Last week, Rep. Virginia Foxx, chairwoman of the House Education and Workforce committee, released her proposal for the reauthorization of the Higher Education Act. Alongside sweeping changes to the student loan system, the 500-plus page PROSPER Act also tucks in a rewrite of existing “borrower defense” protections. The results are not good for people who were scammed into taking on debt: the proposal eliminates numerous consumer protections, effectively cutting many borrowers off from loan discharges that they deserve.
The ability of students to get loan discharges for college debt if their school had ripped them off has been subject to regulatory changes in recent years—as well dubious legal maneuvers by the Trump administration. In 2015–16, in the wake of the widespread closure of schools such as Corinthian and ITT Tech, the Department of Education issued new rules clarifying how to obtain debt relief after being scammed by a school through what’s called a “borrower defense” claim. The last time the department had spoken on the matter was 1994, when it added very little detail, and borrowers rarely used the provision.
For people defrauded by schools and looking to rebuild their lives, the PROSPER Act does not live up to its cheery name.
The final 2016 regulations clarified how the secretary of education could give more automatic relief to groups of borrowers facing similar circumstances, and ensured that she automatically discharged loans when a school closed and a student did not re-enroll within three years; they also adjusted financial “triggers” to help ensure schools maintain a strong enough financial position to avoid abruptly closing and leaving the department and taxpayers holding the bag for discharged debt. At the same time, the new regulations also added consumer protections, such as prohibiting class action bans and mandatory arbitration agreements in school enrollment contracts.
As soon as the Trump administration came into office, they tried to reverse course on student protections. First, they delayed implementation of the new regulations, a move that prompted a number of state attorneys general to sue the Department of Education, as it had provided an unconvincing argument as to why they needed to delay. Next, they started a regulatory rewrite process by pulling together a negotiated rulemaking panel, the first step required any time the Department of Education wishes to change Title IV regulations. In doing so, they have, bizarrely, almost entirely ignored the recently codified 2016 rules, pretending that only the previous barebones 1995 regulations exist.
Now, with Rep. Foxx’s proposal, House Republicans want a say. The PROSPER Act rewrites the underlying statute to incorporate one piece of the 2016 rules, a standard that gives borrowers a claim under the “borrower defense” provision if there is a judgment against a school, a breach of contract by the school, or a substantial misrepresentation that the borrower reasonably relied on. But it cuts out many of the currently codified provisions from 2016 designed to protect students and make the borrower defense provision a meaningful way to access relief. Among other things, the proposal:
- Ends the secretary of education’s ability to provide streamlined debt relief by automatically discharging loans for groups of borrowers facing similar circumstances, instead requiring individualized applications and a formal proceeding with an administrative judge. The proposal also ends the required automatic discharge of loans for certain eligible students who attend a school that closed after 2013. This will make it harder for borrowers to get debt relief if they don’t know about the “borrower defense” process, or don’t have the resources to navigate an individual claim.
- Reduces the statute of limitations for relief on amounts already paid by borrowers, from six years since the misrepresentation was discovered to three years from the misconduct itself—a far stricter standard.
- Ends the prohibition on college enrollment agreements that contain mandatory arbitration clauses, requirements to first run borrower defense claims through an internal process, or class action bans.
- Removes improvements to the rules on loan discharge on the basis of “false certification,” which is when a school falsely certifies a borrower’s eligibility for federal aid.
- Provides ambiguous guidance as to how someone with student debt could use the borrower defense process with any of the new types of “Federal One” loans created the bill.
- Removes the heightened financial standards required of schools that were intended to encourage schools to avoid risky financial behavior and to ensure they could cover liabilities.
Process matters, particularly for people with limited resources. By making the process more difficult, this bill would all but guarantee that many struggling, defrauded borrowers trying to piece their lives together will get lost in a time-intensive, confusing, potentially expensive system of obtaining relief. It is precisely these types of complications that resulted in the Department of Education to writing new regulations in the first place. For example, previous processes for closed-school discharges meant that the provision was rarely accessed by borrowers. And data show that the inclusion of mandatory arbitration clauses and class action bans meant that people were far less likely to obtain relief.
For people defrauded by schools and looking to rebuild their lives, the PROSPER Act does not live up to its cheery name.
Tags: student debt, student loans, Student protections, rulemaking
House Proposal Narrows Protections for Student Borrowers Cheated by Schools
Last week, Rep. Virginia Foxx, chairwoman of the House Education and Workforce committee, released her proposal for the reauthorization of the Higher Education Act. Alongside sweeping changes to the student loan system, the 500-plus page PROSPER Act also tucks in a rewrite of existing “borrower defense” protections. The results are not good for people who were scammed into taking on debt: the proposal eliminates numerous consumer protections, effectively cutting many borrowers off from loan discharges that they deserve.
The ability of students to get loan discharges for college debt if their school had ripped them off has been subject to regulatory changes in recent years—as well dubious legal maneuvers by the Trump administration. In 2015–16, in the wake of the widespread closure of schools such as Corinthian and ITT Tech, the Department of Education issued new rules clarifying how to obtain debt relief after being scammed by a school through what’s called a “borrower defense” claim. The last time the department had spoken on the matter was 1994, when it added very little detail, and borrowers rarely used the provision.
The final 2016 regulations clarified how the secretary of education could give more automatic relief to groups of borrowers facing similar circumstances, and ensured that she automatically discharged loans when a school closed and a student did not re-enroll within three years; they also adjusted financial “triggers” to help ensure schools maintain a strong enough financial position to avoid abruptly closing and leaving the department and taxpayers holding the bag for discharged debt. At the same time, the new regulations also added consumer protections, such as prohibiting class action bans and mandatory arbitration agreements in school enrollment contracts.
As soon as the Trump administration came into office, they tried to reverse course on student protections. First, they delayed implementation of the new regulations, a move that prompted a number of state attorneys general to sue the Department of Education, as it had provided an unconvincing argument as to why they needed to delay. Next, they started a regulatory rewrite process by pulling together a negotiated rulemaking panel, the first step required any time the Department of Education wishes to change Title IV regulations. In doing so, they have, bizarrely, almost entirely ignored the recently codified 2016 rules, pretending that only the previous barebones 1995 regulations exist.
Now, with Rep. Foxx’s proposal, House Republicans want a say. The PROSPER Act rewrites the underlying statute to incorporate one piece of the 2016 rules, a standard that gives borrowers a claim under the “borrower defense” provision if there is a judgment against a school, a breach of contract by the school, or a substantial misrepresentation that the borrower reasonably relied on. But it cuts out many of the currently codified provisions from 2016 designed to protect students and make the borrower defense provision a meaningful way to access relief. Among other things, the proposal:
Process matters, particularly for people with limited resources. By making the process more difficult, this bill would all but guarantee that many struggling, defrauded borrowers trying to piece their lives together will get lost in a time-intensive, confusing, potentially expensive system of obtaining relief. It is precisely these types of complications that resulted in the Department of Education to writing new regulations in the first place. For example, previous processes for closed-school discharges meant that the provision was rarely accessed by borrowers. And data show that the inclusion of mandatory arbitration clauses and class action bans meant that people were far less likely to obtain relief.
For people defrauded by schools and looking to rebuild their lives, the PROSPER Act does not live up to its cheery name.
Notes
Tags: student debt, student loans, Student protections, rulemaking