On Friday, the U.S. Department of Education announced final regulations to protect federal student loan borrowers and taxpayers against closures and misconduct by predatory schools like we saw with the now closed Corinthian Colleges. The regulations, most of which are scheduled to go into effect July 1, 2017, include significant amendments to the rules governing borrower defenses to repayment of federal loans based on school misconduct and discharges for students who could not graduate due to their school’s closure, as well as important new restrictions on abusive mandatory arbitration clauses that schools have used to silence complaints and keep students’ claims out of court. Below we discuss the likely impact of some of the key provisions on borrowers who have been harmed by school misconduct.
Borrower Defense to Repayment
The new regulations create a much-needed—and long-overdue—process for borrowers who have been taken advantage of through illegal conduct by predatory schools to get the loan relief they are entitled to under the Higher Education Act. Although the final rules do not contain a number of the protections NCLC and others pushed for to improve accountability and access to relief for the borrowers who need it most, they do provide more clarity about how borrowers can get loan relief in situations of school misconduct. Specifically, they set out in broad terms how borrowers can apply individually for relief, how the Department may pursue groupwide relief for groups of borrowers who attended the same school, and what process and standards the Department will apply in considering borrowers’ eligibility for and the amount of relief. Downsides to the rule include that the bases for relief are relatively narrow compared to what is available under many state consumer protection laws, that the Department will apply time limits to restrict refunds to borrowers who have already paid down some of their debt, and that the amount of relief to students found to have been defrauded will be dependent on the Department’s discretion.
What we’ll be watching now is implementation. In particular, the rules leave to the Department’s discretion whether and when to pursue providing relief to groups of students who attended the same school based on findings of widespread fraud by the school. While NCLC has long pushed for a group relief process and welcomes the inclusion of a group process in the rule, this group relief provision will only have an impact if the Department commits to using its authority to investigate widespread fraud and provide group relief. If the Department does not make this commitment, the rules will do little to ensure that borrowers receive the relief they are legally entitled to. Experience has shown that the vast majority of students who are defrauded do not know about their right to student loan discharge or the evidence showing the fraud, and will not navigate the process for attaining relief on their own. In fact, less than one third of Corinthian borrowers who are presumptively eligible for relief under the Department’s streamlined process have applied to have their loans canceled. Even worse, as Senator Warren recently highlighted in her letter to the Department, many of these borrowers are losing their social security benefits, having a portion of their wages taken every month, and losing tax refunds – including their Earned Income Tax Credits (EITC) to pay for a debt that is likely invalid.
The Department in fact already has discretion to provide automatic, group-wide relief to borrowers who were subject to the same fraudulent conduct—including those the Department has found were misled by Corinthian’s advertised false job placement numbers. The Department has yet to use this discretion. We reiterate our call that the Department halt collection of these Corinthian borrowers’ federal student loans and discharge the debts.
Additionally, as indicated in the first report on work of the new Borrower Defense Unit, the Department is applying time limits to curtail claims for relief by borrowers the Department has found were defrauded. It is outrageous that the Department would penalize these borrowers for not submitting their borrower defense claims sooner, when they couldn’t submit sooner because the Department has only now created a submission process 20 years after the right to the borrower defense was established. If the Department finds that borrowers with outstanding loans were defrauded, and is only now accepting applications for relief, it should not limit relief based on how long it took to set up a process for applying for relief. The Department should reconsider the fairness of that approach and the efficiency of researching the statute of limitations applicable to every claim and defense in every state, and to instead exercise its authority to simply provide full relief to borrowers it finds were defrauded.
Protecting Students’ Right to Go to Court
Importantly, the rules also bar schools that rely on federal tax dollars from shutting off student access to the courthouse through forced arbitration clauses. This is a big win for student loan borrowers, who have been unfairly stopped from raising their claims against predatory schools due to the arbitration clauses that most for-profit schools slip into their student enrollment agreements. (In contrast, public and non-profit schools rarely require their students to waive their right to go to court). It is also a win for future students and for taxpayers. As NCLC has explained in urging the Department and other government actors to bar these clauses, forced arbitration silences legitimate complaints about illegal conduct, forcing complaints into secretive arbitration systems or suppressing cases before they’re even filed. By bringing these complaints into the open and allowing students to band together in asserting classwide claims, we expect school misconduct will be made public much earlier on—helping prospective students and the government to decide whether a school deserves their dollars.
Critically, the final arbitration rules close major loopholes that NCLC and other consumer advocates identified in the proposed rules, by barring use of any pre-dispute arbitration agreements to bar students from accessing the courts, even if signing the arbitration terms is not a formal “condition of enrollment” or contains a so-called “opt-out” provision. These were loopholes that threatened to swallow the rule, and we commend the Department for closing them. The arbitration ban should help ensure that schools that rely on federal tax dollars cannot gag student complaints or bar students from vindicating their rights in court.
Improved Relief for Students Whose Schools Closed on Them
Students who took out federal loans but could not complete their degree because their school closed will also get important relief under these rules and other announcements made by the Department on Friday. First, the new rules provide for automatic loan discharge if students do not re-enroll at another school within three years of the school closure. NCLC, along other legal services advocates, successfully pushed the Department to add closed school discharges to the rulemaking agenda, and we applaud the Department for adopting our suggestion to make closed school discharges automatic for eligible borrowers. While the Department did not adopt all of the changes we recommended, including making the discharge automatic after one instead of three years, this change will nonetheless have a real impact on borrowers harmed by the increasing number of for-profit schools that are closing.
The Department plans to implement this provision as soon as possible. Automatic closed school discharge relief will apply to eligible students who attended Corinthian and the many other schools that have closed since November 2013, including ITT. There are thousands, if not tens of thousands, of students entitled to discharge of their federal student loans because their school closed on them, and this rule will help ensure they get this relief.
Second, the Department announced that it plans to restore Pell Grant eligibility to students who attended closed schools. Students are limited to 12 semesters of Pell Grants, and so borrowers who attended a school for 3 years and used 6 semesters of Pell Grants before the school closed would otherwise not have access to Pell Grants for their full college education if they chose to discharge their debts and start over again on a four-year degree at a quality school. Although students whose schools close on them will never get back all the time they invested in the school, this will ensure that they can at least get back their student aid to start anew.
Restoring Pell Grant eligibility to students harmed by closed schools is an important step in the right direction. Regrettably, the Department failed to restore Pell eligibility to borrowers found harmed by other school misconduct, including those with valid claims to a borrower defense to repayment or to discharge based on their school’s false certification of eligibility for financial aid.