Judge’s Order Complicates Education Department’s Borrower-Defense Program

Earlier this fall, the Education Department announced that it would forgive $109 million in loans held by students who were misled by the University of Phoenix and Ashford University. Department officials said they would try to claw back some of that money from the for-profit institutions, though they haven’t moved forward yet.

However, an Oct. 17 decision—in a closely watched test case of how the department can use its authority to recoup money from institutions—could put those plans on hold.

Federal borrower defense to repayment rules allow those who believe they were defrauded or misled by a college to file a claim seeking relief and potentially have their loans discharged. If the department agrees with the borrower and discharges those loans, federal regulations allow the agency to recoup funds from the institution the student attended.

The department didn’t try to do that until 2022. That’s when the department said it would hold DeVry University, a for-profit based in Illinois, liable for $24 million to cover the cost of 18,000 borrower-defense claims totaling $71.7 million.

DeVry challenged the department’s decision to recoup the funds on several fronts. The university first sued the department in federal court to block it from recouping money, arguing that the Education Department’s action exceeding its authority violated the U.S. Constitution. DeVry also sought relief from the department’s Office of Hearings and Appeals (OHA).

Robert Layton, an administrative law judge in the Office of Hearings and Appeals, issued the order temporarily blocking the recoupment. He cited developments in an unrelated federal lawsuit challenging the legality of the new borrower defense to repayment regulations that were finalized last year and took effect July 1. A federal appeals judge blocked those new rules in August, siding with the Career Colleges & Schools of Texas (CCST), a trade association representing for-profit colleges in Texas, which brought the lawsuit. Oral arguments in the Texas lawsuit over the injunction were held Monday.

The Office of Hearings and Appeals had previously twice denied DeVry’s request for a stay but reconsidered after reviewing filings in the Texas lawsuit, according to the order. “Those arguments call into question several relevant issues,” wrote Layton, who didn’t elaborate on what those issues are.

Jason Altmire, president of Career Education Colleges and Universities, the national association representing for-profit institutions and a supporter of the lawsuit, said that tying the stay to the status of the Texas litigation could mean the department is “looking at a pretty long time before they get anything.”

Altmire said the judge’s decision to wait for the resolution of the lawsuit is the “right thing to do,” in part because the legal challenge could spell the end of the borrower-defense program.

“The litigation is written in a way that it does give the courts the possibility of taking a much broader look at [borrower defense to repayment] generally, and coming to the conclusion that BDR itself is not consistent with what the department is authorized to do,” he said. “I’m not saying this is the likely outcome, but it’s a possible outcome that the court could throw up BDR in its entirety.”

He said the stay should put a hold on other potential recoupment actions. “The department would really have to backtrack if that were to happen, and it would cause more problems, so I do think this is the smart way to handle it as all this proceeds,” he said.

The Education Department did not respond to questions from Inside Higher Ed on Monday. Officials told Higher Ed Dive, which first reported on the temporary stay, that the department wants the stay reconsidered, although the decision won’t affect other potential recoupment proceedings.

Clare McCann, a higher education fellow at the philanthropy Arnold Ventures who previously worked in the Education Department during the Obama and Biden administrations, said the judge’s decision “seemed odd.”

“To the best of my knowledge, DeVry’s borrower-defense discharges were not granted under the regulations for which the department is being sued by CCST,” she said. “But I think that’s sort of the confusion for me. They don’t appear to be related to each other. Even if CCST does raise questions relevant to borrower defense, there’s no reason it would raise questions relevant to the borrower-defense authority used here.”

McCann doesn’t expect the department to change course in response to the temporary stay; the order doesn’t seem determinative enough, she said. “The department initiated the recoupment action because they understand that represents a really important piece of the borrower defense—to make sure that taxpayers are not the ones who are on the hook for institutional wrongdoing and to deter future wrongdoing on the part of institutions,” she said.

Terance Gonsalves, a partner at Alston & Bird and chair of the law firm’s education team, who has worked with DeVry in the past, said that though the department can still proceed with recoupment, the judge’s order gives institutions that could face such an action another tool to fight it.

“Another institution who is facing a recoupment action could similarly ask OHA or a federal district court to pause or stay those proceedings, pending the outcome of what’s happening in the Fifth Circuit, and now there’s precedent that it should be stayed,” he said. The “argument for a stay is much stronger today” than before the judge’s decision, he added.

Gonsalves is skeptical that the Education Department has the authority to carry out its borrower-defense rules. “My opinion is that there’s a lot of legitimate constitutional legal challenges to the rule, but they haven’t been tested until now because [the department hasn’t] begun these recoupment proceedings,” he said.

The judge’s order comes as a variety of colleges and universities are seeing an increase in borrower-defense claims. That increase has worried institutions, because the claims could eventually lead to a recoupment action similar to what DeVry is facing.

“I think lots of institutions will be very interested to hear about this ruling because they are thinking about what comes next,” Gonsalves said. “What comes next for most of them is the risk of a recoupment.”

Emmanual Guillory, senior director of government relations at the American Council on Education, said he was a bit surprised that a stay was granted. Still, he said, “A stay doesn’t mean the department won’t and can’t recoup money from institutions moving forward.”

He and others pointed out that the department is under pressure from congressional Democrats to recoup money from the University of Phoenix and Ashford University, which is now owned by the University of Arizona.

Illinois senator Dick Durbin and Connecticut representative Rosa DeLauro, both Democrats, sent a letter to Education Secretary Miguel Cardona on Monday, calling on him to ensure “that taxpayers are not left holding the bag.” They also praised the department’s decision to approve the borrower-defense claims.

“While this is a victory for defrauded students, it is Ashford and Phoenix, not taxpayers, which should foot the bill,” they wrote. “We therefore urge the Department to aggressively recoup funds from these institutions. This would send a strong warning signal to other predatory for-profit colleges that there are substantial financial consequences for defrauding students.”