5 Key Takeaways from the New Borrower Defense Regulations

Borrower defense is the most effective safety valve for defrauded students seeking loan cancellation. PPSL’s litigation and advocacy have consistently exposed the failings of past borrower defense regulations and pushed for improved borrower protections—from forcing then-Secretary DeVos to implement the 2016 rule, to challenging illegal delays in adjudicating claims, establishing group borrower defense claims submitted by attorneys general as valid, ending the partial relief policy, and more. 

The final Borrower Defense rule published by the Department of Education on Monday, October 31, which is set to take effect on July 1, 2023, reflects many of the issues we’ve advanced through our litigation, strengthening protections for borrowers and adding needed safeguards to the federal student lending process.  

Here is PPSL’s take on how the new Borrower Defense (BD) rule will help borrowers: 

1. Adopts an improved group process for BD claims  

The final rule reintroduces the group process for BD claims that was eliminated by the 2019 rule. Under the new group process, the Department can grant relief for similarly situated borrowers who all attended the same institution, regardless of whether they all submitted BD claims. In an improvement over the 2016 rule, the new group process allows third-party requestors, including state attorneys general, law enforcement agencies, and legal assistance organizations like PPSL, to submit group claims to efficiently assert the BD rights of student borrowers. We know from experience that predatory schools don’t operate with honesty and integrity one week and unlawfully the next. They are designed from top-to-bottom to take advantage of students, and that is why group consideration is appropriate and necessary. 

2. Sets clear deadlines for adjudication of BD claims to prevent illegal delay 

Under this new rule, all individual applicants will receive a decision within three years, and all group claims that are requested by third parties will be resolved within one year of the Department’s decision to form a group.  

This is the first time that the Department of Education has put a time table on its borrower defense system. Under former Secretary DeVos, the Department of Education halted all processing of borrower defense claims, and the system has struggled to catch up. As of June 2019, more than 200,000 students had a borrower defense application pending. Many had been unresolved for nearly four years. In response, a group of borrowers with pending BD applications sued the Department to demand that it start adjudicating their borrower defenses immediately. After more than three years, that lawsuit—Sweet v. Cardona—is nearing completion as the Court decides whether to approve a comprehensive settlement agreement. The proposed settlement is designed to clear the backlog of BD applications: 200,000 class members would have their loans discharged automatically, and the remaining 64,000 class members would have their claims evaluated under a streamlined process and according to clear deadlines. In addition, all borrowers who submitted a BD application after the class closed on June 22, 2022, but before final approval—currently over 100,000 people—would receive a decision within three years.  

With clear deadlines for adjudication of future BD claims now in place, ED can ensure that the backlog cleared by the Sweet settlement does not recur in the future. 

3. Ensures approved BD applications will receive full loan discharge, abandoning the “partial relief” scheme 

The final rule mandates that every approved claim will result in a full discharge of all related federal student loans. 

As we have maintained, predatory institutions cause damage to students far beyond the amount of the federal student loan debt. Past attempts by the Department of Education to calculate “partial relief” have been wrongheaded and unlawful. We won an injunction against one such rule, devised by former Secretary DeVos, that would have left former students of Corinthian Colleges obligated to repay over eighty percent of their federal loans. (The Department has since given Corinthian students full cancellation.) The Trump administration also tried to apply a partial relief rule across the board, relying on a faulty statistical model that denied most borrowers full relief and even told certain students from schools like ITT that they had a borrower defense but were entitled to zero loan cancellation. In June 2020, PPSL and Public Citizen filed a class action lawsuit in the U.S. District Court for the District of Columbia, Pratt v. Cardona, challenging the “partial relief” rule as arbitrary and capricious and arguing that it was adopted without procedures required by law. After the Court granted our motion for class certification, in March 2021 the Department of Education announced that it was rescinding the rule and would be providing full relief to borrowers with previously approved borrower defense claims.  

The new BD rule recognizes the reality that “articulating a clear and consistent standard for applying a partial discharge is not feasible,” and instead recognizes the extent of injury caused by predatory schools.   

4. Eliminates “form denial notices” by requiring reasoned decisions on BD claims 

The final rule requires the Department to provide any borrower whose BD claim is denied with a written decision stating the reasons for the denial and the evidence upon which the decision was based and notifying the borrower that she has the opportunity to request reconsideration of her claim.  

PPSL has litigated to ensure that borrowers understand the decisions that are made on their claims. In 2020, the Department issued tens of thousands of boilerplate denial notices to members of the Sweet class. These notices did not explain the reason for the Department’s decision, did not identify what evidence the Department had considered, and, consequently, left borrowers with no effective means to challenge the denials. Once PPSL became aware that the Department was issuing a flood of form denial notices, the initial Sweet settlement fell apart—on October 19, 2020, the Court found that there was “no meeting of the minds” and denied final approval.  

Plaintiffs submitted a supplemental complaint, alleging that the form denial notices were unlawful. At the same time, they reentered settlement negotiations with the new administration. The proposed settlement agreement, which was preliminarily approved on August 4, 2022, would rescind all form denial notices issued between December 2019 and October 2020. Under the proposed settlement agreement, the Department also agrees to provide any class member whose claim is denied with a written explanation for the denial and an opportunity to revise and resubmit their application.  

5. Reinstates the prohibition on mandatory pre-dispute arbitration agreements and class action waivers 

The final rule reinstates the prohibition on arbitration agreements and class action waivers, recognizing that the inclusion of these provisions in enrollment agreements “insulates institutions from financial liability and severely limits the opportunities for borrowers to pursue recovery while bringing their claims about the institutions’ misdeeds to the attention of appropriate regulators and the public.”  

This builds on the 2016 rule, which took the important step of requiring schools that receive Title IV funds to agree that they would not use pre-dispute arbitration agreements or class action waivers to limit the rights of borrowers to assert claims that could be raised in a BD application. As a result of this rule, PPSL was able to file Britt v. Florida Career College, a putative class action lawsuit alleging that FCC uses high-pressure tactics and false statements to induce students to enroll in worthless career-training programs, targeting its predatory product at students of color, in violation of federal antidiscrimination laws and Florida state law. Unfortunately, when the 2019 final rule went into effect and the ban on arbitration agreements was rescinded, FCC was able to argue that its waiver of its right to arbitrate—which deviated from the language required by the 2016 final rule—was likewise terminated, and the Court compelled the case to individual arbitration. 

The new BD regulation closes this loophole. The Department reiterates that institutions must promptly provide the required waiver notice—as it is written in the regulations—to all students. And in response to advocates’ calls to ensure compliance with the letter and spirit of the arbitration and class action waiver regulations, the Department states its intention to “vigorously assess institutions’ compliance with these regulations and enforce them to protect borrowers’ rights.”