What Our Partners Think of the New Student Loan Borrower Defense Rule

Today the Department of Education released its final regulations on protecting students and taxpayers from predatory institutions, and ensuring a process of loan forgiveness in cases of institutional misconduct. Here’s what some of our partners and other advocacy groups have to say about the final rule. Click through headlines for full releases.

Americans for Financial Reform (AFR):

Americans for Financial Reform welcomes the news that the Department of Education has finalized a rule that will prohibit the use of forced arbitration clauses at schools that receive federal financial aid, a practice that denies students the right to hold their school accountable in court when it breaks the law. We commend the Department for protecting students from these “ripoff clauses,” and for making this change happen prior to the end of the Administration. We are also encouraged that Corinthian students who were enrolled when the school closed (and those who withdrew on or after June 20, 2014) will be able to benefit from a streamlined closed school discharge process sooner. And we applaud today’s additional news the Department has announced that Pell Grant recipients who attended institutions that closed will have semesters of Pell Grant eligibility restored, following calls for this restoration from Senator Patty Murray and Representative Luke Messer.

However, AFR is disappointed that the borrower defense discharge portions of final rule remains largely unchanged from the proposal, despite suggestions for improvement from lawmakers, law enforcement, and advocates. The final rule establishes a new federal standard that may reduce borrower’s ability to pursue relief based on State law claims. While the final rule allows for non-default, contested judgments based on any State or Federal law to form the basis for a borrower defense claim, default judgements are rare, even in clear-cut cases like Corinthian: the judgements received by Consumer Financial Protection Bureau and the California state Attorney General in the Corinthian case have both been default judgements, as the school had gone bankrupt and did not continue its defense against the suit. The final rule also does not presume full relief for harmed borrowers, nor does it establish any formalized process for attorneys general and nonprofits to petition for group relief. We hope that as the Department moves forward to procedural guidance and to enforcement that it does everything possible to ensure that no defrauded borrower be left buried in debt from a school that broke the law, betrayed its students, and cheated taxpayers.

Today, the Department also provided new details about the number of former Corinthian students who’ve been approved for debt relief due to Corinthian’s lawbreaking using the existing borrower defense regulations. While we welcome the news that an additional 11,822 former Corinthian students who were victim to misrepresentations have now been approved for relief, this is just 12.5% of the entire universe of students who are eligible for relief due to the Department’s prior findings — leaving over 87% of those eligible for relief under the findings still buried in debt. The students approved for relief represent an even smaller fraction of the some 500,000 students who are estimated to have attended Corinthian historically.

Rather than spending the Administration’s time and resources adjudicating individual claims, conducting Facebook and servicing pilots, and sending to potentially eligible borrowers, we urge the Department to finally heed the calls that lawmakers, law enforcement and advocates alike have been making for years now, and automatically grant relief to all former Corinthian students.

Attorney and Higher Education Policy Advocate David Halperin:

“These new Obama administration rules, like the gainful employment rule, should have been even stronger in order to best protect students and taxpayers, but taken collectively, and given the improved law enforcement by federal and state agencies, it’s becoming much harder for for-profit colleges to engage in egregious abuses. However, many bad schools are still operating, and the public should continue to demand stronger action.”

The Century Foundation Policy Associate Tariq Habash:

“Today the U.S. Department of Education announced much-needed improvements in the process for providing relief to former students of colleges that failed to deliver on their promises. As a result, student loan borrowers who were the victims of fraud will have a clearer path to having those loans canceled so they can move on with their lives. The department is to be commended for lifting that burden, and for taking steps to seek compensation from the schools for the harm done to students and taxpayers…

“Additionally, under the new rules, any student with a federal loan cannot be subjected to fine print restrictive clauses with regard to a complaints that could lead to students’ loans being canceled. Further, the department has made it clear that schools must wait until a dispute arises before a resolution process is mutually agreed upon. These regulations send a clear message to all fraudulent institutions—you will no longer be able to hide your misrepresentations through private mandatory arbitration.”

Consumers Union Staff Attorney Suzanne Martindale:

“Hundreds of thousands of students have been harmed in recent years by predatory schools that have treated them as little more than dollar signs. Today’s action by the Department will help assist students get the relief they deserve and ensure schools are responsible for the cost of cancelled loans when they engage in fraud.”

“We urge the Department to use its full authority to swiftly resolve borrower defense claims, and to stop collections on students’ debts where the Department already has evidence that they were defrauded.”

Generation Progress Executive Director Maggie Thompson:

“This rule is an essential step forward for students who were defrauded by their schools. Students deceived by predatory schools will never get the time they spent at the institution back, but this rule gives them a path to be made at least partially whole by establishing a process for loan discharges.

