The Department of Education’s broadened borrower defense to repayment rule, recently released in its final form, looks likely as ever to do far more harm than good. Despite widespread concern that the department’s move was a dangerous “overreach” with collateral consequences, the expansion will proceed largely unchecked.
The update expands on a 1995 department rule that allowed federal borrowers to sue for student loan forgiveness but left the claims up to state law. What was a narrowly applicable solution to a rare problem came to seem, in the wake of the Corinthian College closures, the best way to weaponize the department against for-profit colleges: The initial push to expand borrower defense swiftly followed concerns that the department had not done enough for those enrolled in Corinthian classes cut short by the closure.
Come July, when the new rule takes effect, the Department of Education will get to decide what constitutes a “misleading misrepresentation” on the part of any postsecondary institution that accepts federal money. Based on a student’s claim—or any event or report that pricks the department’s curiosity enough to kick off a federal fact finding mission—a college can easily come under costly suspicion.
More easily than most imagine, according to lawyer Katherine Lee Carey with Cooley LLP. She’s watched the department’s rule making process in order to prepare postsecondary institutions for its consequences. Traditional colleges—private or public, not for profit, four year schools—may become victims of their own complacency, she said. They looked at the rule’s progress and then at each other for reassurance that they can’t possibly mean us. Among traditional colleges, Carey told me, “There’s this sense that ‘our students won’t make claims,’ that ‘our students are happy.'”
“We don’t do any of those things,” Carey described a too-common boiling frog mindset, “we don’t breach our contracts with students, and we don’t misrepresent anything.” But their confidence does not change the fact that the Department of Education has the discretion to form an investigative body to follow up on its own suspicions, regardless of claims made by students.
The broadened rule targets for-profit schools, as intended—but the “risk is there for every institution in the country, every Title IV direct loan participating institution anywhere.” Carey described a hypothetical scenario, that seemed eerily imminent in light of recent scrutiny over law schools’ reported placement data.
“If the department’s fact-finding process concludes that all of the students from a given year should have been told something and weren’t, and they’re going to forgive all of those students loans,” she explained, “then the next step is that they’re going to come [to the college in question] and say, ‘Okay, we forgave all these loans, and now you owe us 12 million dollars.'”
For some small scrupulous schools running on shoestring budgets such a risk was too great to ignore. Presidents, trustees and advocates of historically black colleges and universities appealed to the department in July, pointing out that the rule’s financial triggers for investigation would force them to raise tuition. The measure their letter cited as most threatening has been all but removed from the final rule.
Other opponents however made far less headway. Taxpayer advocacy groups, Americans for Tax Reform and American Commitment among others, used the Office of Management and Budget’s cost estimate for broadened borrower defense—somewhere between two and 43 billion dollars, OMB estimated—to argue that the new rule is a partisan priority recklessly pushed through with unknown cost to American taxpayers, a 70 percent majority of whom don’t have a college degree.
Now that the final rule’s on the federal record, it’s too late for the independent review these groups requested. In truth, this is the outcome taxpayer-defenders expected, American Commitment’s Phil Kerpen confessed.
The adverse consequences of the rule, its uncertain cost and underestimated risk to colleges, are such that, “If this were not a political priority of the administration, there’s no way it would have even got this far,” he said.
