the American Association of Colleges of Osteopathic Medicine

This analysis was prepared by Venable, LLP, on behalf of AACOM.

On July 13, 2022, the U.S. Department of Education (the “Department”) published a Notice of Proposed Rulemaking (“NPRM”) proposing draft regulations on seven topics related to student loans administered by the Department. This summary addresses the Department’s proposals to (1) establish a new federal standard and process for determining when a borrower has a defense to repayment; and (2) amend the Public Service Loan Forgiveness (“PSLF”) program rules to make it easier for borrowers working in public service to obtain forgiveness. The NPRM also includes regulations to (3) prohibit colleges from requiring borrowers to sign mandatory pre-dispute arbitration and class action waivers; (4) eliminate interest capitalization when not required by statute; (5) eliminate the income monitoring period and expand allowable certification documentation for granting total and permanent disability discharges; (6) expand borrower eligibility and eliminate reenrollment requirements for closed school discharges; and (7) streamline the false certification discharge process. The Department will consider comments received by August 12, 2022 and publish final rules this fall, meaning they will take effect no later than July 1, 2023.

Key Points of the Proposed Rules

Defense to Repayment: The draft defense to repayment regulations propose to:
Establish a new federal standard for the initial adjudication of a borrower defense claim;
Add definitions of “substantial misrepresentation,” “substantial omission of fact,” “breach of contract,” and “aggressive and deceptive recruitment,” all of which are bases for a defense claim;
Clarify how discharge amounts will be determined for approved claims, including establishing a rebuttable presumption of full discharge;
Design a structured process for reconsidering decisions;
Eliminate the limitations period for borrowers;
Adopt a revised limitations period for institutional recoupment;
Incorporate additional information about the nature of claims that the Department receives, the types of evidence received from borrowers, and procedural improvements to help ensure timely decisions for borrowers; and
More clearly establish the importance of the institutional response process and leverage existing procedures for establishing and collecting liabilities to seek recoupment from institutions.
PSLF Program: The draft PSLF program regulations propose to:
Add and revise numerous definitions, including “qualifying employer,” “non-governmental public services,” and “full-time employment;”
Count more payments toward the 120 qualifying payment requirement, including late payments, overpayments, and months in certain deferments or forbearances;
Provide borrowers a hold-harmless option for periods in other types of deferments or forbearances;
Automate forgiveness when the Secretary of Education (the “Secretary”) has sufficient information to make a determination; and
Establish a reconsideration process for denied applications.

Comment Period

Comments must be received by August 12, 2022 and must be submitted via the Federal eRulemaking Portal at www.regulations.gov. Comments received by fax or email, or those received after the comment period, will not be accepted. Comments should indicate they are submitted in response to “Docket ID ED-2021-OPE-0077” and be submitted in Microsoft Word format or searchable Portable Document Format (“PDF”). Comments received will be available for public viewing in their entirety on the Federal eRulemaking Portal.

Borrower Defense to Repayment

Background

Section 455(h) of the Higher Education Act (“HEA”) authorizes the Secretary to specify which acts or omissions of an institution of higher education a borrower may assert as a defense to the repayment of a Direct Loan (i.e., a borrower defense).

The Department has issued borrower defense regulations three times—in 1994, 2016, and 2019.

The 1994 regulations provided that any act or omission of the institution attended by the student that relates to the making of a Direct Loan for enrollment at the school or the provision of educational services for which the loan was provided, giving rise to a cause of action against the institution under applicable state law, is a “borrower defense.”
The 2016 regulations (effective in 2018 after an extended court challenge) were issued following the closure of Corinthian Colleges and established a new federal standard to clarify and streamline the borrower defense claim process. The federal standard applied to loans issued after July 1, 2017, but the new borrower defense claim procedure applied to loans regardless of their disbursement date. The 2016 regulations also enhanced protections for borrowers and strengthened the Department's ability to hold institutions financially accountable for their actions and omissions that resulted in loan discharges.
The 2019 regulations established a more limited federal standard for borrower defense claims by (1) requiring borrowers to prove that the institution engaged in a misrepresentation that was made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth; (2) eliminating the possibility of using common evidence to adjudicate claims on a group basis; (3) requiring the borrower to document the amount of harm suffered; and (4) setting a 3-year limitation period on filing a claim.The 2019 regulations do not include a reconsideration process. The 2019 regulations only applied to loans first disbursed on or after July 1, 2020.

