
    Discussion: Proposed Sec.  668.171(c)(1) included a range of 
governmental actions and certain actions by private parties, and 
proposed Sec.  668.171(c)(6)(ii) included any other litigation that the 
institution was required to report in a filing with the SEC. Regardless 
of the substantive basis or motivation of the party suing, each of 
these suits could pose a serious potential threat to the continued 
existence and operation of the school, and as such, they affect the 
assessment of the school's ability to meet its financial obligations. 
We see no basis for ignoring that risk simply because some suits in 
each of these types may in fact be frivolous, assert exaggerated 
demands, rest on attempts to make new law, or attempt to extract 
concessions from the school in what the commenter calls areas unrelated 
to the school's educational mission. We consider pending suits under 
these regulations for two reasons. First, a

[[Page 75990]]

judgment entered in any of these suits may significantly jeopardize the 
existence or continued operations of the institution, and that threat 
bears directly on the statutory requirement that the Secretary 
determine whether the institution for the present and near future, the 
period for which the assessment is made, ``is able to meet . . . all 
its financial obligations.'' 20 U.S.C. 1098c(c)(1)(C). Second, that 
consideration looks not merely at obligations already incurred, but 
looks as well to the ability of the institution to meet ``potential 
liabilities''--whether the institution has the resources to ``ensure 
against precipitous closure''--and thus demands that we assess threats 
posed by suits not yet reduced to judgments that would be recognized in 
the financial statements submitted annually and evaluated under the 
current composite score methodology. In response to the comment 
regarding treatment of qui tam suits under the False Claims Act, we 
confirm that those actions are evaluated like any other litigation not 
brought by a Federal or State agency enforcing claims that may relate 
to borrower defenses. They are evaluated under the summary judgment 
test.
    Responding to the objection that we should consider only claims 
reduced to judgment, we stress that ignoring the threat until judgment 
is entered would produce a seriously deficient assessment of ability to 
meet financial obligations, and worse, would delay any attempt by the 
Department to secure financial protection against losses until a point 
at which the institution, by reason of the judgment debt, may be far 
less able to supply or borrow the funds needed to provide that 
protection. We reject this suggestion as contrary to the discharge of 
the duty imposed on the Department by section 498 of the HEA. 
Similarly, we see no basis for the contention that taking into account 
risk posed by pending suits somehow deprives an institution of its due 
process right to contest the suit. If the risk posed is within the 
statutory mandate to assess, as we show above, taking that risk into 
account in determining whether an institution qualifies to participate 
in the title IV, HEA programs cannot deprive the institution of any 
constitutionally protected right. The institution remains free to 
respond to the suit in any way it chooses; it is frivolous to contend 
that we are barred from considering whether that risk warrants 
financial protection for the taxpayer as a condition for the continued 
participation by that institution in this Federal program.
    Besides these general objections to the consideration of pending 
suits, the comments we received addressed several distinct aspects of 
the proposed consideration. These included comments addressed to the 
inclusion of suits by an oversight entity, which may include a local 
government component, in the category of government suits; the proposal 
that suits be evaluated on their merits by a third party, by Department 
officials, or by a Department hearing official; objections to inclusion 
of debts arising from settlements; objections that the thresholds in 
the proposed rule were unrealistic or arbitrary; objections to the 
proposed method of calculating the amount claimed where the institution 
contends that the amount claimed exceeds the amount that applicable law 
would support; objections to the proposed calculation of the amount in 
actions that did not seek a stated amount of relief; objections to the 
proposed use of summary judgment as a test of the potential risk posed 
by the suit; and objections to consideration of debts already incurred 
and paid in prior years. We discuss each in turn and, as discussed 
earlier explaining the use of an adapted composite score methodology, 
we are modifying the proposed regulations in several regards that we 
intend and expect to assess the risk posed by pending suits in a manner 
that alleviates several of major concerns raised by commenters.
    We address first the changes to the proposed thresholds, because 
adoption of the composite score methodology of assessing risk affects 
the response to those objections and other concerns as well. Each 
institution is well aware of its most recent composite score, and as 
explained above, the amount of risk posed by each suit considered under 
the regulations will be assessed by recognizing that loss in the 
financial statements on which that composite score was based, and 
determining whether that recognition will produce a failing composite 
score. Any institution can readily evaluate that effect and take that 
result into account in responding to the suit. A pending suit that 
produces a failing score will be recognized as a threat until the suit 
is resolved and that result produces a score of 1.0 or more, whether by 
favorable judgment or settlement. Second, we include an opportunity for 
an institution to demonstrate that loss from any pending suit is 
covered by insurance. Commenters advised that we should not treat 
lawsuits as potential triggering events because the risks posed by 
these suits are commonly covered by insurance. If the institution 
demonstrates that insurance fully covers the risk, the suit is simply 
not considered under these financial responsibility standards. The 
institution can demonstrate that insurance fully or partially covers 
risk by presenting the Department with a statement from the insurer 
that the institution is covered for the full or partial amount of the 
liability in question.
    In response to the proposal that the regulations should provide for 
an evaluation of the merit of a suit by a third party, by a Department 
official, or by a Department hearing official, we see no practical way 
to implement such a procedure. Litigants already have the ability to 
engage in court-sponsored or independent mediation, in which both 
parties can adequately present their positions; if both parties are 
amenable to such a two-party assessment, the parties can readily pursue 
that course through mediation, and we see no need for the Department to 
undertake that role. We see little or no value in entertaining and 
evaluating a presentation solely from a defendant institution, whether 
that evaluation were to be performed by a Department official or an 
administrative hearing official in a Department proceeding. As noted, a 
party whose defense is financed by insurance may find the insurer 
conducting precisely such an evaluation in conducting the litigation, 
and that assessment will influence the conduct of the litigation.
    In addition, the proposal that the Department or a third party 
assess the merit of an action by a government agency would require the 
Department or a third party to interpret the statutes and regulations 
on which that agency based its actions as well as assess whether the 
action was a reasonable exercise of the agency's authority. We have no 
authority to second guess the actions of another agency in the exercise 
of its authority, and we would neither presume to do so nor adopt a 
procedure in which we would credit such second-guessing by a third 
party.
    The proposed regulation would treat ``oversight authority'' actions 
like actions of Federal or State agencies. By this term, we include 
local government entities with power to assert and recover on financial 
claims. This consideration applies only to affirmative government 
financial claims against the institution, not to government actions 
that deny approvals or suits that seek only injunctive or other 
curative relief but make no demand for payment. Local authorities can 
take enforcement actions that can pose a serious financial risk to the 
institution, and we see no basis for disregarding that risk or 
undertaking any internal or third-party assessment of

[[Page 75991]]

the merit of the claim. Given the wide range of such government 
actions, we agree that those that do not directly seek relief that 
affects or relates to borrower defenses under this regulation might 
warrant a different assessment of risk than those closely related to 
borrower defenses. Generally the risks posed by the events deemed 
automatic triggers are events that threaten the viability of the 
institution, and the risks to the taxpayer posed by those threats 
include risks posed by closed school discharges and unaccounted-for 
Federal grant and loan funds. Federal or State agency suits asserting 
claims related to the making of a Direct Loan or the provision of 
educational services, as the latter term is considered under Department 
regulations, pose an additional risk and warrant a different assessment 
of risk, because these Federal or State actions not only pose a threat 
to the viability of the institution but are also reasonably expected to 
give rise to, and support, borrower defense claims. For those suits, we 
continue to consider it reasonable to treat the amount claimed in the 
suit or discernable from the scope of the allegations to quantify the 
potential loss from these suits.\53\ However, we acknowledge the value 
of having the obligation to require financial protection depend on 
something more than the mere filing of a lawsuit if delaying surety 
does not jeopardize our ability to obtain appropriate financial 
protection. The summary judgment scheme we adopt for all other 
litigation may result in significant delay before protection is 
required for borrower defense-related suits, which may impair our 
ability to obtain adequate surety. Rather than delaying protection 
requirements until summary judgment or even a point close to trial, or 
creating some third-party evaluation of the merit of government agency 
suits involving borrower defense-related claims, we will rely on the 
outcome of the initial opportunity available in the litigation process 
itself for an institution to challenge the viability of the suit--the 
motion to dismiss. Thus, under these regulations, a government suit 
related to potential borrower defenses is a potential triggering event 
only if the suit remains pending 120 days after the institution is 
served with the complaint. This change provides the institution with 
ample time to move to dismiss the suit on any ground, including failure 
to state a claim on which relief can be granted.\54\
---------------------------------------------------------------------------

    \53\ The most prominent recent example of such government 
actions that have resulted in judgments--those against Corinthian--
does not suggest that assigning this level of risk to a government 
borrower defense-related suit is unreasonable, and, for that reason, 
as well, we decline the proposal to consider claims that such suits 
should be discounted.
    \54\ The Federal Rules of Civil Procedure require an answer or 
motion to dismiss to be filed within 20 days of service of the 
complaint, and also allow a defendant to move at any time for 
summary judgment. Fed. R. Civ. Proc. 12(a), (b); 56(b).
---------------------------------------------------------------------------

    For suits by a Federal or State agency not directly implicating 
borrower defenses, and suits by other government agencies, we consider 
the summary judgment test applicable to private party lawsuits--not a 
motion to dismiss test--to provide a reasonable basis for testing the 
degree of risk posed.\55\ Moreover, the threat posed by any of these 
suits may have no substantial effect on the composite score of the 
institution; as explained above, threats evaluated here require 
financial protection only if the threats together produce a failing 
composite score under these regulations.
---------------------------------------------------------------------------

    \55\ The Federal Rules of Civil Procedure have for almost 50 
years authorized motions for summary judgment upon proper showings 
of the lack of a genuine, triable issue of material fact. Summary 
judgment procedure is properly regarded not as a disfavored 
procedural shortcut, but rather as an integral part of the Federal 
Rules as a whole, which are designed ``to secure the just, speedy 
and inexpensive determination of every action.'' . . . Before the 
shift to ``notice pleading'' accomplished by the Federal Rules, 
motions to dismiss a complaint or to strike a defense were the 
principal tools by which factually insufficient claims or defenses 
could be isolated and prevented from going to trial with the 
attendant unwarranted consumption of public and private resources. 
But with the advent of ``notice pleading,'' the motion to dismiss 
seldom fulfills this function any more, and its place has been taken 
by the motion for summary judgment.
    Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S. Ct. 2548, 
2555, 91 L. Ed. 2d 265 (1986).
---------------------------------------------------------------------------

    We recognize that settlements may well achieve highly desirable 
outcomes, and that regulations should not create a disincentive to 
settlements. Regardless of the position taken in these regulations, a 
debt actually incurred under a settlement entered into in the current 
fiscal year will be recognized in the financial statements of the 
institution eventually submitted for the current year, and will be part 
of the financial information on which the institution's composite score 
will be calculated for the current year. The concerns raised about 
treatment of settlement obligations are therefore concerns only about 
how the regulations treat during the current fiscal year those 
settlement debts incurred during the current year, not their subsequent 
treatment. A settlement debt that the institution can meet will likely 
not jeopardize its financial score when actually evaluated, and we 
approach such debts from the same perspective by assessing their effect 
when incurred using the composite score method as adopted here. We do 
not expect that an institution will enter into a settlement that 
jeopardizes its viability, and by removing the thresholds and assessing 
that debt in a holistic manner, we believe that the regulation will 
remove any disincentive to enter into settlement. If an adjusted 
composite score includes a potential liability from a suit or oversight 
action that eventually results in a settlement, the previously recorded 
risk will be accordingly adjusted downward to the settlement amount.
    We are retaining the summary judgment test for all non-governmental 
suits, because awaiting a final judgment that may cripple the 
institution would substantially frustrate our objective to acquire 
financial protection at a time when a significant threat is posed and 
while the institution is far more likely to be able to afford to 
provide that coverage. That alternative is unacceptable for those 
reasons, and those who object to use of a summary judgment standard 
pose no alternative judicial test that avoids these problems. We 
recognize that a complaint that lacks substantive merit may avoid 
dismissal if sufficiently well pled, but that such a suit survives 
summary judgment only with a showing of some evidence sufficient to 
support recovery.\56\ The

[[Page 75992]]

obvious inference from a choice not to file for summary judgment is 
that a defendant fears that such a motion would not be well-founded, an 
assessment that implies a concession that the suit does pose a risk. 
Such a suit is at that point hardly frivolous, and constitutes a 
significant threat to the viability of the institution. Summary 
judgment is available in Federal court litigation, in which we expect a 
significant amount of even private party litigation to be brought, such 
as qui tam actions under the False Claims Act. As to the shortcomings 
of the summary judgment test under particular State law as asserted by 
the commenter, we note that the commenter pointed to only a few States 
in which the commenter asserted that summary judgment (or summary 
disposition) is less effectively available than in Federal courts. 
Institutions are already subject to those limitations, and face 
scrutiny by any party from whom the institution seeks investment or 
loans for the risks posed by such suits. The consideration we undertake 
here is no different in kind.
---------------------------------------------------------------------------

    \56\ As one writer has observed, ``summary judgment stands as 
the only viable postpleading protector against unnecessary trials.'' 
Martin H. Redish, Summary Judgment and the Vanishing Trial: 
Implications of the Litigation Matrix (2005), 57 Stan. L. Rev. 1329. 
The comments that some States adopt summary judgment or summary 
adjudication procedures that differ either in labels (e.g., 
California) or in some detail from the Federal standard do not show 
that the test is not available or sufficient to meet this objective. 
Where a plaintiff asserts several causes of action, a summary 
adjudication under Cal.C.C.P. Sec.  437c(f) or similar law, or 
partial summary judgment that disposes of some but not all causes of 
action, those claims not disposed of remain pending and proceeding 
to trial, and therefore continue to pose risk. Furthermore, the 
regulations treat a failure to file for summary disposition by a 
defendant as a concession that the plaintiff has sufficient evidence 
to withstand a motion, and therefore that the claim has sufficient 
support to merit presentation to a jury. The fact that a State 
permits a plaintiff to seek summary judgment immediately upon 
commencement of the action (e.g., N.Y. C.P.L.R., rule 3213, 28 
U.S.C.A. (McKinney) does not frustrate use of this summary judgment 
test by a defendant institution; the institution is required merely 
to answer the plaintiff's motion. N.Y. Uniform Dist. Ct. Act Sec.  
1004 (McKinney). The institution is not required to make a cross 
motion for summary judgment, and may move later for summary 
judgment. N.Y. C.P.L.R., rule 3212, 28 U.S.C.A. (McKinney). The 
comment cites Virginia law as restricting the defendant's use of 
declarations and affidavits as making summary judgment less 
effective a test there. Even if this support is disfavored, the 
defendant is free to support the motion with ``admissions, 
interrogatories, and documents produced'' in discovery. Nicoll v. 
City of Norfolk Wetlands Bd., 90 Va. Cir. 169 (Va. Cir. Ct. 2015). 
The tool, therefore, remains substantially available to test 
meritless cases.
---------------------------------------------------------------------------

    In response to the commenters who raised concerns about assessing 
the potential recovery sought in an action that articulates no specific 
financial recovery, we cannot ignore the threats posed by such suits. 
The fact that a particular suit may avoid stating a dollar amount of 
damages in the complaint in no way affects whether the suit poses a 
significant risk to the school. The potential recovery in such suits 
may not be obvious from a complaint, but will ordinarily be articulated 
in a number of different ways, at least one of which would be routinely 
available. For example, the plaintiff may have articulated a specific 
financial demand in a written demand made prior to suit. Second, a 
plaintiff may have offered to settle the claim for a specific 
amount.\57\ Third, defendants engage in discovery, the amount of 
financial relief claimed is highly relevant to the handling of the 
suit, and we expect that a defendant would invariably seek such 
information in discovery. We recognize that suits brought by Federal 
and State authorities may and commonly do seek ``rescission,'' 
``restitution,'' and ``disgorgement'' in unspecified amounts from the 
school, with civil penalties, for patterns and practices affecting 
students enrolled for years up to the filing.\58\ The institution may 
be able to demonstrate that the complaint seeks unstated financial 
relief that as pled, pertains only to students enrolled in a particular 
program, location, or period of enrollment, and not all students 
enrolled at the institution, and may calculate the maximum recovery 
sought using data for that cohort.
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    \57\ We recognize the settlement negotiations are privileged, 
and this option does not in any way diminish that privileged status. 
Private parties commonly disclose voluntarily to government agencies 
material that is privileged without risk of losing that privilege, 
and parties that share a settlement proposal with the Department 
under this option would not lose that protection, Thus, the 
Department would not disclose, in response to a Freedom of 
Information Act request, material regarding settlements if that 
material fell within exemption 4 of that Act, 5 U.S.C. 552(b)(4). 34 
CFR 5.11. Such information includes commercial or financial 
information provided voluntarily and not customarily disclosed by 
the party to the public.
    \58\ We derive the default recovery amount of three years of 
tuition and fees from actions such as Consumer Fin. Prot. Bureau v. 
Corinthian Colleges, Inc., No. 1:14-CV-07194, 2015 WL 10854380 (N.D. 
Ill. Oct. 27, 2015) (claims for actions over three year period); see 
also California v. Heald College, No. CGC-13-534793, Sup. Ct. Cty of 
San Francisco (March 23, 2016). (claims based on actions of varying 
duration). An institution may demonstrate that lesser amounts are 
applicable.
---------------------------------------------------------------------------

    Together, these changes are expected and designed to enable a 
school faced with the kinds of suits the commenters describe to either 
vigorously contest the suits as the school sees fit or to settle them. 
In either case, even a suit or settlement that might warrant financial 
protection in one year, that protection would be required only until 
the institution later may achieve a passing composite score despite 
recognition of the settlement obligation.
    Changes: We have revised Sec.  668.171(c)(1) to remove both the 
$750,000 and 10 percent of current asset threshold amounts for events 
that constitute an automatic trigger. Section 668.171(c) is revised to 
consider government actions unrelated to borrower defense claim 
subjects, and any private party lawsuits, to constitute a triggering 
event only if the suit has survived a motion for summary judgment or 
disposition, or the institution has not attempted to move for summary 
judgment and the suit progresses to a pretrial conference or trial. 
Section 668.171(c)(2) is revised to identify the sources from which an 
institution may discern the amount of financial recovery sought if that 
amount is not stated in the complaint.

Accrediting Agency Actions

Teach-Out Plan Sec.  668.171(c)(1)(iii)

    Comments: Under proposed Sec.  668.171(c)(3)(i), an institution is 
not financially responsible if it is currently or was at any time 
during the three most recently completed award years required by its 
accrediting agency to submit a teach-out plan, for a reason described 
in Sec.  602.24(c)(1), that covers the institution or any of its 
branches or additional locations.
    Some commenters suggested making the submission of a teach-out plan 
under 34 CFR 602.24(c) a separate, automatic trigger. The commenters 
argued that, unlike accreditor sanctions, the teach-out provisions are 
clearer circumstances that suggest the institution may imminently 
close.
    Commenters argued that a letter of credit for institutions that 
trigger the teach-out provision is unnecessary and duplicative of 
existing protections in the regulations. The commenters stated that in 
the scenario of a closing institution, it is highly unlikely that the 
school will be able to obtain a letter of credit, and argued that, as a 
result, requiring the closing school to submit a letter of credit could 
convert a planned, orderly closing into a sudden shut down, thus 
leaving students stranded and harming taxpayers.
    Some commenters warned that including the voluntary closure as a 
trigger would have unwanted effects. The commenters argued that this 
trigger would incent schools to keep locations open, despite the fact 
that the locations may no longer be serving its purpose and its 
continued presence may constitute a drain on institutional resources. 
Forced to choose between a location that is running slightly in the red 
and a letter of credit calculated against the entire institution's 
title IV expenditures, the commenters believed institutions may have no 
choice but to keep the doors open.
    Moreover, the commenters argued that requiring a letter of credit 
makes little sense in the circumstance in which a school closes one or 
more locations, but the institution remains open. The commenters 
offered that in any scenario involving the closure of a location but 
not the main campus, the Department may pursue derivative student 
claims against an institution when those students receive a loan 
discharge pursuant to proposed Sec.  685.214.
    Some commenters also contended that the closure of locations is 
typically designed to increase the financial soundness of an 
institution and believed that the Department's records would show that 
most individual locations are closed only after an orderly teach-out 
and without triggering many (or any) closed school discharges. They 
argued that the closing of one or more locations of a school does not 
necessarily signal financial instability of a school; it may signal 
prudent fiscal controls. Closing locations that are not profitable or 
that cannot effectively serve students makes the institution as a whole 
more financially responsible and better able

[[Page 75993]]

to serve its remaining students. Consequently, the commenters cautioned 
that schools should not be punished for making reasonable business 
decisions to conduct an orderly wind down of an additional location. 
The commenters recommended that no letter of credit be imposed in the 
circumstance of the proposed closure of individual locations, and that 
the Department address on a case-by-case basis the appropriateness of 
requiring a letter of credit from a school that announces a teach out 
of the entire school. Alternatively, if the Department maintains the 
letter of credit requirement based on a school's intention to close a 
location, the commenters suggested that the letter of credit should 
only apply to locations that service 25 percent or more of the 
institution's students.
    Similarly, other commenters suggested that the Department adopt a 
materiality threshold, such as the number of students enrolled or 
affected or the title IV dollar amount associated with those students, 
because the closure of an additional location may have no adverse 
effect on an institution.
    In response to the Department's request for comment on whether a 
threshold should be established below which the closure of a branch or 
additional location would not trigger the letter of credit requirement, 
as noted previously, commenters urged the Department to eliminate the 
closure of a branch or additional location as a triggering event, or at 
minimum, make the trigger discretionary rather than mandatory. If the 
Department does not do so, the commenters asserted that a threshold is 
then both necessary and appropriate, but the commenters believed that a 
letter of credit should be required only if the closure of a branch or 
additional location would have a material financial impact on the 
school as a whole. The commenters offered that the Department could 
request a letter of credit if the closure of a branch or additional 
location:
     Would reduce total school enrollment by 30 percent or 
more;
     Would reduce total school title IV receipts by 30 percent 
or more; or
     Would reduce total school tuition revenues by 30 percent.
    Other commenters suggested that the Department extend the 10 
percent materiality concept to this situation and apply the letter of 
credit requirement only if the closure of a location involves more than 
10 percent of the school's population.
    Some commenters noted that locations are often part of campus 
models that, among other things, bring postsecondary education to areas 
that might otherwise have none, and believed that institutions may 
elect to forgo these innovative efforts if they are unable to close a 
location without incurring a significant financial penalty.
    Other commenters suggested that the Department clarify whether the 
letter of credit provisions would be applied based on the title IV, HEA 
funds received by the main or branch campus, and how the letter of 
credit provisions would apply to teach-out plans that might be 
submitted for a branch campus instead of the entire main campus.
    Discussion: Under the teach-out provisions in 34 CFR 602.24(c)(1), 
an accrediting agency must require an institution to submit a teach-out 
plan whenever (1) the Department initiates an emergency action or an 
action to limit, suspend, or terminate the institution's participation 
in the title IV, HEA programs, (2) the accrediting agency acts to 
withdraw, terminate, or suspend the institution's accreditation, (3) 
the institution notifies the accrediting agency that it intends to 
cease operations entirely or close a location that provides 100 percent 
of a program, or (4) a State licensing or authorizing agency notifies 
the accrediting agency that the institution's license or authority to 
provide an educational program has been or will be revoked. The 
occurrence of any of these actions may call into question an 
institution's ability to continue, placing at risk the welfare of 
students attending the institution. However, in keeping with our 
treatment for other automatic triggering events, instead of using a 
materiality threshold, the Department will recalculate the 
institution's composite score (1) based on the loss of title IV, HEA 
funds received by students attending the closed location during the 
most recently completed fiscal year, and (2) by reducing the expenses 
associated with providing programs to those students, as specified in 
Appendix C to these regulations. We believe that this approach will 
corroborate the position of some of the commenters that closing an 
unprofitable location was a good business decision in cases where the 
recalculated composite score is higher but not less than the original 
score. Otherwise, a failing recalculated composite score shows that 
closing the location had an adverse impact on the institution's 
financial condition.
    Changes: We have added a new Sec.  668.171(c)(1)(iii) to provide 
that an institution is not financially responsible if it is required by 
its accrediting agency to submit a teach-out plan under Sec.  602.24(c) 
that covers the institution or any of its branches or additional 
locations if, as a result of closing that institution or location, the 
institution's recalculated composite score is less than 1.0. In 
addition, we provide in Appendix C to subpart L, the adjustments to the 
financial statements that are needed to recalculate the composite 
score.

Show Cause or Probation Sec.  668.171(g)(5)

    Comments: Under proposed Sec.  668.171(c)(3)(ii), an institution is 
not financially responsible if it is currently, or was at any time 
during the three most recently completed award years, placed on 
probation or issued a show-cause order, or placed on an accreditation 
status that poses an equivalent or greater risk to its accreditation by 
its accrediting agency for failing to meet one or more of the agency's 
standards, and the accrediting agency does not notify the Secretary 
within six months of taking that action that it has withdrawn that 
action because the institution has come into compliance with the 
agency's standards.
    Some commenters were concerned that the scope of the proposed 
accrediting agency triggering events is too broad because it includes 
matters that do not necessarily pose any existential threat to the 
viability of an institution. The commenters stated that an institution 
placed on probation or show-cause status does not, in all cases, signal 
an imminent threat to the continued viability of the institution that 
should automatically require a letter of credit; in the tradition of 
accreditation, while these designations are meant to identify and make 
public areas of concern at an institution, the goal remains that of 
self-improvement and correction.
    Other commenters agreed that an institution placed on show cause by 
most accrediting agencies is typically at substantial risk of losing 
its accreditation, and loss of accreditation would likely have some 
impact on its finances and operations. However, the commenters noted 
that, in many cases, the agency placed the institution on show cause 
because it had demonstrated significant financial and operational 
deficiencies that were already having an impact on its business and 
educational outcomes. Therefore, the commenters cautioned that in many 
cases, it is the reason behind the show cause order (i.e., concerns 
about the financial and operational capacity of the institution), and 
not the show-cause status itself, that suggests an institution is not 
financially responsible.
    Some commenters stated that in many cases, an accrediting agency 
places an

[[Page 75994]]

institution on probation for issues of academic quality or dysfunction 
at the governance level even while the institution's operations and 
finances remain strong. The commenters stated that, while the issues 
that lead to the probation are certainly not minimal, it would take an 
institution longer than six months to correct them. In addition, the 
agency will need time to evaluate the changes and determine that the 
institution is now in compliance. Moreover, the commenters maintain 
that there is no clear evidence that institutions on probation 
routinely or uniformly experience operational or financial outcomes as 
a result of being on probation, particularly when the issues leading to 
the probation are unrelated to finance or operations. Again, the 
commenters cautioned that uniformly concluding that all institutions on 
probation that cannot correct non-compliance issues in six months are 
not financially responsible is overly broad. In addition, the 
commenters noted that it effectively punishes an institution that is on 
probation for issues not related to financial and operational 
deficiencies by requiring the institution to provide a letter of credit 
and participate in the title IV, HEA programs under a provisional 
certification.
    The commenters believed that if the Department intends to rely on 
accrediting actions to determine financial responsibility, then the 
Department must review the content of the accrediting actions and act 
based on the reasons for those actions. As a matter of due process, 
each accrediting agency action imposing probation makes highly 
individualized findings of non-compliance that provide clear indicators 
regarding the institution's risk, as determined by the agency. For 
these reasons, the commenters suggested that the Department revise the 
show cause and probation provisions to refer specifically to agency 
standards related to finances, operations, or institutional ethics or 
integrity or related areas.
    Other commenters supported tying accrediting agency actions to 
financial or operational issues but, in the alternative, would also 
support the Department's suggestion during the negotiated rulemaking 
process that there be a way for an accrediting agency to inform the 
Department as to why its probation or show-cause action will not have 
an adverse effect on the institution's financial or operating condition 
(see 81 FR 39364). Along somewhat similar lines, other commenters 
believed that, if an accrediting agency takes an action against a 
school based on financial responsibility concerns, that action should 
not supplant the Department's own analysis under subpart L of the 
regulations.
    Other commenters stated that accreditors do not consider a show-
cause order a negative action--to the contrary, accreditors routinely 
use it as a mechanism to promote institutional change and compliance. 
The commenters argued the Department itself has not previously taken 
the view that a show-cause order or probation was a significant threat 
to an institution's financial health by noting that a recent report 
listing the institutions the Department required to submit letters of 
credit did not identify an accrediting agency action as the basis for 
requiring any of those letters of credit. The commenters also noted 
that the Department's recent spreadsheet listing the institutions on 
heightened cash monitoring indicates that 13 of the 513 institutions 
were placed there for Accreditation Problems, which the Department 
defined as ``accreditation actions such as the school's accreditation 
has been revoked and is under appeal, or the school has been placed on 
probation.'' The commenters asserted the spreadsheet establishes (1) 
that the Department already has a mechanism for seeking financial 
protection from institutions experiencing accreditation problems, and 
(2) that a mere show cause order historically has not been viewed as 
posing the same risk as revocation or probation. In addition, the 
regulations governing recognized accreditors permit an accreditor to 
afford an institution up to two years to remedy a show-cause before it 
must take action, and the commenters believe that this allowable 
timeframe effectively codifies the notion that a show-cause order is 
neither a sign of impending financial failure, nor a matter than an 
institution would expect to resolve in six months' time. See 34 CFR 
602.20.
    Other commenters agreed with the Department that actions taken by 
an accreditor could be a sign that the institution may imminently lose 
access to Federal financial aid. In those cases, the commenters 
believed that asking for additional funds upfront would be a sensible 
step as an advance protection for taxpayers. However, the commenters 
point to recent review of accreditor actions over the last five years 
showing that the current sanctions system is highly inconsistent. The 
commenters stated this inconsistency was true with respect to 
terminology, the frequency with which actions happen, and how long an 
institution stays on a negative status. (Antoinette Flores's ``Watching 
the Watchdogs,'' published in June 2016). Given this inconsistency, the 
commenters recommend making the following changes to the proposed 
accrediting triggering events.
    Commenters suggested that the Department make accreditor actions a 
discretionary trigger because, given the inconsistency among 
accreditors, establishing an automatic trigger tied to negative 
sanctions may be difficult. They stated that accreditors do not 
interpret what it means to be on probation or show cause in the same 
way. In addition, the commenters stated that making sanctions by 
accreditors an automatic trigger also risks making them unlikely to 
take action when they should.
    The commenters note that a clear finding from the research, 
``Watching the Watchdogs,'' is that many accreditors put institutions 
on a negative status for a very short period of time, while other 
accreditors required institutions facing a sanction to stay in that 
status for at least a year. The commenters were concerned that setting 
a clear threshold of six months would give an institution too much 
leverage to argue that its accreditor should withdraw the sanctions 
sooner than the accreditor otherwise would.
    Discussion: In view of the significant number of comments that a 
probation or show cause action taken by an accrediting agency may not 
be tied to a financial reason or have financial repercussions, and 
could have serious unintended consequences as an automatic trigger, we 
are revising this trigger to make it discretionary. As such, we will 
work with accrediting agencies to determine the nature and gravity of 
the reasons that a probation or show cause action was taken and assess 
whether that action is material or would otherwise have an adverse 
impact on an institution's financial condition or operations. Moreover, 
under this approach, the proposed six-month waiting period for an 
institution to come into compliance with accrediting agency standards 
is no longer necessary.
    Changes: We have reclassified and relocated the automatic probation 
and show-cause trigger in proposed Sec.  668.171(c)(3)(ii) as a 
discretionary trigger under Sec.  668.171(g)(5) and revised the trigger 
by removing the six-month compliance provision.

Gainful Employment Sec.  668.171(c)(1)(iv)

    Comments: Under proposed Sec.  668.171(c)(7), an institution would 
not be financially responsible if, as determined annually by the 
Secretary, the number of title IV recipients

[[Page 75995]]

enrolled in gainful employment (GE) programs that are failing or in the 
zone under the D/E rates measure in Sec.  668.403(c) is more than 50 
percent of the total number of title IV recipients who are enrolled in 
all the GE programs at the institution. An institution is exempt from 
this provision if fewer than 50 percent of its title IV recipients are 
enrolled in GE programs.
    Some commenters noted that many institutions subject to the GE 
regulations have limited program offerings, and in some cases offer 
only one program. For those institutions, a single program scoring in 
the zone will result in more than 50 percent of its students being 
enrolled in zone-scoring programs. The commenters further noted that 
the GE regulations provide for a runway for institutions to bring 
programs into compliance, and institutions do so through cost 
reductions that are passed along to students. The commenters reasoned 
that imposing a letter of credit requirement on such an institution 
would deprive it of curative resources and ultimately lead to a closure 
of the program, rather than its remediation.
    In response to the Department's request for comment on whether the 
majority of students who enroll in zone or failing GE programs is an 
appropriate threshold, commenters offered several observations and 
recommendations.
    First, the commenters believed that a simple tally of the number of 
GE programs that may be failing or in the zone at a given point in time 
will not produce a consistently accurate assessment of an institution's 
current or future financial stability. The first set of debt-to-
earnings rates, for example, are based on debt and earnings information 
for students who graduated between the 2008-09 and 2011-12 award years 
(assuming an expanded cohort). See generally 34 CFR 668.404. By the 
time the associated debt-to-earnings ratio for these programs are 
released (likely early 2017), many institutions will be offering new or 
different programs that are designed to perform favorably under the GE 
framework. Though, as of 2017, a significant number of the students may 
still be enrolled in the institution's older GE programs, these 
programs will no longer be integral to the institution's business 
model, and indeed, may be in a stage of phase-out. For this reason, the 
commenters suggested that any reasonable assessment of an institution's 
financial health would need to account for the phase-out of older GE 
programs and the strength of the newer ones.
    Second, the commenters recommended that the Department exclude from 
this determination any GE programs that are in the zone, or at a 
minimum, GE programs that have only been in the zone for two or fewer 
years. The commenters argued that, because a GE program must be in the 
zone for four consecutive years for which rates are calculated before 
it loses eligibility, the inclusion of a zone program prior to this 
point does not justify the presumption that the program may lose 
eligibility.
    Finally, the commenters suggested that, rather than exempting 
institutions where fewer than 50 percent of the title IV recipients are 
enrolled in GE programs, the regulations should simply compare the 
number of students who receive title IV, HEA funds and are enrolled in 
failing GE programs to the total number of students. The commenters 
believed this approach would be a better and more straightforward 
measure of the risk of financial failure posed to the entire 
institution.
    Discussion: We appreciate the concerns and suggestions made by the 
commenters regarding the GE trigger and are persuaded that the trigger 
should be revised to (1) account for the time that an institution has 
to improve a GE program in the zone, and (2) focus more on the 
financial impact of failing programs instead of the percentage of 
students enrolled in GE programs.
    We proposed including zone programs in the GE trigger because there 
are no assurances that an institution will attempt to improve or 
succeed in improving those programs. However, we agree that the 
proposed trigger could influence an institution to discontinue an 
improving program prematurely or hold an institution accountable for 
poorly performing programs that it voluntarily discontinues. In 
proposing the 50 percent threshold, we were attempting to limit this 
trigger to those situations where the potential loss of program 
eligibility would have a material financial impact on an institution. 
But, as alluded to by the commenters, the percentage threshold based on 
title IV recipients may not apply to situations where an institution 
discontinues a zone program, or cases where 50 percent of the title IV 
recipients enrolled at an institution account for a small fraction of 
(1) the total number of students enrolled, or (2) institutional 
revenue.
    To address these concerns, we are revising the GE trigger by 
considering only those programs that are one year away from losing 
their eligibility for title IV, HEA program funds and assessing the 
impact of that program's closure and any potential loss under the 
recalculated composite score approach. Specifically, the Department 
will use the amount of title IV, HEA program funds the institution 
received for those programs during its most recently completed fiscal 
year as the potential loss and recalculate the composite score based on 
that amount and an allowance for reductions in expenses that would 
occur if those programs were discontinued.
    Changes: We have revised the GE trigger as described above. We have 
also revised the GE trigger in Sec.  668.171(c)(1)(iv) to provide that 
the loss used in recalculating the institution's composite score under 
Sec.  668.171(c)(2) is the amount of title IV, HEA program funds the 
institution received for affected programs during the most recently 
completed fiscal year. Lastly, we specify in Appendix C to subpart L, 
the changes needed to reflect that loss of funding and the reduction in 
educational expenses associated with discontinuing those programs.

Withdrawal of Owner's Equity Sec.  668.171(c)(1)(v)

    Comments: Under proposed Sec.  668.171(c)(8), an institution whose 
composite score is less than 1.5 is not financially responsible if 
there is any withdrawal of owner's equity from the institution by any 
means, including by declaring a dividend.
    Some commenters appreciated the provision in Sec.  668.171(d)(2) 
that would allow an institution whose composite score is based on the 
consolidated financial statements of a group of institutions, to report 
that an amount withdrawn from one institution was transferred to 
another entity within that group. However, the commenters argued that, 
since the Department is aware of the institutions whose composite 
scores are calculated based on consolidated financial statements, 
requiring those institutions to report every intercompany funds 
transfer imposes an unnecessary burden because the reporting provides 
little if any benefit to the Department. Therefore, the commenters 
recommend amending proposed Sec.  668.171(c)(8) to expressly exclude 
any withdrawal of equity that falls within the circumstances described 
in Sec.  668.171(d)(2).
    Other commenters assumed that this provision is intended to apply 
only to proprietary institutions because nonprofits do not have owners. 
However, because in financial reporting, the term ``equity'' is often 
used conceptually to refer both to owner's equity for businesses or net 
assets for nonprofits, the commenters recommended that the Department 
clarify in the final regulations that this provision applies only to 
proprietary institutions.

[[Page 75996]]

    Discussion: We agree that, where a composite score is calculated 
based on the consolidated financial statements of a group of 
institutions, funds transfers between institutions in the group should 
not be reported as withdrawals of owner's equity. The trigger for the 
withdrawal of owner's equity was based on the reporting requirement 
under the zone alternative in current Sec.  668.175(d)(2)(ii)(E), which 
applies only to proprietary institutions. We agree to clarify in the 
regulations that as a triggering event under Sec.  668.171(c), the 
withdrawal of owner's equity applies only to proprietary institutions.
    In addition, by recalculating the composite score we capture the 
impact of withdrawals of owner's equity in cases where the withdrawals 
were not made solely to meet tax liabilities.
    Changes: We have revised the withdrawal of owner's equity trigger 
now in Sec.  668.171(c)(1)(v) to specify that it applies only to a 
proprietary institution and that it does not include transfers to an 
entity included in the affiliated entity group on whose basis the 
institution's composite score was calculated. In addition, we specify 
in Sec.  668.171(c)(2)(iv)(B) that except for a withdrawal used solely 
to meet tax liabilities, as provided under Sec.  668.171(h)(3)(ii), the 
Secretary will recalculate the institution's composite score to account 
for that withdrawal.

Cohort Default Rates Sec.  668.171(f)

    Comments: Under proposed Sec.  668.171(c)(9), an institution is not 
financially responsible if its two most recent official cohort default 
rates are 30 percent or greater, unless the institution files a 
challenge, request for adjustment, or appeal with respect to its rates 
for one or both of those fiscal years and that action remains pending, 
results in reducing below 30 percent the official cohort default rate 
for either or both years, or precludes the rates from either or both 
years from resulting in a loss of eligibility or provisional 
certification.
    Some commenters urged the Department to remove the cohort default 
rate trigger, citing concerns that this trigger would have unintended 
consequences. The commenters believed that, because of the 
corresponding letter of credit requirements, it is likely that banks 
would curtail their lending to affected institutions making it more 
difficult for those institutions to initiate, or continue with, 
innovative educational efforts that are often capital-intensive.
    In response to the Department's request for comment on whether a 
cohort default rate of 30 percent or more for a single year should be a 
triggering event, some commenters believed that the proposed two-year 
trigger should not be changed. One commenter suggested that this 
trigger should apply to any institution whose most recent cohort 
default rate is 30 percent or higher, arguing that keeping default 
rates below 30 percent is a very low standard for an institution to 
meet--only 3.2 percent of institutions have a default rate of 30 
percent or higher. The commenter noted that, among all students 
attending institutions of higher education where the default rate is 30 
percent or higher, 85 percent attend public institutions and just 11 
percent attend proprietary institutions. The commenter urged the 
Department not to exempt public institutions from this trigger if the 
Department's goal is to protect as many students as possible.
    Discussion: We wish to make clear that the Department will not 
apply the cohort default rate trigger until any challenge, request for 
adjustment, or appeal that an institution qualifies to file, under 
subpart N of the General Provisions regulations, is resolved. If that 
action is resolved in favor of the institution, the Department will 
take no further action and make no further requests of the institution 
with regard to this trigger. Otherwise, after the challenge, request, 
or appeal is resolved, the Department will apply the cohort default 
rate trigger and request the corresponding financial protection from 
the institution.
    We disagree with the notion that a bank will curtail its lending to 
an institution solely because the Department requests financial 
protection under this trigger. Like other creditors, a bank would 
assess the risks inherent in making a lending decision, including 
regulatory risks. In this case, under the statutory provisions in 
section 435(a)(2) of the HEA, pending any appeal for, or adjustment to, 
its cohort default rates the institution is one year away from losing 
its eligibility for title IV, HEA funds. Although an institution's 
intention to initiate or continue innovative educational efforts are 
laudable, we believe it is questionable that a bank would jeopardize 
funds requested by the institution after having assessed the risks of 
whether the institution could repay those funds in the event that the 
institution's eligibility under the title IV, HEA programs is 
terminated in the near term.
    With regard to the Department's request for comment, we are 
persuaded to maintain the proposed two-year threshold.
    With respect to the comment that, to protect as many students as 
possible, the Department should not exempt a public institution from 
the cohort default rate trigger, we note that while cohort default 
rates for all institutions are publicly available and can be used by 
students and parents in making enrollment decisions for particular 
institutions, the purpose of this trigger is to protect the Federal 
interest in the event an institution loses its eligibility for title 
IV, HEA funds in the coming year. In that circumstance for a public 
institution, we already have financial protection in the form of full 
faith and credit of the State to cover any liabilities that may arise 
(see the discussion under the heading ``Public Domestic and Foreign 
Institutions'').
    Changes: None.

Non-Title IV Revenue (90/10) Sec.  668.171(d)

    Comments: Under proposed Sec.  668.171(c)(5), a proprietary 
institution is not financially responsible if it does not derive at 
least 10 percent of its revenue from sources other than title IV, HEA 
program funds during its most recently completed fiscal year.
    Some commenters believed this trigger was unjustified, arguing that 
an institution's eligibility to participate in the title IV, HEA 
programs is not at risk after a one-year failure. The commenters stated 
that section 487(d)(2) of the HEA provides that no penalties are 
imposed on an institution until it loses title IV eligibility by 
failing the 90/10 revenue test for two consecutive years, and that the 
sanctions that are specified do not include the financial 
responsibility consequences proposed under this trigger. For these 
reasons, the commenters concluded that, lacking specific statutory 
authority, the Department should remove this trigger from the final 
regulations.
    Other commenters were concerned that institutions actively game the 
90/10 requirements by (1) delaying title IV disbursements until the 
next fiscal year; (2) combining locations that exceed the 90 percent 
revenue limit with those that do not, and (3) raising tuition, which 
forces students to take out private loans that increase revenue from 
non-title IV sources. The commenters believed that these gaming 
strategies are the reason that only a few institutions fail the 90/10 
revenue test each year (14 institutions for the 2013-14 reporting 
period) and urged the Department to limit the use of these strategies, 
recommending for example, that Department track for three years the 90/
10 compliance for each location included at the institution's request 
under a single PPA or that the Department should not grant those

[[Page 75997]]

requests when institutional 90/10 compliance is in question.
    Discussion: As we noted in the preamble to the NPRM, an institution 
that fails the 90/10 revenue test for one year, is one year away from 
losing its title IV eligibility. Under Sec.  668.28(c)(3), an 
institution that fails the revenue test must notify the Department of 
that failure no later 45 days after the end of its fiscal year. If the 
institution fails again in the subsequent fiscal year, it loses its 
eligibility for title IV, HEA funds on the day following the end of its 
fiscal year, not at the end of the 45-day reporting period. After the 
end of its fiscal year, the institution's ability to continue to make 
disbursements to enrolled students is severely limited under the 
provisions in Sec.  668.26. Consequently, in view of the institution's 
dependence on revenues from title IV, HEA funds that it is no longer 
eligible to receive, it is likely that the institution would close, 
possibly precipitously, leading to closed school discharges and program 
liabilities owed to the Department. These are the same outcomes that 
would result from an existential threat, such as a crippling lawsuit or 
loss of accreditation, for which financial protection is authorized 
under the financial responsibility provisions in section 498(c) of the 
HEA.
    Contrary to the commenters' assertion that there is no risk to an 
institution's eligibility after a one-year failure, the HEA 
contemplates that risk under section 487(d)(2)(B) by providing that 
after a one year failure, the institution automatically becomes 
provisionally certified and remains on that status for the following 
two years, unless it fails the 90/10 revenue test in the subsequent 
year and loses eligibility. Moreover, the Department's authority to 
establish 90/10 as a basis for determining whether an institution is 
financially responsible is anchored under the provisions in section 
498(c)(1) of the HEA, not the provisions governing the institution's 
eligibility under the 90/10 revenue provisions.
    With regard to the comments about institutions evading the 90/10 
requirements, we note that changes to these requirements are beyond the 
scope of this rulemaking. Administratively however, the Department will 
continue to diligently enforce the 90/10 requirements and work closely 
with the Office of the Inspector General to help ensure that 
institutions properly calculate their 90/10 rates.
    Changes: None.

