Students will have a clearer path to loan forgiveness if they are defrauded or misled by their colleges, according to rules issued Monday by the Obama administration, which also create a financial backstop to ensure that schools, not taxpayers, are responsible for the debt.
The proposal is the culmination of months of contentious debates over the responsibility of the government to make it easy for people victimized by colleges to have their federal student loans wiped away. Advocates have pressed the Department of Education for broad rules that give students unlimited time to file claims and unrestricted debt relief. Yet agreeing to those terms could ultimately mean the loss of billions of dollars in taxpayer money.
As it stands, students can apply to have their federal loans discharged if they can prove a school used illegal or deceptive tactics in violation of state law to persuade them to borrow money for college. The process, known as a “borrower defense to repayment,” is widely considered difficult to navigate. It was rarely used until the 2014 collapse of for-profit chain Corinthian Colleges ushered in a deluge of claims at the Education Department, forcing the agency to take steps to fix the system and create a new standard to judge appeals for debt relief.
Now the department is outlining a set of violations that would make borrowers eligible for loan forgiveness. Chief among them is a breach of contract as well as a state or federal court judgement against a school related to the loan or the educational services for which the loan was made. The government would also consider wiping away debt in the event of a “substantial misrepresentation” by the school about the nature of the program, financial charges or the chance graduates have of finding work, according to the proposal.
The regulations are more inclusive than an initial proposal released by the department in February during rule-making sessions, where a panel of negotiators tried unsuccessfully to hammer out a plan. Whereas the government had sought to give students only two years from the time they discover a breach of contract or substantial misrepresentation to file a claim, the new proposal would extend that timeline to six years. There is also a broader definition of what counts as misrepresentation, which now includes colleges withholding information from students. Borrowers with older bank-based federal loans would also have an easier time seeking relief under the new proposal. What’s more, students could have their claims approved in groups.
“I really appreciate that the Department of Education listened to stakeholders and many of us in the Senate and significantly improved their initial proposal in some key ways,” said Sen. Patty Murray (D-Wash.), the ranking member on the Senate Education Committee, in an email.
Still, advocates are concerned that the government is proposing pegging the amount of forgiveness to the extent of harm determined by the department or a hearing official. People who land a job after graduation or receive credits that can be transferred to other schools might only be eligible for partial forgiveness. Advocates also worry that the federal statute will supersede stronger state laws.
“We’re disappointed that the department is replacing the current state law standard with a federal standard that won’t be as comprehensive for borrowers that live in states with strong consumer protection laws,” said Alexis Goldstein, senior policy analyst at the progressive Americans for Financial Reform.
Randi Weingarten, president of the American Federation of Teachers, said “the rule does not start from the assumption that students who have been defrauded by their colleges are entitled to full relief, nor does it automatically capture actions against colleges by state attorneys general.”
According to the department, the proposed regulation would have an annual budget impact of anywhere from $199 million to $4.2 billion.
To guard against taxpayers being stuck with the tab for debt relief, the department plans to ban mandatory pre-dispute arbitration agreements, gag rules and class-action waivers that for-profit colleges routinely include in enrollment contracts. If students have an easier time suing schools, they would be less likely to turn to the government for relief, saving taxpayers from picking up the tab for the misdeeds of private companies.
“These regulations would prevent institutions from using mandatory arbitration clauses as a shield to skirt accountability to their students, to the department and to taxpayers,” Undersecretary of Education Ted Mitchell said during Monday’s call.
Consumer advocates, however, say the proposed rule falls short of ensuring all students, not just federal borrowers, are covered by the arbitration ban. Anyone using G.I. Bill benefits, for instance, may be excluded from the protection based on the way the rule is currently written. Schools could also continue to use the pre-dispute clause by portraying the agreement as voluntary, said Julie A. Murray, an attorney with Public Citizen, an advocacy group.
“There are some ambiguities … that could allow schools to still force students into arbitration,” she said. “The final rule should broaden the scope of covered claims and ensure that all students are covered by all portions of the rule if they attend a school that receives federal aid.”
Another way the government plans to limit financial risk to taxpayers is by expanding the conditions under which colleges have to get a letter of credit from a bank assuring the availability of at least 10 percent of the total amount of federal financial aid funds it receives. The letter is meant to protect students and taxpayers if the school is unable to cover federal student-aid liabilities. Among the circumstances that would trigger a letter are lawsuits filed by federal agencies, defaults on debt obligations and enforcement action taken by an accreditation agency.
Expanding the conditions that trigger a letter of credit is significant in light of the spate of legal and regulatory actions taken against for-profit chains, such as DeVry University, University of Phoenix and ITT Tech. Just last week, the department asked ITT to set aside more money to cover losses because the company is under threat of losing its accreditation. There is growing concern that ITT, which is battling multiple federal lawsuits and enrollment declines, may not have enough money to meet the department’s demand. If that were the case, the company could have its federal funding pulled and face closure.
Nearly 350 former ITT students have already submitted borrower defense claims, according to the latest data from the Education Department. At the start of June, the department had received a total of 23,000 claims, mainly from people who attended Corinthian schools, according to Mitchell. He said the department has provided $42.3 million in relief to 2,048 of those Corinthian students.
Activists say the government is still moving too slowly in discharging the debt of Corinthian students, and worry that even with the proposed rule changes, victims of unscrupulous schools could still struggle to hold schools accountable.
“Although the rule looks like it sets up a process that could provide much needed mass relief — and in theory it could — it all hinges on the discretion of the department. And the department has proven time and time again that it will use its discretion to prevent as much relief as possible,” said Luke Herrine, an organizer working with the former Corinthian students who campaigned for blanket debt relief. “It views itself as a debt collection agency first and a protector of students second.”
The fight waged by the former Corinthian students ultimately culminated in the Obama administration’s decision to make it easier for students harmed by colleges to get debt relief. The government is cleaning up a mess that many say could have been avoided if the department and accreditors had reined in Corinthian before the school had collapsed, and trying to avoid another Corinthian fiasco.
Monday’s proposal, especially the expanded letter of credit provision, places added pressure on for-profit colleges. Many of the largest chains are already contending with state and federal investigations into their business practices, and heightened scrutiny from accreditation agencies. Now those schools will have to inform students if they have poor loan repayment rates, low post-college earnings and high default rates, disclosures that could further increase declines in enrollment and revenue.
Department officials are aiming to have the rule in place by November 2016, which means it would take effect the following July. People can submit comments on the proposed rule through the end of July.
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