Wiping Out Debt

Education Department unveils draft regulations for borrowers seeking federal debt forgiveness, which include an end to mandatory arbitration agreements and requirements for some for-profits to be on the hook to pay for debt relief.

June 14, 2016

The U.S. Department of Education on Monday released a broad set of draft regulations designed to clarify and strengthen the process for federal student loan borrowers to seek to have their debt forgiven when they have been misled or defrauded by a college.

The draft regulations include new requirements that apply mostly to the for-profit sector, including that institutions must issue warnings to prospective students about poor loan-repayment rates, and financially troubled institutions must set aside money to pay for loan-forgiveness claims.

“The Obama administration won’t sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag,” John King Jr., the U.S. secretary of education, said in a phone call with journalists. “These rules ought to make them think twice.”

Consumer groups and Democrats in the U.S. Senate largely praised the department’s proposal, which also would eliminate colleges’ use of mandatory arbitration agreements that limit students’ ability to sue over allegations of wrongdoing, a fairly common practice among for-profits.

“Today’s proposed rule from the Department of Education is about justice: compensating the victims of past misdeeds, and making it more difficult for disreputable colleges to escape responsibility,” said Robert Shireman, a senior fellow at the Century Foundation and former Education Department official, and Tariq Habash, a policy associate at the foundation. The two wrote a report criticizing arbitration requirements some for-profit colleges have students sign as part of their enrollment agreements.

Advocates for the for-profit sector, however, said the regulations target them unfairly. And Republicans in the U.S. House of Representatives called the proposed regulations a "vague and subjective regulatory regime" that should be withdrawn.

Steve Gunderson is president and CEO of Career Education Colleges and Universities, the primary for-profit college association, which recently changed its name. He said the regulatory push was ideological and would threaten many for-profit and career colleges, and the students who attend them.

“We agree that poor-performing institutions, as well as those institutions that are financially at risk, should be monitored closely to protect students,” Gunderson said in a written statement. “But what the department fails to acknowledge is that these issues exist across all of higher education, not just private-sector institutions.”

The draft regulations began to take shape last year, as the feds were scrambling to respond to the collapse of Corinthian Colleges, a controversial for-profit chain.

In the two decades before Corinthian’s demise, a total of fewer than 5,000 students had sought to have their federal loans forgiven under the current borrower defense rule, which was created in 1995, according to the department. But Corinthian, which enrolled 72,000 students when it shut down, changed the stakes.

The department has received debt-forgiveness claims from thousands of former Corinthian students, as well as from students who attended other troubled for-profits. By this spring, the department had wiped away more than $42 million in debt held by 2,048 former Corinthian students. And more than 23,000 claims, including those from students who attended other institutions, had been filed by earlier this month.

The Obama administration said last year that the borrower defense regulations needed significant changes to better protect students and taxpayers. For example, federal officials said it was unclear what evidence former students must give to show that a college’s misconduct warrants debt relief.

The department brought together a negotiated rule-making panel earlier this year to come up with the new standards. But that group did not come to a consensus, so the department was able to draft its own regulations. The public comment period for the draft rules ends Aug. 1, and the department plans to publish a final version Nov. 1.

The 530-page notice about the regulations includes widely varying estimates on the cost of debt forgiveness to the federal government, with a range of $199 million to $4.23 billion annually.

Ted Mitchell, the under secretary for education, said on the call with reporters that the department is still learning about the how the process will work. But he said it will be both efficient and fair.

“Taxpayers shouldn’t be on the hook for institutions’ mistakes,” he said.

Defining Risk

King, in unveiling the rules, said they were part of the administration’s broader attempt to crack down on poor-performing for-profits.

For example, he said, military veterans’ educational benefits should be factored into a rule requiring that for-profits receive no more than 90 percent of their revenue from federal sources (the Post-9/11 GI Bill and other military benefits currently do not count toward that limit). Likewise, he said the requirement should be tightened to allow only 85 percent of revenue to come from federal sources.

He called for an end to “fighting against common-sense rules” to protect students, and said, “It’s time for Congress to get into the game, too.”

Advocates for the for-profit sector, however, argued that borrower defense rules do not apply equally to nonprofit colleges.

For example, the draft regulations would only force for-profits to provide students with information about the rates at which former students repay their loans. Some nonprofit colleges also have low repayment rates but will not be forced under to warn students under the rules.

Some for-profits also will be subject to a requirement that they set aside an amount equal to at least 10 percent of their annual federal aid revenue in the form of a letter of credit. That rule would kick in if a for-profit is snagged by various triggers related to financial stability, including if a state or federal agency files a “major” lawsuit against the institution. (The department recently increased the amount it required ITT Educational Services to set aside in its letter of credit.)

“The complex and burdensome nature of this regulation will crush career education with financial requirements not imposed on others in higher education -- including institutions that have lower graduation rates and higher default rates,” Gunderson said.

Mitchell said the regulations focus on for-profits because those institutions are more likely to perform poorly on metrics such as loan-repayment rates.

“It really is the proprietary sector where most of the risk exists,” he said.

While consumer groups seemed to be pleased with the draft regulations, some said aspects of the rules don’t go far enough.

For example, Public Citizen, which has pushed for an end to arbitration clauses, said the regulations should ban all such agreements, not just mandatory ones tied to a student’s enrollment or ability to continue at a college.

“We applaud the Department of Education for taking this important step,” said Sonia Gill, counsel for civil justice and consumer protection for Public Citizen, in a written statement, “but urge it to adopt a rule with teeth to protect the interests of students and families when they are defrauded by unscrupulous schools engaged in predatory practices.”

The Institute for College Access and Success (TICAS) also said the rules could be improved. For example, instead of providing full loan forgiveness to defrauded students, the department instead proposed an "unclear and complex method for limiting relief to borrower," the group said.

Senate Democrats, however, were effusive in their praise.

Senator Dick Durbin, an Illinois Democrat and frequent critic of for-profits, said the rules would be the Obama administration’s higher education legacy. And Senator Patty Murray of Washington said the proposed regulations are strong new safeguards.

“This is a very positive ‎step forward that will make an important difference for cheated student borrowers who have been left to dig themselves out from under a mountain of debt they cannot repay,” Murray said in a written statement.

House Republicans said the department already had the tools in place for a fair debt-forgiveness process.

The new proposal "threatens to ensnare institutions that are following the law and serving the best interests of their students," Representative John Kline, the Minnesota Republican who leads the House education committee, and Representative Virginia Foxx, a Republican from North Carolina, said in a written statement. "Taxpayers will be on the hook for billions of dollars in discharged loans, and ultimately, students will have a harder time accessing the education they need to succeed in life."


Back to Top