Department of Education issues new regulations to protect student borrowers

Loans may be forgiven in instances of institutional fraud or misconduct

Recent regulations from the Department of Education improve protection for student borrowers targeted by misleading or predatory practices, and establish a clear path for loan forgiveness in instances of institutional fraud or misconduct—an issue financial aid experts say will impact both for-profits and nonprofits.

The Department of Education can now automatically provide debt relief to borrowers in instances of widespread misrepresentations, and proprietary schools with poor loan repayment histories must include plain-language warnings to potential students.

The regulations, the majority of which take effect July 1, 2017, are inspired in part by the 2015 closure of for-profit Corinthian Colleges and resulting student borrower defense claims. And although primarily targeting predatory institutions, the regulations have a wide reach.

“What I say to aid administrators all across the sector is, ‘Don’t think this is a for-profit only institution thing,’” says Karen McCarthy, director of policy analysis for NASFAA, the national organization of financial aid administrators. “For example, any borrower at any institution can say, ‘My school committed misrepresentation and I shouldn’t have to repay my loans.’”

All institutions will now need to be more cognizant of potential fraud information they provide to borrowers at the beginning of the financial aid process.

Other new regulations will:

  • Restore full Pell Grant eligibility for students whose institutions have closed before they could complete their studies.“People were burning through their lifetime limits at these institutions, and they weren’t getting that back,” says McCarthy. “It’s great that in the final rules they found a way to legally pull that off to help make these students whole, even in terms of their Pell Grant.”
  • Ban pre-dispute arbitration agreements that have borrowers forfeit their right to bring a lawsuit against a school. Often tucked into enrollment requirements, these agreements occur almost exclusively at for-profit schools, according to an April 2016 report from The Century Foundation. Students are often pressured into signing such agreements as a condition for enrollment, rarely with any detailed explanation as to what rights are actually being waived.

“What the Department of Education has done here is a sensible response to this problem, particularly in the for-profit college context,” says Julie Murray, attorney for Public Citizen, a nonprofit consumer advocacy organization.

Murray points out that the regulation does not bar arbitration in all contexts. “The department has said that schools and students can arbitrate disputes as long as they agree to arbitrate after a dispute has arisen,” she says.

Data points

  • 15,000+: Approved borrower defense claims from students who believe they were defrauded by for-profit Corinthian Colleges
  • $247 million: Total outstanding loan balance of those claims

Source: Federal Student Aid Enforcement Office Report on Borrower Defense, U.S.


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