Stupid Government Solutions: College Debt Edition
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A proposed Education Department rule governing student loan forgiveness is subjective and vague, critics say, and could lead to a rush of litigation for many colleges — both for-profit and nonprofit — and cost students and taxpayers billions.

The rule is aimed at making it easier for students to get their debt erased because of alleged “misrepresentations” of a college’s performance in such areas as graduation rates and job placement. It was written largely a response to the collapse of Corinthian Colleges — a for-profit school sued by former students in 2015 who said they had been defrauded.

The new 530-page draft regulation, set to go into effect next year, would establish a much broader definition of misrepresentation as it relates to student loan forgiveness that could encompass innocent mistakes and accurate but overhyped claims of success by colleges and universities.

“The new standard for ‘substantial misrepresentation’ looks to me to be extremely broad, allowing government officials to hand out severe punishments, at their discretion, to colleges even for small and innocent mistakes in what college officials say publicly,” Patrick Wolf, a professor in the University of Arkansas Department of Education Reform, told Watchdog.org. “This rule would change the risk environment for colleges and universities dramatically.”

Wolf and others say the Education Department proposal is an overreaction.

“There is an old saying that outlier cases make for bad law,” Wolf said. “The Department of Education should continue their process of redressing the harm caused by Corinthian, but not punish the entire for-profit and nonprofit college sector for the transgressions of a single bad actor.”

As of June, of the 26,600 borrower defense claims filed with the U.S. Department of Education, 87 percent came from former Corinthian students.

Under rules in place since the mid-1990s, to receive the type of student loan forgiveness that would be afforded by the proposed rule, a debtor needs to prove fraud. While that standard applies in the Corinthian case, other instances that are less clear would likely be swept into the process under the proposed rule. Most vulnerable are smaller universities, both profit and nonprofit, with limited resources to take on the federal bureaucracy.

When the draft rule was released last month, Education Secretary John King Jr. said “the Obama administration won’t sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag.”

Others see it as a way for the Obama administration to put in place a massive student loan forgiveness program without going through Congress.

In any case, the proposed rule has created an unusual coalition.

Among those pushing back are conservative groups and GOP lawmakers such as Americans for Prosperity, Americans for Tax Reform and Heritage Action. Some traditionally black colleges, universities and groups have also voiced concern, including the UNCF, the Thurgood Marshall College Fund and the National Association for Equal Opportunity in Higher Education.

They say the proposed concept of misrepresentation could put their schools at risk of liability “for benign things like discontinuing a course after it was published in the course catalog.”

The rule has also sparked considerable public comment.

The National Association of College and University Business Officers (NACUBO), which represents more than 2,100 public and nonprofit colleges and universities, submitted a letter of comment to theDepartment of Education, which received more than 5,000 comments on the rule.

“The federal government’s rulemaking effort on borrower defense to repayment is vitally important, but we have grave concerns about the Department of Education’s expansion of institutional financial responsibility indicators within the proposed rule,” said John D. Walda, president and CEO of NACUBO.

“NACUBO is particularly concerned about the consequences for private nonprofit colleges and universities,” the association states in the comment letter. “The regulatory changes put forth by [the federal Department of Education] include inappropriate indicators — and generate consequences for institutions and students — that will not reliably address the deceptive, fraudulent practices that motivated this rulemaking effort.”

Six higher education associations signed the comment letter: The Association of Jesuit Colleges and Universities, the Coalition of Higher Education Assistance Organizations, the Council of Independent Colleges, the National Association of Independent Colleges and Universities, the National Association of Student Financial Aid Administrators, and UNCF.

One problem NACUBO sees with the potential rule is timing. If there is no provision about how long the Education Department can take to process a claim, students will be left in the lurch along with colleges and universities. Without a time frame for how long it takes to settle a claim, students could see interest accrue even if collections stall.

“Before submitting an application for defense to repayment, a borrower should know how long — at a maximum — it should take Education Department to reach a decision,” NACUBO wrote, and urged the department to establish a time frame for processing claims.

The Cooley law firm, a national firm that represents a number of colleges, told clients in a written notice that the proposal would “enormously broaden” the type of actions considered to be misleading and greatly increase liability by eliminating “the need to prove any intent on the part of the institution to deceive, replacing that with a ‘misleading under the circumstances’ standard.”

“The proposed rule also adds that ‘substantial misrepresentation’ includes any statement made by a representative of an institution that omits information in such a way as to make the statement false, erroneous or misleading,” Cooley warned clients. “While the proposed rule does require the borrower to prove that he or she relied on the misrepresentation to his or her detriment, the nature of what could be construed as the ‘false, erroneous or misleading’ statement — particularly where no intention to mislead is required to be shown — is so broad as to challenge reasonable interpretation.”

Jonathan Butcher, education director at the Goldwater Institute, told Watchdog.org the federal government tends to be heavy-handed while trying to solve problems of the scope of student loan debt, and the proposed student loan forgiveness rule is no exception.

“There needs to be protection for taxpayers and student borrowers, but because the feds have made this sector so dependent on federal intervention, it’s too unwieldy for any one entity to manage,” said Butcher. “They should give families and individuals more flexibility with their own money and savings so they can better prepare for a child’s college education. Expanding the uses of 529 college savings accounts would be a good place to start.”

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