New Rules Aim To Make It Easier For Students To Seek Financial, Legal Relief From Failed Colleges

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In the last few years, multiple for-profit college chains have closed with little or no warning given to their students, while others remain on the brink of closure. And many of the for-profit schools that remain bar wronged students from ever suing the college in a court of law. Today, the Department of Education finalized the massive overhaul of its “Borrower Defense” rules in an effort to make it easier for students to hold colleges financially and legally responsible for their actions.

The final regulations [PDF] aim to protect student borrowers against misleading and predatory practices by postsecondary institutions and clarify a process for loan forgiveness in cases of institutional misconduct.

The Dept. of Education and advocates began working on revisions to the Borrower Defense rules shortly after Corinthian Colleges Inc — the operator of Heald College, Everest University, and WyoTech – closed in 2014.

At the time the schools closed, Borrower Defense applications had been a rare occurrence, thus the standards and processes involved were not exactly clear.

The finalized rules set forth more specific benchmarks for situations where students would be eligible for loan relief. The final regulations include key provisions that aim to protect the rights of borrowers and hold institutions accountable by:

• Giving borrowers access to consistent, clear, fair, and transparent processes to file claims;
• Empowering the Secretary of Education to provide debt relief to borrowers without requiring individual applications in instances of widespread misrepresentations;
• Protecting taxpayers by ensuring that financially troubled institutions provide the government with protection against the risks they create and that institutions whose actions lead to discharges of Federal student loans are held responsible;
• Helping students make more informed decisions by requiring proprietary schools with poor loan repayment outcomes to include a plain-language warning in their advertising and promotional materials;
• Ensuring affected borrowers have information about loan discharge when schools close and access to an automated process;
•Banning schools from inducing students to sign pre-dispute arbitration agreements that waive their rights to go to court and bring class action lawsuits based on borrower defense claims.

Borrower Relief

The finalized rules provide for a streamlined timeframe and process for students to receive loan discharges when their school closes. Under the new guidelines, this option becomes available to currently or recently enrolled students when a school shuts its doors.

Students who receive a closed school discharge have no further obligation to repay their Direct Loans, Federal Family Education Loan (FFEL) Program loans (which include Stafford and PLUS loans), or Perkins Loans.

The finalized rules include a measure for early implementation of automatic closed school discharges.

Specifically, students who attended a school that closed on or after Nov. 1, 2013 and didn’t enroll in another Title IV participating institution within three years. will receive a loan discharge.

The final regulations also makes it clear that the Department will determine in a “reasonable and practicable way the appropriate relief for a borrower defense claim, taking into account any educational benefit received.”

As for Pell Grant eligibility, the Dept. of Education announced plans to restore semesters of grant eligibility for students who were unable to complete their programs because their institution closed.

The rule could make a significant difference for students who rely on grants to cover education costs. Currently there is a maximum Pell Grant lifetime eligibility of 12 semester. Once a student has used their allotted lifetime Pell Grant eligibility, it’s gone, even if the school they attended later closes or is later found to have defrauded students with false job placement rates or other misleading tactics.

Forced Arbitration

The finalized rules also address forced pre-dispute arbitration clauses in students’ enrollment agreements. These clauses generally bar students from bringing any legal action against the school in a court of law, or joining together with other wronged students in a class action.

Instead, each student would have to go it alone through private arbitration, where damages may be limited, no legal precedents are set, and where the arbitrator’s decision can not be appealed to the legal system even when an error is made that could have resulted in a different outcome.

Additionally, many arbitration hearings include nondisclosure agreements for all parties, meaning that even if a student prevails in demonstrating the school screwed up, the world will not know.

As we’ve previously reported, these clauses are virtually unheard of outside of the for-profit education industry. Still, some schools have taken steps to dial back the requirements after increased scrutiny over the tactics: University of Phoenix recently announced that its new owners are doing away with the clauses starting July 1, while the non-profit that acquired a number of Corinthian’s locations likewise did away with them.

Under Friday’s finalized rules, the Dept. of Education bans all pre-dispute arbitration agreements for all Direct Loan borrowers when it comes to disputes related to the educational services provided or the making of Direct Loans, regardless of whether such clauses are a condition of enrollment.

The rules also end “day-in-court denials,” that blocked students from ever taking a school to court. Specifically, the provision allows students to agree to arbitration of their claims, but only after the actual dispute arises.

Finally, the rules prohibit schools from placing in their enrollment agreements restrictions that silence students from voicing their concerns to authorities.

“The Department is concerned that some schools require students to first pursue an internal process before contacting accreditors and regulators about potential violations of the law,” the provision states. “The final regulations bar this practice, while also providing more transparency on the outcomes of arbitration by requiring schools to notify the Secretary when arbitration and judicial claims are filed and the decisions and awards issued in arbitration and in court proceedings.”

Pauline Abernathy of The Institute for College Access & Success says her organization is still reviewing the new rules, but that she believes they “will help ensure that students at closed schools know their options and that their loans are automatically discharged if they do not continue their studies. Both students and taxpayers will be better protected because the riskiest schools will have to warn students and put money aside to help cover the cost if their students’ loans are discharged.”

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