United States: Colleges Should Prepare: ED Loan Discharge Letters On The Way

Though much has changed at the U.S. Department of Education over the years, at least one thing has remained constant: the agency's penchant for releasing guidance right before a holiday. Indeed, each year, as we glaze our hams and deck our halls, we can be sure that the Department is about to post a Q&A, publish a DCL, or put out a pamphlet. Last week was no exception. As we all were searching for grandma's recipe book, the Department quietly dropped not one, but two significant announcements.

Here come the borrower defense claim letters

The first of the two electronic announcements is titled "Implementation of School Notice Requirements Under the 2016 Borrower Defense Regulations," and concerns the roll out of the 2016 borrower defense claim process. Pursuant to the rule, borrowers can apply to the Department to have their loans discharged on the basis that the institution they attended committed a prohibited act or omission. If the Department grants the discharge, the agency then has the right to recover the amount discharged from the offending school. As readers know, we have devoted considerable time to the evolution of this claim process in recent years, including two webinars examining the latest version published this past September.  

In its announcement last week, the Department signaled that it is preparing to begin processing discharge claims using the discharge protocol put into place by the Obama administration, which, as the agency rightly notes, requires the agency to "notify the school associated with the borrower defense application of the claim filing, and give the school the opportunity to submit records or a response to the allegations contained within the application."  

The purpose of the Department's announcement is to inform institutions of higher education that the agency "will soon begin to send notices required under the 2016 final regulations." Consistent with the 2016 regulatory framework, the Department "will send the school associated with the borrower's allegations a letter and a copy of the borrower's application and invite the school to respond and provide information relevant to the borrower's allegations within 30 days."

Why colleges and universities should care

First, the Department is sitting on a huge pile of pending claims, which represents billions of dollars of potential discharge liability. According to the last Borrower Defense to Repayment Report released by the Department, approximately 210,000 unresolved borrower defense claims were awaiting adjudication as of June 2019. The vast majority of these claims relate to a relatively small number of schools. In its periodic Reports, the Department does not provide the names of the institutions against which the claims have been made. However, data provided during the negotiated rulemaking (and in response to FOIA requests lodged by news outlets) has consistently shown that as great as 90% of the claims are linked to 10 to 15 institutions.  

This having been said, there are still plenty of claims to go around. Even if 90% of claims are concentrated among a handful of schools, that still leaves 21,000 claims to be spread across the rest of higher education. And 21,000 claims represents a lot of potential discharge dollars. By way of example, the 47,942 claims that had been approved by the Department as of June 2019 led to the discharge of $534,765,563 in loans. For administrators, this math is not surprising. If the Department discharges the loans for five bachelor's degree students, for example, a school could be looking at a bill for hundreds of thousands of dollars.

Second, there is reason to believe that new claims will continue to be made. Much of the public discussion regarding the borrower defense rule has been focused on its application to proprietary schools. And there is no question that this was a primary focus of the prior administration and many of the negotiators who participated in the rulemaking processes. But the claims process applies to all institutions of higher education, and as such, is available to borrowers from all institutions. 

These borrowers are only becoming more aware of the borrower defense discharge opportunity. Concerns regarding graduate debt, college affordability, and outcomes continue to percolate through public discourse, garner coverage in presidential debates, and appear in mainstream media. Meanwhile, the Department, consumer media, and consumer advocates, all have increased efforts to make information regarding the borrower defense application process readily available. As dissatisfaction with student debt is stirred, and discharge options are promoted, it seems probable that claims activity will be sustained, and could even increase.

Closed school loan discharge letters are on the way, as well

The second electronic announcement released by the Department is titled "Liabilities Associated with Closed School Discharges," and notifies institutions that the Department is going to begin the process of collecting on the "automatic" closed school loan discharges that it began processing in late 2018. The closed school loan discharge rule has been on the books for decades. As directed by statute, the Department discharges the loans of borrowers who were unable to complete their education due to a school's closure. Historically, borrowers had to apply to the Department for a closed school loan discharge, but the 2016 version of the borrower defense rule created an "automatic" discharge feature, which provides that a loan discharge is granted automatically after three years have passed since a school's closure, if the borrower was enrolled when the school closed and did not enroll at another school within the three year period.

