Proposed Changes to Gainful Employment Regulations: Summary of ED Proposals

1. Negotiated Rulemaking and Other U.S. Department of Education Developments Dennis Cariello Jonathan Tarnow NCHER SPRING 2018 Legal MeetingApril 13, 2018 Alexandria, Virginia

2. Gainful Employment • Negotiated Rulemaking Committee met over three, four-day sessions during December, February and March • Baseline for changes: current Gainful Employment regulations that took effect July 1, 2015 • Consensus not achieved • ED will proceed to draft a Proposed Rule • Proposed Rule for comment expected to be published in May/June • Final Rule must be published by November 1st in order to become effective July 1, 2019

3. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Scope and Purpose: • Changed scope from programs preparing students for gainful employment in recognized occupation to all “educational programs” • Debt-to-earnings rates no longer tied to Title IV Program eligibility • Limited to undergraduate programs • Uniform two-year cohort of graduates • Disclosure of both D/E and Loan Repayment Rate

4. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Debt-to-Earnings Rates: • Eliminate current regime of “passing,” “zone” and “failing” D/E rates • Proposed “acceptable” vs. “low-performing” designations • ED sought feedback on concept of evaluating outcomes based only on top 50% of students completing program • Maintained two D/E rates • Discretionary income rate • Annual earnings rate

5. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Debt-to-Earnings Rates: • Acceptable if: (1) discretionary income rate is less than or equal to 20 percent; or (2) annual earnings rate is less than or equal to eight percent • Considered to be acceptable if program meets standards for economically disadvantaged appeals or “small program” appeals (30 or fewer borrowers) • If no D/E rates calculated for a given year, institution required to disclosure prior year rates • If no D/E rates calculated for two years, disclosure would be “N/A”

6. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Debt calculations in D/E Rates: • Amortize debt over a 10-year period for undergraduate certificates, post-baccalaureate certificates, and associate’s degrees • Amortize debt over a 15-year period for bachelor’s degrees • Apply annual statutory interest rate on Federal Direct Unsubsidized Loans in effect during the last award year of the cohort period • Earnings data for program completers remains sourced from Social Security Administration

7. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Debt calculations in D/E Rates: • ED initially limited proposal to Title IV debt, subsequently proposed option to later include institutional and private loan debt through a Federal Register notice • Attribute all loan debt incurred by student for enrollment in any program at a single institution to the highest credentialed program (again limited to undergraduate programs)

8. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Loan Repayment Rates: • Introduced by ED during final negotiating session • No specific proposal on LRR threshold, but was subject of extensive discussion concerning applicable data • Disclosure item only; not tied to program eligibility for Title IV funds • Calculated by dividing the number of borrowers either paid in full or active repayment by the number of borrowers entering repayment • Certain exclusions for military deferment, discharges for disability, enrollment elsewhere, or death

9. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Sanctions: • If one or more programs meets neither the D/E rates nor LRR benchmark, ED may determine the institution’s administrative capability is impaired: • May limit ability to expand programs or start new programs that share the same four-digit CIP code to the programs that do not meet benchmarks • May schedule a program review • Mandated warnings regarding D/E rates and LRR that do not meet benchmarks

10. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Alternate Earnings Appeals: • Change minimum threshold from 30 to 10 students for calculation of draft D/E rates • Eliminate alternate earnings appeals in favor of appending required notification language to allow disclaimer informing potential students that the D/E rates measure could be affected if a significant number of program graduates under-reported earnings such as tip income, or were self-employed and had business expenses that reduced the earnings being reported

11. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Program Disclosures: • Eliminate program cohort default rate as a specified disclosure • Add disclosure requirement to link to any web page containing the State’s mandatory qualifications for licensure, if the program prepares students for fields requiring licensure • Add requirement to link to College Scorecard • Eliminate requirement for direct distribution to prospective students

12. Gainful Employment Summary of ED Proposals to Final Neg-Reg Session • Reporting Requirements: • Eliminated on basis of D/E rates including only Title IV program loans • Certification Requirements: • Modify certification requirements to require that any undergraduate educational program that prepares students for employment in an occupation for which the State or Federal government has requirements for certification/licensure, the institution certify in its PPA that the program is approved by a recognized accrediting agency and meets the State or Federal requirements