Publicly Traded Institutions Sec.  668.171(e)

General
    Comments: Under proposed Sec.  668.171(c)(6), a publicly traded 
institution is not financially responsible if the SEC warns the 
institution that it may suspend trading on the institution's stock, the 
institution's stock is delisted involuntarily from the exchange on 
which it was traded, the institution disclosed in a report to the SEC 
that it is subject to a judicial or administrative proceeding, the 
institution failed to file timely a required report with the SEC, or 
the exchange on which the institution's stock is traded notifies the 
institution that it is not in compliance with exchange requirements.
    Commenters believed that the NPRM did not provide meaningful 
rationale for some of the provisions that the Department asserts 
require financial protection, pointing for example to an institution's 
failure to file a timely report with the SEC, or noncompliance with 
exchange requirements, and noting that the Department only suggested 
that such events could lead to institutional failure. In response to 
the Department's request for comment regarding how these triggers could 
be more narrowly tailored to capture only those circumstances that 
could pose a risk to an institution's financial health, the commenters 
offered that the final regulations should provide that in every 
instance where an SEC action occurs, the Department will only take 
action after it affords the institution a notice and hearing and 
thereafter makes a reasoned determination that the event is likely to 
result in a material adverse effect. The commenters further stated 
that, to be a triggering event, any SEC action should be a final, non-
appealable judgment or suspension and not merely a warning or 
notification. The commenters also stated that because many companies 
inadvertently and regularly miss a periodic filing deadline, the final 
regulations should require a finding of materiality, as applied to the 
delinquency of the filing, and the Department should consider whether 
the filing failure is an isolated incident or part of a pattern of 
conduct, and whether the missed filing was the fault of the 
institution.
    Similarly, in response to the Department's request for comment, 
other commenters identified the following situations that they believed 
would provide for a more appropriate set of triggers for publicly 
traded institutions:
    (1) The institution is in default on an obligation to make payments 
under a credit facility, or other debt instrument, and the default 
involves an amount in excess of 10 percent of the institution's current 
assets, and the default is not cured within 30 days;
    (2) An event of default has been declared by the relevant lender or 
trustee under any outstanding credit facility or debt instrument of the 
institution or its parent, including any bond indenture, and the 
default is not cured within 30 days; or
    (3) The institution or its parent declares itself insolvent, files 
a petition for reorganization or bankruptcy under any Federal 
bankruptcy statute, or makes an assignment for the benefit of 
creditors.
    The commenters believed that adopting the recommended triggers 
would enable the Department to efficiently identify those cases in 
which a publicly traded institution is in financial trouble, and would 
avoid conflating investor-facing disclosures or nonmaterial 
administrative matters (e.g., failure to timely file a required report, 
notification of non-compliance with exchange requirements) with 
reliable indicators of financial distress.
    Discussion: With regard to the suggestion that the Department apply 
these triggering events only when an SEC action is what the commenter 
describes as a final, non-appealable judgment or suspension, and not a 
warning or notification, doing so would further distance these events 
as early but significant indicators of serious financial distress. We 
understand that the warning is issued by the SEC only after repeated 
efforts have already been made to alert the delinquent party of the 
need to file, and despite these attempts, the registrant continues to 
fail to respond. We understand that the consequences of failure to file 
timely required reports after this warning include significant burdens 
should the institution wish to raise capital, and that not uncommonly, 
the reason a registrant becomes so delinquent as to be issued this 
warning is that the registrant has ceased operations. We are not 
capturing, or requiring contemporaneous reporting of, the actions and 
circumstances that give rise to an SEC or exchange action--information 
that may at an early stage forecast operational or financial 
difficulties--because that would be unmanageable and could lead to 
erroneous conclusions. Instead, we are relying on the conclusions 
reached by the SEC and the stock exchange that the actions taken by the 
institution warrant a significant and corresponding reaction.
    With regard to the proposal that the Department take action to 
impose financial protection based on an SEC or

[[Page 75998]]

exchange action only after providing the institution an opportunity for 
a hearing and a case-by-case evaluation of the significance of the 
particular event on which the SEC or exchange acted, we note that Sec.  
668.171(h)(3)(iv) provides the institution with an opportunity at the 
time it reports the event to demonstrate that the condition no longer 
exists, has been cured or, that it has insurance that will cover any 
and all debts and liabilities that arise at any time from that 
triggering event. The liabilities referred to here are those that arise 
from a precipitous closure of an institution, including, but not 
limited to losses from closed school discharges, and liabilities for 
grant and loan funds not accounted for as properly spent by the 
statutorily required compliance audit. If the Department takes an 
enforcement action based on this trigger, or any other automatic 
triggering events, to condition the continuing participation of the 
institution on providing the required financial protection, Sec.  
668.90(a)(3)(iii)(A) provides the institution a more formal opportunity 
to demonstrate these defenses. The event itself is of such significance 
that the Department considers only these defenses, and not contentions 
that the event itself is not grounds for requiring protection.
    While we appreciate the suggestions made by the commenters to 
streamline the triggers for publicly traded institutions, particularly 
with regard to making payments under a credit facility, as discussed 
more thoroughly under the heading ``Violation of Loan Agreement,'' we 
have made these provisions discretionary and they apply to all 
institutions. While we agree that some of the situations described 
would signal serious distress, under these regulations we will make 
those determinations on a case-by-case basis. As previously noted, if 
the lender files suit as a result of the delinquency, that suit would 
be considered under the private litigation assessment in Sec.  
668.171(c)(1)(ii).
    Changes: None.
Delisting
    Comments: With regard to the triggers pertaining to a warning from 
the SEC that it may suspend trading and the involuntary delisting of an 
institution's stock, some commenters found the correlation the 
Department was attempting to make between an institution's failure to 
comply with exchange requirements and its ability to meet its financial 
obligations troublesome.
    The commenters argued that, while a delisting is significant, 
correlating an institution's financial health to its delisting 
incorrectly assumes that the delisting is generated as a result of 
financial problems and the delisting will materially impact the 
institution's financial health. Even where the delisting is itself 
related to something that is measured in dollars, like a minimum bid 
price, that measure is not necessarily indicative of the health of an 
institution, as opposed to the market value of a share of the 
institution.
    Discussion: While the commenters are technically correct that an 
involuntary delisting does not necessarily mean that an institution has 
financial problems, it could equally or more likely mean that it does. 
Even worse, the delisting may be a prelude to bankruptcy. Generally 
speaking, financially healthy institutions are not involuntarily 
delisted. As discussed in the preceding comment, the regulations 
provide the institution ample informal and formal opportunities to show 
that the risks that the triggering event may cause have been removed by 
curing the event itself. These liabilities are those that ensue from a 
precipitous closure, as described above. An institution's financial 
viability under the Department's composite score methodology assesses, 
as explained earlier, the ability of the institution to borrow and 
access capital as needed. Delisting and SEC actions directly affect the 
ability of a publicly-traded institution to access capital. An 
institution may contend that the event on which the action was premised 
does not portend closure, but the action by the exchange or SEC 
unquestionably affects the ability of the institution to obtain 
financing, a critical aspect of financial viability. While the negative 
effect of that impairment may be difficult to quantify, and cannot 
immediately be assessed under the composite score methodology, that 
impairment warrants requiring financial protection.
    Changes: None.
SEC Filings Regarding Judicial or Administrative Proceeding
    Comments: With regard to judicial or administrative proceedings, 
some commenters noted that the SEC's requirements are designed to 
encourage disclosure of information to potential investors and 
cautioned that the proposed regulations may discourage those 
disclosures. The commenters believed that although the proposed 
reporting requirements under Sec.  668.171(d)(i) would permit an 
institution to explain why a particular litigation or suit does not 
constitute a material adverse event that would pose an actual risk to 
its financial health, a publicly traded institution that elects to make 
broad disclosures to the SEC and potential investors would be dependent 
on the Department agreeing with the institution's position. If the 
Department disagrees, the commenters opined that the institution would 
face a financial penalty (i.e., be required to submit a letter of 
credit) for a situation where the disclosure may not have been required 
by the SEC in the first place. Along similar lines, other commenters 
noted that the reporting provisions do not require the Department to 
act on any evidence provided by the institution, and do not specify 
what opportunity, if any, the institution would have to discuss these 
events with the Department. For these reasons, the commenters suggested 
that the Department should not implement regulations that would 
interfere with the primary purpose of SEC disclosures--to permit 
potential investors to make their own decisions about whether to invest 
in the institution.
    Similarly, other commenters believed this triggering event would 
run counter to the long-standing practice of publicly traded 
institutions generally erring on the side of disclosing legal and 
regulatory events to the public and their shareholders. More 
specifically, the commenters asserted that publicly traded institutions 
tend to over-disclose these events, particularly since the materiality 
of those events often cannot be reasonably determined at their onset.
    Discussion: We acknowledge that a judicial or administrative 
proceeding reported by an institution to the SEC may or may not be 
material. We believe that proceedings reported in SEC filings that seek 
substantial recovery but may not be meritorious pose a risk similar to 
the risk posed by non-governmental actions. The institution may succeed 
in dismissing such a suit, or at least testing its merit by moving for 
summary judgment or disposition. The institution may also have 
insurance that fully protects the institution from loss from the suit.
    Changes: We have added a new Sec.  668.171(c)(1)(ii) to treat all 
private party litigation as a triggering event only if the action 
survives a motion for summary judgment or disposition, or the 
institution has chosen not to file for summary judgment, and have 
amended Sec.  668.171(h) to enable the institution to demonstrate that 
all actual and potential losses stemming from that litigation are 
covered by insurance.
SEC Reports Filed Timely
    Comments: With respect to the trigger for filing timely SEC reports 
under proposed Sec.  668.171(c)(6)(iii), some commenters warned that 
the

[[Page 75999]]

Department should not assume that an institution is unable to meet its 
financial or administrative obligations and impose punitive actions 
based on a failure to meet SEC filing requirements. As an initial 
matter, the commenters argued that the proposed trigger is more 
stringent than the SEC's rules, which allow an institution to file a 
notification of late filing, that enables the institution to file the 
report by an extended deadline, and once filed the institution would be 
deemed to have timely filed the report. In addition, the commenters 
stated that an institution's failure to file a report may not 
necessarily reflect that the institution is unable to meet its 
financial or administrative obligations, because the report could be 
late for many reasons outside of financial problems at an institution, 
including the unavailability of an individual required to sign the 
report, an unforeseen circumstance with an institution's auditors, or 
the need to address a financial restatement done for technical reasons. 
Similarly, other commenters urged the Department to apply this trigger 
only where the filing would be considered late under SEC rules. The 
commenters explained that pursuant to SEC rules, an institution that 
fails to timely file a report must file a Form 12b-25, reporting the 
failure to file no later than one business day after the report was 
due. If the Form 12b-25 is properly filed, the institution will have 15 
additional calendar days to file an annual report or five additional 
calendar days to file a quarterly report. If the institution files the 
late report within the extended deadline, the SEC considers that the 
report was timely filed.
    Discussion: A late SEC filing, or failure to file, may precipitate 
an adverse action against an institution by the SEC or a stock 
exchange. For example, an AMEX or Nasdaq-listed institution that files 
a late SEC report is cited for failing to meet exchange requirements 
and will be required by the exchange to submit a plan for regaining 
compliance with listing requirements. The exchange may suspend trading 
on the institution's stock if it does not come into compliance with 
those requirements. Or, a late filing may limit the institution's 
ability to conduct certain types of registered securities offerings. In 
addition, capital markets tend to react negatively in response to late 
filings. All told, the consequences of late SEC filing may impact the 
institution's capital position or its ability to raise capital, and we 
believe that it remains a significant event to include as an automatic 
trigger.
    Changes: None.

Discretionary Triggering Events Sec.  668.171(g)

    Comments: Under proposed Sec.  668.171(c)(10), an institution is 
not financially responsible if the Secretary determines that there is 
an event or condition that is reasonably likely to have a material 
adverse effect on the financial condition, business, or results of 
operations of the institution, including but not limited to whether (1) 
there is a significant fluctuation in the amount of Direct Loan or Pell 
Grant funds received by the institution that cannot be accounted for by 
changes in those programs, (2) the institution is cited by a State 
licensing or authorizing agency for failing State or agency 
requirements, (3) the institution fails a financial stress test 
developed or adopted by the Secretary to evaluate whether the 
institution has sufficient capital to absorb losses that may be 
incurred as a result of adverse conditions, or (4) the institution or 
its corporate parent has a non-investment grade bond or credit rating.
    Commenters believed that the proposed discretionary triggers were 
unreasonable for several reasons. First, the commenters noted that the 
discretionary provisions do not afford institutions any opportunity to 
communicate with the Department regarding a possible materiality 
determination. Instead, it appeared to the commenters that the 
Department may determine unilaterally, and without engaging the school, 
that there is an event or condition that is reasonably likely to have a 
material adverse effect and proceed to demand financial protection, 
violating the school's due process. Moreover, the commenters argued 
that any standard of financial responsibility that does not permit the 
receipt and review of information from the school cannot produce 
consistent and accurate results and, as such, fails to satisfy the 
reasonability standard put into place by Congress.
    Second, the commenters noted that the Department did not define the 
term ``material adverse effect'' and made no mention of the concept in 
the preamble to the proposed regulations. The commenters asserted that 
the Department must define this term to ensure that the regulations are 
consistently applied, particularly where an institution could be 
significantly penalized (required to submit a letter of credit) pending 
the result of the determination.
    Third, the commenters argued that by requiring under proposed Sec.  
668.171(d) that an institution must report any automatic or 
discretionary trigger within 10 days, the proposed regulations are 
unworkable--because the discretionary triggers are not exhaustive, an 
institution would have an obligation to speculate as to the types of 
events the Department might determine would have a material adverse 
effect and report those events. Conversely, the commenters were 
concerned that the Department could argue that an institution's failure 
to report an event, that the Department might deem likely to have 
material adverse effect, is a failure to provide timely notice under 
Sec.  668.171(d), and grounds to initiate a proceeding.
    Fourth, the commenters argued that the six examples of events that 
the Department might consider ``reasonably likely'' to have a material 
adverse effect on an institution are vague, and asserted that the 
Department offered no factual support in the preamble for the notion 
that these events regularly, or even more often than not, lead to 
financial instability at an institution. The commenters stated that the 
only rationale the Department offers for including these six events is 
that each could, in theory, signal financial stress. For example, they 
noted that a citation from a State-authorizing agency for failing a 
State requirement could concern almost any aspect of an institution's 
operations. The commenters contended that routine citations occur with 
great frequency in annual visit reports and routine audits. Therefore, 
under the proposed regulations, an institution would be required to 
report every citation, without regard to materiality, frequency, or the 
relationship to the institution's financial health. According to the 
commenters, events such as ``high annual dropout rates,'' a 
``significant fluctuation'' in the amount of Federal financial aid 
funds received by an institution, an undisclosed stress test, and an 
adverse event reported on a Form 8-K with the SEC are equally 
problematic and vague. Commenters stated that it was unclear what these 
thresholds or events represent, how they would be evaluated, or how an 
institution would know that one has occurred and report it to the 
Department.
    Other commenters believed that the Secretary should not have open-
ended discretion to determine which categories of events or conditions 
would be financial responsibility triggers. Like other commenters, 
these commenters argued that as a practical matter it

[[Page 76000]]

would likely be impossible for an institution to comply with the 
reporting requirements in proposed Sec.  668.171(d) for any event or 
condition that is not specifically identified by the Secretary because 
the institution would have to guess which additional events or 
conditions might be of interest. Similarly, some commenters believed 
the discretionary triggers should be exhaustive with established 
parameters so that institutions know the events they must comply with 
and report to the Department.
    Some commenters believed that the discretionary triggers constitute 
an open invitation for litigation by anyone with an ``axe to grind'' 
with any school. The commenters were concerned that the Secretary could 
use the expanded authority under the discretionary triggers to take 
actions against institutions for any reason.
    Discussion: As a general matter, the discretionary triggers are 
intended to identify factors or events that are reasonably likely to, 
but would not in every case, have an adverse financial impact on an 
institution. Compared to the automatic triggers, where the impact of an 
action or event can be reasonably and readily assessed (e.g., claims, 
liabilities, and potential losses are reflected in the recalculated 
composite score), the materiality or impact of the discretionary 
triggers is not as apparent. The Department will have to conduct a 
case-by-case review and analysis of the factors or events applicable to 
an institution to determine whether one or more of those factors or 
events has an adverse financial impact. In so doing, the Department may 
request additional information or clarification from the institution 
about the circumstances surrounding the factors or events under review. 
If the Department determines that the factors or events have a material 
adverse effect on the institution's financial condition or operations, 
the Department notifies the institution of the reasons for, and 
consequences of, that determination. As for the comment that we should 
define ``material adverse effect,'' we do not intend to adopt a 
specific measure here, because identification of those events that 
cause such an effect is a particularized judgment.\59\ We disagree with 
the notion that it is inappropriate for the Department to determine 
which factors or events may be used as discretionary triggers, or that 
the list of factors and events in the regulations should be exhaustive. 
Each discretionary trigger rests on a particularized judgment that a 
factor or event has or demonstrates such a substantial negative 
condition or impact on the institution as to place continued operations 
in jeopardy.\60\ In this regard, as explained more fully under the 
heading ``Reporting Requirements,'' an institution is responsible for 
reporting only the actions and events specified in these regulations.
---------------------------------------------------------------------------

    \59\ Accounting rules do not set a specific figure for such 
effects. However, SEC regulations require the registrant to disclose 
resources the loss of which would have a material adverse effect on 
the registrant, and in that rule explicitly require the registrant 
to disclose an investment of 10 percent or more of company resources 
in an entity, 17 CFR 210.1-02(w), and identify any customer or 
revenue source that accounts for 10 percent or more of the 
registrant's consolidated revenues, if the loss of that revenue 
would constitute a material adverse effect. 17 CFR 229.101(c)(1)(i), 
(vii). While not defining material adverse effect, the selection of 
this threshold supports an inference that loss of this magnitude can 
be expected to constitute a material adverse effect. A popular 
characterization of the significance of such a loss states that 
material adverse effect is a term that commonly denotes an effect 
that
    . . . usually signals a severe decline in profitability and/or 
the possibility that the company's operations and/or financial 
position may be seriously compromised. This is a clear signal to 
investors that there is something wrong . . . Material adverse 
effect is not an early warning signal, but rather a sign that a 
situation has already deteriorated to a very bad stage. Investopedia 
www.investopedia.com/articles/analyst/112702.asp#ixzz4JKIpsbwk.
    \60\ The assessment would look to the factors identified in 
recent revisions to Financial Accounting Standards Board rules 
regarding the expectations regarding whether the entity's ability to 
continue as a going concern. FASB Standards Update, No. 2014-15, 
Presentation of Financial Statements--Going Concern (Subtopic 205-
40):
    205-40-55-2 The following are examples of adverse conditions and 
events that may raise substantial doubt about an entity's ability to 
continue as a going concern. The examples are not all-inclusive. The 
existence of one or more of these conditions or events does not 
determine that there is substantial doubt about an entity's ability 
to continue as a going concern. Similarly, the absence of those 
conditions or events does not determine that there is no substantial 
doubt about an entity's ability to continue as a going concern. 
Determining whether there is substantial doubt depends on an 
assessment of relevant conditions and events, in the aggregate, that 
are known and reasonably knowable at the date that the financial 
statements are issued (or at the date the financial statements are 
available to be issued when applicable). An entity should weigh the 
likelihood and magnitude of the potential effects of the relevant 
conditions and events, and consider their anticipated timing. a. 
Negative financial trends, for example, recurring operating losses, 
working capital deficiencies, negative cash flows from operating 
activities, and other adverse key financial ratios. b. Other 
indications of possible financial difficulties, for example, default 
on loans or similar agreements, arrearages in dividends, denial of 
usual trade credit from suppliers, a need to restructure debt to 
avoid default, noncompliance with statutory capital requirements, 
and a need to seek new sources or methods of financing or to dispose 
of substantial assets. c. Internal matters, for example, work 
stoppages or other labor difficulties, substantial dependence on the 
success of a particular project, uneconomic long-term commitments, 
and a need to significantly revise operations. d. External matters, 
for example, legal proceedings, legislation, or similar matters that 
might jeopardize the entity's ability to operate; loss of a key 
franchise, license, or patent; loss of a principal customer or 
supplier; and an uninsured or underinsured catastrophe such as a 
hurricane, tornado, earthquake, or flood.
---------------------------------------------------------------------------

    We address specific concerns and suggestions about the 
discretionary triggers in the following discussion for each factor or 
event. In addition, we have added pending borrower defense claims as a 
discretionary trigger because it is possible that an administrative 
action could cause an influx of borrower defense claims that we can 
expect to be successful, though that will vary on a case-by-case basis.
    Changes: None.

Discretionary Triggering Events

Bond or Credit Rating, Proposed Sec.  668.171(c)(11)

    Comments: Commenters argued that a non-investment grade bond or 
credit rating is not a reliable indicator of financial problems. The 
commenters stated that, because the rating assigned by a rating agency 
is a measure designed for the benefit of creditors concerned solely 
with pricing the institution's debt, a rating below investment grade 
does not necessarily mean that an institution cannot meet its financial 
obligations. Moreover, the commenters questioned how the Department 
would determine that an institution or its corporate parent had a non-
investment grade rating, since there are multiple rating agencies and 
the agencies may not necessarily assign the same rating to a particular 
institution or in the case where the institution or its corporate 
parent have multiple ratings, some of which are investment grade. The 
commenters stated that this financial structuring is not unusual and 
has no impact on the ability of the institution to meet its 
obligations. For these reasons, the commenters suggested that, if the 
Department retains bond or credit ratings as a triggering event, it 
should specify how those ratings are determined. In addition, the 
commenters were concerned that applying this trigger could potentially 
increase costs to institutions because, in an effort to avoid this risk 
of a non-investment grade rating, an institution may seek not to have a 
credit rating in the first place, so obtaining alternate financing 
could increase its costs of capital.
    Other commenters argued that assuming that schools with 
noninvestment grade bond ratings are somehow deficient is unwarranted. 
The commenters noted that the majority of nonprofit colleges and 
universities do not have a bond rating at all, since they have not 
issued public debt, citing the data provided by the Department in the

[[Page 76001]]

NPRM that shows that only 275 private institutions have been rated by 
Moody's (some others likely have used other rating agencies like Fitch 
or Standards & Poor). The commenters contended that institutions that 
have a rating are arguably in better financial condition than those 
that do not, so rather than being a trigger for additional scrutiny, 
the existence of a credit rating and outstanding public debt would, in 
itself, be an indication of financial responsibility. Further, the 
commenters noted that a bond rating seeks to assess the 
creditworthiness and risk of nonpayment over an extended time period--
typically 20 to 30 years--that is well beyond the much shorter 
timeframe contemplated by the financial responsibility regulations.
    Discussion: In considering the complexities and difficulties noted 
by the commenters in using and relying on bond or credit ratings, we 
are removing this triggering event.
    Changes: We have removed bond or credit ratings as a discretionary 
trigger.

Adverse Events Reported on Form 8-K, Proposed Sec.  668.171(c)(11)

    Comments: Commenters believed that the trigger regarding the 
reporting of adverse events on the SEC's Form 8-K is too narrow since 
it is not used to identify adverse events at non-publicly traded 
institutions and too broad since it would capture events reported on 
Form 8-K that are not indicative of an institution's financial health. 
Although the commenters acknowledged that it may be efficient to use 
existing disclosure channels to identify potential issues of concern, 
they nevertheless believed that it was unfair for the Department to 
impose burdens on publicly traded institutions, but not on other 
institutions that may be experiencing adverse events. In addition, the 
commenters stated that many events listed on Form 8-K have no bearing 
on an institution's ability to meet its financial obligations, so the 
Department should identify the events it considers to be adverse. Once 
identified, the commenters suggested that the Department could develop 
a broader list of adverse events that would be applicable to all 
institutions.
    Also, the commenters believed that, because of the proposed 
trigger, publicly traded institutions would have an incentive not to 
report events on Form 8-K that could potentially be adverse events, but 
in the ordinary course would have provided useful information to 
investors. In conclusion, the commenters feared that, without clear 
guidelines from the Department about what constitutes an adverse event, 
publicly traded institutions would have to make their own decisions as 
to whether to treat something as an adverse event. Commenters were 
concerned that, even where institutions make that decision in good 
faith, they could potentially be exposing themselves later to an action 
by the Department if the Department exercises its own judgment in 
hindsight.
    Similarly, other commenters believed that a number of events on 
Form 8-K have little or no relationship to the institution's continued 
capacity to operate or to administer the title IV, HEA programs. 
Instead of using a trigger based on Form 8-K reporting, the commenters 
suggested that the financial responsibility regulations should be 
focused on potential risks to the title IV, HEA programs and, as a 
related matter, institutional outcomes that are indicative of that 
risk.
    Discussion: While we are not convinced that some of the reportable 
items on Form 8-K will not have an adverse financial impact on an 
institution, we will not require an institution to report any Form-8K 
event because that information is otherwise publicly available to the 
Department. We may, however, evaluate the effect of an event reported 
in a Form 8-K as if it were a discretionary triggering event, on a case 
by case basis, or in light of the effect on an institution's composite 
score as applied under these regulations.
    Changes: We have removed the discretionary trigger regarding an 
adverse event reported by an institution on a Form 8-K under proposed 
Sec.  668.171(c)(10)(vii).

High Drop-Out Rates and Fluctuations in Title IV, HEA Funding

Drop-Out Rates Sec.  668.171(g)(4)
    Comments: Some commenters urged the Department to define how it 
will calculate high annual dropout rates and provide an opportunity for 
the pubic to comment on the methodology employed. The commenters noted 
that in the preamble to the NPRM, the Department stated that it uses 
high dropout rates to select institutions for program reviews, as 
described in 20 U.S.C. 1099c-1(a), and that ``high dropout rates may 
signal that an institution is employing high-pressure sales tactics or 
is not providing adequate educational services, either of which may 
indicate financial difficulties and result in enrolling students who 
will not benefit from the training offered and will drop out, leading 
to financial hardship and borrower defense claims'' (81 FR 39366 
(emphasis added)). Although the commenters agreed that those statements 
may be true, they argued that when the Department conducts a program 
review, it investigates whether high dropout rates are in fact signs of 
financial difficulties. Under the NPRM, the commenters surmised that 
the Department would have the discretion to impose a requirement to 
provide a letter of credit or other financial protection without any 
review of institutional practice or other investigation to find a 
causal connection between high dropout rates and financial 
difficulties, thus depriving the institution of fair process.
    Other commenters were concerned that this trigger is arbitrary 
because it is unlikely that a high dropout rate is related to a 
school's financial stability. The commenters pointed to a study 
published in December 2009 by Public Agenda showing that the most 
common reason students dropped out of school is because they needed to 
work. Other reasons cited in the study include: Needing a break from 
school, inability to afford the tuition and fees, and finding the 
classes boring or not useful. Based on this study and survey results 
from the Pew Research Center, the commenters concluded that the reasons 
students drop out of school typically have very little to do with 
school itself, and therefore suggested that the Department remove this 
triggering event.
    Some commenters argued that the use of the dropout rate as a 
trigger fails to account for the various missions that title IV 
institutions represent, or the extended time to graduation that many 
contemporary students face as they balance career, family and higher 
education. The commenters believed that establishing a dropout rate as 
a trigger for a letter of credit creates a perverse incentive for 
institutions to enroll and educate only those students who are most 
likely to succeed, instead of continuing to extend access to higher 
education to the broader population. In addition, the commenters 
believed that measures of academic quality are best left to 
accreditors, but if the Department chooses to take on this role, it 
should consider instead triggering a letter of credit if an 
institution's persistence rate decreases significantly between 
consecutive award years, or over a period of award years. The 
commenters believed this approach would account for the significant 
variances in mission and student body across higher education without 
potentially limiting access.

[[Page 76002]]

Fluctuations in Funding Sec.  668.171(g)(1)

    Commenters believed the proposed trigger for a significant 
fluctuation between consecutive award years, or a period of award 
years, in the amount of Pell Grant and Direct Loan funds received by an 
institution, is overly vague. The commenters noted that year-over-year 
fluctuations can occur when an institution decides to discontinue 
individual programs or close campus locations, often because those 
campuses or programs are under-performing financially even where the 
overall institution is financially strong and argued that because these 
are sound business decisions made in the long-term interests of the 
institution, they should not give rise to a letter of credit 
requirement.
    Some commenters believed that a decrease in total title IV 
expenditures should not trigger a letter of credit requirement because 
the decreases in the amount of title IV, HEA funds disbursed puts the 
Department at less risk of financial loss. In addition, the commenters 
stated that a decrease in title IV, HEA funding to a school is largely 
out of the school's control--it is usually a result of decreased 
enrollments or the Department's rulemaking actions.
    Other commenters agreed that big changes in the amount of financial 
aid received by an institution could be a sign that growth that is too 
fast, or an enrollment decline may signal a school is in serious 
trouble. The commenters argued, however, that at small schools, big 
percentage changes could simply be the result of small changes in the 
number of students. While the commenters were confident that the actual 
implementation of this rule would not result in the Department holding 
a small school accountable for what is a minor change, they believed 
the Department should clarify that the change in Federal aid would need 
to be large both in percentage and dollar terms as a way of proactively 
assuaging this concern.
    One commenter noted that the phrase ``significant fluctuation'' was 
not defined, but that the Department implied on page 39393 of its NPRM 
that it believes a reasonable standard would be a 25 percent or greater 
change in the amount of title IV, HEA funds a school receives from year 
to year, after accounting for changes in the title IV, HEA programs. 
The commenter urged the Department to clarify in the final regulations 
precisely what this phrase means so that institutions would know how to 
comply. Moreover, the commenter argued that the Department may be 
evaluating institutions by the wrong metric, stating that the for-
profit sector has seen six-fold enrollment growth over the past 25 
years where significant fluctuations in title IV, HEA program volume 
may be a reflection of that expansion. Said another way, a significant 
fluctuation in title IV, HEA program volume, without looking at 
important contextual clues, is insufficient to determine whether there 
is questionable conduct at the institution. In addition, the commenter 
warned that including significant fluctuation as a trigger may serve to 
deter institutional growth, since a large increase in enrollment would 
trigger the financial protection requirement even if that increase was 
perfectly legitimate.
    In addition, the commenter believed that, while the Department has 
a compelling interest in ensuring that institutions do not raise 
tuition unnecessarily to take advantage of title IV, HEA aid, the 
Department should try to address this problem in a way that does not 
discourage institutions from expanding their enrollment.
    For these reasons, the commenter suggested revising the trigger so 
it refers to a significant fluctuation in title IV, HEA program volume 
per aid recipient, not program volume overall. The commenters believed 
this approach would guard against increases in tuition designed to take 
advantage of the title IV, HEA programs while not penalizing 
institutions with rapid enrollment growth.
    Discussion: We intend to use the high drop-out rate and 
fluctuations in funding triggers only when we make a careful, reasoned 
analysis of the effect of any of these events or conditions on a 
particular institution, and conclude that the condition or event is 
likely to have a material adverse effect on the institution. An 
institution that challenges this determination may present an argument 
disputing this determination. If we are not persuaded, we will take 
enforcement action under 34 CFR part 668, subpart G to limit the 
institution's participation to condition further participation on 
supplying the financial protection demanded. The institution may obtain 
an administrative hearing to dispute the determination, and unlike with 
the automatic triggers, the institution may present and have considered 
both evidence and argument in opposition to the determination that the 
condition may constitute a material adverse effect, but also whether 
the amount of financial protection demanded is warranted.
    As noted in the introductory discussion of this section and noted 
by some commenters, the materiality or relevance of factors like 
dropout rates and fluctuations in funding must be evaluated on a case-
by-case basis in view of the circumstances surrounding or causes giving 
rise to what may appear to be excessive or alarming outcomes. In other 
words, what may be a high dropout rate or significant fluctuation in 
funding at one institution may not be relevant at another institution. 
In this regard, we appreciate the suggestions made by the commenters 
for how the Department could view or determine whether or the extent to 
which these factors are significant.
    While a case-by-case approach argues against setting bright-line 
thresholds, to mitigate some of the anxiety expressed by the commenters 
as to what may be a high dropout rate or fluctuation in funding, we may 
consider issuing guidance or providing examples of actual cases where 
the Department made an affirmative determination.
    Changes: None.

State or Agency Citations Sec.  668.171(g)(2)

    Comments: With respect to the discretionary trigger under proposed 
Sec.  668.171(c)(10)(ii), some commenters noted that because State 
agencies may issue citations for minor violations of State requirements 
and not subject an institution to any penalties, the Department should 
remove this triggering event. The commenters believed this triggering 
event would unnecessarily capture citations for minor violations, such 
as failure to update the institution's contact information. It would 
also capture violations for which the State agency has decided no 
penalty is necessary. The commenters questioned why the Department 
should substitute its judgment for that of the State agency and 
determine that an otherwise non-punitive citation is indicative of 
financial problems. In the alternative, the commenters suggested that 
the final regulations should provide that this trigger would only be 
invoked if an institution's failure to comply with State or agency 
requirements was material. In addition, the commenters suggested that 
the final regulations should define ``State licensing or authorizing'' 
agency in this context to mean only the primary State agency 
responsible for State authorization, not specialized State agencies, 
such as boards of nursing, that have responsibility for professional 
licensure and other matters that would not have a material impact on 
the overall financial condition of the institution.
    Other commenters recommend that the Department apply the State 
agency-

[[Page 76003]]

based trigger only if the citation by the State authorizing agency is 
final and relates to the same bases that can support a borrower defense 
claim. Or, because State agencies frequently cite institutions for 
findings of noncompliance that are remedied appropriately and timely, 
the commenters supported applying the trigger only if the State agency 
has initiated an action to suspend or terminate its authorization of 
the institution.
    Some commenters were concerned that the Department did not provide 
any evidence that would support that an institution that chooses to 
discontinue State approval for a single program at a single location 
would implicate the financial stability of an entire institution, much 
less a large institution with a wide range of programming and multi-
million dollar endowment.
    Discussion: The State agency-based trigger and other discretionary 
triggers are intentionally broad to capture events that may have an 
adverse financial impact on an institution. With regard to the comments 
that the Department should not require an institution to report State 
agency actions for events or violations (1) that the institution 
considers minor, (2) for which the agency did not penalize the 
institution, or (3) that are remedied timely, we believe that doing so 
under any of these circumstances defeats the purpose of the trigger. 
There is little or no reporting burden on an institution that is 
sporadically cited for a violation by a State agency, but where the 
institution is cited repeatedly the reporting burden is warranted 
because even if individual violations are minor, collectively those 
violations may signal a serious issue at the institution.
    A State licensing or authorizing agency, for the purpose of this 
trigger, includes any agency or entity in the State that regulates or 
governs (1) whether an institution may operate or offer postsecondary 
educational programs in the State, (2) the nature or delivery of those 
educational programs, or (3) the certification or licensure of students 
who complete those programs. In this regard, we disagree with the 
assertion that actions by a State agency responsible for professional 
licensure would never have a material impact on the financial condition 
of the institution. To the contrary, because the State agency enforces 
standards that restrict professional practice to individuals who, in 
part, satisfy rigorous educational qualifications, a citation or 
finding by the agency could impact how an institution offers or 
delivers an educational program.
    Finally, with regard to the comment about an institution 
voluntarily discontinuing State approval for a program at a particular 
location, we note that, unless the State cited the institution for 
discontinuing the program, this is not a reportable event.
    Changes: None.
    Comments: Some commenters believed that considering ``claims of any 
kind'' against an institution, in proposed Sec.  668.171(c)(1)(ii), 
would invite a broad set of claims that may not cause financial 
damages. Others objected to the apparent ability under proposed Sec.  
668.171(c)(10) to add other events or conditions as it wished without 
public comment. Commenters believed that proposed triggers do not focus 
just on fiscal solvency; rather, they assert, the proposed triggers 
include events not related to financial solvency: Accrediting agency 
actions, cohort default rates, and dropout rates. The commenters opined 
that the Department was inappropriately attempting to shift the 
emphasis of these regulations from financial oversight into much 
broader accountability measures and to insert the Federal government 
into institutional decision-making.
    Discussion: To the extent that the proposed regulations would have 
included events other than explicit claims, we are revising the 
regulations to include only events that pose an imminent risk of very 
serious financial impact. An institution that could lose institutional 
eligibility in the next year is indeed at serious risk of severe 
financial distress. Other events cited here we agree pose a risk only 
under particular circumstances, and should not be viewed as per se 
risks.
    Changes: Section 668.171 has been revised to make clear that 
accreditor sanctions and government citations, are considered, like 
high dropout rates, as triggering events only on a reasoned, case-by-
case basis under Sec.  668.171(g)(2) and (5).

Stress Test Sec.  668.171(g)(3)

    Comments: Commenters believed that a trigger based on the proposed 
stress test is redundant because the Department uses the existing 
composite score methodology as the primary means of evaluating the 
financial health of an institution. In addition, the commenters were 
concerned that the Department did not provide schools with enough 
information regarding what the financial stress test will be and if it 
will be developed through negotiated rulemaking. The commenters 
suggested removing the stress test as a trigger, but if the Department 
does implement a stress test, it should first be developed through 
negotiated rulemaking.
    Other commenters echoed the suggestion to develop the stress test 
through negotiated rulemaking, arguing that developing a test would not 
only be time consuming and complex, but have serious implications for 
institutions--all the reasons why institutions and other stakeholders 
should have an opportunity to provide their views and analyses.
    Some commenters argued that it was premature and unreasonable to 
include reference to a stress test, which has yet to be developed, and 
which schools have not had a chance to review and offer comment on.
    Discussion: We do not intend to replace the composite score 
methodology with a financial stress test. The stress test could be used 
to assess an institution's ability to deal with an economic crisis or 
adverse event under a scenario-based model, whereas the composite score 
methodology focuses primarily on actual financial performance over a 
fiscal year operating cycle.
    We certainly understand the community's desire to participate in 
any process the Department undertakes to develop a stress test, or 
evaluate adopting an existing stress test, but cannot at this time 
commit to a particular process. However, we wish to assure institutions 
and other affected parties that we will seek their input in whatever 
process is used.
    Changes: None.

Violation of Loan Agreement Sec.  668.171(g)(6)

    Comments: Under proposed Sec.  668.171(c)(4), an institution is not 
financially responsible if it violated a provision or requirement in a 
loan agreement with the creditor with the largest secured extension of 
credit to the institution, failed to make a payment for more than 120 
days with that creditor, or that creditor imposes more stringent loan 
terms or sanctions as a result of a default or delinquency event.
    Some commenters noted that because the largest secured extension of 
credit may be for a very small dollar amount, the Department should 
specify a minimum threshold below which a violation of a loan agreement 
is not a triggering event.
    Other commenters believed that a school that satisfies the 
composite score requirements should not be required to post a letter of 
credit relating to violations of loan agreements. The commenters 
cautioned that this provision could have the unintended impact of 
altering the relationship

[[Page 76004]]

between schools and their creditors because creditors would have 
additional leverage in negotiations regarding violations of loan 
agreements. The commenters believed that, because this additional 
leverage could potentially place a school's financial stability at risk 
where it otherwise was not, this triggering event should be deleted.
    Along the same lines, other commenters warned that the proposed 
loan agreement triggers would create significant leverage for banks 
that does not presently exist. The commenters opined that a bank 
potentially could threaten to trigger a violation of a loan agreement 
or obligation, thereby exercising inappropriate leverage over the 
institution and its operations to the detriment of its educational 
mission, students, and employees. The commenters believed this outcome 
would be a significant threat that the Department must consider this 
``countervailing evidence'' in rationalizing the reasonableness of this 
proposed trigger. See Am. Fed'n of Labor & Cong. of Indus. 
Organizations v. Occupational Safety & Health Admin., U.S. Dep't of 
Labor, 965 F.2d 962, 970 (11th Cir. 1992) (quoting AFL-CIO v. Marshall, 
617 F.2d 636, 649 n. 44 (D.C. Cir. 1979)).
    Other commenters agreed that, in certain circumstances, the 
violation of a loan agreement or other financial obligation may signal 
the need for financial protection. However, the commenters believed the 
proposed triggering events were overly broad and could result in 
financially sound institutions being regularly penalized. The 
commenters recommended that the Department revise the triggering events 
in two ways.
    First, the Department should include a materiality threshold in 
proposed Sec.  668.171(c)(4)(i) so that this provision is only 
triggered when a default is material and adverse to the institution. In 
addition, the commenters suggested that this provision should apply 
only to any undisputed amounts and issues that are determined by a 
final order after all applicable cure periods and remedies have 
expired. With regard to proposed Sec.  668.171(c)(4)(ii), because 
cross-defaults are prevalent in most material loan agreements, 
commenters suggested that the Department should focus on defaults that 
are material and adverse to the institution as a going concern, as 
opposed to narrowing the trigger to the institution's largest secured 
creditor.
    Second, commenters suggested that the language in proposed Sec.  
668.171(c)(4)(iii) should be revised to exclude events where the 
institution it permitted to cure the violation in a timely manner in 
accordance with the loan agreement. They noted that this type of 
``curing'' is a common occurrence and specifically contemplated in the 
agreements between the parties.
    Other commenters believed that the Department should include 
allowances for instances in which the creditor waives any action 
regarding a violation of a provision in a loan agreement, or the 
creditor does not consider the violation to be material. The commenters 
note that although the reporting requirements under proposed Sec.  
668.171(d)(3) permit an institution to notify the Department that a 
loan violation was waived by the creditor, it does not explicitly state 
that such a waiver would make the institution financially responsible. 
The commenters urged the Department to revise this provision to clearly 
state that a waiver of a term or condition granted by a creditor cures 
the triggering event so that financial protection is not required. 
According to the commenters, certified public accountants use this 
standard when assessing a school's ability to continue as a going 
concern--if a waiver is issued or granted by the creditor the certified 
public accountant does not mention this event in the school's audited 
financial statements because it is no longer an issue for the debtor.
    Some commenters believed that the proposed loan agreement 
provisions were too broad and would unnecessarily impact institutions 
that pose no risk. The commenters stated that loan agreements may 
include a number of events that are not related to the failure of the 
institution to make payments that trigger changes to the terms of the 
agreement, and in that case the proposed provisions would seem to 
capture the change in terms as a reportable event. The commenters noted 
that nonprofit institutions have access to and use variable rate loans, 
and that some nonprofit institutions have synthetically converted their 
variable rate interest borrowings into fixed rate debt by entering into 
an interest rate swap agreement. The commenters believed that, under 
these circumstances, it would be incorrect to assume that changes to 
the interest rates negatively impact the institution. Further, while 
the loan provision in the proposed regulations is narrower than the 
current one since it only applies to an institution's largest secured 
creditor, rather than all creditors, the commenters believed the 
Department should establish a materiality threshold and/or make a 
determination that any changes to the interest rate or other terms 
would have a material impact on the institution. In addition, the 
commenters noted that the exception provided under Sec.  668.171(d)(3), 
allowing the institution to show that penalties or constraints imposed 
by a creditor will not impact the institution's ability to meet its 
financial obligations, only applies if the creditor waived a violation 
and questioned whether the end result would be the same if the creditor 
did not waive the violation, but the penalties or changes to the loan 
nevertheless would not have an adverse impact.
    Discussion: In considering the comments regarding the materiality 
of loan violations, and whether the sanctions or terms imposed by a 
creditor as a result of a default or delinquency event are relevant or 
adverse, we are making the provisions in proposed Sec.  668.171(c)(4) 
discretionary triggers under Sec.  668.171(g)(6). We believe that 
evaluating a delinquency or default on a loan obligation under the 
discretionary triggers addresses the commenters' concerns that the 
Department should review or assess a loan violation on a case-by-case 
basis to determine whether that violation is material and sufficiently 
adverse to warrant financial protection. This case-by-case review 
eliminates the need to qualify or limit the scope of loan violations to 
the largest secured creditor. Moreover, making these discretionary 
triggers maintains the Department's objective of identifying and acting 
on early warning signs of financial distress. We expect that making the 
proposed provisions discretionary will abate the concerns raised by the 
commenters that an automatic action by the Department in response to a 
loan violation would prompt or create an unfair advantage for 
creditors, because that action is no longer certain. In addition, we 
note that if a creditor files suit in response to a loan violation, 
that suit is covered under the provisions in Sec.  668.171(c)(1)(ii) as 
an automatic triggering event.
    Changes: We have relocated the proposed loan agreement provision to 
Sec.  668.171(g)(6), reclassified those provisions as discretionary 
events, and removed the qualifier that the loan violation is for the 
largest secured creditor.

Borrower Defense Claims Sec.  668.171(g)(7)

    Comments: None.
    Discussion: After further consideration, the Department concluded 
that, in instances in which the Department can expect an influx of 
successful borrower defense claims as a

[[Page 76005]]

result of a lawsuit, settlement, judgment, or finding from a State or 
Federal administrative proceeding, we may wish to require additional 
protection. However, since such instances are fact-specific, we have 
decided to make such a trigger discretionary.
    Changes: We have added a new discretionary trigger in Sec.  
668.171(g)(8) relating to claims for borrower relief as a result of a 
lawsuit, settlement, judgment, or finding from a State or Federal 
administrative proceeding.

Reporting Requirements Sec.  668.171(h)

    Comments: Some commenters believed that the proposed mandatory 
reporting requirements under Sec.  668.171(d) are outside the scope of 
the Department's authority. The commenters argued that statutory 
provisions cited by the Department, that the Secretary has authority 
``to make, promulgate, issue, rescind, and amend rules and regulations 
governing the manner of operation of, and governing the applicable 
programs administered by, the Department,'' and that the Secretary is 
authorized ``to prescribe such rules and regulations as the Secretary 
determines necessary or appropriate to administer and manage the 
functions of the Secretary or the Department'' (20 U.S.C. 1221e-3), are 
``implementary rather than substantive,'' meaning that they ``can only 
be implemented consistently with the provisions and purposes of the 
legislation.'' New England Power Co. v. Fed. Power Comm'n., 467 F.2d 
425, 430 (D.C. Cir. 1972), aff'd, 415 U.S. 345 (1974) (citation 
omitted).
    Discussion: The Secretary cited 20 U.S.C. 1221e-3 as authority for 
revisions to 34 CFR 30.70, 81 FR 39407, and the repayment rate 
disclosures proposed as new Sec.  668.41(h). 81 FR 39371. As pertinent 
here, the Department cited as authority for the proposed changes to 
Sec.  668.171, which includes the new reporting requirements under 
Sec.  668.171(h), sections 487 and 498(c) of the HEA, 20 U.S.C. 1094 
and 1099c. Section 487 states that the Secretary ``notwithstanding any 
other provision of this title (title IV of the HEA), shall prescribe 
such regulations as may be necessary to provide . . . in matters not 
governed by specific program regulations, the establishment of 
reasonable standards of financial responsibility . . . including any 
matter the Secretary deems necessary to the sound administration of the 
financial aid programs, such as the pertinent actions of any owner, 
shareholder, or person exercising control over an eligible 
institution.'' 20 U.S.C. 1094(c)(1)(B). Section 498 states that the 
Secretary is to determine whether an institution is able to meet its 
financial obligations to all parties, including students and the 
Secretary, including adopting financial criteria ratios. 20 U.S.C. 
1099c(c). These provisions give the Secretary ample substantive 
authority to adopt regulations that require the institution to provide 
audited financial statements and other records needed to evaluate the 
financial capability of the institution. This authority is direct and 
specifically authorizes the required reporting by participating 
institutions, unlike the charge imposed by the Federal Power Commission 
in New England Power Co. v. Fed. Power Comm'n, cited by the commenter 
to support its view. The court there concluded that the Commission 
lacked authority to impose that charge on the industry member for costs 
incurred not for the benefit of the member but for the general public. 
New England Power Co. v. Fed. Power Comm'n, 467 F.2d 425, 427 (D.C. 
Cir. 1972), aff'd, 415 U.S. 345 (1974). Here, the HEA expressly 
authorizes the Secretary to adopt regulations governing the conditions 
for participation in the title IV, HEA programs, and in particular, the 
assessment of the institution's financial capability.
    Changes: None.
    Comments: Under the reporting requirements in proposed Sec.  
668.171(d), an institution must report any action or event identified 
as a trigger under Sec.  668.171(c) no later than 10 days after the 
action or event occurs. For three of the reportable actions or events--
disclosure of a judicial or administrative proceeding, withdrawal of 
owner's equity, and violations of loan agreements--the institution may 
show that those actions or events are not material or relevant.
    Commenters were concerned that the Department would not be bound to 
act or consider any evidence an institution would provide under 
proposed Sec.  668.171(d)(2) regarding the waiver of a violation of a 
loan agreement, or provide any opportunity to the institution to 
discuss the waiver. Moreover, the commenters were concerned that the 
waiver reporting provisions would permit the Department to disregard 
any such evidence if the creditor imposes additional constraints or 
requirements as a condition of waiving the violation, or imposes 
penalties or requirements. Absent a materiality modifier, the 
commenters believed that the waiver ``carve out'' would become 
meaningless. Ostensibly, the commenters feared that the Department 
could proceed to demand financial protection even if a creditor waived 
the underlying violation and the institution effectively demonstrated 
that the additional requirements imposed would only have a negligible 
impact on the institution's ability to meet current and future 
financial obligations. The commenters recommended that at a minimum, 
proposed Sec.  668.171(d)(2) should be modified to require a material 
adverse effect on the institution's financial condition.
    Other commenters believed that requiring institutions to report the 
widely disparate events reflected in the proposed triggering events 
within 10 days is unreasonable, particularly for large, decentralized 
organizations. The commenters believed that it was one thing to demand 
that type of prompt reporting on a limited number of items from 
institutions that already have been placed on heightened monitoring but 
quite different to require hyper-vigilance from all institutions. The 
commenters argued that various offices across the institution might be 
involved and have contemporaneous knowledge of the triggering events, 
but the individuals dealing with an unrelated agency action, a lawsuit, 
or a renegotiation of debt are unlikely to have a Department reporting 
deadline on the top of minds. Moreover, the commenters believed that 
individuals at an institution who are charged with maintaining 
compliance with Department regulations are unlikely to learn about some 
of these events within such a short period of time.
    Discussion: In view of these comments and other comments discussing 
the triggering events, we clarify in these final regulations the 
reporting requirement that applies to each triggering event. As shown 
below, an institution must notify the Department no later than:
    1. For the lawsuits and other actions or events in Sec.  
668.171(c)(1)(i), 10 days after a payment was required, a liability was 
incurred, or a suit was filed, and for suits, 10 days after the suit 
has been pending for 120 days;
    2. For lawsuits in Sec.  668.171(c)(1)(ii), 10 days after the suit 
was filed and the deadlines for filing summary judgment motions 
established, and 10 days after the earliest of the events for the 
summary judgments described in that paragraph;
    3. For accrediting agency actions under Sec.  668.171(c)(1)(iii), 
10 days after the institution is notified by its accrediting agency 
that it must submit a teach-out plan.
    4. For the withdrawal of owner's equity in Sec.  668.171(c)(1)(v), 
10 days

[[Page 76006]]

after the withdrawal is made. 5. For the non-title IV revenue provision 
in Sec.  668.171(d), 45 days after the end of the institution's fiscal 
year, as provided in Sec.  668.28(c)(3).
    6. For the SEC and exchange provisions for publicly traded 
institutions under Sec.  668.171(e), 10 days after the SEC or stock 
exchange notifies or takes action against the institution, or 10 days 
after any extension granted by SEC.
    7. For State or agency actions in paragraph (g)(2), 10 days after 
the institution is cited for violating a State or agency requirement;
    8. For probation or show cause actions under paragraph (g)(5), 10 
days after the institution's accrediting agency places the institution 
on that status; or
    9. For the loan agreement provisions in paragraph (g)(6), 10 days 
after a loan violation occurs, the creditor waives the violation, or 
imposes sanctions or penalties in exchange or as a result of the 
waiver. We note that the proposed loan agreement provisions are 
discretionary triggers in these final regulations, and as such 
facilitate a more thorough dialogue with the institution about waivers 
of loan violations and creditor actions tied to those waivers.
    We also are providing that an institution may show that a 
reportable event no longer applies or is resolved or that it has 
insurance that will cover the debts and liabilities that arise at any 
time from that triggering event.
    In addition, we are providing that an institution may demonstrate 
at the time it reports a State or Federal lawsuit under Sec.  
668.171(c)(1)(i)(B) that the amount claimed under that lawsuit exceeds 
the potential recovery. We stress that this option does not include any 
consideration of the merit of the government suit. It addresses only 
the situation in which the government agency asserts a claim that the 
facts alleged, if accepted as true, and the legal claims asserted, if 
fully accepted, could still not produce a recovery of the deemed or 
claimed amount for reasons totally distinct from the merit of the 
government suit. Thus, the regulations in some instances deem a suit to 
seek recovery of all tuition received by an institution, but the 
allegations of the complaint describe only a limited period, or a given 
location, or specific programs, and the institution can prove that the 
total amount of tuition received for that identified program, location, 
or period is smaller than the amount claimed or the amount of recover 
deemed to be sought.
    Changes: We have revised Sec.  668.171(h)(1) to specify the 
reporting requirements that apply to a triggering event, as described 
above. We have also provided in revised paragraph (g)(3) that an 
institution may show (1) that a reportable event no longer exists, has 
been resolved, or that it has insurance that will cover debts and 
liabilities that arise at any time from that triggering event; or (2) 
that the amount claimed in a lawsuit under Sec.  668.171(c)(1)(i)(B) 
exceeds the potential recovery the claimant may receive.

Public Domestic and Foreign Institutions Sec.  668.171(i)

Domestic Public Institutions
    Comments: Commenters were concerned that the proposed regulations 
would unfairly target private institutions, noting that public 
institutions would be exempt from the triggering events requiring 
letters of credit, even as recent events have shown that public 
institutions are not necessarily more financially stable than other 
institutions.
    Other commenters believed that the Department intended to exempt 
public institutions, as it currently does, from the financial 
responsibility standards, including the proposed triggering events, but 
the Department did not explicitly do so in the NPRM.
    Discussion: We rely, and have for nearly 20 years relied, on the 
full-faith and credit of the State to cover any debts and liabilities 
that a public institution may incur in participating in the title IV, 
HEA programs. Under the current regulations in Sec. Sec.  668.171(b) 
and (c), a public institution is not subject to the general standards 
of financial responsibility and is considered financially responsible 
as long as it does not violate any past performance provision in Sec.  
668.174. The Department has on occasion placed public institutions on 
heightened cash monitoring for failing to file required audits in a 
timely manner, but even then has never required a public institution to 
provide financial protection of any type because we already have it in 
the form of full-faith and credit. We would like to clarify that we are 
not changing long-standing policy for public institutions with these 
final regulations. In other words, the triggering events in Sec.  
668.171(c) through (g) of these regulations do not apply to public 
institutions.
    Changes: None.
Foreign Institutions
    Comments: Commenters believed that the actions and events that 
could trigger a letter of credit under Sec.  668.171(c) are not 
applicable to foreign institutions, and requested that foreign 
institutions be exempted from these regulations, at least until the 
composite score methodology is revised. In addition, the commenters 
reasoned that a foreign institution with thousands of students from the 
institution's home country and perhaps a few dozen U.S. students should 
not be required to post warnings for all of its students based on this 
U.S. regulatory compliance issue.
    Discussion: While we agree that some triggering events in 
Sec. Sec.  668.171(c) through (g) may not apply to foreign 
institutions, that circumstance does not justify exempting those 
institutions from the triggering events that do apply. In addition, we 
see no reason to grant a temporary exemption until the composite score 
methodology is revised because it is unlikely that accounting-based 
revisions to a financial statement-centered methodology will affect 
triggering events like lawsuits that are applied contemporaneously, or 
title IV, HEA program compliance requirements like cohort default rate 
and gainful employment. We note that foreign public institutions, like 
U.S.-based public institutions, are currently exempt, and continue to 
be exempt in these final regulations, from most of the general 
standards of financial responsibility, including the composite score.
    Changes: None.

