In its final year, the Obama administration is ramping up efforts to impose regulatory expansions affecting large swaths of the economy. The next target: higher education. The administration is poised to create a college tuition death spiral—and students and taxpayers will pay the price.
The Department of Education has proposed a rule to amend the “borrower defense to repayment regulation,” which will allow current and former students to file claims for loan forgiveness if their school made a “substantial misrepresentation” about its credentials.
Originally implemented in 1994, the regulation aims to provide protections against colleges that defraud students. In its amended form, it will be broadly expanded, with the type of impossibly vague language that trial lawyers love to exploit. It promises to leave schools vulnerable to countless claims—including, for the first time, class action law suits—that previously would not have given cause for action. Simple errors could now enable students to throw their debt obligation back at their schools, which would doubtless pass that lost revenue on to future students in the form of higher tuition.
The rule will dramatically expand the scope of current law, but one scenario is most troubling. According to the proposal, when a college makes a “substantial misrepresentation” to its students, they may sue.
“Substantial misrepresentation” sounds like “fraud”, but “fraud,” in legalese, is generally defined narrowly as “intent to deceive” that results in financial harm. For example, in 2011, Arthur Fisher was imprisoned for fraud after he and his wife created a fictitious construction company to charge Vassar College for bogus services. That’s fraud.
Campus fraud should be combatted, but the administration’s broad attack will lead to serious liability concerns for colleges. The proposed new language defines “substantial misrepresentation” as a “statement” or “omission” with a “likelihood or tendency to mislead under the circumstances.” For lawyers that make money from suing people, the broadness of “likelihood” and “tendency” are legal gifts for funding their vacation houses and retirement accounts.
That isn’t just my conclusion and forecast, all government estimates have concluded that this proposal would have a negative economic impact. The Office of Management and Budget calls the economic impact “significant” and the Department of Education estimates it will cost between $2 billion and $42 billion (!) over the next 10 years.
The clear problem is increased liability translates to increased costs. Increased costs mean that colleges will need to increase tuitions. Increased tuition means that student aid will need to increase, and that taxpayers and the government will be on the hook for even more money—all to create more billable hours for the lawyers exploiting these newly minted loopholes.
Furthermore, increased college tuition will mean fewer people will go to school because of the increased costs (and the students shut out will not be children from the top 1 percent).
The Obama administration continues to strong-arm rules and push policies that create havoc in economic markets that it doesn’t understand. This time even the department proposing the rule has admitted the financially devastating effect of its own proposal. The government agency charged with scoring regulations has identified this one as expensive. And shark lawyers are circling the waters.
While the stated goal is a good one—to punish bad actors who deceive students and parents—the obvious outcomes of this overly vague proposal are bad: even higher costs, fewer students achieving a college degree, and endless legal hassles for educators.
Maybe it is the Obama administration that is “substantially misrepresenting” itself on this issue?
Charles Sauer is president of the Market Institute.
