Debate Over Debt Relief Begins

Education Department starts negotiations over a new federal debt relief process -- and weighs new possible sanctions for risky colleges.

January 12, 2016

Less than a year ago, Ann Bowers was among the first of 15 student activists refusing to repay the federal loans they used to attend a faltering for-profit college chain.

Starting Tuesday, she will be at the negotiating table as a U.S. Department of Education committee tries to hammer out new rules governing debt relief for federal borrowers that will likely have implications well beyond the now-defunct Corinthian Colleges.

Bowers, along with department officials, consumer advocates, state officials and representatives of various types of colleges will begin the first of three rounds of negotiations over setting a new standard for when the Education Department will cancel federal student loans as a result of a college’s misconduct.

As part of that process, the Education Department is also eyeing a set of additional rules aimed at cracking down on risky colleges that may end up costing the government money with debt relief claims, according to documents the department sent to negotiators that were obtained by Inside Higher Ed.

Department officials are considering, for instance, expanding the circumstances under which financially troubled colleges would be required to post letters of credit or warn their students about the situation.

Setting New Standards

Tuesday’s negotiations come after the Obama administration struggled for much of the last year to address the hundreds of debt relief claims that poured in following the collapse of Corinthian Colleges.

The rules the department hopes will emerge from these negotiations are designed to further define a provision of the Higher Education Act -- known as borrower defenses to repayment -- that had largely been dormant until student activists, consumer groups, state attorneys general and Democratic lawmakers last year begin pressing the Education Department to use that law to forgive the debts of students who attended Corinthian campuses.

Amid mounting pressure, the Obama administration announced last summer that it would review the debt relief claims of former Corinthian students and other borrowers who believed they had been defrauded by their colleges. The department hired a “special master” as well as a small staff of lawyers to make recommendations on which claims it should grant.

Bowers, the student activist who is representing for-profit-college students on the negotiating panel, was among the “debt strikers” who met with federal officials last summer to deliver hundreds of debt relief claims, including her own.

“The Department of Education was the gatekeeper for the federal funds for me to go to this school,” she said in an interview. “I feel like they’re at fault as well, but hopefully this is the first step to doing the right thing.”

Bowers said she racked up $58,000 in federal loans while attending online classes at the Corinthian-owned Everest Institute. She completed her associate degree from the college but left in November 2014, halfway through her bachelor’s degree, after she became concerned with the mounting federal investigations of the then-collapsing company.

Bowers, whose claim with the Education Department remains pending, said she was looking forward to sharing her story with fellow negotiators on the rule-making committee.

“There are so many students out there who can’t support their families because of these student loans and they can’t get a job because their diplomas are not recognized by employers,” she said. “I’m hoping to represent them on the panel and let people know the grief that’s being caused by this.”

Among the issues that negotiators will take up is precisely what the standard for debt relief ought to be -- and whether it should be uniform across the country. The department’s current rules, which were written during the Clinton administration, call for a federal student loan to be discharged if the student’s college violated a state law, which can vary widely.

Negotiators will also decide what type of evidence borrowers need to show in order to receive debt relief. Student activists and consumer advocates have pushed for the department to be more aggressive in granting broad-based relief based on evidence it already has against a college rather than requiring each borrower to individually prove his or her case.

Luke Herrine, who advises the student activist group known as the Debt Collective on legal issues, said he was skeptical that the Education Department could produce the type of widespread relief that students are seeking in the face of “fundamental countervailing incentives.”

“There are strong reasons that the department would prefer to limit this as much as possible,” he said. “I think the Department of Education recognizes that if the process is truly functional, then that’s a budgetary hole they have to fill. They are quite aware that this is hundreds of millions of dollars. That’s a nontrivial amount of money.”

Unclear for Current Claims

The Obama administration has said it doesn’t expect to finalize the new debt relief regulations until this November, meaning they would likely not take effect until next July (under a new administration that would be able to make its own changes).

In the meantime, however, it’s unclear how the new regulations will affect the hundreds of existing applications for debt relief that the Education Department has received over the past few months.

Although the department has said it is fast-tracking the debt relief requests of students who attended certain Corinthian campuses -- which mostly include California locations -- officials have yet to grant any of the defense to repayment claims it has received.

Department officials are considering whether the new debt relief rules should be made retroactive, according to the materials they circulated to the rule-making panel. Another issue that appears to be undecided is whether the new debt relief process will apply to borrowers with federally guaranteed student loans made by private lenders or federal PLUS loans.

New Accountability Tools

Beyond the debt relief process for students, department officials are also looking at ways to hold colleges more accountable for misconduct as part of the rule-making process.

Part of the negotiations will focus on ways for the Education Department to recoup from colleges the amount of loans it forgives because of the institutions’ misconduct.

In addition, the department is interested in revising the federal financial responsibility and administrative capacity requirements that colleges currently face.

The department is considering whether it should add more “triggering events, metric-based standards or other risk factors” to its determination about whether a college is financially responsible enough to receive federal funds.

Officials are also eyeing new penalties for violating those standards, such as a letter of credit or other financial guarantee, or a requirement that college disclose the problems to students.

Dan Madzelan, assistant vice president of the American Council on Education and a former Education Department official, said ACE is waiting to see how the department moves ahead with the new debt relief process, especially the tools for recouping from colleges the loan dollars that are discharged due to successful claims.

“I don’t think anybody thinks a borrower will just sign a certification saying, ‘My college did bad by me, give me a discharge,’” he said. “But if the department liberalizes the requirements or make them more generous on the front end, then that certainly makes the possibility of larger recoupment on the back end.”

“How colleges and universities will be affected depends on how individual borrowers will be affected,” he said. “So there is a connection there.”


Back to Top