Earlier this summer, a federal court ordered the Department of Education “to cease all efforts to collect debts” from students who attended failed for-profit universities. While the court order focused on a privacy issue, the heart of the suit is the borrower’s defense rule.
The rule allows students to assert a defense against repaying their student loans if their college engaged in misconduct.
Though the rule dates back to a 1995 regulation, it was rarely invoked until recently. Before July 1, 2016, borrowers’ defense claims were approved for around $73 million in loans. In the following 7 months, though, $376 million in claims were approved. The Obama-era rule was estimated to cost $15 billion over the next ten years.
Claims have exploded for two reasons. First, Corinthian Colleges, which had a peak enrollment of around 80,000 students, declared bankruptcy in 2015. Corinthian allegedly inflated job placement rates, misrepresented career services, and made false claims about credit transfers, which has created as many as 100,000 potential claims from borrowers who attended the school.
Second, the Obama administration rubber-stamped claims for a borrower’s entire loan obligation and then tried to codify that lax policy in a rule at the end of the president’s term.
Facing billions of dollars in questionable loan forgiveness, Secretary Betsy DeVos paused the processing of claims and delayed the Obama would-be rule indefinitely in June 2017. Further, Secretary DeVos has proposed allowing claims based only on actual damages a given student has suffered. In other words, if an alumna is making what she would have made had she attended a college that didn’t make fraudulent representations, then the student will be on the hook for most or all of her loans. Effectively, the new policy prevents windfalls to students that haven’t been significantly harmed.
While that return to the status quo jibes with common sense and standard calculations of damages, progressive politicians and liberal advocacy groups have attacked Secretary DeVos for her position.
For instance, Democratic attorneys general from 18 states sued the Department of Education and Secretary DeVos to enforce the Obama-era position. With characteristic restraint, California Attorney General Xavier Beccera weighed in on the issue, describing how borrowers had “their American dreams stolen by a so-called higher education institution” and “are now being denied critical relief by a secretary of education hostile to their plight.”
Even if the suit were successful and the lax Obama policy put in place, it’d be little more than a band-aid. Absent from the previous administration’s actions were any measure that addressed the front-end of the loan process, which allowed students to receive billions of dollars in loans to obtain potentially worthless degrees. Besides belatedly attacking for-profit schools, the administration failed to conduct any due diligence about the quality of education it funded and yet seemed shocked that misconduct subsequently ensued.
Plainly, charging the same interest rates to Harvard Law students, who have the highest mid-career salary of any group of graduates, and Corinthian College students is devoid of any economic basis. By subsidizing the cost of attending a bad school or program through artificially low interest rates, a key market indicator was withheld from students. It was utterly predictable that these policies would harm students at underperforming schools.
If Attorney General Beccera wants to help career-minded Californians, he should focus on reforming the crushing occupational-licensing burden in his home state, which the Institute for Justice ranked as the most onerous.
Secretary DeVos should ignore the Left’s bluster and continue keeping taxpayers from getting the short end of the Obama administration’s midnight rule. After remedying that back-end error, she should address the root of the problem by requiring that any loans issued by the Education Department have a realistic chance of being worthwhile for the borrower. If Secretary DeVos makes such changes, both taxpayers and students would be indebted to her.