The rule also takes important steps to protect taxpayers from fraudulent institutions. We applaud the Department for taking steps to ensure that schools, not taxpayers, will be on the hook to pay for loan discharges if they defraud students.

The rule includes excellent new protections for students and taxpayers, but does not guarantee them. There is more to be done to safeguard students from predatory institutions.  The rule does not provide a process for automatic group discharge of loans in cases of widespread fraud. The borrower defense program established in this rule grant the both the Secretary and the Department too much discretion in determining who gets relief, and how much. The Department must use this discretion to ensure students get the maximal amount of relief.

Only a small portion of students at Corinthian Colleges, where it has been found that fraud was widespread, have received a loan discharge.  While the Department has made progress in reaching out to borrowers to let them know about loan forgiveness, the example of Corinthian underscores the need for a process that does not put the burden on defrauded student to apply for relief.

The rule contained several other important provisions. We are glad to see the Department take strong action to ban any pre-dispute arbitration agreements by schools. The Department also took a forceful stand to reinstate Pell eligibility to students that attended a school which closed three or more years ago.”

The Institute for College Access and Success (TICAS) Executive Vice President Pauline Abernathy:

“The U.S. Department of Education’s announcement today includes huge wins for students and taxpayers. The final borrower defense and college accountability regulations make it much harder for schools that commit fraud to hide it, which will make it less likely that schools commit fraud in the first place. Schools receiving federal student aid will be severely limited in their ability to use pre-dispute arbitration clauses and class action waivers to evade accountability, as Corinthian College and ITT Technical Institutes did. The rules will help ensure that students at closed schools know their options and that their loans are automatically discharged if they do not continue their studies. Both students and taxpayers will be better protected because the riskiest schools will have to warn students and put money aside to help cover the cost if their students’ loans are discharged.

The rules also provide a pathway for automatically discharging the loans of groups of defrauded students instead of requiring individual applications. However, how many harmed borrowers will benefit from group discharges and refunds is unclear, since they remain at the Education Department’s discretion.

While the Department has made significant progress in reaching out to former Corinthian students and processing their borrower defense claims, still only a fraction has submitted applications. We urge the Department to use its existing authority to stop collections and discharge loans without requiring applications when it knows that borrowers were defrauded. The Department has evidence that groups of students were defrauded at many schools, including Corinthian Colleges, Marinello School of Beauty, ATI Career Training Center,Westwood College, Career Education Corporation schools, FastTrain College, MedTech College and Globe University and Minnesota School of Business. These students deserve relief without delay or unnecessary applications. Federal contractors should not be aggressively collecting on loans that the Department knows are eligible for discharge.

Today’s announcement also included welcome news for Pell Grant recipients who attended closed schools. We applaud the Department for restoring Pell Grant eligibility for students at schools that closed before they completed their studies, including the more than 28,000 Pell Grant recipients affected by the closures of ITT Technical Institutes and Corinthian Colleges. While nothing can give students back the time they spent at schools that closed, this action will help ensure they have access to Pell Grants to resume their education at a quality institution.

The Department’s action follows bipartisan calls from Senator Patty Murray and Representative Luke Messer to use its existing statutory authority to restore students’ eligibility for Pell Grants when a school suddenly closes. We urge Congress to similarly restore Pell Grant and GI Bill eligibility for students who attended schools that defrauded them or closed. Legislation introduced by Representative Bobby Scott and Senator Barbara Boxer would restore Pell Grant eligibility for any student who could have their federal student loans discharged because of school fraud. Bipartisan bills introduced by Senators Richard Blumenthal and Thom Tillis and Representatives Mark Takano and Chris Gibson would restore students’ eligibility for veterans benefits if a school closes.”

Public Citizen:

Julie Murray, attorney, Public Citizen’s Litigation Group
Today’s rule is a game-changer for many students who will finally have a realistic opportunity to have their day in court after being defrauded. This rule is well within the Department’s legal authority, and it’s smart economic policy. Too often, taxpayers are left holding the bag when students graduate from predatory colleges with worthless degrees and federal loans they cannot possibly repay. We look forward to working with the Department to implement this rule and to adopt further measures to strengthen students’ access to court.

Lisa Gilbert, director, Public Citizen’s Congress Watch division
Public Citizen applauds the Obama administration’s rule prohibiting these “rip-off” clauses in student contracts. For far too long, predatory schools have used fraud as a business model, and they’ve gotten away with it by shutting the courthouse doors to students and forcing those students into individual, secret arbitrations. The burden of making students whole for fraud should fall on the shoulders of schools that break the law, not vulnerable students or the public.

Connect With Us

Author Information