Turning to Courts for Loan Forgiveness

As months pass without action by the Trump administration on loan-forgiveness claims, some borrowers who attended defunct for-profits find success clearing loan debt through the courts.

May 28, 2019
 
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Education Secretary Betsy DeVos

Earlier this year, Sarah Dieffenbacher closed the book on a two-year legal fight with the U.S. Department of Education over her student loan debt.

But the resolution was unsatisfying to Dieffenbacher. Instead of getting a ruling on the loan-forgiveness claim she filed for debt racked up at the former Everest College, the department discharged her loans through bankruptcy court.

“Unfortunately, it was not a settlement that I can say I'm proud to have received,” she said. “They found an easy way out.”

For some plaintiffs like Dieffenbacher, the courts have become the only viable path to forgiveness of student loans they argue aren’t valid because they attended fraudulent programs. That’s because Betsy DeVos, the education secretary, hasn’t acted on a single loan-forgiveness application -- so-called borrower-defense claims -- in nearly a year. More than 158,000 claims are currently pending review, according to department officials.

A handful of lawsuits, however, recently have ended in settlements that cleared the loan debt of students who attended programs operated by Corinthian Colleges -- the defunct parent company of Everest -- or other for-profit colleges where state regulators documented misconduct and deception of students.

But those victories themselves have happened only after years of litigation. And the relief they’ve offered has been limited to the plaintiffs themselves.

In a separate lawsuit in Massachusetts, the department reached a settlement agreement this month with two borrowers who attended Everest Institute programs in that state. Darnell Williams and Yessenia Tavares took out thousands of dollars in student loans to attend massage therapy and medical assistant programs, respectively. But neither found jobs in those fields, and within a few years they had defaulted on their federal student loans.

Williams and Tavares sued the department in 2016 after it sought to garnish their wages, arguing the loans were unenforceable because the Everest programs were fraudulent. Maura Healey, the state's attorney general, joined the lawsuit and said the department must review a borrower-defense claim filed on behalf of more than 7,200 Massachusetts borrowers.

More than two years after filing their lawsuit, Williams and Tavares reached a settlement with the department, which is subject to a confidentiality agreement. The department, however, hasn’t ruled on the debt of the other Everest borrowers, despite a court ruling that found that the attorney general could file a borrower-defense claim on their behalf. Healey’s office is continuing to press for a resolution for those borrowers.

Meanwhile, the Education Department has started negotiating a settlement agreement with Christine Gold, a former student of the for-profit Court Reporting Institute in Seattle who sued the department in 2018 after waiting more than two years for a ruling on her borrower-defense claim. The program closed in 2006 after state regulators found widespread deception of students. Gold was on the hook for $36,000 she took out to attend, which ballooned to more than $60,000 by the time she filed her lawsuit.

Gold’s lawyers at the National Student Legal Defense Network said they couldn’t comment on her case.

Eileen Connor, a lawyer who represents Dieffenbacher as well as Williams and Tavares, said the department is forcing borrowers to turn to the courts because of excessive delays in the administrative process to review their loan debt.

“Every single person shouldn’t have to bring a lawsuit to get the department to follow the law,” said Connor, director of litigation at the Project on Predatory Student Lending at Harvard University’s Legal Services Center. “Unfortunately, I think the department is reading these decisions as narrowly as possible.”

In the case of the Massachusetts Everest students, Healey's office is demanding a resolution for the thousands of borrowers in the state with circumstances similar to those of Williams and Tavares. According to a court filing from the attorney general's office this month, the Education Department continues to garnish the tax returns of borrowers on whose behalf it submitted borrower-defense claims.

“All 7,200 former Corinthian students are entitled to the same relief as the two named plaintiffs in this case. The Department of Education cannot use a settlement to continue their illegal collection activities and avoid the relief these borrowers equally deserve,” Jillian Fennimore, a Healey spokeswoman, said in a statement.

Regulatory Battles

The legal fights have unfolded as DeVos wages a larger battle over borrower-defense regulations. Before 2015, the loan-forgiveness application was a little-used provision of the Higher Education Act. The collapse of the Corinthian chain that year led to a flood of new claims from borrowers who said they were misled by their college in violation of state law.

The Obama administration issued new regulations in 2016 that sought to clarify federal standards for students to get loan forgiveness. Although DeVos delayed the Obama rule from taking effect in 2017, a federal court told her last year to carry out the regulation. So even though the Trump administration has its own borrower-defense rule in the works, the 2016 regulations remain in effect. But that hasn’t led to debt relief for former students of Corinthian Colleges or ITT Technical Institutes.

After another judge last year blocked DeVos from using a partial-relief standard to award forgiveness to borrowers for only part of their student loans, the department hasn’t approved any new claims in months. DeVos has blamed the ongoing litigation over the department’s partial-relief formula for the delays.

“They [were] being approved before the court stepped in,” she told the U.S. House of Representatives' education and labor committee in an appearance last month.

Diane Auer Jones, the principal deputy secretary at the department, said at a House oversight subcommittee hearing this week that she couldn’t commit to a timeline for clearing the backlog of borrower-defense claims until the lawsuit over the partial-relief system is resolved.

“We are not able to determine the level of harm or level of relief a borrower should get because the methodology we have used is being blocked by a California court,” she said.

But Connor said there’s nothing stopping the department from issuing full relief to borrowers who were defrauded.

“It’s very clear that the preliminary injunction doesn’t preclude the department from granting complete relief to students, which is of course the right thing to do here,” she said. “It also doesn’t preclude them from coming up with an alternative way of effecting partial relief.”

After the Trump administration announced it would award only partial relief to borrowers with valid claims, Dieffenbacher received an offer to settle her lawsuit and have about half of her $67,000 in student debt canceled. She said she considered the offer “a joke.”

Dieffenbacher had waited for a ruling on her borrower-defense claim since 2015, and filed her lawsuit in 2017. But she wasn't willing to take an offer that didn't clear all of her loan debt for a program she said hadn't provided any benefits.

“I think they felt I would take it and shut up and be happy with it and go on,” she said.

Late last year, though, Dieffenbacher filed for bankruptcy after several years of struggling with loan debt that prevented her from taking major financial steps like purchasing a new home. When the department offered to discharge her debt through the bankruptcy process in a settlement, she agreed.

"I was exhausted from fighting. I was ready to get on with my life," she said. "It almost felt like I had no other way out."

Dieffenbacher said she hopes other students who were misled by their colleges press the department to allow loan discharge through the bankruptcy process, which is barred by law to most student borrowers.

“It’s proof it can be done,” she said. “I’m hoping it puts more pressure on them to allow that.”

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