On July 31, 2018, the U.S. Department of Education published a Notice of Proposed Rulemaking describing its new policy for borrower defense and student debt. In the following letter, submitted in response to the department’s request for comment, senior fellow Robert Shireman outlines just three of the many ways that the new guidelines deviate from the Higher Education Act’s original intentions, and how they fail to adequately protect students from predatory behavior.
You can also read comments on the notice by TCF senior fellow Jen Mishory, senior policy associate Tariq Habash, and contributor Sean Marvin.
Thank you for the opportunity to comment on the department’s Notice of Proposed Rulemaking on borrower defense and related issues. The proposed rule is replete with errors and logical flaws, and colored throughout by a disturbingly cynical attitude about students, along with a naively charitable view of school owners and investors. Given the extremely short timeline for responding, I am not commenting on all of the issues but instead focusing on three topics: the proposal’s onerous standard of harm and proof, the proposal’s embrace of an “informed choice” fantasy, and the department’s irrational fear of unjustified claims.
1. The proposal’s onerous standard of harm and proof is not consistent with the statute, nor with legislative intent.
The Higher Education Act provides for the collection of payments on direct loans to be halted in the event of “acts or omissions by an institution of higher education.” In its NPRM, the department proposes to equate “acts or omissions” with, essentially, intentional outright fraud. Further, the department has indicated that it is considering requiring a “clear and convincing” standard of proof for that intentional fraud rather than a “preponderance of the evidence” standard. (I am assuming that the department is dropping its ill-advised and counterproductive idea to require borrowers to default on their loans in order to be eligible for a borrower defense claim).
The requirement to provide outright fraud, as if borrowers should be helped only when someone at a school was sent to jail, is completely at odds with the statute, its history, and its concerns about cost to schools.
A. The language of the HEA is not consistent with limiting relief to outright intentional fraud.
If Congress had intended the secretary to cease collecting loans only when schools committed outright, intentional fraud, then the language of the statutory provision would have declared precisely that. For example, in section 438(c) of the Higher Education Act, Congress required discharge when loans were “falsely certified” by the school or “falsely certified as a result of a crime of identity theft.” If Congress had intended for the “acts or omissions” to be limited only to purposeful fraud, then Congress would have followed the 438(c) approach and said that loans should not be collected in cases in which the institution of higher education was found to intentionally defraud the student. But instead Congress used the much broader terms, “acts or omissions,” that are broader than false statements with proven intent.
The terms “acts or omissions” are much more consistent with the unfairness standard employed by most state UDAP laws (unfair and deceptive acts and practices, as referenced by the department) and the current definition of misrepresentation in 34 CFR 668.71.
B. Congress was concerned about borrowers abused in ways far beyond proven intentional fraud.
In the years immediately prior to the 1992 and 1993 amendments to the Higher Education Act, the U.S. Senate Permanent Subcommittee on Investigations conducted an investigation and a series of hearings on abuses in the federal student loan program. The final report, adopted unanimously, found that “unscrupulous, inept, and dishonest elements” of the student loan system had left “hundreds of thousands of students with little or no training, no jobs, and significant debts that they cannot possibly repay.” The subcommittee’s use of the terms “unscrupulous, inept, and dishonest” goes well beyond intentional fraud to include clever and cunning, and even clumsy, efforts to take advantage of students.
Likewise, the subcommittee’s recommendation that may have led to the borrower defense provision uses the broad term “abuse,” not just fraud:
The Department of Education must develop ways to assist those students who continue to be victimized by fraud and abuse within the GSLP. Because the Department’s oversight systems have failed, students who have not received the education promised have been left responsible for loans that they cannot repay and, therefore, on which they all too often default. The Department must not only increase efforts to prevent this type of abuse in the future, but also work with students to ease financial burdens imposed as a result of past abuse. [Emphasis added.]
If the subcommittee had been concerned only about intentional fraud, it would have said as much. Further, in making loans, the subcommittee asserted that lenders have a duty that goes far beyond avoiding outright lies:
Congress should require participating lenders to exert due diligence in the making of a guaranteed student loan.There is no reason why, as is currently the case, a bank should be allowed to originate a guaranteed student loan without the same reasonable care and prudence it would exercise in originating its own consumer loans. In the event that loans are found to have been made in violation of this requirement, the Department should not pay claims on those loans.[Emphasis added.]