Proposed Defense to Repayment Regulations

The Department initiated the latest borrower defense rulemaking because it believes that the more restrictive standard for approving a borrower defense claim and the relatively narrow statute of limitations for filing claims under the 2019 regulations created a standard that placed undue burdens on borrowers to obtain relief. The Department contends that these burdens were far more onerous than any state standard and went beyond evidentiary requirements and argumentation that a reasonable borrower could be expected to provide.

The proposed regulations for the borrower defense to repayment program, which applies only to Direct Loan borrowers, would expand the current basis for a borrower to receive a discharge for loans obtained to attend a particular institution. As proposed, a borrower defense discharge would occur when the Department determines an institution engaged in substantial misrepresentations or substantial omissions of fact, breached a loan contract, engaged in aggressive academic recruitment, or was subject to a judgment based on federal or state law in a court or administrative tribunal of competent jurisdiction for any of the above behaviors.

Where a borrower defense discharge is warranted, the proposed regulations would make it easier for the Department to recoup the cost of discharges from responsible institutions from both public and private schools.

The material provisions of the proposed defense to repayment provisions are explained in detail below:

Effective Date of Regulations; Claims Covered Under Proposed Regulations: Proposed 34 CFR part 685, subpart D would establish a framework for uniform borrower defense discharges based on applications received following, or already pending with the Secretary on, the effective date of the new regulations, rather than based on a loan's disbursement date. Under the proposed rules, institutions would not face recoupment for conduct approved solely under the new federal standard if the conduct occurred prior to July 1, 2023. Nor would institutions face larger amounts of recoupment if the amount of a discharge is greater than it would have been under the applicable prior regulation.
FFEL Loans: Federal Family Education Loan (“FFEL”) borrowers must still consolidate their loans into a Direct Consolidation loan to obtain a borrower defense discharge; however, the proposed rule makes two improvements for applicants:
1. The Department would allow FFEL borrowers to file and receive a decision on their borrower defense applications before their loans are consolidated, unlike previous iterations of the regulations.
2. The Department proposes to streamline the borrower defense application process by having the application for borrower defense also serve as a Direct Loan consolidation application for borrowers with FFEL and Perkins loans, which would only be executed if the borrower's claim is approved.
Federal Standard: In proposed § 685.401(b), a claim could be brought on any of five grounds, explained in more detail below:
1. Substantial misrepresentation,
2. Substantial omission of fact,
3. Breach of contract,
4. Aggressive and deceptive recruitment, or
5. A federal or state judgment or Departmental adverse action against an institution that could give rise to a borrower defense claim.

Also, as proposed, a violation of state law could form the basis for a borrower defense claim, but only if the borrower or, in the case of a group claim brought by a state requestor, that state requestor requests reconsideration of the Secretary's denial of a claim.

Substantial Misrepresentation: The Department has relaxed the substantial misrepresentation standard to require a borrower to merely prove a substantial misrepresentation occurred, rather than the stricter 2019 rule that required a borrow to also show that an institution's misrepresentation was made with knowledge that it was false, misleading, or deceptive or with reckless disregard for the truth. To meet this proposed substantial misrepresentation threshold, the borrower would have to articulate to the Department the misrepresentation made by the institution and show they relied upon the misrepresentation to decide to take out a Direct Loan.

The Department also proposes to remove the requirement that a borrower demonstrate individualized harm to instead require that the borrower demonstrate that the misrepresentation caused the borrower to take out a loan to their detriment. For group claims, the proposed regulations apply a presumption of reasonable reliance, rather than the requiring each borrower to demonstrate individualized harm.

In § 668.72 and .74, the proposed regulations clarify that misrepresentation may occur in the “institution’s marketing materials, website, or communications to students” and include the following acts:

False, erroneous, or misleading statements concerning institutional selectivity rates or rankings;
Misrepresenting the classification of the institution as nonprofit, public, or proprietary for purposes of its participation in the title IV programs;
Existence of certifications or other approvals for the institution and/or its programs that were not actually obtained, and the institution's failure to remove such certifications or approvals from marketing materials after they are revoked or withdrawn;
Misrepresentations about student externships or other similar opportunities;
Misrepresentations about the institution offering assistance to obtain a high school diploma or General Education Development certificate (GED);
Misrepresentations about the pace of completing the program or the time it would take to complete the program contrary to the stated length of the educational program; and
Misrepresentations about job placement rates (“JPRs”), including provisions to allow the Department to verify that an institution correctly calculated JPRs.
Substantial Omission of Fact: The Department proposes to continue allowing omissions to give rise to a borrower defense claim, but, unlike the 2016 and 2019 regulations, the proposed regulations separate omissions of fact from the definition of misrepresentation to provide clarity to borrowers and specify additional circumstances.

