By: Sam Whittaker, Sherry Gray, and Nick Michiels
In recent weeks, key developments in the borrower defense to repayment (“BDR”) process have raised important questions in the higher education community. First, continuing litigation in Sweet v. McMahon (formerly Sweet v. Cardona and Sweet v. DeVos) has created uncertainty regarding the outcome of over 170,000 “post-class applicant” claims filed between June 23 and November 15, 2022. Many institutions responded to these claims between summer 2023 and fall 2025. Second, the U.S. Department of Education (the “Department”) resumed sending notices of BDR claims to institutions in March 2026. These claims were filed by borrowers on or after November 16, 2022 and therefore are not subject to the Sweet settlement agreement nor directly affected by the outcome of that litigation. Below we describe the developments in Sweet and offer observations regarding new claims received in March 2026 and beyond.
Sweet Litigation
Under the terms of the Sweet settlement agreement, the Department agreed to issue final decisions by January 28, 2026 respecting the merits of BDR claims filed between June 23 and November 15, 2022. If the Department failed to decide these post-class applicant claims by January 28, 2026, then the borrower would be entitled to “full settlement relief” including discharge of loans associated with attendance at the school, a refund of amounts previously paid on the loan, and credit repair. In November 2025, as it became clear the Department would not meet the decision deadline as to most claims, the agency filed a motion seeking relief from the judgment—specifically, the Department asked the district court to grant an 18-month delay to allow adequate time to issue a decision on the merits of post-class applications.
The district court mostly denied the Department’s request for more time on December 11, 2025, refusing to grant an extension for post-class applications filed by students attending “Exhibit C” schools (i.e., the 151 institutions whose borrowers were previously deemed automatically entitled to full settlement relief if they had a pending claim as of June 22, 2022). However, the district court granted the Department a modest extension to April 15, 2026 to issue decisions on non-Exhibit C post-class claims. After an unsuccessful motion for relief from the district court’s decision on the extension, the Department filed a notice of appeal to the Ninth Circuit on February 24, 2026, followed by a motion for an emergency stay of the district court’s order and the corresponding deadlines. After a hearing on March 20, the Ninth Circuit issued an order denying the Department’s request for an emergency stay of the deadlines on March 25, 2026. The Ninth Circuit reasoned that the Department was unlikely to succeed on the merits of their appeal.
For now, the Sweet litigation continues, and the fate of post-class applications remains somewhat uncertain. It seems likely the Ninth Circuit will hold the Department to the January 28 deadline set by the settlement agreement and the April 15 deadline as modified by the district court. At that point, the Department must decide whether to continue to appeal or to begin effectuating settlement relief for post-class applicants with undecided claims. Assuming the latter occurs, any claims that are the subject of full settlement relief in accordance with Sweet (and are not adjudicated under the borrower defense regulations) are not likely to be subject to recoupment. This is because the automatic discharges will constitute an exercise of the Department’s settlement and compromise authority, rather than a successful borrower defense to repayment under the regulations. Further, to the extent that the Department used irregular procedures under the settlement to decide any post-class applications (such as applying the 2016 federal standard to loans disbursed prior to July 1, 2017), this should also be viewed as pursuant to the Department’s settlement and compromise authority.
What does this mean for institutions? The most important issue for institutions is whether the Department will be able to institute recoupment proceedings with regard to amounts discharged. In short, the Department arguably has the ability to conduct separate regulatory adjudications of claims subject to Sweet and institute recoupment proceedings, but we view this as unlikely considering the agency’s resource constraints. As noted previously, the Department cannot institute recoupment proceedings based solely on loans discharged pursuant to the settlement (i.e., discharges granted without regulatory adjudication).
Borrower Defense Claims Received Beginning March 2026
Claims received by institutions beginning in March 2026 are not directly affected by the Sweet settlement litigation described above. These claims were filed by borrowers on or after November 16, 2022, and the Department may now be devoting resources to these claims as it makes plans to turn the page on claims subject to the Sweet settlement. We believe it is appropriate to respond to these newly-received claims to the extent feasible.
