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Financial Services Law Insights and Observations

Department of Education Releases Final Regulations Creating Additional Protections for Student Borrowers and Establishing New Federal Standard for Borrower Defense to Repayment of Student Loans

Federal Issues Consumer Finance Student Lending Department of Education

Federal Issues

On October 28, the Department of Education announced new Final Regulations (81 FR 75926) to protect student borrowers against misleading and predatory practices by postsecondary institutions and clarify a process for loan forgiveness in cases of institutional misconduct. The new regulations establish the conditions under and process through which a borrower may assert a defense to repayment, also referred to as a “borrower defense,” of a Federal Direct Loan. Specifically, a borrower may now be eligible for discharge of Federal loans whenever a postsecondary institution:  (i) makes false and misleading statements about school or career outcomes, (ii) makes false and misleading statements about financing needed to pay for those programs; or (iii) the institution fails to fulfill specific contractual promises regarding program offerings or educational services. By contrast, the current standard allows borrowers to assert a borrower defense only where a cause of action would arise under applicable state law.

Under the new regulations, a school participating in the Direct Loan program is also prohibited from obtaining any form of pre-dispute arbitration agreement or waiver of a borrower’s right to initiate or participate in a class action lawsuit. Further, participating schools may no longer require that students engage in internal dispute processes before seeking relief under the new “borrower defense” provisions. The final regulations also impose certain notification and disclosure requirements on any school that is the subject of a lawsuit filed in court or that are voluntarily submitted to arbitration after a dispute has arisen. The new regulations are effective July 1, 2017.