Lexology

HIGHLIGHTS:

• Recently released guidance from the U.S. Department of Education’s Office of Federal Student Aid (FSA) confirms that both private and public institutions of higher education must report litigation, settlements and other specified liabilities.
• The new guidance – which addresses the notice requirements in the provision of the federal student aid regulations known as the Borrower Defense to Repayment – states that all private and public institutions participating in the federal student aid program must report all settlement liabilities and any litigationbrought on or after July 1, 2017, “regardless of the type of legal action or the size of the claim.”
• Compliance with these regulations, and continued participation in federal student aid programs, will require careful internal coordination among staff and legal counsel at educational institutions to ensure that litigation, settlements and other specified liabilities are appropriately monitored and reported within the prescribed time periods.

New guidance confirms that both private and public institutions of higher education must notify the U.S. Department of Education about specified liabilities and lawsuits. The Department’s Office of Federal Student Aid (FSA) released on June 3, 2019, a questions-and-answers document addressing the notice requirements in the provision of the federal student aid regulations known as the Borrower Defense to Repayment. FSA confirms in its new guidance that all private and public institutions participating in the federal student aid program must report all settlement liabilities and any litigation brought on or after July 1, 2017, “regardless of the type of legal action or the size of the claim.” The guidance also addresses when institutions have to report litigation and other liabilities.

The Regulations

The Obama Administration published the Borrower Defense regulations in November 2016, but implementation was stayed until 2018. Since then, institutions have been seeking further guidance from the Education Department about how the regulations will be implemented and how institutions may fulfill their corresponding obligations.

The stated purpose of the regulations is to protect “student loan borrowers from misleading, deceitful, and predatory practices of, and failures to fulfill contractual promises by, institutions participating in the Department’s student aid programs.” To achieve that purpose, the Department is focused on determining and monitoring an institution’s financial condition.

The Department attempts to measure an institution’s financial health by calculating a “composite score” based on the institution’s self-reported financial information. If a score is greater than or equal to 1.5, the Department considers the institution financially responsible. If the score is 1.0 or lower, institutions are subject to more stringent oversight and restrictions, including probationary status or dismissal from the student aid program.

The Borrower Defense regulations establish “triggering events” that could lead to a recalculation of a composite score. Triggering events include final judgments, settlements, required teach-out plans, gainful employment ineligibility, Direct Loan litigation and summary judgment deadlines in “other litigation,” among others. Institutions experiencing a triggering event must notify the Department within 10 days in most cases.

The June 2019 Guidance

The June 2019 guidance addresses three urgent questions regarding the 2016 regulations. First, the regulations apply to both private and public institutions. All institutions participating in the federal student aid program under Title IV of the Higher Education Act are subject to these reporting obligations. (continue reading)