THE OBAMA administration has made no secret of its dislike of for-profit colleges, so it comes as no surprise that, with time running out on the president’s time in office, there is a new effort to crack down on the multibillion-dollar industry. But in its zeal to disable the for-profit sector, the administration may be creating a new set of costly problems for taxpayers and the entire higher-education field.
At issue are proposed rules for when the federal government will forgive student loans to borrowers who say they were defrauded or otherwise victimized by the schools they attended. The so-called borrower-defense-to-repayment proposal was drafted by the U.S. Education Department largely in response to last year’s collapse of the for-profit Corinthian College, when former students sought debt relief and officials said the standards created in 1995 were not equipped to handle the needs. The more than 80,000 Corinthian borrowers who eventually had their loans forgiven were no doubt helped by the fact that the Obama administration helped to push Corinthian out of business.
There seems to be agreement across the spectrum of higher education, including the for-profits, that some mechanism must be in place so that students who have suffered as the result of being deliberately defrauded have recourse for loan forgiveness. But the 530-page regulation proposed by the Education Department, which would not be limited to for-profits but would also affect traditional public and private colleges and institutions, would vastly — critics say irresponsibly — expand the basis for debt relief with a far lower burden of proof. Of particular concern is language that allows students to sue if their college made a “substantial misrepresentation” even if there is no harm and no evidence of intent to defraud or mislead, which is generally the standard in fraud claims.
A cottage industry already is forming with law firms and loan-consolidation companies trolling for students with borrower defense claims. Their appeals are not limited to for-profit schools but include well-established traditional colleges and universities. Taxpayers could be on the hook for billions of dollars in student loan discharges.
The department released the proposed regulation in June and is accepting comments until Aug. 1. It initially hoped to issue a final rule in the fall so it could take effect next year. That’s a rushed timetable; let’s hope the department slows down enough to listen to the concerns of key education stakeholders and come up with a more sensible plan.
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