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What the Proposed Borrower Defense Rules Mean for Student Loans

The U.S. Department of Education’s proposed borrower defense rules may make it tougher for some students to discharge their student loans.

If implemented, the new rules will affect student loan borrowers who claim they were defrauded by a college or university.

The Obama administration first introduced the current borrower defense rules in 2016 after the collapse of the for-profit Corinthian Colleges Inc. The Obama-era rules were intended to allow borrowers to petition the Department of Education for a federal student loan discharge if they could prove their school defrauded them under state law.

[Read: What Expenses You Should Cover With Student Loans.]

But a month before the Obama rules were slated to take effect in 2017, the department delayed their implementation and announced its plans to revise them.

Recently, there has been a flurry of legal action by several attorneys general against the department’s delay in processing borrower defense claims. In fact, a federal judge in the District of Columbia ruled last week that the department’s postponement of the rule last year was “arbitrary and capricious.”

[Read: What Student Loan Borrowers Need to Know About Navient Lawsuits.]

According to the Education Department, a revised set of rules will bring clarity and consistency to the claim filing process for students while giving schools the opportunity to make a case for themselves in response. The agency says that current structure isn’t designed to process the more than 100,000 claims it’s received since 2015.

For borrowers who are interested in filing a claim, here are the agency’s proposed changes to the current borrower defense rules.

[Read: How the Trump Administration May Reform Student Loans.]

Borrowers will need to be in default before making a claim. While moving to streamline the claim process, the proposed changes would require that borrowers be in default before being able to claim a discharge. This is different from the current program, which allows borrowers to file without consideration of their payment status.

Additional evidence may be needed to support a claim. When filing a claim, the requirement for supporting evidence may call for more than what’s currently needed. A key difference is court actions against a school will not stand alone as cause for filing a claim. Instead, borrowers will now have to demonstrate that they were caused financial harm by acting on a substantial misrepresentation by the school.

This approach would replace the state law-based standard currently in effect and establish a uniform federal standard for borrower’s defense to repayment, according to the National Association of College and University Business Officers.

Additionally, schools would now have a way to counter claims.

The proposed changes are intended to hold schools more directly responsible for the taxpayer burden of loan forgiveness under these circumstances. While the current rules allow borrowers the opportunity to appeal an unfavorable ruling on their claim, the new rules would not retain that provision.

There’s a crackdown on false certifications. Students who are unable to produce diplomas or high school transcripts in the process of applying for federal financial aid will be allowed to proceed without the required documentation as long as they can formally assert that they have met that requirement. Those who are later found to have misrepresented the facts will not be eligible for any discharge under the proposed borrower defense rules.

Colleges are allowed to offer teach-out plans instead of suddenly closing. A teach-out plan would allow students who are already enrolled a reasonable opportunity to complete their studies, either at the original institution or a partnering institution. Under the proposed changes, if students are offered a teach-out plan and elect not to accept it, they forfeit their eligibility for a closed school discharge.

There’s an expanded window of eligibility. The longer period ensures borrowers who discontinued their enrollment at an institution 180 days prior to closure are still able to file a claim. But that’s provided that they don’t transfer their earned classroom credits to another school.

Under the current rules, the window is 120 days. This part of the proposed rule change could benefit student loan borrowers who skip or withdraw from a semester.

Keep in mind that these are proposed changes, and that none of what you read here has been implemented. Now that the period for public comment has expired, the Department of Education has announced that it intends to finalize these rules by July 1, 2019.

The Student Loan Ranger encourages borrowers to follow developments and on-going litigation related to the proposed borrower defense rules.

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What the Proposed Borrower Defense Rules Mean for Student Loans originally appeared on usnews.com



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