The ranking Republican on the subcommittee, Senator William Roth, complained of schools that had “substituted marketing schemes for real education, for the specific purpose of conning unsuspecting students.” The federal loans “seem to have provided an opportunity for a fast buck to be made by the sharp-shooters.” He called for federal action to “insure that the young are not merely being taken, from the standpoint of a loan, but are receiving a worthwhile education.” The final report echoed that theme, speaking of poor quality education and “unscrupulous” schemes, not merely bald-faced intentional lies:
Unquestionably, the guaranteed student loan program has vastly expanded accessibility to education for those Americans who seek it. The value of accessibility, however, depends on what it is that one is being given access to. On that point, the Subcommittee found that the program has failed, particularly in the area of proprietary schools, to insure that federal dollars are providing quality, and not merely quantity, in education.
As a result, many of the program’s intended beneficiaries—hundreds of thousands of young people, many of whom come from backgrounds with already limited opportunities—have suffered further because of their involvement with the GSLP. Victimized by unscrupulous profiteers and their fraudulent schools, students have received neither the training nor the skills they hoped to acquire and, instead, have been left burdened with debts they cannot repay.
Likewise, the American taxpayer has suffered, both in terms of footing the bill for billions of dollars of losses in defaulted loans and the ultimate cost of the program’s failure to provide the skilled labor force our Nation needs in the increasingly competitive global marketplace. Conversely, while students and taxpayers have paid dearly, unscrupulous school owners, accrediting bodies, lenders, loan servicers, guaranty agencies, and secondary market organizations have profited handsomely, and in some cases, unconscionably.
The legislative history clearly supports an approach to borrower defense complaints that compensates borrowers for a wide ranges of unfair and abusive practices that go beyond outright purposeful lies, and a standard of evidence that gives the borrowers the benefit of the doubt.
C. The department’s arguments about costs to taxpayers or schools do not hold water.
The department brings up various cost arguments to support exceedingly narrow standards that will deny compensation to deserving borrowers. The arguments don’t make sense.
The department expresses a concern about schools having to close, unfairly, as a result of borrower defense claims. But the 2016 rule did not automatically require schools to pay claims that had been paid to students, so that worry is unfounded. The two processes, of compensating students and seeking reimbursement from schools, are related but not linked.
The department asserts that paying borrower defense claims as envisioned in the 2016 rule could “create an existential threat” to the federal loan program. Yet the 2016 rule calculated the projected costs, and it was not an existential threat. Furthermore, the legislative history actually supports the contrary position: failure to respond adequately to abuses by schools could undermine the loan program. The Senate Permanent Subcommittee on Investigations concluded: “in its present state, the GSLP’s credibility has been severely eroded and the program is faced with the prospect of drastic action that could significantly reduce its size or even result in its being eliminated entirely.”
Creating disincentives for schools to misbehave is clearly consistent with legislative intent, and would reduce taxpayer costs. Clearly it is possible for schools to behave in ways that do not cause borrowers to feel that they were cheated. After all, a majority of for-profit schools and nearly all nonprofit and public schools have few if any borrower defense complaints. Yet while paying lip service to the concept of prevention, the proposed rule’s exceedingly narrow standards would actually be giant step backwards, a fact that the department admits that the drop in claims would come from process changes imposed on borrowers rather than from changed institutional behavior.
2. The department’s “informed choice” notion does not withstand even basic analysis.
The department says that its approach to borrower defense is to rely on a stronger offense: prospective students avoiding institutions and programs that are overselling, or overcharging, or are a poor fit for their backgrounds. This theme, that wiser shoppers will make everything better, undergirds the entire NPRM and emerges explicitly in several places. The department declares that its goal with the NPRM “is to enable students to make informed decisions on the front end of college enrollment.” The department implies that the fraud complaints it has received are not the fault of the schools, but instead the fault of borrowers who “regret the choices they made.” And the department lectures that students should, when enrolling or taking a loan, “be sure they have explored their options carefully and weighed the available information to make an informed choice.”
As will be explained below, the department’s notion that borrower complaints of fraud are the result of poor shopping, and that information will cure the problem:
- is not adequately explained or described;
- has been rejected by previous research and analysis; and,
- is not supported by the structure, text, or legislative history of the Higher Education Act.
