Comments on the Proposed Borrower Defense to Repayment Regulations

The U.S. Department of Education is currently accepting public comments (through August 30) on their proposed borrower defense to repayment regulations, which affect students’ ability to get loans forgiven in the case of closed schools or colleges that misrepresented important facts. Since these regulations also affect colleges and taxpayers, I weighed in to provide a researcher’s perspective. My comments are reprinted below.

August 21, 2018

Jean-Didier Gaina

U.S. Department of Education

400 Maryland Avenue SW, Mail Stop 294-20

Washington, DC 20202

Re: Comments on the proposed borrower defense to repayment regulations

Dear Jean-Didier,

My name is Robert Kelchen and I am an assistant professor of higher education at Seton Hall University.[1] As a researcher who studies financial aid, accountability policies, and higher education finance, I have been closely following the Department of Education (ED)’s 2017-18 negotiated rulemaking efforts regarding borrower defense to repayment and financial responsibility scores. Since there were no academic researchers included in the negotiated rulemaking committee (something that should be reconsidered in the future!), I write to offer my comments on certain segments of the proposed regulations.

My first comment is on the question of whether ED should accept so-called affirmative claims from borrowers who are not yet in default and seek to make a claim against a college instead of only accepting defensive claims from borrowers who have already defaulted. For colleges that are still open, this is a clear decision in my view: affirmative claims should be allowed because ED can then attempt to recoup the money from the college instead of effectively requiring the taxpayer to subsidize at least some amount of loan forgiveness. However, the decision is somewhat more complicated in the case of a closed school, where taxpayers are more likely to foot the bill. My sense is that affirmative claims should probably still be allowed given the relationship between defaulting on student loans and adverse outcomes such as reduced credit scores.[2]

To protect taxpayers and students alike, more needs to be done to strengthen federal requirements for colleges that are at risk of closure. If a college closes suddenly, students may be eligible to receive closed school discharges at taxpayer expense. Yet my research and analyses show that ED’s current rules for determining a college’s financial health (the financial responsibility score) are only weakly related with what they seek to measure. For example, several private nonprofit colleges that closed in 2016 had passing financial responsibility scores in 2014-15, while many colleges have continued to operate with failing scores for years.[3] I also found that colleges did not change their revenue or expenditure patterns in any meaningful way after receiving a failing financial responsibility score, suggesting that colleges are not taking the current measure seriously.[4]

I am heartened to see that ED is continuing to work on updating the financial responsibility score metric to better reflect a college’s real-time risk of closing through another negotiated rulemaking session. However, I am concerned that students and taxpayers could suffer from continuing with the status quo during a potential six-year phase-in period, so anything to shorten the period would be beneficial. I again urge ED to include at least one academic researcher on the negotiated rulemaking panel to complement institutional officials and accountants, as the research community studies how colleges respond to potential policy changes that the rest of the committee may be proposed.

Finally, I am concerned about ED’s vague promise to encourage colleges to offer teach-out plans instead of suddenly closing, as the regulations provide no incentives for colleges on the brink of financial collapse to work with accreditors and states to develop a teach-out plan. It would be far better for ED to require colleges to be proactive and develop teach-out plans at the first sign of financial difficulties, reducing the risk to taxpayers by minimizing the risk of closed school discharges. These plans can then be approved by an accreditor and/or state agency as a part of the regular review process. Colleges would likely contend that having to develop a pre-emptive teach-out plan may affect their ability to recruit and retain students, but tying this to an existing benchmark of federal concern (such as a low financial responsibility score or being on HCM2) should alleviate that issue.

Thank you for the opportunity to provide comments on these proposed regulations and I am happy to respond to any questions that ED staffers may have.

[1] All opinions reflected in this commentary are solely my own and do not represent the views of my employer.

[2] Blagg, K. (2018). Underwater on student debt: Understanding consumer credit and student loan default. Washington, DC: Urban Institute.

[3] Kelchen, R. (2017, March 8). Do financial responsibility scores predict college closures? https://robertkelchen.com/2017/03/08/do-financial-responsibility-scores-predict-college-closures/.

[4] Kelchen, R. (forthcoming). Do financial responsibility scores affect institutional behaviors? Journal of Education Finance.

Author: Robert

I am an assistant professor of higher education at Seton Hall University. All opinions are my own.

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