Omission of fact would include, but not be limited to, concealing, suppressing, or failing to provide:

Material information regarding the entity that is actually providing the educational instruction;
The availability of slots, or requirements for obtaining admission, in a program where the institution places students in a preprogram at the time of enrollment; and
Factors that would prevent an applicant, for reasons such as a prior criminal record or preexisting medical condition, from qualifying to meet requirements that are generally needed to be employed in the field for which the training is provided.
Breach of Contract: The proposed regulations restore breach of contract, which was removed in the 2019 regulations, as part of the federal borrower defense standard. This would include situations where an institution fails to fulfill a specific contractual promise to provide certain training or courses or breach of other terms of contract that relate to the making of a Direct Loan or the provision of educational services.
Aggressive Recruitment: The proposed regulations add new category related to aggressive and deceptive recruitment. Under § 668.501, the Department defines the types of aggressive recruitment to include actions that:
Demand or pressure the student or prospective student to make enrollment or loan-related decisions immediately, including on the same day of first contact;
Falsely claim that the student or prospective student would lose the opportunity to attend the institution if they did not enroll immediately or otherwise place an unreasonable emphasis on unfavorable consequences of delay;
Take advantage of a student's or prospective student's lack of knowledge about, or experience with, postsecondary institutions, postsecondary programs, or financial aid to pressure the student into enrollment or borrowing funds to attend the institution;
Discourage the student or prospective student from consulting an adviser, a family member, or other resource or individual prior to making enrollment or loan-related decisions;
Fail to respond to the student's or prospective student's requests for more information, including about the cost of the program and the nature of any financial aid;
Obtain the student's or prospective student's contact information through websites that:
- Falsely appear to offer assistance to individuals seeking Federal, state or local benefits;
- Falsely advertise employment opportunities; or,
- Present false rankings of the institution or its programs;
- Use threatening or abusive language or behavior toward the student or prospective student; or
- Repeatedly engage in unsolicited contact for the purpose of enrolling or reenrolling after the student or prospective student has requested not to be contacted further.
State Law Standard: In proposed § 685.401(b), a violation of state law could form the basis for a borrower defense claim, but only if the borrower, or a state requestor in the case of a group claim brought by as state requestor, requests reconsideration of the Secretary's denial of a claim. “State requestors” include states, state attorneys general, or state oversight or regulatory agencies with authority from the state (such as a state consumer financial protection agency with civil investigative demand authority from that state).
Limitations Period: Proposed §§ 685.206, .222 and Part 688 remove the limitations periods included in the 2019 regulations for borrowers with outstanding loans.
Exclusions: Proposed § 685.401(d) would clarify that an institution's violation of institutional eligibility or compliance rules under the HEA or other laws would not constitute a claim for borrower defense.
Group Claims: The Department proposes two processes for pursuing group claims in new § 685.402. The Department may initiate a group claim:
1. If it identifies a group of borrowers who have a common defense to repayment at the same institution, including multiple campuses of the same institution.
2. Upon request from a state requestor, on the condition that the state requestor submit an application and other required information to the Department to determine if it should form a group.

For group claims, the Department proposes placing those loans in forbearance if they are in repayment and stopping collection activity if they are in default. Any borrower who was not initially identified could opt into the group, however, and would be granted forbearance or stopped collection, as appropriate.

Proposed § 685.404 would establish a process by which the Department could consider prior final Secretarial actions against an institution in the context of determining whether to form and approve a group borrower defense claim.

