A group of 22 state attorneys general joined by the District of Columbia AG filed a lawsuit in a California federal district court against Secretary of Education Betsy DeVos and the U.S. Department of Education (ED) seeking to invalidate the ED’s final “Institutional Accountability Regulations” issued in 2019 (“2019 Rule”) which replaced the Obama administration’s “Borrower Defense” rule issued in 2016 (“2016 Rule”).  The 2019 Rule became effective on July 1, 2020 and applies to loans disbursed on or after that date.  A bi-partisan resolution under the Congressional Review Act to override the 2019 Rule was vetoed by President Trump.

Significant changes to the 2016 Rule made by the 2019 Rule include:

• A school receiving Title IV assistance under the Higher Education Act (HEA) can require federal student loan borrowers to sign pre-dispute arbitration agreements or class action waivers as a condition of enrollment if it makes a “plain language disclosure” available to prospective and enrolled students and the public.
• A new federal standard for a “borrower defense” asserted with respect to Direct Loans and loans repaid by Direct Consolidated Loans applies.  (A Direct Loan is a federal student loan made by the ED under the Direct Loan Program and a Direct Consolidated Loan is a federal student loan made by the ED under the Direct Loan Program that repays multiple Direct Loans or other specified loans.)
• A defense to payment (which can also support a request to recover payments previously made) must be based on a misrepresentation of material fact on which the borrower reasonably relied in deciding to obtain a Direct Loan, or a loan repaid by a Direct Consolidation Loan.
  • The misrepresentation must directly and clearly relate to (a) (i) enrollment or continuing enrollment at the school or (ii) the provision of educational services for which the loan was made.
  • The borrower must have been financially harmed by the misrepresentation.
  • A “misrepresentation” is defined as a statement, act, or omission by a school to a borrower that is false, misleading, or deceptive, and made with knowledge of its false, misleading, or deceptive nature or with reckless disregard for the truth, and that directly and clearly relates to enrollment or continuing enrollment at the school or the provision of educational services for which the loan was made.

In their lawsuit, the AGs allege that ED’s action in replacing the 2016 Rule with the 2019 Rule violates the Administrative Procedure Act (APA) because:

• ED’s decision to replace the 2016 Rule was arbitrary and capricious and not the product of reasoned decision making as required by the APA.  Among other provisions of the 2019 Rule, the AGs’ complaint highlights the 2019 Rule’s replacement of the 2016 Rule’s ban on the use of pre-dispute arbitration agreements and class action waivers for borrower defense claims with a disclosure requirement for such agreements and waivers.  The AGs allege that “ED’s conclusion that requiring schools to disclose their use of mandatory predispute arbitration agreements and class action waivers will adequately protect borrowers is also contrary to substantial evidence and ED’s own prior conclusions.”
• The standards and claims process established by the 2019 Rule are not in accordance with law as required by the APA.  By establishing an illusory process that makes it almost impossible for students to qualify for borrower defense relief, the 2019 Rule does not comply with Congress’s requirement in the HEA that the ED “specify in regulations which acts or  omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan made under [the Direct Loan Program].”