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The Biden administration’s new rule making it easier for a defrauded borrower to seek debt relief has “numerous statutory and regulatory shortcomings,” a federal appeals court ruled last week. The judges said that a lawsuit seeking to overturn those regulations is likely to succeed. The administration is expected to appeal the ruling to the U.S. Supreme Court.
The new “borrower defense to repayment” rules, which were finalized October 2022, have been on hold since last summer pending appeal after a Texas district court declined to issue a preliminary nationwide injunction. Career Colleges & Schools of Texas (CCST), a trade association representing for-profit colleges in the state, sued to block the regulations from taking effect. The group argued the rules exceeded the department’s authority and violated the Constitution.
Under the borrower defense to repayment program, borrowers can apply for debt relief if their college or university misled them or violated certain state laws. The new regulations simplified the application process for affected students and allowed the department to automatically discharge student loans in some cases.
The ruling from a three-judge panel on the U.S. Court of Appeals for the Fifth Circuit reversed the lower court decision to reject a nationwide injunction. The district court said CCST had not shown it would suffer irreparable harm—a key standard to receiving an injunction. But the Fifth Circuit panel disagreed. The regulations, they said, would cause “immediate and irreparable injuries” as a result of increased compliance costs, changes to operating procedures and “immediate threats of costly and unlawful adjudications of liability.”
The appellate judges also called some provisions “certainly unlawful” and criticized the rule’s “vague, brand new standards” for colleges’ conduct that could lead to approved borrower defense claims.
“The unbridled scope of these prohibitions enables the department to hold schools liable for conduct that it defines only with future ‘guidance’ documents or in the course of adjudication,” the judges wrote. “Simply put, the statute does not permit the department to terrify first and clarify later.”