The claims received by institutions in March 2026 fall under the substantive standards of either the 1994 or 2016 BDR rules. See Fed. Student Aid, General 26-22: School Notification Process Under the 1994 and 2016 Borrower Defense to Repayment Regulations (Mar. 30, 2026). Since the inception of the borrower defense to repayment process, there have been four sets of rules promulgated by the Department—in 1994, 2016, 2019, and 2022, respectively. The 2022 Rule is not in effect because it was subject to a preliminary injunction in the Career Colleges and Schools of Texas v. U.S. Department of Education litigation in the Fifth Circuit in 2024 and was later delayed until 2035 by the One Big Beautiful Act of 2025. The 2019 Rule built on top of the existing 1994 and 2016 standards, creating a system whereby the substantive standard under which a borrower’s claim is adjudicated depends on when the loan was first disbursed. Because the claims received in March 2026 are subject to either the 1994 or 2016 standards, this update briefly examines those standards.
1994 Standard: For loans first disbursed prior to July 1, 2017, the borrower is required to assert a valid State-law basis for their claim to succeed. The 1994 Standard requires the claim to show “any act or omission of the school attended by the student that relates to the making of the loan for enrollment at the school or the provision of educational services for which the loan was provided that would give rise to a cause of action against the school under applicable State law.” 34 C.F.R. § 685.206(c)(1). Generally speaking, this would require the borrower to prove the elements of a common law fraud, negligent misrepresentation, or breach of contract claim in the relevant state or to demonstrate the school violated the state’s consumer protection statute(s). Because the 1994 Standard requires analysis of the varying laws of different states, it is the most difficult for the Department to administer, particularly because borrowers rarely specify a cause of action or the law the institution allegedly violated. This also means it may be the most difficult standard for a borrower to meet. Further, many of the relevant statutes of limitation likely have passed on the borrower’s potential state-law claims because these borrowers were enrolled prior to July 1, 2017.
2016 Standard: For loans first disbursed on or after July 1, 2017, and before July 1, 2020, the borrower is required to assert a claim under 34 C.F.R. § 685.222. The 2016 Standard is easier for the Department to administer because it is a unified federal standard. Specifically, the borrower defense to repayment may be based on (1) a nondefault, favorable contested judgment against the school in court or an administrative tribunal, (2) a breach of contract by the school, or (3) a substantial misrepresentation by the school. As the Department acknowledged in the recent Electronic Announcement, the most common claims relate to an alleged misrepresentation on the part of the institution. To succeed, the borrower must demonstrate, by a preponderance of the evidence, that an institution (or its representatives) made a “substantial misrepresentation” upon which “the borrower reasonably relied” resulting in harm to the borrower when the borrower decided to attend, to continue attending, or to take out a Direct Loan.
The Department has stated that, going forward, it will provide institutions with notice of pending claims and an opportunity to respond, generally granting a 60-day window for filing the response. Further, the Department has represented that institutions are not required to respond to claims, and the agency will not draw negative conclusions from a non-response. However, Powers strongly advises institutions to respond to all BDR claims. Unlike claims granted automatic relief pursuant to the Sweet settlement agreement or decided under irregular procedures, it seems more likely the Department will initiate recoupment proceedings against institutions based on loan discharges granted in relation to these newly received claims, subject to certain time limitations. Responding to a claim at the first opportunity may increase the likelihood the claim will be denied, cutting off the potential for future liability to the Department related to the loan. At a minimum, proactively formulating a response will create a record and organize information relevant in any future proceedings.
Institutions should also remember that the Department’s decision to initiate recoupment proceedings constitutes a mandatory triggering event for financial responsibility purposes if the institution’s recalculated composite score would be less than 1.0 as a result of adjudicated BDR claims. Due to the triggering event, the Department would require the institution to provide financial protection (e.g., letter of credit) of not less than 10 percent of the total Title IV funding received in the prior fiscal year. The Department would also place the institution on provisional certification. These potential consequences make responding to BDR claims at the first opportunity all the more critical.
If you have questions concerning the borrower defense to repayment process or desire a consultation regarding a pending claim, please do not hesitate to reach out to Powers.
The information provided in this article does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only.