Last week, the Biden administration proposed sweeping regulations that would overhaul the nation’s student loan system. One element of the proposal is an updated borrower defense to repayment rule, which forgives federal loans for students who were defrauded by their institutions.
The Biden administration’s rule seeks to make it easier for defrauded students to receive debt relief and aims to crack down on predatory marketing and recruiting practices by colleges. It lays out a timeline meant to streamline the review of borrower defense applications. And it would create one standard for reviewing claims, regardless of when a borrower took out their loans. Previous regulations had different standards for students to receive relief based on when they got their loans.
“This single federal standard for all borrower defense claims, I think it is just going to do a lot to simplify the process,” said Jill Desjean, a senior policy analyst with the National Association of Student Financial Aid Administrators.
The proposal would be a major update to the borrower defense rule, which has been subject to intense regulatory back-and-forth over the past decade. Although the rule predated the Obama administration, it took on new relevance during that era as former students of Corinthian Colleges sought debt relief when that for-profit chain collapsed.
While the Obama administration strengthened the rule in favor of borrowers, the Trump administration issued its own regulation making it much harder for students to qualify for debt relief. That rule is still in effect today.
The Biden administration is aiming for its rule to take effect in July 2023. The rule will be subject to a 30-day comment period before the U.S. Department of Education can issue a final rule.
Higher Ed Dive examined the draft rule and spoke to several higher education experts about how it would change the student loan landscape. Below are three things about the proposal that higher education leaders should know.
Borrower defense protections for students would expand
The new rule would expand the types of institutional misconduct that could trigger a borrower defense claim. For the first time, borrowers would be able to file a claim if their institution used aggressive and deceptive recruitment tactics.
This addition could heavily affect for-profit and nonprofit colleges alike. While for-profit colleges have frequently been accused of misleading enrollment tactics, lawmakers and policymakers are growing increasingly skeptical of nonprofit colleges that contract with online program managers, or OPMs. These companies help institutions build online programs and recruit students into them for a share of their tuition revenue.
A recent Wall Street Journal investigation into one prominent OPM company, 2U, found that the firm aggressively recruited students and received hefty shares of online programs’ tuition revenue in exchange for its services.
Institutions should think twice about how they present programs built with OPMs, said Barmak Nassirian, vice president for higher education policy at Veterans Education Success, an advocacy group.
Programs created with an OPM often use the institution’s insignia. And in 2U’s case, the company’s recruiters were given .edu email addresses for reaching out to prospective students.
“I do think that does fall under the category of misrepresentation,” Nassirian said.
Ed Department could approve group borrower defense applications
The current borrower defense rule — which took effect July 1, 2020, and covers only loans made after that date — does not allow for group claims. But past versions of the borrower defense rule have resulted in individual reviews of claims that may have been better handled as group applications, the Ed Department recently argued earlier this year.
The Biden administration’s borrower defense proposal would allow the agency to group claims together in several cases, including when an institution faces a class-action lawsuit or individual applications make similar allegations. States could also ask the Ed Department to initiate a group review.
The proposal also would create a “clear expectation” that the Ed Department would seek to collect money from colleges to cover costs of borrower defense discharges, according to an agency fact sheet. It would separate this recoupment process from the approval of claims — a move meant to ensure students don’t have to wait for the money to be collected before they receive relief.
For-profit representatives oppose this policy, arguing it would harm institutions and waste taxpayer money.
Institutions will care if the Ed Department publishes documents saying it has adjudicated claims in favor of borrowers, said Nicholas Kent, chief policy officer at Career Education Colleges and Universities, or CECU, a group that lobbies on behalf of for-profit colleges.
"The general public is going to believe that that institution did something wrong," Kent said."Bifurcating the two processes doesn't really work — they are married together."
The Ed Department defended the separation of adjudication and recoupment in the draft proposal. It said institutions will not face financial consequences from borrower defense approvals tied to loans made before July 1, 2023 — when the new regulation is slated to take effect — unless they also would have been approved under the borrower defense rule in place when the loans were issued.
“The Department believes whatever reputational harms to the institution might occur based on this regulatory change are outweighed by the benefits to the borrower,” the agency wrote in the draft proposal. It also argued that while the changes might result in increased costs to resolve borrower defense claims in the short term, they and other regulatory efforts would deter institutions from engaging in predatory behavior that leads to loan discharge applications in the long term.
Timeline would be added for Ed Department to review claims
The borrower defense regulation in effect today does not impose a timeline for the Ed Department to issue a finding on claims. As a result, some borrowers have waited several years for a response to their applications.
The Biden administration’s proposal would create two timelines. The Ed Department would have two years to decide on group claims for borrower defense and three years for individual applications for loan forgiveness. If the agency missed those timelines, students would automatically receive debt relief.
Kyle Southern, associate vice president at The Institute for College Access & Success, an advocacy group, views this change as a step in the right direction.
“It’s important to have accountability at the department,” Southern said. “It’s only fair that we don’t leave people languishing for five, six, seven years at a time with these claims.”
“It’s only fair that we don’t leave people languishing for five, six, seven years at a time with these claims.”
Kyle Southern
Associate vice president, TICAS
But CECU isn’t happy with the potential change.
Kent said the policy stands to harm taxpayers and institutions. CECU is ready to explore legal action if the final borrower defense regulation doesn’t differ significantly from the draft rule, he said.
The proposal says institutions would not be on the hook to pay for loan discharges if the Ed Department's clock runs out, since no borrower defense claim would be approved. But Kent worries colleges tied to large-scale loan relief could suffer from reputational damage.
He argued the Ed Department’s approach to borrower defense has created “a monster,” with the agency receiving many more applications than Congress envisioned.
The backlog of borrower defense claims ballooned during the Trump administration, which faced legal action over its refusal to process applications. But the Ed Department received 60,000 applications in just one week after it agreed to discharge $6 billion worth of loans last month to settle a class-action lawsuit over the agency’s handling of borrower defense claims, Politico reported. That’s compared to 100,000 applications in all of 2021.
