Scientia Sit Potential: Is the Education Department's Newest Financial Responsibility Reporting Rule a Source of Powerful Knowledge or a Bureaucratic Mess?

Author:Eschenfelder, Robert

This article addresses the U.S. Department of Education's Financial Responsibility Reporting Rule, codified at 34 C.F.R. [section] 668.171, including the history of its development, its requirements, and its potential impacts on Florida's public colleges and universities.

Precursor to the Rule

Title IV of the Higher Education Act of 1965 (HEA), 20 U.S.C. [section] 1070, et seq., empowers the secretary of education "to assist in making available the benefits of postsecondary education to eligible students ... in institutions of higher education" through various types of financial aid. The William D. Ford Federal Direct Loan Program (direct loan program) allows students who attend "participating institutions of higher education" to obtain direct loans from the federal government to pay for their educational expenses. (1) To participate in the direct loan program, institutions of higher education must enter into contracts, called program participation agreements (PPAs), with the secretary of education and agree to comply with the HEA, all applicable regulations, and certain other conditions. (2) These contracts may include any provisions "the [s]ecretary determines are necessary to protect the interests of the United States and to promote the purposes of" the direct loan program. (3)

By statute, students who are harmed by a Title IV school's violation of certain laws, including prohibitions on fraud, may be entitled to relief from their federal direct loan obligations through a process known as "borrower defense" to repayment. (4) In administering the direct loan program, the secretary must also "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 the direct loan program. (5) More generally, the secretary has authority "to make, promulgate, issue, rescind, and amend rules and regulations governing the" direct loan program. (6)

Based on these regulations, the secretary issued "standards, criteria, and procedures governing the Federal Direct Student Loan ... program," in January 1994, including the first iteration of the borrower defense rule. (7) In December 1994, the secretary amended the direct loan program regulations, including those governing borrower defenses, (8) and under those regulations, borrowers were permitted to assert "as a defense against repayment, any act or omission of the school attended by the [borrower] that would give rise to a cause of action against the school under applicable [s]tate law." (9) The 1994 regulations 1) permitted a student borrower to assert his or her school's misconduct as a reason for nonrepayment; and 2) if the borrower was successful, permitted the Department of Education to recoup the loan from the school. (10)

The collapse of Corinthian Colleges in May 2015 exposed potential inadequacies of the 1994 borrower defense rule. (11) Corinthian, a for-profit company that "operat[ed] numerous postsecondary schools that enrolled over 70,000 students at more than 100 campuses nationwide," (12) filed for bankruptcy in 2015. In the wake of Corinthian's closure, the department ultimately determined that the college had misrepresented its job placement rates. In the aftermath, "thousands of claims for student loan relief" were filed, and Corinthian's bankruptcy meant that there was "no other party from which the [f]ederal government [could] recover any losses." (13) The department concluded, against this backdrop, that the 1994 borrower defense rule was outdated and was no longer adequate to deal with the changed "landscape of higher education." (14)

In an effort to address the deficient rule, the department commenced rulemaking, and on November 1, 2016, it published the final rule governing the direct loan program that is the subject of this article. (15) In relevant part, the 2016 rule 1) prohibits schools "participating in the Direct Loan Program from obtaining" or relying upon a borrower's "waive[r] [of] his or her right to initiate or participate in a class action lawsuit" or "from requiring students to engage in internal dispute processes before contacting accrediting or government agencies" (arbitration and class action waiver provision); 2) requires "financially risky institutions [to be] prepared to take responsibility for the losses to the government for discharges of and repayments for [f]ederal student loans" (financial responsibility provision); 3) adopts certain disclosure obligations for institutions "at which the median borrower has not repaid in full, or made loan payments sufficient to reduce by at the least one dollar the outstanding balance of the borrower's loans received at the institution" (repayment rate provision); and 4) amends the standards and procedures applicable to the borrower defense process (borrower defense provision). (16)

The Rule's Reporting Requirements Applied to Public Institutions

Subsections (c) through (g) of [section] 668.171 set forth various actions or events that would indicate an institution "may not be able to meet its financial or administrative obligations" necessary to comply with Title IV, HEA program requirements. In turn, subsection (h) of [section] 668.171 sets forth reporting requirements that are linked to the actions or events set out in subsections (c) through (g). However, subsections (d) and (e) do not apply to public institutions because they are directed at proprietary institutions and publicly traded institutions respectively. Therefore, this article does not address the requirements in those two subsections. Subsection (f), addressing cohort default rates, does apply to public institutions. However, as it does not contain any reporting requirements, it will also not be...

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