Last week, the U.S. Department of Education under Secretary Betsy DeVos released a rule finalizing a rollback of key protections for student borrowers. This revised “borrower defense” regulation reverses many of the standards and protections finalized by the Obama administration in 2016 to help student borrowers discharge their loans if they were misled or defrauded by their schools. Instead, it engineers a new process that will render the protections almost useless and that will reduce debt relief for borrowers by an estimated $11 billion over the next ten years.
A Comprehensive Rollback
In the rule, the Department of Education seems to throw almost every procedural roadblock possible to prevent students from receiving a discharge of their loan debt after they have been misled or defrauded by schools. In doing so, the department guts what was once a significant protection against fraud or deceptive behavior, leaving borrowers out in the cold and giving schools a pass to continue to behave in predatory behavior. The department’s own words say it best: “Overall, we expect that the changes in the final regulations that will reduce the anticipated number of borrower defense applications are related more to changes in the process, not due to changes in the type of conduct on the part of an institution that would result in a successful defense.”
In doing so, the department guts what was once a significant protection against fraud or deceptive behavior, leaving borrowers out in the cold and giving schools a pass to continue to behave in predatory behavior.
So what does it take to strip students of billions of dollars in debt relief? The department’s rule removes the existing automatic process to cancel debt for people whose schools suddenly closed on them—an increasingly common occurrence amongst poor performing institutions. It also ends the group discharge system, in which the department could move forward in processing groups of loan discharges for students who all faced similar misrepresentations, basing the decision on an unsubstantiated claim that students could then lose access to their transcripts—while also reducing from six years to three years the time allotted to students for bringing a borrower defense claim. And it makes the standards to prove misrepresentation much more difficult to meet, requiring borrowers to show that the institution made misleading statements knowingly or with reckless disregard for the truth; that employment struggles are due to misleading claims by the institution and not other causes; and that financial harm suffered by the borrower was due to misrepresentations and not other factors, such as poor job performance or health issues.
The department did back away from pursuing two particularly draconian ideas that were contained in its initial proposed regulation: it removed the requirement that students be in default before bringing a borrower defense claim, and it also abandoned its initial attempt to end debt discharges for students that attended schools that close abruptly but were offered “teach-out” plans. However, these modest concessions do little to salve rollbacks that abandon defrauded students.
Mandatory Pre-Dispute Arbitration Agreements and Class Action Waivers
The Department of Education in its new rule also took the opportunity to eliminate other consumer protections, allowing institutions to force students into signing pre-dispute arbitration agreements as well as class action waivers as requirements for enrollment. Research shows that borrowers are less successful in arbitration and obtain less relief. The department’s rule actually directly contradicts the Trump’s Department of Health and Human Services reasoning on a similar issue, which acknowledges the harm that such mandatory arbitration provisions can have for consumers.
The Department of Education in its new rule also took the opportunity to eliminate other consumer protections, allowing institutions to force students into signing pre-dispute arbitration agreements as well as class action waivers as requirements for enrollment.
Importantly, allowing schools to employ mandatory pre-dispute arbitration agreements and class action waivers also prevents the exposure of abusive patterns perpetrated by institutions. In 2016, the Department of Education stated that a core objective for the department in implementing the Direct Loan program is protecting the taxpayers’ investment. Specifically, their original rule prevented institutions accepting Direct Loans from protecting themselves from direct and effective accountability of misconduct, or “from deterring publicity that would prompt government oversight agencies to react, and from shifting the risk of loss for that misconduct to the taxpayer.” Arbitration agreements masks these behaviors, leading to higher future costs to the department in the long run—a connection made clear in cases like Corinthian Colleges and in the recent closure of Education Corporation of America. Yet, the final rule by DeVos’s Department of Education removes the ban, even while acknowledging the harm. The department explicitly states that removing the ban, combined with the removal of the reporting requirements around arbitration, “may extend the period that misrepresentation by institutions may go undetected, potentially exposing more borrowers and increasing taxpayer exposure to potential claims.”
The Department of Education defends its underlying theory for reversing student protections by relying on two lines of reasoning: that students will bring frivolous claims, and that a “borrower beware,” disclosure-based system will be enough to protect consumers. Yet the department does not make any sort of reasonable case for its fear of burdensome frivolous claims, or show why such a fear should outweigh the deep harm done by predatory schools that borrowers will now face. And while the department previously stated that the borrower defense claims are solely the fault of the students who “regret the choices they made”—a line of reasoning it continues to take in the final rule—the department also does not provide support to show that this “knowledgeable shopper” system will actually protect students (previous research would disprove such a claim), or that the theory is supported by the structure, text, or legislative history of the Higher Education Act (it’s not). Such claims would be unsupportable, which is why we have—or, in this case, had—systematic protections in place for students looking to better their lives and forced to take out debt in order to do so.