A. The omniscient shopper concept is not adequately explained or described.
The purpose of the financial aid programs in Title IV of the Higher Education Act of 1965 is to bring to needy students the “benefits” of postsecondary education. The department posits that the route to these benefits is for prospective students, prior to enrollment, to “be sure they have explored their options carefully and weighed the available information to make an informed choice.”
If the department is going to rely on this theory it must be more specific about what it means and how it is supposed to work. At a minimum, the department must choose some examples from the more than 130,000 borrowers who have filed fraud complaints and explain:
- In the specific circumstance, what is the “available information” to which the department is referring in the NPRM?
- What other sources of information was the student relying on, such as personal interactions with recruiters, advertisements or other sources?
- In the cited example, what is the right way for the prospective student to “weigh” the information? What does “informed choice” actually look like?
- What role did the school play in promoting a different weighting than the department’s recommended weighting?
If the department cannot provide actual examples with actual information, the department is not in a position to assert that “accurate and complete information” should be the underlying goal of these regulations.
B. The omniscient shopper theory has been rejected by previous research and analysis.
Education exhibits a type of market failure that a seminal article in the Yale Law Journal called “contract failure.” When it is difficult to evaluate the quality of a promised or provided product or service, the provider can too easily overcharge or deliver inferior goods. The department seems to be under the impression that the market failure can be addressed by piling “information” onto consumers. But that won’t work: much of the information is not of the type that can be divined or commanded by a central authority for listing on a fact sheet. For example:
- Can the student trust a school official’s insistence that a program is a good fit for the student’s skills and interests?
- Is the recruiter steering a prospect to a particular program because the recruiter genuinely believes it is a good program, or because it is a low-cost program for the school to deliver?
- To what extent is the recruiter exaggerating the value of “flexibility” or “convenience” of an online curriculum in order to get the student to enroll, rather than because online learning would be right for that student?
- How will the actual background and attentiveness of instructors next year, or three years from now, compare to the impression given in the sales stage?
- How much turnover will there be in instructors? Will the school expand enrollment without commensurate increases in similarly qualified faculty?
- Will the school be sold to new owners who have different priorities?
- Will the school steer funds away from student support and into profit or recruitment?
- Will the school lower its admissions standards, reducing academic expectations and the peer learning value of the curriculum, and potentially undermining the transfer value of earned units?
- In terms of getting jobs, what level of assistance will the placement center provide in the future, after the student has left?
The questions above illustrate why it is so easy to take unfair advantage of consumers in markets like education: the product that is being purchased cannot really be inspected in the ways that one would inspect a toaster, car, or refrigerator.
Because education is a future-oriented service that is difficult for non-experts to evaluate in the present, data and disclosures provide little effective guidance to consumers. A randomized trial that included presentations and information packets on labor market returns by degree program, for example, found that they were “unlikely to have a major impact on the overall allocation of students into post-secondary programs.” Research on high school students using the College Scorecard found that high school students had difficulty understanding the terminology, often did not interpret loan repayment rates or default rates as reflecting on the college, and were not convinced that averages were applicable to them.
C. The omniscient shopper theory is not supported by the structure, text, or legislative history of the HEA.
In enacting the Higher Education Act of 1965, Congress declared that the purpose of the financial aid programs in Title IV is to provide the recipients of federal aid with “the benefits” of higher education. If Congress had intended for the accountability mechanism to primarily come from student choices, then Congress would have included only minimal provisions for institutional accountability. But far from operating like a transportation voucher or food stamps, Congress included numerous provisions that recognized that students could easily be taken advantage of by providers more interested in the money than in the education. Those provisions included:
- limiting institutional eligibility to public and other nonprofit institutions;
- requiring accreditation by an agency recognize by the secretary;
- requiring state authorization of the institution; and
- requiring state and nonprofit intermediaries to share the cost of defaults and play the lead role in judging appropriate costs and risks.
After the HEA’s first decade, a rise in defaults led the Nixon administration to create an interagency committee to examine the problem and propose solutions. Consistent with the original drafters, they found that because education creates hazards not found in typical consumer markets, and that federal aid magnifies those hazards, federal government has a heightened responsibility to protect students and borrowers and to compensate them for harm. Due the “inexperience” of a potential college student, the committee found,
coupled with the expensive and intangible nature of the services he is purchasing, and in light of the potential for consumer abuse in “future service contracts” used by most schools, the educational consumer not only has responsibilities, but also has important “consumer rights.” When these rights are not respected, the student should be protected and should have redress mechanisms available to him.