Alternative Standards and Requirements Sec.  668.175

Provisional Certification Alternative Sec.  668.175(f)

Amount of Financial Protection Sec.  668.175(f)(4)

Cost of Letter of Credit
    Comments: One commenter stated that, years ago, letters of credit 
were both widely available and very inexpensive; it was not unusual for 
a bank to issue a small letter of credit on behalf of a client for no 
charge and without any collateral. However, the commenter stated that 
the bursting of the stock bubble in the late 1990s and the new rules 
regulating banks after the financial crisis has had a tremendous effect 
on the ability of banks to issue letters of credit, the price charged 
for them, and the amount of collateral required to issue one.
    According to the commenter, a $1,000,000 letter of credit that 
might have cost $5,000 to issue with no collateral 30 years ago now 
costs $10,000-$20,000 and requires $500,000 to $1,000,000 of cash to 
collateralize it. The commenter opined that while this is still 
relatively easy for the wealthiest

[[Page 76007]]

schools with the largest endowments to meet, it would place a 
tremendous burden on smaller schools, vocational schools, and schools 
that serve the poorest students in the poorest areas because it will 
tie up a significant portion of their cash as collateral. For these 
reasons the commenter urged the Department to accept alternatives to 
bank-issued letters of credit, noting that performance bonds are used 
widely in business to guarantee satisfactory performance of 
construction, services, and delivery of goods. The commenter stated 
that most States that have regulations to protect students from poorly 
run schools allow performance bonds already.
    According to the commenter, a performance bond guarantees the 
performance of a task on behalf of the client. In the case of a 
borrower defense, the Department is using the letter of credit to 
guarantee to successful completion of the education for which the 
Department issued title IV loans. By allowing performance bonds, 
according to the commenter, the Department could protect itself from 
poorly run schools that harm students without harming thinly 
capitalized schools by forcing them to purchase more expensive 
products. The commenter stated that a typical surety bond for 
$1,000,000 might cost $5,000-$15,000 and only require 25 percent 
collateral or less. This means that the schools get to keep more of 
their cash to better deliver education to students and the Department 
is still adequately protected against a claim from a closed school.
    Some commenters noted that the Department has the statutory 
authority under section 498(c)(3)(A) of the HEA to accept performance 
bonds and should use that authority because surety bonds cost far less 
than letters of credit and are equally secure.
    Other commenters were concerned that the cost of securing required 
letters of credit could be prohibitive and cause some schools to close. 
These and other commenters believed that schools are finding that it is 
increasingly more difficult to secure letters of credit because of high 
cost and the regulatory uncertainties facing the higher education 
sector. The commenters noted that these costs include fees to the 
lenders and attorneys each time the underlying credit facility is 
negotiated to expand the letters of credit (schools are required to pay 
their attorney's fees as well as lender attorney fees for these 
transactions). Moreover, the commenters stated that because of the 
Department's compliance actions against proprietary schools, many 
lenders will no longer lend to proprietary institutions. Therefore, if 
schools are forced to obtain large letters of credit they will need to 
turn to second or third tier lenders, or lenders who offer crisis 
loans, who will charge significant fees for these letters of credit.
    In view of the cost and financial resources needed to secure a 
letter of credit, some commenters believed that the Department should 
apply a cap of 25 percent on the amount of the cumulative letters of 
credit that a provisionally certified institution could be required to 
post under the revised regulations.
    Other commenters suggested that if a letter of credit is imposed 
for an accrediting agency trigger relating to closing a location, the 
letter of credit should be based on a percentage of the amount of title 
IV, HEA funds the closing location received, not a percentage of title 
IV, HEA funds received by the entire institution. The commenters 
reasoned that if the financial impact of the closing of the branch or 
additional location will have a material negative impact on the school, 
then the Department should set the letter of credit amount based on 10 
percent of the branch or additional location's title IV, HEA funds, 
arguing that this approach is straight-forward: Any liabilities that 
the school may incur resulting from the closure of a branch or 
additional location would relate only to the students attending the 
closing location. In contrast, the commenter believed that imposing the 
letter of credit based on the total title IV, HEA funds received by the 
school would be disproportionate to the financial impact of the 
potential student issues to which a letter of credit may relate. The 
commenters noted that the NPRM expressly recognized the cost of 
securing letters of credit and the difficulties a school may have in 
obtaining a letter of credit within 30 days. 81 FR 39368. If a school 
cannot secure a letter of credit within that timeframe, the Department 
would set aside title IV, HEA funds, which according to the commenters 
would almost assuredly have a catastrophic financial impact on the 
institution. Therefore, the commenters concluded that imposing a larger 
letter of credit on the school than is necessary will impose cost and 
financial burden on the school far greater than any possible benefits 
that the Department could obtain from the larger letter of credit, and 
will negatively impact students in the process.
    Discussion: With regard to the comment that the Department cap any 
cumulative letters of credit to 25 percent of amount that would 
otherwise be required, we believe setting an inflexible cap would 
defeat the purpose of requiring financial protection that is 
commensurate with the risks posed by one or more of the triggering 
events. The Secretary currently has the discretion to establish the 
amount of financial protection required for a particular institution, 
starting at 10 percent of the amount the title IV, HEA program funds 
the institution received in the prior award year, and that discretion 
is not limited by these regulations. As noted previously in this 
preamble under the heading ``Composite Score and Triggering Events,'' 
the amount of the financial protection required is based on a 
recalculated composite score of less than 1.0--the total amount of 
financial protection required is, at a minimum, 10 percent of the title 
IV, HEA funds the institution received during its most recently 
completed fiscal year, and such added amount as the Secretary 
demonstrates is warranted by the risk of liabilities with regard to 
that institution.
    We do not disagree with the general notion that the costs 
associated with a letter of credit have increased over time and that 
some institutions may not be able to secure, or may have difficulty 
securing, a letter of credit. We acknowledged this in the preamble to 
the NPRM and offered the set-aside as an alternative to the letter of 
credit. With regard to other alternatives, we are not aware of any 
surety instruments that are as secure as bank-issued letters of credit 
and that can be negotiated easily by the Department to meet the demands 
of protecting the Federal interests in a dependable and efficient 
manner. However, if surety instruments come to light, or are developed, 
that are more affordable to institutions than letters of credit but 
that offer the same benefits to the Department, we will consider 
accepting those instruments. To leave open this possibility, we are 
amending the financial protection requirements in Sec.  
668.175(f)(2)(i) to provide that the Department may, in a notice 
published in the Federal Register, identify acceptable surety 
alternatives or other forms of financial protection. We wish to make 
clear that the Department will not accept, or entertain in any way, 
surety instruments or other forms of financial protection that are not 
specified in these final regulations or that are not subsequently 
identified in the Federal Register. In this vein, the Department is 
continuing to examine generally the alternatives to a letter of credit 
to ensure that such alternatives strike a reasonable balance between 
protecting the interests of the taxpayers and the Federal Government 
and

[[Page 76008]]

providing flexibility to institutions, and is revising the regulations 
to provide that all alternatives to a letter of credit or a set-aside 
arrangement, including cash, will be permitted only in the Secretary's 
discretion.
    Lastly, as discussed previously throughout this preamble, an 
institution that can prove that it has sufficient insurance to cover 
immediate and potential debts, liabilities, claims, or financial 
obligations stemming from each triggering event, will not be required 
to provide financial protection of any kind.
    With regard to the amount of financial protection stemming from the 
teach-out trigger for closed locations under Sec.  668.171(c)(iv), by 
considering only closures of locations that cause the composite score 
to fall below a 1.0, we identify those events that pose a significant 
risk to the continued viability of the institution as a whole, and the 
financial protection needed should be based on the risk of closure and 
attendant costs to the taxpayer, not merely the expected costs of 
closed school discharges to students enrolled at the closed location.
    Finally, the Department has long had discretion, under current 
regulations, in setting the amount of the required financial 
protection, and we are revising Sec.  668.175(f)(4) to memorialize our 
existing discretion to require financial protection in amounts beyond 
the minimum 10 percent where appropriate.
    Changes: We have revised Sec.  668.175(f)(2)(i) to provide that the 
Secretary may identify acceptable surety instruments or other forms of 
financial protection in a notice published in the Federal Register. In 
each place in the regulations where we address acceptable forms of 
financial protection, we have revised the regulations to provide that 
alternatives to letters of credit and set-aside arrangements will be 
permitted in the Secretary's discretion. In addition, we have revised 
Sec.  668.175(f)(4) to provide the minimum amount of financial 
protection required, specifically to set 10 percent of prior year title 
IV, HEA funding as the minimum required protection amount, with a minor 
exception for institutions that do not participate in the loan program, 
and to authorize the setting of such larger added amount as the 
Secretary determines is needed to ensure that the total amount of 
financial protection provided is sufficient to fully cover any 
estimated losses, provided that the Secretary may reduce this added 
amount only if an institution demonstrates that this added amount is 
unnecessary to protect, or is contrary to, the Federal interest. We 
made a conforming change to Sec.  668.90(a)(3)(iii)(D).

Set-Aside Sec.  668.175(h)

    Comments: Commenters believed that the set-aside under proposed 
Sec.  668.175(h) as an alternative a letter of credit or cash would not 
be a viable option. The commenters argued that most schools rely on 
title IV, HEA funds for cash flow purposes, so administratively 
offsetting a portion of those funds would likely force many schools to 
close. Similarly, if a school is placed on Heightened Cash Monitoring 2 
(HCM2) or reimbursement because it cannot secure a letter of credit, 
the commenters asserted that the school would likely close because 
historically the Department and institutions have not been able to 
timely process funds under HCM2.
    Other commenters acknowledged the Department's concern about 
getting financial protection into place quickly, but believed that 90 
days would be a more reasonable timeframe. The commenters stated that 
under current conditions in the financial markets, even with the best 
efforts it is almost impossible to get a letter of credit approved 
within the proposed 30-day timeframe. Also, the commenters suggested 
that if the Department implements the set-aside because of a school's 
delay in providing the letter of credit, this section needs to allow 
for the set-aside agreement to be terminated once the school is able to 
provide the letter of credit.
    Other commenters agreed that the Department needs some way to 
obtain funds from institutions that fail to provide a letter of credit. 
The commenters believed, however, that the proposed set-aside 
provisions are overly generous in terms of time and amount. In 
particular, the commenters suggested the following changes:
    (1) Make set-aside amounts larger than letter of credit requests. 
An institution's inability to obtain a letter of credit may in and of 
itself be a warning sign that private investors do not trust the 
institution enough to be involved with it. Therefore, the commenters 
suggested that any amounts covered by the set-aside provision should be 
set at 1.5 times the size of a letter of credit. This would both 
encourage colleges to obtain letters of credit and also send a strong 
message that the set-aside is a last resort action.
    (2) Implement other limitations on colleges that cover letters of 
credit through set asides. According to the commenters, the set-aside 
is not the ideal way to get institutions to provide their financial 
commitments. Accordingly, they proposed that this provision should come 
with greater protections for students and taxpayers or, at the very 
least, include some sort of limitation on Federal financial aid that 
prevents the institution from increasing the number of Federal aid 
recipients at the school and potentially even considers not allowing 
for new enrollment of federally aided students. Absent such 
protections, commenters noted that schools may face perverse incentives 
where they are encouraged to grow enrollment as a way of meeting the 
set-aside conditions.
    (3) Lessen the time period for collecting set-aside amounts. 
Commenters noted that nine months is a long period of time for 
collecting amounts that an institution would otherwise be expected to 
provide in 30 days through a letter of credit. Nine months is also a 
long time in general--almost an entire academic year. Commenters stated 
that collecting the funds in this amount of time makes it possible for 
institutions to still enroll a large number of students and then run 
the risk of shutting down, and suggested that the Department shorten 
this time period to no more than half an academic year.
    Discussion: While a set-aside may not be an option for an 
institution that is unable to compensate for a temporary loss of a 
percentage of its title IV, HEA funding, either by using its own 
resources or obtaining some form of financing, it is unlikely that the 
institution has any other options. For other institutions with at least 
some resources, we believe the set-aside is a viable alternative.
    We disagree with the assertion that an institution is likely to 
close if it is placed on HCM2. Based on data available on the 
Department's Web site at https://studentaid.ed.gov/sa/about/data-center/school/hcm, approximately 60 percent of the institutions on HCM2 
as of March 2015 were still on that status as of June 2016.
    With regard to extending the time within which an institution must 
submit a letter of credit, we adopt in these regulations the 
Department's current practice of allowing an institution 45 days.
    In addition, we are providing in the final regulations that when an 
institution submits a letter of credit, the Department will terminate 
the corresponding set-aside agreement and return any funds held under 
that agreement. With regard to the comments that the Department should 
increase the amount of the set-aside or shorten the time within which 
the set-aside must be fully funded, we see no justification for

[[Page 76009]]

either action. The Department proposed the set-aside as an alternative 
for an institution that is unable to timely secure a letter of credit, 
so that inability cannot be used as a reason to increase the amount of 
financial protection under the set-aside arrangement. For the funding 
timeframe, the Department proposed nine months, roughly the length of 
an academic year, as a reasonable compromise between having financial 
protection fully in place in the short term and minimizing the 
consequences of reducing an institution's cash flow. We believe that 
shortening the funding timeframe may put unnecessary financial stress 
on an institution that would otherwise fulfill its obligations to 
students and the Department. We continue to analyze, and will publish 
in the Federal Register, the terms on which an institution may provide 
financial protection other than a letter of credit or set-aside 
arrangement.
    Changes: We have revised Sec.  668.175(h) to increase from 30 to 45 
days the time within which an institution must provide a letter of 
credit to the Department and provide that the Secretary will release 
any funds held under a set-aside if the institution subsequently 
provides the letter of credit or other financial protection required 
under the zone or provisional certification alternatives in Sec.  
668.175(d) or (f).

Provisional Certification (Section 668.175(f)(1)(i))

    Comments: Some commenters were concerned that the Department would 
place a school on provisional certification simply because of a 
triggering event in Sec.  668.171(c), such as the school's cohort 
default rate, 90/10 ratio, or D/E rates under the GE regulations. The 
commenters argued that the regulations covering these measures did not 
intend or contemplate their use as reasons for placing an institution 
on provisional certification, so schools should not be subject to 
additional penalties.
    Other commenters questioned whether the Department made a change in 
the applicability of the provisional certification alternative in Sec.  
668.175(f) that was not discussed in the NPRM. The commenters stated 
that it was unclear whether excluding the measures in Sec.  
668.171(b)(2) and (b)(3) from either zone alternative or the 
provisional certification alternatives in proposed Sec.  668.175(d) and 
(f) was intentional or if the reference to Sec.  668.171(b)(1) should 
just be Sec.  668.171(b). In addition, the commenters noted that only 
the provisional certification alternative in proposed Sec.  668.175(f) 
refers to the proposed substitutes for a letter of credit (cash and the 
set-aside), whereas both the NPRM and proposed Sec.  668.175(h), by 
cross-reference to Sec.  668.175(d), refer to the substitutes as 
applicable to the zone alternative.
    One commenter noted that the current regulations create multiple 
options for institutions with a failing financial responsibility score, 
but the terms between the zone and provisional certification 
alternatives are not sufficiently equal. The commenter also contended 
that the time limits associated with the alternatives are unclear. To 
address this, the commenter recommended the following changes to the 
current regulations.
    (1) Increase the minimum size of the initial letter of credit for 
institutions on provisional status.
    Currently, an institution choosing this option only has to provide 
a letter of credit for an amount that in general is, at a minimum, 10 
percent of the amount of title IV, HEA funds received by the 
institution during its most recently completed fiscal year, while an 
institution that chooses to avoid provisional certification must submit 
a 50 percent letter of credit. The commenter recognized that part of 
this difference reflects the bigger risks to an institution that come 
with being provisionally certified but believed the current gap in 
letters of credit is too large. The commenter recommended that the 
Department increase the minimum letter of credit required from 
provisionally certified institutions that enter this status after the 
final regulations take effect to 25 percent.
    (2) Automatically increase the letter of credit for institutions 
that renew their provisional status.
    The commenter stated that Sec.  668.175(f)(1) of the current 
regulations suggests that an institution may participate under the 
provisional certification alternative for no more than three 
consecutive years, whereas Sec.  668.175(f)(3) suggests that the 
Secretary may allow the institution to renew this provisional 
certification and may require additional financial protection.
    The commenter requested that the Department clarify the terms on 
which it will renew a provisional status. In particular, the commenter 
recommended that we require the institution, as part of any renewal, to 
increase the size of the letter of credit to 50 percent of the 
institution's Federal financial aid. This amount would align with the 
current requirements for an institution with a failing composite score 
that does not choose the provisional certification alternative and, 
according to the commenter, would reflect that an institution has 
already spent a great deal of time in a status that suggests financial 
concerns.
    (3) Limit how long an institution may renew its provisional status.
    The commenter stated that Sec.  668.175(f)(3) of the current 
regulations suggests an institution could potentially stay in 
provisional status forever. The commenter asked the Department to place 
a time limit on these renewals that would ideally be no longer than the 
period during which institutions can continue to participate in the 
title IV, HEA programs while subject to other conditions under the 
Department's regulations, which tends to be three years. However, the 
commenter believed that even six years in provisional status may be an 
unacceptably long amount of time.
    Discussion: Contrary to the comments that the current cohort 
default rate, 90/10, and GE regulations do not contemplate provisional 
certification, we note the 90/10 and cohort default rate provisions do 
just that after a one- or two-year violation of those standards. In 
addition, we clarify that an institution under either the zone or 
provisional certification alternative may provide a letter of credit 
or, in the Secretary's discretion, provide another form of financial 
protection in a form or under terms or arrangements that will be 
specified by the Secretary or enter into a set-aside arrangement. The 
set-aside arrangement is not available to an institution that seeks to 
participate for the first time in the title IV, HEA programs or that 
failed the financial responsibility standards but seeks to participate 
as a financially responsible institution, because in either case the 
institution must show that it is financially responsible. That is, the 
institution must show that it has the financial resources to secure, or 
a bank is willing to commit the necessary resources on behalf of the 
institution to provide, a letter of credit. For the references to the 
general standards and triggering events, an institution that fails the 
general standards under Sec.  668.171(b)(1) or (3), as reflected in the 
composite score or the triggering events under Sec.  668.171(c), or no 
longer qualifies under the zone alternative, is subject to the minimum 
financial protection required under Sec.  668.175(f). With respect to 
the numerous changes the commenter proposed for how the Department 
should treat institutions on provisional certification, since we did 
not propose any changes to the provisional certification requirements 
under Sec.  668.175(f) or Sec.  668.13(c), or to

[[Page 76010]]

the long-standing minimum letter of credit requirements, the suggested 
changes are beyond the scope of these regulations.
    Changes: None.

Financial Protection Disclosure

General

    Comments: One commenter asserted that the proposed financial 
protection disclosure requirements exceed the Department's statutory 
authority because the financial responsibility provisions in the HEA, 
unlike other provisions of the Act, do not mention disclosures. The 
commenter maintained that such omissions must be presumed to be 
intentional, since Congress generally acts intentionally when it uses 
particular language in one section of the statute but omits it from 
another.
    Discussion: We do not agree with the commenter. The financial 
protection disclosure requirements do not conflict with the financial 
responsibility provisions in the HEA. Furthermore, the lack of specific 
mention of such disclosures in the provisions of the HEA related to 
financial responsibility does not preclude the Department's regulating 
in this area. Courts have recognized that the Department under its 
general rulemaking authority may require disclosures of information 
reasonably considered useful for student consumers.\61\
---------------------------------------------------------------------------

    \61\ See, e.g., Ass'n of Private Colleges & Universities v. 
Duncan, 870 F. Supp. 2d 133 (D.D.C. 2012)(Department has broad 
authority ``to make, promulgate, issue, rescind, and amend rules and 
regulations governing the manner of operation of, and governing the 
applicable programs administered by, the Department.'' 20 U.S.C. 
1221e-3 (2006); see also id. Sec.  3474 (``The Secretary is 
authorized to prescribe such rules and regulations as the Secretary 
determines necessary or appropriate to administer and manage the 
functions of the Secretary or the Department.''). The financial 
protection disclosures fall comfortably within that regulatory 
power.
---------------------------------------------------------------------------

    As noted above, the Department continues to assert both its 
authority to require disclosures related to financial responsibility 
and the usefulness of those disclosures for student consumers. However, 
in the interest of clarity and ensuring that disclosures are as 
meaningful as possible, we have made several changes to proposed Sec.  
668.41(i). Under the proposed regulations, institutions required to 
provide financial protection to the Secretary must disclose information 
about that financial protection to enrolled and prospective students. 
These final regulations state that the Department will rely on consumer 
testing to inform the identification of events for which a disclosure 
is required. Specifically, the Secretary will consumer test each of the 
events identified in Sec.  668.171(c)-(g), as well as other events that 
result in an institution being required to provide financial protection 
to the Department, to determine which of these events are most 
meaningful to students in their educational decision-making. The 
Department expects that not all events will be demonstrated to be 
critical to students; however, events like lawsuits or settlements that 
require financial protection under Sec.  668.171(c)(1)(i) and (ii); 
borrower defense claims that require financial protection under Sec.  
668.171(g)(7); and two consecutive years of cohort default rates of at 
least 30 percent, requiring financial protection under Sec.  668.171(f) 
are likely to be of more relevance to students. Findings resulting from 
the Department's administrative proceedings are included among these 
triggering events. The issue of students being ill-informed about 
ongoing lawsuits or settlements with their institutions was raised by 
students, particularly Corinthian students, during negotiated 
rulemaking, as well as by commenters during the public comment period. 
We also believe that students will have a particular interest in, and 
deserve to be made aware of, instances in which an institution has a 
large volume of borrower defense claims; this may inform their future 
enrollment decisions, as well as notify them of a potential claim to 
borrower defense they themselves may have. Finally, we believe that 
cohort default rate is an important accountability metric established 
in the HEA, and that ability to repay student loans is of personal 
importance to many students. Any or all of these items may be 
identified through consumer testing as important disclosures.
    Changes: We have revised Sec.  668.41(i) to clarify that all 
actions and triggering events that require an institution to provide 
financial protection to the Department will be subject to consumer 
testing before being required for institutional disclosures to 
prospective and enrolled students.
    Comments: A few commenters expressed strong overall support for 
requiring disclosures to prospective and enrolled students of any 
financial protection an institution must provide under proposed Sec.  
668.175(d), (f), or (h). The commenters cited the significant financial 
stake an institution's students have in its continued viability, and a 
resulting right to be apprised of financially related actions that 
might affect that viability.
    However, some commenters who supported the proposed requirements 
raised the concern that unscrupulous institutions might intentionally 
attempt to undermine the disclosures by burying or disguising them. 
Accordingly, those commenters suggested that the Department should 
prescribe the wording, format, and labeling of the disclosures. Other 
commenters expressed disappointment that the proposed regulations do 
not require institutions to deliver financial protection disclosures to 
prospective students at the first contact with those students, and 
strongly supported including such a requirement in the final 
regulations. Though acknowledging several negotiators' objections that 
establishing a point of first contact would prove too difficult, one 
commenter was unconvinced, and asserted the importance of requiring 
delivery of critical student warnings at a point when they matter most. 
The same commenter found the proposed regulatory language on financial 
protection disclosures to be vague, and requested clarification as to 
whether proposed Sec.  668.41(h)(7) (requiring institutions to deliver 
loan repayment warnings in a form and manner prescribed by the 
Secretary) applies to financial protection disclosures as well. The 
commenter further asserted that information regarding financial 
protection is even more important to consumers than repayment rates, 
and therefore institutions' promotional materials should be required to 
contain financial protection disclosures in the same way that the 
proposed regulations require such material to contain repayment rate 
warnings.
    Finally, some commenters urged that, notwithstanding the proposed 
financial protection disclosures required of institutions, the 
Department should itself commit to disclosing certain information about 
institutions that are subject to enhanced financial responsibility 
requirements. Specifically, the commenters suggested that the 
Department disclose the amount of any letter of credit submitted and 
the circumstances that triggered the enhanced financial responsibility 
requirement.
    For several reasons described in this section, many commenters 
opposed either the concept of requiring institutions to make financial 
protection disclosures, or the way in which such disclosures are 
prescribed under the proposed regulations. One commenter suggested 
removing financial protection disclosure requirements solely on the 
grounds that students will neither take notice of nor care about this 
information. The commenter expressed the belief that most people do not 
really know what a letter of credit is, and that

[[Page 76011]]

therefore informing them of an institution's obligation to secure such 
an instrument would only cause confusion.
    Discussion: We thank those commenters who wrote in support of the 
proposed financial protection disclosures. In response to the commenter 
who raised concerns about unscrupulous institutions attempting to 
undermine the proposed disclosures and warnings, including by burying 
or disguising them, we share those concerns and drafted the applicable 
regulatory language accordingly. Section 668.41(i)(1) of the final 
regulations requires that an institution disclose information about 
certain actions and triggering events (subject to and identified 
through consumer testing) it has experienced to enrolled and 
prospective students in the manner described in paragraphs (i)(4) and 
(5) of that section, and that the form of the disclosure will be 
prescribed by the Secretary in a notice published in the Federal 
Register. Before publishing that notice, the Secretary will also 
conduct consumer testing to help ensure the warning is meaningful and 
helpful to students. This approach both holds institutions accountable 
and creates flexibility for the Department to update warning 
requirements, including specific language and labels, as appropriate in 
the future. Based on these comments, and the comment expressing 
confusion as to which of the delivery requirements in this section 
apply to financial protection disclosures, we have revised Sec.  
668.41(i) to make the requirements that apply to the actions and 
triggering events disclosure and the process by which the language of 
the disclosure will be developed and disseminated more explicit.
    While mindful of the potential benefit to prospective students of 
receiving disclosures early, we are not convinced that requiring 
institutions to deliver such disclosures at first contact with a 
student is necessary or efficacious. In many cases and at certain types 
of institutions, it is impractical if not impossible to isolate the 
initial point of contact between a student and an institutional 
representative. Such a requirement would place a significant burden on 
compliance officials and auditors as well as on institutions. Section 
668.41(i)(5) of the final regulations requires institutions to provide 
disclosures to prospective students before they enroll, register, or 
enter into a financial obligation with the institution. We believe this 
provides prospective students with adequate advance notice.
    Regarding whether requirements in the proposed regulations 
pertaining to the delivery of loan repayment warnings to prospective 
and enrolled students apply to financial protection disclosures as 
well, we are revising the regulations to separately state the 
requirements for loan repayment warnings and financial protection 
disclosures. Section Sec.  668.41(i) states that, subject to consumer 
testing as to which events are most relevant to students, an 
institution subject to one or more of the actions or triggering events 
identified in Sec.  668.171(c)-(g) must disclose information about that 
action or triggering event to enrolled and prospective students in the 
manner prescribed in paragraphs (i)(4) and (5).
    However, the actions and triggering events disclosures are not 
required to be included in an institution's advertising and promotional 
materials. We concur with the commenter that such financial protection 
disclosures will provide critical information to students, but maintain 
that delivery of those disclosures to students through the means 
prescribed in revised Sec.  668.41(i)(4) and (5), and posting of the 
disclosures to the institution's Web site as included in revised Sec.  
668.41(i)(6), are most appropriate for this purpose. The loan repayment 
warning provides information on the outcomes of all borrowers at the 
institution, whereas the financial protection disclosure pertains 
directly to the institution's compliance and other matters of financial 
risk. We believe this type of disclosure is better provided on an 
individual basis, directly to students, and that it may require a 
longer-form disclosure than is practicable in advertising and 
promotional materials.
    Regarding the commenters' suggestion that the Department itself 
disclose certain information about institutions subject to enhanced 
financial responsibility requirements, we understand the value of this 
approach, especially with respect to uniformity and limiting the 
opportunity for unscrupulous institutions to circumvent the 
regulations. However, we remain convinced that schools, as the primary 
and on-the-ground communicators with their students, and the source of 
much of the information students receive about financial aid, are well-
placed to reach their students and notify them of the potential risks 
of attending that institution. We do not believe there are any 
practical means through which the Department might similarly convey to 
individual students the volume of information suggested by commenters. 
Nevertheless, we intend to closely monitor the way in which 
institutions comply with the actions and triggering events disclosure 
requirements, and may consider at some point in the future whether the 
Department should assume responsibility for making some or all of the 
required disclosures. Additionally, the Department may, in the future, 
consider requiring these disclosures to be placed on the Disclosure 
Template under the Gainful Employment regulations, to streamline the 
information flow to those prospective and enrolled students.
    We respectfully disagree with the commenter who suggested removing 
the financial protection disclosure requirements on the grounds that 
students will neither take notice of nor care about this information. 
Some of the information conveyed in the disclosures would undoubtedly 
be of a complex nature. We also recognize that many people have limited 
familiarity with financial instruments such as letters of credit. For 
that reason, and to minimize confusion, we proposed consumer testing of 
the disclosure language itself, in addition to consumer testing of the 
actions and triggering events that require financial protection, to 
ensure that the disclosures are meaningful and helpful to students. As 
discussed above, in the final regulations we are revising proposed 
Sec.  668.41(i) to require consumer testing prior to identifying the 
actions and/or triggering events for financial protection that require 
disclosures. We believe this change will result in disclosures that are 
more relevant to students, and that relate directly to actions and/or 
events that potentially affect the viability of institutions they 
attend or are planning to attend. In keeping with the intent of the 
proposed regulations to ensure that disclosures are meaningful and 
helpful to students, the final regulations retain the use of consumer 
testing, not only in determining the language to be used in such 
disclosures but also the specific actions and triggering events to be 
disclosed.
    Changes: We have revised Sec.  668.41(i) to require consumer 
testing of disclosures of the actions and triggering events that 
require financial protection under Sec.  668.171(c)-(g).
    Comments: Several commenters contended that the proposed 
regulations inappropriately equate financial weakness with lack of 
viability, and would require institutions to make disclosures that are 
misleading or untrue. For example, an institution that is financially 
responsible may experience a triggering event that nevertheless 
requires the institution to disclose to students that it is financially 
at risk. In the opinion of one

[[Page 76012]]

commenter, this constitutes compelling untrue speech and violates the 
First Amendment.
    Echoing this overall concern, one commenter expressed the belief 
that warnings based on triggering events that have not been rigorously 
proven to demonstrate serious financial danger would destroy an 
institution's reputation based on insinuation, not fact. The commenter 
proposed that an institution should have the opportunity to demonstrate 
that it is not in danger of closing before requiring disclosures.
    Strenuously objecting to financial protection disclosures, one 
commenter described the relationship between some of the triggering 
events listed in Sec.  668.171(c) and the institution's value to 
students or its financial standing as tenuous. The commenter further 
argued that the ``zone alternative'' found in current Sec.  668.175(d) 
recognizes the potential for an institution to be viable in spite of 
financial weakness; and that the proposed regulations weaken the zone 
alternative.
    A commenter, although acknowledging that students should be made 
aware of some triggering events, took particular exception to the 
Department's assertion that students are entitled to know about any 
event significant enough to warrant disclosures to investors, 
suggesting that SEC-related disclosures are not a reliable basis on 
which to require disclosures to students. In support of this position, 
the commenter noted that SEC disclosure requirements may or may not 
indicate that a publicly traded institution will have difficulty 
meeting its financial obligations to the Department, because such 
disclosures serve a different purpose, namely to assist potential 
investors in pricing the publicly traded institution's securities. The 
commenter stated that linking financial protection disclosures to SEC 
reporting may create false alarms for students and cause them to react 
impulsively.
    Discussion: We do not agree that the proposed regulations either 
inappropriately equate financial weakness with lack of viability, or 
require institutions to issue misleading or untrue disclosures.
    Under the regulations, an institution is required to provide 
financial protection, such as an irrevocable letter of credit, only if 
that institution is deemed to be not financially responsible because of 
an action or event described in Sec.  668.171(b). As described in the 
NPRM, we believe that the factors necessitating an institution to 
provide financial protection could have a significant impact on a 
student's ability to complete his or her education at an institution.
    However, we recognize that not all of the actions and triggering 
events for financial protection will be relevant to students. 
Therefore, we have revised the requirement to clarify that the 
Secretary will select particular actions and events from the new 
triggers specified in Sec.  668.171(c)-(g), as well as other events 
that result in an institution being required to provide financial 
protection to the Department, based on consumer testing. The events 
that are demonstrated to be most relevant to students will be published 
by the Secretary, and schools subject to financial protection 
requirements for those events will be required to make a disclosure, 
with language to be determined by the Secretary, to prospective and 
enrolled students about the event. In addition to making required 
disclosures more useful and understandable to students, while 
accurately reflecting concerns about the institution's financial 
viability, this change will ensure that the action or triggering events 
behind the disclosure are relevant to students.
    As the actions and triggering events identified in proposed Sec.  
668.171(c) may affect an institution's ability to exist as a going 
concern or continue to deliver educational services, we continue to 
believe that, having made a substantial investment in their collective 
educations, students have an absolute interest in being apprised of at 
least several of these actions and events. This is not, as the 
commenter suggests, destruction of an institution's reputation by 
insinuation in place of facts, but rather the providing of factual 
information to students on which they can make a considered decision 
whether to attend or continue to attend that institution.
    We agree with the commenter that noted that the purposes of 
disclosures to investors required by the SEC and these proposed 
disclosures are different in some respects. As discussed under 
``Automatic Triggering Events,'' we are revising the triggers in Sec.  
668.171(c) to ensure that the triggers, including the proposed triggers 
that were drawn from SEC disclosure requirements, are tailored to 
capture events that are most relevant to an institution's ability to 
provide educational services to its students. With these changes, we 
believe that each of these triggers and the related disclosure will 
serve the Department's stated purpose.
    We understand the commenters' concern that some students may draw 
undesirable or even erroneous conclusions from the disclosures or act 
impulsively as a result of the disclosures. As students must decide for 
themselves the value of any institution and the extent to which that 
value is affected by the event or condition that triggered the 
disclosure, there might always be some subjectivity inherent to an 
individual's reading of the required disclosure. However, we believe 
the benefit to those students in being apprised of actions or events 
that might affect an institution's viability outweighs this potential 
concern. Moreover, as previously discussed, the Department will conduct 
consumer testing to ensure that both the events that result in 
institutions being required to provide financial protection to the 
Department, as well as the language itself, is meaningful and helpful 
to students before requiring disclosures of those events. Our intent is 
for the required disclosures to convey accurate, important information.
    Finally, with regard to the suggestion made by one commenter that 
institutions be afforded the opportunity to demonstrate that they are 
not in imminent danger of closing before having to provide financial 
protection and the accompanying financial protection disclosures, as 
discussed above under ``Reporting Requirements,'' we are revising Sec.  
668.171(h) to permit an institution to demonstrate, at the time it 
reports a triggering event, that the event or condition no longer 
exists, has been resolved or that it has insurance that will cover any 
and all debts and liabilities that arise at any time from that 
triggering event. If such a demonstration is successfully made, the 
institution will not be required to provide financial protection, and 
will not be subject to the financial protection disclosure requirement.
    We agree with the commenter who pointed out that the ``zone 
alternative'' in current Sec.  668.175(d) recognizes the potential for 
an institution to be viable in spite of financial weakness, but we do 
not concur with the assertion that the regulations would weaken the 
zone alternative. The zone alternative is specific to an institution 
that is not financially responsible solely because the Secretary 
determines its composite score is less than 1.5 but at least 1.0. Such 
an institution may nevertheless participate in the title IV, HEA 
programs as a financially responsible institution under the provisions 
of the zone. We are not proposing to change current regulations related 
to the zone alternative. Participation under the zone alternative is 
not an action or triggering event and would, therefore, not result in 
an institution having to make a disclosure.

[[Page 76013]]

    Changes: We have revised Sec.  668.41(i) to require consumer 
testing of disclosures of the actions and triggering events that 
require financial protection under Sec.  668.171(c)-(g).
Scope of the Disclosure Requirement
    Comments: Several commenters requested clarification as to the 
scope of the financial protection disclosure requirements. One 
commenter expressed concern about proposed Sec.  668.41(i), which 
stated that an institution required to provide financial protection to 
the Secretary such as an irrevocable letter of credit under Sec.  
668.175(d, or to establish a set-aside under Sec.  668.175(h), must 
provide the disclosures described in Sec.  668.41(i)(1)-(3). The 
commenter contended that it is not clear whether the disclosure 
requirement pertains only to financial protections resulting from the 
new triggers in the proposed regulations, or whether the disclosures 
would be required for any financial protections, including those 
required under existing financial responsibility standards, such as the 
50 percent letter of credit provided under current Sec.  668.175(c). 
The commenter added that when an institution provides a letter of 
credit pursuant to current Sec.  668.175(b) and (c), it qualifies as a 
financially responsible institution, and thus there should be no need 
for disclosures in these situations. However, the commenter asserted 
that the Department's frequent use of the undefined phrase ``financial 
protection,'' throughout Sec.  668.175, has resulted in a lack of 
clarity. The commenter asked that the Department limit financial 
protection disclosures to the new triggers in Sec.  668.171.
    Another commenter noted that the zone alternative under Sec.  
668.175(d) does not include a requirement to provide financial 
protection to the Department and therefore should not be referenced in 
the disclosure requirement.
    Discussion: We thank the commenter who brought to our attention the 
unintentional reference in Sec.  668.41(i) to financial protection 
provided to the Secretary under Sec.  668.175(d). As the commenter 
pointed out, Sec.  668.175(d) relates to the zone alternative and does 
not include a requirement to provide financial protection. Proposed 
Sec.  668.41(i) is intended to reference only financial protection 
provided to the Secretary under Sec.  668.175(f), or the set-aside 
under Sec.  668.175(h).
    To clarify the scope of proposed Sec.  668.41(i), that section 
would have required disclosures for any financial protection an 
institution is required to provide under Sec.  668.175(f) or for any 
set-aside under Sec.  668.175(h), not just financial protection 
provided as a result of the new triggering actions and events 
established in these regulations.
    However, as described above, we are revising the financial 
protection disclosures so that the Secretary will conduct consumer 
testing to identify which actions and triggering events should be 
disclosed. Institutions will be required to disclose information about 
those events only if it is found to be relevant to students.
    Changes: As described above, we have revised Sec.  668.41(i) to 
require consumer testing of disclosures of the actions and triggering 
events that require financial protection under Sec.  668.171(c)-(g).

Harm to Institutions

    Comments: Several commenters addressed the potential harm to 
institutions they believe will result from the proposed financial 
protection disclosures. These commenters warned of irreparable damage 
to an institution's reputation that could drive away students, alarm 
potential donors, diminish access to capital, and unfairly brand an 
unknown number of institutions as untrustworthy. One commenter 
envisioned a cascading series of events in which declining enrollment 
and alumni and donor support forces tuition hikes, which in turn lead 
to further declines in enrollment and the institution's eventual 
closure.
    Underlying the commenters' concern over potential negative outcomes 
was the opinion that the required disclosures are based on flawed 
financial standards that are not truly indicative of whether an 
institution is carrying out its educational mission. One commenter 
suggested that the Department might cause lasting and perhaps grave 
harm to institutions not currently at risk of failure, turning 
disagreements about accounting issues into existential enrollment 
threats. Another commenter pointed out that some nonprofit institutions 
operate close to the margin of sustainability because of their mission, 
or a charitable commitment to supporting needy students. The proposed 
financial protection disclosures would, in the opinion of the 
commenter, thrust such institutions into a cycle of failure.
    Discussion: We understand the concern regarding the potential for 
the financial protection disclosures that were initially proposed, as 
well as the financial protection disclosures in these final 
regulations, to damage an institution's reputation. However, we do not 
believe that the possibility of harm to an institution's reputation is 
reason enough to withhold from students, who in many cases have 
borrowed heavily to finance their educations, information on the 
financial viability of the institutions they attend. Regarding the 
catastrophic series of events predicted by some commenters, we believe 
such occurrences are unlikely. However, in the event that some 
institutions do fall into what one commenter termed a cycle of failure, 
we believe that is more appropriately attributable to the actions or 
failures of the institutions themselves than to the financial 
protection disclosures.
    We address earlier in this section the commenters' contention that 
the financial responsibility standards on which the actions and 
triggering events disclosure requirements are based are flawed and not 
indicative of institutions' actual financial positions. We do not agree 
with the observation of one commenter that the proposed regulations 
require financial protection disclosures for what are essentially 
disagreements about accounting issues. As discussed under ``Triggering 
Events,'' our analysis and assessment of the triggering actions and 
events which necessitate providing financial protection indicates they 
would have a demonstrable effect on an institution's financial 
position.
    Lastly, with regard to the point made by one commenter that some 
nonprofit institutions operate close to the margin in adherence to a 
mission or particular commitment to funding needy students, the 
Department commends the efforts of such institutions. We do not believe 
that for the most part, such institutions have a heightened risk of 
experiencing a triggering action or event. The financial stress on 
institutions operating close to the margin of sustainability for the 
reasons noted above is most likely to reflect in a lower composite 
score than might otherwise be the case. Those institutions are 
frequently able to operate as financially responsible institutions 
under the zone alternative, and would not be subject to financial 
protection disclosures.
    Changes: None.

Warnings to Students--General

    Comments: Some commenters contended that the proposed provisions 
related to mandatory warnings to students are not consistent with the 
provisions and purposes of the HEA. They noted that the HEA enumerates 
an extensive list of information that institutions must ``produce . . . 
and [make] readily available upon request'' to current and prospective 
students (20 U.S.C. 1092(a)(1)), which includes, among other things, 
graduation rates and crime statistics, but makes no

[[Page 76014]]

reference to any requirement to disclose information that bears on the 
institution's financial viability or its need to provide financial 
protection. See id. Sec. Sec.  1092(a)-(m). Moreover, the commenters 
opined that the mandatory warning requirements run afoul of the First 
Amendment, arguing that compelled speech, as included in the proposed 
regulation's required warnings, is subject to strict scrutiny and 
permissible only if ``reasonably related to the State's interest in 
preventing deception of consumers.'' R.J. Reynolds Tobacco Co. v. FDA, 
696 F.3d 1205, 1212 (D.C. Cir. 2012).
    Discussion: Section 668.41(h)(3) and (i)(4) and (5) requires the 
institution to provide what are described as ``warnings'' to students, 
regarding the repayment rate of its alumni, through advertising and 
promotional materials, and ``disclosures'' regarding the actions and 
triggering events for any financial protection, identified pursuant to 
consumer testing, directly to prospective and enrolled students. The 
repayment rate provision requires the institution to state in its 
disclosure that: ``A majority of recent student loan borrowers at this 
school are not paying down their loans''--a statement that will rest 
squarely on factual determinations of repayment patterns demonstrated 
by a recent cohort of student borrowers from that institution, derived 
from data validated through a challenge process in which the 
institution may contest the accuracy of the data elements. The 
statement does not, unlike the warning criticized in a prior court 
ruling, state that the prospective student should expect difficulty in 
repayment.\62\ It merely provides a factually accurate statement that 
ascribes no adverse quality to the institution itself as the cause of 
this pattern.\63\ The regulation does not compel the institution to 
articulate a government position on the cause of that pattern, or to 
engage in or disseminate as true what is ``uncertain, speculative 
estimates.'' Association of Private Sector Colleges & Universities v. 
Duncan, 110 F. Supp. 3d 176, 199 (D.D.C. 2015), aff'd 640 Fed.Appx. 5 
(D.C. Cir. 2016). Rather, the repayment rate provision simply requires 
disclosure of a factual statement that the Department considers 
valuable information to the consumer. The institution is free to 
explain, if it wishes, why it believes that pattern exists, or why it 
believes that the pattern does not indicate that it is unable to 
deliver a quality education. The statement falls well within the 
grounds upheld for other required disclosures.
---------------------------------------------------------------------------

    \62\ ``[A] student who enrolls or continues to enroll in the 
program should expect to have difficulty repaying his or her student 
loans.'' Debt Measure Rule, 76 Fed.Reg. at 34,432. . . . the court 
doubts that the statement that every student in a program ``should 
expect to have difficulty repaying his or her student loans'' is a 
purely factual one. Association of Private Colleges and Universities 
v. Duncan, 870 F. Supp. 2d 133, 155 (D.D.C. 2012).
    \63\ Similarly, the statement simply describes whether borrowers 
are paying ``down'' their loans, a readily understood term meaning 
that the payments made are not reducing the loan amount--not whether 
they are repaying under whichever repayment plan they chose, or are 
in default.
---------------------------------------------------------------------------

    Furthermore, the form, place, and even the actual language of this 
warning may change based on consumer testing or other factors to help 
ensure that the warning is meaningful and helpful to students, and if 
so, the Department will publish those matters in a notice in the 
Federal Register. Sec.  668.41(h)(3). For the financial protection 
disclosures, the Secretary will also conduct consumer testing to 
determine precisely which actions and triggering events that require 
financial protection would be most relevant and important for 
prospective and enrolled students to know, and to determine the 
appropriate language for a disclosure. Sec.  668.41(i).
    We note first that the governmental interest in compelling speech 
is not limited to ``preventing deception,'' as the commenter appears to 
suggest.\64\ This follows from the nature of the test applied to First 
Amendment challenges to compelled speech, as demonstrated in recent 
litigation challenging disclosures mandated by the Department's GE 
regulations. Because the required disclosures/warnings are commercial 
speech, the government may require the commercial disclosure of `purely 
factual and uncontroversial information' as long as there is a rational 
justification for the means of disclosure and it is intended to prevent 
consumer confusion.'' Ass'n of Private Colleges & Universities v. 
Duncan, 870 F. Supp. 2d 133, 155 (D.D.C. 2012). As that court noted in 
upholding a requirement that an institution offering GE programs make 
disclosures about its programs, costs, and student outcomes:

    \64\ Am. Meat Inst. v. U.S. Dep't of Agric., 760 F.3d 18, 22 
(D.C. Cir. 2014) (upholding country of origin labelling 
requirements; overruling prior opinions of that court that limited 
requirements to those aimed at preventing deception).
---------------------------------------------------------------------------

. . . The Department has broad authority ``to make, promulgate, 
issue, rescind, and amend rules and regulations governing the manner 
of operation of, and governing the applicable programs administered 
by, the Department.'' 20 U.S.C. 1221e-3 (2006); see also id. Sec.  
3474 (``The Secretary is authorized to prescribe such rules and 
regulations as the Secretary determines necessary or appropriate to 
administer and manage the functions of the Secretary or the 
Department.''). The disclosures mandated here fall comfortably 
within that regulatory power, and are therefore within the 
Department's authority under the Higher Education Act.

    Ass'n of Private Colleges & Universities v. Duncan, 870 156.\65\ 
The regulations accord the institution a challenge process regarding 
the calculation of the repayment rate itself, as well as an opportunity 
for a hearing to consider challenges to a requirement to provide 
financial protection. These procedures will produce a factual outcome; 
the factual outcome--like the disclosures about costs, placements, 
completion rate and repayment rate mandated in the GE regulations 
already upheld--may themselves also be ``vanilla'' disclosures of 
unpleasant, but factually accurate determinations. How alumni are 
repaying their loans, and whether the school has experienced actions or 
triggering events that pose financial risk to the government (and 
students), are of direct interest to consumers. We believe 
disclosures--and warnings--that convey determinations on those matters 
fall well with the kind of disclosures the courts have upheld.
---------------------------------------------------------------------------

    \65\ In contrast, the court there doubted that the language of 
the warning also required under those regulations (that every 
student in a program ``should expect to have difficulty repaying his 
or her student loans'') would have been ``purely factual and 
uncontroversial information.'' Ass'n of Private Colleges & 
Universities v. Duncan, 870 F. Supp. 2d 155. When that regulation 
was reissued and later challenged on First Amendment grounds, this 
same court upheld the disclosures required in the new rule, and in 
doing so contrasted the ``graphic, compelled speech'' challenged by 
tobacco advertisers in R.J. Reynolds, on which the commenters relay, 
with ``the vanilla, estimated-cost disclosures at issue'' in the 
Department regulation. Id. Moreover, the court further noted that 
even ``R.J. Reynolds acknowledged that the Zauderer standard applies 
not just to purely factual and uncontroversial information, but also 
to `accurate statement[s].' . . . The `total cost' estimates 
contemplated here certainly meet that description.'' Ass'n of 
Private Sector Colleges & Universities v. Duncan, 110 F. Supp. 3d 
176, 200 n.12 (D.D.C. 2015), aff'd sub nom. Ass'n of Private Sector 
Colleges & Universities v. Duncan, 640 F. App'x 5 (D.C. Cir. 2016).
---------------------------------------------------------------------------

    Changes: None.

