The Furor Over Student Loan Forgiveness

Once again, Education Secretary Betsy DeVos has kicked the hornet’s nest, this time by changing the rules for deciding if a student will be relieved of his or her obligation to repay federal college loans.

The way our higher education finance system works, the federal government makes it easy for students to borrow money for college, no matter how academically weak and disengaged they might be. Many schools have been created to cash in on that money by providing educational programs (mostly with a vocational focus) for people who think they need some postsecondary education to land a good job.

All those schools need to do is become accredited by one of the accrediting agencies recognized by the Department of Education. That isn’t very difficult and, once accredited, the schools don’t have to worry much about their standards. Neither the accreditors nor the government scrutinizes them to ensure that students aren’t wasting their time and taxpayer money.

This system proved to be tempting for school officials who want to bring in as much revenue as possible by enrolling very marginal students with promises of good careers after they graduate. Whether the students were really apt to benefit or the programs were of high quality didn’t particularly matter. If they couldn’t find work and pay off their loans, it wasn’t their problem.

As long ago as the 1970s, federal officials were aware of this. In particular, Caspar Weinberger, while serving under Presidents Nixon and Ford, called attention to the problems with student aid. As this Century Foundation paper states, “HEW Secretary Weinberger recognized that because his agency was in effect endorsing the schools by backing the loans, the federal government bore some responsibility for the abuses. Schools that were heavily reliant on federal loans, he observed, had too strong an incentive to dilute their academic standards and use ‘exaggerated claims’ to enroll students…”

The policies that Weinberger established to mitigate those problems did not continue after responsibility for student aid was shifted to the new Department of Education under President Carter.

When Congress rewrote the Higher Education Act in 1993, it included a provision intended to deal with cases where students were misled or defrauded by their schools. Sec. 455(h) was added, stating, “The Secretary shall specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan made under this part.” The rule that was subsequently written allowed for a discharge of a federal loan if the school had violated a law in the state where it was located.

Thus, federal law recognized a “Borrower Defense to Repayment” (BDTR). But during the next twenty-plus years, it was used by students only five times.

Then, in 2015, the demise came of Corinthian Colleges, a large for-profit chain that had come under intense state and federal scrutiny for its deceptive practices. Suddenly, thousands of students who had borrowed to attend had their plans disrupted. Activist groups realized that many if not all of those students could be eligible for relief under BDTR. Word spread fast and soon the Education Department was facing more than 30,000 claims from Corinthian students and graduates who wanted their loans discharged.

The Obama administration began to handle the deluge, but Education Secretary Arne Duncan saw that the old regulation lacked clarity on exactly what sort of “act or omission” would qualify for discharging loans. Therefore, in March 2016, the Education Department announced that it would begin negotiated rulemaking, a process that brought together a large number of interested parties. But months of discussion failed to lead to agreement among the negotiators, and the department wrote its own rules.

Those rules were published on October 28, 2016, and scheduled to take effect on July 1, 2017. Under it, students could pursue BDTR claims under one of three grounds:

  • If there had been a legal judgment against the school;
  • If the student can show a breach of contract by the school;
  • Or if the student can demonstrate that there was “substantial misrepresentation” by the school that the borrower reasonably relied on.

Another crucial feature of this rule was that debts could be handled on a class-wide basis rather than individually. Students only had to show they had attended Corinthian or other identified “bad actor” schools during the last five years to qualify, under the assumption that all students must have been deceived or defrauded.

Clearly, the Obama administration wanted to make it easier for students to succeed with their BDTR claims. After all, it had demonized for-profit colleges and wanted to be seen as friendly toward students. Still, the new rules caused some apprehension. Education law attorney Katherine Lee Carey explained here, “There is genuine concern that broadening this rule too much could open a Pandora’s box. Even the Department of Education seems to recognize, and wants to guard against, frivolous claims made by disgruntled students, or those who simply think this is the loophole that gets them out of student debt.”

Shortly after the department announced its new rule on borrower defense, something utterly unexpected happened—Donald Trump’s election.

Obama officials hurried through thousands of claims before the Trump administration could take over. In the last three weeks, before they relinquished control, they approved 16,000 claims, rejecting none. When they left office, there was a backlog of some 48,000 claims, with more pouring in daily. (The above-noted Century Foundation study shows that the vast majority are against a fairly small number of for-profit schools, but that there are also claims against non-profit and public institutions.)

More than $500 million in debt relief was dispensed under the Obama administration. The taxpayers have a huge stake in the way BDTR is handled in the future.

