Final Regulations for Defense to Repayment for Direct Loans, Perkins, FFEL Released

October 31, 2016 · by mlivolsi · Spark Notes

Prepared by:  Harrison Wadsworth (hwadsworth@wpllc.net)  

October 28, 2016

The Department of Education (ED) last night announced the publication of the final regulations expanding the definition of “defense to repayment” (DTR) where Direct Loan borrowers can avoid repaying a federal student loan if they can show their school misrepresented its offerings, falsely certified the student’s eligibility, or made other errors.  The final regulations were made public in full at 9 a.m. EDT today and are expected to be published in Monday’s Federal Register.  COHEAO will be continuing to go over the massive 927-page document in the coming days.  The complete regulations as made public by ED can be found here.

The final regulations apparently hew fairly closely to the draft regulations that were published in July, but there are a couple of significant changes noted in the ED fact sheet that accompanied its press release.

The regulations technically just cover Direct Loans, but Perkins Loan borrowers, as well as FFEL borrowers, can get the same forgiveness options as long as they consolidate their loans into a Direct Loan first.  Perkins and FFEL borrowers will be able to get immediate administrative forbearance like Direct Loan borrowers while their borrower defense claim is being evaluated by ED.  Note that this provision is designated for immediate implementation – Tuesday, November 1, 2016.  Like a Stafford or PLUS loan, a Perkins loan that is consolidated then forgiven under the DTR rules can then be clawed back from the school that made it.

The Department will be the sole arbiter of whether or not a student should have to repay a loan and if a school should be forced to reimburse ED for the forgiven amount.  ED says, “The final regulations make clear that the Department will determine in a reasonable and practicable way the appropriate relief for a borrower defense claim, taking into account any educational benefit received.”

In a change from the draft rule, the final rules completely ban arbitration clauses in contracts between schools and students.  Stopping arbitration was a high priority for the consumer groups at the negotiated rulemaking table earlier this year.  The draft regulation banned mandatory, pre-dispute arbitration but permitted clauses allowing voluntary arbitration.  The final rule also bans all pre-dispute arbitration clauses as well as prohibitions on class-action lawsuits and requirements that students follow an internal arbitration process before complaining to regulators.

In addition, the final rules will permit blanket forgiveness of loans for students who attended closed schools, such as the Corinthian colleges and ITT.  That will cost the taxpayer between $9.4 and $21.2 billion over the next 10 years, depending on inflation and how much is recovered from schools.  This part of the rules will take effect as soon as ED is ready operationally to handle it, rather than being delayed until July 1, 2017, as is normal practice with new ED regulations.

ED defined several triggering events that it will use to require large-dollar letters of credit from schools, although it says it moderated these rules compared to the draft regulations.

ED also announced that another 11,000 new DTR claims were approved “based on the Department’s findings concerning Corinthian’s misleading job placement rates.”  To date, more than 15,000 claims have been approved, with a combined outstanding loan balance of $247 million.

The Department has also decided it does have the authority to automatically restore semesters of Pell Grant eligibility for eligible students who were unable to complete their programs because their institution closed.  The Department is “still exploring the operational changes required to implement this policy.”

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