Proprietary Institution Loan Repayment Warning

General: Repayment Rate

    Comments: A number of commenters supported requiring warnings for 
prospective and enrolled students at proprietary institutions with poor 
repayment rates. They argued that the warnings will provide useful 
information for students as they make educational and borrowing 
decisions. One group of commenters urged the Department to release all 
loan repayment rates publicly, including for

[[Page 76015]]

institutions that are not required to deliver loan repayment warnings 
under Sec.  668.41(h).
    However, several commenters argued that, because repayment behavior 
is not controllable by the institution, the repayment rate is not an 
appropriate institutional performance measure. Another argued that loan 
repayment rate reflects financial circumstances, but not educational 
quality, so it is not appropriate to require institutions to issue 
warnings based on their loan repayment rate.
    Several commenters also raised concerns that Sec.  668.41(h) would 
place an undue burden on institutions and duplicates other established 
disclosure requirements. They contended that the requirement is 
unnecessary, particularly because the proprietary institutions required 
to comply with Sec.  668.41(h) are already subject to the GE reporting 
and disclosure requirements, including a repayment rate disclosure if 
specified by the Secretary; and because the Department already 
publishes both cohort default rates and institutional repayment rates 
on the College Scorecard. Other commenters suggested that the measure 
would increase costs of higher education due to higher administrative 
burden, and contended that the disclosures were not likely to make much 
impact, given the large number of mandated disclosures already in 
place.
    Discussion: We appreciate the comments supporting the repayment 
rate warning provision. We agree that this provision will provide 
critical information for students that will help them to make well-
informed decisions about where to go to college and their financial aid 
use. Repayment rates provide a key indicator of students' post-college 
repayment outcomes, which are of vital interest to students considering 
their families' personal financial circumstances, as well as to 
taxpayers and policymakers. The Department has already worked to 
promote greater access to such information through the GE regulations 
and the College Scorecard; we believe that the repayment rate warning 
requirement in these regulations will provide an important complement 
to those other efforts.
    We do not agree with the commenters who stated that repayment does 
not constitute a measure of educational quality, or the commenter who 
argued that repayment rate is a measure of students' financial 
backgrounds and not academic quality. We believe that all students 
deserve to have information about their prospective outcomes after 
leaving the institution. Particularly for students who expect to borrow 
Federal loans to attend college, it is critical to know whether other 
students have been able to repay their debts incurred at the 
institution.
    However, while we believe that this information is very important 
for prospective students to be aware of and to consider, we agree with 
the concerns that creating a new rate could confuse the borrowers who 
will also receive the GE program-level repayment rate disclosures using 
a different calculation and different cohorts for measuring borrower 
outcomes. While not decisive, we also recognize and understand the 
comments from those who raised concerns that the requirement may be 
overly burdensome because of the differences with the data used in the 
GE calculation. Requiring a separate data corrections process for 
proprietary institutions, which are already subject to reporting 
requirements for repayment rate under GE for virtually all of their 
borrowers, may be needlessly burdensome given the virtually complete 
overlap in students covered.
    To avoid any confusion resulting from a new repayment rate 
calculation, as well as to limit burden on institutions, we are 
revising the repayment rate provision. Under this revised provision, 
the repayment rate data that proprietary institutions report at the 
program level will be used to calculate a comparable repayment rate at 
the institution level. Specifically, the Department will calculate, for 
those borrowers who entered repayment during a particular two-year 
cohort period, the repayment rate as follows: The number of borrowers 
in GE programs who are paid in full or who are in active repayment 
(defined as the number of borrowers who entered repayment and, during 
the most recently completed award year, made loan payments sufficient 
to reduce the outstanding balance of loans received for enrollment in 
the program by at least one dollar), divided by the number of borrowers 
reported in GE programs who entered repayment. Institutions with a 
repayment rate showing that the median borrower has not either fully 
repaid the borrower's loans by the end of the third year after entering 
repayment, or reduced their outstanding balance by at least one dollar, 
over the third year of repayment (which, under the calculation 
methodology, is equivalent to a loan repayment rate of less than 0.5) 
will be subject to a requirement that they include a warning, to be 
prescribed in a later Federal Register notice by the Secretary, in 
advertising and promotional materials. We are also removing the 
proposed requirement for direct delivery of repayment rate warnings to 
prospective and enrolled students, recognizing that the GE regulations 
already require those proprietary institutions to deliver a program-
level disclosure template that includes repayment rate to those 
students. We believe that these changes will reduce administrative 
burden on institutions considerably, and help to ensure that increased 
administrative burden is not passed on by institutions in greater costs 
to students.
    We disagree with the commenters who argued that the disclosures 
would not make much impact. A large and growing body of research 
suggests that in many cases, students and families react to information 
about the costs and especially the value of higher education, including 
by making different decisions.\66\ To maximize the potential for 
effective warnings to students, the Department has revised the 
regulatory language about the warnings that must be included in 
advertising and promotional materials to maximize the likelihood that 
such information will be well presented in a timely manner. We believe 
that this information will build upon, and not conflict with, other 
disclosures that institutions currently make. In particular, we believe 
that the institutional warning requirement in advertising and 
promotional materials will provide a valuable caution to students in 
their early stages of considering which colleges to attend. We also 
believe that the institutional warning requirement will act as a 
complement to other disclosure requirements, including the disclosure 
template required to be provided under the GE regulations and the 
Department's own efforts to promote greater transparency and better-
informed decision-making through the College Scorecard and the 
Financial Aid Shopping Sheet. The Department will also promote this 
information through its own channels to reach students, including 
through the College Scorecard or the FAFSA, after consideration of the 
most effective and efficient ways to do so.
---------------------------------------------------------------------------

    \66\ Wiswall, M., and Zafar, B. (2015). How Do College Students 
Respond to Public Information about Earnings? Journal of Human 
Capital, 9(2), 117-169. DOI: 10.1086/681542. Retrieved from ; 
Hastings, J., Neilson, C.A., and Zimmerman, S.D. (June 2015). The 
Effects of Earnings Disclosure on College Enrollment Decisions. 
Cambridge, MA: National Bureau of Economic Research. NBER Working 
Papers 21300. Retrieved from www.nber.org/papers/w21300; and Hoxby, 
C. and Turner, S. (2015). What High-Achieving Low-Income Students 
Know About College. Cambridge, MA: National Bureau of Economic 
Research. NBER Working Paper No. 20861. Retrieved from www.nber.org/papers/w20861.pdf.

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[[Page 76016]]

    Changes: We have revised the loan repayment rate calculation in 
Sec.  668.41(h), altered the loan repayment rate issuing process to 
reflect that any corrections will occur under the GE regulations, and 
provided that proprietary institutions with a sufficiently large number 
of borrowers who are not covered under GE reporting may be exempt from 
the warning requirement (as described in more detail later in this 
section). We have made conforming changes to separate the loan 
repayment warning delivery provisions, which require a warning to be 
included in advertising and promotional materials but no individual 
disclosure to students, from the delivery provisions for the financial 
protection disclosure required under Sec.  668.41(i) of the final 
regulations, which require delivery of the disclosure to prospective 
and enrolled students.

Legal/Process Concerns

    Comments: Noting that the proposed loan repayment warning was not 
included in the Department's notice announcing its intent to establish 
a negotiated rulemaking committee published in the Federal Register on 
August 20, 2015 (80 FR 50588), one commenter contended that the 
requirement falls outside the scope of the rulemaking process.
    Discussion: The first session of negotiated rulemaking, held 
January 12-14, 2016, included a discussion of the potential 
consequences for ``conditions that may be detrimental to students,'' 
including the possibility of disclosure requirements and student 
warnings. The Department proposed regulatory text concerning a 
repayment rate warning at the second negotiated rulemaking session 
(February 17-19, 2016), and the committee discussed the proposal during 
the second and third sessions. Moreover, the negotiated rulemaking 
process ensures that a broad range of interests and qualifications are 
considered in the development of regulations. We believe that 
sufficient notice was provided about the potential for inclusion of the 
repayment rate warning, and that the negotiators involved in developing 
these regulations were well-qualified to explore the option.
    Changes: None.
    Comments: One commenter argued that the loan repayment rate 
provision does not constitute ``reasoned decision-making,'' because the 
Department did not explain the evaluation of repayment on an 
individualized basis; the use of a median, rather than an average, 
borrower to determine the school's rate; the zero percent threshold; 
the length of the measurement window; and the exemption of in-school 
and military deferments only in the final year. Another commenter 
asserted that the requirement is arbitrary and capricious because 
several points in the preamble (such as the level of the calculation 
and the data challenge process) were unclear.
    Discussion: We disagree with the commenters who stated that the 
repayment rate warning provision is arbitrary and capricious, and that 
it does not constitute reasoned decision-making. The repayment rate 
measure identified in the proposed regulations, while different from 
other repayment rate measures the Department has used in other 
contexts, was designed to measure repayment outcomes in greater detail 
than existing measures do (for instance, by looking at the percentage 
of the balance repaid rather than the share of borrowers who met a 
binary threshold of paying down at least one dollar in principal).
    However, as described earlier, the Department has revised the 
repayment rate provision in the final regulations to mirror the 
program-level rates used under the GE regulations. Those rates 
calculate the share of borrowers who have made progress in repaying 
their loans, and will rely exclusively on data reported already under 
the GE regulations. We believe that these changes address the concerns 
of the commenters.
    Changes: We have revised the calculation of the loan repayment rate 
in Sec.  668.41(h), as previously described.

Proprietary Sector Requirement

    Comments: Several commenters wrote that limiting the repayment rate 
provision to proprietary institutions is reasonable, given the 
differences in structure between those institutions and other sectors 
and the data that indicate poor repayment outcomes are widespread in 
the for-profit sector.
    However, many commenters disagreed with the Department's proposal 
to limit the requirement to proprietary institutions. One commenter 
questioned the validity of the Department's argument that limiting the 
applicability of Sec.  668.41(h) to proprietary institutions reduces 
the burden on institutions because only certain institutions benefit 
from the reduced burden. Noting that there is no similar limitation 
applicable to financial protection disclosures, one commenter suggested 
that the Department's limitation of the repayment rate provision to 
proprietary institutions was inconsistent. Some commenters argued that 
the Department was ignoring the needs of students at the estimated 30 
percent of public and private nonprofit institutions with similarly low 
repayment rates that are not subject to the warning requirement, 
particularly because a majority of Federal student loan borrowers 
attend public institutions. Others stated that a repayment rate warning 
requirement for public and private nonprofit institutions is necessary 
to help students understand their choices and contextualize the 
information available to them. Several of these commenters proposed 
that public and private nonprofit institutions be required to disclose 
that the Department had not calculated a loan repayment rate for the 
institution and that it is therefore not possible to know whether the 
institution's repayment rate is acceptable.
    Some commenters contended that there is no rationale for limiting 
the warning requirement to the proprietary sector. Other commenters 
stated that the Department lacked sufficient research to support the 
proposed regulations. Several commenters argued that the information 
cited as justification for limiting the repayment rate warning 
requirement to the proprietary sector was overstated or invalid. One 
commenter suggested that the Department cited inaccurate data from the 
College Scorecard. Several commenters noted that they could not 
replicate their Scorecard repayment rates due to inconsistencies in the 
National Student Loan Data System (NSLDS) data underlying the measure. 
Another commenter suggested that the cohort used to support the 
analysis did not reflect typical cohorts, since those students entered 
repayment during a recession. Several other commenters contended that 
the decision to limit the warning requirement to proprietary 
institutions violates GEPA and has no basis in the HEA.
    A number of commenters suggested removing the loan repayment 
warning provision entirely, while several proposed expanding its 
application to all institutions with low repayment rates, regardless of 
sector. Several commenters suggested limiting the repayment rate 
warning requirement to institutions at which a majority of students are 
enrolled in programs subject to the Department's GE regulations, 
because, according to the commenters, students at career-oriented 
institutions frequently have misconceptions about their likely 
earnings. Alternatively, commenters suggested limiting the requirement 
to schools with ``financially interested boards'' to include 
proprietary

[[Page 76017]]

institutions that have converted to nonprofit status.
    Discussion: We appreciate the comments supporting the limitation of 
the repayment rate warning to proprietary institutions in light of the 
concentration of poor repayment outcomes in the proprietary sector and 
the risk of excessive and unnecessary burden to institutions with a far 
lower likelihood of poor repayment rates. As discussed in both the NPRM 
\67\ and in the Gainful Employment final regulations,\68\ a wide body 
of evidence demonstrates that student debt and loan repayment outcomes 
are worse for students in the proprietary sector than students in other 
sectors.
---------------------------------------------------------------------------

    \67\ www.regulations.gov/document?D=ED-2015-OPE-0103-0221.
    \68\ www.regulations.gov/document?D=ED-2014-OPE-0039-2390.
---------------------------------------------------------------------------

    Most students in the proprietary sector borrow Federal loans, while 
borrowing rates among public and private nonprofit institutions are far 
lower; and debt levels are often higher. For instance, as also noted in 
the final Gainful Employment regulations, in 2011-2012, 60 percent of 
certificate students who were enrolled at for-profit two-year 
institutions took out Federal student loans during that year, compared 
with 10 percent at public two-year institutions. Of those who borrowed, 
the median amount borrowed by students enrolled in certificate programs 
at two-year for-profit institutions was $6,629, as opposed to $4,000 at 
public two-year institutions. Additionally, in 2011-12, 66 percent of 
associate degree students who were enrolled at for-profit institutions 
took out student loans, while only 20 percent of associate degree 
students who were enrolled at public two-year institutions did so. Of 
those who borrowed in that year, for-profit two-year associate degree 
enrollees had a median amount borrowed during that year of $7,583, 
compared with $4,467 for students at public two-year institutions.\69\
---------------------------------------------------------------------------

    \69\ National Postsecondary Student Aid Study (NPSAS) 2012. 
Unpublished analysis of restricted-use data using the NCES 
PowerStats tool.
---------------------------------------------------------------------------

    In addition to higher rates of borrowing, students at proprietary 
schools also default at higher rates than borrowers who attend schools 
in other sectors. Proprietary institutions have higher three-year 
cohort default rates than other sectors (15.0 percent, compared with 
7.0 percent at private nonprofit institutions and 11.3 percent at 
public institutions in fiscal year 2013), and enroll a disproportionate 
share of students who default relative to all borrowers in the 
repayment cohort.\70\
---------------------------------------------------------------------------

    \70\ ``Comparison of FY 2013 Official National Cohort Default 
Rates to Prior Two Official Cohort Default Rates.'' U.S. Department 
of Education. Calculated August 6, 2016: http://www2.ed.gov/offices/OSFAP/defaultmanagement/schooltyperates.pdf.
---------------------------------------------------------------------------

    In the final regulations, the Department seeks to reduce confusion 
among students and families by using rates that parallel the Gainful 
Employment program-level repayment rate, including using the same 
cohorts of students as the GE rates do. As a result of these changes, 
the repayment rate will be calculated using data that institutions 
already report to the Department through the GE regulations, rather 
than through a distinct data reporting and corrections process. This 
eliminates many of the concerns raised by commenters and discussed in 
the NPRM about the burden to institutions of complying with the 
repayment rate calculation provision.
    However, the Department believes that, because of the changes, it 
would be inappropriate to apply an institutional warning to sectors 
other than the proprietary sector, because public and private nonprofit 
institutions are not typically comprised solely of GE programs and the 
repayment rate warning may not be representative of all borrowers at 
the school. Federal student loan borrowers also typically represent a 
relatively small proportion of the student population in the public 
sector, whereas borrowing rates are much higher, on average, at 
proprietary institutions (for instance, among full-time undergraduates 
enrolled in 2011-12, 19.7 percent borrowed Stafford loans at public 
less-than-two-year institutions, compared with 82.9 percent at for-
profit less-than-two-year institutions and 83.3 percent at for-profit 
two-year-and-above institutions).\71\ Moreover, the mix of programs at 
public and private nonprofit institutions may shift from year to year, 
changing the share of GE borrowers at the institution on an annual 
basis; including such institutions in the repayment rate requirement 
would require the Department to expend annual efforts to identify 
schools that are comprised entirely of GE programs for a relatively 
small number of schools. Therefore, this requirement is limited only to 
proprietary institutions. We recognize that some proprietary 
institutions may have Federal student loan borrowers in non-GE programs 
under section 102(b)(1)(ii) of the HEA. Accordingly, the final 
regulations specify that proprietary institutions with a failing 
repayment rate may appeal to the Secretary for an exemption from the 
warning requirement if they can demonstrate that including non-GE 
borrowers in the rate would increase the rate to passing.
---------------------------------------------------------------------------

    \71\ U.S. Department of Education, National Center for Education 
Statistics, 2007-08 and 2011-12 National Postsecondary Student Aid 
Study (NPSAS:08 and NPSAS:12). (This table was prepared July 2014.) 
https://nces.ed.gov/programs/digest/d15/tables/dt15_331.90.asp?current=yes.
---------------------------------------------------------------------------

    With these changes, we believe that the Department's decision to 
limit the repayment rate warning to proprietary institutions is well-
founded and does not raise concerns about excessive burden or 
inaccurate representation of student outcomes, and we disagree with the 
commenters who stated that the limitation to proprietary schools is not 
appropriate.
    In response to the commenter who asserted that requiring only 
proprietary institutions to disclose repayment rates is inconsistent, 
as noted earlier, we decided to limit the repayment rate warning 
requirement to the sector of institutions where the frequency of poor 
repayment outcomes is greatest. Also as described earlier, the 
Department's analysis of data shows the financial risk to students to 
be far more severe in the proprietary sector; and data suggest that an 
institution-wide warning about borrower outcomes is more appropriate in 
the proprietary sector, given higher rates of borrowing among students 
(particularly in GE programs).
    While we recognize some users' concerns with specific elements of 
the data cited in the NPRM, we believe that the data corrections 
process that will be established through the GE regulations will ensure 
the accuracy of the information on which the warning in advertisements 
and promotional materials is based. We recognize the concerns of the 
commenter who stated that the data cited in the NPRM reflect a cohort 
that entered repayment during the recession, but believe that this 
regulation will appropriately capture the actual outcomes of students, 
given that even students who enter repayment during a recession will be 
required to repay their loans in accordance with the terms and 
conditions of the Federal student loan programs. The provision of GEPA 
to which the commenter refers requires uniform application of 
regulations throughout the United States. 20 U.S.C. 1232(a). The HEA 
authorizes the Department to adopt disclosure regulations as does the 
general authority of the Secretary in 20 U.S.C. 1221e-3 and 20 U.S.C. 
3474. Assn. of Private Coll. and Univs. v. Duncan, 870 F. Supp. 2d at 
156. We believe that our analysis of the outcomes provides a reasonable 
basis on

[[Page 76018]]

which to focus this requirement on for-profit schools.
    We disagree with the commenters who propose to remove the repayment 
rate warning provision from the regulations. The Department believes 
that this information is critical to ensure students and families have 
the information they need to make well-informed decisions about where 
to go to college. Given the concerns discussed earlier about the 
inaccuracy of applying a warning to an entire institution based on data 
that do not necessarily represent all borrowers at the school, and the 
added burden both on public and private nonprofit institutions and on 
the Department to identify the relatively few institutions that might 
be accurately represented by such a rate, we believe it is appropriate 
to maintain the repayment rate warning provision only for proprietary 
schools. We appreciate the comments from those who suggested tying the 
repayment rate warning requirement to those institutions with a 
significant proportion of students in GE programs, and have adopted a 
version of that requirement (i.e., the warning requirement applies only 
to those institutions at which a majority of GE borrowers are not in 
active repayment or repaid in full; and only at proprietary 
institutions, where effectively all programs are subject to the GE 
requirements). While we appreciate the comments from those who proposed 
instead limiting the requirement to ``financially interested boards'' 
to prevent certain institutions from avoiding the requirements, we 
believe that the requirements as stated in the final regulations will 
cover the vast majority of students at institutions with such boards, 
and that the added burden of identifying those institutions in another 
way would not yield much additional coverage for the requirement.
    Changes: We have revised Sec.  668.41(h) to provide that, if a 
proprietary institution has a repayment rate that shows that the median 
borrower has not either fully repaid, or made loan payments sufficient 
to reduce by at least one dollar, the outstanding balance of the 
borrower's loans, it may seek to demonstrate to the Secretary's 
satisfaction that it has borrowers in non-GE programs who would 
increase the school's repayment rate above the threshold for the 
warning requirement if they were included in the calculation. If an 
institution demonstrates this to the Secretary's satisfaction, it will 
receive an exemption from the warning requirement.

Income-Driven Repayment (IDR) Enrollment

    Comments: A number of commenters asserted that Sec.  668.41(h) 
conflicts with the Administration's income-based repayment plan 
enrollment campaigns. One commenter pointed to a Council of Economic 
Advisers report that states that borrowers on IDR plans are from more 
disadvantaged backgrounds than those on the standard repayment plans, 
suggesting that borrowers' investments in higher education pay off over 
time. That commenter contended that measuring borrowers' repayment 
behavior in the first five years is not appropriate because of the 
long-term payoff of postsecondary education. Other commenters argued 
that institutions would be unfairly--and retroactively--penalized for 
encouraging students to sign up for IDR plans.
    Several commenters proposed to remove from the repayment rate 
calculation any borrower making payments under any Federal repayment 
plan, including IDR plans. Alternatively, one of the commenters 
proposed that the Department should allow institutions to include in 
the warning to students that the negative amortization of its borrowers 
occurred because of federally authorized repayment plans where that is 
the case.
    Discussion: We disagree with the commenters' statements that 
income-driven repayment plans conflict with the loan repayment warning 
provision. The IDR plans that Congress and the Department provide to 
borrowers were created to act as a safety net for struggling 
borrowers--those whose debts are sufficiently high, or incomes are 
sufficiently low, to make repaying them on the expected timeline 
exceedingly difficult. However, a post-college safety net program for 
borrowers does not eliminate the responsibility the institution has to 
provide a high-quality education that ensures borrowers are able to, at 
a minimum, afford to pay down their loans, even in the first years 
after entering repayment. Moreover, the Department agrees with the 
commenter who noted that many of the borrowers currently enrolled in 
income-driven repayment (IDR) plans would otherwise be in distress on 
their loans, and may thus be in negative amortization regardless of 
whether they were on an IDR plan or may have defaulted. For instance, a 
recent report from the Council of Economic Advisers found that over 40 
percent of borrowers who entered repayment in fiscal year 2011 and 
later enrolled in income-driven repayment had defaulted, had an 
unemployment or economic hardship deferment, or had a single 
forbearance of more than two months in length before entering their 
first income-driven repayment plan.\72\ While the report shows that 
measurements of short-term distress were mitigated for the borrowers 
who enrolled in income-driven repayment plans, the Department believes 
that the fact that such borrowers experienced types of financial 
distress--whether failure to pay down the outstanding balance of the 
loans or deferments, forbearances, and defaults that suggest acute 
problems in repaying in the initial several years after leaving 
school--constitute critical information that prospective students and 
potential borrowers should be aware of prior to making enrollment or 
financial aid decisions. To that point, we do not agree with the 
commenters who stated that enrollment in IDR plans among students would 
unfairly penalize institutions; on the contrary, borrowers who enroll 
in IDR plans and still do not have sufficiently high incomes or low 
debts to pay down the balance on their loans are experiencing precisely 
the negative post-college outcomes about which students, taxpayers, and 
the Department should have concerns. This argument is especially 
relevant for institutions that are eligible for title IV, HEA aid on 
the basis of providing educational programs that prepare students for 
gainful employment in a recognized occupation. Students considering 
such programs should be warned if the majority of borrowers do not have 
sufficient income to pay down their Federal student debt, even if those 
borrowers are protected from default by enrolling in IDR plans.
---------------------------------------------------------------------------

    \72\ ``Investing in Higher Education: Benefits, Challenges, and 
the State of Student Debt.'' Council of Economic Advisers. July 
2016: www.whitehouse.gov/sites/default/files/page/files/20160718_cea_student_debt.pdf.
---------------------------------------------------------------------------

    Changes: None.

Inconsistency of Rates

    Comments: Several commenters noted that the Department has 
considered many variations of a repayment rate calculation in recent 
years. They stated that none of these rates has been subject to peer-
review research and that the Department has not sufficiently supported 
its proposal with research. Several commenters raised concerns that the 
use of multiple repayment rates would lead to significant confusion. 
These commenters urged the Department to use an existing definition of 
repayment rate, or to remove the provision entirely.
    Discussion: We appreciate the commenters' concerns that multiple

[[Page 76019]]

repayment rates, particularly where provided to the same students, may 
lead to confusion. While we believe that this is important information 
for students and families to consider while deciding where to apply and 
enroll in college, we do not wish to create confusion for borrowers.
    To that end, as described earlier, the Department has revised the 
repayment rate provision in the final regulations to mirror the 
program-level rates used under the GE regulations. Those rates 
calculate the share of borrowers who have made progress in repaying 
their loans; and will rely exclusively on data already reported under 
the GE regulations. We believe that these changes address the 
commenters' concerns. Moreover, the GE definition of ``repayment rate'' 
has been subjected to research, analysis, and consumer testing by the 
field.
    Changes: We have revised the calculation of the loan repayment rate 
in Sec.  668.41(h), as described in more detail earlier in this 
section.

Technical Comments About the Calculation

    Comments: A number of commenters suggested specific changes to the 
repayment rate. One commenter disagreed with the Department's proposed 
use of a median repayment rate, rather than a mean. Several others 
argued that an institutional median is not appropriate because post-
college repayment outcomes may vary significantly by program. One 
commenter was confused as to whether the loan repayment rate would be 
calculated on a per-borrower or a per-loan basis. Another commenter 
proposed to separate out, and create distinct loan repayment rates and 
warnings for graduate, undergraduate, and Parent PLUS Loan debts. 
Several commenters stated that the treatment of consolidation loans was 
unclear. One commenter suggested changing treatment of payments on 
consolidation loans by attributing the same payments to loans at 
multiple institutions, rather than attributing payments based on the 
share of debt from each institution.
    One commenter expressed confusion over the use of ``accrued 
interest'' in the definition of ``original outstanding balance,'' and 
the use of ``capitalized interest'' in the definition of current 
outstanding balance for the repayment measure. Another commenter 
proposed that, for graduate programs that prepare students for medical 
residencies, the original outstanding balance should be defined as the 
principal balance after the medical residency forbearance period.
    Other commenters suggested minor changes to the proposed 
calculation. One commenter argued that the Department proposed 
inconsistent treatment of borrowers who default on their loans. This 
commenter urged the Department to ensure that all defaulters appear as 
a zero percent repayment rate, or that defaulters are given no distinct 
treatment. Another commenter proposed that, under Sec.  
668.41(h)(6)(i), there should be a minimum of 30 students in the 
cohort, rather than 10, before requiring a loan repayment warning.
    As noted earlier, several commenters argued that the zero percent 
repayment rate threshold was not supported by any evidence or analysis, 
and one contended that it is legally unsupportable.
    Several commenters raised concerns about the five-year window for 
measuring borrowers' repayment. Some argued that the five-year 
measurement period is not predictable because of insufficient data. 
Some commenters argued that a two- or three-year measurement period 
would be better supported; or alternatively, proposed to use a 10-year 
window. Another commenter stated that analysis of data from the College 
Scorecard found that three- or seven-year repayment rates would be more 
reliable. One commenter argued that the repayment rate window for 
medical schools should be seven years, as in the Gainful Employment 
regulations; while another commenter proposed that repayment rates for 
graduate programs that prepare students for medical residencies should 
be measured five years from the end of their medical residency 
forbearance period.
    Several commenters raised concerns about excluding from the 
measurement only those students who are in certain deferments during 
the measurement year. One commenter proposed to extend the measurement 
window of borrowers who spend several years in in-school deferments, 
while others proposed to exclude any borrower who entered an in-school 
or military deferment at any point during the measurement period.
    Several commenters argued that borrowers' backgrounds affect their 
repayment rates; one commenter asserted that when borrowers' 
backgrounds are taken into consideration, repayment rates of low-income 
students and students enrolled at proprietary institutions are similar 
to those of their higher-income peers. One commenter suggested that the 
Department should revise the loan repayment rate methodology to exclude 
all borrowers with an Expected Family Contribution of zero dollars in 
any year of attendance. Another proposed to disclose the percentage of 
Pell Grant recipients or adjust the threshold at institutions with a 
high enrollment of Pell Grant recipients.
    Discussion: We appreciate the commenters' concerns about the 
specific calculation of the repayment rate. We have made changes to the 
calculation of the repayment rate, as described earlier, that address 
or eliminate many of the concerns raised, including clarifying that the 
median rate over a mean is comparable to a proportion of borrowers; the 
use of program-level data to calculate an institution-level rate, 
ensuring that borrowers in GE programs receive warnings if either or 
both rates raise cause for concern; and whether the rate would be 
calculated on a per-borrower or per-loan basis (because the rate was 
replaced by a proportion of borrowers who have not repaid at least one 
dollar in outstanding balance). We disagree with the commenter who 
suggested that creating distinct repayment rates and warning 
requirements for particular programs is necessary, because such rates 
will already be made available at the educational program level through 
the GE regulations; this warning requirement is designed to complement 
and supplement that rate with a broader measure of the entire 
institution.
    We believe that we have clarified the treatment of consolidation 
loans, which will mirror the treatment of such loans in the GE 
regulations. We also believe that additional clarification of the 
definitions of ``accrued'' and ``capitalized'' interest, and one 
commenter's proposed change to the definition for graduate programs 
that prepare students for medical residencies, is not necessary because 
the repayment rate will instead rely on data already reported under the 
GE regulations. Similarly, the treatment of defaulted student loans 
will mirror the GE data that are already reported to the Department. We 
will continue to use a minimum cohort size of 10, rather than 30 as one 
commenter proposed, because 10 is a sufficiently large size to meet 
both minimum requirements and best practices for the protection of 
student privacy; a minimum count of 10 borrowers is also the standard 
already used in the GE regulations for repayment rate and other 
metrics. With respect to concerns from several commenters about the use 
of negative amortization as a threshold for requiring warnings, we 
disagree that there is no support in research for doing so. Based on 
internal analysis of data from the National Student Loan Data System

[[Page 76020]]

(NSLDS), the typical borrower in negative amortization--more than half 
of those who have made no or negative repayment progress in the third 
year after entering repayment--experienced long-term repayment hardship 
such as default. Those borrowers are especially unlikely to satisfy 
their loan debt in the long term.\73\ Additionally, several public 
comments received and papers published during the negotiations for the 
Department's GE regulations include reference to negative-amortization 
thresholds for student loan repayment rates.\74\ Moreover, we believe 
this will be an understandable measure to help inform consumer choice.
---------------------------------------------------------------------------

    \73\ Analysis of NSLDS data was based on a statistical sample of 
two cohorts of borrowers with FFEL Loans and Direct Loans entering 
repayment in 1999 and 2004, respectively. The repayment statuses of 
the loans were tracked at 10 and 15 years after entry into 
repayment, depending on the age of the cohort.
    \74\ For instance, ``TICAS Detailed Comments on Proposed Gainful 
Employment Rule,'' The Institute for College Access and Success. May 
27, 2014. http://ticas.org/content/pub/ticas-detailed-comments-proposed-gainful-employment-rule; and Miller, Ben. ``Improving 
Gainful Employment: Suggestions for Better Accountability.'' New 
America. www.newamerica.org/education-policy/policy-papers/improving-gainful-employment/.
---------------------------------------------------------------------------

    We agree with commenters who stated that a measurement three years 
after entering repayment (e.g., examining borrowers' outcomes three 
years after they enter repayment) is well supported. Given the other 
changes to the repayment rate calculation made to mirror the GE 
repayment rate metric, we will use this period, rather than the five-
year period included in the proposed regulations, to calculate the 
institutions' rate. We believe that a 10-year window, as some 
commenters proposed, would be too long to provide relevant and timely 
data; such long-term outcomes would fail to incorporate improvement in 
quality or other changes at the institution since those borrowers 
entered repayment, and would likely fail to capture many of the signs 
of short-term financial distress that some borrowers experience. We 
agree with the commenter who stated that the repayment rate window 
should be lengthened for medical schools; we are revising the provision 
to provide that the same period will be used for this requirement as is 
used in the GE regulations.
    With respect to comments raised about students who use in-school or 
military deferments, we will again mirror the provisions outlined in 
the GE regulations. Because that calculation measures active repayment 
during the most recently completed award year, we believe that we have 
addressed concerns about borrowers who may have used deferments in the 
interim. For the purposes of this calculation, the Department plans to 
rely on the data reporting and data corrections under the GE 
regulations for the purposes of calculating repayment rates.
    We disagree with the commenters who stated that borrowers' 
backgrounds drive their ability to repay, and that institutions should 
therefore not be held accountable for their repayment rates. One of the 
central missions of institutions of higher education is to ensure low-
income students receive an education that will help them to earn a 
living and successfully repay their loans. At institutions where more 
than half of borrowers do not successfully pay down the balance on 
their loans, the Department believes that students have the right to 
know--before they enroll or borrow financial aid--that the majority of 
borrowers have not repaid even one dollar in outstanding balance three 
years out of school.
    Changes: We have revised Sec.  668.41(h) as described earlier in 
this section.

Challenge Process

    Comments: One commenter asked the Department to clarify whether 
institutions will have an opportunity to challenge the Department's 
student-level data. Another commenter recommended that the Department 
use a 20.8 percent borrowing rate in place of the proposed two-step 
borrowing rate calculation in order to simplify the calculation and 
reduce the associated burden.
    Discussion: We appreciate the commenter's concern for the accuracy 
of the data. Given the changes to the rate described earlier, there 
will be no additional data corrections process beyond the one already 
provided for in the GE regulations. Institutions will already be 
responsible for reporting accurate data under the GE regulations, and 
for making any necessary corrections to the data. The Department will 
use those already-corrected data to derive the institution-level 
repayment rate. However, a proprietary institution at which the median 
borrower has not repaid in full, or paid down the outstanding balance 
of, the borrower's loans may receive an exemption from the warning 
requirement if the institution demonstrates that not all of its 
programs constitute GE programs and that if the borrowers in the non-GE 
programs were included in the calculation of the loan repayment rate, 
the loan repayment rate would be equal to or greater than 0.5, meaning 
that the median borrower had paid down the outstanding balance of the 
borrower's loans by at least one dollar.
    Additionally, we do not believe the participation rate index (i.e., 
the index comparable to the 20.8 percent borrowing rate percentage) 
appeal is still necessary under this revised version of the repayment 
rate. The GE repayment rate calculation does not include such an 
exception, and limiting the warning requirement only to proprietary 
institutions means that the rates will cover all borrowers at the 
institution, accurately representing the universe of students with 
Federal loan debt. In the interest of ensuring consistency between the 
GE repayment rates and this one, and of reducing burden on both 
institutions and the Department, we have removed the participation rate 
index appeal.
    Changes: We have revised Sec.  668.41(h) to remove the data 
corrections process and the participation rate index appeal. We have 
also added Sec.  668.41(h)(4)(ii), which creates an exemption to the 
warning requirement for institutions that demonstrate that they have 
borrowers in non-GE programs and that, if those borrowers were included 
in the loan repayment rate calculation, the loan repayment rate would 
meet the threshold.

Warnings

    Comments: Several commenters supported using a plain-language 
warning that has been tested with consumers, and that is timely for 
students. One commenter supported incorporating those warnings into 
institutional promotional materials, and suggested expanding the 
definition of ``promotional materials'' to include all materials and 
services for which an institution has paid or contracted. Several 
commenters requested that we further clarify how the warning must be 
presented, so that it is not difficult for the public to see. Other 
commenters expressed disappointment that the proposed regulations do 
not require institutions to deliver repayment rate warnings to 
prospective students at the first contact with those students, when the 
information may be most valuable to students, and strongly supported 
including such a requirement in the final regulations.
    However, several commenters suggested that the loan repayment 
warning raises First Amendment concerns. Some commenters believed that 
the requirement would both target institutions at which borrowers are 
appropriately using IDR plans and excuse private nonprofit and public 
institutions with similarly poor loan repayment rates. One commenter 
raised concerns that the specific language provided for illustrative 
purposes in the

[[Page 76021]]

NPRM did not accurately describe the loan repayment rate.
    One commenter believed that the warning would be most effective if 
it were included within other loan and borrowing information, rather 
than delivered separately along with other disclosures. The commenter 
also stated that institutions should not be required to provide the 
warning to students who do not intend to borrow Federal student loans.
    Several commenters argued that requiring institutions to include 
the entire content of the warning in advertising and promotional 
materials would be cost-prohibitive. Instead, commenters proposed that 
institutions provide a briefer statement, similar to the requirements 
in the Gainful Employment regulations.
    Discussion: We appreciate the support of commenters who stated that 
they agreed with the Department's proposed use of a plain-language, 
consumer-tested warning. We also agree with commenters who supported 
incorporating warnings into a wider range of promotional materials, and 
have strengthened the definitions for warnings and promotional 
materials accordingly. We recognize and agree with the concerns of 
commenters who suggested additional clarity around the presentation of 
the warning to prevent obfuscation. To that end, we have clarified the 
requirements for promotional materials to ensure the warning will be 
prominent, clear, and conspicuous, including a variety of conditions 
both for advertising and promotional materials. The Secretary may 
require the institution to modify its materials if the Department 
determines that the warning is not sufficiently prominent or 
conspicuous. The Secretary may also issue guidance describing form, 
place, and manner criteria that would make the warning sufficiently 
prominent, clear, and conspicuous.
    We also appreciate the perspective of commenters who supported 
hand-delivered warnings at early stages in a student's college search. 
However, we recognize that many of these goals will be accomplished 
under the GE regulations, which require that program-level data be 
provided on a GE disclosure template to students. To that end, we have 
removed the requirement that an institution-level warning also be 
provided directly to prospective and enrolled students, and instead 
will require that the warnings be provided through advertising and 
promotional materials. This also resolves the concerns of the commenter 
who believed that the warning would be most effective if accompanied by 
other loan and borrowing information; and the commenter who argued that 
institutions should be required to provide the warning directly to only 
those students who intend to borrow Federal student loans.
    While we recognize that some institutions believe providing these 
warnings in advertising and promotional materials would be cost-
prohibitive, we believe that this is important information to help 
students themselves make critical cost-benefit analyses prior to 
investing their time and money in an institution.
    We address the First Amendment concerns above in the section 
``Warnings'' and do not repeat them here. We also remind commenters 
that the warning language included in the final regulations may be 
subject to consumer testing and may change in accordance with the 
results of that testing. The precise warning language, if revised, will 
be published in the Federal Register by the Secretary.
    Changes: We have revised Sec.  668.41(h) to remove the delivery of 
a repayment rate warning to prospective and enrolled students. Instead, 
we have strengthened the requirements under Sec.  668.41(h)(3) to 
ensure the materials are appropriately provided in advertising and 
promotional materials.

Agreements Between an Eligible School and the Secretary for 
Participation in the Direct Loan Program (Section 685.300)

Legal Authority and Basis for Regulating Class Action Waivers and 
Arbitration Agreements

    Comments: Several commenters objected that the Department lacks the 
legal authority to ban either mandatory predispute arbitration 
agreements or class action waivers. These commenters strongly believed 
that by this regulation, the Department would be inappropriately 
interfering with institutional operations, violating established 
Federal law, and interfering with parties' freedom to contract. 
Commenters suggested that the Department has ignored clear messages 
from both Congress and the Supreme Court indicating Federal policy 
favoring arbitration.
    Many commenters argued that the Federal Arbitration Act (FAA) 
precludes the Department from restricting the use of arbitration 
agreements. Commenters noted that the FAA makes arbitration agreements 
``valid, irrevocable, and enforceable as written,'' reflecting a 
national preference for resolving disputes by arbitration. These 
commenters believed that the proposed regulations run counter to public 
policy and violate the FAA. According to commenters, the prohibition on 
arbitration in the proposed regulations is precisely the type of agency 
action that Congress sought to curtail with the FAA.
    The commenters asserted that the Supreme Court has repeatedly 
demonstrated its support for the FAA and for arbitration as an 
effective method of dispute resolution. Commenters cited cases in which 
they view the Supreme Court as having struck down regulations and 
statutes that are inconsistent with the pro-arbitration policy 
established by the FAA, such as DirecTV v. Imburgia, 136 S.Ct. 463 
(2015). Commenters further cited to a line of Supreme Court precedent 
favoring arbitration, including Hall St. Assocs., L.L.C. v. Mattel, 
Inc., 552 U.S. 576 (2008), and Moses H. Cone Mem. Hosp. v. Mercury 
Constr. Corp., 460 U.S. 1 (1983). According to these commenters, the 
Department's proposed regulations are contrary to well-established law.
    Commenters contended that, under the FAA, the Department may not 
issue the proposed regulations absent a clear congressional command, 
which they argued the Department lacks. According to commenters, when 
Federal law is silent as to whether Congress intended to override the 
FAA for a claim, the FAA requires that an arbitration agreement be 
enforced according to its terms. Here, in the absence of explicit 
congressional command, commenters believed that the Department is not 
authorized to restrict arbitration. To support this position, 
commenters noted that Congress has granted the necessary authority to 
other agencies in other circumstances. Commenters suggested that 
because Congress has granted agencies this authority in the past, but 
has not granted this authority to the Department, this silence means 
that Congress did not intend for the Department to exercise such 
authority.
    Specifically, commenters stated that the HEA does not authorize the 
Department to supersede the FAA. As a result, commenters contended that 
the proposed ban on arbitration must yield to the FAA. Specifically, 
commenters noted that sections 454(a)(6) and 455(h) of the HEA, which 
the Department cites in the proposed regulations, provide no indication 
that the Department is authorized to override the FAA. One commenter 
contended that the Department has misinterpreted its statutory mandate 
by relying on these provisions to justify the proposed arbitration ban. 
Specifically, this

[[Page 76022]]

commenter asserted that, unlike other sections of the HEA, section 
454(a)(6) does not contain a provision that expressly makes the FAA 
inapplicable. According to the commenter, the Department should 
interpret this distinction to mean that the Department may not 
disregard the FAA in its actions pursuant to this provision.
    Further, another commenter stated that section 454(a) of the HEA 
does not relate to contracts between students and schools and that none 
of the current regulatory requirements governing PPAs regulate 
contracts between students and the institution. These commenters 
objected that the Department is acting outside the scope of its 
statutory authority by attempting to become involved in contractual 
relationships between students and institutions.
    Other commenters, in contrast, asserted that the Department has 
authority to regulate the use of arbitration. One commenter stated that 
the FAA does not limit the Department's ability to require schools to 
remove forced arbitration clauses and class action waivers from 
enrollment contracts. The commenter noted that the FAA legal analysis 
is not triggered in the absence of an arbitration clause and that the 
FAA does not preclude laws or regulations preventing parties from 
placing arbitration provisions in their contracts. This commenter 
asserted that the history of the FAA and judicial treatment of 
arbitration provisions does not suggest an absolute right to impose an 
arbitration agreement.
    Another commenter strongly asserted that the Department may 
condition Federal funding on a school's agreement not to use forced 
arbitration clauses without violating the FAA. This commenter cited to 
section 2 of the FAA, stating that agreements to arbitrate are ``valid, 
irrevocable, and enforceable,'' except where grounds ``exist at law or 
in equity for the revocation of any contract.'' This commenter 
suggested that the proposed regulations would not interfere with 
existing arbitration agreements and that students would still have the 
ability to arbitrate if they chose to do so. One commenter noted that 
the Department's authority to adopt stand-alone conditions on funding 
as part of its PPAs is broad with respect to the Direct Loan Program, 
and stated that barring predispute arbitration agreements is within the 
scope of this authority. The commenter noted that including this 
restriction in PPAs would force schools to internalize the cost of 
their misconduct and minimize costs imposed on the public.
    Another commenter cited the Spending Clause of the Constitution in 
support of its position that the Department is authorized to impose 
conditions of this nature on Federal funding recipients. The commenter 
stated that the Supreme Court has recognized the constitutionality of 
such conditional funding in South Dakota v. Dole, 483 U.S. 203 (1987). 
In addition to citing this holding, the commenter noted that other 
agencies, such as the U.S. Commodity Futures Trading Commission (CFTC) 
and the U.S. Department of Defense (DoD) place similar conditions on 
recipients of their funding.
    Discussion: Addressing the comment that the Department lacks legal 
authority to ban either class action waivers or predispute arbitration 
agreements regarding borrower-defense type claims, we repeat the 
position and rationale for each as stated in the NPRM. As we stressed 
there, the HEA gives the Department the authority to impose conditions 
on schools that wish to participate in a Federal benefit program. In 
this regulation, the Department is exercising its broad authority, as 
provided under the HEA, to impose conditions on schools that wish to 
participate in the Federal Direct Loan Program. Section 452(b) of the 
HEA states, ``No institution of higher education shall have a right to 
participate in the [Direct Loan] programs authorized under this part 
[part D of title IV of the HEA].'' 20 U.S.C. 1087b(b). If a school 
chooses to participate in the Direct Loan Program, it must enter into a 
Direct Loan Program participation agreement (PPA). 20 U.S.C. 1087d. 
Section 454(a)(6) of the HEA authorizes the Department to include in 
that PPA ``provisions that the Secretary determines are necessary to 
protect the interests of the United States and to promote the purposes 
of'' the Direct Loan Program. 20 U.S.C. 1087d(a)(6); 81 FR 39385.
    This regulation addresses class action waivers and predispute 
arbitration agreements separately, because the proscriptions adopted 
here are distinct and apply to each separately. As we explained in the 
NPRM, recent experience with class action waivers demonstrates that 
some institutions, notably Corinthian, aggressively used class action 
waivers to thwart actions by students for the very same abusive conduct 
that government agencies, including this Department, eventually 
pursued. Corinthian used these waivers to avoid the publicity that 
might have triggered more timely enforcement agency action, which came 
too late for Corinthian to provide relief to affected students. 81 FR 
39383.\75\ Corinthian's widespread use of these waivers and mandatory 
arbitration agreements resulted in grievances against Corinthian being 
asserted not against the now-defunct Corinthian, but as defenses to 
repayment of taxpayer-financed Direct Loans, with no other party from 
which the Federal government may recover any losses. As noted, 
Corinthian was not alone in this practice. The absence of class action 
risk coincided with the use of deceptive practices in the industry 
during this same period, as recounted in the NPRM and in the earlier 
NPRM for Program Integrity: Gainful Employment. 79 FR 16426 (March 24, 
2014). We infer that from the continued misconduct and from the 
extensive use of class action waivers that the waivers effectively 
removed any deterrent effect that the risk of such lawsuits would have 
provided. These claims, thus, ended up as defenses to repayment of 
Direct Loans. This experience demonstrates that class action waivers 
for these claims substantially harm the financial interest of the 
United States and thwart achievement of the purpose of the Direct Loan 
Program. Accordingly, section 454(a)(6) of the HEA authorizes the 
Department to ban Direct Loan participant institutions from securing 
class action waivers of borrower-defense type claims.
---------------------------------------------------------------------------

    \75\ As one commenter noted, during the period in question--2011 
to 2015--very few Corinthian students pursued arbitration, according 
to records maintained by the American Arbitration Association, and 
even fewer received any award. www.regulations.gov/document?D=ED-2015-OPE-0103-10723, citing Consumer Arbitration Statistics, 
Provider Organization Report, available at www.adr.org. This data 
supports our conclusion that widespread use of mandatory arbitration 
agreements effectively masked serious misconduct later uncovered in 
government enforcement actions, while providing minimal relief for 
students.
---------------------------------------------------------------------------

    Separately, we considered the effect of predispute arbitration 
agreements on the achievement of Direct Loan Program objectives and the 
Federal interest, as evidenced during the same period. A major 
objective of the program is protecting the taxpayer investment in 
Direct Loans. That objective includes preventing the institutions 
empowered to arrange Direct Loans for their students from insulating 
themselves from direct and effective accountability for their 
misconduct, from deterring publicity that would prompt government 
oversight agencies to react, and from shifting the risk of loss for 
that misconduct to the taxpayer. Predispute arbitration agreements, 
like class action waivers, do each of these, and thus jeopardize the 
taxpayer investment in Direct Loans. Aligned with these steps

[[Page 76023]]

to protect the taxpayer investment in Direct Loans, we note that these 
regulations replace, for new loans, the State law cause of action 
standard with a new Federal standard. Negotiators had objected to that 
change, and we retained the State law option for those State law claims 
reduced to judgment. Mandatory predispute arbitration agreements would 
have made this standard a null option.
    For all these reasons, as explained in the NPRM, we concluded that 
agreements barring individual or joint actions by students frustrate 
Federal interests and Direct Loan Program objectives for the same 
reasons as did class action waivers. Therefore, we concluded that 
section 454(a)(6) of the HEA authorizes the Department to regulate the 
use of predispute arbitration agreements.
    As explained in the NPRM, we acknowledge that the FAA assures that 
agreements to arbitrate shall be valid, and may not be invalidated 
``save upon such grounds as exist at law or in equity for the 
revocation of any contract.'' 9 U.S.C. 2. Contrary to the commenters' 
assertion, none of the case authority to which the commenters cite 
addresses Federal regulations that may affect arbitration, and the 
disputes addressed in that case authority appear to involve litigation 
between private parties regarding rights arising under Federal, State, 
or local law or contracts between those parties.
    As we also stated in the NPRM, the Department does not have the 
authority, and does not propose, to displace or diminish the effect of 
the FAA. 81 FR 39385. These regulations do not invalidate any 
arbitration agreement, whether already in existence or obtained in the 
future. Moreover, the Department does not have the authority to 
invalidate any arbitration agreement, did not propose to do, and does 
not in this final rule attempt to do so.
    However, as we explained in the NPRM, and repeat under ``Class 
Action Waivers'' here, the Department considers the regulation of class 
action waivers and predispute arbitration agreements to be justified 
because they affect Direct Loan borrowing.\76\ The arguments that, by 
these regulations, the Department attempts to override, displace, or 
disregard the FAA mischaracterize the regulations. The regulations do 
not control the conduct of purely private transactions between private 
parties, transactions unrelated to the Direct Loan Program.\77\ Direct 
Loans are not purely private transactions; but for the Direct Loan, the 
student may very likely not have enrolled at all in a chosen school. 
The terms of enrollment agreements between the institution and the 
student loan recipient, and the school's performance with respect to 
the education financed by that loan, directly affect the Direct Loan 
program. These regulations impose a condition on the participation by a 
school in this specific Federal program, a Federal program in which 
Congress explicitly stated that ``no institution shall have a right to 
participate . . .'' 20 U.S.C. 1087b(b). The final regulations do not 
bar schools from using any kind of predispute arbitration agreements, 
or class action waivers, so long as they pertain only to grievances 
unrelated to the Direct Loan Program. The regulations merely require 
that a school that participates in the Direct Loan program cannot enter 
into a predispute arbitration agreement regarding borrower defense-type 
claims with a student who benefits from aid under that program.
---------------------------------------------------------------------------

    \76\ 81 FR 39382-39383.
    \77\ Purely private transactions are the kinds of relationships 
that the CFPB may regulate under section 1028(b) of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, 12 U.S.C. 5518(b) 
(authority to regulate the use of agreements between covered persons 
and consumers).
---------------------------------------------------------------------------

    These requirements are well within the kind of regulation upheld by 
courts that address the authority of the government to impose 
conditions that limit the exercise of constitutional rights by 
beneficiaries. That case law gives strong support for the position that 
the Department has authority to impose limits of the kind adopted here 
on the use of class action waivers and predispute arbitration 
agreements. For example, the government may impose a restriction on the 
exercise of a recipient's First Amendment rights so long as that 
restriction does not extend beyond the recipient's participation in the 
Federal program:

    Our `unconstitutional conditions' cases involve situations in 
which the Government has placed a condition on the recipient of the 
subsidy rather than on a particular program or service, thus 
effectively prohibiting the recipient from engaging in the protected 
conduct outside the scope of the federally funded program.

