Borrower Defense Rules Deserve Praise

The Obama administration should be applauded for refusing to back down from rules it had proposed that aim to make it easier to discharge the federal student loan debt of borrowers who have been defrauded. Higher education leaders have attacked the proposed “Borrow Defense to Repayment” regulations, which the U.S. Department of Education finalized on Friday, arguing that they could expose even the most prestigious colleges to an onslaught of frivolous accusations.

But, as the administration makes clear in its explanation of the final rules, the concerns that advocates for public and private non-profit colleges have expressed are grossly exaggerated. The Education Department intends to use its student-loan discharge authority sparingly – only in cases where students can show that they have been deceived by schools that engaged in “misleading, deceitful, and predatory” practices to enroll them.

The Education Department has had the authority to discharge the federal student loan debt of defrauded students since the early 1990s. But despite widespread and highly-publicized cases of abuse in the for-profit college sector, neither the Clinton nor Bush administrations made much use of it. As a result, many borrowers have been in default for decades on loans they took out to attend shady for-profit colleges that scammed them.

Nothing changed in the Obama administration, until the collapse of Corinthian Colleges last year forced the administration’s hand. A substantial number of Corinthian College students refused to repay their loans and demanded that the Education Department use its “Borrower Defense” authority to discharge their debt. Since that time, the Department has agreed to cancel nearly $250 million of federal loan debt owed by more than 15,000 former Corinthian College students  who were misled into enrolling. But the process has been slow-going. The Department is facing a backlog of nearly 70,000 claims from borrowers who attended Corinthian or other for-profit colleges.

Obama administration officials have blamed the delay in processing claims on the standard that the Education Department has been using to evaluate whether borrowers qualify for a discharge. In 1995, the Department put in place rules that require borrowers to show that the school they had attended violated state law.

This vague standard not only requires Department officials to be familiar with states’ varying consumer protection laws, but it’s also potentially unfair because it treats borrowers differently depending on where they go to college. Students in states with tough laws are more likely to have their loans forgiven than those attending college in states with weaker statutes.

To fix these problems, the administration in July proposed creating a uniform federal standard that would be used to consider claims. Under the proposed rules, the Department said that, starting next July, it would cancel the loans of borrowers who could show that their school had made “a substantial misrepresentation” related to “the nature of the educational program, the nature of financial charges, or the employability of graduates” that had convinced them to enroll. In addition, the rules also allowed the Department to provide automatic group discharges in cases where it found that the school had made “widespread misrepresentations” to prospective students.

Given all of the allegations against their schools, for-profit college lobbyists recognized that they needed allies to fight these rules. So the industry did what it does best: freak out higher education leaders and lobbyists by arguing that these regulations could pose a grave threat to traditional colleges as well.

For example, for-profit higher education’s top lobbyist Steve Gunderson ( who, in a former life, was a well-respected Republican Congressman) warned that the rules threatened “a serious new risk to the continued viability of post-secondary institutions, regardless of whether they are public, nonprofit, or proprietary.”  Meanwhile, the Washington Post, whose former publisher owns the for-profit giant Kaplan University and was aggressively lobbying against the administration's efforts to help defrauded borrowers, ran an editorial in July that couldn’t help but give public and private non-profit colleges the shivers. “A cottage industry already is forming with law firms and loan-consolidation companies trolling for students with borrower defense claims,” the editorial ominously stated. “Their appeals are not limited to for-profit schools but include well-established traditional colleges and universities.”

Traditional colleges reacted predictably: they took the bait. In comments to the Education Department and the media, lobbyists for these schools complained that the Department was opening the floodgates to frivolous claims by allowing borrowers to get debt relief without having to prove that their schools had intentionally misled them.

Justin Draeger, the president of the National Association of Student Financial Aid Administrators, complained to the Department that its regulations could treat a mistake made by a student tour guide as a serious transgression. Similarly, in an interview with The Wall Street Journal, a well-respected community college lobbyist mused about the types of outlandish claims that could be brought against liberal-arts colleges. “In theory, a student could say, I took English 101 and you didn’t teach me Shakespeare and the course description said you’d provide a solid foundation in Western literature,” he stated.

To their credit, Education Department officials responded to these ridiculous statements this week by reminding higher education leaders that they are not idiots, and would not be duped by fatuous claims.  In their explanation of the final rules, they wrote that they would “operate within a rule of reasonableness,” and assured that “borrower defense claims that do not meet the evidentiary standard will be denied.”

Department officials also defended their decision to allow borrowers to bring claims of misrepresentation without having to prove that their schools had intentionally deceived them. “Gathering evidence of intent would likely be nearly impossible for borrowers,” they stated. “Information asymmetry between borrowers and institutions, which are literally in control of the best evidence of intentionality of misrepresentations, would render borrower defense claims impossible for most borrowers.”

Despite the for-profit college industry’s “scare tactics,” the real danger is not that the Education Department will be too permissive in providing loan discharges, but that it will be too restrictive. The regulations give the Department complete discretion over how aggressively it will enforce the rules.  As the National Consumer Law Center has said, we won’t know how beneficial these rules are for defrauded borrowers until we see how the Department puts them to use.

Will federal officials make borrowers, who have been defrauded largely as the result of the government’s long-standing gate-keeping and oversight failures, whole? Or will they be cheap and leave these financially-distressed borrowers in the lurch?

Only time will tell.