The Department of Education
today proposed regulations to further protect
student borrowers and taxpayers against predatory practices by postsecondary
institutions. The regulations clarify, simplify, and strengthen existing regulations that grant students loan
forgiveness if they were defrauded or deceived by an institution. The proposed
regulations would also hold financially risky institutions accountable for
their behavior and ban schools’ use of legal clauses to sidestep accountability.
This new regulatory effort builds on the Obama
Administration's commitment to protect taxpayers' and students' investments and
ensure that all Direct Loan borrowers can engage in a process that is
efficient, transparent and fair when applying for a loan discharge based on the
misconduct of the institution.
“We won’t sit idly by while
dodgy schools leave students with piles of debt and taxpayers holding the bag,”
said U.S. Secretary of Education John
B. King Jr. “All students who are defrauded deserve an
efficient, transparent, and fair path to the relief they are owed, and the
schools should be held responsible for their actions.”
The proposed regulations would
streamline relief for student borrowers who have been wronged and create a
process for group-wide loan discharges when whole groups of students have been
subject to the misconduct. They also establish triggers that would require
institutions to put up funds if they engage in misconduct or exhibit signs of
financial risk.
Additionally, the proposed
regulations require financially risky schools and proprietary schools in which
students have poor loan outcomes to provide clear, plain-language warnings to
prospective and current students, and the public. The rules also make it
simpler for eligible students to receive closed-school discharge.
Finally, in a major step to
protect student borrowers and prevent schools from shirking responsibility for
the injury they cause, the proposed regulations would prohibit the use of
so-called mandatory pre-dispute arbitration clauses and class action waivers
that deny students their day in court if they are wronged. Under these
regulations, schools would no longer be able to use their enrollment
agreements, or other pre-dispute arbitration agreements or clauses in other
documents, in order to force students to go it alone by signing away their
right to pursue relief as a group, or to impose gag rules that silence students
from speaking out.
“These regulations would
prevent institutions from using these clauses as a shield
toskirtaccountabilityto their students, to the Department and to taxpayers,”
said U.S.Under Secretary of Education
Ted Mitchell.“By allowing students to bringlawsuits againstaschool
for alleged wrongdoing,the regulations removethe veil of secrecy, create
increased transparency, and give borrowers full access to legal redress."
Last September, the Department
began a negotiated rulemaking
process to clarify how Direct Loan borrowers who believe they have been
wronged by their institutions can seek relief and to strengthen provisions to
hold colleges accountable for their actions. Current provisions in federal law
and regulations allow borrowers to seek discharge of their Direct Loans if
their college's acts give rise to a state law cause of action.
The third and final session of
negotiated rulemaking was held in March, but the committee did not come to a
consensus on a draft of the rule. The Department took the committee’s feedback
into account when drafting this proposed regulation.
The proposed rule publishes in
the Federal Register on June 16, and the public comment period ends Aug. 1. The
Department will publish a final regulation by Nov. 1.
The proposed regulations build
on years of work by the Obama Administration to protect students and taxpayers
from fraudulent or failing institutions of higher education. Those efforts
include the landmark Gainful Employment regulations ending Federal student aid
eligibility for career colleges that are not paying off for their students,
establishing tougher regulations targeting misleading claims by colleges and
incentives that drove sales people to enroll students through dubious promises,
requiring States to step up their oversight through the state authorization
regulation, creating a new Enforcement Unit to protect students and taxpayers
from unscrupulous colleges, and calling for improved accreditation practices
that focus on student outcomes.
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