    Agency for Int'l Dev. v. All. for Open Soc'y Int'l, Inc., 133 S. 
Ct. 2321, 2330-31 (2013), quoting Rust v. Sullivan, 500 U.S. 173, 197 
(1991).\78\ Here, the scope of the federally funded program--the Direct 
Loan Program--extends far beyond the simple act of originating the loan 
on behalf of the Department; the HEA itself regulates a broad range of 
school actions as they relate to Direct Loan participation, from 
advertising and recruiting practices that lead to enrollment to 
refunding tuition payments after a student drops out. See, e.g., 20 
U.S.C. 1094(a)(20) (incentive compensation); 20 U.S.C. 1094(a)(22) 
(refund requirements). Section 454 of the HEA provides that under the 
Direct Loan program, the school acts as the Department's loan 
originator, and accepts responsibility and financial liability for 
failure to perform its functions pursuant to the Direct Loan PPA. 20 
U.S.C. 1087d(a)(3). The HEA gives the Secretary the authority to modify 
the terms of the PPA as needed to protect Federal interests and promote 
the objectives of the program. 20 U.S.C. 1087d(a)(6). The Department 
issues these regulations pursuant to that authority, to regulate 
conduct well within the ``scope of the federally funded program'' at 
issue here. As we explained in the NPRM and earlier in this discussion, 
the restrictions involve terms, conditions, and practices that directly 
and closely affect the objectives of the Federal Direct Loan 
Program.\79\
---------------------------------------------------------------------------

    \78\ The Spending Clause of the Federal Constitution grants 
Congress the power ``[t]o lay and collect Taxes, Duties, Imposts and 
Excises, to pay the Debts and provide for the common Defence and 
general Welfare of the United States.'' U.S. Const. art. I, Sec.  8, 
cl. 1. The clause provides Congress broad discretion to tax and 
spend for the ``general Welfare,'' including by funding particular 
State or private programs or activities. That power includes the 
authority to impose limits on the use of such funds to ensure they 
are used in the manner Congress intends. Rust v. Sullivan, 500 U.S. 
173, 195, n. 4, 111 S.Ct. 1759, 114 L.Ed.2d 233 (1991) (``Congress' 
power to allocate funds for public purposes includes an ancillary 
power to ensure that those funds are properly applied to the 
prescribed use.''). Agency for Int'l Dev. v. All. for Open Soc'y 
Int'l, Inc., 133 S. Ct. 2321, 2327-28, (2013).
    \79\ See 81 FR 39383-84.
---------------------------------------------------------------------------

    For several reasons, the fact that Congress gave certain agencies 
power to regulate arbitration, or outright banned mandatory 
arbitration, supports no inference that Congress considered other 
agencies, such as the Department, to lack the power to regulate.\80\ 
First, these enactments regulate purely private transactions between 
private parties. As such, transactions in these contexts fall squarely 
within the terms of the FAA, a Federal statute, and arbitration clauses 
in these transactions would be deemed valid and enforceable if Congress 
had not, by Federal legislation, barred or nullified their use, or 
explicitly

[[Page 76024]]

authorized a Federal agency to do so by regulation. Federal legislation 
was therefore essential to achieve the intended restriction of 
arbitration in that context. None of the situations cited involve the 
terms and conditions of participation in a Federal benefit program.\81\ 
Second, these latter enactments offer no legislative interpretation of 
the 1993 amendment to the 1965 Higher Education Act, which enacted 
section 454, because they deal with different subject matters. Thus, 
courts interpret statutes with similar language, and which address the 
same general subject matter, ``as if they were one law.'' See 
Erlenbaugh v. United States, 409 U.S. 239, 243-44 (1972). In such a 
case, a ``later act can . . . be regarded as a legislative 
interpretation of (an) earlier act . . .'' United States v. Stewart, 
311 U.S. 60, 64-65 (1940) (construing two statutes that both address 
the scope of the tax exemption afforded farm loan bonds).
---------------------------------------------------------------------------

    \80\ See, e.g., 10 U.S.C. 987(f)(4), (h) (authorizing the DoD to 
regulate use of mandatory arbitration in extensions of credit to 
servicemembers); 12 U.S.C. 5518 (authorizing the CFPB to regulate 
use of arbitration in consumer financial services); 15 U.S.C. 78o 
(authorizing the SEC to regulate use of mandatory arbitration in 
certain investment relationships); 15 U.S.C. 1639c(e) (barring 
mandatory arbitration in extensions of credit secured on the 
principal dwelling of a consumer); and 18 U.S.C. 1514A(e) 
(prohibiting use of arbitration in regard to certain whistleblower 
proceedings regarding securities).
    \81\ Congress's power to regulate in these matters rests, thus, 
on the Commerce Clause, not the Spending Clause.
---------------------------------------------------------------------------

    Here, newer enactments addressing arbitration provide no 
``legislative interpretation'' of the HEA, because they share neither 
language nor subject matter with the 1965 Higher Education Act in 
general or the 1993 Direct Loan Program statute in particular. To the 
contrary, Congress has generally rejected any inference that other 
Federal law regulating consumer lending, most prominently, the Truth in 
Lending Act (TILA), operates on ``the same general subject matter'' as 
Federal education loans financed under the HEA. See, e.g., 15 U.S.C. 
1603(7) (exempting from TILA those loans made, insured, or guaranteed 
pursuant to a program authorized by title IV of the Higher Education 
Act of 1965). Section 454 itself--the statutory basis for adopting 
``other provisions'' needed to protect Federal interests evidences this 
distinction in subject matter by repeatedly referencing not other 
Federal laws addressing consumer lending, but specific disclosure 
requirements in the HEA itself, as well as provisions barring the 
school from charging fees for arranging Direct Loans. 20 U.S.C. 
1087d(a)(1)(E). This context compels the conclusion that the scope of 
the power to regulate under section 454 was to be governed by reference 
to the Federal objectives stated in this very statute, not by 
inferences drawn from subsequent legislation addressing very different 
objectives in transactions involving different--private--participants. 
The objection that section 454(a)(6) of the HEA does not authorize the 
Department to involve itself in the contractual relationships--or 
impair its freedom to contract with others and exercise rights under 
existing contracts--ignores a host of HEA provisions that regulate the 
``contractual relationships'' between the school and other parties. 
These provisions restrict, and in some instances ban, the exercise of 
rights that the school may already have under existing contracts or 
wish to include in future contracts. The HEA thus regulates contractual 
relationships with students: The qualifications for enrollment of 
students who may become borrowers, 20 U.S.C. 1091(a), (d); the manner 
in which the school must determine whether the student borrower is 
making academic progress while enrolled, 20 U.S.C. 1091(c); banning the 
school from imposing penalties and late fees on students whose tuition 
payments may be delayed for various reasons, 20 U.S.C. 1094(a)(19); and 
determining when that student has ceased enrollment and whether and how 
much the school must refund to the student and the Department of 
tuition payments the school has already received for that student, 20 
U.S.C. 1091b. The HEA, moreover, imposes significant prohibitions that 
ban the institution from the exercise of rights it may have under its 
existing contracts with its employees and third parties, or may wish to 
include in future contracts with those employees and with third 
parties. Thus, an institution cannot compensate its employees on the 
basis of success in securing enrollments (``incentive compensation''). 
20 U.S.C. 1094(a)(20). More recently, section 487 of the HEA was 
amended by Public Law 110-315, the Higher Education Opportunity Act of 
2008, to impose significant new restrictions on the exercise by 
institutions and affiliated entities of rights under existing contracts 
with lenders that provided financing for their students. That act 
mandated adoption and compliance by institutions with a code of conduct 
governing their relationships with lenders that made both Federal loans 
and private loans for their students, and banned numerous practices in 
widespread use at the time under arrangements between the institution, 
affiliated entities, its own employees and their family members, and 
lenders. 20 U.S.C. 1094(a)(25), (e). These amendments were effective on 
the date of enactment. Public Law 110-3110-315, Sec.  3, August 14, 
2008, 122 Stat 3078. Thus, the HEA itself repeatedly conditions 
participation in title IV, HEA programs on an institution's refraining 
from exercising rights the institution may already have under existing 
contracts or may acquire under new contracts. These regulations 
similarly operate within the very scope of the Federal program in which 
these HEA provisions operate, to bar the institution from exercising 
certain rights it may have already acquired or wished to acquire by 
contract. In doing so, neither the HEA nor these regulations improperly 
infringe on the institution's freedom of contract or freedom of 
expression.
    Changes: None.
    Comments: A few commenters suggested that the proposed regulations 
may violate the rights of institutions under the First Amendment, by 
compelling speech, and under the Takings and Due Process Clauses of the 
Fifth Amendment by interfering with or depriving the institution of its 
contractual rights in arbitration and class action waiver agreements. 
Several commenters objected that by applying to existing contracts, the 
regulations are impermissibly retroactive.
    Discussion: The regulations effect neither a deprivation of a 
property right of an institution in agreements it already has with 
students, nor an impairment of those contracts. The regulation affects 
the terms on which an institution may continue to participate in a 
Federal program. The institution has no property right to continue to 
participate on the terms under which the institution previously 
participated. See Ass'n of Private Sector Colleges & Universities v. 
Duncan, 110 F. Supp. 3d at 198. Rights acquired by the institution 
under agreements already executed with students remain fully 
enforceable on their own terms.
    Like any new regulations, these regulations impose requirements on 
the future conduct of institutions that intend to continue to 
participate in the Direct Loan Program. Regulations commonly change the 
future consequences of permissible acts that occurred prior to adoption 
of the regulations, and such regulations are not retroactive, much less 
impermissibly retroactive, if they affect only future conduct, and 
impose no fine or other liability on a school for lawful conduct that 
occurred prior to the adoption of the regulations. The regulations do 
not make an institution prospectively ineligible because it has already 
entered into contracts with arbitration provisions. The regulations 
impose no fine or liability on a school that has already obtained such 
agreements. The regulations address only future conduct by the 
institution, and only as that conduct is related to the institution's 
participation in the Federal Direct Loan Program. The institution is 
not obligated

[[Page 76025]]

to continue to participate in the Direct Loan program. If it chooses to 
continue to participate, it agrees to do so under rules such as these 
that change--prospectively--the conduct in which it can engage. These 
rules thereafter bar the institution that chooses to continue to 
participate from exercising rights acquired by the institution under 
agreements already executed with students. The regulations abrogate 
none of those agreements; an institution that chooses not to continue 
to participate is free to rely on those agreements.
    In response to the assertion that requiring the institution to 
include provisions in any arbitration agreement it has obtained or 
obtains in the future violates the First Amendment, we note that the 
regulations compel action, not merely speech. The requirements of Sec.  
685.300(e)(1) and (2) and (f)(1) and (2) are different than the 
warnings required under Sec.  668.41, and those warnings and 
disclosures regarding gainful employment programs that were challenged 
and upheld in Ass'n of Private Sector Colleges & Universities v. 
Duncan, 110 F. Supp. 3d 176, 182 (D.D.C. 2015), aff'd sub nom. Ass'n of 
Private Sector Colleges & Universities v. Duncan, 640 Fed. Appx 5 (D.C. 
Cir. 2016). Section 685.300(e) and (f) requires an institution that has 
obtained a class action waiver or predispute arbitration agreement that 
included borrower defense-type claims to, most importantly, take no 
action to enforce that waiver or agreement and, secondly, to notify the 
affected student that it does not intend to enforce the agreement. The 
regulations further require the institution to avoid certain actions, 
or to conduct those actions in a particular manner, which include 
adding a clause to new agreements to advise the student of its 
commitment. To the extent that the regulations compel speech, they 
compel commercial speech, like other communications with students 
required by Department regulations, and the content of the speech is 
limited to stating that the institution agrees to comply with a 
particular Federal regulation. The regulations do not require the 
institution to express the viewpoint of any other party on the value of 
arbitration, much less to disparage arbitration. Nor do they prevent 
the institution from advocating in its communications with students its 
opinion of the benefits of arbitration and the disadvantages of 
litigation, or from encouraging students who have a grievance with the 
institution from agreeing to arbitration. To the extent that the 
regulations compel speech, therefore, they compel only factual, non-
controversial speech.
    Changes: None.
    Comments: Several commenters considered the Department's proposed 
arbitration and class action waiver bans to be arbitrary and capricious 
agency actions, adopted without proper, reasoned decision-making. Some 
commenters contended that the Department did not gather sufficient 
evidence to support its positions in the NPRM. Commenters also believed 
that the Department relied too heavily on a CFPB study that they 
believed was not relevant to the public student loan context at issue. 
Additionally, commenters believed that the Department did not 
sufficiently consider conflicting evidence, such as the benefits of 
arbitration and the drawbacks of class actions. A commenter cited to 
literature and academic studies that the commenter asserts demonstrate 
the merits of arbitration.
    Discussion: As discussed elsewhere, we do not deny the merits of 
arbitration, and the regulations do not ban arbitration. The Department 
gathered substantial evidence to support the position taken in the 
regulations, as described in detail in the NPRM. That evidence showed 
that the widespread and aggressive use of class action waivers and 
predispute arbitration agreements coincided with widespread abuse by 
schools over recent years, and effects of that abuse on the Direct Loan 
Program. It is undisputable that the abuse occurred, that a great many 
students were injured by the abuse, that the abusive parties 
aggressively used waivers and arbitration agreements to thwart timely 
efforts by students to obtain relief from the abuse, and that the 
ability of the school to continue that abuse unhindered by lawsuits 
from consumers has already cost the taxpayers many millions of dollars 
in losses and can be expected to continue to do so.
    Regarding the commenter that objected to our reliance on the CFPB 
study because that study may not be relevant to the Federal student 
loan market, the CFPB's study did analyze the prevalence of arbitration 
agreements for private student loans as well as disputes concerning 
those loans. Schools participating in the Direct Loan Program not 
infrequently provide or arrange private student loans to their 
students; these private loan borrowers may also have Direct Loans, and 
in any case can be expected often to share characteristics with Direct 
Loan borrowers.
    Changes: None.
    Comments: One commenter stated that the arbitration ban falls 
outside the scope of topics the Department announced that it would be 
addressing in development of these regulations and therefore the 
Department is not authorized to address the issue.
    Discussion: The proposal to include consideration of arbitration 
agreements and class action waivers was presented in writing by at 
least one negotiator during the negotiated rulemaking proceedings, and 
was the subject of significant discussion during the final negotiated 
rulemaking session. The issue was highly relevant to the consideration 
of borrower defense claims, the core of the rulemaking exercise, and 
was duly and properly considered.
    Changes: None.

Class Action Waivers

    Comments: Commenters offered opposing views on the treatment of 
class action waivers under the regulations. Several commenters approved 
of the Department's proposal to prohibit the use of class action 
waivers, noting the government's obligation to protect taxpayers and 
students from misuse of funds dispensed through the Direct Loan 
Program. One commenter cited research from the CFPB showing that class 
actions are more effective at securing relief for consumers than 
individual arbitrations. This commenter suggested that arbitration 
agreements prevented Corinthian students from receiving relief from the 
institution, and that class actions are essential to safeguarding 
taxpayer money. This commenter asserted that the provisions in the 
proposed regulations addressing class action waivers are narrowly 
tailored, consistent with precedent established in Rust v. Sullivan, 
500 U.S. 173 (1991).
    Another commenter suggested that class actions are beneficial to 
students because they minimize resource obstacles often faced by 
students. According to this commenter, class actions are powerful tools 
that can rectify wrongs and create incentives for industries to change 
behavior. Further, this commenter noted that class actions enable 
students to band together to seek relief, rather than bringing such 
grievances to the Department as defenses to repayment of taxpayer-
funded Direct Loans.
    Other commenters disapproved of the Department's proposed ban on 
class action waivers. These commenters contended that class actions 
only benefit lawyers and are not helpful to students. A few commenters 
noted that an individual participant in a class

[[Page 76026]]

action often receives only nominal returns for his or her claim, while 
attorneys receive disproportionately large returns. One commenter 
suggested that class actions cannot be effective because the needs and 
particular circumstances of individuals within the class cannot be 
properly considered, so students cannot receive the appropriate 
tailored relief.
    Another commenter criticized class actions as being incredibly time 
consuming and yielding minimal public benefit. The commenter stated 
that attorneys are less likely to represent students from small schools 
in class actions because of the lower potential rewards, leaving 
injured students at small schools without adequate recourse.
    One commenter rejected the Department's position that class actions 
are likely to have a deterrence effect, contending that plaintiffs' 
lawyers often pursue frivolous claims for which institutions could not 
anticipate liability and therefore could not effectively monitor their 
own behavior.
    One commenter stated that the ban on class action waivers would be 
harmful to schools, particularly private institutions that lack the 
legal protections afforded to public institutions. A commenter 
contended that the rule would expose institutions to frivolous lawsuits 
and thus would divert funds needed for educational expenses to pay the 
costs of litigation.
    Discussion: In the NPRM, we described in detail the actual effect 
that class action waivers have had in the postsecondary education field 
on students and Federal taxpayers. 81 FR 39382. Nothing in the comments 
opposing the regulation demonstrates that these effects are exaggerated 
or mischaracterized, that the substantial problems created by the use 
of class action waivers can be reduced or eliminated by more modest 
measures, that the disadvantages and burdens the regulation would place 
on schools outweigh the costs and harm that use of class action waivers 
has already caused, or that there is any reason to expect that this 
pattern will change so that such waivers will not cause these same 
problems in the future. It is possible that banning class action 
waivers may increase legal expenses and could divert funds from 
educational services, or lead to tuition increases.\82\ We expect that 
the potential exposure to class actions will motivate institutions to 
provide value and treat their student consumers fairly in order to 
reduce the likelihood of suits in the first place.\83\
---------------------------------------------------------------------------

    \82\ It is probable that institutions against whom arbitrations 
have been filed are already incurring legal costs for arbitration. 
The CFPB study found that on the average, over 90 percent of the 
companies involved in the arbitrations it surveyed were represented 
by counsel in those proceedings. CFPB, Arbitration Study, Sec.  
5.5.3.
    \83\ ``[C]lass actions increase negative publicity of for-
profits and draw attention to deceptive recruiting in a much more 
public fashion than bilateral arbitration. '' Blake Shinoda, 
Enabling Class Litigation As an Approach to Regulating for-Profit 
Colleges, 87 S. Cal. L. Rev. 1085 (2014).
---------------------------------------------------------------------------

    We expect that institutions, like other parties that provide 
consumer services, already monitor, and will continue to monitor, court 
rulings to guide these efforts. By strengthening the incentive for all 
institutions to serve consumers fairly, and thereby reduce both 
grievances by students and attendant scrutiny by the Department (and 
other enforcement agencies), we expect that the limits we adopt here 
will tend to reduce the likelihood that an institution that neglects 
these efforts will enjoy a competitive advantage over those that engage 
in these efforts. Although it is possible that frivolous lawsuits may 
be brought, and that institutions will incur costs to defend such 
suits, institutions already face that risk and expense. We do not 
dismiss this risk, but we have no basis from which to speculate how 
much this regulation might increase that risk and attendant expense. We 
see that risk as outweighed by the benefits to students and the 
taxpayer in allowing those students who wish to seek relief in court 
the option to do so.
    Commenters who oppose the regulations on the ground that class 
actions benefit lawyers more than consumers, and may result in modest 
returns for an individual member of the class, disregard the need for 
this regulation in this field. Contrary to the assertion that class 
actions provide only modest returns, we note that the CFPB found, in 
its study, that the 419 consumer finance class actions during the five-
year period it studied produced some $2.2 billion in net cash or in 
kind relief to consumers in those markets.\84\ Whether or not consumer 
class actions have produced minimal or no actual benefit to the 
consumers who comprise the class, there is little evidence that this 
has happened in the postsecondary education industry.\85\ Rather, 
precisely because of schools' widespread and aggressive use of class 
action waivers, and even opposition to class arbitration, as described 
in the NPRM, there appears to be no history of such minimal benefits in 
this market.
---------------------------------------------------------------------------

    \84\ 81 FR 32858.
    \85\ It appears that at least in the postsecondary education 
market, the claim is unfounded; in one of the few class actions to 
proceed to trial, a class of students obtained two million dollars 
in relief from a for-profit school. Jamieson v. Vatterott 
Educational Centers, Inc., 259 FRD. 520 (D. Kan. 2009); Nick 
DeSantis, Missouri Court Upholds Ex-Student's Win in Suit Against 
Vatterott College, Chronicle of Higher Education, The Ticker (Aug. 
27, 2014), available at www.chronicle.com/blogs/ticker/mo-appeals-court-upholds-ex-students-win-in-suit-against-vatterott-college/84777.
---------------------------------------------------------------------------

    We do not suggest that class actions are a panacea, and the 
criticisms of class actions in other markets may also apply to class 
actions in the postsecondary education market if such suits were 
available. We stress that class actions have significant effects beyond 
financial recovery for the particular class members, including 
deterring misconduct by the institution, deterring misconduct by other 
industry members, and publicizing claims of misconduct that law 
enforcement authorities might otherwise have never been aware of, or 
may have discovered only much later. The CFPB described these effects 
in its proposed rule,\86\ and as we demonstrated in the NPRM, recent 
history shows the significant consequences for students and taxpayers 
in an industry that has effectively barred consumers from using the 
class action tool. As to the comment that class actions would harm 
private non-profit institutions, we note that these institutions are 
already subject to that risk, and nevertheless, only a small percentage 
of non-profit institutions currently use arbitration agreements with 
their students.\87\ This suggests that institutions in this sector have 
generally felt no need for such protection, and we see no reason to 
expect that this regulation will change the exposure of non-profit 
institutions to class actions or other suits.
---------------------------------------------------------------------------

    \86\ See, e.g., 81 FR 32861-32865.
    \87\ Tariq Habash and Robert Shireman, How College Enrollment 
Contracts Limit Students' Rights, The Century Foundation, (April 28, 
2016), available at https://tcf.org/content/report/how-college-enrollment-contracts-limit-students-rights/.
---------------------------------------------------------------------------

    Changes: None.
    Comments: A commenter objected that the proposed regulations would 
improperly restrict borrowers' choices regarding how they are 
represented. This commenter expressed concern that borrowers from small 
schools would be overlooked under the proposed regulations because they 
would not be able to share the costs of litigation with a larger group. 
Another commenter objected that the regulations would adversely affect 
students who could not successfully pursue class actions because their 
claims would not meet the commonality and predominance requirements for 
class actions. This commenter asserted that alternative forms of 
aggregate litigation other than class action suits are essential to 
ensuring that students are able to obtain

[[Page 76027]]

judicial relief, and found the regulations insufficient to enable those 
actions.
    Discussion: The objective of Sec.  685.300(e) is to ensure that 
those students who choose to pursue their claims against a voluntarily 
participating school by a class action are not prevented from doing so 
by agreements they are compelled to enter in order to enroll at the 
school. The Department cannot change the rules and practical 
consequences of class action litigation so that groups of students 
would be spared the costs and risks incurred by class action litigants, 
and did not intend to do so in these regulations. Similarly, the 
Department has neither the mandate nor the authority to create 
alternative forms of aggregate litigation in other forums, but the 
regulations, by ensuring that individuals are free to retain the right 
to sue for relief, necessarily enable those individuals to enjoy the 
benefits of joinder under Fed. R. Civ. Proc. 20 or comparable State 
rules, as an alternative to class actions.
    Changes: None.

Arbitration Agreements

    Comments: Several commenters urged the Department to bar the use of 
any predispute arbitration agreements by schools. Commenters asserted 
that limiting the regulation to mandatory predispute agreements would 
prove ineffective for several reasons: The agreement could be presented 
to the student as part of a packet of enrollment materials, or included 
as another term in a mandatory enrollment agreement with merely an 
opportunity to agree or decline; the agreement could be required as a 
condition of other benefits, even if not a condition of enrollment; or 
the clause could be included, with an ``opt-out'' provision. The 
commenters stressed that for a student to understand the significance 
of the agreement, the school would have to explain its significance, a 
duty that the proposed rule did not impose. The commenters further 
contended that even if the student were to be aware of the clause, it 
is reasonable to expect that the student would not understand the 
significance of entering into such an agreement. A commenter stated 
that numerous student consumers represented by the commenter had agreed 
to arbitration, stating that they did so even, in some instances, where 
the agreement was labeled voluntary, because they did not understand 
the significance of the agreement itself or their ability to opt out, 
or because they relied on misstatements by recruiters.\88\ Other 
commenters stressed that the literature is replete with evidence that 
consumers do not understand the terms of agreements governing the 
consumer financial transactions in which they engage, making it 
unlikely that the student would fully understand either the 
significance of the agreement itself or a warning that the student need 
not agree to arbitration in order to enrollment. A commenter provided 
declarations and statements from students attesting to their lack of 
understanding either that they had executed agreements to arbitrate, or 
what arbitration meant, or both.\89\
---------------------------------------------------------------------------

    \88\ www.regulations.gov/document?D=ED-2015-OPE-0103-10729.
    \89\ www.regulations.gov/document?D=ED-2015-OPE-0103-10723.
---------------------------------------------------------------------------

    Commenters also addressed the issue of ``opt-out'' clauses with 
similar concerns. A comment signed by sixteen attorneys general urged 
that the regulation ban the use of ``opt-out'' clauses, which they 
viewed as unfair as mandatory arbitration clauses. They asserted that 
predatory for-profit schools, in particular, have a history of using 
arbitration clauses to violate the rights of their students, and that 
in their experience, students often do not consider the consequences of 
an arbitration agreement, or the value of opting out, until they have a 
legitimate complaint against the school, at which point it is too late 
to opt out of any arbitration agreement that may have appeared in the 
student's enrollment agreement. Other commenters strongly believed that 
arbitration agreements containing opt-out clauses should still be 
considered mandatory, and should be prohibited under Sec.  685.300(f). 
According to these commenters, opt-out provisions are highly 
ineffective because students misunderstand the provisions or choose not 
to accept them to avoid being disagreeable. Commenters also asserted 
that recruiters at proprietary institutions are trained to manipulate 
students and may be able to convince them to sign agreements even if 
students are apprehensive about the meaning and consequences. Some 
commenters noted that students are unable to make informed decisions 
about whether to accept these optional agreements because students must 
understand and exercise the option well before any disputes arise. One 
commenter cited to a CFPB study that found that, even when consumers 
are afforded the opportunity to opt-out of arbitration clauses, many 
are either unaware of this option or do not exercise this right. 
Another commenter cited to examples from court records indicating that 
students who receive an opt-out provision rarely take advantage.
    Based on these concerns, commenters recommended that the Department 
prohibit schools from entering into any predispute arbitration 
agreements, even those containing opt-out provisions. Commenters 
cautioned that the Department's failure to explicitly prohibit these 
agreements would create an exception that swallows the Department's 
proposed rule on forced arbitration. Some commenters suggested that 
failure to ban opt-out clauses would actually make students worse off 
than if the agreements had no such option. According to these 
commenters, students who unknowingly sign arbitration agreements 
containing opt-out provisions may face greater hurdles in any efforts 
to circumvent them by demonstrating their unconscionability, as is 
generally required for challenges to arbitration agreements. 
Additionally, commenters suggested that, as proposed, it would be more 
difficult for the Department to take enforcement actions against 
schools that take advantage of loopholes in the regulations.
    Another commenter believed that allowing the enforcement of 
arbitration agreements containing opt-out provisions would be highly 
beneficial to both students and the Department. This commenter believed 
that these provisions afford students a higher degree of choice and 
control over their situations. Additionally, this commenter believed 
that allowing such provisions would relieve the Department of a 
potential influx of claims.
    Discussion: The Department solicited comments on how the 
regulations should treat agreements that would mandate arbitration of 
borrower defense claims but that contain opt-out clauses. We have 
considered the comments received, as well as the findings of the CFPB 
cited by the commenter as relevant to this question. We have considered 
as well the comments about students' lack of awareness either that they 
were executing an agreement to arbitrate, or that doing so had 
significant consequences that they did not understand, or both. The 
same considerations that apply to opt-out clauses apply as well to our 
proposal in the NPRM that would ban only mandatory predispute 
arbitration.
    Our proposal in the NPRM to bar only mandatory ``take it or leave 
it'' predispute arbitration agreements rested on the expectation that a 
student consumer could make an informed choice prior to a dispute to 
agree to arbitrate such a dispute, and that this

[[Page 76028]]

objective could realistically be accomplished by having the agreement 
presented to the student in a manner that would separate the agreement 
from the bulk of enrollment material presented to the borrower on or at 
the beginning of class, with a clearly-worded notice that the student 
was free not to sign the agreement. These comments have persuaded us 
that the steps we proposed in the NPRM would not produce an informed 
decision, because even if the agreement were to be presented to 
students in this manner, it is unrealistic to expect the students to 
understand what arbitration is and thus what they would be 
relinquishing by agreeing to arbitrate. The submissions from commenters 
provide specific evidence of this lack of understanding in the 
postsecondary education market among students enrolled in the very 
sector of that market that far more commonly uses predispute 
arbitration agreements.\90\ They are not alone. The literature 
regarding use of arbitration agreements in consumer transactions 
provides repeated anecdotal and empirical evidence that consumers 
commonly lack understanding of the consequences of arbitration 
agreements.\91\ In its survey of credit card users, the CFPB found 
generally that ``consumers generally lack awareness regarding the 
effects of arbitration agreements'' and specifically that 
``[r]espondents were also generally unaware of any opt-out 
opportunities afforded by their issuer.'' CFPB, Arbitration Agreements, 
81 FR 32843 (May 24, 2016).\92\
---------------------------------------------------------------------------

    \90\ Indeed, a commenter noted testimony in one case that the 
school official shared her students' lack of understanding: None of 
[the students] knew what arbitration was or asked any questions 
about the arbitration provision. Ms. Dennison testified that, 
although she interviews hundreds of applicants each year, she has 
never been asked a question about the arbitration provision and she 
has not mentioned it when meeting with prospective students. In 
fact, Ms. Dennison testified that she did not understand the 
arbitration provision herself.
    Rude v. NUCO Edn. Corp., 2011 WL 6931516 Ohio Ct. App. Dec. 30, 
2011.
    \91\ See: Jeff Sovern, et al., ``Whimsy Little Contracts'' with 
Unexpected Consequences, 75 Md. L. Rev. 1, at 21 (2015): The degree 
of literacy required to comprehend the average disclosure form and 
key contract terms simply is not within reach of the majority of 
American adults.'' Judge Posner has explained ``not all persons are 
capable of being careful readers.'' Former Federal Reserve Chair Ben 
S. Bernanke, whose agency was responsible for administering the 
Truth in Lending disclosures, among others, has said that ``not even 
the best disclosures are always adequate. . . . [S]ome aspects of 
increasingly complex products simply cannot be adequately understood 
or evaluated by most consumers, no matter how clear the 
disclosure.'' And noted scholar and now-Senator Elizabeth Warren . . 
. has been quoted as saying about a credit card contract: ``I teach 
contract law at Harvard, and I can't understand half of what it 
says.''
    \92\ The CFPB stated that it focused on use of credit card 
users, a subset of the financial products included in its Study, 
because ``credit cards offer strong market penetration across the 
nation.'' Id.
---------------------------------------------------------------------------

    We see no reason to expect that students who are now enrolled or 
will enroll in the future will be different than those described or 
included in the comments. We see no realistic way to improve this 
awareness, and thus, we do not believe that the use of predispute 
agreements to arbitrate will result in well-informed choices, 
particularly by students in the sector of the market in which such 
agreements are most commonly used. Based on the lack of understanding 
of the consequences of these agreements evidenced in the CFPB survey of 
credit card users, in the literature dealing with credit cards and 
other financial products, and in the examples of individual 
postsecondary students' lack of awareness, we consider predispute 
arbitration agreements, whether voluntary or mandatory, and whether or 
not they contain opt-out clauses, to frustrate achievement of the goal 
of the regulation--to ensure that students who choose to enter into an 
agreement to arbitrate their borrower defense type claims do so freely 
and knowingly.
    Changes: We have revised Sec.  685.300(f)(1) to delete the words 
``will not compel a student''; we have revised Sec.  685.300(f)(1), 
(2), and (3)(i) and (ii) to remove the word ``mandatory'' each time it 
appears; we have revised Sec.  685.300(g)(1)(ii) to delete the word 
``predispute''; and we have revised Sec.  685.300(i) to delete 
paragraph (i)(4). We also have removed the definition of a ``voluntary 
agreement'' from Sec.  685.300(f)(1)(ii) and revised the definition of 
``predispute arbitration agreement'' in Sec.  685.300(i).
    Comments: Several commenters believed that the proposed regulations 
would unfairly deny students the opportunity to seek relief through 
arbitration. Commenters suggested that if given the option, many 
students would choose to seek relief through arbitration, rather than 
litigation. Multiple commenters suggested that limiting the 
availability of arbitration would be highly burdensome for students, 
particularly those from low-income backgrounds who are less likely to 
be able to afford attorneys and fees associated with litigation. These 
commenters suggested that without arbitration, many low-income students 
may be prevented from actively pursuing relief. These commenters 
contended that arbitration is beneficial to students and should remain 
available to those students who would like to pursue it as a means of 
obtaining relief.
    Some commenters lauded arbitration as fair and legally sound. One 
commenter noted that under a particular arbitration agreement, students 
received a fair and impartial hearing, comprehensive review of 
evidence, and an impartial ruling by an independent arbitrator. This 
commenter also noted that the arbitration agreement in question is 
governed by State law, which the commenter believes provides sufficient 
legal oversight.
    Other commenters noted that arbitrators generally have more subject 
area expertise than judges, which makes them more qualified to issue an 
informed decision on a particular matter. One commenter suggested that 
students benefit from widespread arbitration because administrators 
learn to run more effective and service-oriented schools by 
participating in arbitration proceedings. One commenter noted that the 
benefits of arbitration are particularly profound in smaller 
institutions with closer relationships between students and 
administrators.
    Further, commenters suggested that arbitration is more efficient 
than litigation, and suggested that limiting the availability of 
arbitration would unduly delay provision of relief to students. Some 
commenters suggested that students benefit from the flexibility 
afforded by arbitration agreements. According to a few commenters, the 
flexibility available in arbitration proceedings allows participants to 
schedule events around their availability. Additionally, commenters 
believed that parties benefit from not being restricted by requirements 
that they adhere to traditional rules of evidence or civil procedure.
    One commenter asserted that arbitrators are generally very fair to 
students. This commenter opined that the consumer arbitration rules are 
particularly friendly to plaintiffs, particularly because of lower fees 
associated with proceedings. Another commenter asserted that plaintiffs 
prevail in arbitration proceedings at least as frequently as they do in 
court. Some commenters believed that the arbitration process often 
facilitates more positive outcomes because both students and 
institutions participate fully in the process, and are more invested in 
the outcomes.
    Additionally, some commenters suggested that in the absence of 
widespread arbitration, legal fees associated with litigation would 
take money away from institutions that could be used towards resources 
that

[[Page 76029]]

would improve educational outcomes for students. Several commenters 
suggested that the arbitration ban may ultimately lead to tuition 
increases as institutions are required to spend more money on 
litigation. These commenters also noted that the arbitration ban will 
be particularly harmful to smaller institutions that lack the resources 
necessary to hire robust legal teams. One commenter believed that some 
smaller institutions may be forced to close if responsible for funding 
costly litigation. This commenter also worried about ``ambulance 
chasing'' attorneys encouraging students to bring frivolous suits.
    On the other hand, a number of commenters supported the proposed 
ban on mandatory predispute arbitration agreements for various reasons. 
Several commenters suggested that arbitration systems create structures 
that the commenters view as inherently biased against students. 
Commenters noted that arbitrators are often paid on a case-by-case or 
hour-by-hour basis, which can create incentives for them to rule in 
favor of institutions, which are more likely than individuals to be 
able to produce repeat business for them. One commenter cited to 
empirical evidence that the commenter viewed as supporting its position 
that arbitration is harmful to consumers. Additionally, commenters 
noted that because arbitrators are not bound by adhering to precedent, 
their decisions are less predictable and reliable.
    Further, commenters stated that arbitration can be extremely 
costly. Commenters attributed the high costs of arbitration to the 
private nature of the system, noting that individual parties are often 
responsible for paying costs associated with arbitration, which may 
include high fees that arbitrators may tack on to total costs without 
sufficient notice. One commenter also cited the procedural limitations 
of arbitration as another detriment. This commenter stated that 
students may miss out on the opportunity for discovery in arbitration 
because the discovery process is not formalized in the same manner as 
civil lawsuits. According to the commenter, students are often denied 
access to information that is essential to their claims. Additionally, 
the commenter noted that there is a lack of oversight in arbitration 
proceedings, which may result in a lack of accountability among 
arbitrators for following by their own established procedures. This 
commenter also believed that the appeal process under arbitration is 
inadequate and that the narrow grounds and limited time frame for 
appeals ultimately harms students. Several commenters also suggested 
that the lack of transparency in the arbitration system works to the 
detriment of students. These commenters believed that the public and 
parties benefit from the transparency offered by civil litigation. 
Unlike civil litigation, arbitration is generally not public, 
transcripts are not provided to the public at large, and some 
proceedings include gag clauses to maintain privacy.
    One commenter believed that forced arbitration impedes the 
Department's ability to effectively oversee Federal assistance programs 
and ensure proper use of taxpayer dollars. This commenter also 
suggested that forced arbitration is unfair to students and deprives 
them of the opportunity to receive an education in a well-regulated 
system. Several commenters lauded the Department for taking measures to 
ensure that students who are wronged by unscrupulous schools receive 
their day in court. These commenters were particularly concerned that 
many students have been signing their rights away upon enrollment and 
urged the Department to prevent the continuation of that practice.
    Discussion: We appreciate the support for the proposed regulations 
from many of the commenters. For those commenters that did not support 
Sec.  685.300(f), many of their objections incorrectly suggested the 
regulations pose an outright ban or effectively preclude any use of 
arbitration. The regulations do not bar the use of arbitration and 
therefore do not deny students the benefits that the commenters ascribe 
to arbitration. Rather, consistent with the scope of our statutory 
authority, the regulations ban predispute arbitration agreements for 
borrower defense-type claims.
    The regulations do not bar the school from seeking to persuade 
students to agree to arbitrate, so long as the attempt is made after 
the dispute arises. The regulations, moreover, extend only to 
predispute agreements to arbitrate borrower defense-type grievances. 
They do not prohibit a school from requiring the student, as a 
condition of enrollment or continuing in a program, to agree to 
arbitrate claims that are not borrower defense-related grievances. 
Consistent with our statutory authority to regulate Direct Loan 
participation terms, the regulations address only predispute 
arbitration agreements for claims related to borrower defenses and not 
for other claims.
    Changes: None.
    Comments: A commenter suggested that the private nature of 
arbitration affords a level of protection to parties. According to this 
commenter, because arbitration proceedings are not public, parties need 
not be concerned about private information being revealed during 
proceedings.
    Discussion: The regulations do not ban arbitration entirely, but 
only arbitration achieved through predispute arbitration agreements for 
borrower defense-type claims. Students and institutions are free under 
this rule to agree to arbitration if privacy is an important 
consideration to the student. We expect that a student who chooses to 
litigate rather than pursue arbitration is already aware that generally 
litigation is a public proceeding, or becomes aware of that fact very 
quickly, and accepts that fact voluntarily. The regulations simply 
assure that a student will have the option to choose that forum.
    Changes: None.
    Comments: A few commenters addressed the effect of delegation 
clauses within arbitration agreements--provisions that assign, or 
delegate, to the arbitrator, not a court, the power to decide whether a 
particular claim or grievance falls within the agreement to arbitrate. 
The commenters considered such delegation clauses problematic because 
they allow arbitrators who, according to the commenters, may have 
financial incentives that impact their neutrality, to make decisions 
regarding whether a claim belongs in court or arbitration. The 
commenters suggested that if the Department does not address delegation 
provisions, the proposed regulations may not fulfill their intended 
purpose. The commenters urged the Department to prohibit the use of 
delegation clauses to ensure that any questions about the 
enforceability or scope of predispute arbitration agreements are 
resolved by a court rather than an arbitrator, so that schools cannot 
force students into time-consuming arbitration proceedings to resolve 
threshold questions about enforceability.
    Discussion: The commenters identify an important issue, one made 
particularly significant because Sec.  685.300(e) and (f) distinguish 
between borrower defense-type claims or grievances, which the 
regulations address, and other student claims, which it does not. The 
commenters rightly argue that the objective of the regulation may be 
frustrated if the school resists a suit by moving to compel arbitration 
and the arbitrator, not the court, were to have authority under the 
agreement to decide whether the claim is one that the student must 
arbitrate. In the NPRM, we described the recent history of aggressive 
actions to compel arbitration of student claims,

[[Page 76030]]

and consider it reasonable to expect that schools will continue to 
oppose lawsuits by moving to compel arbitration, and would rely on 
delegation clauses in arbitration agreements to support these efforts. 
We did not explicitly address in the NPRM the use of delegation 
clauses, but we proposed there to preclude attempts, where the student 
had agreed to a class action waiver, to ``seek[ ] dismissal, deferral 
or stay'' of ``any aspect of a class action,'' Sec.  685.300(e)(2)(i), 
or, if the student had entered into a mandatory predispute arbitration 
agreement, to ``seek[ ] dismissal, deferral or stay'' of ``any aspect 
of a judicial action filed by the student.'' Sec.  
685.300(f)(2)(i).\93\ These prohibited actions could rest on an express 
delegation clause committing to the arbitrator the determination 
whether the claim was a borrower-defense type claim. We did not intend 
to allow that action, and in response to the commenters who stressed 
the significance of this issue, we are adding language making it clear 
that the court, not the arbitrator, is to decide the scope of any 
arbitration agreement or class action waiver. Of course, if the student 
has in fact agreed to arbitrate some or all claims in a post-dispute 
agreement, then the school has every right, pursuant to these terms of 
its Direct Loan agreement with the Department, to oppose litigation by 
relying on that arbitration agreement. However, the regulation is 
intended to protect the rights of students who agree, predispute, only 
to arbitration of other kinds of claims, to have their borrower defense 
claims heard by a court. To ensure that goal is achieved, we believe 
that any arbitration agreement with a Direct Loan borrower should place 
power to decide the scope of the agreement in the court, not the 
arbitrator.
---------------------------------------------------------------------------

    \93\ Indeed, in at least two of the cases cited in the NPRM, an 
essential element of the ruling turned on whether the student had 
agreed to arbitration of issues about the arbitrability of the 
claims at issue. Eakins v. Corinthian Colleges, Inc., No. E058330, 
2015 WL 758286 (Cal. Ct. App. Feb. 23, 2015); Kimble v. Rhodes 
College, No. C-10-5786, 2011 WL 2175249 (N.D. Cal. June 2, 2011).
---------------------------------------------------------------------------

    Changes: We have modified Sec. Sec.  685.300(e)(3) and 
685.300(f)(3) to add to the required provisions and notices the 
statement that ``we agree that only the court is to decide whether a 
claim asserted in the lawsuit is a claim regarding the making of the 
Direct Loan or the provision of educational services for which the loan 
was obtained.''
    Comments: A few commenters recommended alternatives to proposed 
Sec.  685.300(f). One commenter recommended that the Department 
eliminate its ban and instead provide suggested best practices to 
facilitate dispute resolution. Another commenter recommended that the 
Department develop rules to govern arbitration proceedings rather than 
banning them entirely. Some rules proposed by the commenter included: 
(1) A neutral arbitrator, (2) more than minimal discovery, (3) a 
written arbitration award, (4) all forms of relief available in court 
available in arbitration, and (5) prohibition on imposing unreasonable 
costs in arbitration. Another commenter suggested that the Department 
establish an annual threshold for the number of arbitration settlements 
for all institutions. Under this proposal, institutions would only be 
held accountable if their number of arbitration proceedings exceeded 
this threshold.
    Discussion: The regulations do not ban arbitration entirely, as 
suggested by some of the commenters. Rather, the regulations ban 
predispute arbitration agreements for borrower defense-type claims. We 
discussed at some length in the last negotiated rulemaking session the 
proposal to regulate the conduct of arbitration, rather than banning 
compelled predispute arbitration agreements, but in issuing this final 
rule, we conclude that limiting agreements to arbitrate borrower 
defense claims to those entered into after a dispute has arisen will 
achieve the goal of an informed decision by the borrower. Therefore, we 
have no reason to set a limit on the number of such arbitrations a 
school may conduct. The regulations do, however, require information 
from the school about the substance and outcomes of arbitration.
    Changes: None.
    Comments: One commenter suggested that eliminating mandatory 
arbitration would be overly burdensome on our judicial system because 
many claims that otherwise would have gone to arbitration will wind up 
in court.
    Discussion: The regulations allow students who agree to arbitration 
to use that method, rather than pursuing relief through a lawsuit, and 
we have no expertise or experience from which to estimate the effect of 
the regulation on judicial filings.
    Changes: None.
    Comments: One commenter contended that the Department's position is 
logically inconsistent, because the commenter viewed the Department as 
simultaneously asserting that courts do not provide adequate relief for 
students, while also asserting that access to the judicial system is 
essential for students to obtain relief.
    Discussion: We do not believe, and did not state, that the judicial 
system provides inadequate relief for students; to the contrary, we 
noted that recent history shows that access to the judicial system was 
denied by widespread use of mandatory predispute arbitration agreements 
and class action waivers. Far from implying that the judicial system 
did not or could not provide relief, we included in the new borrower 
defense Federal standard, for new loans, an alternative that rests 
entirely on a court judgment on a borrower defense claim based on State 
law.
    Changes: None.
    Comments: One commenter stated that permitting only post-dispute 
arbitration agreements would be entirely ineffective and cautioned the 
Department against allowing only post-dispute arbitration as an option 
to students. Another commenter urged the Department to implement 
additional safeguards to protect students under post-dispute 
arbitration agreements. This commenter was concerned that schools could 
potentially force students to sign post-dispute arbitration agreements 
with prohibitions limiting their ability to seek relief and urged the 
Department to take measures to prevent schools from engaging in this 
activity.
    Discussion: Section 685.300(f) does not limit the ability of the 
school to enter into a post-dispute arbitration agreement, even one 
that would include arbitration of a borrower defense-type claim. A 
student with an actual claim has every reason to question the 
consequences of agreeing to arbitrate the claim, as opposed to filing 
suit, and at that point we expect such a decision to be an informed 
choice by the student.
    Changes: None.
    Comments: A commenter noted that some students would have 
difficulty joining in a class action for various reasons, and would 
lack the resources to pursue an individual suit, but that recently 
consumers have had success by participating in aggregate litigation. 
The commenter feared that the NPRM by barring class action waivers 
would not have barred the institution from attempting to force an 
individual student to pursue litigation alone and not as part of a 
combined suit.
    Discussion: The regulation as proposed would bar an institution 
from relying on a mandatory predispute arbitration agreement by 
``dismissal, deferral, or stay of any aspect of a judicial action filed 
by the student.'' Sec.  685.300(f)(2)(i). We consider that language to 
include the action described by the commenter, such as actions to 
challenge the student's joinder in a single suit under Fed. R. Civ. 
Proc. 20 or a similar rule by which individual litigants may 
consolidate their actions.

[[Page 76031]]

We clarify that in this final regulation. An institution remains free 
to seek relief on grounds other than that the individual is barred from 
joinder in an action by reason of the terms of the arbitration 
agreement.
    Changes: Section 685.300(f)(2)(i) is revised to include opposing 
joinder in a single action.

Internal Dispute Processes

    Comments: One commenter expressed strong approval for Sec.  
685.300(d), which would ban schools from requiring students to use the 
school's internal complaint process before seeking remedies from 
accrediting agencies or government agencies. However, a few commenters 
strongly believed that students should exhaust internal grievance 
procedures before seeking relief externally. These commenters noted 
that internal grievance procedures offer students adequate 
opportunities to seek relief. A few of these commenters touted the 
transparency and collaboration between students and institutions that 
results from engaging in these proceedings.
    Discussion: The regulations do not discourage the use and promotion 
of internal grievance procedures, and we encourage schools to adopt 
those procedures in order to remedy grievances before they become 
claims that lead to litigation or arbitration. The regulations also do 
not bar the institution from addressing the grievance as fully as it 
may wish immediately, whether or not the student chooses to raise the 
complaint to authorities. The institution may succeed in resolving the 
matter. However, if the student believes that the grievance is 
significant enough to warrant the attention of law enforcement 
officials or bodies empowered to evaluate academic matters, we believe 
that the benefit of bringing that complaint to their attention 
outweighs the benefits of attempting to compel the student to delay. 
The regulations do not impose any duty on an authority or accreditor to 
take any particular action, and they may choose to defer or delay 
consideration of the complaint until completion of the institutional 
process. However, the regulations would help those authorities better 
monitor institutional performance by making timely notice of complaints 
more likely.
    Changes: None.
    Comments: One commenter suggested that proposed Sec.  685.300(d) 
conflicts with State law that requires that students exhaust internal 
dispute resolution procedures prior to seeking other relief.
    Discussion: State law may require a consumer to make a written 
demand on a merchant before filing suit, and the regulations do not 
supersede such a law. Some State laws or case law may also require a 
student to exhaust a school's administrative appeal process before 
filing suit on a grievance.\94\ Section 685.300(d) addresses not the 
filing of a lawsuit, but rather a very different matter: Seeking 
redress from the State agency with authority to address the complaint, 
or the accreditor for the school. If those authorities decline to 
intervene, the student is left in effect with the need to pursue any 
internal grievance process. The regulations in no way require those 
authorities to exercise their independent judgment. The regulations 
simply bar the school from attempting to block the student from seeking 
redress from those authorities. The regulations leave the school free 
to respond to a student's lawsuit by contending that applicable law 
precludes judicial review of the claim or requires the litigant to 
first exhaust available internal procedures.
---------------------------------------------------------------------------

    \94\ See, e.g., Susan M. v. New York Law Sch., 76 N.Y.2d 241, 
556 NE.2d 1104 (1990).
---------------------------------------------------------------------------

    Changes: None.

