By: Sherry Gray, Dan Brozovic, Nick Michiels

On Friday, June 16, 2017, the U.S. Department of Education issued a notice in the Federal Register confirming its June 14th announcement that the effective date of the Defense to Repayment (“DTR”) regulation, originally set for July 1, 2017, would be postponed.  The DTR regulation most notably: (1) provided a framework for students seeking discharge of their federal student loans on the basis that their school misled or defrauded them, (2) prohibited the use of pre-dispute arbitration or class-action waiver clauses and required schools that have used them to modify their agreements with students, (3) imposed new financial responsibility requirements on private non-profit and for-profit schools ostensibly designed to be an “early warning system” for financial difficulties, and (4) imposed repayment rate disclosure obligations on for-profit schools.

In the notice and accompanying press release posted on the Department’s website, the Department cited a lawsuit challenging the DTR regulation filed by the California Association of Private Postsecondary Schools (CAPPS) as the basis for the postponement.  The Department invoked Section 705 of the Administrative Procedure Act to stay the effective date of the regulation until further notice.  The only portions of the regulation not being stayed relate to peripheral matters (discharge of loans due to death of the borrower, consolidation of nursing loans, severability, and technical corrections), none of which substantively impact the DTR provisions.

Likely in response to recent questions the Department has faced regarding the status of loan discharges granted under the previous administration, Education Secretary Betsy DeVos stated in the press release that “promises made to students under the current rule will be promises kept”, and that the Department will continue work to process the approximately 16,000 student loan discharge claims currently before it.  The Department’s release also states that it will continue to process new loan discharge applications under the existing (pre-DTR regulation) process.

DTR: Pause, Then Replace

Simultaneously, the Department announced its intent to begin a new rulemaking process to revise the DTR regulation, the first step of which is to convene a negotiated rulemaking committee.  Secretary DeVos commented that the original rulemaking that culminated in the existing regulation “missed an opportunity to get it right,” resulting in “a muddled process that’s unfair to students and schools, and puts taxpayers on the hook for significant costs.”  As a possible clue to areas of focus for the new rulemaking process, the Department referred in its press release to concerns focusing on “excessively broad definitions of substantial misrepresentation and breach of contract, the lack of meaningful due process protections for institutions, and ‘financial triggers’ under the new rules.”

In the notice, the Department said the issue of whether a guaranty agency may charge collection costs to a defaulted borrower who enters into a repayment agreement will also be considered as part of the DTR negotiated rulemaking.

GE: No Pause, But Eventually Replace

In the same press release that addressed the activity around DTR, the Department announced its intent to convene a separate rulemaking committee to re-examine the Gainful Employment (“GE”) regulation.  The GE regulation establishes debt-to-earnings ratio requirements, as well as extensive reporting and disclosure requirements, for (1) non-degree programs across higher education and (2) virtually all programs at for-profit higher education institutions, including degree programs.  The Department attributes the need for a new GE rulemaking to its determination, gathered while implementing the GE regulation, that “as written, it is overly burdensome and confusing for institutions of higher education.”

Unlike the DTR regulation, the GE regulation is already in effect (with a delay of certain deadlines set to expire on July 1), so a logical question for schools with programs covered by GE is to what extent the Department will expect continued compliance with the existing requirements while changes are considered.  The Department’s announcement makes no reference to a stay or other pause in the enforcement of GE requirements, such as the July 1 deadline to begin complying with expanded disclosure requirements.  Therefore, unless the Department issues another announcement, as of July 1, schools will need to issue updated GE disclosures using the Department’s new template and begin distributing that disclosure template to all prospective students.  (We also remind schools that July 1 is the deadline to submit GE alternative earnings appeals to the Department.)

 Next Steps

The Department’s next step, as identified in the Federal Register notice announcing the new rulemaking process, will be to accept public comments on both DTR and GE as well as suggestions for additional topics that should be considered by the negotiating committees.  Comments can be given at public hearings in Washington D.C. (on July 10, 2017) and in Dallas, Texas (on July 12, 2017), or can be submitted in writing to the Department through July 12, 2017.

For both the DTR and GE regulations, the Department signaled its intent to solicit nominations for negotiated rulemaking committee members in a later Federal Register publication, and to convene the rulemaking committees in November or December of 2017.  If the Department is able to complete the rulemaking process in time to issue final regulations by November 1, 2018, the new regulations could become effective as early as July 1, 2019.

If you have questions about DTR or GE, or would like assistance in submitting written comments to the Department, please contact any of the Powers Education Group attorneys listed below.

Sherry Gray (Email: Sherry.Gray@PowersLaw.com; Phone 202-872-6778)

Stanley Freeman (Email: Stan.Freeman@PowersLaw.com; Phone 202-872-6757)

Joel Rudnick (Email: Joel.Rudnick@PowersLaw.com; Phone: 202-872-6763)