WASHINGTON -- For-profit colleges and their advocates are aggressively fighting the Obama administration’s proposed rule for federal loan forgiveness, arguing that the regulation is subjective and overly broad, and will “crush” the sector while costing taxpayers many billions of dollars.
Yet for-profits aren’t the only ones fretting about the rule, which is slated to go into effect next year if enacted. Many nonprofit colleges also face financial and reputational challenges due to the scope of the so-called borrower-defense-to-repayment proposal, said lawyers and several traditional higher education groups.
While traditional colleges' vulnerability largely has flown under the radar, the rule's broad definition of what constitutes a misrepresentation in marketing to students and its new requirements for the financial stability of institutions in particular could pose risks.
“It’s a dramatic expansion,” said Stan Freeman, a lawyer with the D.C.-based firm Powers Pyles Sutter & Verville. “This should be a concern to all postsecondary education, not just for-profits.”
The U.S. Department of Education crafted the 530-page regulation mostly in response to the collapse of Corinthian Colleges.
Last year former students of the for-profit chain joined with consumer advocates to lead a high-profile “debt strike” campaign. The students said their federal loans should be forgiven because they had been defrauded, an allegation a California Superior Court judge backed with a March ruling that Corinthian misled students with bogus job placement claims and also used unlawful debt-collection practices.
The debt strike attracted widespread support, including from U.S. Senator Elizabeth Warren, a Democrat from Massachusetts. As of June 24, the department said it had received 26,603 borrower defense claims, 87 percent of which were from former Corinthian students. Many of the rest were filed by former students of other for-profits. The department so far has discharged loans held by about 4,000 students, with a total combined balance of $73 million.
All that action has occurred under the current rule, which was created in 1995 and department officials have said is skimpy and needs updating. During the last two decades before Corinthian’s collapse, fewer than 5,000 students had sought to have the department forgive their federal loans.
The feds last month released the enormously complex replacement rule. The release followed a negotiated rule-making session that ended in a deadlock, which gave the department broad latitude in crafting the regulations. The department is accepting public comments on the rule this month. Department officials said the regulation was aimed primarily at for-profits, where they said most of the fraud, misrepresentation and financial risks exist.
“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, told reporters.
Yet nonprofit colleges also are covered by most of the rule. And both the National Association of College and University Business Officers and the National Association of Independent Colleges and Universities said their member institutions could be sanctioned under the proposed regulation.
NAICU supports borrowers being able to seek to have their loans forgiven, said Maureen Budetti, the group’s director of student aid policy, particularly in cases of fraudulent behavior by colleges.
However, Budetti said, both the financial responsibility and misrepresentation sections of the proposed rule are defined quite broadly.
“It’s possible we could find ourselves in the line of fire, some of our schools,” she said. “The secretary’s given quite a bit of leeway.”
Graduate schools could be vulnerable in particular, according to a recent article by BuzzFeed. So could historically black colleges and universities.
Julianne Malveaux, the former president of Bennett College, said the proposed rule is vague, difficult to understand and will be expensive.
“While I agree that students must be able to petition their educational providers for student loan forgiveness if they feel they have been defrauded, I worry about the unintended ramifications of such an enormously wide-open regulation,” she said in a written statement. “Unfortunately, if this rule is implemented in its current form, opportunities for black students to receive the education they need to compete in the 21st century could decline -- HBCUs would be forced to funnel their already limited monetary resources into unnecessary legal counsel instead of into the classroom where they belong.”
Scams and a Cottage Industry
Whether the floodgates open for a large number of borrower claims from former students at nonprofit colleges, lawyers said, depends in part on the success of a cottage industry that has added debt forgiveness to their loan consolidation, debt counseling and other fee-carrying and often shady offerings.
Colleges would be on the hook financially if their former students' claims were to succeed. That’s because the department could require colleges to pay off borrowers' loan balances.
The huge dollar amount of student loan debt is a tantalizing target. The department has estimated that the new defense-to-repayment regulation could result in the discharge of up to $42 billion in loans over the next decade. For-profits have said the amount owed by the government will be much larger.
Under the proposed rule, the department would be able to consolidate similar claims from students into a group, or even grant a group discharge for an alleged misrepresentation or breach of contract without having individual student claims.
The Obama administration could seek to enact the regulation before next year, said Diane Auer Jones, a senior fellow at the Urban Institute and a former official in the department during the George W. Bush administration, who later worked for Career Education Corporation, a for-profit. And while the department has the discretion to reject claims, she said that won't be easy under the proposed rule.
"At some point they're going to lose control of this," said Jones.
Some law firms and loan-consolidation companies already are trolling for students to file borrower defense claims.
For example, an outfit called the Budget Buddy Club said on its website that students who attended Emory University, Oregon State University and many other colleges could quality for student loan forgiveness with the help of its “student shield” debt relief program. There is no obvious reason the company chose those specific institutions, with ads that refer to community colleges, for-profits and public research universities.
“The American government has recently passed laws that will give millions of Americans currently struggling with student loan debt much-needed relief,” the site said.
While the “government” hasn’t passed anything yet, experts said these websites may indeed attract unwitting former students.