Forbearance (Sections 685.205(b)(6) and 682.211)

    Comments: Several commenters expressed support for the Department's 
proposal to grant an administrative forbearance to a Direct Loan 
borrower who applies for relief under the borrower defense provisions. 
Commenters were also supportive of the proposal to grant FFEL borrowers 
the same type of administrative forbearance that Direct Loan borrowers 
would receive.
    Multiple comments supported the Department's proposed use of 
forbearance (along with information about how to decline forbearance 
and providing information about income-driven repayment plans). One 
commenter, however, recommended that the Department require borrowers 
to request forbearance instead of expecting borrowers to decline 
forbearance (opting-in rather than opting-out). Commenters also 
expressed the view that forbearance should apply to all loan types.
    Another commenter suggested that the use of administrative 
forbearance or the suspension of collection activity would lead to 
frivolous claims intended to delay repayment.
    A group of commenters recommended that forbearance for a borrower 
who files a borrower defense claim be granted in yearly increments, or 
for some other explicit time frame designated by the Department, during 
which the Department will make a determination of eligibility for a 
borrower defense claim. These commenters noted that servicing systems 
generally require periods of forbearance to have explicit begin and end 
dates. The commenters believed that the proposed change would resolve 
the servicing requirement and permit the Department to designate an 
explicit time frame for servicers (such as one to three years) during 
which the Department would make a determination of eligibility for 
relief under a borrower defense claim.
    Under the commenters' proposal, upon receiving the notification of 
the Department's determination of eligibility for relief under borrower 
defenses, FFEL Loan servicers would either end the forbearance and 
resume servicing or maintain the forbearance until the borrower's loans 
are consolidated into a Direct Consolidation loan. A group of 
commenters recommended that, if the Department plans to begin the 
process for prequalification or consolidation before the effective date 
of the final regulations, the Department consider permitting early 
implementation of the new mandatory administrative forbearance under 
Sec.  682.211(i)(7). The commenters noted that without the new 
authority to grant mandatory administrative forbearance, discretionary 
forbearance can be used to suspend servicing and collection. However, 
these commenters pointed out that discretionary forbearance requires a 
borrower's request and agreement to the terms of the forbearance. A 
discretionary forbearance may also be subject to a borrower's 
cumulative maximum forbearance limit. If a borrower has reached his or 
her maximum forbearance limit, the loan holder would have no other 
remedy but to provide a borrower relief during the review period. The 
commenters believed that early implementation of Sec.  682.211(i)(7) 
would be more efficient and provide a necessary benefit for borrowers 
that have reached their cumulative maximum forbearance limit while the 
Department makes a discharge eligibility determination.
    One commenter noted that, under the proposed regulation, a borrower 
who files a defense to repayment claim will experience immediate relief 
due to forbearance or suspension of collection. However, any interest 
that is not paid during forbearance will be capitalized. This commenter 
suggested that a borrower should not be discouraged from mounting a 
defense to repayment that could involve extended

[[Page 76032]]

investigation by having accrued interest capitalized if the claim is 
rejected. The commenter recommended that the Department set a limit on 
the interest that can be capitalized or limit the length of time for 
which accrued interest can be capitalized.
    A group of commenters recommended a conforming change to Sec.  
682.410(b) to address defaulted loans held by a guaranty agency. In 
such cases, a guaranty agency is the holder of a loan for which the 
Department is making a determination of eligibility, not a lender. 
Under the conforming change, when the guarantor is the holder of a 
loan, the Department will notify the guarantor to suspend collection 
efforts, comparably to when a lender is notified by the Department 
under Sec.  682.211(i)(7) of a borrower defense claim. Upon receiving 
notification of the Department's determination, a guarantor would 
either resume collection efforts or maintain the suspension until the 
borrower's loans are consolidated into a Direct Consolidation loan.
    Discussion: We appreciate the commenters' support for granting 
forbearance and providing information about alternatives and believe it 
will aid borrowers while the Department reviews their applications. 
Forbearance is available to Direct Loan borrowers and administered by 
the loan servicers.
    The Department will allow lenders and loan holders to implement 
Sec.  682.211(i)(7) early, so that they may grant the forbearance prior 
to July 1, 2017. Lenders and loan holders will be required to grant 
such forbearance as of July 1, 2017, the effective date of these 
regulations.
    We disagree that forbearance should be an opt-in process, as we 
believe that the majority of borrowers will want to receive the 
forbearance, making an opt-out process both more advantageous to 
borrowers and more efficient.
    We also disagree that providing forbearance and suspending 
collection activities will lead to substantial numbers of frivolous 
claims. Borrowers experiencing difficulty with their monthly loan 
obligations may avail themselves of income-driven repayment plans, loan 
deferment, and voluntary forbearance upon request. Additionally, 
because applicants for forbearance are required to sign a certification 
statement that the information contained on their application is true 
and that false statements are subject to penalties of perjury, we do 
not expect a sizeable increase in fraudulent claims.
    We disagree with the recommendation that the Department set a limit 
on the amount of accrued interest that may be capitalized, or the 
length of time that interest may be allowed to accrue, during the 
administrative forbearance. We have seen no evidence that 
capitalization of interest that accrues during a forbearance period 
while a discharge claim is being reviewed discourages borrowers from 
applying for loan discharges. Even in situations when the suspension of 
collection activity may be for an extended period of time--such as 
during bankruptcy proceedings--interest that accrues during the 
suspension of collection activity is capitalized. We see no 
justification for limiting capitalization of interest during the period 
in which a borrower defenses claim is being evaluated by the 
Department.
    We agree with the commenters that it is preferable to have a set 
time period for mandatory forbearances granted during the period that 
the Department is reviewing a borrower defense claim. In addition to 
resolving the systems issues raised by the commenters, it would help 
borrowers to have precise begin and end dates for the forbearance. 
Granting these forbearances in yearly increments, with the option to 
end the forbearance earlier if the borrower does not qualify, would be 
consistent with most of the other mandatory forbearances in the FFEL 
Program, which are granted in yearly increments, or a lesser period 
equal to the actual period of time for which the borrower is eligible 
for the forbearance. In most cases, we do not believe that the full 
year for the forbearance will be required.
    We also agree to make the conforming changes that would address 
defaulted loans held by a guaranty agency.
    Changes: We have modified Sec.  682.211(i)(7) to specify that the 
administrative forbearance is granted in yearly increments, until the 
loan is consolidated or the Department notifies the loan holder to 
discontinue the forbearance.
    We have added a new Sec.  682.410(b)(6)(viii), requiring a guaranty 
agency to suspend collection activities on a FFEL Loan held by the 
guaranty agency for borrowers seeking relief under Sec.  682.212(k) 
upon notification by the Department.

Closed School Discharges (Sections 674.33, 682.402 and 685.214)

General

    Comments: Several commenters supported the proposed closed school 
discharge regulations. These commenters appreciated the Department's 
proposal to provide more closed school discharge information to 
borrowers and to increase access to closed school discharges. One 
commenter strongly supported the proposed changes to the closed school 
discharge regulations that would require greater outreach and provision 
of information to students at schools that close, and would 
automatically discharge the loans of students from closed schools who 
do not re-enroll within three years. This commenter believed that too 
many students at schools that close neither receive a closed school 
discharge nor complete their program at another school.
    A group of commenters also felt that too few eligible borrowers 
apply for closed school discharges, primarily because these borrowers 
are unaware of their eligibility. These commenters believed that 
amending the regulations to provide additional closed school discharge 
information to borrowers, to make relief automatic and mandatory for 
borrowers who do not re-enroll within one year, and to provide for 
review of guaranty agency denials, would ensure that eligible students 
get relief.
    One commenter supported strengthening regulations to hold 
institutions accountable and protect student borrowers from fraudulent 
and predatory conduct. This commenter applauded the Department's 
efforts on behalf of Latino students who are overrepresented in 
institutions that engage in this conduct, while suggesting that more 
must be done to ensure the success of these students.
    A group of commenters recommended that the Department broaden the 
scope of the proposed regulation to apply to any planned school 
closures, rather than only school closures for which schools submit 
teach-out plans. These commenters noted that very few closing schools 
arrange for teach-outs at other schools, and that many of the recent 
school closures did not involve teach-outs. These commenters believed 
that the proposed regulations would fail to ensure that students at 
closing schools that do not submit teach-out plans receive accurate, 
complete, and unbiased information about their rights prior to the 
school closure.
    One commenter recommended that the Department require institutions 
to facilitate culturally responsive outreach and counseling to students 
who opt-in to teach-out plans to ensure that they understand the 
benefits and consequences of their decision.
    Discussion: We thank the commenters for their support. We agree 
that these are important provisions, and note that through our intended 
early implementation of the automatic closed school discharge 
provisions, students

[[Page 76033]]

affected by the recent closure of Corinthian will be able to benefit 
from a more streamlined, automatic process for relief sooner. However, 
we do not believe that it is necessary to broaden the scope of the 
regulations to apply to ``any planned school closures'' because the 
current regulations already cover all planned school closures. Current 
34 CFR 668.14(a)(31) requires a school to submit a teach-out plan under 
several conditions, including a school intending to close a location 
that ``provides at least 100 percent of at least one program'' or if 
the school ``otherwise intends to cease operations.'' 34 CFR 
668.14(a)(31)(iv) and (v). Therefore, the provision of the teach-out 
plan triggers the provision of the closed school disclosures and 
application form.
    Although we agree that schools should provide culturally responsive 
outreach and counseling to students who opt-in to teach-out plans, we 
believe that it would be difficult to establish standards for such 
outreach and counseling or to define ``culturally responsive'' through 
regulation. However, we expect institutions to be cognizant of the 
needs of their student population, and to provide appropriate outreach 
and counseling for their students. At a future date, the Department may 
consider providing resources, guidance, or technical assistance to 
institutions to facilitate a culturally responsive dissemination of 
information.
    Changes: None.

Availability of Disclosures

    Comments: Many commenters supported the Department's proposed 
regulations that increase disclosure requirements for schools that are 
closing. These commenters shared the Department's concern that many 
borrowers are unaware of their eligibility for a closed school 
discharge because of insufficient outreach and information. These 
commenters noted that, in some instances, closing schools inform 
borrowers of the option to complete their program through a teach-out, 
but either fail to advise them of the option for a closed school 
discharge, or advise them of the option in a way that discourages them 
from pursuing a discharge. According to these commenters, students 
often receive a closed school loan discharge application from the 
Department after deciding whether to enroll in teach-out programs. The 
commenters believe that students must receive clear, accurate, and 
complete information much earlier in the process when they are making 
major decisions. The commenters speculated that students who have 
enrolled in, but have not completed, a teach-out program may not 
realize they are still eligible for a closed school discharge, and may 
feel committed to pursuing the teach-out even though it is not in their 
best interest to do so.
    A group of commenters urged the Department to clarify that closed 
school discharges may be available to eligible students who have re-
enrolled in another institution. These commenters argued that relief 
should not be limited to students who do not re-enroll in a title IV-
eligible institution. Commenters stated that the HEA and current 
regulations provide that a borrower is eligible for closed school 
discharge if the borrower did not complete a program due to school 
closure and did not subsequently complete the program through a teach-
out or credit transfer. Students who participate in a teach-out or who 
transfer credits but do not complete their program remain eligible for 
a closed school discharge, as do students who re-enroll in a different 
institution but do not transfer credits or transfer some credits to an 
entirely different program. According to these commenters, this 
clarification is particularly important because students attending 
closing institutions have reported frequent instances of having been 
misled by closing institutions and recruiters from proprietary schools.
    In these commenters' view, the low application rate for closed 
school discharges is due to a lack of understandable and accessible 
information about closed school discharges.
    A group of commenters noted that in some cases it may be unclear 
when loan discharge information should be provided because the 60-day 
forbearance or suspension of collection activity period may expire 
while the borrower is still within the six-month grace period before 
collection begins. Therefore collection activities will not be resumed 
by the guaranty agency or lender under Sec.  682.402(d)(6)(ii)(H), or 
by the Department under Sec.  685.214(f)(4). These commenters urged the 
Department to revise the regulations to clarify that the closed school 
discharge information must be provided either when collection first 
begins (when a borrower enters repayment after the grace period and 
will be more inclined to exercise their discharge rights) or when 
collection is resumed, whichever is applicable.
    A group of commenters supported the Department's proposal to 
require closing schools to provide discharge information to students. 
When schools announce that they are closing, they currently have no 
obligation to inform their students about their loan discharge rights 
and options. According to these commenters, students feel compelled to 
continue their educations in ways that may not be in their best 
interests because they lack sufficient information. For example, 
commenters contended that when a teach-out is offered, students often 
believe they are obligated to participate, even though they have a 
right to opt for a closed school discharge instead. Alternatively, 
although instruction may be seriously deteriorating, students may feel 
compelled to complete the program at the closing school, unaware that 
they have a right to withdraw within 120 days of the closure and 
receive a closed school discharge. These commenters also suggested that 
students may feel compelled to accept another school's offer to accept 
their credits, without understanding that by accepting the offer they 
may become ineligible for a closed school discharge.
    Because of the issues discussed above, these commenters supported 
the Department's proposal to require schools to provide borrowers with 
a notice about closed school discharge rights when they submit a teach-
out plan after the Department initiates an action to terminate title IV 
eligibility or other specified events.
    A group of commenters recommended that we revise the regulations to 
require that whenever a school notifies the Department of its intent to 
close, it must provide a written notice to students about the expected 
date of closure and their closed school discharge rights, including 
their right to a discharge if they withdraw within 120 days prior to 
closure.
    One commenter stated that the proposed regulations would require 
the dissemination of a closed school discharge application to students 
who are not and will not be eligible for discharge. The commenter 
recommended that the Department revise proposed Sec.  668.14(b)(32) so 
that an institution would not be required to disseminate a closed 
school discharge application if the institution's teach-out plan 
provides that the school or location will close only after all students 
have graduated or withdrawn. According to this commenter, if a school 
that plans to close remains open until all students have graduated or 
withdrawn, few if any students would be eligible for a loan discharge.
    The commenter believed that the proposed regulations create 
incentives to withdraw that are contrary to public policy favoring 
program completion. The commenter recommended that proposed Sec.  
668.14(b)(32) be revised to

[[Page 76034]]

provide that when an institution arranges a teach-out opportunity that 
would permit a student to complete his or her program, the institution 
would only be required to provide the discharge application and 
accompanying disclosure if the student declines the teach-out 
opportunity. The commenter suggested that the Department require that 
institutions inform students of their opportunity to discharge their 
loans before the school closes and before the student makes any 
decision as to whether to participate in the teach-out. The commenter 
believed that it is unrealistic to assume that students will not take 
advantage of the opportunity to discharge their loan debt, particularly 
when students can simply enroll in another institution and complete 
their program after receiving a discharge.
    Another commenter disagreed with the inclusion of voluntary school 
closures in Sec.  668.14(b)(31)(iv) where the institution intends to 
close a location that provides 100 percent of at least one program. The 
commenter stated that when a school decides that a particular location 
is no longer desirable or viable, and makes plans to responsibly teach-
out the enrolled students itself, the school should not be treated like 
a school which has lost State approval, accreditation, or Federal 
eligibility. The commenter believed that the proposed regulation would 
discourage schools from acting responsibly and undertaking the 
considerable expense to voluntarily teach-out a location because after 
receiving a discharge application, students would be more likely to 
withdraw and seek a discharge rather than finishing their education. 
This commenter recommended limiting the requirement that closing 
schools provide a discharge application and a written disclosure to 
situations described in Sec.  668.14(b)(31)(ii) and (iii), where there 
is some likelihood that the school's behavior may have disadvantaged 
students.
    Some commenters urged the Department to locate the provision 
requiring closing schools to provide a discharge application and 
written disclosures in Sec.  668.26, rather than Sec.  668.14, the 
section of the regulations pertaining to the PPA. These commenters 
asserted that placing this provision in the PPA could lead to potential 
False Claims Act liability centered around disputes of fact that cannot 
be resolved absent undergoing discovery in a court proceeding. 
According to these commenters, schools would face the risk of costly 
litigation to address issues of fact regarding whether students 
received proper notice, even where schools have documented the proper 
provision of notice.
    One commenter recommended a technical change for non-defaulted 
loans, by moving the proposed requirement to provide a second 
application from guarantor responsibilities in Sec.  
682.402(d)(6)(ii)(J) to lender responsibilities in Sec.  
682.402(d)(7)(ii).
    Discussion: We appreciate the support of the commenters who agreed 
with our proposed changes to the disclosure requirements. The 
commenters are correct that a borrower may receive a closed school 
discharge even if the borrower re-enrolls at another institution of 
higher education. Under current Sec.  685.214(c)(1)(C), an otherwise 
eligible borrower who re-enrolled at another institution may qualify 
for a closed school discharge if the borrower did not complete the 
program of study at another school, or by transferring credits earned 
at the closed school at another school.
    With regard to the recommendation that the Department revise the 
regulations to specify that closed school discharge information be 
provided either when collection first begins, or when collection 
resumes, whichever is applicable, we do not believe that a lender in 
the FFEL program would find the use of the term ``resume'' confusing. 
We note that current regulations in Sec.  682.402(d)(7)(i) use the term 
``resume.'' We are not aware of any cases in which a FFEL lender failed 
to meet the requirements in the current regulations to ``resume'' 
collections activities because the lender had not yet begun collection 
activities.
    We disagree with the recommendation that a school that plans to 
keep a closing location open until all of the students have either 
graduated or withdrawn should be exempted from the requirement to 
provide its students with the closed school disclosures or the 
application. Because all students at such a school or location are 
entitled to the option of a closed school discharge, we believe that 
all such borrowers should receive this information, so that they have 
full knowledge of their options. While many of the students at such a 
school location may plan to take advantage of the teach-out, not all 
necessarily will.
    We disagree with the recommendation that the closed school 
discharge form only be provided to borrowers who decline the teach-out. 
As other commenters pointed out, students may accept a teach-out not 
realizing that they have other options. The disclosure information and 
the information on the discharge application form will apprise 
borrowers of their options, and help the borrower to make an informed 
decision based on full knowledge of the borrower's options.
    We disagree with the comment suggesting that the proposed 
regulations create an incentive to withdraw that is contrary to public 
policy. Although public policy generally favors higher rates of program 
completion, it is not always in the individual borrower's best interest 
to continue a program through graduation. In a closed school situation, 
the value of the degree the borrower obtains may be degraded, depending 
on the reasons for the school closure. Borrowers at closing schools may 
incur unmanageable amounts of debt in exchange for relatively low-value 
degrees. We do not believe that it is good public policy to require 
these borrowers to repay that debt if they cannot or choose not to 
complete the program and are eligible for a closed school discharge.
    Similarly, we disagree with the recommendation that voluntary 
school closures be exempted from the requirements. As noted earlier, 
the teach-out requirements in 34 CFR 668.14(a)(31) apply whether the 
school is forced to close or voluntarily closes. We see no basis for 
exempting schools that voluntarily close from the closed school 
discharge requirements promulgated in these final regulations.
    With regard to schools being discouraged from acting responsibly 
and voluntarily providing teach-outs, as noted above, closing schools 
are required to provide teach-outs. A school that declines to provide 
teach-outs as a result of these final regulations would be in violation 
of the requirements specified in the school's PPA.
    We do not agree with the recommendation that a school be required 
to provide disclosures whenever a school notifies the Department of its 
intent to close. The regulations as proposed require a school to 
provide disclosures as result of any of the events in section 
668.14(b)(31)(ii)-(v), which includes ``an institution otherwise 
intends to cease operations.'' We disagree with the recommendation that 
the provision in Sec.  668.14 be moved to Sec.  668.26. We believe the 
provision is more appropriately included in Sec.  668.14, which 
enumerates the requirements of a school's PPA. We do not agree that 
schools are at greater risk of costly litigation if the provision is 
located in Sec.  668.14 than they would be if the provision were 
located in Sec.  668.26. To the extent that a closed school would face 
potential liability under the False

[[Page 76035]]

Claims Act for claims for Federal funds made after the school failed to 
comply with this requirement, we see little difference in the risk 
based on where the regulatory requirement is located in the Code of 
Federal Regulations.
    We agree with the recommended technical change that, for non-
defaulted FFEL Program loans, the regulations should include the 
requirement to provide a borrower a second closed school application 
under lender responsibilities in Sec.  682.402(d)(7).
    Changes: We have revised Sec.  682.402(d)(7)(ii) to require a 
lender to provide a borrower another closed school discharge 
application upon resuming collection.

Content of Disclosures

    Comments: Under the proposed regulations, institutions are 
responsible for providing written disclosures to students to inform 
them of the benefits and consequences of a closed school discharge. A 
group of commenters made recommendations for the content of the written 
materials that schools would be required to provide to students under 
proposed Sec.  668.14(b)(32). Specifically, these commenters suggested 
that the written disclosure describing the benefits and consequences of 
a closed school discharge as an alternative to program completion 
through a teach-out should encourage program completion, because 
earning a degree can lead to employment. These commenters encouraged 
the Department to work with the postsecondary education community to 
draft discharge applications and disclosures that encourage program 
completion.
    This group of commenters also recommended modifications to the 
closed school discharge regulations, to proscribe the content of the 
disclosures. These commenters believed that if the Department provided 
or approved the written disclosures, it would help ensure that 
borrowers are able to make better-informed choices over how they 
proceed with their higher education.
    These commenters believed that the Department should not rely on 
failing schools to ensure that students receive this information prior 
to closure. According to these commenters, because these schools can be 
liable for the closed school discharges, closing schools often provide 
inaccurate closed school discharge information or provide information 
in a format that students are unlikely to read or notice.
    To prevent misleading disclosures, which would defeat the purpose 
of the proposed regulation, these commenters recommend that the 
Department amend proposed Sec.  668.14(b)(32) to require that the 
written disclosure the school gives to its students be in a form 
provided or approved by the Secretary.
    This group of commenters recommended that the closed school 
disclosures also include the expected closure date. These commenters 
asserted that when schools announce that they are closing, but plan on 
teaching out all the existing programs themselves, they currently have 
no obligation to inform their students about the expected date of 
closure. These commenters suggest that, as a result, students who 
experience a deterioration in the level of instruction are hesitant to 
withdraw and in many cases do not know they have the right to withdraw. 
These commenters contend that even students who are aware of their 
right to withdraw do not know when they can withdraw while remaining 
eligible for a closed school discharge.
    To provide borrowers with more choice over how they proceed with 
their higher education, these commenters recommended that, upon 
notifying the Department of its intent to close and teach-out all 
existing students, the regulations require a school to provide a 
written notice to students about the expected date of closure and their 
right to a discharge if they withdraw within 120 days prior to closure.
    One commenter contended that schools required to post letters of 
credit before closing have a strong financial incentive to minimize the 
number of students who choose to take a closed school discharge, 
regardless of what is in each student's best interest. In addition, 
this commenter suggested that unscrupulous schools often aggressively 
recruit students from closed schools. This commenter recommended that, 
to ensure students at closing schools receive clear, accurate, and 
complete information about their options, the Department should require 
schools to use standard language and/or a standard fact sheet approved 
by the Department in their disclosures.
    This group of commenters recommended that the disclosures clearly 
explain the student's closed school discharge rights. The commenters 
asserted that closing schools often obfuscate a borrower's discharge 
rights and options. In the commenters' view, the Department's proposal 
would only encourage continued obfuscation. Under the proposed 
regulations, a school must provide a disclosure that describes the 
benefits and consequences of a closed school discharge as an 
alternative to a teach-out agreement. The commenters believe that a 
school could comply with this proposed requirement by providing a long, 
complicated disclosure about benefits and consequences, while burying a 
borrower's right to obtain a closed school discharge instead of 
participating in a teach-out. To prevent obfuscation and confusion the 
commenters recommended that the Department revise proposed Sec.  
668.14(b)(32) to require a clear and conspicuous written disclosure 
informing students of their right to seek a closed school discharge as 
an alternative to a teach-out.
    Discussion: We do not have plans to develop written closed school 
discharge disclosure materials for schools to use, although we may 
develop such materials in the future if warranted. In addition, we may 
provide technical assistance to schools required to develop school 
discharge disclosure materials. We note that the Department already 
provides information on closed school discharges on our studentaid.gov 
Web site.
    The current closed school discharge form provided to borrowers, 
Loan Discharge Application: School Closure, is a Department form. The 
Department has developed this form in consultation with the student 
financial aid community. The form is due to expire on August 31, 2017. 
In the coming months, we will revise the form to reflect the changes in 
the closed school discharge regulations. The revised version of the 
form will go through two public comment periods before it is 
implemented.
    We disagree with the recommendation that we require schools to 
provide students with the expected date of a school closure. The 
expected date of closure may not be the actual closure date, and the 
school may actually close earlier or later than that date. Providing a 
date that may or not be accurate could be confusing to borrowers. It 
may also discourage borrowers from continuing in their education 
programs when, in some cases, it may be beneficial for them to complete 
their programs at that institution.
    Changes: None.

Procedures for Providing Disclosures

    Comments: A group of commenters expressed support for the 
Department's closed school discharge proposal, but strongly recommended 
several modifications to further the Department's goal of increasing 
the numbers of eligible students who receive closed school discharges. 
Under current Sec.  685.214(f)(2), after the Department confirms the 
date of a school closure, the Department mails a closed school 
discharge application to

[[Page 76036]]

borrowers affected by the closure. The Department suspends collection 
efforts on applicable loans for 60 days. If the borrower does not 
submit the closed school discharge application within that timeframe, 
the Department resumes collection on the loan, and grants forbearance 
for the 60-day period as provided for under Sec.  685.214(f)(4). These 
commenters noted that, currently, after a school closes, the Department 
or guaranty agency is required to provide discharge applications to 
borrowers who appear to have been enrolled at the time of the school's 
closure or to have withdrawn not more the 120 days prior to closure. 
The Department or guaranty agency often sends this information one to 
six months after the school has closed. Then, the Department or 
guaranty agency must refrain from collecting on the loans obtained to 
attend the closed school for 60 days. If the borrower does not apply 
for a closed school discharge during that time, the Department or 
guaranty agency is required to resume collection on their loans if the 
loans are not still within the six-month grace period that begins when 
a borrower ceases to be enrolled at an eligible school on at least a 
half-time basis, as provided for under Sec. Sec.  685.207(b)(2)(i) and 
685.207(c)(2)(i).
    Some commenters believed that many borrowers do not respond to the 
notice regarding closed school discharge because it is typically 
provided within the six-month grace period. At that time the borrower 
is focused on his or her school closure rather than debt burden. These 
commenters contend that providing another closed school discharge 
application when the loan is actually being collected, and the borrower 
faces the burden of loan payments, is likely to increase the borrower 
response rate.
    Another group of commenters proposed that after one year, the 
Department or guaranty agency should provide a closed school discharge 
application and information to borrowers who have re-enrolled in a 
title IV institution, noting that borrowers who have re-enrolled may 
still qualify for a closed school discharge.
    These commenters also recommended requiring that closed school 
discharge information be provided with the borrower's monthly payment 
statement upon beginning or resuming collection, or the appropriate 
entity if the borrower is in default. These commenters contended that 
many closed school borrowers receive fraudulent solicitations 
containing inaccurate information. These commenters asserted that many 
borrowers are confused about which notifications are legitimate and 
which are not, and are most likely to trust and pay attention to the 
monthly payment statement from their loan servicer.
    This group of commenters recommended that the Department take 
measures to ensure that disclosures are provided on a timely basis. In 
the commenters' view, the Department's proposal does not address a 
situation in which the school fails to provide the required 
information. The commenters noted that most schools close due to 
financial problems, and that by the time they submit teach-out plans 
(if they do submit such plans), most schools have lost significant 
personnel and their operations are in disarray. As a result, commenters 
suggested that some schools are likely to fail to provide the required 
notices. The commenters recommended that the Department clarify that, 
if a school fails to provide the notice required under proposed Sec.  
668.14(b)(32) within five days after submission of a teach-out plan, 
the Secretary would be required to provide timely disclosures before 
any student may take steps toward participation in a teach-out plan 
that may impact his or her discharge eligibility.
    Similarly to teach-outs, a group of commenters recommended that 
whenever a school notifies the Department of its intent to close, the 
Department provide a written notice to students about the expected date 
of closure and their closed school discharge rights, including their 
right to a discharge if they withdraw within 120 days prior to closure, 
if the school fails to do so within five days of informing the 
Department of closure.
    Discussion: Although we agree that providing the disclosures with 
the monthly payment statement would be an effective way of providing 
the disclosures to students, there are a variety of methods in which a 
loan holder can provide such disclosures to borrowers, and we do not 
believe that the Department should specify which method to use through 
regulation. However, nothing in the regulations prevents a loan holder 
from providing the closed school discharge disclosures in this manner.
    We have concerns with the recommendation that a second closed 
school discharge application be provided to the borrower when payment 
resumes, either after the six-month grace period has elapsed or after 
the end of the 60-day forbearance period. We also have concerns about 
the recommendation that a second closed school discharge application be 
provided after one year if the borrower has re-enrolled. Borrowers are 
often overwhelmed with information that is provided to them related to 
their student loans, either by the Department or other sources. 
Providing multiple copies of the discharge form to borrowers at 
different points in time would likely add to the information overload 
that student loan borrowers currently experience. We also point out 
that the Department's current closed school discharge form is easily 
available on the Department's studentaid.gov Web site.
    We disagree with the recommendation that the Department provide the 
required disclosures if the school does not provide them within five 
days of submission of the teach-out plan. We do not believe that the 
commenters' suggestion is feasible or practical. The Department expects 
regulated parties to comply with regulatory requirements, and typically 
reviews for such compliance in program reviews or audits. It would be 
difficult for the Department to determine whether the school has 
provided the disclosures within five days of submission of the teach-
out plan without such a review or audit.
    Changes: None.

Discharge Without An Application

    Comments: The Department proposed revisions to Sec.  674.33(g)(3), 
Sec.  682.402(d)(8), and Sec.  685.214(c)(2) that would permit the 
Department to discharge loans of borrowers who do not re-enroll in a 
title IV-eligible institution within three years of their school's 
closure. Several commenters supported the Department's proposal to 
grant a closed school discharge without a borrower application, based 
on information in its possession indicating that the borrower did not 
subsequently re-enroll in any title IV-eligible institution within 
three years after the date the school closed.
    One commenter applauded this proposal, noting that 47 percent of 
all Direct Loan borrowers at schools that closed from 2008-2011 did not 
receive a closed school discharge or title IV, HEA aid to enroll 
elsewhere in the three years following the school's closure. The 
commenter asserted that students were left with debt but no degree, 
putting them at great risk of default. The commenter asserted that 
research has consistently shown that students who do not complete their 
programs are among the most likely to default on their loans, leaving 
them worse off than when they enrolled. The commenter recommended that 
the final preamble clearly state that after three years, an eligible 
borrower's loans shall be

[[Page 76037]]

discharged without an application and any amounts paid shall be 
refunded. This commenter believed that the preamble to the NPRM 
suggested discharge of loans without an application for students who 
have not re-enrolled within three years is optional, not required.
    One of the commenters supportive of the proposal noted that the 
proposed regulations would not discharge the loans of students who 
enroll in a teach-out program but do not complete it and are not still 
enrolled within three years of a school's closure. The commenter noted 
that these borrowers may be unaware of their eligibility for a closed 
school discharge. The commenter recommended that the Department use 
available data on program completion among students receiving title IV, 
HEA aid to automatically discharge the loans of students who did not 
complete and are not enrolled in a comparable program within three 
years of their school closing.
    A commenter recommended that the final regulation provide for 
automatic discharges of the loans, to the extent that data are 
available to identify them, for borrowers who:
     Transfer credits from a closed school and enroll in, but 
do not complete, a comparable program, and
     Transfer credits to enroll in a completely different 
program.
    Several commenters did not support the automatic discharge 
provision of the proposed rule. One group of commenters contended that 
under the proposed regulations, the Department would discharge the loan 
absent any evidence that the failure of the student to re-enroll in 
another school was a result of the closed school or that the student 
did not receive any value for the education received from the closed 
school. This group of commenters believed the proposed rule would not 
serve the public interest, as it would minimize borrowers' incentives 
to continue educational pursuits. These commenters recommended that the 
automatic discharge provision be deleted from the final rule. These 
commenters further recommended that if the automatic discharge 
provision is not removed, that schools should not be held liable for 
loans that have been automatically discharged due to a student's 
failure to re-enroll in another school.
    Another commenter believed that it would not be appropriate for the 
Department to grant a closed school discharge without a borrower 
application. In this commenter's view, a loan servicer may easily 
provide a borrower with the information necessary to apply for a closed 
school discharge. This commenter noted that in many instances a student 
may have completed his or her education under a teach-out agreement 
without necessarily receiving any additional title IV, HEA aid, and 
NSLDS may not indicate that the student enrolled in another 
institution.
    A group of commenters that supported the Department's proposal to 
allow loan holders to grant closed school discharges without 
applications to borrowers who do not re-enroll in a new institution 
within three years of their schools' closures noted that, although the 
disclosures discussed earlier in this section will increase the number 
of closed school discharge applications submitted by eligible 
borrowers, many borrowers will still not likely respond to the 
disclosures. These commenters noted that borrowers in closed school 
situations, even students who receive information about their rights 
from State agencies and the Department, are often confused by 
contradictory information from their schools, as well as aggressive 
solicitations from other proprietary schools and fraudulent student 
loan debt relief companies.
    The commenters also urged the Department to make additional 
revisions in the final regulations. They recommended that the 
Department make automatic discharges mandatory for borrowers who have 
not re-enrolled in a title IV-eligible institution within three years 
of their schools' closures. These commenters believed that discharges 
under the proposed rule would be entirely discretionary, noting that 
under the proposed rule, loan holders ``may'' grant discharges in 
certain circumstances. The commenters expressed concern that, given 
that the Department and guaranty agencies have conflicting duties and 
motivations to collect on loans, the discretionary language could make 
this regulation meaningless. These commenters also noted that the 
proposed regulations lack a mechanism for allowing an organization, 
borrower, or attorney general to demand that the Department or guaranty 
agency implement the automatic discharge provision. These commenters 
recommended that the Department make automatic discharge mandatory, 
noting that the Department proposed to make this provision mandatory 
during the negotiated rulemaking sessions.
    This group of commenters also recommended shortening the re-
enrollment period from three years to one year. These commenters stated 
that the vast majority of closed school borrowers who are able to 
transfer their credits do so within several weeks to several months 
after a school closes. They noted that other schools often market their 
programs to affected students immediately following a school closure. 
They also claimed that that other schools, including community 
colleges, often reach out to students within the first few weeks after 
a school closure, and that students actively search for a new school to 
accept their closed school credits.
    Commenters contended that because very few students transfer their 
closed school credits after one year, all closed school borrowers who 
do not re-enroll in a title IV institution within one year should be 
granted a closed school discharge without any application. These 
commenters believed that it would be unfair to require these borrowers 
to wait three years for a closed school discharge, during which time 
they will make payments and may face burdensome involuntary debt 
collection tactics if they default.
    This group of commenters anticipated that the vast majority of 
eligible borrowers would likely want a closed school discharge. 
However, these commenters asserted that some borrowers may not want a 
discharge. These commenters propose addressing this potential issue 
through an opt-out procedure, in which students receive notice of the 
consequences of the discharge and are afforded the opportunity to opt-
out of a discharge within 60 days of receiving the notice.
    One commenter raised concerns that the proposal to discharge loans 
without an application from a borrower would deny institutions due 
process. This commenter proposed revising the regulations to clarify 
whether there is a presumption that the borrower did not re-enroll 
absent evidence to the contrary, or whether the Department must have in 
its possession evidence that the borrower did not re-enroll in another 
institution. The commenter also recommended that the regulation be 
revised to afford the closed school with notice and the opportunity to 
contest the student's eligibility for a loan discharge (e.g., whether 
the borrower was enrolled within 120 days of the closure or whether the 
borrower was enrolled at another institution or participated in a 
teach-out).
    In the commenter's view, the procedures the Department follows to 
discharge a student loan and make a determination regarding amounts 
owed by an institution constitute informal agency adjudication, and 
even in the context of informal adjudication, an agency must provide 
fundamental due

[[Page 76038]]

process. The commenter contended that due process requires that a 
participant in an agency adjudication must receive adequate notice and 
``the opportunity to be heard at a meaningful time and in a meaningful 
manner.'' Though the Department has flexibility in the way it provides 
such due process, the Department may not deny closed institutions the 
opportunity to communicate with the Department prior to a discharge and 
recovery action. The commenter also expressed the view that, as a 
matter of public policy, it would benefit the Department to involve 
closed schools before discharging any loans in order to ensure that 
discharges are only granted to eligible borrowers.
    Another group of commenters recommended eliminating the automatic 
discharge provision. These commenters expressed concern with the 
concept of an automatic closed school discharge, especially if the 
Department intends to rely on the school's NSLDS enrollment reporting 
process for information about student re-enrollment. In the school 
enrollment reporting process for NSLDS, schools are only required to 
include title IV recipients. Therefore, NSLDS may not identify students 
who re-enrolled but did not receive title IV, HEA aid. As a result, 
commenters suggested that borrowers who received credit from attending 
the closed school for the same or similar program of study could be 
improperly identified as eligible to receive a discharge.
    Under proposed Sec.  682.402(d)(6)(ii)(K)(3), if the Department 
determines that the borrower meets the requirements for a closed school 
discharge, the guaranty agency, within 30 days of being informed that 
the borrower qualifies, will take the actions described under Sec.  
682.402(d)(6) and (7). Section 682.402(d)(6) and (7) specifies the 
responsibilities of a guaranty agency. A group of commenters expressed 
the view that the cross-reference to Sec.  682.402(d)(6) is too broad. 
Theses commenters believed that Sec.  682.402(d)(6)(ii)(E) and Sec.  
682.402(d)(6)(H)(1) more specifically describe the required action by 
the guarantor and should replace Sec.  682.402(d)(6) in the cross-
reference. These commenters also stated that if the Department 
determines that the borrower is eligible for a discharge, the guaranty 
agency will pay the claim and the lender actions in Sec.  
682.402(d)(7)(iv) do not change.
    These commenters also recommended changes to the regulations to 
provide that the guarantor pay the claim if the Department determines a 
borrower is eligible for a discharge. This change would not impact 
lender actions in Sec.  682.402(d)(7)(iv).
    These commenters also recommended that, if the Department continues 
using NSLDS and providing an automatic discharge after three years, the 
Department should be responsible for monitoring identified borrowers 
during this period, and notifying the applicable guarantor when a 
closed school discharge must be processed.
    Discussion: We agree with the commenters who recommended that the 
Department clarify the final regulations to provide that closed school 
discharges for Perkins, FFEL and Direct Loan borrowers who have not re-
enrolled in a title IV-eligible institution within three years of their 
schools' closures are not discretionary. We have revised Sec. Sec.  
674.33(g)(3), 682.402(d)(8), and 685.214(c)(2) to clearly delineate the 
circumstances under which a closed school discharge is discretionary as 
opposed to required.
    We recognize that some borrowers will qualify for closed school 
discharges, but will not receive an automatic closed school discharge 
because they re-enrolled in a title IV school within the three-year 
timeframe. If the borrower is not participating in a teach-out, or 
transferring credits from the closed school to a comparable program at 
the new school, the borrower would still be eligible for a closed 
school discharge. We do not agree, however, that the Department should 
automatically grant closed school discharges in these situations. A 
borrower in this type of situation still has access to a closed school 
discharge; however, the borrower must apply directly for the discharge. 
The provisions for discharges without an application are intended to 
provide closed school discharges to borrowers that the Department can 
readily determine qualify for the discharge, based on information in 
our possession. A borrower who re-enrolled within the three-year time 
period may or may not qualify for a closed school discharge, depending 
on whether the borrower transferred credits from the closed school to a 
comparable program. A borrower who re-enrolled, but still qualifies for 
a closed school discharge, would have to provide more detailed 
information to the Department through the closed school application 
process to allow for a determination of the borrower's eligibility for 
a closed school discharge. However, the Department has continued to 
increase and improve the quality of data reporting by institutions, 
including beginning the collection of program-level data for borrowers 
through recently implemented Gainful Employment regulations and through 
recent Subsidized Stafford Loan reporting requirements. While current 
data limitations make it challenging to definitively identify a 
borrower who has enrolled in a comparable program or who has 
successfully transferred credits, in future years, the Department may 
be able to identify those eligible borrowers who did re-enroll, but not 
in a comparable program. In that case, the Department may revisit its 
ability to provide closed school discharges automatically to those 
borrowers, using the discretion available to the Secretary and 
mirroring the three-year provision set forth in these regulations. This 
will help to ensure that as many eligible borrowers as possible receive 
the discharges for which they qualify.
    We disagree with the commenters who recommended eliminating 
automatic closed school discharges from the final regulations. We note 
that the current regulations already provide for a closed school 
discharge without an application, and believe that this is an important 
benefit to borrowers. We also believe that the final regulations 
provide sufficient safeguards to prevent abuse, such as the three-year 
period before an automatic closed school discharge is granted. 
Therefore, we also decline to accept the recommendation that we reduce 
the three-year time period to one year.
    With regard to the three-year time period, we note that the 
discharge of a loan is a significant benefit to a borrower, with 
potentially significant fiscal impacts. Absent a closed school 
discharge application from a borrower, we do not believe that a one-
year period of non-enrollment would be sufficient to discharge a 
borrower's debt.
    We see no basis for exempting schools from liability for closed 
school discharges when the discharge is granted without an application.
    We do not believe an opt-out notice for the automatic discharge 
without an application is necessary. It is unlikely that a sufficient 
number of borrowers will choose not to have their loans discharged to 
justify the administrative burden involved in sending the borrower an 
opt-out notice. We are also concerned that an opt-out notice could be 
confusing, and result in ``false positives''--borrowers inadvertently 
choosing to opt out of the discharge.
    We acknowledge that the automatic discharge process could result in 
discharges being granted to some borrowers who were able to complete 
their programs but we believe this would be a negligible number of 
borrowers. Even a borrower who does not receive title IV, HEA aid to 
attend

[[Page 76039]]

another school, may still receive an in-school deferment. Both receipt 
of additional title IV, HEA aid and receiving an in-school deferment 
would be reported to NSLDS. Unless the borrower is attending in a less-
than-half-time status, the Department will be able to determine whether 
a borrower has re-enrolled at another title IV eligible institution 
during the three-year period. We believe that the likely minimal 
potential cost of granting discharges to a very small number of 
borrowers who do not qualify is counterbalanced by the benefit of 
granting closed school discharges to large numbers of borrowers who 
qualify for them, but do not receive them under our current procedures.
    The comment regarding the Department monitoring borrowers during 
the three-year period relates to operationalization of the final 
regulations. The Department will develop procedures for determining 
whether borrowers qualify for a closed school discharge without an 
application, and the appropriate method of notifying guaranty agencies 
if the Department makes such a determination. We note, however, that 
the final regulations in Sec.  682.402(d)(8)(iii) give guaranty 
agencies the authority to grant closed school discharges without an 
application based on information in the guaranty agency's possession.
    We disagree with commenters who stated that closed school discharge 
procedures may deny schools of due process. The closed school discharge 
procedures do not currently involve the school in the determination 
process. The Department currently pursues recovery of the amounts lost 
through closed school and other discharges under section 437(c) of the 
HEA through the ordinary audit and program review process. Thus, in the 
final audit determination or the final program review determination 
issued upon closure of a school or one of its locations, the Department 
asserts a claim for recovery of the amounts discharged. The school may 
challenge that claim in an appeal under Subpart L of Part 668, as it 
can with any other audit or program review liability.\95\
---------------------------------------------------------------------------

    \95\ See, e.g., In the Matter of Coll. of Visual Arts, 
Respondent, Docket No.: 15-05-SP, 2015 WL 6396241, at *1 (July 20, 
2015); In the Matter of Pennsylvania Sch. of Bus., Respondent, 
Docket No. 15-04-SA, 2015 WL 10459890, at *1 (Oct. 27, 2015).
---------------------------------------------------------------------------

    Changes: We have revised Sec. Sec.  674.33(g)(3), 682.402(d)(8), 
and 685.214(c)(2) to clearly delineate the circumstances under which a 
closed school discharge is discretionary, as opposed to required.
    Comments: None.
    Discussion: Upon further review, the Department determined that the 
proposed regulations related to automatic closed school discharges 
needed to specify the period of time for which borrowers from closed 
schools would be evaluated to determine whether they would qualify for 
automatic discharges. The Department concluded that it would be 
administratively feasible to conduct such an evaluation for borrowers 
at schools that closed on or after November 1, 2013.
    Changes: We have revised Sec. Sec.  674.33(g)(3)(ii), 
682.402(d)(8)(ii), and 685.214(c)(2)(ii) to specify that they apply 
with respect to schools that closed on or after November 1, 2013.

Review of Guaranty Agency Denials

    Comments: Some commenters expressed strong support for the proposed 
regulation that would allow borrowers the right to appeal to the 
Department when guaranty agencies deny closed school discharges. One 
commenter noted that the right to appeal is paramount to due process. 
This commenter stated that the right to appeal provides qualified 
borrowers with a safety net for obtaining debt relief and also provides 
a framework for accountability in guaranty agency decisions.
    These commenters noted that the guarantor in this case would need 
to notify the lender to resubmit the closed school claim for 
reimbursement.
    A group of commenters recommended that the Department retain 
current language requiring the guaranty agency to state the reasons for 
its denial. The group of commenters supported the Department's proposal 
to provide for the review of guaranty agency denials of closed school 
discharge applications for FFEL Loans. These commenters averred that 
FFEL borrowers, whose loans are held by guaranty agencies, should have 
the same right to challenge an erroneous unpaid refund or closed school 
discharge denial as Direct Loan and FFEL Loan borrowers whose loans are 
held by the Department. The commenters noted that current FFEL Loan 
regulations do not provide borrowers with any right to seek review of 
guaranty agency denials of closed school discharges. The commenters 
also noted that, even when FFEL borrowers are entitled to 
administrative review, their right to seek further review in court is 
not clear, unlike Direct Loan borrowers. Commenters noted that the APA 
does not provide for judicial review of decisions by private, non-
governmental entities such as guaranty agencies, nor is there any 
explicit right to judicial review of guaranty agency decisions in the 
HEA.
    As a result, commenters said that FFEL borrowers whose loans are 
held by guaranty agencies have no clear way to challenge an erroneous 
closed school discharge decision from a guaranty agency. Only Direct 
Loan and FFEL Loan borrowers whose loans are held by the Department may 
seek judicial review of administrative unpaid refund or closed school 
discharge denials. These commenters believe that the Department's 
proposed rule would address what the commenters consider an arbitrary 
denial of borrower due process.
    This group of commenters recommended one modification to the 
proposed regulations. Under current Sec.  682.402(d)(6)(ii)(F), if a 
guaranty agency denies a closed school discharge application, it must 
notify the borrower in writing of its determination and the reasons for 
the determination. Under the proposed regulation, a guaranty agency 
would still be required to notify the borrower of its determination, 
but would not be required to notify the borrower of its reasons for the 
determination. These commenters believed that removing this requirement 
would frustrate the purpose of the review process and urged the 
Department not to remove the notification requirement.
    Multiple groups of commenters noted that the proposed regulations 
do not provide a time frame during which a borrower can request an 
appeal of a denied closed school discharge by the guarantor. These 
commenters recommended a 30-day timeframe, which would align with the 
timeframe allowed for an appeal of a false certification discharge 
denial. These commenters also proposed language that would allow a 
borrower to submit a request after the 30-day period.
    One group of commenters proposed that the guarantor would still 
submit the appeal to the Department; however, collection of the loan 
would continue during the Department's review.
    Another group of commenters also recommended additional language to 
address situations in which a borrower submits a request after the 30-
day period. The commenters suggested that in this case, the guarantor 
would still submit the appeal to the Secretary; however, unlike with a 
timely request, collection of the loan (nondefaulted or defaulted) 
would continue during the Secretary's review.

[[Page 76040]]

    This group of commenters stated that the proposed regulations are 
not clear on the availability of an appeal option for non-defaulted 
borrowers. These commenters recommended adding language to clarify that 
non-defaulted borrowers should be afforded the same opportunity to 
appeal. Under the proposed regulations, a guarantor would be 
responsible for notifying a defaulted borrower of the option for review 
by the Secretary. For consistency, the commenters believed it would be 
reasonable for the guarantor to utilize this same process for non-
defaulted borrowers.
    These commenters also believed that it would be less confusing for 
a borrower for the guarantor to retain the loan until 30 days after the 
agency's notification to the borrower of the right to appeal. 
Commenters proposed that if the borrower appeals within 30 days, the 
loan should remain with the guarantor until the Secretary renders a 
final determination on the borrower's appeal. These commenters 
recommended that the guarantor should be responsible for notifying 
defaulted and non-defaulted borrowers of the option for review by the 
Secretary.
    Under proposed Sec.  682.402(d)(6)(ii)(K)(3), if the Department 
determines that the borrower meets the requirements for a closed school 
discharge, the guaranty agency, within 30 days of being informed that 
the borrower qualifies, will take the actions described under Sec.  
682.402(d)(6) and Sec.  682.402(d)(7). Section 682.402(d)(6) specifies 
the responsibilities of a guaranty agency and 682.402(d)(7) specifies 
the responsibilities of a lender.
    A group of commenters expressed the view that the cross-reference 
to Sec.  682.402(d)(6) is too broad. These commenters believed that 
Sec.  682.402(d)(6)(ii)(E) and 682.402(d)(6)(ii)(H)(1) more 
specifically describe the required action by the guarantor and should 
replace Sec.  682.402(d)(6) in the cross-reference. These commenters 
also recommended that we clarify under Sec.  682.402(d)(6)(ii)(K)(3) if 
the Department determines that the borrower is eligible for a 
discharge, the guaranty agency will pay the claim and the lender will 
be required to take the actions specified in Sec.  682.402(d)(7)(iv).
    Discussion: We do not believe that a 30-day timeframe for appealing 
a denial of a closed school discharge claim by a guaranty agency is 
sufficient. We have retained the language in the NPRM, which did not 
provide a timeframe for such an appeal.
    We agree with the commenters who recommended that proposed Sec.  
682.402(d)(6)(ii)(F) be revised to specify that, when a guaranty agency 
notifies a borrower of the denial of a closed school discharge claim 
and of the opportunity to appeal the denial to the Department, that the 
notification from the guaranty agency should state the reasons for the 
denial. Since the proposed revision to the regulation is intended to 
provide borrowers an opportunity to appeal a negative decision, a 
borrower should have the opportunity to address the issues that led to 
the denial during the appeal process.
    We agree with the commenters that the regulations should provide 
for an appeal process for non-defaulted FFEL borrowers (whose loans are 
held by lenders) as well as for defaulted FFEL borrowers (whose loans 
are held by guaranty agencies). Although the NPRM only addressed an 
appeal process for FFEL Program loans held by a guaranty agency, our 
intent was to provide an appeal process for FFEL Program loans held by 
either a lender or a guaranty agency.
    We agree that the cross-references to Sec.  682.402(d)(6)(ii)(K)(3) 
should be written more narrowly, and have made additional technical 
corrections to the FFEL regulations, based on the recommendations 
relating to the process for granting discharges in the FFEL Program. 
These technical corrections are identified in the ``Changes'' section, 
below.
    Changes: We have revised Sec.  682.402(d)(6)(ii)(F) to stipulate 
that a guaranty agency that denies a borrower's closed school discharge 
request must notify the borrower of the reasons for the denial.
    We have revised the cross-references in Sec.  
682.402(d)(6)(ii)(K)(3), to more specifically describe the guarantor's 
action. We have also changed the cross-reference from (d)(7) to 
(d)(7)(iv), clarifying that after the guaranty agency pays the claim 
the lender actions in (d)(7)(iv) do not change.
    We have made a technical correction to Sec.  682.402(d)(6)(ii)(H), 
deleting the reference to a guaranty agency exercising a forbearance 
during the suspension of collection activity.
    We have revised Sec.  682.402(d)(7)(iii) to clarify that a borrower 
whose FFEL Loan is held by a lender, has the same appeal rights as a 
borrower whose loan is held by a guaranty agency if the guaranty agency 
denies the closed school discharge request.