Evidentiary Standard: Under the proposed regulations, the Department would continue the practice of using a preponderance of the evidence standard in resolving individual and group borrower defense claims, as set forth in proposed § 685.401(b).
Institutional Response Process: In proposed § 685.405, an institution would have 90 days to respond once notified of a borrower defense claim. With its response, the institution would be required to execute an affidavit confirming that the information contained in the response is true and correct under penalty of perjury, the same requirements that are placed on the borrower's application. If the institution fails to respond, the Department would presume that the institution does not contest the allegations in the borrower defense claim.
Borrower Status During Adjudication: Proposed §§ 685.402(d)(2) and 685.403(c)(3) would provide that, during adjudication of a borrower defense claim, all of the borrower's title IV non-defaulted loans would be placed in forbearance and all title IV loans in default would be placed in stopped collection status, regardless of whether they are associated with the borrower defense claim.
Times to Adjudicate: Under proposed § 685.406, group claims formed in response to a state requestor would be adjudicated within two years of the point at which the Department notified the state requestor that it would be forming the requested group. Individual claims would be adjudicated within 3 years from the submission of a materially complete application package.
Adjudication Process: Under § 685.406, the following adjudication processes apply:
For group claims, the Department considers evidence related to the claim, materials in the group application, individual claims that were part of the group, evidence within the Department's possession, and evidence or other information from the institution as well as any other relevant information. In adjudicating the group, the rebuttable presumption would be that everyone in the group was affected.
The Department adjudicates individual claims based on the information available to the official. The Department considers materials in the individual application, evidence within the Department's possession, evidence or other information from the institution, as well as any other relevant information.
If the Department requires additional information, an institution has 90 days to respond to a request and an individual must respond within a reasonable time frame.
Decision Letters: Under proposed § 685.406(e), the Department would issue a written decision on the outcome of an adjudication. If the Department official approves some or all of the borrower defense claim, the written decision would reflect the discharge amount and that the borrower's loans associated with the claim would be placed in, or continue in, an interest-free forbearance until the Secretary discharges some portion or all of the loans. If the Department official denies the borrower defense claim, the written decision would include the reasons for the denial, the evidence relied upon, the loans that are due and payable to the Department or that would return to the loan's prior status, and the timeframe by which the Department's collection action would resume (90 days). The written decision also would describe the process for the borrower to request reconsideration of the decision and be made available to an individual or member of a group and, to the extent practicable, the institution.
Post-Adjudication Reconsideration Process: Under proposed section § 685.407, a borrower may seek reconsideration for administrative or technical errors; the availability of new evidence; or a request by the borrower (for an individual claim) or a state requestor (for a group claim) for reconsideration under a state law standard.

Individuals may request reconsideration of their claims. For group claims, only a state requestor can request reconsideration.

When the reconsideration request is received, the borrower or group members would be placed in forbearance or stopped collections. The Department would have the option to request an additional response from the institution.

The Secretary may reopen at any time a borrower defense application that was partially or fully denied.

Amounts to Be Discharged: The Department proposes applying a rebuttable presumption that the borrower or group of borrowers with an approved claim should receive a full discharge of the loans they received for attendance at the institution that is the subject of the claim, unless a preponderance of the evidence demonstrates that the discharge should be a lower amount and one of the following three specific criteria is met:
Where the harm to the borrower resulted from an action that is easily quantifiable, such as failing to provide promised supplies or materials that have a fair market value of $200 or less.
When approval of the borrower defense claim is based entirely on actions that did not involve promises by the institution about educational outcomes or the quality of educational services delivered.
Where an institution provides false or inaccurate data unrelated to educational outcomes (for example, relating to the test scores or grade point averages of incoming students) to an organization that produces widely recognized rankings of institutions or programs, resulting in a ranking higher than what that institution or its program's true position should be.
Recovery from Institutions: The proposed regulations replace the institutional recovery provisions in § 668.87 in their entirety. Under proposed § 685.409, the Department would attempt to recover from institutions the amounts that the Secretary discharges for both individual and group borrower defense claims and to leverage the procedures already in place at part 668, subpart H, which govern how the Department pursues liabilities related to program reviews. The Department would have the option to forego recovery proceedings in situations such as where the cost of collecting would be more than the amount to recover or recovery would be outside of the six-year limitations period.
Time Limit for Recovery: Under proposed § 685.409(c), the Department would adopt a six-year limitations period to recover the amount of borrower discharge from the institution for loans disbursed on or after July 1, 2023.

Public Service Loan Forgiveness Program

Background

The PSLF program encourages individuals to enter and continue in full-time public service employment by forgiving the balance of a borrower’s Direct Loans after the borrower has made 120 consecutive qualifying monthly payments and is employed in a “public service job” at the time of forgiveness and during the entire period in which the 120 payments are made. Specifically, to qualify for forgiveness under the current regulatory regime, the borrower must:

Be employed full-time by a U.S. federal, state, local, or tribal government; a nonprofit organization that provides public services in one of several categories (e.g., public health, including nurses, nurse practitioners, clinical nurses, and full-time professional health care practitioners or health care support); a 501(c)(3) organization; or a Tribal college or university; and
Make 10 years of “qualifying monthly payments” in an income-driven repayment plan, meaning the payments must be made after October 1, 2007, for the full amount due as shown on the bill, and no later than 15 days after the due date.

In light of a denial rate of more than 90% of PSLF applicants, the Department determined the current regulations governing the program are too restrictive, particularly the requirements for a payment to qualify toward forgiveness. As such, the Department announced a Limited PSLF Waiver in Fall 2021, effective until October 31, 2022, that relaxes many requirements, including counting toward forgiveness any prior period of repayment—regardless of the loan program, repayment plan, or whether the payment was made in full or on time—and certain periods of forbearances and deferments.

