Examining the US DOE's Proposed Loan Repayment Rule

Student loan debt is a significant and growing problem for the millions of college graduates who are in danger of defaulting each year. Nationwide, approximately 40 million loans totaling more than $1 trillion are guaranteed or held by the federal government.

Almost seven in 10 seniors (68 percent) who graduated from public and nonprofit colleges in 2015 had student loan debt, with an average of $30,100 per borrower. Statewide average debt levels for the Class of 2015 range from $18,850 (Utah) to $36,101 (New Hampshire). The share of graduates with debt ranges from 41 percent (Utah) to 76 percent (New Hampshire). Florida is considered to be a “low-debt” state, with an average debt level of $23,379 and 53 percent of graduates with debt.

In November 2016, the U.S. Department of Education (Department) published its final Borrower Defense to Repayment Rule (Rule). The Rule, which will take effect on July 1, 2017, permits the Department to discharge student loans, thereby relieving the student of any obligation to repay the loan, if the borrower can demonstrate: (1) that there was a substantial misrepresentation by the school; and (2) that the borrower reasonably relied on that misrepresentation when deciding whether to attend, or keep attending, the school.

Critics of the Rule have expressed concern that the standard for misrepresentation is so broad that borrowers will have nothing to lose by claiming a borrower defense, even if they are gainfully employed and happy with their college experience. It is doubtful that the institutions or taxpayers could shoulder this burden if thousands of students or graduates start requesting that their loans be discharged.

Costs will be borne by the institutions, loan guaranty agencies, the federal government, and (ultimately) the taxpayers. Changes to an institution’s business practices, revised advertising and marketing materials, and employee training will have costs; however, the greatest cost will be the cost to the taxpayers as a result of student borrowers who are successful in their borrower defense claims. Although the Rule was drafted with the for-profit sector in mind, many public and private not-for-profit institutions will also experience financial repercussions. The financial liability to Florida taxpayers under the Rule is substantial; all told, based on the Department’s estimates of financial impacts, the financial liability to Florida taxpayers could be as little as $131.36 million over the next decade or as much as $2.81 billion. This excludes the costs of the accompanying administrative and legal burden placed on the institutions which, although indeterminate, will be substantial. TaxWatch estimates that, based on the Department’s estimates of the financial impacts over the 2017-26 loan cohorts, every one percent of student debt discharged by the Department under the Rule will cost Florida taxpayers an additional $10.92 million.