Miscellaneous Recommendations

    Comments: One commenter supported the proposed changes to the 
closed school discharge regulations, but believed that the proposal did 
not go far enough to provide displaced students with comprehensive 
assistance and an explanation of their right to debt relief. This 
commenter urged the Department to ensure that a clearly identifiable, 
knowledgeable, and accessible representative is made available on 
campus immediately after announcement of an impending closure, to 
provide in-person, meaningful assistance to displaced students.
    In addition, this commenter recommended that the Department offer 
ongoing assistance through the creation of a student loan discharge 
hotline and/or on-line computer chat, and hyper-links on the 
Department's Web site directing students to assistance in their local 
communities. The commenter averred that assistance should be made 
available in multiple formats (telephone, smartphone apps, mail, in 
person, and on-line), as many students at closing or closed schools do 
not own or have limited access to computers.
    A group of commenters recommended that the discharge regulations 
for Perkins and Direct Loans be amended to extend the 120-day look back 
period by the number of days between the expected and actual date of 
closure whenever the actual closure date is later than the expected and 
disclosed closure date.
    Another commenter recommended prohibiting the capitalization of 
interest when the collections process has been suspended because a 
student is filing for a closed school discharge.
    A group of commenters recommended that the terminology throughout 
Sec.  682.402(d) be updated for consistency with current Sec.  682.402 
regulations for other discharges types. Specifically, commenters 
suggested replacing references to written and sworn statements with 
references to applications.
    Discussion: We appreciate the recommendations for additional steps 
the Department may take to assist borrowers in closed school 
situations. Many of these recommendations relate to activities that are 
not governed by regulations, or are out of the scope of this regulatory 
action.
    With regard to the comment recommending that we extend the look-
back period beyond 120 days if the expected closure date is different 
than the actual closure date, we do not believe such a change is 
necessary. Under current regulations in

[[Page 76041]]

Sec.  685.214(c)(1)(B), the Department has the authority to extend the 
look-back period due to ``exceptional circumstances.'' We believe that 
this provision provides appropriate flexibility to the Department in 
cases where it may be necessary to extend the look-back period.
    Under Sec.  682.202(b)(2)(ii) and (iii) a lender may capitalize 
interest that accrues during a period of authorized deferment or 
forbearance. We see no justification for exempting the 60-day 
forbearance period from this practice.
    We agree with the recommendation to update the terminology 
throughout Sec.  682.402(d) for consistency with current Sec.  682.402 
for other discharges types, and will make those changes in the final 
regulations.
    Changes: In Sec. Sec.  682.402(d)(6)(ii)(B)(1), (d)(6)(ii)(B)(2), 
(d)(6)(ii)(F)(5), (d)(6)(ii)(G), and (d)(6)(ii)(H) of the FFEL closed 
school discharge regulations, we have replaced the terms ``sworn 
statement'' or ``written request'' with the term ``application'', to 
conform the regulations with the current closed school discharge 
application process.

Data Requests

    Comments: A group of commenters recommended that the Department 
disclose, at the school level, information about closed school 
discharges, including information about the Department's outreach to 
borrowers, the number of applicants, the number of applicants who 
receive a discharge, the total amount discharged, and the amount 
collected from schools to offset the discharged amounts. Similarly, 
this group of commenters requested that the Department disclose, at the 
school and discharge type level, information about false certification 
discharges, including the number of applicants, the number of 
applicants who receive a discharge, and total amount discharged and 
related offsets. In addition, this group of commenters recommended that 
the Department disclose the number of borrowers for whom a death 
discharge has been requested, the number of borrowers for whom a death 
discharge has been granted, and the total discharged amount.
    Discussion: We thank the commenters for their thoughtful reporting 
recommendations; however, we do not have plans to provide such 
information at this time. We note that publication of data at this 
level may require providing the school with the opportunity to review 
and challenge or correct inaccurate information. However, the 
Department may be able to publish more aggregated versions of these 
data for public review at a later date. The Department is not prepared 
to implement such processes at this time, but will consider releasing 
these data moving forward.
    Changes: None.

False Certification Discharges (Section 685.215)

High School Diploma

    Comments: Commenters generally supported the proposed improvements 
to the false certification process. Some commenters noted that 
broadening the reasons that loans may be discharged due to false 
certification may provide a simpler process for loan discharge than 
borrower defense to repayment for many borrowers.
    A group of commenters expressed support for the proposed regulatory 
changes that would provide a false certification loan discharge to 
borrowers whose schools have falsely reported that they earned a high 
school diploma, including schools that have facilitated the borrower's 
attainment of a fabricated high school diploma. The commenters noted 
that that proposed Sec.  685.215(a)(1)(ii) would allow for discharge of 
a borrower's loan if the school falsified the borrower's high school 
graduation status; falsified the borrower's high school diploma; or 
referred the borrower to a third party to obtain a falsified high 
school diploma. The commenters viewed this proposed regulation as a 
critical improvement over the current false certification regulations.
    However, several commenters expressed concern that some otherwise 
eligible borrowers may be denied discharges because their financial aid 
applications, which were completed by the school, indicate that they 
reported having earned a high school diploma.
    A group of commenters recommended revisions to the final 
regulations regarding what they referred to as ``unfair'' evidentiary 
burdens. These commenters recommended that the Department clarify that 
students whose schools falsely certified that they have high school 
diplomas, including schools that do so by falsely certifying financial 
aid applications, are eligible for false certification discharges.
    One group of commenters recommended that the Department further 
modify the regulatory language to clarify that borrowers who report to 
their school that they earned a high school diploma are ineligible for 
a false certification loan discharge, but that borrowers whose FAFSA 
falsely indicates the borrower had earned a high school diploma may be 
eligible for a false certification loan discharge.
    Another group of commenters believed that the Department should 
revise the proposed regulations to ensure that a borrower will qualify 
for a false certification discharge only if the borrower can fulfill 
the bases for discharge. These commenters recommended that the 
Department revise proposed Sec.  685.215(c) to require borrowers to 
demonstrate each element of the bases for discharge under proposed 
Sec.  685.215(a)(l) in order to qualify for a discharge. The commenters 
also recommended that the Department provide guidance regarding 
acceptable online high schools.
    These commenters observed that the Department's intent, as stated 
in the preamble to the NPRM, is that borrowers who provide false 
information to postsecondary schools regarding high school graduation 
status will not obtain a false certification discharge. Proposed Sec.  
685.215(a)(l) (``Basis for Discharge'') states that a false 
certification discharge is available if a borrower reported to the 
postsecondary school that the borrower did not have a high school 
diploma. The commenters believed that the section of the proposed 
regulation regarding borrower qualifications for discharge does not 
reflect the Department's intent. Proposed Sec.  685.215(c) (``Borrower 
qualification for discharge'') does not require a borrower to 
demonstrate that the borrower presented accurate information regarding 
the borrower's high school graduation status to the postsecondary 
school.
    These commenters believe that under the proposed regulations, 
taxpayers may be forced to pay for false certification discharges for 
borrowers who did not meet the test in proposed Sec.  685.215(a)(l) and 
yet qualified under proposed Sec.  685.215(c)(1). The commenters noted 
that the Department can seek recovery from institutions for certain 
losses determined under proposed Sec.  685.2125(a)(l). However, if 
borrowers are granted discharges under the weaker standard at proposed 
Sec.  685.215(c)(1), then in many cases the Department will be unable 
to collect from institutions under the stronger standard at proposed 
Sec.  685.215(a)(l).
    The commenters believed that schools should be able to rely on the 
fact that a high school is accredited by a reputable accrediting 
agency, absent a list of high schools that provide instruction to adult 
students and that are acceptable to the Department. Another commenter 
requested that the Department provide schools with a reliable source of 
information regarding appropriately accredited high school

[[Page 76042]]

diploma programs available to adults, including those that are offered 
online.
    A group of commenters expressed concerns that the proposed false 
certification and unauthorized payment discharge rule would penalize 
institutions for the false certification of the student or the 
independent actions of a third party.
    In addition, these commenters recommended that, under the 
evidentiary standards articulated in proposed Sec.  685.215(c)(1), a 
borrower requesting a false certification loan discharge should be 
required to certify that, at the time of enrollment, he or she did not 
represent to the school, either orally or in writing, that he or she 
had a high school diploma. The commenters believed that this 
evidentiary requirement would help deter frivolous false certification 
claims.
    Some commenters observed that, pursuant to proposed Sec.  
685.215(a)(l)(ii), a borrower would be eligible for a false 
certification loan discharge if the school the borrower attended 
certified the eligibility of a student who is not a high school 
graduate based on ``[a] high school diploma falsified by the school or 
a third party to which the school referred the borrower.'' The 
commenters recommended that the regulation be revised to clarify that a 
school is only penalized if it referred a student to a third party for 
the purpose of having the third party falsify the high school diploma. 
These commenters believed that it is not uncommon for a school to refer 
a student to a third-party servicer to verify the diploma, particularly 
in the case of students who graduated from foreign high schools. The 
commenters believed that institutions should not be penalized if a 
third-party verification entity falsified the legitimacy of the foreign 
credential without the school's knowledge.
    Discussion: We thank the commenters who are supportive of the 
proposed revisions of the false certification of high school graduation 
status regulatory provisions. However, we do not agree that the 
regulations need further modification to address situations in which a 
borrower who is not a high school graduate states on the FAFSA that the 
borrower is a high school graduate. If a borrower falsely stated on the 
FAFSA that they were a high school graduate, but also reported to the 
school that they were not a high school graduate, and the school 
certified the eligibility of the borrower based on the FAFSA, the 
school would still have falsely certified the eligibility of the 
borrower. In this situation, the borrower would qualify for a false 
certification discharge--assuming the borrower did not meet the 
alternative to high school graduation status in effect at the time--
regardless of the information on the student's FAFSA. The same would 
hold true whether the FAFSA was actually completed by the borrower, or 
completed by the school. We note that, while a school may assist a 
student in completing a FAFSA, a school may never complete a FAFSA for 
a student. Conversely, if a borrower falsified the FAFSA on their own 
initiative, did not inform the school that they were not a high school 
graduate, and the school did not receive any discrepant information 
indicating that the borrower was not a high school graduate, the 
borrower would not qualify for a false certification discharge. 
Borrowers who deliberately provide misleading or false information in 
order to obtain Federal student loans do not qualify for false 
certification discharges based on the false or misleading information 
that the borrower provided to the school.
    We agree with the commenters who noted a discrepancy between the 
language in proposed Sec.  685.215(a)(l) and proposed Sec.  
685.215(c)(l). Section 685.215(a)(l) provides the basic eligibility 
criteria for a false certification discharge based on false 
certification of a borrower's high school graduation status. Section 
685.215(c)(1) describes how a borrower qualifies for a discharge. The 
two sections are intended to mirror each other, not to establish 
slightly different standards for the discharge. If a borrower, in 
applying for the discharge, is only required to state that the borrower 
``did not have a valid high school diploma at the time the loan was 
certified,'' the question of whether the borrower ``reported not having 
a high school diploma or its equivalent'' would not be addressed.
    We also agree that the standards under which the Department may 
seek recovery for losses under Sec.  685.215(a)(1) should not be 
different from the standards under which a borrower may receive a false 
certification discharge under Sec.  685.215(c)(1).
    The commenter who recommended that schools be able to rely on a 
high school's accreditation status by a ``reputable accrediting 
agency'' did not specify what criteria would be used to determine if an 
agency accrediting a high school is reputable, and does not suggest a 
process for making such determinations. Moreover, even if it were 
feasible for the Department to provide a list of acceptable high 
schools for title IV student financial assistance purposes or guidance 
regarding acceptable schools, there is no guarantee that a diploma 
purporting to come from such a school is legitimate.
    We do not share the concern of commenters that the proposed 
regulations may penalize a school for relying on the independent 
actions of a third party. If a school is relying on a third party to 
verify the high school graduation status of a borrower, it is incumbent 
on the school to ensure that the third-party is providing legitimate 
verifications. We note that high school graduation status, or its 
approved equivalent, is a fundamental borrower eligibility criterion 
for title IV federal student assistance. Any school that wishes to 
participate in the title IV, HEA programs and outsources the 
determination of high school graduation status to a third party without 
ensuring that the third party is trustworthy, is acting irresponsibly.
    We also note, in response to this comment, that the Department is 
not proposing revisions to the regulations governing false 
certification discharges due to unauthorized payment.
    We also disagree with the comment recommending that a school should 
only be penalized if it referred a student to a third-party ``for the 
purpose of having the third party falsify the high-school diploma.'' 
This commenter raised this issue in particular with regard to students 
who graduated from foreign high schools. The commenter stated that 
schools often use third parties to verify the legitimacy of a foreign 
credential. We do not believe that the Department must demonstrate 
intent on the part of a school when assessing liabilities against a 
school due to false certification of borrower eligibility. We do not 
believe that a school that routinely certifies eligibility of borrowers 
who graduated from foreign high schools can credibly claim to be 
ignorant of the legitimacy of a third-party verification entity that 
the school uses for verification purposes.
    We agree with the comment that the false certification loan 
discharge application should include a certification from the borrower 
that the borrower did not report to the school that the borrower had a 
high school diploma. The current form, Loan Discharge Application: 
False Certification (Ability to Benefit), expires on August 31, 2017. 
After these final regulations are published, we will revise the form to 
make it consistent with these final regulations. The revised version of 
the form will go through two public comment periods, with the intent of 
being finalized by the time these regulations become effective on July 
1, 2017.
    Changes: We have revised Sec.  685.215(c)(1) to clarify that the 
borrower must have reported to the

[[Page 76043]]

school that the borrower did not have a high school diploma or its 
equivalent.

Disqualifying Condition

    Comments: Current regulations under Sec.  685.215(a)(1)(iii) 
provide for a discharge if a school certified the eligibility of a 
borrower who would not meet requirements for employment in the 
occupation for which the training program supported by the loan was 
intended. The proposed regulations would modify this provision to 
clarify that the relevant ``requirements for employment'' are ``State 
requirements for employment'' in the student's State of residence at 
the time the loan was originated.
    A group of commenters sought confirmation that, while a borrower 
may be eligible for a false certification discharge due to a condition 
that disqualified them for employment in the field for which 
postsecondary education was pursued, the postsecondary institution 
would not be financially liable for the discharged loan. These 
commenters believed that this is the Department's intent because the 
remedial action provision at proposed Sec.  685.308 does not list the 
disqualifying condition discharge provision at proposed Sec.  
685.215(a)(l)(iv) as a basis for institutional liability. These 
commenters observed that the current version of Sec.  685.308 states 
the Department may seek recoupment if the loan certification resulted 
in whole or in part from the school's violation of a Federal statute or 
regulation or from the school's negligent or willful false 
certification.
    These commenters averred that anti-discrimination laws limit 
schools' ability to deny admission to a prospective student, even when 
the individual would be disqualified for employment in the career field 
for which the program prepares students. The commenters recommended 
that the Department state explicitly in the preamble to the final 
regulations that disqualifying condition discharges will not result in 
institutional liabilities.
    Another commenter asserted that it would be administratively 
burdensome for institutions to maintain the knowledge necessary to 
determine what conditions would disqualify a prospective student for 
employment in a specific field. This commenter suggested that this 
would be particularly challenging for distance education programs that 
serve students remotely, since these institutions would only be aware 
of potentially disqualifying conditions that the student discloses.
    A group of commenters echoed this concern, stating that it would be 
administratively burdensome for distance education programs to comply 
with proposed Sec.  685.215(c)(2). In these commenters' view, a 
primarily distance education institution may not have occasion to 
become aware of a student's disqualifying physical or mental condition 
unless and until the student voluntarily discloses such information. In 
addition, for institutions that operate in numerous States, the 
commenters stated that it would be administratively burdensome and near 
impossible for an institution to remain constantly vigilant about 
potential changes to State statutes, State regulations, or other 
limitations established by the States that may affect a student's 
eligibility for employment.
    Since institutions must comply with various anti-discrimination 
laws when admitting students, several commenters argued that 
institutions should not be held liable for discharges based on 
disqualifying conditions unless it can be shown that the institution 
engaged in substantial misrepresentation. Another commenter stated that 
there are legitimate reasons why institutions--including, but not 
limited to, distance education institutions--may not be aware of a 
student's disqualifying physical or mental condition or criminal 
record. The commenter claimed that, under applicable Department 
regulations, an institution may not make a preadmission inquiry as to 
whether an applicant has a disability. The commenter cited regulations 
at 34 CFR 104.42(b)(2) limiting schools' ability to determine whether 
applicants have a disability.
    Another commenter referenced the Department's publication Beyond 
the Box: Increasing Access to Higher Education for Justice-Involved 
Individuals, which encourages alternatives to inquiring about criminal 
histories during college admissions and provides recommendations to 
support a holistic review of applicants.
    A commenter asked why the regulation does not specify that the 
institution knew about or could be expected to have known about the 
disqualifying condition. The commenter questioned whether a student who 
intentionally concealed a disqualifying condition should obtain a 
discharge. The commenter also raised the issue of a borrower whose 
disqualifying impairment occurs after the fact, but does not qualify 
for a disability discharge. In such situations, the commenter 
recommended that the Department clearly state that the school would not 
be subject to any penalty under Sec.  685.308.
    Another group of commenters recommended that the Department expand 
the regulation pertaining to disqualifying conditions to include 
certifications not provided by the State, such as those referenced in 
the Gainful Employment regulations such as professional licensure and 
certification requirements, including meeting the requirements to sit 
for any required licensure or certification exam.
    A group of commenters noted their opposition to the Department's 
proposal which, in their view, narrows discharge eligibility for 
students whose schools falsely certify that they meet the requirements 
for employment in the occupations for which their programs are intended 
to train. These commenters asserted that some schools frequently 
recruit students they know will be barred from employment in their 
field after program completion.
    These commenters objected to the proposed regulatory language, 
which addresses requirements imposed by the State, not by the 
profession. To the extent that this discharge provision is intended to 
provide relief to students whose schools recruit and enroll them 
despite the fact that they cannot benefit from the program, the 
commenters believed that the Department should not limit the scope of 
this protection. The commenters observed that while most professional 
licensing is found in State law and regulation, others--such as those 
from trade-specific entities--are not. In the commenters' view, the 
proposed change would unnecessarily restrict relief to students who are 
unemployable because they are ineligible for certifications not 
provided by a State.
    The commenters also believed that this change would be inconsistent 
with the Department's Gainful Employment regulations, which requires 
schools to certify that each of their career education programs 
``satisfies the applicable educational prerequisites for professional 
licensure or certification requirements in that State so that the 
student who completes the program and seeks employment in that State 
qualifies to take any licensure or certification exam that is needed 
for the student to practice or find employment in an occupation that 
the program prepares students to enter.'' 34 CFR 668.414(d)(3). As the 
Department noted in the preamble to the NPRM for the Gainful Employment 
regulations, a student's enrollment in a program intended to prepare 
them for a career for which they cannot be certified ``can have grave 
consequences for students' ability to find jobs and repay their loans 
after graduation.'' 79 FR 16478.

[[Page 76044]]

    The commenters believed that the consequences are equally grave for 
students who are unwittingly enrolled in programs that they personally 
can never benefit from, though their classmates might. In the view of 
these commenters, it is therefore unnecessary and unfair to narrow this 
standard for relief.
    Discussion: The proposed regulations were not intended to absolve 
schools of financial liability in the case of false certification due 
to a disqualifying condition. The commenters point to proposed Sec.  
685.308, which inadvertently omitted a cross-reference to Sec.  
685.215(a)(1)(iv) in identifying provisions under which the Secretary 
``collects from the school the amount of the losses the Secretary 
incurs and determines that the institution is liable to repay.'' We 
note that the proposed regulations include cross-references to the 
provisions covering false certification due to high school graduation 
status and unauthorized signature. We believe that discharge due to 
false certification of disqualifying status should be treated the same 
as the other types of false certification discharges, as it is under 
current regulations in Sec.  685.308(a)(2).
    The commenter who suggested that it would be administratively 
burdensome for schools to maintain the knowledge necessary to determine 
what conditions would disqualify a prospective student from employment 
in a specific field appears to be unaware of the current regulatory 
requirements. Under current Sec.  685.215(a)(1)(iii), the Department 
considers a school to have falsely certified a borrower's eligibility 
for a title IV loan if the school ``certified the eligibility of a 
student who, because of a physical or mental condition, age, criminal 
record, or other reason accepted by the Secretary would not meet the 
requirements for employment (in the student's State of residence when 
loan was originated) in the occupation for which the training program 
supported by the loan was intended.'' The final regulations revise this 
provision to refer to ``State requirements,'' but make no additional 
changes to this provision. The change is consistent with our 
interpretation set forth in Dear Colleague Letter (DCL) GEN-95-42, 
dated September 1995. In that DCL, we clarified that for a borrower to 
qualify for a false certification discharge due to a disqualifying 
condition, a borrower must provide evidence that the borrower had a 
disqualifying condition at the time of enrollment and of ``a State 
prohibition (in that student's State of residence) against employment'' 
in that occupation based on the borrower's status.
    We note in response to the commenters who were concerned about the 
administrative burden associated with compliance for distance education 
programs that these schools have been subject to this regulatory 
requirement for over 20 years. Neither the proposed regulations nor 
these final regulations would change the basic requirements regarding 
false certification due to a disqualifying condition.
    The regulation at 34 CFR 104.42 refers to general postsecondary 
education admission procedures, not eligibility for title IV student 
financial assistance. While the requirements in Sec.  685.215 do not 
apply to a school's evaluation of whether to admit a student to a 
particular program, they do apply to its certification of that 
student's eligibility for title IV student financial assistance for 
that program. Therefore, we do not believe that the further limitation 
suggested by the commenter is necessary.
    The Department of Education Beyond The Box publication cited by 
commenters specifically addresses career-training programs. Further, 
the publication does not advise schools to ignore disqualifying 
characteristics, but rather not to be overbroad in their preclusion of 
otherwise eligible applicants:

    Tailor questions about CJI [``Criminal Justice Information''] to 
avoid unnecessarily precluding applicants from entering training 
programs, and thus employment, for which they might be eligible. For 
career-oriented training programs, institutions should limit CJI 
inquiries to criminal convictions that pose barriers to 
certification and licensing. For example, if a State teacher's board 
will not grant a license to anyone with a felony conviction for 
sexual assault or rape, the teaching program could specifically ask, 
``Have you ever been convicted of felony sexual assault or rape?'' 
instead of broadly asking, ``Have you ever been convicted of a 
crime?'' This specificity would enable the institution to adequately 
assess whether a student could face occupational licensing and 
credentialing barriers (Beyond the Box: Increasing Access to Higher 
Education for Justice-Involved Individuals, p. 25).

    As stated in the Beyond the Box publication, we expect schools to 
be aware of disqualifying conditions for employment in the fields for 
which the schools are providing training. Schools that offer career-
training programs need to be proactive in determining whether borrowers 
who are training for fields that have such employment restrictions do 
not have a disqualifying condition for that career.
    In response to the comment regarding a student intentionally 
misleading a school, if the school could demonstrate that a student 
intentionally misled the school about a disqualifying condition, we 
would take that into account in determining the amount that the school 
is liable to repay under Sec.  685.308(a). However, in our view, it 
seems unlikely that a borrower would knowingly go through the time, 
effort, and expense of enrolling in an education program that trains 
the borrower for an occupation for which the borrower is unemployable. 
A far more common scenario is unscrupulous schools recruiting students 
with disqualifying conditions who cannot possibly benefit from the 
training programs that the school offers.
    With regard to borrowers who do not have a disqualifying condition 
at the time of enrollment, the regulations specify that a borrower 
qualifies for the discharge only if the borrower had a disqualifying 
condition that ``would have'' disqualified the borrower from employment 
in the occupation, and that the borrower ``did not meet'' State 
requirements for employment in the career. A condition that arose after 
the borrower was no longer enrolled at the school would not qualify the 
borrower for a false certification discharge due to a disqualifying 
condition.
    We addressed the question of expanding the scope of this provision 
to include non-State requirements for employment in certain fields, 
such as employment standards established by professional associations 
during the negotiated rulemaking sessions and in the NPRM. As we noted 
earlier, employment standards established by professional associations 
could vary, and it would not be practical to require schools to 
determine which professional association standards to use. The 
reference to the Gainful Employment requirements is inapplicable here, 
as the Gainful Employment requirements relate to the quality of a 
school's program.
    Changes: We have revised Sec.  685.308(a) to clarify that 
Department assesses liabilities to schools for false certification due 
to disqualifying condition or identity theft.

Satisfactory Academic Progress

    Comments: A group of commenters supported the proposed regulation 
that would provide automatic false certification loan discharges for 
students whose satisfactory academic progress (SAP) was falsified by an 
institution. While the regulation specifies that these loan discharges 
are initiated by the Department, these commenters requested that 
borrowers be permitted to submit an application for false certification 
loan discharge due to the

[[Page 76045]]

falsification of satisfactory academic progress by an institution.
    The commenters urged the Department to clarify that students may 
also apply for a discharge on this basis, rather than wait for the 
Department to grant discharges without applications. The commenters 
observed that there are often False Claims Act and government cases 
involving false certification of SAP, and that many students also know 
when their academic progress was falsified by schools, but are not 
covered by such cases.
    The commenters suggested that information provided by students in 
discharge applications would also allow the Department to identify bad-
acting schools and prevent abuse of title IV, HEA funding. These 
commenters recommended that the Department revise the proposed rules to 
provide a means for students to individually apply for discharge when 
their SAP is falsely certified by their school.
    Discussion: We continue to believe that allowing individual 
borrowers to apply for false certification discharges due to 
falsification of SAP is not practical. As we discussed in the NPRM, 
schools have a great deal of flexibility both in determining and in 
implementing SAP standards. There are a number of exceptions under 
which a borrower who fails to meet SAP can continue to receive title IV 
loans. Borrowers who are in danger of losing title IV eligibility due 
to a failure to meet SAP standards often request reconsideration of the 
SAP determination. Schools often work with borrowers in good faith 
efforts to attempt to resolve the situation without cutting off the 
borrower's access to title IV assistance.
    We do not believe that a school should be penalized for legitimate 
attempts to help a student who is not meeting SAP standards, nor do we 
believe a student who has successfully appealed a SAP determination 
should be able to use that initial SAP determination to obtain a false 
certification discharge on his or her student loans. In addition, we 
continue to believe that it would be very difficult for an individual 
borrower to sufficiently demonstrate that a school violated its own SAP 
procedures.
    Given these considerations, the final regulations continue to limit 
false certification discharges based on falsification of SAP to 
discharges based on information in the Secretary's possession.
    Changes: None.

Ability To Benefit

    Comments: A group of commenters requested that the Department 
reconsider the evidentiary standard for false certification of a 
borrower's ability to benefit. In these commenters' view, the 
requirement for additional corroborating evidence beyond the self-
certification of the borrower is unreasonable. The commenters suggested 
that borrowers who are unable to obtain corroborating evidence should 
be able to submit a sworn statement in support of their false 
certification application.
    These commenters referenced two DCLs the Department issued in 
connection with false certification of ability to benefit: DCL GEN-95-
42 (dated September 1995) and DCL FP-07-09 (dated September 2009). The 
commenters characterized the DCLs as establishing a presumption that 
students who claim ability to benefit fraud are not telling the truth 
unless they submit independent corroborating evidence to support their 
discharge application. To support this claim, these commenters quoted 
the statement in DCL GEN-95-42 that the absence of findings of improper 
ability to benefit practices by authorities with oversight powers 
``raises an inference that no improper practices were reported because 
none were taking place.''
    The commenters asserted that many borrowers cannot provide proof of 
Federal or State investigations of particular schools because 
enforcement has been lenient in this area. They asserted that, in 1992, 
Congress provided for the false certification discharge and overhauled 
the student loan system because oversight of schools was inadequate.
    A group of commenters criticized the Department's current approach, 
and noted that statements that a borrower makes on the current Loan 
Discharge Application: False Certification (Ability to Benefit) are 
made under penalty of perjury. According to commenters, if a borrower 
is unable to provide investigative findings supporting the borrower's 
claim, the Department or the guaranty agency will deny the discharge 
unless the borrower submits additional corroborating evidence (such as 
statements by school officials or statements made in other borrower 
claims for discharge relief).
    The commenters noted that DCL FP-07-09 discusses guaranty agencies' 
consideration of ``the incidence of discharge applications filed 
regarding that school by students who attended the school during the 
same time frame as the applicant,'' and suggested that students have no 
way of knowing whether a guaranty agency has done so in evaluating 
their applications.
    The commenters asserted that students do not have access to school 
employee statements and do not know whether other borrowers have filed 
similar claims for relief. When borrowers are able to find attorneys to 
help them, attorneys are often unable to obtain the required evidence 
through Freedom of Information Act requests. The commenters also 
asserted that the Department does not have possession of all false 
certification discharge applications and does not ensure that copies 
are retained when guaranty agencies go out of business or retain all 
potentially corroborating evidence. In addition, if the student has 
carried the debt for years before learning of their right to a false 
certification discharge, the school may have closed. At that point, key 
documents and corroborating evidence may no longer be available.
    The commenters recommended that the Department revise its proposed 
regulations to specify that a student may establish a right to a false 
certification discharge through a ``preponderance of the evidence,'' as 
it has proposed for borrower defense claims. In addition, the 
commenters recommended that borrowers be presumptively eligible for 
discharge after application in the following circumstances:
     The school's academic and financial aid files do not 
include a copy of test answers and results showing that the borrower 
obtained a passing score on an ability-to-benefit test approved by the 
Secretary;
     No testing agency has registered a passing score on an 
ability-to-benefit test approved by the Secretary for the borrower; or
     The school directed the borrower to take an online test to 
obtain a high school degree, the borrower believed the test to be 
legitimate, and the high school diploma is invalid.
    Discussion: In the NPRM, we removed the references to ``ability to 
benefit'' from the Direct Loan false certification regulatory language 
and replaced it with a cross-reference to section 484(d) of the HEA, 
and have retained that change in the final regulations. Section 484(d) 
establishes the current borrower eligibility requirements for students 
who are not high school graduates. The current alternative to 
graduation from high school requirements are substantially different 
from the earlier ability to benefit requirements. We have provided 
guidance describing the current alternative to high school graduation 
requirements in DCL GEN-16-09.

[[Page 76046]]

    We disagree with the recommendation to revise the regulations 
pertaining to the evidentiary standards for false certification of 
ability to benefit. Any modifications to these regulations could only 
be applied prospectively. Schools can be held liable for false 
certification discharges, and we cannot impose retroactive requirements 
on schools.
    We also disagree with the commenters' characterization of the 
guidance in DCL GEN-95-42 and DCL FP-07-09. DCL FP-07-09 does not 
require a borrower to provide additional corroborating evidence if the 
borrower is unable to do so. That DCL provides examples of ``credible 
evidence'' that would provide a guaranty agency with ``an adequate 
basis for granting a discharge application'' when there is no borrower-
specific evidence that the borrower qualifies for a discharge due to 
false certification of ability to benefit.
    We believe the two DCLs still provide an accurate description of 
the legal requirements for false certification, so we do not have plans 
to update them in the near future.
    Changes: None.

Interest Capitalization (Sections 682.202(b)(1), 682.405, and 
682.410(b)(4))

    Comments: Several commenters supported the proposed changes in 
Sec. Sec.  682.202(b)(1), 682.405, and 682.410(b)(4), providing that a 
guaranty agency may not capitalize unpaid interest after a defaulted 
FFEL Loan has been rehabilitated, and that a lender may not capitalize 
unpaid interest when purchasing a rehabilitated FFEL Loan.
    A group of commenters noted that in the preamble to the NPRM, the 
Department characterized these changes as clarifications of existing 
regulations. The commenters disagreed with this characterization, 
stating that during the negotiated rulemaking sessions, negotiators 
representing guaranty agencies, lenders, and servicers did not agree 
that current regulations prohibit the capitalization of interest 
following loan rehabilitation. The commenters further stated that the 
negotiating committee agreed to add this issue to the negotiating 
agenda after an agreement was reached with the Department that the 
proposed changes represented a change in policy for prospective 
implementation. The commenters added that when the Department was asked 
by another member of the negotiating committee whether the proposed 
changes would have any retroactive impact, the Department responded 
that retroactive application was not the issue being negotiated. The 
commenter requested that the Department clarify in the final 
regulations that the changes to the FFEL Program regulations 
prohibiting the capitalization of interest following loan 
rehabilitation are amendments to the current rules, consistent with the 
commenters' understanding of what was agreed to during the 
negotiations. Based on that understanding, the commenters stated that 
FFEL Program guarantors, lenders, and servicers are planning to 
implement the changes for loans that go into default on or after the 
effective date of the regulations and are subsequently rehabilitated.
    Discussion: We thank the commenters for their support of the 
changes to prohibit interest capitalization following loan 
rehabilitation. In response to the group of commenters who requested 
confirmation that the changes in Sec. Sec.  682.202(b)(1), 682.405, and 
682.410(b)(4) represent amendments to the current regulations and are 
to be applied only prospectively, we confirm that this is the intent.
    Changes: None.

Executive Orders 12866 and 13563

Regulatory Impact Analysis

    Under Executive Order 12866, it must be determined whether this 
regulatory action is ``significant'' and, therefore, subject to the 
requirements of the Executive order and subject to review by the Office 
of Management and Budget (OMB). Section 3(f) of Executive Order 12866 
defines a ``significant regulatory action'' as an action likely to 
result in a rule that may--
    (1) Have an annual effect on the economy of $100 million or more, 
or adversely affect a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State, local, or 
tribal governments or communities in a material way (also referred to 
as an ``economically significant'' rule);
    (2) Create serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impacts of entitlement grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles stated in the 
Executive order.
    This final regulatory action will have an annual effect on the 
economy of more than $100 million because regulations would have annual 
federal budget impacts of approximately $1.9 billion in the low impact 
scenario to $3.5 billion in the high impact scenario at 3 percent 
discounting and $1.8 billion and $3.4 billion at 7 percent discounting, 
additional transfers from affected institutions to student borrowers 
via reimbursements to the Federal government, and annual quantified 
costs of $9.8 million related to paperwork burden. Therefore, this 
final action is ``economically significant'' and subject to review by 
OMB under section 3(f)(1) of Executive Order 12866. Notwithstanding 
this determination, we have assessed the potential costs and benefits, 
both quantitative and qualitative, of this final regulatory action and 
have determined that the benefits justify the costs.
    We have also reviewed these regulations under Executive Order 
13563, which supplements and explicitly reaffirms the principles, 
structures, and definitions governing regulatory review established in 
Executive Order 12866. To the extent permitted by law, Executive Order 
13563 requires that an agency--
    (1) Propose or adopt regulations only on a reasoned determination 
that their benefits justify their costs (recognizing that some benefits 
and costs are difficult to quantify);
    (2) Tailor its regulations to impose the least burden on society, 
consistent with obtaining regulatory objectives and taking into 
account--among other things and to the extent practicable--the costs of 
cumulative regulations;
    (3) In choosing among alternative regulatory approaches, select 
those approaches that maximize net benefits (including potential 
economic, environmental, public health and safety, and other 
advantages; distributive impacts; and equity);
    (4) To the extent feasible, specify performance objectives, rather 
than the behavior or manner of compliance a regulated entity must 
adopt; and
    (5) Identify and assess available alternatives to direct 
regulation, including economic incentives--such as user fees or 
marketable permits--to encourage the desired behavior, or provide 
information that enables the public to make choices.
    Executive Order 13563 also requires an agency ``to use the best 
available techniques to quantify anticipated present and future 
benefits and costs as accurately as possible.'' The Office of 
Information and Regulatory Affairs of OMB has emphasized that these 
techniques may include ``identifying changing future compliance costs 
that might result from technological innovation or anticipated 
behavioral changes.''
    We are issuing these final regulations only on a reasoned 
determination that

[[Page 76047]]

their benefits justify their costs. In choosing among alternative 
regulatory approaches, we selected those approaches that maximize net 
benefits. Based on the analysis that follows, the Department believes 
that these regulations are consistent with the principles in Executive 
Order 13563.
    We also have determined that this regulatory action does not unduly 
interfere with State, local, or tribal governments in the exercise of 
their governmental functions.
    In accordance with both Executive Orders, the Department has 
assessed the potential costs and benefits, both quantitative and 
qualitative, of this regulatory action. The potential costs associated 
with this regulatory action are those resulting from statutory 
requirements and those we have determined as necessary for 
administering the Department's programs and activities.
    In this Regulatory Impact Analysis (RIA) we discuss the need for 
regulatory action, the comments about the NPRM analysis and significant 
changes from the NPRM, the potential costs and benefits, net budget 
impacts, assumptions, limitations, and data sources, as well as 
regulatory alternatives we considered. Although the majority of the 
costs related to information collection are discussed within this RIA, 
elsewhere in this notice under Paperwork Reduction Act of 1995, we also 
identify and further explain burdens specifically associated with 
information collection requirements.
1. Need for Regulatory Action
    These final regulations address several topics related to the 
administration of title IV, HEA student aid programs and benefits and 
options for borrowers.
    As detailed in the NPRM, the Department last revised the borrower 
defense regulations over two decades ago, and until recently, use of 
borrower defense has been very limited. The lack of clarity in the 
current regulations has led to much confusion among borrowers regarding 
what protections and actions for recourse are available to them when 
dealing with cases of wrongdoing by their institutions. The Department 
received comments addressing this lack of clarity during the public 
comment period.
    The need for a clearer and more efficient process was also 
highlighted when the collapse of Corinthian generated an unprecedented 
level of borrower defense claims activity. As detailed extensively in 
the NPRM, Corinthian, a publicly traded for-profit higher education 
company that in 2014 enrolled over 70,000 students at more than 100 
campuses nationwide, filed for bankruptcy in 2015 after being the 
subject of multiple investigations and actions by Federal and State 
governments. The Department committed itself to ensuring that students 
harmed by Corinthian's misrepresentations receive the relief to which 
they are entitled, and realized that the existing regulations made this 
process burdensome, both for borrowers and for the Department. Under 
the current process, the Department would be required to devote 
significant resources to reviewing individual State laws to determine 
which law to apply to each borrower's claim. The Department appointed a 
Special Master in June of 2015 to create and oversee the process of 
providing debt relief for these Corinthian students. As of October 
2016, approximately 3,787 borrower defense discharges totaling $73.1 
million had been completed and another 7,858 closed school discharges 
totaling approximately $103.1 million have been processed. Moreover, 
the Department has received thousands more claims--both from former 
Corinthian students and from students at a number of other 
institutions--that are pending a full review, and expects to receive 
more as the Department continues to conduct outreach to potentially 
affected students.
    The Department remains committed to ensuring that borrowers with a 
valid defense to repayment are able to benefit from this option. 
Research has shown that large sums of student debt can reduce levels of 
participation in the economy, especially if borrowers are unable to 
obtain adequate income to repay their debts.\96\ If the borrower is 
harmed such as by being provided with educational credentials worth 
significantly less than an institution's misrepresentation has led him 
or her to believe, the borrower may be entitled to some relief from the 
loans associated with such education. The changes to the borrower 
defense provisions in these final regulations will update the process 
and standard for determining relief and allow the Department to 
effectively address claims that arise in the modern postsecondary 
educational system.
---------------------------------------------------------------------------

    \96\ The Economics of Student Loan Borrowing and Repayment, Wen 
Li, Federal Reserve Bank of Philadelphia, available at https://philadelphiafed.org/-/media/research-and-data/publications/business-review/2013/q3/brq313_economics-of-student-loan-borrowing-and-repayment.pdf.
---------------------------------------------------------------------------

    The landscape of higher education has changed significantly over 
the past 20 years, including a substantial increase in the number of 
students enrolled in distance education. Because distance education 
allows students to enroll in courses and programs based in other States 
and jurisdictions, it has created additional challenges as it relates 
to the Department's current borrower defense regulations.
    The current regulations require an analysis of State law to 
determine the validity of a borrower defense claim. This approach 
creates complexities in determining which State law applies and may 
give rise to potential inequities, as students in one State may receive 
different relief than students in another State, despite common 
underlying facts and claims.
    The expansion of distance education has also impacted the 
Department's ability to apply its borrower defense regulations. The 
current borrower defense regulations do not identify which State's law 
is considered the ``applicable'' State law on which the borrower's 
claim can be based.\97\ Generally, the regulation was assumed to refer 
to the laws of the State in which the institution was located; we did 
not have much occasion to address differences in protection for 
borrowers in States that offer little protection from school misconduct 
or borrowers who reside in one State but are enrolled via distance 
education in a program based in another State. Some States have 
extended their rules to protect these students, while others have not.
---------------------------------------------------------------------------

    \97\ In the few instances prior to 2015 in which claims have 
been recognized under current regulations, borrowers and the school 
were typically located in the same State.
---------------------------------------------------------------------------

    The final regulations give students access to consistent, clear, 
fair, and transparent processes to seek debt relief. The new Federal 
standard will allow a borrower to assert a borrower defense on the 
basis of a substantial misrepresentation, a breach of contract, or a 
favorable, nondefault contested judgment against the school for its act 
or omission relating to the making of the borrower's Direct Loan or the 
provision of educational services for which the loan was provided. 
Additionally, the final regulations separately address predispute 
arbitration clauses, another possible obstacle to borrowers pursuing a 
borrower defense claim. These final regulations also prohibit a school 
participating in the Direct Loan Program from obtaining, through the 
use of contractual provisions or other agreements, a predispute 
agreement for arbitration to resolve claims brought by a borrower 
against the school that could also form the basis of a borrower defense 
under the Department's

[[Page 76048]]

regulations. The final regulations also prohibit a school participating 
in the Direct Loan Program from obtaining an agreement, either in an 
arbitration agreement or in another form, that a borrower waive his or 
her right to initiate or participate in a class action lawsuit 
regarding such claims and from requiring students to engage in internal 
dispute processes before contacting accrediting or government agencies 
with authority over the school regarding such claims. In addition, the 
final regulations establish the conditions or events upon which an 
institution is or may be required to provide to the Department 
financial protection, such as a letter of credit, to help protect 
students, the Federal government, and taxpayers against potential 
institutional liabilities.
    Additionally, to enhance and clarify other existing protections for 
students, these regulations update the basis for obtaining a false 
certification discharge, clarify the processes for false certification 
and closed school discharges, require institutions to provide 
applications and explain the benefits and consequences of a closed 
school discharge, and establish a process for a closed school discharge 
without an application for students who do not re-enroll in a title IV-
participating institution within three years of an institution's 
closure. These regulations also codify the Department's practice that a 
discharge based on school closure, false certification, unpaid refund, 
or defense to repayment will result in the elimination or recalculation 
of the subsidized usage period associated with the loan discharged.
    These regulations also amend the regulations governing the 
consolidation of Nursing Student Loans and Nurse Faculty Loans so that 
they align with the statutory requirements of section 428C(a)(4)(E) of 
the HEA; clarify rules regulating the capitalization of interest on 
defaulted FFEL Loans; require that proprietary schools at which the 
median borrower has not repaid in full, or paid down the balance of, 
the borrower's loans include a warning in advertising and promotional 
materials about those repayment rate outcomes; require that a school 
disclose on its Web site and to prospective and enrolled students about 
events for which it is required to provide financial protection to the 
Department; clarify the treatment of spousal income in the PAYE and 
REPAYE plans; and make other changes that we do not expect to have a 
significant economic impact.
2. Summary of Comments and Changes From the NPRM
    A number of commenters expressed that the RIA in the NPRM was 
inadequate and did not support proceeding with the regulations without 
further study. Commenters noted that the accuracy of several of the 
Department's past budget estimates had been questioned by Congressional 
committees and other outside reviewers. Several commenters pointed out 
that the wide range in the estimate, from $646 million up to $41.3 
billion over the 2017 to 2026 loan cohorts, indicated that the 
Department does not know the potential budget impact of the regulation. 
Other commenters noted that if the impact is at the higher end of the 
range, the analysis does not quantify benefits greater than the costs 
to justify the decision to proceed with the regulations.
    Another set of comments focused on the impact of the regulations on 
higher education, the costs to institutions, and the potential for 
institutional closures. A number of commenters expressed concern that 
institutional closures related to the regulations, especially the 
financial responsibility provisions, will reduce access to higher 
education for low-income and minority students. Materials included with 
the comments analyzed National Postsecondary Student Aid Study 2012 
(NPSAS 2012) data to demonstrate that students at for-profit 
institutions are, on average, more likely to be older, racial 
minorities, veterans, part-time, financially independent, responsible 
for dependents, and Pell Grant recipients. A number of commenters 
suggested that the costs of providing financial protection would result 
in increased costs for students and potentially limit access to higher 
education. Other commenters were concerned with a lack of analysis 
about the costs of the financial protection or the possibility that 
schools would be unable to obtain a letter of credit and would lose 
access to title IV, HEA funding and be forced to close. Several 
commenters suggested that the regulations would open the floodgates to 
frivolous claims that would overwhelm the Department and institutions, 
exacerbating the harmful effects on higher education.
    One commenter argued that the proposed regulations would result in 
a large number of disappointed borrowers filing borrower defense claims 
without merit. Several commenters were concerned that the projected net 
budget impact referred to in the NPRM of as much as $42.698 billion 
during the coming decade would undermine the integrity of the Direct 
Loan Program and that neither American taxpayers, nor schools that have 
successfully educated students, could cover these costs if thousands of 
students or graduates start requesting discharges of their loans. The 
commenters argued that the regulations lack any quality control measure 
to ensure that the Department would not be hit with an influx of 
fraudulent claims. They cited a recent lawsuit in which a former law 
student unsuccessfully sued her law school for false advertising.
    Finally, a number of commenters suggested the high cost estimate 
was overstated because schools would change their practices and limit 
behavior that would result in valid borrower defense claims. Another 
commenter questioned the characterization of the net budget impact as a 
cost based on the idea that the Department should not collect on loans 
established fraudulently. Several commenters noted that the potential 
fiscal impact should not factor into decisions about whether borrowers 
are eligible for relief.
    We appreciate the comments about the RIA in the NPRM. As discussed 
in the NPRM, given the limited history of borrower defense claims and 
the limitations of available data, there is uncertainty about the 
potential impact of the regulations. Per OMB Circular A-4, in some 
cases, uncertainty may be addressed by presenting discrete alternative 
scenarios without addressing the likelihood of each scenario 
quantitatively. The uncertainty about borrower defense was acknowledged 
and reflected in the wide range of scenario estimates in the NPRM. The 
Department presented the range of scenarios and discussion of sources 
of uncertainty in the estimates in order to be transparent and 
encourage comments that might aid the Department in refining the 
estimates for the final regulations.
    We do not agree that the analysis was inadequate to support 
proceeding with the regulations. Under Executive Orders 12866 and 
13563, the Department must adopt a regulation only upon a reasoned 
determination that its benefits justify its cost. The Executive Orders 
recognize that some benefits and costs are difficult to quantify, and 
provide that costs and benefits include both quantifiable measures--to 
the fullest extent that they can be usefully estimated--as well as 
qualitative measures of costs and benefits that are difficult to 
quantify but ``essential to consider.'' OMB Circular A-4 provides that 
in cases where benefit and cost estimates are uncertain, benefit and 
cost estimates that reflect the full

[[Page 76049]]

probability distribution of potential consequences should be reported. 
Where possible, the analysis should present probability distributions 
of benefits and costs and include the upper and lower bound estimates 
as complements to central tendency and other estimates. If a lack of 
knowledge prevents construction of a scientifically defensible 
probability distribution, the Department should describe benefits or 
costs under plausible scenarios and characterize the evidence and 
assumptions underlying each alternative scenario. The Department took 
this approach in the NPRM and presents the analysis with relevant 
revisions for the final regulations.
    OMB Circular A-4 suggests that in some instances when uncertainty 
has significant effects on the final conclusion about net benefits, the 
agency should consider additional research prior to rulemaking. For 
example, when the uncertainty is due to a lack of data, the agency 
might consider deferring rulemaking, pending further study to obtain 
sufficient data. Delaying a decision will also have costs, as will 
further efforts at data gathering and analysis. The Department has 
weighed the benefits of delay against these costs in making the 
decision to proceed with the regulation. With respect to borrower 
defense, if the Department did not proceed with the final regulations, 
the existing borrower defense provisions would remain in effect and 
some of the costs associated with potential claims would be incurred 
whether or not the final regulations go into effect. The final 
regulations build in more clarity and add accountability and 
transparency provisions that are designed to shift risk from the 
taxpayers to institutions. Moreover, if the Department were to delay 
implementation of the final regulations to obtain further information 
about the scope of institutional behavior that could give rise to 
claims, it is not clear when a significant amount of relevant data 
would become available. Borrower responses in absence of the process 
established in the final regulations do not necessarily reflect the 
level of claims that will be processed under the final regulations. 
Delaying the regulations would delay the improved clarity and 
accountability from the regulations without developing additional data 
within a definite timeframe, and we do not believe the benefits of such 
a delay outweigh the costs. As with any regulation, additional data 
that becomes available will be taken into account in the ongoing re-
estimates of the title IV, HEA aid programs.
    We have considered the other comments received. Revisions to the 
analysis in response to those comments and our internal review of the 
analysis are incorporated into the Discussion of Costs, Benefits, and 
Transfers and Net Budget Impacts sections of this RIA as applicable. 
Table 1 summarizes significant changes made from the NPRM in response 
to comments and the Department's ongoing development of the final 
regulations.

