August 31, 2023Client Alert

Responding To The Influx Of Borrower Defense Claims

Colleges and universities may have noticed a recent influx in borrower defense claims from students seeking to discharge their student loan repayment obligations. This influx is likely due to a variety of factors, including the United States Supreme Court striking down President Biden’s student loan forgiveness program; student loan repayment and interest obligations are scheduled to resume in October; and a class-action settlement in Sweet v. Cardona that is expected to discharge around $6 billion in loans for more than 200,000 borrowers.

Background on the Borrower Defense Regulations

Student borrowers are seeking relief under the borrower defense to repayment (“BDR”) regulations. There have been numerous challenges to the changes to the BDR regulations since 2016, making it all the more confusing for schools to determine how to respond to these claims. The challenges to the BDR regulations started with the 2016 BDR regulations, and they have not stopped since. Here is a simplified history:

  • 2016 BDR regulations went into effect October 16, 2018 (originally scheduled to be effective July 1, 2017);
  • 2019 BDR regulations went into effect July 1, 2020; and
  • 2022 BDR regulations are currently being challenged and were supposed to go into effect July 1, 2023.

On August 7, 2023, the Fifth Circuit granted a motion for an injunction pending appeal, which stayed the effective date of the borrower defense and closed school loan discharge provisions of the 2022 BDR regulations. The stay of the effective date will remain until at least November 6, 2023, when the Fifth Circuit is scheduled to hear the appeal. However, while the Department of Education (“DOE”) has acknowledged the effective date of the 2022 regulations is delayed by the Fifth Circuit’s decision, it has stated it will continue to adjudicate applications “using an earlier version of the regulations where required under a court settlement.” DOE further stated it would not adjudicate applications under the 2022 BDR “unless and until the effective date is reinstated.”

While DOE’s statement does not expressly reference the Sweet settlement, we understand DOE is following its obligations under the Sweet settlement agreement in adjudicating applications covered by the agreement. The Project on Predatory Student Lending has a handy guide to the Sweet settlement agreement listing schools in the automatic discharge group and laying out the timeline the settlement agreement requires DOE to make a decision on an application based on when the BDR application was filed. Notably, the Sweet settlement appears to require DOE to utilize the 2016 BDR regulations to adjudicate all applications filed prior to November 16, 2022. 

As of the date of publication, DOE has yet to provide schools or borrowers with any clarity on whether it will adjudicate claims filed today under the 2019 BDR regulations.

What Should You Do If Your School Receives a Claim?

While many schools may review an application and conclude the allegations are unfounded or frivolous, it is generally a good idea to respond to the application within DOE’s designated timeline, because if DOE determines the application meets the requirements for discharge, it can seek to recoup the amount of the discharged loan from the school.

  • Identify when the student filed their application and when their loan(s) were first disbursed to assess what standards and processes DOE will likely apply when adjudicating the application.
  • Conduct an internal investigation evaluating the merits of the borrower’s allegations.
  • After completing your internal investigation, consider whether the facts and documents gathered directly refute the applicant’s allegations. If they do, ensure this is clearly explained in your response—including providing all documentation supporting your position.
  • If the internal investigation does not reveal information directly refuting the student’s allegations (maybe the allegations rely on oral statements with an employee no longer employed at your institution or maybe the allegations are so vague they are next to impossible to investigate), continue to consider whether the allegations meet the standard for discharge in the first place. For instance, even if the student’s allegations are true, was there a substantial misrepresentation the student relied upon when they made the decision to take out their loan, attend your institution, or continue to attend your institution?
  • Review your external communications to assess whether they accurately reflect the nature of your school’s educational programs, financial charges, and employability of graduates.
  • If the allegations in the discharge application or the facts uncovered in your internal investigation indicate the borrower’s application may have merit (or you simply want to outsource this process), consider reaching out to outside counsel for assistance responding to the claim.

Schools should continue to monitor incoming communications from DOE to ensure they are well-positioned to respond to any BDR applications. Michael Best will continue to monitor the Fifth Circuit’s decision and its potential impact on pending and future BDR applications to help higher education institutions handle BDR claims.

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