United States: New Regulations Change The Rules For Federal Student Loans

Last Updated: September 11 2019
Article by Paul G. Lannon


  • The U.S. Department of Education has published new "Institutional Accountability" regulations that apply to all federal student loans disbursed after July 1, 2020, changing significantly the rules by which student borrowers seek discharges or assert defenses to repayment obligations.
  • To address public concerns about the financial stability of higher education institutions, the new regulations impose stricter financial accountability requirements on institutions, specifically addressing school closings and other "triggering" events impacting financial responsibility.
  • The new federal student loan regulations are consistent with the recent trend toward greater regulatory scrutiny of, and legal compliance obligations on, institutions of higher education. States and regional accreditors will likely consider similar provisions.

Culminating two years of negotiated rulemaking, the U.S. Department of Education (the Department) published on Aug. 30, 2019, new "Institutional Accountability" regulations that apply to all federal student loans disbursed after July 1, 2020. The regulations change significantly the rules by which student borrowers seek discharges or assert defenses to repayment obligations. The regulations also impose stricter financial accountability requirements on institutions of higher education, specifically addressing school closings and other "triggering" events impacting financial stability. The financial accountability requirements are in effect now.

Borrower's Defense

The Department's 2019 regulations change when and how students may challenge their loan repayment obligations. Regarding when, the Department has unified and extended the time period to bring a claim: Borrowers will have three years from the date that the borrower leaves school for graduation, withdrawal or any other reason. Currently, the rules distinguish between affirmative proceedings for discharges and defensive responses to defaults and collection actions. The Department has abolished that distinction and set one three-year limitations period for all claims.

When students seek a loan discharge because of school closure, the regulations offer more protection by extending the discharge window from 120 to 180 days prior to the closure. This look-back period can be extended further at the Department's discretion in certain exceptional circumstances. In addition, the regulations incentivize institutions to develop approved teach-out plans prior to closing, and allow a borrower to choose whether to accept the teach-out opportunity or pursue a discharge.

As for how to bring a claim, the regulations clarify the process and make it more equitable. Borrowers must submit a sworn, written application, a waiver permitting disclosure of relevant education records, a statement of financial harm suffered and supporting evidence. The Department will grant forbearance on the loan while the claim is pending. Institutions receive a copy of the application materials and an opportunity to respond. Borrowers then get a chance to reply, and the Department issues a written decision based on a preponderance of the evidence. The Department's decision is final; there is no appeal.

When a loan discharge claim is successful, in whole or in part, and an institution is held liable, the institution is responsible to the Department for the discharged amounts, including purchase of the loans and repayment of funds.


A current hot-button issue is when misrepresentations by educational institutions would constitute grounds for a loan discharge. Under the new regulations, the burden of proof remains on the borrower. There are no automatic discharges or defenses, no presumption of full relief. Borrowers must establish that they reasonably relied on a misrepresentation of material fact in taking out a federal loan and that the misrepresentation caused them financial harm.

Misrepresentation in this context is defined as a "a statement, act, or omission by an eligible school to a borrower that is false, misleading, or deceptive; that was made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth; and that directly and clearly relates to 1) enrollment or continuing enrollment at the institution or 2) the provision of educational services for which the loan was made." Notably, this definition lowers the standard from knowing or intentional wrongdoing to recklessness. Illustrative examples emphasize that misrepresentations must be material and objective, capable of verification.

Financial harm is defined narrowly as well. Borrowers must establish that they suffered a monetary loss caused by a misrepresentation as opposed to market conditions, the borrower's own employment decisions or other factors beyond an institution's control. The act of taking out a federal loan, by itself, will not be considered evidence of financial harm.

Arbitration and Class Action Waivers

Educational institutions may require students to sign arbitration agreements and class action waivers as a condition of enrollment, provided that they satisfy certain notice requirements intended to protect students. The notice requirements include plain-language disclosures, posted on websites along with other admissions information, and review of the terms of internal dispute and arbitration processes during the borrower's entrance counseling. Institutions should carefully weigh advantages and disadvantages before adopting arbitration and class action waiver agreements, which have recently garnered public criticism and protest.

Financial Responsibility

To address public concerns about the financial stability of higher education institutions, the new regulations impose stricter financial accountability requirements. The terms and methodology of the financial resources composite score have been updated to align more closely with current accounting standards, including accounting for leases and long-term debt. Institutions should carefully review the new methodology and how it will impact their eligibility.

The 2019 regulations also identify events that will or may cause the Department to impose additional financial conditions for continued participation in federal student loan programs, including letters of credit and other sureties. Mandatory triggering events include legal liabilities, withdrawal of an owner's equity, public security exchange restrictions, and two or more discretionary triggering events. Discretionary triggering events include, among others, potential loss of accreditation from a show-cause order, violation of a security or loan agreement, violation of a state licensing requirement, and high annual dropout or cohort default rates.

Conclusion and Considerations

The Department's new federal student loan regulations are consistent with the recent trend toward greater regulatory scrutiny of, and legal compliance obligations on, institutions of higher education. States and regional accreditors will likely consider similar provisions.

This Holland & Knight alert highlights only a few of the more salient changes to the student loan regulations. Institutions are well advised to consult with legal counsel and financial aid professionals to understand the full impact of these changes and how best to comply with them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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