1. U.S. Department of Education Negotiated Rulemaking on Borrower Defenses to Repayment Jonathan Tarnow Partner, Education Law Practice Drinker Biddle & Reath LLP 2016 Winter Legal Meeting February 26, 2016

2. Borrower Defenses to Repayment – Statute  HEA § 455(h), 20 U.S.C. § 1087e(h): -“Notwithstanding any other provision of State or Federal law, the Secretary shall specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan made under this part, except that in no event may a borrower recover from the Secretary, in any action arising from or relating to a loan made under this part, an amount in excess of the amount such borrower has repaid on such loan.” National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting2

3. 3 Borrower Defenses to Repayment – Regulation  34 CFR § 685.206(c)(1): -“In any proceeding to collect on a Direct Loan, the borrower may assert as a defense against repayment, any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law.”  July 1995 Notice of Interpretation (60 FR 37768): -ED indicated it acknowledges DTR only if cause of action directly relates to the loan or to the school’s provision of educational services for which the loan was provided.

4. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting4 Borrower Defenses to Repayment  According to ED, only 5 instances of DTR claims between 1995-2015.  ED reportedly received 15,000+ DTR claims in 2015.  October 2015: Negotiated rulemaking announced. -Session 1: January 12-14, 2016 -Session 2: February 17-19, 2016 -Session 3: March 16-18, 2016 (This presentation reflects ED draft language from Session 2)

5. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting5 Borrower Defenses to Repayment  Negotiated Rulemaking Issues: 1)Whether to establish a new standard for the purpose of determining whether a borrower can establish DTR based on an act or omission of a school. 2)Time period of availability for any borrower DTR claims. 3)Developing a regulatory framework for the process of submitting, reviewing, and determining the veracity of borrower DTR claims. 4)Update and expand the existing categories of false certification discharges. 5)Whether to revise the financial responsibility or administrative capability regulations, and whether to add disclosure requirements, to help protect students, the federal government, and taxpayers against potential school liabilities and risks.

6. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting6 Borrower Defenses to Repayment  Negotiated Rulemaking Issues (continued): 6.Allow loan holders to rely on faxed or electronically submitted death certificates for purposes of discharging loans or TEACH Grant service obligations based on the death of the borrower or TEACH Grant recipient. 7.Revise the Direct Consolidation Loan regulations to allow for the consolidation of Nurse Faculty Loans. 8.Prohibit loan holder interest capitalization upon loan rehabilitation.* 9.Make technical changes to PAYE and REPAYE regulations, and remove FFEL from Income Contingent Repayment Plans (34 CFR § 685.209). 10.Revise 34 CFR § 682.410(b) regarding charging of collection costs by guaranty agency to a defaulted borrower who responds within 60 days to the initial notice sent by the guaranty agency after it pays a default claim and acquires the loan. ** 11.Whether to revise the closed school discharge regulation to ensure borrowers are aware of and utilize their ability to receive a closed school discharge. † * Proposed by ED but not accepted as additional issue by Committee during Session 1. Accepted during Session 2. ** Proposed by ED but not accepted as additional issue by Committee during Session 1. Withdrawn by ED and replaced with separate non-ED proposal during Session 2. † Proposed by ED between Sessions 1 and 2. Accepted during Session 2.

7. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting7 Issues 1-3: DTR Standards, Time Period & Process  ED draft language, general provisions: -Misrepresentation includes any statement that omits facts in such a way as to make the statement false, erroneous, or misleading. -Current standard in 34 CFR § 685.206 applies to loans first disbursed prior to July 1, 2017. -Proposes new 34 CFR § 685.222 for loans first disbursed on or after July 1, 2017. -Violation by school of an HEA eligibility or compliance requirement, or Title IV regulations, is not alone a basis for a DTR claim.

8. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting8 Issues 1-3: DTR Standards, Time Period & Process  ED draft language basis for DTR claim: -Borrower, whether as an individual or as a member of a class, has obtained, or a governmental agency has obtained for the borrower’s benefit, a favorable judgment in a court of competent jurisdiction against the school (no statute of limitations). -Borrower received a Direct Loan, and the school failed to perform its obligations under the terms of a contract with the student (two-year statute of limitations). -Substantial misrepresentation (34 CFR Part 668, Subpart F) that the borrower relied on when deciding to attend or to continue attending the school (two-year statute of limitations).

9. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting9 Issues 1-3: DTR Standards, Time Period & Process  ED draft language concerning process: -Discharge application may be pursued by an individual borrower, from a representative on behalf of a group of borrowers with common facts and claims, or by ED on behalf of a group of borrowers identified by the Secretary. -Non-defaulted loans: ED grants forbearance and offers option to continue making payments, including under IBR plan. -Defaulted loans: ED suspends collection activity and notifies borrower of option to continue payments under a rehabilitation agreement.

10. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting10 Issues 1-3: DTR Standards, Time Period & Process  ED draft language concerning process: -Closed school: ED notifies borrower of decision on DTR and relief granted and any non-discharged amount returns to prior status. -Open school: Fact-finding process in which both the school and the borrower will be given an opportunity to participate; hearing official will decide the claim. An ED official may be designated to present the claim. ED may consolidate claims involving common questions of law or fact. Any non-discharged amount returns to prior status.

11. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting11 Issues 1-3: DTR Standards, Time Period & Process  ED draft language concerning borrower relief: -Where complete relief if not warranted, injury may be calculated in light of each borrower’s unique circumstances, including but not limited to: Difference in tuition between the student’s program and average tuition for a comparable pool of programs. Difference between actual charges and amount the student could have reasonably believed to be the charges. Difference between student’s earnings (i) one year after leaving the program or school, and (ii) average salary publicized by the school, or if such data is not available, the lowest decile of earnings for that occupation reported by BLS. Total amount of the student's economic loss, less the value of the benefit, if any, of the education obtained by the student.

12. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting12 Issues 1-3: DTR Standards, Time Period & Process  ED draft language concerning recoupment: -Revised 34 CFR § 685.308 on remedial actions. -Requires school to repay ED the amount of losses incurred on loans that ED determines to be unenforceable. -ED will not apply administrative appeal process set forth for program review and audit recoveries (34 CFR Part 668, Subpart H). -Instead, ED will follow the procedures “applicable to the determination of those losses.” -ED may impose a fine or take an emergency action, or limit, suspend, or terminate school's participation in the Direct Loan Program in accordance with 34 CFR Part 668, Subpart G.

13. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting13 Issue 4: False Certification Discharges  ED draft language would add: -Certification of eligibility of a student who reported not having a high school diploma or its equivalent, and the student did not satisfy alternative that was in effect at the time of certification (e.g., ability-to- benefit). -Certification of eligibility of a student who is not a high school graduate based on a high school diploma falsified by the school, or by a third party under an arrangement with the school.  ED draft language also amends provisions regarding false certifications based on disqualifying conditions.

14. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting14 Issue 5: Financial Responsibility, Administrative Capability & Disclosures  ED draft language: -Augments existing “general standards” of financial responsibility. Proposed automatic and discretionary triggers for schools to provide ED with irrevocable letter of credit. -No change to the composite score standard of financial responsibility. -Clarifies that a change in school’s participation status from fully certified to provisionally certified is a “limitation” -Amends consumer information disclosures to include: Any letter of credit required by ED. Institution’s loan repayment rate (LRR) if below specified thresholds. LRR is different than CDR; also different from College Scorecard LRR

15. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting15 Issue 5: Financial Responsibility, Administrative Capability & Disclosures  ED proposals regarding letter of credit (LC) triggers: -Automatic triggers requiring LC equal to the last three years’ total amounts of: Any losses incurred by ED for DTR claims; Any debt or liability arising from investigation, audit or review of the school by a state, federal, or accrediting entity, or from the resolution or settlement of a suit brought against the school by a state, federal, or accrediting entity.

16. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting16 Issue 5: Financial Responsibility, Administrative Capability & Disclosures  Proposed automatic LC triggers, requiring at least 10% LC: Violation of any loan agreement, or failure to make a payment in accordance with existing debt obligations for more than 120 days Involuntary delisting of publicly-traded stock, or SEC suspends trading on the stock Not making required refunds including Return to Title IV obligations Disclosure with the SEC of an adverse action taken by any State or Federal entity Required to repay ED debts or liabilities arising from Title IV program participation Any time during the prior three years, the school’s accrediting agency issued a show cause order or placed the school on probationary status or took other adverse action Disclosure of contingent liability in audited financial statements of any loss stemming from a governmental action that is possible or probable, or any event that causes the school or related entity to realize any contingent liability More than 50% of enrolled students are enrolled in Gainful Employment (GE) programs, and the number of students enrolled in “passing” GE programs under the debt-to-earnings measures is less than 50% percent of the total number of students enrolled in all GE programs at the school Violation of the 90/10 limitation in the most recently- completed fiscal year (proprietary schools only) School is being sued, or was sued during the prior 3 years, by one or more State or Federal entities Cohort default rates of 30 percent or greater in two most recent fiscal years Not financially responsible in a manner that results in any withdrawal of owner’s equity from the school by any means, including by declaring a dividend

17. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting17 Issue 5: Financial Responsibility, Administrative Capability & Disclosures  ED proposals regarding LC triggers: -Discretionary triggers requiring LC of at least 10% of the prior year’s Title IV funds: Having a significant number of outstanding or pending borrower defense claims; Experiencing high annual dropout rates; or Experiencing a significant year-over-year fluctuation in the volume of Direct Loans or Pell Grants for reasons not accounted for by changes in the programs themselves.

18. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting18 Issue 6: Discharges Due to Death of Borrower  Existing regulations at 34 CFR § 674.61: -Require an original or certified copy of death certificate, or an accurate and complete photocopy of the original or certified copy of the death certificate.  ED draft language: -Would permit discharges of Perkins, FFEL, Direct Loan, and TEACH Grants following the submission of a faxed, scanned, or otherwise electronic death certificate verifying the death of the borrower, or following such verification via authoritative state or federal database.  No objections from negotiated rulemaking committee.

19. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting19 Issue 7: Consolidation of Nurse Faculty Loans  ED draft language: -Revises regulations to reflect the statutory language that provides for Direct Consolidation Loan of both Nursing Student Loans and Nurse Faculty Loans made under the Public Health Service Act.  No objections from negotiated rulemaking committee.  Tentative consensus reached on this issue.

20. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting20 Issue 8: Prohibit Interest Capitalization Upon Loan Rehabilitation  ED characterized its proposal as clarifying generally-held understandings.  ED draft language adds provisions expressly stating: -Lender shall not capitalize unpaid interest at the time a rehabilitated defaulted loan is purchased; and -Guaranty agency shall capitalize unpaid interest due from borrower at the time it pays a default claim, but not thereafter.  Tentative consensus reached on this issue.

21. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting21 Issue 9: Technical Changes to PAYE, REPAYE & ICR  ED draft language: -Changes definition of "eligible loan" in PAYE and REPAYE regulations to clarify that the loan types included in that definition are considered only for purposes of determining whether a borrower has a partial financial hardship (PAYE), or making certain adjustments to a borrower's monthly payment amount (both PAYE and REPAYE), including certain FFEL program loans. -Amends REPAYE regulations to specify that monthly payment amount is not adjusted to take into account the eligible loan debt of the borrower’s spouse if only the borrower’s income is used to calculate the payment amount.

22. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting22 Issue 9: Technical Changes to PAYE, REPAYE & ICR  ED draft language: -Amends REPAYE regulations to remove an incorrect reference to loss of partial financial hardship status. -Amends REPAYE regulations to remove the requirement for the annual notice informing the borrower of the need to recertify income and family size to include information about a separate notice that will be sent if the borrower is removed from the REPAYE plan. Because the information in the latter notice is not applicable when a borrower is simply being notified of the annual income certification requirement.  Negotiated rulemaking committee has requested clearer language on these changes.

23. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting23 Issue 10: Charging of Collection Costs by Guaranty Agencies to Defaulted Borrowers  ED draft language would have codified Dear Colleague Letter GEN-15- 14 in which ED stated that a guaranty agency may not charge collection costs to a defaulted borrower who, within the 60-day period following the initial notice, enters into a repayment agreement, including a rehabilitation agreement, and who honors that agreement.  ED withdrew issue during Session 2, noting the need for a final resolution in United Student Aid Funds v. Duncan.  Committee agreed to substitute Issue 10 (for sequencing purposes) with legal aid representative’s proposal to conform ED regulations on compromising debts with the maximum amount permitted by Treasury, which will be considered during Session 3.

24. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting24 Issue 11: Closed School Discharge Disclosures  ED draft language: -Upon submission of any teach-out plan to its accrediting agency, school must also provide all enrolled students with closed school discharge application and must disclose a closed school discharge as an alternative to teach-out. -If guaranty agency determines that FFEL borrower does not qualify for closed school discharge, requires notice of an opportunity for ED review of that determination. Within 30 days of borrower’s request for ED review, guaranty agency must forward all relevant documentation to ED.

25. National Council of Higher Education Resources (NCHER) 2016 Winter Legal Meeting 1500 K Street, NW Washington, DC 20005 www.drinkerbiddle.com Email: Jonathan.Tarnow@dbr.com Phone: (202) 354-1357 CALIFORNIA | DELAWARE | ILLINOIS | NEW JERSEY NEW YORK | PENNSYLVANIA | WASHINGTON DC | WISCONSIN © 2016 Drinker Biddle & Reath LLP | All rights reserved. A Delaware limited liability partnership 25