by Preston Cooper
Having recently ruled that the Department of Education acted illegally in delaying a 2016 regulation aimed at making it easier for students defrauded by their colleges to receive loan forgiveness, District Court Judge Randolph Moss on Tuesday ordered the regulation to take effect immediately. Activists on the left hailed the ruling as a massive victory for student borrowers, and much of the news coverage echoed this sentiment. But in reality, the implications of the judge’s order are much narrower than they appear.
The case concerns a series of regulations known as “borrower defense to repayment,” which essentially stipulate that student borrowers can apply to have their federal loans discharged if their college committed fraud. It seems straightforward enough. But defining what constitutes “fraud” and when it’s appropriate to cancel student loans due to fraud is a tricky business. In 1994, the Department of Education issued a borrower defense policy which essentially kicked those decisions to the states. Borrower defense claims since then have been processed according to applicable state laws, rather than a standardized federal procedure.
The 2015 collapse of Corinthian Colleges, a major for-profit college chain, triggered a rush of borrower defense claims alleging fraud on the part of the institution. Indeed, many Corinthian students’ borrower defense claims are still in the pipeline. But contrary to perceptions, most former Corinthian students will not see major changes due to Judge Moss’ recent ruling.
Why? The Corinthian debacle galvanized the Obama administration to create a federal standard for borrower defense claims, which it published in 2016. However, changing the borrower defense standard on existing loans would amount to retroactively changing the contract between students, institutions, and the government, meaning that the new Obama standards only apply to loans issued after July 1, 2017.
Many observers criticized the Obama administration for drafting too broad a standard for borrower defense discharges, which might result in the cancellation of student debt from legitimate as well as fraudulent educations. Fearful of the taxpayer expense that could result from a wave of questionable borrower defense discharges, the Trump administration rewrote the Obama rule. While the rewrite was underway, the Department also delayed the effective date of the Obama regulations; Judge Moss ruled this delay unlawful after it was challenged in court.
The Trump administration’s proposed rewrite, released earlier this year, maintained a clear path to loan cancellation for defrauded students but included some basic precautions, such as requiring borrowers to show financial harm from their institution’s fraud. While the final version of the rule has not yet been published, in all likelihood the Trump standards will apply to loans issued after July 1, 2020.
Here’s what everyone’s missing about the recent court ruling on borrower defense: the more lenient Obama standards will indeed take effect, but they will only apply to loans issued between July 1, 2017 and July 1, 2020, after which point the Trump rules take effect.
The Department will continue to adjudicate borrower defense claims for loans issued before 2017—including the claims of all former Corinthian students—under applicable state laws, not Obama’s federal rules. And claims regarding loans issued after 2020 will fall under the stricter Trump standards. The court ruling does not affect those new standards, only the Trump administration’s delay of the Obama rules.
To be sure, the Obama version of the rule contained other provisions that will affect borrowers who took out loans before 2017. For instance, the rule creates a channel for borrowers to have their loan forgiveness applications considered as a group. But the actual standards by which the Department of Education judges claims of fraud will not change for pre-2017 borrowers. Thus, most borrowers who were ineligible for a borrower defense discharge before Judge Moss’ ruling will remain ineligible afterwards.
The number one outcome of this court ruling will probably be confusion. Students who borrowed before 2017 will have their loan relief applications judged according to one set of standards, those who borrowed between 2017 and 2020 will face another standard, and those who borrow after 2020 will have to deal with yet a third standard. As with most current events, the truth about borrower defense is more complicated and less interesting than headlines suggest.