The fight over student loan forgiveness has consumed most of the attention of the higher education policy world, and as a result, other policies are receiving much less attention than they should. One such neglected topic is borrower defense to repayment, which is a method of waiving repayment requirements for student loan borrowers who were misled by their college.
Borrower defense, as it is often called, was the topic of a recent Government Accountability Office (GAO) report. The report provides a useful summary of the law and regulatory changes over the years:
- Established by law in 1993, with regulations to implement released in 1995. Debt was waived based on each state’s standards of misconduct.
- 2016: New regulations abandoned the state standards and replaced it with a federal standard. To have debt waived, the college’s misconduct had to meet four criteria: misrepresentation, substantial (non-trivial misrepresentations), reliance (students relied on the misrepresentation), and detriment (students were harmed).
- 2019: New regulations allowed for claims based on misrepresentation and harm.
- 2022: New regulations loosened requirements and allowed for mass waivers, including automatic waivers.
In theory, these regulations should have given us some indication of how borrower defense has operated over the years. In reality, they are virtually meaningless due to a host of court cases. The 2016 regulations were postponed by the Trump administration until a judge ordered them to take effect in 2018. Courts have paused the 2022 regulations while their legality is determined. And most of the recent action that has taken place has occurred under a completely separate court settlement.
The settlement is a clear case of sue and settle, where progressive lawyers sue and then settle with a progressive administration that agrees to implement the progressive wish list without having to go through the normal regulatory process. This settlement is known as the Sweet v. Cardona Settlement, and it reads like a progressive wish list.
Outside of the settlement, the Department generally conducted investigations into each borrower’s defense claim individually, though when colleges had many claims, the investigations could rely on information found in previous cases—documented in the Common Findings Memo for that college. As a result, claims from about seven colleges were generally approved since past cases had demonstrated sufficient misconduct. The Sweet settlement turbocharged this list of colleges, expanding it by more than 20 times to include 151 colleges whose borrowers would have their debt automatically waived. Some of the 151 colleges objected to being put on this list, because it strongly implies that they have been found guilty of misconduct.
For claims from borrowers who didn’t attend those 151 colleges, the process is also nearly automatic because the Department is required to treat any claim on a borrower defense application as true without requiring any proof or conducting any investigation at all. As the report dryly notes, “Under the settlement, when reviewing these applications, Education must not require evidence outside of a written application, require proof of reliance, or apply any statute of limitations. Education must determine whether the application states a claim that, if presumed to be true, would assert a valid basis for borrower defense under the applicable regulation.” In other words, if a borrower states a college is guilty, the college is guilty. There is literally nothing that a college could do to prove its innocence.
There are two main lessons from all this.
First, there is no bipartisan agreement on what borrower defense should look like. Conservatives keep trying to treat it as a remedy for misconduct by colleges, which requires proof of misconduct by colleges, while progressives keep trying to treat it as a backdoor tool for student loan forgiveness and will accept just about any allegation of misconduct, especially claims against for-profit colleges. This will result in an unstable regulatory ping-pong every time a new administration takes office.
Second, the current process is completely unworkable even if there was a bipartisan compromise. I regard the Sweet settlement as a travesty. Yet, the judge who approved it, Judge Alsup, is a good judge who really wrestles with the facts of a case (e.g., rumor has it that he learned how to write code so that he could better understand a copyright case involving code). One of the reasons he likely approved the settlement was that without it, the claims backlog would have taken 25 years to clear. To reiterate, the standard student loan is paid back in 10 years, yet the borrower defense backlog was 25 years.
Given that borrower defense is both unstable, shifting dramatically with each new administration, and unworkable, the most reasonable path forward is to shut it down and rely on standard fraud court cases to provide protection for students and punishment for misconduct by colleges.
Image by Rogswell — Main Headquarters, Government Accountability Office — Flickr
I am outraged with for profit schools and how they target minority groups that really are not informed on the difference between real college degrees verses the non accredited for profit degrees. All these schools are a huge scam and should not get any funding through the Dept of Education. They should be held accountable for scamming these kids trying to better themselves with a college educations. They should be forced to explain in detail that future employers and companies will not recognize those degree’s as actual Bachelors Degrees. I’m apart for the Sweet Verses Cardona cases and will fight like hell to get all those loans discharged. I was a victim and am well informed on what I need to do to move forward and fight fight fight until all these BS schools get shut down permanently.
The irony of this is that the schools pushing back on this want it both ways. They cry foul over lack of “due process” when it comes to adjudicating these claims, but they want no hinderance whatsoever when it comes to accessing the federal loans. Where was the due process when they admitted anyone with a pulse, let them borrow as much as they wanted, rubber stamped students through classes without any rigor and ignored every warning sign that the students in question were not employable and/or would not gain any economic advantage with their degree, even if they could finish?
I will say in their defense that a substantial portion of this borrowing typically goes into the student’s pocket as “free” living expense money. It doesn’t all go to tuition and fees. It’s not clear they should be held accountable for that, but that’s a separate issue. It remains the case that most of the students in question are not employed in fields that are in any way related to their degree or earning anything near college wages. Something needs to be done to rein in reckless lending for useless degrees.
To reiterate, the standard student loan is paid back in 10 years, yet the borrower defense backlog was 25 years.
That itself is evidence of fraud existing — graduates with lucrative employment would have chosen to repay the loan so as to avoid the ruined credit rating and related consequences affecting not only the ability to borrow but rent an apartment, auto insurance rates, and employment.
If the backlog is 25 years, then we are talking people nearly 50 years old who have forgone all the benefits of good credit for all this time — I argue that is evidence that they aren’t making much money because they otherwise would have paid, the consequences of .not doing so being the loss of the middle class life.
… to shut it down and rely on standard fraud court cases to provide protection for students and punishment for misconduct by colleges.
1: I do not believe that this is possible — I know that one can’t discharge a student loan in bankruptcy (the traditional debtor defense), and I don’t believe that fraud can be used as a defense against collection.
2: Even if it can, absent a class action suit, the legal costs of doing so are prohibitive.
As a society we have established — for at least 60 years now — that shoddy goods is a defense against collection of a debt. I believe that every state has a vehicle “lemon” law, some offering more protection than others. Mortgage companies require title insurance to protect them from defective deeds, which would be a defense against collection. And we have a “holder in due course” rule to protect debtors from that sort of stuff.
Hence my take is the exact opposite — I’d like to see a bureaucratic process, clearly established and defined by law, where someone sold a bill of goods about the employment value of a Women Studies degree could hand the debt back to the college.
There’d be a lot less of these useless degrees if colleges knew that they would be on the hook for the loans paying for them And that would be a GOOD thing…
In fact, the “holder in due course” rule was established for exactly this sort of thing.
Company A would sell defective goods (e.g. furniture) on credit to a consumer and then sell that debt to Company B. Company B would then sue to collect the debt.
When the consumer raised the defective goods as a defense against repayment, Company B would point out that was a separate suit the consumer had against Company A (which hand now disappeared) and did not affect the legitimacy of the debt the consumer owed Company B.
The Holder in Due Course rule is that any defense which the consumer would have had against the initial company applies to whoever acquires the debt, even if the current holder hasn’t done anything wrong.
It’s not exactly the same thing as what was happening in the 1960s because the company selling the defective product was also issuing the credit, but it’s very close.
A student borrows money through the college for a worthless degree — and then the college is out of it with the student loan people collecting the debt. Well, shouldn’t the student have a holder in due course defense that the degree was worthless?
And the other thing that used to be true (and I believe still is) was that once a student defaulted on a student loan, the government wrote that off — and allowed private debt collectors to keep whatever they might be able to collect from the student. I always had a problem with that.
“Company B” in this case would be the US. Department of Education, and ultimately the US taxpayer, as the majority of all student loans are issued by the federal government. Any amounts cancelled or written off simply add to the deficit. The loan servicers are merely middlemen, who collect on behalf of the government. They do not own and have no ultimate stake in the loans, other than fees collected to service them.