13. Borrower Defense to Repayment • Negotiated Rulemaking Committee met over three, four-day sessions during November, January and February • Baseline for changes: Borrower Defense regulations from 1994 (not the 2016 final regulations) • Separate Financial Responsibility Subcommittee appointed to discuss and make recommendations concerning certain FASB/GAAP changes’ impacts on composite score • Consensus not achieved • ED will proceed to draft a Proposed Rule • Proposed Rule for comment expected to be published in May/June • Final Rule must be published by November 1st in order to become effective July 1, 2019

14. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Standards for Borrower Defense claims: • An institutional misrepresentation, a court judgment against an institution, or a final judgment from an arbitrator or administrative tribunal against an institution • In each case concerning the nature of the institution’s educational program or financial charges, employability of graduates, eligibility for licensure or certification, the State agency authorization or approval of the institution or educational program, or an accreditor approval of the institution or educational program • Applicable to loans disbursed on/after July 1, 2019

15. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Standard for Borrower Defense claims: • Misrepresentation • Related to material fact, opinion, intention, or law upon which the borrower reasonably relied under the circumstances in deciding to obtain a Direct Loan to enroll or continue enrollment in a program at the institution that resulted in financial harm to the borrower • Statement, act, or omission by an eligible institution to a borrower that is intentionally false or misleading or made with a reckless disregard for the truth and that relates to the making of a Direct Loan for enrollment at the institution or the provision of educational services for which the loan was made • BD claim must be filed within 3 years of the date the borrower discovered, or reasonably should have discovered, the misrepresentation

16. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Standards for Borrower Defense claims: • Court judgment • State or Federal court; final, definitive judgment rendered in a contested proceeding, and awarded monetary damages against the institution • Arbitrator or administrative tribunal • Final, definitive judgment, or equivalent final determination, rendered in a contested proceeding and was awarded monetary damages against the institution

17. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Process for Submission and Evaluation: • Borrower submit application under penalty of perjury, accompanied by evidence in support of the BD claim • Must indicate whether the borrower has made a claim based on the same act or omission of the school on which the borrower defense claim is based with any third party, such as the holder of a performance bond or a tuition recovery program, and, if so, the amount of any payment received by the borrower or credited to the borrower's loan obligation • Unlike 2016 final regulations, no group BD claims considered

18. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Process for Submission and Evaluation: • Forbearance if Direct Loan borrower is not in default • Mandatory administrative forbearance by FFEL lender upon notice from ED of a submitted BD claim for a loan intended to be consolidated into Direct Loan Program • Question – may a FFEL loan be reconsolidated for this purpose under Section 428C(a)(3)? • Suspension of Direct Loan collection activity • Mandatory suspension of collection activity by guaranty agency upon notice from ED of a submitted BD claim for a loan intended to be consolidated into Direct Loan Program • No capitalization of interest accrued during period of forbearance or suspended collection

19. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Process for Submission and Evaluation: • Notification to school with copy of the borrower’s application and supporting evidence • Opportunity for school to respond • ED may consider all relevant evidence from the borrower, the school, or its own records • Either party may request reconsideration by submitting newly discovered evidence within 60 days of ED’s decision

20. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Determination of full or partial loan relief based on the value of the education that the borrower received from the school and the borrower’s earning potential • Further relief could include: • Reimbursing the borrower for amounts paid toward the loan voluntarily or through enforced collection; • Determining that the borrower is not in default on the loan and is eligible to receive assistance under title IV of the Act; and • Updating reports to consumer reporting agencies to which the Secretary previously made adverse credit reports with regard to the borrower's Direct Loan

21. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Recoupment of BD losses from institutions: • No later than 3 years after the final decision on the borrower’s claim • School must repay ED unless it demonstrates the decision to to approve the BD claim was clearly erroneous • School may present relevant evidence in the recovery proceeding

22. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Financial Responsibility: • Revise regulatory purpose of FR standards to determine whether an institution can: • Provide the services described in its official publications and statements • Meet all of its financial obligations, and • Provide the administrative resources necessary to comply with Title IV, HEA program requirements

23. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Financial Responsibility: • Amend general standards such that an institution may not be financially responsible if: • After its FY end, the institution incurs debt or liability from BD claims that would cause its recalculated composite score to be below 1.0 • For proprietary institution with composite score below 1.5, there is a withdrawal of owners equity, including by declaring a dividend (unless transferred to an affiliated entity on whose basis the score is determined)

24. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Financial Responsibility: • Amend general standards such that an institution may not be financially responsible if: • Publicly traded institution: (1) SEC warns of suspension in trading, (2) failure to file a required annual or quarterly report within SEC timeframes, (3) notice from exchange of noncompliance with exchange standards, or stock is delisted • Proprietary institution fails 90/10 requirement in a single fiscal year

25. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Financial Responsibility: • Subcommittee recommended various updates to nonprofit and for-profit composite score appendices to account for FASB/GAAP terminology and definitional changes • Subcommittee recommended a transition period of four years for composite scores adversely impacted by FASB changes with respect to leases (which begins to take effect in 2019)

26. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Financial Responsibility: • ED would permit institutions to meet Letter of Credit obligations via either • Cash held in escrow by ED, or • Offsets of Title IV receipts for a period of between 6 and 12 months

27. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Pre-dispute Arbitration Agreements, Class Action Waivers, and Internal Dispute Processes • Require schools that use pre-dispute arbitration agreements and/or class action waivers to disclose that information in an easily accessible format for students, prospective students, and the public • Require schools to provide an annual notification of this information to enrolled students • Amend loan counseling requirements to include provision of information regarding any pre-dispute arbitration agreements and/or class action waivers

28. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Closed School Discharges: • Requires borrower submit a completed application form, rather than a sworn statement • Expand the window for closed school discharges from 120 days to 150 days • Provide for ED review of a closed school discharge denied by a guaranty agency • False Certification: • Require submission of a completed application, rather than a sworn statement • Update requirements regarding false certification of eligibility of non-high school graduates

29. Borrower Defense to Repayment Summary of ED Proposals to Final Neg-Reg Session • Guaranty Agency Collection Fees: • Prospectively bars guaranty agencies from charging collection costs to a defaulted borrower who enter into a repayment agreement within 60 days of receiving notice of default from the agency • Prospectively bars guaranty agencies from capitalizing interest on a loan that is sold following the completion of loan rehabilitation • Subsidized Usage Periods: • Would eliminate or recalculate the subsidized usage period and, if applicable, restore interest subsidy associated with a Direct Subsidized Loan(s) fully or partially discharged based on school closure, false certification, unpaid refund, or borrower defense

30. ED Staffing and Buyouts • 15 senior leadership positions • Only 5 confirmed appointees, with 6 pending nominees • No nominee for Undersecretary • No nominee for Asst. Secretary for Postsecondary Education • No nominee for Asst. Secretary for Career, Technical and Adult Education • No nominee for Asst. Secretary for Communications • ED has smallest staff of 15 Cabinet agencies, with just over 4,000 employees nationally • Approximately 350 buyouts or other departures during calendar year 2017 • Over 250 additional buyouts reportedly offered

31. ED Regulatory ReformTask Force • Presidential Executive Order 13777: Enforcing the Regulatory Reform Agenda • ED progress reports issued May 25, 2017 and October 18, 2017 • Outreach by Principal Offices: • OPE hearings • OCTAE participation in national literacy training organization meetings • OESE request for comments • OSERS on-site meetings, teleconferences, blogs, newsletters, and conference presentations • OM focus groups concerning FERPA and privacy

32. ED Regulatory ReformTask Force • Regulatory Review Actions: • OPE actions on Gainful Employment and Borrower Defense to Repayment regulations • Additional negotiated rulemakings: • Likely – State Authorization, Credit Hour, “Regular and Substantive Interaction,” and Accreditation • Maybe – Third-party servicer & incentive compensation • OESE identified for withdrawal the “Supplement Not Supplant” requirement from ESEA/NCLB/ESSA regs • Policy Guidance Actions: • 500+ guidance documents identified as stale or otherwise out-of-date, and thus subject to withdrawal

33. Questions? Dennis Cariello Hogan Marren Babbo & Rose, Ltd.  Phone: (212) 422-4900 Email: dennis.cariello@hmbr.com  Jonathan Tarnow Drinker Biddle & Reath LLP  Phone: (202) 354-1357 Email: jonathan.tarnow@dbr.com