The Department began "running the numbers" back in December 2018, and over the last year has been processing automatic closed school loan discharges. The purpose of last week's announcement was to inform institutions that the agency will soon begin "issuing Automatic Closed School Loan Discharge Liability Letters to affected schools," which will "assess school liabilities equal to all loan funds discharged through the automatic closed school discharge process."

Why colleges and universities should care

First, the rule's application is much broader than is often appreciated. The closed school loan discharge rule covers the closure of any location, not just the closure of an entire institution. Per the rule, any location that closed on or after November 1, 2013, will be reviewed for possible automatic discharges. It does not matter whether the closure was of a branch campus, a main campus, or an entire school. 

It's also important to understand that the Department is not just sweeping its systems for students who were enrolled at the time of closure, but for anyone who withdrew within the 120 days preceding the last date of instruction at the location. 20 U.S.C. § 1087(c), which governs the closed school discharge of Federal Direct Loans, simply provides that if a student "is unable to complete the program in which [he or she] is enrolled due to the closure of the institution..., then the Secretary shall discharge the borrower's liability on the loan...." The regulation, however, goes beyond the statute, providing that the Department will discharge the loans of any student who "[d]id not complete the program of study at that school because the school closed while the student was enrolled, or the student withdrew from the school not more than 120 days before the school closed."  34 C.F.R. § 685.214(a)(1) (emphasis added). 

Second, this process is new and automated, which, in our view, means there will be significant opportunity for error. Indeed, the existing, application-based process is often prone to mistakes. For example, the Department does not have a fail safe means by which to determine the basis for a student's withdrawal during the 120 day period, which can lead to faulty discharges. We have seen instances where a student who was dismissed for academic failure was nonetheless granted a discharge because the dismissal occurred during the 120-day window. The Department simply assumed that the withdrawal was due to the imminent closure. And because the Department discharges first, and asks questions later, the school's first opportunity to note the issue was during the recovery proceeding.   

Parting advice

Institutions of higher education will soon begin receiving notifications from the Department if a student has filed a borrower defense claim, or if the Department has granted an automatic closed school loan discharge. We strongly suggest that general counsel, compliance officers, and financial aid staff put into place a protocol for the receipt and management of such claims. These institution should know who likely will receive any such notices from the Department, and have a plan in place for producing a timely response. We also strongly encourage institutions to closely and aggressively evaluate any notices received from the Department, as well as the underlying claims, and to provide a fulsome and well-articulated reply. There is no question that there will be borrower defense and closed school loan discharges that are meritorious and should be granted (or upheld, in the case of the latter). But we also anticipate that there will be frivolous claims, and inadvertent errors, and institutions will want to take every opportunity to bring these issues to light.

Institutions seeking assistance managing discharge claims are welcome to contact Aaron Lacey at 314-552-6405, or at alacey@thompsoncoburn.com. Thompson Coburn's Higher Education Practice has deep experience representing institutions in matters involving the Department, and considerable familiarity with the borrower defense rulemaking. In 2018, Aaron served the Department as one of 17 primary negotiators charged with overhauling the borrower defense rule. The Department appointed Aaron to represent and negotiate on behalf of general counsel, attorneys, and compliance officers at postsecondary institutions nationwide.

Finally, we invite institutions to join us on December 17, 2019, when we will provide an overview of the status and substance of the Department's current rulemaking activity, with a focus on developments that have, or could have, near-term impact for institutions of higher education. The webinar will cover the final borrower defense, accreditation, and state authorization rules promulgated this fall, and discuss the distance education and Title IX rules on the horizon.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions