With a tad less than two months to go before leaving office, the Obama administration has released its final regs on student loan forgiveness for those using the borrower defense claim. This will let people with unpaid student loans have their loans written off if the college they borrowed money to attend victimized them through fraud.
The final regs were issued last week by the U.S. Department of Education (ED).
"Since taking office, the Obama Administration has worked tirelessly to protect students and taxpayers and crack down on dodgy schools," said U.S. Secretary of Education John B. King on October 28. "Today's regulations build on that process by ensuring students who are lied to and mistreated by their school get the relief they are owed and that school that harm students are held responsible."
A flood of borrower defense claims from students of the defunct Corinthian Colleges last year forced ED to act and the September bankruptcy of ITT Tech will only add fuel to this fire. Existing regulations that date to 1995 provided little guidance on how borrowers could submit borrower defense claims after the Corinthian crack-up or how ED could resolve them. The new regs will also replace a hodge-podge of state laws and bring some standardization to the process. Some observers say individual states, especially those with proactive attorneys general such as Massachusetts and Illinois, offer better protection than the new regs.
ED's new regs would require that a letter of credit to be produced by struggling schools who are on the bubble or who have engaged in fraud to prove that they are viable businesses. LoCs are typically issued by banks that guaranty the payment of financial obligations by those seeking such a letter.
Key enhancements contained in ED's new regs include an automatic closed-school loan discharge retroactive to November 1, 2013. ED wants to implement this solution as soon as possible so borrowers can benefit from this streamlined process.
ED will also ban schools from inducing students to sign pre-dispute arbitration agreements--known as arb clauses--that are contained in enrollment contracts, which in the past have prevented students that get ripped off from taking their schools to court. ED's new regs not only allow borrowers to pick where to pursue claims against a school, but also prohibit schools from banning class action lawsuits by students.
Critics of ED's new regs, such as Americans for Tax Reform, have pointed to the hit that taxpayers will have to take. ED has estimated that the cost of these regs could run to $42 billion over the next decade.
ED and advocates for borrowers say that these rules should theoretically survive a Trump or Clinton administration. "Most of the final rules will become effective on July 1, 2017," said Abby Shafroth, an attorney with the Boston-based National Consumer Law Center. "They will remain in effect indefinitely (or) until they are amended or withdrawn through a future Department of Education rulemaking process--like the one just completed to create these rules--or are found to be unlawful or exceed the Department's authority by a court."
While the Corinthian Colleges fiasco was the armature for ED's new guidelines, they are not limited to for-profit colleges. Bad student outcomes have been noted throughout higher ed. The law school land rush of recent years yielded a bumper crop of newly-minted lawyers who found that degrees from second- and third-tier schools left them with large amounts of debt and few good career opportunities. It's not clear that ED's new borrower defense regs will help them.'
"There have been lawsuits under state unfair and deceptive practices acts brought against schools by law students," stated NCLC's Shafroth. "However, those are different from borrower defense claims, which will proceed through an administrative process and provide a different type of relief--the discharge of loans rather than money damages from the school."
Despite the ban on arb clauses which prevented schools from being sued, the new borrower defense regs should benefit student claims precisely because they don't require claimants to take their schools to court.
"Borrower defense claims for federal loans are not class action law suits," said Shafroth. "They will go through an administrative process--rather than a court--that is only available at the discretion of the Department. They are not lawsuits and will not be subject to class actions procedures."
Shafroth added that ED's administrative process "should definitely be cheaper and theoretically is should be faster, although we'll see."