Likewise, a Facebook poster named Tyra Robinson in May said on the social media site that “if you attended Trinity Washington University, you may qualify for loan forgiveness.” Similar Facebook postings name other nonprofit colleges, using phrases like “breaking news” to hawk links and phone numbers to debt relief companies.
A number Robinson (or whomever posted the ad on Facebook) included for Trinity Washington students leads to a privately held company called Student Advocates, according to two employees who answered separate calls from a reporter.
“We help with student loan forgiveness,” one employee said. “We work directly with the Department of Education.”
That claim is not true, unless you count submitting claims for a fee as working directly with the feds.
Patricia McGuire, Trinity Washington’s president, called the Facebook posting about her institution outrageous. “It is such an effort to exploit students,” she said.
Roughly 85 percent of Trinity Washington’s students are eligible to receive Pell Grants. But the private nonprofit institution’s average debt load is less than $30,000, the national average, and its loan default rate is well below the level that would provoke a federal sanction.
Despite being the target of the ad, McGuire said she supports the feds’ attempt to get tougher with colleges on borrower defense claims.
“I don’t think the department is wrong at all to crack down on fraud and misrepresentation,” she said.
'Onerous' or the Right Balance?
The department recently hired several lawyers to work on its borrower defense program, which the new Student Aid Enforcement Unit at the department’s Federal Student Aid office is overseeing.
Experts are split on whether the new rule will snag only egregious misrepresentations by colleges, or if it might also catch careless mistakes.
“The only schools that have something to really worry are schools that engage in substantial misrepresentation,” said Adam Minsky, a Boston-based lawyer who focuses on student loans, who calls the proposed rule a “fairly reasonable” attempt to regulate marketing by colleges.
Likewise, several consumer and student advocates have said the rule doesn’t go far enough. Some said the proposed regulations are not clear enough, complex and will not lead to full loan forgiveness for deserving students.
Yet for-profits and several lawyers, as well as a couple of traditional higher education associations, said the proposed misrepresentation and financial responsibility language is broad, and even “onerous” or “draconian.”
A key complaint centers on the department’s view of what constitutes a substantial misrepresentation. As Cooley, a law firm that represents colleges, including nonprofits, explained in a written notice to its clients, the feds have proposed to “enormously broaden” that definition by eliminating the need to prove any intent by the college to deceive students. The nature of what could be construed as a false, erroneous or misleading statement “is so broad as to challenge reasonable interpretation,” said the firm.
Possible problem areas, some said, could include fudged admissions numbers colleges have submitted to boost their rankings in U.S. News & World Report or on other lists. These scandals have involved both graduate and undergraduate programs at selective institutions, and could be grounds for borrower defense claims.
Many nonprofit colleges also brag about the job-placement rates of their graduates, some claiming rates as high as 99 percent on billboards and their websites. If institutions’ advertisements on job placement fail to include methodology or disclaimers, they could trip on the new standard for misrepresentation, experts said.
In addition, a lawsuit filed by the U.S. Federal Trade Commission or a state attorney general about such advertising can causes serious problems for colleges. DeVry University, a large for-profit chain, currently is facing an FTC job-placement claim lawsuit.
Such legal challenges are among the more than 10 “triggers” the department proposed under the regulations for determining the financial responsibility and stability of for-profits and private nonprofit institutions. (Public institutions are exempt from financial responsibility requirements, the department said, because state governments back them. The misrepresentation rules would apply to public colleges, however.)
Triggers include when a college must pay off a debt because of an audit, investigation or settlement, including the filing of a lawsuit by a state AG’s office. Colleges also would trip on the new rule if they were required to pay defense-to-repayment losses of at least $750,000 or 10 percent of their assets in a recent year.
When a college has a triggering event, under the rule the department would require it to take out a letter of credit equal to 10 percent of the college’s annual federal aid revenue. And other triggers would result in another letter of credit, meaning multiple lawsuits or successful debt claims could lead to a college having to find credit equal to much of their annual receipts. That could put institutions out of business, several experts said.
“That could get expensive,” said Budetti. “You could have one problem that would manifest itself in numerous different ways.”
The business officers' association and private college groups have criticized the department’s current methodology for calculating the financial responsibility of colleges through composite scores, which remain unchanged under the proposed regulation. They don’t like the new triggers, either.
“NACUBO is concerned that the Education Department would penalize nonprofit colleges and universities for circumstances that are unrelated to student outcomes and not indicative of potential risk to the federal government,” the group said in a written statement. “Proposed triggers that would require schools to obtain letters of credit or provide other surety are not comprehensive financial indicators and do not suggest that an institution is about to close precipitously.”
Even some supporters of the rule, who said the department has struck the right balance with between consumer protection and regulation, said nonprofit colleges should use the next year to make sure their marketing and financial practices are in good order. If not, they could face the same federal scrutiny that some for-profits are scrambling to handle.
Minsky said sloppiness in advertising or on college websites deserves to be treated similarly to intentional misrepresentation.
“Those schools should have to change their behavior,” he said, adding that they “have had plenty of notice.”