Last Wednesday, the DeVos administration’s watered-down borrower defense rules went into effect. This set of regulations, established by the Obama administration in 2016, created a process for borrowers to ask the Department to discharge their federal student loans when their school behaves illegally or misleads them about the educational programs they offer or the loans the student can borrow to attend the school’s program. The rules that went into effect last Wednesday replaced the 2016 version. Congress tried to stop the rules from taking effect, but President Trump vetoed their efforts. And while advocates have challenged the 2019 Rule in federal court, that case is still ongoing. As a result, today borrowers have fewer protections against school deception and fraud.
While the regulations created new standards for borrower defenses asserted to discharge federal student loans issued after July 1, 2020, the regulations also contain some important changes for existing borrowers. This blog post explains what the new regulations will mean for borrowers with preexisting loans. More information on how the 2019 Rules impact borrowers with loans issued after July 1, 2020 appears here.
First and foremost, the new regulations do not change the regulations that already applied to borrowers who have Direct Loans and submitted borrower defense claims. The new standards that govern whether a borrower is eligible for a borrower defense only apply to loans issued after July 1, 2020. For loans issued before July 1, 2020, the new regulations will have no bearing on what rules the Department applies to determine whether a borrower’s application is eligible for a loan discharge.
However, based upon its explanation of the regulatory changes, it is unclear what evidence the Department will require borrowers to submit to establish a borrower defense regardless of when the loan was issued. The Department explained that borrowers must provide more than their own written testimony to establish that a school committed wrongdoing. We are unsure if the Department is now requiring that all borrowers submit additional evidence to establish that a school committed a borrower defense offense, even for claims governed by an earlier borrower defense standard. Borrowers with outstanding borrower defense claims may want to seek legal advice from a student loan advocate to determine whether to amend their borrower defense claims.
But, the regulations do remove two critical protections for pre-existing student loan borrowers: a restriction on when schools can stop students from holding schools accountable in court, and a provision for automatic closed school loan discharges.
The 2019 Rule allows schools to use forced arbitration agreements in contracts with students. Arbitration contracts stop students from holding schools accountable in court. Under the old rule, the Department could refuse to provide schools with federal student aid if they compelled students to arbitrate claims that could be asserted as borrower defenses. The 2019 Rules remove that protection altogether. Instead, the Department merely requires schools to tell students if there is an arbitration clause in their enrollment contract.
Going to court is a critical protection for students because when students sue a school, they can compel it to provide information it would not otherwise release. Additionally, under the 2016 regulations, a judgment in court can establish a student’s borrower defense. All students from the school–not just those involved in the litigation–can use publicly-available evidence filed in the lawsuit to support their own borrower defense claim. But, the 2019 Rule allows schools to force students to raise their claims in a secretive, private arbitration proceeding, which will not result in a court judgment or make the evidence available to others.
The new regulations also remove protections for students whose schools close, stopping them from completing their educational programs. The 2019 regulations remove automatic loan discharges for students whose schools close after July 1, 2020 and who do not complete their program within three years. Instead, a student whose school closes after July 1, 2020 must individually submit a closed school discharge application to receive the loan discharge he or she is entitled to under the regulations. Our website has more information on closed school discharges and other forms of debt relief.
These regulations make borrower defense even more confusing and make it even more difficult for borrowers to succeed in demonstrating to the Department that they are entitled to a borrower defense loan discharge. Borrowers should get legal advice for more information on how they can increase the odds of getting their loans discharged.
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