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Financial Services Law Insights and Observations

Department of Education revises student loan protections

Federal Issues Student Lending Department of Education

Federal Issues

On August 30, the Department of Education issued final regulations revising protections for student borrowers that were significantly misled or defrauded by the higher education institution they attended. The final Institutional Accountability regulations—first proposed in July 2018 (previous InfoBytes coverage here)—establish standards for loan forgiveness applicable for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.” Loans disbursed prior to July 1, 2020 remain subject to defenses under prior regulations issued in 2016. Provisions under the new regulations include:

  • Borrowers will be required to file their claims within three years of leaving an institution, and may assert defense to repayment claims regardless of whether a loan is in default or in collection proceedings.
  • The 2016 final regulation’s preponderance of the evidence standard for all borrower defense to repayment claims will be maintained. The Department also rejected the presumption against full relief, stating that financial harm will be determined by the Department as “the amount of monetary loss that a borrower incurs as a consequence of misrepresentation. . . . [but will] not include damages for nonmonetary loss.”
  • The pre-dispute arbitration and class action waiver ban contained within the 2016 final regulations will be eliminated. Institutions are permitted to choose their own internal dispute resolution process, including the use of mandatory pre-dispute arbitration agreements and class action waivers, provided the agreements are explained in plain language to enable students to make informed enrollment decisions.
  • The “closed school loan discharge” eligibility time period is extended from 120 days to 180 days for students who have left an institution prior to its closure. However, borrowers must submit applications, as automatic closed-school discharges are not allowed under the new regulations. Borrowers asserting false certification discharge must also submit applications. Additionally, borrowers will be allowed to choose between accepting a teach-out opportunity offered by an institution or submitting a closed school loan discharge to the Department.

The Department notes that the regulations will take effect July 1, 2020. However, “regulations relating to financial responsibility will be available for immediate implementation.”

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