Today, new U.S. Department of Education (the Department) regulations will go into effect, erasing many of the protections students had against school fraud. These regulatory changes could not have come at a worse time. As students are trying to weather the economic instability caused by the coronavirus, the Department has given predatory schools the green light to mislead and deceive them by making it harder for students to cancel debt taken on as a result of school deceit.
The most notable changes pertain to Borrower Defense to Repayment (also called borrower defense). This set of regulations, established by the Obama administration in 2016, created a process for borrowers to request that the Department 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 go into effect today (the 2019 Rules) replace the 2016 version. Overall, the changes to the Department’s regulations make it much more difficult for students to get any loan relief, even if they were impacted by a school’s predatory practices.
This post is the first in a three-part series on the regulation changes. This blog post focuses on how the 2019 Rules affect borrowers with new loans. A later blog post will explain how these regulations will impact borrowers who took out loans before July 1, 2020.
What the 2019 Rules provide is a far cry from what would be a fair process for borrowers. These regulations impose new elements and evidentiary requirements borrowers must satisfy before they are eligible to have even a fraction of their federal student loan debts discharged. Additionally, the regulations permit schools to keep students out of court without facing any consequences. And, the regulatory changes make it harder for students to get loan relief after their school unexpectedly closes.
Congress acknowledged that the 2019 Rules essentially give predatory schools the green light to mislead and scam students with impunity. It approved a bipartisan measure that would have prevented these regulations from going into effect, but President Trump vetoed the measure. Student loan advocates have challenged the rule in court, but that case is still being decided. Until the court or Congress intervenes, these regulations will be in effect and students will struggle to get relief if they are ripped off by their schools.
What Do the 2019 Rules Mean For Borrowers with New Loans?
The new regulations establish a new standard for anyone with a federal student loan issued after July 1, 2020.
Under the 2019 Rules, to receive a borrower defense discharge, a borrower must:
(1) apply within 3 years of attending their school;
(2) demonstrate that they relied upon a “statement, act, or omission by an eligible school to a borrower that is false, misleading, or deceptive” and that “directly and clearly relates to enrollment or continuing enrollment at the institution or the provision of educational services for which the loan was made”;
(3) demonstrate that the school knew it was misleading students; and
(4) submit evidence to show they suffered “financial harm” in the form of “monetary loss” caused by the school’s misrepresentation. The Department will not accept the act of borrowing a loan to show financial harm (unlike what it has done previously). Additionally, if the borrower relies on a period of unemployment to demonstrate financial harm, they must submit documentation to prove that they (a) were involuntarily unemployed and (b) their unemployment was not due to local, regional, or national economic downturns.
The Department’s final rules also state that the borrower’s sworn statement within their application, on its own, will no longer be enough to demonstrate that their school misled them. Now, borrowers must submit both a complete written application and additional written evidence of the school’s misconduct and the financial harm the student suffered as a result of the school’s misconduct for the Department to grant their claim. It is unclear whether the Department will apply its new evidentiary standard to applications submitted before July 1, 2020.
The regulations change other borrower protections for loans issued after July 1, 2020, too.
In addition to changes to borrower defense, the regulations change other types of protections students rely on when things go south with their school.
- False Certification: the 2019 Rules make it more difficult for a borrower to get loan relief when their school lies about the student’s eligibility for a federal student loan (called a False Certification Discharge). The Department made it significantly harder for students to get a loan discharge, even if the school lied to the student about their eligibility to receive federal student loans without a high school diploma or GED. The Department’s regulatory change ignores the fact that many predatory schools bury critical information in small print and force students to sign documents without allowing them to review them. Now a student will be ineligible for loan relief (for loans issued after July 1, 2020) if their school employs that same predatory practice.
- School Warnings Regarding Financial Instability or Low Loan Repayment Rates: the 2019 Rules remove warnings that a school had to provide to prospective and current students if the school became financially unstable or if graduates were unable to repay their loans.
- Automatic Closed School Discharges: A student who attends any school that closes after July 1, 2020, will be able to take advantage of the right to a closed school discharge only by submitting an individual application. A closed school loan discharge is available to a student whose school closed before he or she was able to complete their educational program if they did not enroll in the same program at another school. Previously, the Department automatically discharged the debt of students who did not complete their educational program and did not complete their program at another school within three years of the school closure. Information on closed school discharges appears here.
- Arbitration: the 2019 Rule rolled back protections ensuring that students could hold schools accountable in court by limiting schools’ use of arbitration agreements (more information on arbitration is here and here). Now, as long as schools warn students that they have an arbitration agreement in their enrollment contracts, students may not be able to hold schools accountable for illegal conduct in court.
As the Department itself said in its final rules, “Under these final regulations, a school engaging in misrepresentation alone will not be sufficient for a successful claim.” By accepting that schools will lie and students will have no recourse, the Department tacitly acknowledged that these regulations protect predatory schools and not students. Congress admirably provided COVID-related protections for many federal student loan borrowers, and it should continue to intervene to rein in the Department’s refusal to provide meaningful relief for defrauded students. Students are at risk to fall victim to predatory school practices now more than ever.
In the next few days, we will post tips for what steps student loan borrowers should do to protect themselves against predatory school practices.