BlogLine

Colleges on alert for ‘borrower defense to repayment’ claims from the Department of Education

4/17/24

By: Noël Couch and A. Neil Hartzell

As the cost of college tuition is on the rise, so are the number of claims brought by student borrowers seeking repayment of their loans. Federal regulation provides an avenue for borrowers to seek forgiveness and repayment of their student loans. The Borrower Defense to Repayment (BDR) Rule is applicable to students who received a federal loan to attend college and allege their school engaged in misconduct. Examples of misconduct may include substantial misrepresentation, substantial omission of fact, breach of contract, and aggressive and deceptive recruitment. Initially promulgated in 1994, the Rule has gained widespread public awareness and accessibility in recent years. Notably, reliance on the Rule for loan forgiveness has coincided with other attempts by the Biden administration to forgive student loans; however, the BDR Rule is a separate resource from the $7.4 billion in additional student loan debt relief announced in April 2024. 

There have been several iterations of the Rule, such as that included in the 2016 regulations, the 2019 regulations, and most recently the proposed 2022 regulations, each one laying out a different standard and process for claims. Generally, the legislation has provided a definition of the misconduct that qualifies as grounds for loan relief; however, the standard for showing such misconduct varies by regulation year. Additionally, the time period during which the student received the loan matters for which version of the Rule will apply. Overshading its complicated application are the lawsuits brought by schools who oppose the latest version of the Rule.  

On April 4, 2024, the U.S. Court of Appeals for the Fifth Circuit handed down its ruling in Career Colleges & Schools of Texas v. United States Department of Education, reversing the district court’s order denying a preliminary injunction and remanding with instructions to enjoin and postpone the effective date of the challenged 2022 BDR provisions, pending final judgment. Importantly, the 2022 Rule allowed for group discharge claims including rebuttable presumptions that (1) each member of the group knew about the particular claimed borrower defense; (2) each member relied on the representation, omission, or other act; and (3) each member’s reliance was reasonable. In this case the court recognized that, should the Rule go into effect, schools would be subject to an imposition of significant financial charges, need to expand their recordkeeping operations, and be required to alter their business operations in anticipation of costs spent defending against claims. 

While the ruling may be viewed as a win for colleges and universities, it does not provide relief to colleges facing claims governed by the 2016 regulation. The Department of Education will adjudicate applications filed between June 23, 2022 and Nov. 15, 2022 under the 2016 BDR Rule, as required by the settlement approved in Sweet v. Cardona, 641 F. Supp. 3d 814 (N.D. Cal. 2022). The Department has anticipated completing the initial notification to all schools by approximately April 2024. 

Despite the promising ruling by the Fifth Circuit, schools facing claims subject to the federal settlement remain responsible for addressing such claims. These schools are afforded sixty (60) days to respond to the Department and addressing each claim can be time-consuming and complicated. Ultimately, the Department may seek recoupment of payments that have been refunded to students. Schools will seek to make concerted efforts to defend against allegations contained in the claims to avoid that result.  

As professionals prepared to provide client representation with excellence, FMG stays informed and knowledgeable about legislation impacting higher education institutions. For more information, contact Neil Hartzell at Neil.Hartzell@fmglaw.com or Noël Couch at Noel.Couch@fmglaw.com.