Regulatory Reform Update 2018 Legislative Conference Shelly Repp, NCHER

ED currently conducting two negotiated rulemakings: Revising 2014 gainful employment regulation Revising 2016 borrower defenses regulation

Gainful Employment Neg Reg For for-profit college programs and non-degree programs at nonprofit colleges, HEA defines an “eligible program” to include a program that provides “training to prepare students for gainful employment in a recognized occupation.”

Gainful Employment Neg Reg No regulatory definition until 2014, when ED issued regulations establishing standards and requirements. Standards include: Accountability measure Transparency School certifications School Reporting

Gainful Employment Neg Reg Key metric is debt to earnings (D/E) Debt is the annual loan payment calculated by amortizing median loan debt of program completers Earnings is higher of mean or median annual earnings of program completers, calculated by SSA

Gainful Employment Neg Reg Grading: GE program considered “passing” if D/E rate< 8% (or < 20% of discretionary income) GE program considered “failing” if D/E rate > 12% (or > 30% based on discretionary income) In between “in the zone”

Gainful Employment Neg Reg Sanctions: Program loses eligibility if it fails 2 out of 3 years or fails or is “in the zone” for 4 consecutive years Any program that could lose eligibility based on the following year’s D/E rate must provide a warning to current and prospective students

Gainful Employment Neg Reg Issues: Should rule apply to all programs or just GE programs Is D/E rate the appropriate metric, or should it be eliminated Should D/E rates be used to determine eligibility and sanctions Should D/E rates be included in transparency disclosures Will program disclosures alone be effective in helping enrolled and prospective student identify lower performing programs Can appeals be streamlined (American Association of Cosmetology Schools case) What data will schools be required to report Should school certifications (that program is approved by accreditors and state, and satisfies educational prerequisites for licensure) be retained

Borrower Defenses Neg Reg ED is revisiting the borrower defenses to repayment regulation published 11/1/16. Obama administration estimated that this regulation would cost tax payers $14.9 billion over 10 years. ED says it wants a rule that’s fair to both borrowers and tax payers. Neg Reg also covers other issues included in 2016 rule.

Borrower Defenses Neg Reg Existing rule dates from beginning of Direct Loan Program, but has been seldom used. Borrower needs to establish existence of act or omission by school that would give rise to cause of action under state law. New rule to apply to loans disbursed beginning 7/1/19.

Borrower Defenses Neg Reg - Issues Should a federal standard be established, and should it be the exclusive standard? ED Draft: Sets forth a federal standard What is the standard? ED Draft: A misrepresentation where school acted with intent to deceive, knowledge of misrepresentation or reckless disregard Borrower must prove reasonable reliance Borrower must prove financial harm

Borrower Defenses Neg Reg - Issues What is the standard of proof? ED Draft: Clear and convincing evidence (higher standard than preponderance of evidence) When can a borrower file a claim? ED Draft: Claim must be filed within 3 years of when borrower discovered or should have discovered the misrepresentation

Borrower Defenses Neg Reg - Issues Can ED grant partial relief? ED Draft: Yes Can borrower request reconsideration of denials? ED Draft: ED decision final unless there is newly discovered evidence that borrower could not have previously discovered

Borrower Defenses Neg Reg - Issues Issues Should schools be allowed to use pre-default arbitration agreements and/or class action waivers? ED Draft: Yes (but disclosure and counseling requirements included)

Borrower Defenses Neg Reg - Issues What due process is awarded to schools? ED Draft: School provided opportunity to submit response ED may seek recovery against school if borrower asserts successful claim

Borrower Defenses Neg Reg – Issues Framework for Processing & Submitting Claims ED Draft: Lender to apply mandatory administrative forbearance when notified by Secretary borrower intends to consolidate loan(s) Forbearance applied in yearly increments until consolidated or Secretary notifies to end For loans held by guaranty agency suspend collection activities for the period designated by the Secretary

Borrower Defenses Neg Reg – Issues Financial Responsibility & Administrative Capability ED Draft: Identifies actions or events the Secretary may consider in determining if school financially responsible Includes language Secretary may accept other types of surety or financial protection in lieu of letters of credit Allows for a four-year transition period for operating leases entered into before January 1, 2019

Borrower Defenses Neg Reg – Issues Closed School Discharge ED Draft: Amends application requirement to reflect current practice that borrower submit an application rather than a sworn statement Window for closed school discharge eligibility expanded from 120 to 150 days before school closure Adds ability for borrower to request a review by the Secretary if the guaranty agency denied the claim

Borrower Defenses Neg Reg – Issues False Certification Discharge ED Draft: Amends application requirement to reflect current practice that borrower submit an application rather than a sworn statement Update to remove reference to “ability to benefit” and instead use eligibility of a non-high school graduate who is considered to be a student who did not have a high school diploma or its recognized equivalent and did not meet the alternative requirement under General Provisions at the time the loan was originated

Borrower Defenses Neg Reg – Issues Guaranty Agency Collection Fee ED Draft: Prospectively prohibits charging collection costs on defaulted borrowers who enter into, and honors, an acceptable repayment agreement within 60 days of receiving notice of default; includes rehabilitation agreement Lender purchase of rehabilitated loan is not considered entry into repayment, as such, interest accrued during rehab period may not be capitalize at time of purchase ED confirmed interest capitalization permitted after a subsequent capitalization eligible event such as deferment or forbearance

Borrower Defenses Neg Reg – Issues Recalculation of Subsidized Usage Period and Interest Accrual ED Draft: Recalculate if the borrower receives a discharge when they did not receive all or part of the educational benefits Eliminate or recalculate the subsidized usage period, and if applicable, also restore lost interest subsidy associated with the amount discharged on closed school, false certification, unpaid refund, and borrower defense