        Table 1--Summary of Key Changes in the Final Regulations
------------------------------------------------------------------------
            Reg section                     Description of change
------------------------------------------------------------------------
                   Financial Responsibility Triggers:
------------------------------------------------------------------------
Sec.   668.171(c)(1)..............  As detailed in Table 2, eliminates
                                     the $750,000 or 10 percent of
                                     current assets materiality
                                     threshold. Instead, losses from all
                                     of the automatic triggers except 90/
                                     10, cohort default rate (CDR), SEC
                                     delisting, and SEC warning, are
                                     used to recalculate the composite
                                     score. If the recalculated score is
                                     less than 1.0, the school is not
                                     financially responsible and must
                                     provide financial protection.
                                    Removes Form 8-K trigger from
                                     proposed Sec.
                                     668.171(c)(10)(vii).
                                    Eliminates discretionary trigger
                                     based on bond or credit ratings
                                     from proposed Sec.
                                     668.171(c)(10)(iv).
Sec.   668.171(h).................  Reclassifies proposed automatic
                                     triggers including those related to
                                     accreditor probation and show-cause
                                     actions, pending borrower defense
                                     claims, and violations of loan
                                     agreements as discretionary
                                     triggers.
                                    Specifies that in its notice
                                     reporting a triggering event, an
                                     institution may demonstrate
                                     mitigating factors about the event,
                                     including that the reported action
                                     or event no longer exists or has
                                     been resolved or the institution
                                     has insurance that will cover part
                                     or all of the debts and liabilities
                                     that arise at any time from that
                                     action or event.
------------------------------------------------------------------------
                    Financial Protection Disclosures:
------------------------------------------------------------------------
Sec.   668.41(i)..................  Revised to clarify that the
                                     Secretary will conduct consumer
                                     testing prior to establishing the
                                     actions and triggering events that
                                     require financial disclosures.
                                    Further clarifies the requirements
                                     for testing with consumers before
                                     publishing the content of the
                                     disclosure, as well as the
                                     disclosure delivery requirements to
                                     prospective and enrolled students.
------------------------------------------------------------------------
                        Financial Responsibility:
------------------------------------------------------------------------
Sec.   668.175(f)(5)..............  Clarifies how long an institution
                                     must maintain the financial
                                     protection associated with a
                                     triggering event in Sec.   668.171.
Sec.   668.175(f)(2)(i)...........  Provides that the Secretary may
                                     identify other acceptable forms of
                                     financial protection.
Sec.   668.175(h).................  Provides that the Secretary will
                                     release any funds held under a set-
                                     aside if the institution
                                     subsequently provides cash, the
                                     letter of credit, or other
                                     financial protection required under
                                     the zone or provisional
                                     certification alternatives in Sec.
                                      668.175(d) or (f).
------------------------------------------------------------------------
                             Repayment Rate:
------------------------------------------------------------------------
Sec.   668.41(h)(3)...............  Clarifies that the Secretary will
                                     calculate a repayment rate based on
                                     the proportion of students who have
                                     repaid at least one dollar in
                                     outstanding balance, measured in
                                     the third year after entering
                                     repayment, using data reported and
                                     validated through the Gainful
                                     Employment program-level repayment
                                     rate calculation.
                                    Removes the requirement that
                                     repayment rate warnings be
                                     delivered individually to all
                                     prospective and enrolled students.
                                     Enhances the requirement as to how
                                     repayment rate warnings must be
                                     presented in advertising and
                                     promotional materials.
------------------------------------------------------------------------

[[Page 76050]]

 
                        Closed School Discharge:
------------------------------------------------------------------------
Sec.   682.402(d)(7)(ii)..........  Requires a lender to provide a
                                     borrower another closed school
                                     discharge application upon resuming
                                     collection.
Sec.  Sec.   674.33(g)(3),          Revised to clearly delineate the
 682.402(d)(8), and 685.214(c)(2).   circumstances under which a closed
                                     school discharge is discretionary,
                                     as opposed to required.
Sec.   682.402(d)(6)(ii)(F).......  Revised to stipulate that a guaranty
                                     agency that denies a borrower's
                                     closed school discharge request
                                     must notify the borrower of the
                                     reasons for the denial.
Sec.   682.402(d).................  Updates wording in FFEL closed
                                     school discharge regulations to
                                     refer to application instead of
                                     sworn statement or written request.
------------------------------------------------------------------------
                     False Certification Discharge:
------------------------------------------------------------------------
Sec.   685.215(c)(1)..............  Clarifies that a borrower must have
                                     reported to the school that the
                                     borrower did not have a high school
                                     diploma or its equivalent.
Sec.   685.308(a).................  Clarifies that the Department
                                     assesses liabilities to schools for
                                     false certification due to
                                     disqualifying condition or identity
                                     theft.
------------------------------------------------------------------------
                          Predispute Agreements
------------------------------------------------------------------------
Sec.   685.300....................  Eliminates the use of predispute
                                     arbitration agreements, whether or
                                     not they are mandatory, to resolve
                                     claims brought by a borrower
                                     against the school that could also
                                     form the basis of a borrower
                                     defense or to prevent a student who
                                     has obtained or benefited from a
                                     Direct Loan from participating in a
                                     class action suit related to
                                     borrower defense claim.
------------------------------------------------------------------------

3. Discussion of Costs, Benefits, and Transfers
    In developing the final regulations, the Department made some 
changes to address concerns expressed by commenters and to achieve the 
objectives of the regulations while acknowledging the potential costs 
of the provisions to institutions and taxpayers. As noted in the NPRM, 
the primary potential benefits of these regulations are: (1) An updated 
and clarified process and a Federal standard to improve the borrower 
defense process and usage of the borrower defense process to increase 
protections for students; (2) increased financial protections for 
taxpayers and the Federal government; (3) additional information to 
help students, prospective students, and their families make educated 
decisions based on information about an institution's financial 
soundness and its borrowers' loan repayment outcomes; (4) improved 
conduct of schools by holding individual institutions accountable and 
thereby deterring misconduct by other schools; (5) improved awareness 
and usage, where appropriate, of closed school and false certification 
discharges; and (6) technical changes to improve the administration of 
the title IV, HEA programs. Costs associated with the regulations will 
fall on a number of affected entities including institutions, guaranty 
agencies, the Federal government, and taxpayers. These costs include 
changes to business practices, review of marketing materials, 
additional employee training, and unreimbursed claims covered by 
taxpayers. The largest quantified impact of the regulations is the 
transfer of funds from the Federal government to borrowers who succeed 
in a borrower defense claim, a significant share of which will be 
offset by the recovery of funds from institutions whose conduct gave 
rise to the claims.
    We have considered and determined the primary costs and benefits of 
these regulations for the following groups or entities that we expect 
to be impacted by the proposed regulations:
     Students and borrowers
     Institutions
     Guaranty agencies and loan servicers
     Federal, State, and local government

Borrower Defense, Closed School Discharges, and False Certification 
Discharges

Students and Borrowers

    The fundamental underlying right of borrowers to assert a defense 
to repayment and obligation of institutions to reimburse the Federal 
government for such claims that are valid exist under the current 
borrower defense regulations. These final regulations aim to establish 
processes that enable more borrowers to pursue valid claims and 
increase their likelihood of discharging their loans as a result of 
institutional actions generating such claims. As detailed in the NPRM, 
borrowers will be the primary beneficiaries of these regulations as 
greater awareness of borrower defense, a common Federal standard, and a 
better defined process may encourage borrowers who may have been 
unaware of the process, or intimidated by its complexity in the past, 
to file claims.
    Furthermore, these changes could reduce the number of borrowers who 
are struggling to meet their student loan obligations. During the 
public comment periods of the negotiated rulemaking sessions, many 
public commenters who were borrowers mentioned that they felt that they 
had been defrauded by their institutions of higher education and were 
unable to pay their student loans, understand the borrower defense 
process, or obtain debt relief for their FFEL Loans under the current 
regulations. We received many comments on the NPRM echoing this 
sentiment.
    Through the financial responsibility provisions, these final 
regulations introduce far stronger incentives for schools to avoid 
committing acts or making omissions that could lead to a valid borrower 
defense claim than currently exist. In addition, through clarification 
of circumstances that could lead to a valid claim, institutions may 
better avoid behavior that could result in a valid claim and future 
borrowers may be less likely to face such behavior.
    Providing an automatic forbearance with an option for the borrower 
to decline the temporary relief and continue making payments will 
reduce the potential burden on borrowers pursuing borrower defenses. 
These borrowers will be able to focus on

[[Page 76051]]

supplying the information needed to process their borrower defense 
claims without the pressure of continuing to make payments on loans for 
which they are currently seeking relief. When claims are successful, 
there will be a transfer between the Federal government and affected 
student borrowers as balances are forgiven and some past payments are 
returned. In the scenarios described in the Net Budget Impacts section 
of this analysis, those transfers range from $1.7 billion for the 
minimum budget estimate to $3.3 billion in the maximum impact estimate 
annually, with the primary budget estimate at $2.5 billion annually.
    Borrowers who ultimately have their loans discharged will be 
relieved of debts they may not have been able to repay, and that debt 
relief can ultimately allow them to become bigger participants in the 
economy, possibly buying a home, saving for retirement, or paying for 
other expenses. Recent literature related to student loans suggests 
that high levels of student debt may decrease the long-term probability 
of marriage,\98\ increase the probability of bankruptcy,\99\ reduce 
home ownership rates,\100\ and increase credit constraints, especially 
for students who drop out.\101\ Further, when borrowers default on 
their loans, everyday activities like signing up for utilities, 
obtaining insurance, or renting an apartment can become a 
challenge.\102\ Borrowers who default might also be denied a job due to 
poor credit, struggle to pay fees necessary to maintain professional 
licenses, or be unable open a new checking account.\103\ While 
difficult to quantify because of the multitude of different potential 
borrowing profiles and nature of the claims of those who will seek 
relief through borrower defense and the possibility of partial relief, 
the discharge of loans for which borrowers have valid borrower defenses 
could have significant positive consequences for affected borrowers and 
associated spillover economic benefits.
---------------------------------------------------------------------------

    \98\ Gicheva, D. ``In Debt and Alone? Examining the Causal Link 
between Student Loans and Marriage.'' Working Paper (2013).
    \99\ Gicheva, D., and U. N. C. Greensboro. ``The Effects of 
Student Loans on Long-Term Household Financial Stability.'' Working 
Paper (2014).
    \100\ Shand, J. M. (2007). ``The Impact of Early-Life Debt on 
the Homeownership Rates of Young Households: An Empirical 
Investigation.'' Federal Deposit Insurance Corporation Center for 
Financial Research.
    \101\ Id.
    \102\ https://studentaid.ed.gov/repay-loans/default.
    \103\ www.asa.org/in-default/consequences/.
---------------------------------------------------------------------------

    Affected borrowers also will be able to return into the higher 
education marketplace and pursue credentials they need for career 
advancement. To the extent borrowers have subsidized loans, the 
elimination or recalculation of the borrowers' subsidized usage period 
could relieve them of their responsibility for accrued interest and 
make them eligible for additional subsidized loans, which could make 
returning to higher education a more acceptable option.
    These regulations will also give borrowers more information with 
which they can make informed decisions about the institutions they 
choose to attend. An institution will be required to provide a 
disclosure for certain actions and triggering events, to be determined 
through consumer testing, for which it was required to obtain a letter 
of credit. Recent events involving closure of several large proprietary 
institutions have shown the need for lawmakers, regulatory bodies, 
State authorizers, taxpayers, and students to be more broadly aware of 
circumstances that could affect the continued existence of an 
institution. This disclosure, the content of which will be prescribed 
by the Secretary in a notice published in the Federal Register, will 
allow borrowers to receive early warning signs about an institution's 
risk for students, and therefore borrowers may be able to select a 
different college, or withdraw or transfer to an institution in better 
standing in lieu of continuing to work towards earning credentials that 
may have limited value.
    Proprietary institutions will also be required to provide a warning 
through advertising and promotional materials if their loan repayment 
rate, based on the proportion of students who have repaid at least one 
dollar in outstanding balance and measured in the third year after 
entering repayment, using data reported and validated through the 
Gainful Employment repayment rate calculation, shows that the median 
borrower has not paid down his balance by at least one dollar. To 
estimate the effect of the repayment rate warning on institutions, the 
Department analyzed program-level repayment rate data prepared for the 
Gainful Employment regulation \104\ and aggregated the proprietary 
institutions data to the 6-digit OPEID level and found that 972 of 
1,345 institutions in the 2012 Gainful Employment data had a repayment 
rate that showed the median borrower had not paid down the balance of 
the borrower's loans by at least one dollar.
---------------------------------------------------------------------------

    \104\ A privacy-protected version of the data is available at 
http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/2013-repayment-rate-data.xls. The Department aggregated all program 
numerators and denominators to each unique six-digit OPEID and 
calculated how many institutions had aggregate rates under the 
negative amortization threshold and at least 10 borrowers in the 
denominator. Note that these data reflect students who entered 
repayment in 2007 and 2008; analysis of later cohorts (those who 
entered repayment in 2011 and 2012) published through the College 
Scorecard, which calculate a similar repayment rate, showed 501 
institutions with repayment rates below the negative amortization 
threshold.
---------------------------------------------------------------------------

    A number of commenters pointed to the Department's failure to 
quantify the benefits of the proposed regulations in the NPRM as an 
indication that the analysis did not support the implementation of the 
final regulations. As mentioned throughout the RIA, the extent of the 
private and public benefit from the regulations is difficult to 
quantify. We have limited experience with borrower defense claims to 
draw upon in generating a profile of those likely to make successful 
claims. There are different potential profiles of student loan 
borrowers in terms of loan amounts, loan type composition, likelihood 
of default, fields of employment, degree level, and other factors. We 
do not have a basis in the data from existing claims to know how 
borrower profiles and the distribution and nature of claims will 
intersect. The economic and psychological benefits of debt relief may 
vary for a graduate student with high income potential receiving 
partial relief on a high level of debt and a student who dropped out of 
a certificate program with a lower level of debt and lower earnings 
potential from that program of education. While we do not quantify the 
amount, we expect the benefits associated with the substantial 
transfers to students from successful borrower defense claims will be 
significant. Several commenters noted that students may face costs or 
other negative impacts from these final regulations. In particular, 
commenters expressed concern that the closure of institutions, 
especially proprietary institutions that serve many low-income, 
minority, first-generation, and non-traditional students, will hurt 
access to higher education, especially for those groups. The Department 
acknowledges that some institutions may close if their actions mean 
that they are required to provide a substantial amount of financial 
protection, or that a large number of successful claims are made 
against them. However, as the regulation comes into effect and examples 
of conduct that generates claims are better understood, we expect 
institutions will limit such behavior and compete for students without 
such conduct, and that closures will be reduced over time. The 
Department also believes that institutions that do not face significant 
claims will be able to provide opportunities for students in

[[Page 76052]]

the event of closures of other institutions that do.
    Another possible impact on students mentioned by some commenters is 
that the costs of financial protection or other compliance measures 
will be passed on to students in tuition and fee increases. We believe 
potential tuition increases will be constrained by loan limits and 
other initiatives, such as the Department's Gainful Employment 
regulations, where institutions would be negatively affected by such 
increases.

Institutions

    Institutions will bear many of this regulation's costs, which fall 
into three categories: Paperwork costs associated with compliance with 
the regulations; other compliance costs that may be incurred as 
institutions adapt their business practices and training to ensure 
compliance with the regulations; and costs associated with obtaining 
letters of credit or suitable equivalents if required by the 
institution's performance under a variety of triggers. Additionally, 
there may be a potentially significant amount of funds transferred 
between institutions and the Federal government as reimbursement for 
successful claims. Some institutions may close some or all of their 
programs if their activities generate large numbers of borrower defense 
claims.
    A key consideration in evaluating the effect on institutions is the 
distribution of the impact. While all institutions participating in 
title IV loan programs are subject to the possibility of borrower 
defense, closed school, and false certification claims and the 
reporting requirements in these final regulations, the Department 
expects that fewer institutions will engage in conduct that generates 
borrower defense claims. Over time, the Department expects the number 
of schools that would face the most significant costs to come into 
compliance, the amount of transfers to reimburse the government for 
successful claims, costs to obtain required letters of credit, and 
disclosure of borrower defense claims against the schools to be reduced 
as some offenders are eliminated and other institutions adjust their 
practices. In the primary budget scenario described in the Net Budget 
Impacts section of this analysis, the annual transfers from 
institutions to students, via the Federal government, as reimbursement 
for successful claims are estimated at $994 million. On the other hand, 
it is possible that high-quality, compliant institutions, especially in 
the for-profit sector, will see benefits if the overall reputation of 
the sector improves as a result of (1) more trust that enforcement 
against bad actors will be effective, and (2) the removal of bad 
schools from the higher education marketplace, freeing up market share 
for the remaining schools.
    The accountability framework in the regulations requiring 
institutions to provide financial protection in response to various 
triggers would generate costs for institutions. Some of the triggering 
provisions would affect institutions differently depending upon their 
type and control, as, for example, only publicly traded institutions 
are subject to delisting or SEC suspension of trading, only proprietary 
institutions are subject to the 90/10 rule, and public institutions are 
not subject to the financial protection requirements. To the extent 
data were available, we evaluated the financial protection triggers to 
analyze the expected impact on institutions. Several of the triggers 
are based on existing performance measures and are aimed at identifying 
institutions that may face sanctions and experience difficulty meeting 
their financial obligations. The triggers and, where available, data 
about their potential impact are discussed in Table 2. The consequences 
of an institution being found to be not financially responsible are set 
out in Sec.  668.175 and include providing financial protection through 
a letter of credit, a set-aside of title IV, HEA funds, or other forms 
of financial protection specified by the Secretary in a notice 
published in the Federal Register. Alternatively, an institution that 
can prove it has insurance that covers the triggering risk is not 
considered to be not financially responsible and does not need to 
provide financial protection to the Department.
    The Department will review the triggering events before determining 
whether to require separate financial protection for a triggering event 
that occurs with other triggering events. Another change from the NPRM 
concerns those triggers that include a materiality threshold. Instead 
of being evaluated separately, lawsuits, borrower protection repayments 
to the Secretary, losses from gainful employment and campus closures, 
withdrawal of owner's equity, and other triggers with a materiality 
threshold will be evaluated by their effect on the institution's most 
recent composite score, which will allow the cumulative effect of 
violation of multiple triggers to be taken into account. If the 
recalculated composite score is a failing score, institutions would be 
required to provide financial protection. For the triggers evaluated 
through the revised composite score approach, the required financial 
protection is 10 percent or more, as determined by the Secretary, of 
the total amount of title IV, HEA program received by the institution 
during its most recently completed fiscal year. For the other triggers, 
the amount of financial protection required remains 10 percent or more, 
as determined by the Secretary, of the total amount of title IV, HEA 
program received by the institution during its most recently completed 
fiscal year, unless the Department determines that based on the facts 
of that particular case, the potential losses are greater.

               Table 2--Financial Responsibility Triggers
------------------------------------------------------------------------
              Description                             Impact
------------------------------------------------------------------------
Automatic Triggers Evaluated through Revised Composite Score Calculation
------------------------------------------------------------------------
Institution found to be not financially responsible under Sec.   668.171
 and must qualify under an alternative standard if the addition of the
 triggering liability to the institution's most recently calculated
 composite score causes it to fail the composite score. Triggering
 liabilities that occur during the period between the fiscal year for
 which the Secretary last calculated the institution's composite score
 under Sec.   668.172 and the next following fiscal year for which the
 Secretary calculates a composite score are evaluated. Requires
 financial protection of no less than 10 percent of prior year's title
 IV, HEA aid and such additional amount as the Secretary demonstrates is
 needed to protect from other losses that may arise within the next 18
 months.
------------------------------------------------------------------------

[[Page 76053]]

 
      Lawsuits and Other Actions: Sec.   668.171(c)(1)(i) and (ii)
------------------------------------------------------------------------
Triggered if an institution is required  Since 2010, at least 25
 to pay any debt or incur any liability   institutions have been
 arising from a final judgment in a       investigated or reached
 judicial proceeding, or from an          settlements with State AGs,
 administrative proceeding or             with some being involved in
 determination, or from a settlement.     actions by multiple States.
Triggered if the institution is being     Federal agencies, including
 sued in an action brought on or after    the Department, DOJ, FTC,
 July 1, 2017 by a Federal or State       CFPB, and the SEC have been
 authority for financial relief on        involved in actions against at
 claims related to the making of the      least 20 institutions, with
 Direct Loan for enrollment at the        multiple actions against some
 school or the provision of educational   schools.
 services and the suit has been pending
 for 120 days..
Triggered if the institution is being
 sued in a lawsuit other than by a
 Federal or State authority related to
 the making of a Direct Loan or
 provision of educational services
 which has survived a motion for
 summary judgment or the time for such
 motion has passed.
If claims do not state a dollar amount
 and no amount has been set in a court
 ruling: (1) For Federal and State
 borrower defense-related action, the
 Department will calculate loss by
 considering claim to seek the amount
 set by a court ruling, or if no ruling
 has been issued, in a written demand
 or settlement offer by the agency, or
 the amount of all tuition and fees for
 the period in the suit, for the
 program or location described in the
 allegations. Institution allowed to
 show suit is limited to a smaller
 portion of the school and that tuition
 and fees for that portion should be
 used; and (2) For all other suits the
 potential loss (if none is stated in
 the complaint or in a court ruling) is
 the amount in a written demand pre-
 suit, the amount offered by the
 plaintiff to settle, or the amount
 stated in discovery leading up to a
 trial.
------------------------------------------------------------------------
       Accreditor Actions: (Teach-Outs) Sec.   668.171(c)(1)(iii)
------------------------------------------------------------------------
Triggered if institution required by
 its accrediting agency to submit a
 teach-out plan that covers the closing
 of the institution or any of its
 branches or additional locations.
The amount of title IV, HEA aid
 allocated in the previous year to the
 closed locations will be used to
 recalculate the composite score.
------------------------------------------------------------------------
              Gainful Employment: Sec.   668.171(c)(1)(iv)
------------------------------------------------------------------------
Triggered if the potential loss from
 the closure of programs that are one
 year away from losing their
 eligibility for title IV, HEA program
 funds causes the recalculated
 composite score to fall below 1.0.
The amount of title IV, HEA aid
 allocated in the previous year to
 programs that could lose eligibility
 in the next year will be used to
 recalculate the composite score.
------------------------------------------------------------------------
          Withdrawal of Owner's Equity: Sec.   668.171(c)(1)(v)
------------------------------------------------------------------------
The amount of equity withdrawn will be
 used to recalculate the composite
 score. Applies only to proprietary
 institutions and provides that funds
 transferred between institutions in a
 group that have a common composite
 score are not considered withdrawals
 of owner's equity.
------------------------------------------------------------------------
    Automatic Triggers Not Evaluated through Revised Composite Score
                               Calculation
------------------------------------------------------------------------
Institution found to be not financially responsible under Sec.   668.171
 and must qualify under an alternative standard if the triggering events
 occur..
------------------------------------------------------------------------
                 Non-Title IV Revenue: Sec.   668.171(d)
------------------------------------------------------------------------
If an institution fails the 90/10        In the most recent 90/10
 revenue test in its most recently        report, 14 institutions
 completed fiscal year. Applies to        received 90 percent or more of
 proprietary institutions only.           their revenues from title IV,
                                          HEA funds. The total title IV,
                                          HEA funding for those
                                          institutions in award year
                                          (AY) 2013-14 was $56.4
                                          million.
------------------------------------------------------------------------
Publicly Traded Institutions--SEC or Exchange Actions: Sec.   668.171(e)
------------------------------------------------------------------------
The SEC warns the institution that it
 may suspend trading on the
 institution's stock.
The institution failed to file a
 required annual or quarterly report
 with the SEC within the time period
 prescribed for that report or by any
 extended due date under 17 CFR 240.12b-
 25.

[[Page 76054]]

 
The exchange on which the institution's
 stock is traded notifies the
 institution that it is not in
 compliance with exchange requirements,
 or its stock is delisted.
------------------------------------------------------------------------
                 Cohort Default Rates: Sec.   668.171(f)
------------------------------------------------------------------------
Triggered if institution's two most      From the most recently released
 recent official cohort default rates     official CDR rates, for FY2013
 are 30 percent or above after any        and FY2012, 20 of 3,058 non-
 challenges or appeals.                   public institutions that had
                                          CDR rates in both years were
                                          over 30 percent in both years.
                                          Title IV, HEA aid received by
                                          these institutions in AY2015-
                                          16 totaled $12.8 million.
------------------------------------------------------------------------
                         Discretionary Triggers
------------------------------------------------------------------------
Institution found to be not financially responsible under Sec.   668.171
 and must qualify under an alternative standard if the Secretary
 determines that there is an event or condition that is reasonably
 likely to have a material adverse effect on the financial condition,
 business, or results of operations of the institution..
------------------------------------------------------------------------
Sec.   668.171(g)(1): Significant        The Department looked at
 fluctuations in title IV, HEA program    fluctuations in Direct Loan
 funds.                                   amounts and found that 1,113
                                          of 3,534 non-public
                                          institutions had an absolute
                                          change in Direct Loan volume
                                          of 25 percent or more between
                                          the 2014-15 and 2015-16 award
                                          years and 350 had a change of
                                          50 percent or more.
Sec.   668.171(g)(2): Citation for
 failing State licensing or authorizing
 agency requirements.
Sec.   668.171(g)(3): Failing financial
 stress test developed or adopted by
 the Secretary.
Sec.   668.171(g)(4): High annual        The Department analyzed College
 dropout rates, as calculated by the      Scorecard data to develop a
 Secretary.                               withdrawal rate within six
                                          years. Of 928 proprietary
                                          institutions with data, 482
                                          had rates from 0 to 20
                                          percent, 415 from 20 to 40
                                          percent, 30 from 40 to 60
                                          percent, and 1 from 60 to 80
                                          percent. Of 1,058 private not-
                                          for-profit institutions with
                                          data, 679 had rates from 0 to
                                          20 percent, 328 from 20 to 40
                                          percent, 51 from 40 to 60
                                          percent, and none above 60
                                          percent. Of 1,476 public
                                          institutions with data, 857
                                          had rates from 0 to 20
                                          percent, 587 from 20 to 40
                                          percent, 32 from 40 to 60
                                          percent, and none above 60
                                          percent.
Sec.   668.171(g)(5): The institution    In the March 2015 accreditation
 was placed on probation or issued a      report available at http://
 show-cause order or a status that        ope.ed.gov/accreditation/
 poses equivalent or greater risk to      GetDownLoadFile.aspx, 278 of
 accreditation.                           33,956 programs were on
                                          probation and 5 were in the
                                          resigned under show cause
                                          status. Of the 283 programs in
                                          those statuses in the March
                                          2015 accreditation report, 9
                                          were closed by institutions or
                                          had their accreditation
                                          terminated and 147 remained in
                                          the same status for at least 6
                                          consecutive months.
Sec.   668.171(g)(6): Institution
 violates a provision or requirement in
 a loan agreement that enables a
 creditor to require an increase in
 collateral, a change in contractual
 obligations, an increase in interest
 rates or payments, or other sanctions,
 penalties, or fees.
Sec.   668.171(g)(7): The institution
 has pending claims borrower relief
 discharge under Sec.   685.206 or Sec.
   685.222.
Sec.   668.171(g)(8): The Secretary
 expects to receive a significant
 number of claims for borrower relief
 discharge under Sec.   685.206 or Sec.
   685.222 as a result of a lawsuit,
 settlement, judgement, or finding from
 a State or Federal administrative
 proceeding.
------------------------------------------------------------------------

    In addition to any resources institutions would devote to training 
or changes in business practices to improve compliance with the final 
regulations, institutions would incur costs associated with the 
reporting and disclosure requirements of the final regulations. This 
additional workload is discussed in more detail under Paperwork 
Reduction Act of 1995. In total, the final regulations are estimated to 
increase burden on institutions participating in the title IV, HEA 
programs by 251,049 hours. The monetized cost of this burden on 
institutions, using wage data developed using BLS data available at 
www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $9,175,841. This cost was based 
on an hourly rate of $36.55.

Guaranty Agencies and Loan Servicers

    Several provisions may impose a cost on guaranty agencies or 
lenders, particularly the limits on interest capitalization. Loan 
servicers may have to update their process to accept electronic death 
certificates, but increased use of electronic documents should be more 
efficient over the long term. As indicated in the Paperwork Reduction 
Act of 1995 section of this preamble, the final regulations are 
estimated to increase burden on guaranty agencies and loan servicers by 
7,622 hours related to the mandatory forbearance for FFEL borrowers 
considering consolidation for a borrower defense claim and reviews of 
denied closed school claims. The monetized cost of this burden on 
guaranty agencies and loan servicers, using wage data developed using 
BLS data available at www.bls.gov/ncs/ect/

[[Page 76055]]

sp/ecsuphst.pdf, is $278,584. This cost was based on an hourly rate of 
$36.55.

Federal, State, and Local Governments

    In addition to the costs detailed in the Net Budget Impacts section 
of this analysis, the final regulations will affect the Federal 
government's administration of the title IV, HEA programs. The borrower 
defense process in the final regulations will provide a framework for 
handling claims in the event of significant institutional wrongdoing. 
The Department may incur some administrative costs or shifting of 
resources from other activities if the number of applications increases 
significantly and a large number of claims require hearings. 
Additionally, to the extent borrower defense claims are not reimbursed 
by institutions, Federal government resources that could have been used 
for other purposes will be transferred to affected borrowers. Taxpayers 
will bear the burden of these unreimbursed claims. In the scenarios 
presented in the Net Budget Impacts section of this analysis, 
annualized unreimbursed claims range from $923 million to $2.1 billion.
    The accountability framework and financial protection triggers will 
provide some protection for taxpayers as well as potential direction 
for the Department and other Federal and State investigatory agencies 
to focus their enforcement efforts. The financial protection triggers 
may potentially assist the Department as it seeks to identify, and take 
action regarding, material actions and events that are likely to have 
an adverse impact on the financial condition or operations of an 
institution. In addition to the current process where, for the most 
part, the Department determines annually whether an institution is 
financially responsible based on its audited financial statements, 
under these final regulations the Department may determine at the time 
a material action or event occurs that the institution is not 
financially responsible.
Other Provisions
    The technical corrections and additional changes in the final 
regulations will benefit student borrowers and the Federal government's 
administration of the title IV, HEA programs. Updates to the acceptable 
forms of certification for a death discharge will be more convenient 
for borrowers' families or estates and the Department. The provision 
for consolidation of Nurse Faculty Loans reflects current practice and 
gives those borrowers a way to combine the servicing of all their 
loans. Many of these technical corrections and changes involve 
relationships between the student borrowers and the Federal government, 
such as the clarification in the REPAYE treatment of spousal income and 
debt, and they are not expected to significantly impact institutions.
4. Net Budget Impacts
    The final regulations are estimated to have a net budget impact in 
costs over the 2017-2026 loan cohorts of $16.6 billion in the primary 
estimate scenario, including a $381 million modification to cohorts 
2014-2016 for the 3-year automatic closed school discharge. A cohort 
reflects all loans originated in a given fiscal year. Consistent with 
the requirements of the Credit Reform Act of 1990, budget cost 
estimates for the student loan programs reflect the estimated net 
present value of all future non-administrative Federal costs associated 
with a cohort of loans.
    As noted by many commenters, in the NPRM we presented a number of 
scenarios that generated a wide range of potential budget impacts from 
$1.997 billion in the lowest impact scenario to $42.698 billion in the 
highest impact scenario. As described in the NPRM, this range reflected 
the uncertainty related to the borrower defense provisions in the 
regulations and our intent to be transparent about the estimates to 
generate discussion and information that could help to refine the 
estimates. In response to comments and our own internal review, we have 
made a number of revisions to the borrower defense budget impact 
estimate that are described in the discussion of the impact of those 
provisions.
    The provisions with the greatest impact on the net budget impact of 
the regulations are those related to the discharge of borrowers' loans, 
especially the changes to borrower defense and closed school 
discharges. As noted in the NPRM, borrowers may pursue closed school, 
false certification, or borrower defense discharges depending on the 
circumstances of the institution's conduct and the borrower's claim. If 
the institution does not close, the borrower cannot or does not pursue 
closed school or false certification discharges, or the Secretary 
determines the borrower's claim is better suited to a borrower defense 
group process, the borrower may pursue a borrower defense claim. The 
precise split among the types of claims will depend on the borrower's 
eligibility and ease of pursuing the different claims. While we 
recognize that some claims may be fluid in classification between 
borrower defense and the other discharges, in this analysis any 
estimated effect from borrower defense related claims are described in 
that estimate, and the net budget impact in the closed school estimate 
focuses on the process changes and disclosures related to that 
discharge.
Borrower Defense Discharges
    As the Department will eventually have to incorporate the borrower 
defense provisions of these final regulations into its ongoing budget 
estimates, we have moved closer to that goal in refining the estimated 
impact of the regulations to reflect a primary scenario. The 
uncertainty inherent in the borrower defense estimate given the limited 
history of borrower defense claims and other factors described in the 
NPRM is reflected in the additional sensitivity runs that demonstrate 
the effect of changes in the specific assumption being tested. Another 
change from the NPRM is the specification of an estimated baseline 
scenario for the impact of borrower defense claims if these final 
regulations did not go into effect and borrowers had to pursue claims 
under the existing borrower defense regulation. Similar to the NPRM, 
the estimated net budget impact of $14.9 billion attributes all 
borrower defense activity for the 2017 to 2026 cohorts to these final 
regulations, but with the baseline scenario, we present an estimate of 
the subset of those costs that could be incurred under the existing 
borrower defense regulation.
    These final regulations establish a Federal standard for borrower 
defense claims related to loans first disbursed on or after July 1, 
2017, as well as describe the process for the assertion and resolution 
of all borrower defense claims--both those made for Direct Loans first 
disbursed prior to July 1, 2017, and for those made under the 
regulations after that date. As indicated in this preamble, while 
regulations governing borrower defense claims have existed since 1995, 
those regulations have rarely been used. Therefore, we have used the 
limited data available on borrower defense claims, especially 
information about the results of the collapse of Corinthian, projected 
loan volumes, Departmental expertise, the discussions at negotiated 
rulemaking, comments on the NPRM analysis, and information about past 
investigations into the type of institutional acts or omissions that 
would give rise to borrower defense claims to refine the primary 
estimate and sensitivity scenarios that we believe will capture the 
range of net budget impacts

[[Page 76056]]

associated with the borrower defense regulations.
    While we have refined the assumptions used to estimate the impact 
of the borrower defense provisions, the ultimate method of estimating 
the impact remains entering a level of net borrower defense claims into 
the student loan model (SLM) by risk group, loan type, and cohort. The 
net present value of the reduced stream of cash flows compared to what 
the Department would have expected from a particular cohort, risk 
group, and loan type generates the expected cost of the regulations. 
Similar to the NPRM, we applied an assumed level of school misconduct, 
borrower claims success, and recoveries from institutions (respectively 
labeled as Conduct Percent, Borrower Percent, and Recovery Percent in 
Tables 3-A and 3-B) to the President's Budget 2017 (PB2017) loan volume 
estimates to generate the estimated net borrower defense claims for 
each cohort, loan type, and sector.
    The limited history of borrower defense claims and other factors 
that lead the Department to the range of scenarios described in the 
NPRM are still in effect. These factors include the level of school 
misconduct that could give rise to claims and institutions' reaction to 
the regulation to cut back on such activities, borrowers' response to 
the regulations including the consolidation of FFEL and Perkins 
borrowers to access the Direct Loan borrower defense process, the level 
of group versus individual claims, and the extent of full or partial 
relief applied to claims. Additionally, other regulatory and 
enforcement initiatives such as the Gainful Employment regulations, 
creation of the Student Aid Enforcement Unit, and greater rigor in the 
Department's review of accrediting agencies may have overlapping 
effects and may affect loan volumes and potential exposure to borrower 
defense claims at some institutions. To demonstrate the effect of the 
uncertainty about these factors, we estimated several scenarios to test 
the sensitivity of the various assumptions.
    In refining our approach and estimating a primary scenario with 
several sensitivity runs, we also changed the assumptions from the NPRM 
in response to comments and our own review. The development of the 
estimated baseline scenario described in Table 3-B is one of the 
changes. Another major change is the incorporation of a deterrent 
effect of the borrower defense provisions on institutional behavior. In 
the NPRM, there was no change across cohorts in the level of school 
misconduct giving rise to claims. Upon review, we believe it is more 
likely that the borrower defense provision will have an impact like 
that of other title IV policies such as the cohort default rate or 90/
10 in that institutions will make efforts to comply as the rule comes 
into effect and the precedents for what constitutes behavior resulting 
in successful claims are developed. In the past, when provisions 
targeting specific institutional activities or performance have been 
introduced, there has generally been a period of several years while 
the worst performers are removed from the system and while other 
institutions adapt to the new requirements and a lower steady state is 
established. We expect a similar pattern to develop with respect to 
borrower defense, as reflected in the Conduct Percent in Table 3-A. 
Another change reflected by the Conduct Percent is an increase in 
maximum level of claims from public and private non-profit institutions 
to 3 percent. Many commenters expressed concern about the effect of the 
regulations on these sectors or questions about the type of misconduct 
leading to claims that exist in those sectors. A number of commenters 
pointed to graduate programs, especially law programs, as a potential 
source of claims. Graduate students took out approximately 36 percent 
of all Direct Loans in 2015-16.\105\ Given the history of court 
decisions related to law school debt, the presumed greater 
sophistication of graduate borrowers, and the possibility of partial 
relief due to the value of the education received, we still do not 
expect many successful claims to come from these sectors but did 
increase the level to account for the possibility. The other major 
change is the introduction of a ramp-up in the Borrower Percent and the 
Recovery Percent to reflect an increase in borrower awareness and the 
effectiveness of the financial responsibility protections over time.
---------------------------------------------------------------------------

    \105\ Federal Student Aid, Student Aid Data: Title IV Program 
Volume by School, available at https://studentaid.ed.gov/sa/about/data-center/student/title-iv.
---------------------------------------------------------------------------

    There are a number of other potential mitigating factors that we 
did not explicitly adjust in our estimates in order to avoid 
underestimating the potential cost of the borrower defense provisions. 
Several commenters expressed concern about the effect of the 
regulations on access to higher education, especially for low-income, 
minority, or first-generation students. It is possible that the mix of 
financial aid received by students could shift if they attend different 
institutions than they would if the rule were not in place, but we 
believe that students whose choice of schools may have been affected by 
an institution's wrongdoing will find an alternative and receive 
similar amounts of title IV, HEA aid. Some students who may not have 
pursued higher education without the institution's act or omission may 
not enter the system, reducing the amount of Pell Grants or loans taken 
out, but we do not expect this to be a substantial portion of affected 
student borrowers. In the case of Pell Grants in particular, we do not 
want to estimate savings from potential reductions in aid related to 
borrower defense until such an effect is demonstrated in relevant data. 
Similarly, default discharges may decrease as borrowers seek discharge 
under the borrower defense provisions of these final regulations. If 
borrowers with valid borrower defense claims differ in their payment 
profile from the overall portfolio, the effect on the level of 
defaults, especially in some risk groups, could be substantial.
    Table 3-A presents the assumptions for the primary budget estimate 
with the budget estimate for each scenario presented in Table 4. As in 
the NPRM, we also estimated the impact if the Department received no 
recoveries from institutions, the results of which are discussed after 
Table 4. As in the NPRM, we do not specify how many institutions are 
represented in the estimate, as the scenario could represent a 
substantial number of institutions engaging in acts giving rise to 
borrower defense claims or could represent a small number of 
institutions with significant loan volume subject to a large number of 
claims. According to Federal Student Aid data center loan volume 
reports, the five largest proprietary institutions in loan volume 
received 26 percent of Direct Loans disbursed in the proprietary sector 
in award year 2014-15 and the 50 largest represent 69 percent.\106\
---------------------------------------------------------------------------

    \106\ Federal Student Aid, Student Aid Data: Title IV Program 
Volume by School Direct Loan Program AY2015-16, Q4, available at 
https://studentaid.ed.gov/sa/about/data-center/student/title-iv 
accessed August 22, 2016. https://studentaid.ed.gov/sa/about/data-center/student/title-iv accessed August 22, 2016.
---------------------------------------------------------------------------

    As was done in the NPRM, the PB2017 loan volumes by sector were 
multiplied by the Conduct Percent that represents the share of loan 
volume estimated to be affected by institutional behavior that results 
in a borrower defense claim and the Borrower Percent that captures the 
percent of loan volume associated with potentially eligible borrowers 
who successfully pursue a claim to generate gross claims. The

[[Page 76057]]

Recovery Percent was then applied to the gross claims to calculate the 
net claims that were processed in the Student Loan Model as increased 
discharges. The numbers in Tables 3-A and 3-B are the percentages 
applied for the primary estimate and baseline scenarios for each 
assumption.

                                                   Table 3-A--Assumptions for Primary Budget Estimate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                         Cohort                               2Yr pub        2Yr priv        2Yr prop         4Yr pub        4Yr priv        4Yr prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Conduct Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017....................................................             3.0             3.0              20             3.0             3.0              20
2018....................................................             2.4             2.4              16             2.4             2.4              16
2019....................................................             2.0             2.0            13.6             2.0             2.0            13.6
2020....................................................             1.7             1.7            11.6             1.7             1.7            11.6
2021....................................................             1.5             1.5             9.8             1.5             1.5             9.8
2022....................................................             1.4             1.4             8.8             1.4             1.4             8.8
2023....................................................             1.3             1.3             8.4             1.3             1.3             8.4
2024....................................................             1.2             1.2               8             1.2             1.2               8
2025....................................................             1.2             1.2             7.8             1.2             1.2             7.8
2026....................................................             1.1             1.1             7.7             1.1             1.1             7.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Borrower Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017....................................................              35              35              45              35              35              45
2018....................................................            36.8            36.8            47.3            36.8            36.8            47.3
2019....................................................            38.6            38.6            49.6            38.6            38.6            49.6
2020....................................................            42.4            42.4            54.6            42.4            42.4            54.6
2021....................................................            46.7            46.7              60            46.7            46.7              60
2022....................................................              50              50              63              50              50              63
2023....................................................              50              50              65              50              50              65
2024....................................................              50              50              65              50              50              65
2025....................................................              50              50              65              50              50              65
2026....................................................              50              50              65              50              50              65
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Recovery Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017....................................................              75            23.8            23.8              75            23.8            23.8
2018....................................................              75            23.8            23.8              75            23.8            23.8
2019....................................................              75           26.18           26.18              75           26.18           26.18
2020....................................................              75           28.80           28.80              75           28.80           28.80
2021....................................................              75           31.68           31.68              75           31.68           31.68
2022....................................................              75           33.26           33.26              75           33.26           33.26
2023....................................................              75           34.93           34.93              75           34.93           34.93
2024....................................................              75           36.67           36.67              75           36.67           36.67
2025....................................................              75            37.4            37.4              75            37.4            37.4
2026....................................................              75            37.4            37.4              75            37.4            37.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We also estimated a baseline scenario for the potential impact of 
borrower defense in recognition that many claims could be pursued under 
the existing State standards. The publicity and increased awareness of 
borrower defense could lead to increased activity under the existing 
regulations. In addition to the Corinthian claims, as of October 2016, 
the Department had received nearly 4,400 claims from borrowers of at 
least 20 institutions. The Federal standard in the final regulations 
will provide a unified standard across all States but is based on 
elements of relevant consumer protection law from the various States. 
We estimate that the final regulations could increase claims beyond 
those that could be pursued without it by an average of approximately 
10 percent for the FY2017 cohort. This is based on our initial review 
of claims presented that does not reveal significant differences 
between the State and Federal standards, limiting the expected increase 
in claims from the adoption of the Federal standard. The baseline 
school conduct percentage does improve over time, but at a slower rate 
than occurs under the regulation. The borrower claim percentage for the 
baseline is based on the history of limited claims, informational 
sessions \107\ during which during which 5 to 10 percent was presented 
as a reasonable rate when borrowers have to submit applications or 
otherwise initiate the process, and the level of effort used by the 
Department and advocates to get the Corinthian claims into the system. 
The recovery percentage reflects the fact that public institutions are 
not subject to the changes in the financial responsibility provisions 
because of their presumed backing by their respective States. 
Therefore, the baseline and primary recovery scenarios are the same for 
public institutions and set at a high level to reflect the Department's 
confidence in recovering the expected low level of claims against 
public institutions. Table 3-B presents the assumptions used to 
generate the share of the total net budget impact that we believe could 
have occurred even in the absence of these final regulations.
---------------------------------------------------------------------------

    \107\ Conference calls with the Department, non-Federal 
negotiators, and Professor Adam Zimmerman were held on March 9, 2016 
and March 10, 2016 from 12:00 p.m. to 1:00 p.m.

[[Page 76058]]



                                                 Table 3-B--Assumptions for Estimated Baseline Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                 Cohort                     All sectors       2Yr pub        2Yr priv        2Yr prop         4Yr pub        4Yr priv        4Yr prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Conduct Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017....................................  ..............             2.7             2.7            18.0             2.7             2.7            18.0
2018....................................  ..............             2.6             2.6            17.1             2.6             2.6            17.1
2019....................................  ..............             2.4             2.4            16.2             2.4             2.4            16.2
2020....................................  ..............             2.3             2.3            15.4             2.3             2.3            15.4
2021....................................  ..............             2.2             2.2            14.7             2.2             2.2            14.7
2022....................................  ..............             2.1             2.1            13.9             2.1             2.1            13.9
2023....................................  ..............             2.0             2.0            13.2             2.0             2.0            13.2
2024....................................  ..............             1.9             1.9            12.6             1.9             1.9            12.6
2025....................................  ..............             1.8             1.8            11.9             1.8             1.8            11.9
2026....................................  ..............             1.7             1.7            11.3             1.7             1.7            11.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Borrower Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017....................................               8
2018....................................             8.4
2019....................................             8.8
2020....................................             9.3
2021....................................             9.7
2022....................................            10.2
2023....................................            10.7
2024....................................            11.3
2025....................................            11.8
2026....................................            12.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Recovery Pct
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017....................................  ..............              75               5               5              75               5               5
2018....................................  ..............              75               5               5              75               5               5
2019....................................  ..............              75               5               5              75               5               5
2020....................................  ..............              75               5               5              75               5               5
2021....................................  ..............              75               5               5              75               5               5
2022....................................  ..............              75               5               5              75               5               5
2023....................................  ..............              75               5               5              75               5               5
2024....................................  ..............              75               5               5              75               5               5
2025....................................  ..............              75               5               5              75               5               5
2026....................................  ..............              75               5               5              75               5               5
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As noted in the NPRM, and throughout this RIA, the Department 
recognizes the uncertainty associated with the factors contributing to 
the primary budget assumptions presented in Table 3-A. The baseline 
scenario defined by the assumptions in Table 3-B indicates the net 
costs of claims the Department assumes could occur in absence of these 
final regulations. The $4.9 billion estimated cost for the baseline 
scenario is provided for illustrative purposes and, as discussed above, 
is included in the $14.9 billion total estimated cost for the borrower 
defense provisions. To demonstrate the effect of a change in any of the 
assumptions, the Department designed the following scenarios to isolate 
each assumption and adjust it by 15 percent in the direction that would 
increase costs, increasing the Conduct or Borrower percentages and 
decreasing recoveries. As the gross claims are generated by multiplying 
the PB2017 estimated volumes by the Conduct Percent and the Borrower 
Percent, the Con15 scenario demonstrates the effect of the change in 
either assumption. The recovery percentage is applied to the gross 
claims to generate the net claims, so the REC15 scenario reduces 
recoveries by 15 percent to demonstrate the impact of that assumption. 
The final two runs adjust all the assumptions simultaneously to present 
a maximum and minimum expected budget impact. These sensitivity runs 
are identified as Con15, Rec15, All15, and Min15 respectively. The 
results of the various scenarios range from $14.9 billion to $21.2 
billion and are presented in Table 4.

                                             Table 4--Budget Estimates for Borrower Defense Sensitivity Runs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Estimated costs for cohorts
                           Scenario                              2017-2026 (Budget Authority   Annualized cost to Federal    Annualized cost to Federal
                                                                          in $mns)               Gov't (3% discounting)        Gov't (7% discounting)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Primary Estimate..............................................                       $14,867                        $1,471                        $1,452
Baseline Scenario Estimate....................................                         4,899                           485                           478
Con15.........................................................                        16,770                         1,659                         1,638
Rec15.........................................................                        16,092                         1,592                         1,571
All15.........................................................                        21,246                         2,102                         2,075
Min15.........................................................                         9,459                           936                           923
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 76059]]

    The transfers among the Federal government and affected borrowers 
and institutions associated with each scenario above are included in 
Table 5, with the difference in amounts transferred to borrowers and 
received from institutions generating the budget impact in Table 4. The 
amounts in Table 4 assume the Federal Government will recover some 
portion of claims from institutions. In the absence of any recovery 
from institutions, taxpayers would bear the full cost of successful 
claims from affected borrowers. At a 3 percent discount rate, the 
annualized costs with no recovery are approximately $2.465 billion for 
the primary budget estimate, $637 million for the baseline scenario, 
$2.758 billion for the Con15 scenario, $3.279 billion for the All15 
scenario, and $1.666 billion for the Min15 scenario. At a 7 percent 
discount rate, the annualized costs with no recovery are approximately 
$2.414 billion for the primary budget estimate, $628 million for the 
baseline scenario, $2.699 billion for the Con15 scenario, $3.213 
billion for the All15 scenario, and $1.627 billion for the Min15 
scenario. This potential increase in costs demonstrates the significant 
effect that recoveries from institutions have on the net budget impact 
of the borrower defense provisions.
Closed School Discharge and False Certification Discharges
    In addition to the provisions previously discussed, the final 
regulations also would make changes to the closed school discharge 
process, which are estimated to cost $1.732 billion, of which $381 
million is a modification to cohorts 2014-2016 related to the extension 
of the automatic 3-year discharge and $1.351 billion is for cohorts 
2017-2026. The final regulations include requirements to inform 
students of the consequences, benefits, requirements, and procedures of 
the closed school discharge option, including providing students with 
an application form, and establish a Secretary-led discharge process 
for borrowers who qualify but do not apply and, according to the 
Department's information, did not subsequently re-enroll in any title 
IV-eligible institution within three years from the date the school 
closed. The increased information about and automatic application of 
the closed school discharge option and possible increase in school 
closures related to the institutional accountability provisions in the 
proposed regulations are likely to increase closed school claims. Chart 
1 provides the history of closed schools, which totals 12,666 schools 
or campus locations through September 2016.
[GRAPHIC] [TIFF OMITTED] TR01NO16.000

    In order to estimate the effect of the changes to the discharge 
process that would grant relief without an application after a three-
year period, the Department looked at all Direct Loan borrowers at 
schools that closed from 2008-2011 to see what percentage of them had 
not received a closed school discharge and had no NSLDS record of 
title-IV aided enrollment in the three years following their school's 
closure. Of 2,287 borrowers in the file, 47 percent had no record of a 
discharge or subsequent title IV, HEA aid. This does not necessarily 
mean they did not re-enroll at a title IV institution, so this 
assumption may overstate the potential effect of the three-year 
discharge provision. The Department used this information and the high 
end of closed school claims in recent years to estimate the effect of 
the final regulations related to closed school discharges. The 
resulting estimated cost to the Federal government of the closed school 
provisions is $1.732 billion, of which $381 million is a modification 
related to extending the 3-year automatic discharge to cohorts 2014 
through 2016 and $1.351 billion relates to the 2017 to 2026 loan 
cohorts.
    The final regulations will also change the false certification 
discharge process to include instances in which schools certified the 
eligibility of a borrower who is not a high school graduate (and does 
not meet applicable alternative to high school graduate requirements) 
where the borrower would qualify for a false certification discharge if 
the school falsified the borrower's high school graduation status; 
falsified the borrower's high school diploma; or referred the borrower 
to a third party to obtain a falsified high school diploma. Under 
existing regulations, false certification discharges represent a very 
low share of discharges granted to borrowers. The final regulations 
will replace the explicit reference to ability to benefit requirements 
in the false

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certification discharge regulations with a more general reference to 
requirements for admission without a high school diploma as applicable 
when the individual was admitted, and specify how an institution's 
certification of the eligibility of a borrower who is not a high school 
graduate (and does not meet applicable alternative to high school 
graduate requirements) could give rise to a false certification 
discharge claim. However, we do not expect an increase in false 
certification discharge claims to result in a significant budget impact 
from this change. We believe that schools that comply with the current 
ability to benefit assessment requirement and that honor the current 
high school graduation requirements will continue to comply in the 
manner they now do, and we have no basis to believe that changing the 
terminology or adding false