The committee recommended that “Federal agencies should relinquish any rights they may have as ‘a holder in due course’ of student loan obligations if a student has established a legitimate claim of unfair or misleading practices.”
The committee did not blame students for poor shopping practices, but instead recognized that institutions and the government have a role in helping students avoid poor-value programs. Further, the committee clearly saw the problem as institutions engaging in not just fraud but in “unfair” practices. The HEW secretary at the time, Caspar Weinberger, emphasized in his memoir that the federal funding made federal action necessary. Schools that were heavily reliant on federal loans, he observed, had too strong an incentive to dilute their academic standards and use “exaggerated claims” to enroll students who carried the federal money with them:
[T]he potential for abuse resulting from the rapid increase in the level of federal funds flowing to institutions of higher education . . . required HEW to assume responsibility for administering their operation at a level of detail that in other circumstances would have been entirely inappropriate.
3. The fear of many frivolous claims is unfounded and wrong-headed.
The proposed regulations pursue a number of policy changes based on an unsubstantiated concern that they will receive large numbers of frivolous claims. But the department’s fear of frivolous claims is not supported by existing research on rates of complaints from dissatisfied consumers; ignores good-government practices followed by peer agencies like the Department of Veteran Affairs; and does not reflect the overarching goals of the Higher Education Act.
One of the department’s stated reasons for denying borrowers the right to submit affirmative claims is that the policy “could potentially create improper incentives for borrowers with unsubstantiated allegations against schools to seek loan discharges.” The words “could potentially” were necessary because, as the department acknowledges, it was unable to find any data to support its claim.
Research indicates that the number of consumers who have legitimate reasons to file claims or return a product is far higher than the number who actually file the necessary paperwork. And studies indicate that dissatisfaction rates are three to four times higher than the number of complaints to the seller indicate. Complaints to manufacturers, which might be more comparable to the department in the present case, are estimated at only five percent of the consumers who had a right to seek redress.
Moreover, far from warning about the existence of welcoming complaint policies, the available evidence, from both research and practice, strongly indicates that a robust and responsive complaint mechanism promotes a healthier marketplace and is good practice for both business and government:
Limited action on the part of consumers may mask marketplace problems in need of attention which could and should be corrected. . . Further, widespread failure to express complaints limits the usefulness of complaint data as indicators of marketplace performance and areas in need of public policy actions and as prepurchase information.
[T]he percent of dissatisfied individuals who complain is discouraging because it: (a) prevents the consumer from rectifying an unpleasant purchase experience, (b) limits firm exposure to marketplace problems, and (c) precludes effective policy-making on the basis of complaint data.
The interagency committee formed by the Nixon administration also emphasized the value of a system for taking and handling complaints, recommending that a “central mechanism on educational consumer complaints” be created that would both ensure that complaints are addressed and would serve as “an ‘early warning system’ against educational abuses.”
The Department of Veterans Affairs approach to veterans complaints relating to the GI Bill follows the expert recommendations. The agency has a robust and welcoming complaint system, with broad criteria for issues veterans can raise. The agency categorizes the complaints and provides the data, by school, online. For example, it shows that Ashford University has thirty-five complaints, and that thirteen of them include concerns about recruiting and marketing practices. The VA’s approach makes sense. After all, most people are not experts on what claims may qualify for various types of relief. Indeed, low-income students often blame themselves for failure when in fact the school was at fault. The department is in a much better position to sort out rights and responsibilities, and has access to other students’ complaints that may suggest patterns and practices that is not evident to a single student or borrower.
Finally, it is worth repeating that the purpose of Title IV is to encourage Americans to enroll in college, and for them to receive the benefits of the education. The research on lenient product return policies in the retail product space indicates that they increase the number of returns, but important for our financial aid purposes, they also increase sales. If the goal is to promote college access and success—which is the goal of Title IV—then a mean-spirited policy like the one being proposed by the department is counterproductive.
The NPRM is erroneous and poorly reasoned in so many ways that I advise the department to withdraw it and allow for the full implementation of the 2016 borrower defense rule.
The Century Foundation