Staking Out Sides on Student Debt Discharge

Department of Education receives thousands of comments on proposed regulations for discharge of federal loans when colleges have defrauded students.

August 2, 2016

The U.S. Department of Education has received more than 10,000 comments in response to a proposed rule for federal loan forgiveness for students whose colleges have defrauded them. The deadline for submitting comments was 11:59 p.m. Aug. 1.

The department released the new proposed regulations, known as defense to repayment, in June in response to the collapse of Corinthian Colleges. While they are drawing praise from consumer protection groups, a range of groups, including taxpayer advocates and historically black and other colleges, have raised alarms over wider repercussions of the rules. Several mainstream higher education advocacy groups are also weighing in with concerns over unintended consequences of the rules.

Among the main requirements of the proposed rules: colleges and universities must provide warnings to students about poor loan repayment rates and set aside money for loan forgiveness. Most critically, they lay out a path for the government to forgive students' debt when they claim they were defrauded by their institution.

The department expects to release the final set of regulations on Nov. 1, said a spokeswoman, Kelly Leon. The new regulation could lead to the discharge of $42 billion over the coming decade, according to the department’s own estimates.

For-profit college groups have lined up in opposition to the rules, while many student advocates are saying they don’t go far enough. Those positions were expected, as for-profits were the main target of the rules and Democratic elected officials and consumer advocates have been the biggest champions of new regulations.

But a number of groups representing a range of public and private colleges are raising concerns about whether they would be applied too broadly. A primary focus of those groups is the possibility that the definition of misrepresentation in the rules could be interpreted extremely loosely and applied to nearly every college and university in the country.

“The proposed definition would include erroneous statements made inadvertently and innocently and, thus, would unnecessarily expose my institution to frivolous and unfounded claims for loan forgiveness, generating potentially significant financial liabilities,” wrote Clark Atlanta University President Ronald A. Johnson in comments submitted on the proposed rules last week.

The department is looking to curb the activities of colleges that willfully mislead students on success in job placements, postgraduation income and loan repayments, among other measures. However, even down-the-middle groups like the National Association of Student Financial Aid Administrators are questioning that language. NASFAA supports “strong and enforceable” rules against misrepresentation, wrote President and CEO Justin Draeger in comments to the department.

“However, we are deeply troubled by ED’s discussion of intent,” he wrote. “We believe that the regulation should distinguish between deliberate deception or intentional misleading and inadvertent mistakes.”

Draeger said it should be made clear in the rules that an incorrect statement made by a student tour guide or included in a university publication wouldn’t qualify as substantial misrepresentation.

Steve Gunderson, president of Career Education Colleges and Universities -- the largest trade group representing for-profit colleges -- said the proposed regulations create a "dangerous system that strips away essential safeguards, penalizes institutions before misconduct is shown and creates a serious new risk to the continued viability of postsecondary institutions, regardless of whether they are public, nonprofit or proprietary."

The rules have also drawn responses from groups that don’t typically get in the weeds on higher education or student loan policy. A letter from a slate of conservative small-government activists, including Americans for Tax Reform President Grover Norquist, warned that the new rules would be a benefit to trial lawyers and not taxpayers. And the letter argued that regulations with such a potentially large price tag should be decided by elected officials, rather than by agency officials who are appointed.

“Such an enormous commitment of federal taxpayer dollars should not be made through agency rule making, but by Congress, which is elected by the American people and is responsible under the Constitution for exercising the power of the purse,” the letter reads.

Other groups have been broadly receptive to the proposals and even called for certain measures to be strengthened. The Institute for College Access and Success released a letter with the backing of 56 organizations advocating for students, consumers and other interest groups affected by potential loan regulations that applauded the protections included in the draft proposal. But the letter said loopholes in sections on predispute arbitration and class-action claims would leave some borrowers unprotected.

"We believe these changes are essential to protect both students and taxpayers and prevent future fraud," the letter said of the new regulations.

The American Federation of Teachers urged the department to make automatic discharges of loans uniform in the rules when a college or university has been found to have acted fraudulently, as opposed to each student having to make an individual case for debt forgiveness. AFT President Randi Weingarten also urged that the final rules maintain a ban on mandatory arbitration and not pre-empt even stronger state rules.

"We urge you to build off of the promising start outlined in the proposed rule and create a borrower defense process that provides for broad relief for defrauded students through a simple, easily accessible process that will protect both students and taxpayers," Weingarten said.


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