This new approach to ‘borrower defense’ will reduce the cost to the taxpayers and will prevent some students from trying to use the bureaucracy to escape from their loans.

Upon taking the reins at the Education Department, Secretary DeVos ordered a suspension of BDTR decisions and tasked the department’s inspector general with reviewing the rules and procedures in use. Last June, she decided to start afresh on the rule-making.

Late last month, the department announced its new approach to BDTR. The big change from the old is that instead of making all-or-nothing decisions on loan relief, it will look at how the student’s earnings compare with those of peers. Relief will be calculated on a sliding scale. Therefore, students who, despite any deception or fraud by the school are doing about as well as similar students, will receive only slight loan relief. Those who have very low earnings will still receive full discharge.

Secretary DeVos stated, “This improved process will allow claims to be adjudicated quickly and harmed students to be treated fairly. It also protects taxpayers from being forced to shoulder massive costs that may be unjustified.”

The Wall Street Journal editorialized in favor of the changes and I agree: “The department was discharging debt carte blanche without accounting for the value students received from their education. Before awarding damages, judges are supposed to consider whether plaintiffs are harmed by alleged misrepresentations and then weigh the severity of their injury. Department adjudicators were doing neither.”

Although this new approach to “borrower defense” will reduce the cost to the taxpayers and will prevent some students from trying to use the bureaucracy to escape from their loans, it does nothing to solve the underlying problem. That problem is irresponsible lending by the government, which often results in trouble even when the college hasn’t done anything to mislead the student. The only solution is to get the feds out of the business of financing postsecondary education.

  • Glen_S_McGhee_FHEAP

    The study at The Century Foundation is comprehensive, and presents their FOIA cache from the US Dept of Education for the first time. I was completely unaware of the Weinberger connection with borrower defense rules. You can call this the ‘Student Loan Mess’ Mess.

    However, there is no mention of the breakdown in accreditation that parallels this back-story. A similar story of bumbling could be told from the point of view of the accreditation process. When the 1992 amendments were implemented to address defaults and fraud (presumably, for-profit driven), they were contentless — in other words, they did not specify metrics that accreditors had to meet (even though the rubrics were included in the statute). Rather, rubric content was delegated to the recognized associations to complete as they (and their members) saw fit.

    The current wave of complaints (76,000) originates with Corinthian College, whose collapse also brought down ACICS, the fake accreditor that served as the sleeping watchdog for billions of taxpayer dollars. Without requiring accreditation capable of preventing collapses like Corinthian Colleges, this scenario will repeat over and over again.

  • Chris

    But do nothing about the deceptive and fraudulent practices? Nor provide very tough guidelines about students you should be “selling” loans to. And yes these schools are in the business of selling loans. Cant we trust our for profit businesses to do the right thing with our tax dollars? I guess not

    • Sterling Wilson

      “Cant we trust ____________ to do the right thing with our tax dollars?” Can anyone that wishes to use stolen money be trusted? Of course not.

    • 48574

      Your bias is showing. Why should we believe either public or not for profit schools aren’t in the business of selling loans? The people in charge need tuition revenue as much as any for profit school.

      I would add all of these public school all have lower graduation rates then any of the for profit schools that were shut down as abusive yet people like you seem to never want to do anything about these bad actors in the public school sphere.
      http://www.thefiscaltimes.com/Media/Slideshow/2016/05/19/28-Public-Universities-Worst-Graduation-Rates?page=0

      • George Avery

        Absolutely correct. Public community colleges are horrible at this, and one can easily identify programs at almost any not-for-profit school (women’s studies, African-American studies, most humanities degrees, etc.) where the marketing practices of the programs provide deceptive assurances of the return on investment. When I taught Public Health at Purdue, our program was misplaced in a Kinesiology/PE department. The department tried to sell a program for a bachelor’s degree in “Personal Fitness and Training” to students, at a cost of $23K (instate) to $44K a year – for a degree leading to a career as a personal trainer, a job in which well over half of the people in the field at ALL levels of experience make less than $33K a year. The Martin Center has previously reported on how a UNC study found that the *average* UNC Women’s Studies graduate makes approximately minimum wage – meaning they would have been financially better off to have just started working full time as a Starbucks barrista and skipped the degree and student loan debt. Many liberal arts programs knowingly recruit far more graduate students than they can place in jobs in their field, because for larger Universities, these students are a cheaper source of instructors for freshman and sophomore classes than even adjunct faculty.

