Few colleges examine the percentage of students who found jobs but are underemployed in part-time work or gigs that don’t require a degree, and few find out what happens to those students five or 10 years after graduation. Either universities don’t know the answer or they don’t want anyone else to know it.
In the near future, such boastful marketing that straddles the line of misrepresentation might be enough to allow graduates who took on student-loan debt to get their money back from their alma maters.
A little-known rule called Borrower Defense to Repayment, which is making its way through the regulatory process in Washington, initially was aimed at cracking down on the fraudulent behavior of for-profit colleges. But the rule released last month and set to take effect next July applies to any college or university, including traditional non-profit institutions.
The 230-page rule is based on one sentence that was written into the renewal of the Higher Education Act by Congress in the early 1990s. It allows student-loan borrowers to make a claim for “acts or omissions of an institution.” The current regulation, on the books since 1994, is pretty ambiguous about what kind of acts or omissions rise to the level of the federal government discharging loans.
Few paid attention to the rule, or took advantage of it, until the for-profit chain of Corinthian Colleges collapsed last year and students said their federal loans should be dismissed because they had been defrauded with Corinthian’s false job-placement claims. Since then, the department has been inundated with more than 25,000 claims, mostly from former Corinthian students (the department has discharged about $73 million in loans for about 4,000 students).
During that process, it became clear that the 1990s-era rule wasn’t detailed enough. That’s why new regulations are coming. Given the origins of the new rule in the midst of a for-profit’s financial troubles, few traditional colleges have seemed to notice the rule or think it applies to them.
But they should worry, said Katherine Lee Carey, special counsel in the Education Policy Group at the law firm Cooley LLP, who has been following the regulation closely.
“The department’s messaging has been so focused on the for-profit schools, that non-profits seem like an afterthought,” Carey told me. “But this applies to every institution that receives federal financial aid.”
I asked Carey specifically about the job-placement claims made by colleges given that the surveys used to arrive at those numbers often lack rigorous methodology. She noted that the preamble to the proposed rule explicitly calls out the misrepresentation of student employment outcomes by colleges as a possible claim students can make.
The question for students, institutions, and the federal government is: What constitutes misrepresentation as opposed to simply sloppy marketing? The old rule required that students prove that the misrepresentation caused harm. The new rule is much broader and allows claims even if the misrepresentation is unintentional, such as is often the case with employment outcomes.
“Institutions need to look at all of their marketing and disclosures to students,” said Carey, who also did an extensive Q&A about the rule with Ryan Craig on Forbes. “Basically anything students are told that impacts their decision to enroll could be the basis for a later claim.”
Most worrisome to colleges, Carey told me, is that there are essentially no statute of limitations on the claims. “Schools could be on the hook for any length of time going forward,” she said. And the government plans to go after the institutions to recover the money needed to cover the claims. It estimates that the rule could result in $42 billion in loans being discharged during the next decade.
As Paul Fain at Inside Higher Ed pointed out recently, such an eye-popping number already has led law firms and loan-consolidation companies to look for students to file claims. Some companies have even advertised on Facebook, he wrote, by naming specific non-profit colleges and “using phrases like ‘breaking news’ to hawk links and phone numbers to debt relief companies.”
With the average debt for members of the Class of 2016 at about $37,000, a figure that rises each year, it’s clear that graduates and their parents who are concerned about the return on their investment will be aware of this rule someday, even if their colleges aren’t paying close attention to it right now.