Summary of Proposed PSLF Regulations

The proposed PSLF program regulations would build on parts of the Limited PSLF Waiver to improve the PSLF application process, expand what counts as an eligible monthly payment, expand the definition of “full-time employment,” and provide additional clarifying definitions of public service employment to reduce confusion and to clearly establish the definition of qualifying employment for borrowers. However, not all of the waiver’s provisions (e.g., counting payments on FFEL program loans) are included due to statutory restrictions.

Specifically, the Department’s proposed regulations include the following:

Adding or revising definitions (§ 685.219(b)), including:
A new definition of “qualifying employer” (to replace the existing definition of “public service organization”), meaning:
- A United States-based federal, state, local, or Tribal government organization, agency, or entity, including the U.S. Armed Forces or the National Guard;
- A public child or family service agency;
- A non-profit organization under section 501(c)(3) organization
- A Tribal college or university; or
- A nonprofit organization that provides a non-governmental public service, attested to by the employer on a form approved by the Department, and that is not a business organized for profit, a labor union, or a partisan political organization.
A new definition of “non-governmental public services,” meaning services provided directly by employees of a nonprofit organization where the organization has devoted a majority of its full-time equivalent employees to work in at least one of the following 11 areas:
- “civilian services to the military,”
- “early childhood education program,”
- “non-tenure track employment,”
- “public health,”
- “non-governmental public service,”
- “public service for individuals with disabilities,”
- “public service for the elderly,”
- “public education service,”
- “public library services,”
- “school library services,” and
- “qualifying repayment plan;”
New definitions for the 11 categories listed above, including defining “public health” to mean physicians, nurse practitioners, and nurses in a clinical setting; and those engaged in health care practitioner occupations, health care support occupations, and counselors, social workers, and other community and social service specialist occupations, as those terms are defined by the Bureau of Labor Statistics; and
A simpler definition of “full-time employment” to require employment of at least 30 hours a week.
Counting more payments toward the 120 qualifying payment requirement, including:
Payments that are equal to the full scheduled payment, even if the payment is made in multiple installments or outside the 15-day period in the current regulations so long as the loan is not in default (§ 685.219(c)(1)(iii)).
Credit toward forgiveness on additional payment amounts (not to exceed the date of the borrower’s next annual repayment plan certification) if the borrower makes a lump sum or monthly payments equal to or greater than the full schedule amount made in advance of the borrower’s scheduled payment date (§ 685.219(c)(2)).
Each month in which a borrower is in one of the following deferment or forbearance periods counts as a month toward PSLF if the borrower certifies qualifying employment for the period covered by the deferment or forbearance:
- Cancer treatment forbearance,
- Peace Corps service deferment,
- Economic hardship deferment,
- Military service and post-active-duty deferments,
- AmeriCorps forbearance,
- National Guard Duty forbearance,
- U.S. Department of Defense loan repayment forbearance, and
- Certain administrative forbearances (those that are not requested by the borrower) used while the Department processes paperwork (§ 685.219(c)(2)(v)); and
Payments on an eligible Direct Loan that the borrower later consolidates into a Direct Consolidation Loan toward the 120 monthly payment requirement (§ 685.219(c)(3)).
Automating forgiveness without an application when the Department has sufficient information to determine a borrower’s eligibility, including attempting to determine whether a borrow was working for a qualifying employer based on documentation available to the Department if the borrower is unable to obtain their employer’s certification (§ 685.219(e)).
Creating a reconsideration process for borrowers whose application for forgiveness were denied or who disagree with the Department’s determination of the number of qualifying payments or months of qualifying employment that have been earned by the borrower. Borrowers have 90 days from the date of denial to request reconsideration. Borrowers who denied forgiveness after October 1, 2017 through the date the regulations become effective have 180 days to request reconsideration (§ 685.219(g)).
Providing borrowers a hold-harmless option for all other periods of deferment or forbearance not listed above if the borrower:
Was employed full-time at a qualifying employer during the forbearance or deferment; and
Makes a payment equal to or greater than the amount they would have paid at that time on a qualifying repayment plan (e.g., a borrower with a monthly payment of $100 under the standard 10-year plan who spent a year on a forbearance while employed at a qualifying employer could make an additional payment of $600 and receive credit for six of those months) (§ 685.219(g)).

Please contact AACOM Government Relations at aacomgr@aacom.org with questions or for further information.

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