        • Fred_PA_2000

          While I agree with you, may I make a slightly off-topic observation;
          In Marketing, there is the concept of consumer vs. industrial goods. Consumer goods are for the personal pleasure, benefit, and consumption of an individual. Industrial goods, by contrast, are purchased by organizations to further the conduct of their business / activities.
          Applied to college educations, the “women’s studies, African-American studies, most humanities degrees, etc.” you mention are probably consumer goods — one studies them for the student’s own entertainment and enrichment. I have no objection to people’s self-development and entertainment provided that they’re spending their own money to do it. (And the crime here is that “the programs provide[d] deceptive assurances of the return on investment” when there probably wasn’t any — at least, no cash return.)
          On the other hand, one probably doesn’t study Accounting or Biochemistry for funsies. These degrees are probably, in the model above, industrial goods. One studies them because one expects to sell that knowledge — at a profit — to some future employer. Here, there is an ROI, and it is legitimate to borrow money to develop that salable asset.
          Private lenders would be paying attention to such future repayment prospects / cash-flows. Government, apparently, not so much.

      • Fred_PA_2000

        I obviously don’t know the details of all 28 public colleges your referenced study talks about. But at least one — Kent State at Ashtabula — may not be guilty as charged. They appear to be a feeder campus to Kent State Main Campus in Kent, Ohio. Their self-presentation online encourages students to do their first two years at Ashtabula — which will permit some in NE Ohio to live at home — and then transfer to the main campus to complete their degree. Hence a low percent graduating from Ashtabula may be happening because they’re all down the road boosting the graduation rate in Kent.

        Also, I note that a high percentage of these schools are in Georgia. (And Georgia’s government has a reputation for being education-oriented.) I wonder if the same pattern of feeder campuses isn’t what’s in play in Georgia.

  • Jane S. Shaw

    Thanks, George, for explaining a complex problem!

  • Glen_S_McGhee_FHEAP

    In the case of Corinthian and ITT — the bulk of the claims here — none of this would have happened if the financial ratios and procedures utilized by the US Dept of Education were adequate for protecting taxpayer and government fiscal interest.

    Apparently, the financial models employed by the department were not capable of predicting future collapse, nor did they anticipate the corporate response to funding restrictions belatedly put in place.

    This is something that Congress certainly needs to address in the upcoming Higher Education Act re-authorization.

    • 48574

      It is far from clear that both Corinthian and ITT were targeted by ideologues who simply had a bias against for profit education. There are plenty of public schools that graduate a much lower percentage of their students then either of those universities yet none of the reforms that were targeted at for profit schools applied to not for profit or public schools. If low graduation rates and high student loans were wrong for for profit schools then it ought to be wrong for not for profit and public schools. The Obama administration clearly thought there needed to be two different standards.

  • George Avery

    I have issue with Congress delegating the power to determine the rules for debt forgiveness to an executive agency, which is essentially delegating to the executive branch the powers of appropriations outlined as a duty of Congress in violation of Article I, Section 1 which places those legislative powers exclusively in the hands of Congress.

    • Liberty51

      Absolutely right. The Constitution does not authorize such delegation and up until the New Deal Court undermined the doctrine, such delegation had been ruled unconstitutional. Phil Hamburger’s book Is Administrative Law Unlawful? makes a powerful case against delegation.

  • Fred_PA_2000

    I am surprised that the standard for loan forgiveness is
    that there must be evidence that the school defrauded the student, BUT
    Even with this evidence of malfeasance in hand,
    There is no attempt to recover the ill-gotten gains from the malefactors!
    Instead, it gets dumped on the taxpayers, who were never involved
    in either the bad behavior by the school
    nor the (probably) foolish behavior by the students.

    • Fred_PA_2000

      Have to give credit to the Obama Administration.
      Not only did they engage in the typically foolish spending of other people’s money,
      They also sold us on the (even more foolish) idea of lending other people’s money.

  • cdr

    At least with a loan, there is a contract of expectation between two parties. The real travesty lies with the Grant. How is it that a community college student can start and stop their attendance 12 times pocketing over and above grant money, never complete a degree and never be beholden to pay anything back……that still goes on every day and no attention has been paid to this except to scale back the number of times this can occur from 16 starts to 12 . Let’s put a cap on this asap.

  • George, the last line of your article says it all!

  • Anarchy Softworks

    we should burn down the debt slave factories and start cutting off all wealthy heads