Updated with a response from the Education Department.
The complaint, filed in U.S. District Court on Thursday, accuses the Education Department of violating federal law by halting updates to a regulation known as the borrower defense to repayment. The rule, which dates to the 1990s, wipes away federal loans for students whose colleges used illegal or deceptive tactics to get them to borrow money to attend. The Obama administration revised it last year to simplify the claims process and shift more of the cost of discharging loans onto schools.
Before the changes could take effect July 1, DeVos suspended them last month and said she would convene a new rulemaking committee to rewrite the borrower defense regulation, reviving a process that took nearly two years to complete. Proponents of the revised rule were livid that DeVos made a unilateral decision without soliciting or receiving input from stakeholders or the public.
Education spokeswoman Liz Hill said, “With this ideologically driven suit, the state attorneys general are saying to regulate first, and ask the legal questions later—which also seems to be the approach of the prior administration that adopted borrower-defense regulations through a heavily politicized process and failed to account for the interests of all stakeholders.”
The state attorneys case could be bolstered by an appeals court ruling Monday striking down the Environmental Protection Agency’s suspension of new emission standards on oil and gas wells. The EPA used similar reasoning as the Education Department in delaying the regulation, but the court said that while the agency could reconsider the rule, it could not delay the effective date while seeking to rewrite the statute.
DeVos said the delay was necessary as the department fought a federal lawsuit by a group of for-profit colleges in California seeking to block the rules. State attorneys general, including those from Maryland, Virginia and the District, argue in their lawsuit that the case is “a mere pretext for repealing the rule and replacing it with a new rule that will remove or dilute student rights and protections.” Many of those same attorneys were involved in a motion last month to intervene in the California lawsuit to prevent the rules from being blocked.
Hill argues that the California case “makes serious and credible charges” that the regulations exceed the department’s authority, violated a federal arbitration law and denied schools due process.
“The department cannot simply dismiss these allegations,” Hill said.
In a separate but related case, Public Citizen and the Project on Predatory Student Lending also filed suit Thursday against DeVos for blocking the defense rule. The consumer groups are suing on behalf of former students of the for-profit New England Institute of Art in Brookline, Mass., who previously filed a motion to intervene in the California lawsuit to block the rule.
In defending the rule delay and rewrite, DeVos said the Obama administration created “a muddled process that’s unfair to students and schools, and puts taxpayers on the hook for significant costs.” But consumer advocates and liberal lawmakers contend that the changes achieve exactly the opposite by speeding up loan discharges and having colleges foot more of the bill.
To limit financial risk to taxpayers, the new rules expand 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. 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.
“For almost two years, we worked with other state AGs, schools, lenders, the department, a variety of stakeholders to come up with a rule that would protect students and ensure that schools and taxpayers would be treated fairly,” Healey said.
The financial obligation and complexities of the new regulations created consternation among some colleges and universities. In announcing the rule delay, DeVos said she was trying to provide “clear, fair and balanced rules.”
The secretary said the suspension will have no impact on the tens of thousands of pending claims because the old regulation remains on the books, but state attorneys general say the existing statute doesn’t go far enough to protect students.
The first set of changes that were supposed to take effect this month would have, for instance, limited the ability of schools to require students to sign mandatory arbitration agreement and class action waivers that are commonly used by for-profit colleges to thwart legal action by students. That stipulation in the new rules was the basis of the California lawsuit.
“It’s important that students have their day in court,” Healey said. “All aspects of this rule are important and I’m concerned about any action to undermine or strip any of what’s in the borrower rule.”
Few people used the defense until 2014, when the collapse of for-profit giant Corinthian Colleges ushered in a deluge of claims at the Education Department. That forced the agency to fix the system and create a new standard to judge appeals for debt relief.
DeVos’s critics say that by delaying the borrower defense changes, she has handed a victory to for-profit colleges and Republican lawmakers that have fought against the rules for years. They say she is showing a clear bias in favor of for-profit schools with the delay and the decision Friday to halt a component of the gainful employment rule.
That regulation threatens to withhold federal student aid from vocational programs whose graduates consistently end up with more debt than they can repay. Career schools had until July 1 to inform students about programs that failed to meet the standard set out by the department, but DeVos extended the deadline by a year.
“Betsy DeVos is bending over backwards to make it easier for fly-by-night schools to cheat students and bury them in mountains of debt,” Sen. Elizabeth Warren (D-Mass.) said in a statement Thursday. “Secretary DeVos might not like it, but her job is to serve students — and we will make sure she does.”