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NSLDN Submits Comments in Response to the Department of Education's Borrower Defense Proposed Rule

On August 30, 2018, the National Student Legal Defense Network submitted three separate comments regarding the U.S. Department of Education’s proposal to dramatically rewrite the “borrower defense” rule. NSLDN’s comments focused on the following aspects of the proposed rule.

1. General Comment on Borrower Defense Proposals
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NSLDN submitted a general comment in opposition to the core borrower defense proposals in the NPRM. Among other things, this comment addressed the following topics:

** Defensive” Claims. The Department’s proposal to force borrowers to enter default in order to file a claim provides students with an impossible choice: either ignore the wrongs and continue to make payments on debt incurred under false or fraudulent pretenses orexpose themselves to the severe consequences of default. As the near chorus of opposition has made clear, this proposal must be summarily rejected.

** Intent/Reckless Disregard. By including an intent/reckless disregard standard in the definition of “misrepresentation,” the Department renders illusory the entire defense to repayment process. In 2016, the Department made clear its “longstanding position” that a misrepresentation did not require institutional knowledge or intent. It also made clear that evidence of intent would be “nearly impossible” for students to gather, a position with which the NPRM appears to agree. The Department has not provided adequate justification for changing its position. Its proposal is arbitrary, illogical, contrary to existing state and federal laws, and must be rejected.

** Financial Harm. Not only will borrowers be required to prove institutional knowledge/intent, they will also have to establish that they were financially harmed by the misrepresentation beyond the debt incurred by taking out the loan. In 2016, the Department expressly recognized that student debt incurred from institutional misconduct directly impedes students’ ability to start a family, get a job, rent or buy a home, and pay bills. The NPRM ignores this evidence and declares, without support, that “it does not consider the act of taking out a Direct Loan as evidence of financial harm to the borrower.” In addition, the Department’s proposed financial harm elements will be unduly burdensome and impossible for borrowers to prove. It will also penalize borrowers who obtain employment in spite of the poor education they receive, and will shame, embarrass and dissuade borrowers from filing claims. Further, as demonstrated by a series of hypotheticals set forth in the comment, it appears that the Department has not conducted any analysis of how its proposals will work in practice. The financial harm requirements should be omitted.

** The Process. The process set forth in the NPRM is deeply unfair to borrowers. In 2016, the Department specifically set out to design a borrower defense process that “would not be onerous for borrowers,” “would not require third-party assistance,” and would “work[] toward evening the playing field for students” by not requiring them “to directly oppose schools.” Without analysis or explanation, the NPRM proposes to abandon this approach and require borrowers to face off against sophisticated, corporate institutions. Further, by requiring that the school receive all claims and evidence, the Department hinders its ability to conduct investigations into improper conduct. Unlike in 2016, the NPRM does not even recognize the impact that its rule will have on investigations, suggesting that the Department does not plan to undertake serious investigations of schools, or, at a minimum, is not thinking strategically with respect to investigative strategy and its duty to protect federal taxpayer dollars from waste, fraud, and abuse. The Department should retain the more fair and thoughtful process set forth in the 2016 Rule.

** Mandatory Arbitration and Class Action Waivers. The Department provided a reasoned rationale when it banned pre-dispute arbitration clauses and class action waivers in 2016, finding, among other things, that these clauses substantially harmed the financial interests of the United States. The NPRM ignores or fails to adequately address the evidence cited in 2016 and summarily declares, without support, that the Department “believe[s] that arbitration offers a number of potential advantages.” The Department does not adequately address the case law, research, studies, or empirical analyses from the 2016 Rule and cites to one new case that is irrelevant. The ban on pre-dispute arbitration clauses and class action bans in the 2016 Rule should remain.

** Other Concerns. There are numerous other concerns with this rule, including but not limited to the proposal to require “clear and convincing” evidence, the proposal to impose a three-year statute of limitations on affirmative claims (or a 30-65 day window for defensive claims raised in collection proceedings), and the elimination of group applications. NSLDN details its opposition to each of these proposals in the comment.

2. Closed School Discharge Comment
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NSLDN wrote separately to highlight its opposition to the Department’s proposal to fundamentally rewrite the regulation governing eligibility for closed school discharge relief.

The NPRM proposes to eliminate students’ ability to make individualized choices about their educational futures following a school closure. Rather than allowing students to choose between accepting a teach-out plan, transferring to another institution, or seeking a full discharge of their student loans, the Department’s proposal instead forces students to accept whatever teach-out plan is offered. If students do not accept, they may be forced to pay back their student loan debt for a worthless degree or credential. The Department fails to justify this paternalistic switch in longstanding policy.

The NPRM also does not explain two suggested changes to the language of “exceptional circumstances” examples under which the Secretary may extend the timeframe for closed school discharge eligibility. Moreover, the Department proposes to eliminate two other examples, without ever making clear that it is proposing to do so.

Finally, the NPRM eliminates automatic closed school discharge relief for student loan borrowers whose schools closed on or after November 1, 2013 and who did not re-enroll at another institution within three years. The Department fails to explain why it is no longer concerned about the nearly half of eligible borrowers who remain uninformed about their legal right to a discharge of their student loans.

3. Financial Responsibility Comment
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NSLDN submitted a third comment highlighting its opposition to the Department’s proposal to reduce protections for taxpayers and the U.S. financial interest, which ultimately benefits high-risk institutions of higher education.

The NPRM abandons the Department’s statutory obligation to only allow financially responsible institutions to receive federal student aid funds by removing the use of common-sense triggers that an institution is or might be in financial trouble. These triggers would automatically require institutions to post Letters of Credit (“LOCs”), a financial document that guarantees payment in a certain amount, to the Department in order to protect federal fiscal interests.

The Department’s proposal is especially egregious in light of the fact that the Department seems to have never analyzed data on the existing LOCs in its possession to assess the degree to which these LOCs may fall short of fully protecting the Department. Since March 2018, NSLDN has been trying to get the Department to release information regarding these LOCs. But rather than provide this information, the Department has claimed—despite public records to the contrary—that “they have no documents” responsive to NSLDN’s request. That dispute is currently the subject of litigation. But, for present purposes, the Department’s failure to produce the information: (1) has hindered NSLDN’s ability to comment on the proposal; and (2) suggests that the Department has not conducted the reasoned analysis necessary to draft a final rule.

Other issues are set forth more fully in NSLDN’s comments.