Proposed Changes in Borrower-Defense Rules Would Make It Tougher for Defrauded Students to Get Debt Relief

It may soon get much harder for students who have been defrauded by their colleges or universities to seek and receive relief from repaying their federal student loans.

The U.S. Department of Education on Wednesday released proposed regulations for student-loan forgiveness that many experts said would leave defrauded borrowers high and dry while making it easier for institutions to practice predatory behavior. The experts also said the rules would make it more difficult for students to get debt relief if their college or university closed abruptly.

The regulations, which are now open for 30 days of public comment, cover what’s known as “borrower defense,” a type of student-loan forgiveness granted to borrowers who were misled by their college or whose college broke certain laws.

The proposed new regulations mark a sharp departure from borrower-defense rules introduced in 2016 by the Obama administration after the collapse of the for-profit Corinthian Colleges Inc. In 2017, a month before the Obama rules were slated to take effect, the department delayed the regulations and announced plans to revise them.

The scope of the revision came as no surprise. Last year Betsy DeVos, the education secretary, said that under the previous rules, “all one had to do was raise his or her hands to be entitled to so-called free money.” The department said the goal of the new rules would be to “enable students to make informed decisions prior to college enrollment, rather than to rely on financial remedies after the fact when lost time cannot be recouped and new educational opportunities may be sparse.”

The new regulations are in line with the department’s previous efforts to deregulate higher education and give colleges more power.

The new rules would not only spell out how much relief is available to borrowers, but also narrow who is eligible for it and restrict the time window in which borrowers may apply for such relief. Under the new regulations, the budget for borrower-defense relief and loan forgiveness in the case of an abrupt institutional closure would drop by $12.7 billion next year.

In arguably the biggest change, students applying for borrower defense would need to prove that their college had knowingly misled them or had demonstrated “a reckless disregard for the truth,” according to an overview published by the department. Under the previous rule, borrowers were entitled to forgiveness regardless of the college’s intent. Experts said the shift could make it nearly impossible for students to succeed in a borrower-defense claim, particularly as the department rolls back efforts to investigate predatory behavior.

“The issue is that they’re simultaneously raising the bar and lowering their ability to collect evidence that would support that bar,” said Clare McCann, deputy director for federal higher-education policy at New America and a former policy adviser in the Education Department. “Borrowers are going to be asked to have some kind of evidence before they apply, and I think that just ultimately, if the department isn’t doing those investigations, it’s not clear to me how anyone would ever have evidence of intent.”

A ‘Victory of Due Process’

Students would also need to prove that they had been financially harmed by the college’s behavior, said Abby Shafroth, a staff attorney at the National Consumer Law Center. Even if students proved that they had enrolled in a program or had taken out a loan they would not have otherwise, that wouldn’t be considered enough, she said.

The proposal also says the department is considering limiting eligibility to students who are in default, or what is called a “defensive claim,” instead of letting any borrower in good standing on loan repayment apply. Borrowers would need to apply for borrower-defense relief during the short window of time in which they can protest collection proceedings such as wage garnishment, typically just a month or two, Shafroth said.

But many borrowers may not even know they’re eligible for borrower-defense relief until after that window has closed, and it would be difficult for them to seek timely legal help as well, Shafroth added.

McCann said the process to apply for such relief isn’t “nearly as strategic” as the proposal implies, so limiting relief to defensive claims could have unintended consequences.

“Do we want people to strategically default on their loans thinking that they’ll have a valid, narrower defense claim, and then learn later that they don’t have enough evidence to prove intent?” McCann said.

The proposed regulations also stipulate that borrowers would have to apply for relief individually. Under the 2016 rules, the federal government could grant relief to groups of students who had been misled by the same college or in the same way — which is how most borrower-defense relief has been granted, as in the case of the Corinthian students, Shafroth said. Under the new rules, relief would be calculated on a person-by-person basis, raising the possibility of an enormous backlog of cases, McCann said.

But Steve Gunderson, chief executive of Career Education Colleges and Universities, the for-profit sector’s main lobbying group, said in a written statement that the proposal would ensure just outcomes.

The proposed regulations also require the department to share the results of an investigation with a college, and lay out a process in which colleges may appeal the department’s findings. While Shafroth described that process as “strangely lopsided,” Gunderson hailed it as a “victory of due process.”

‘New Barriers’

Embedded in the nearly 450-page document are new regulations for borrowers seeking student-loan relief after a institution’s abrupt closure. The rules would jettison automatic forgiveness outlined in the 2016 rules, and make borrowers ineligible for relief if they choose not to follow the shuttered college’s teachout plan, Shafroth said.

Teachout plans vary widely by institution, she said, and may not be a good option for borrowers who would thereby be stuck with their loans.

Experts and higher-education advocacy groups largely said they regarded the proposed rules as a win for for-profit institutions and an assault on borrower’s rights in the face of predatory behavior.

“The department is nervous that colleges may have a large potential liability when they have lied to their students, and pretty much everything they’re doing would go pretty far to reduce that potential liability,” McCann said. “It takes the risk off of schools, but it doesn’t do anything for the students. The students kind of wind up on their own, left without options.”

James Kvaal, president of the Institute for College Access and Success, said in a written statement the rules would pose “new barriers” for students seeking relief, and would require “desperate borrowers to intentionally default — with all its negative consequences — before even seeking relief, forcing them to gamble on an unsympathetic bureaucracy.”

The attorney general of California, Xavier Becerra, said that the proposed rules would fail “to support the interests of our sons and daughters.”

Gunderson, however, said the rules would give protection for “all parties.”

The department is not required to heed any of the public comments it receives over the next 30 days, and it could simply impose the rules as written. Under Wednesday’s proposal, the rules are scheduled to take effect in July 2019.

Follow Claire Hansen on Twitter at @clairechansen, or email her at claire.hansen@chronicle.com.

Correction (7/26/2018, 10:20 a.m.): A previous version of this article stated that borrowers would need to prove that their college had knowingly misled them in order to qualify for relief. Defrauded students could also show that their college had demonstrated “a reckless disregard for the truth” in order to qualify, according to a department overview. The article has been updated to reflect this correction.

Clarification (7/25/2018, 5:38 p.m.): This article has been updated to clarify Abby Shafroth’s explanation of a provision of the proposal concerning a borrower’s need to demonstrate financial harm.