Borrower-Defense Claims Could Be Paid by Colleges

The Education Department has big plans to make it easier for borrowers who attended predatory colleges to apply for relief of their student debt, and to hold the institutions accountable for their wrongdoing—and possibly make them repay the costs, too.

A set of newly proposed regulations released July 6 would create a new, separated process to review borrower-defense claims, the process to adjudicate wrongdoing by a college in order to get debt relief, and to determine whether the department will recoup the costs of the debt relief from a college, which were once both considered at the same time.

According to the department, this change would shorten the length of time for borrower-defense claims to be approved and would give the department the chance to “recover the costs to taxpayers” for loan discharges.

“The CEOs and the executives of these large education for-profit education companies walk away with tens of millions of dollars in their pockets for having run what ultimately becomes a scam school,” said Cody Hounanian, executive director of the Student Debt Crisis Center. “Individuals walk away from these companies incredibly wealthy themselves, and they face almost no responsibility for the harm caused under their watch.”

Although the department has always had the ability to recoup costs from colleges in borrower-defense cases, it has never successfully done so. This is partly because when predatory colleges close their doors and file for bankruptcy, the Education Department is left responsible to forgive the debts of borrowers with approved borrower-defense claims. Additionally, there has never been a formal process for recoupment put into the regulations.

The proposed regulations create that formal process, and many expect there will be a rise in opportunities for the department to seek recoupment of the costs of borrower-defense claims, because many more borrower-defense claims are being filed against colleges that are still open.

“This language would also help with making institutions know that they could be on the hook for the funds, and then being able to actually recoup it while they are still open is a big and really important shift on the accountability front,” said Michelle Dimino, senior policy adviser on education at the think tank Third Way.

For example, when the Education Department approved $5.8 billion in student debt to be automatically discharged to 560,000 former Corinthian Colleges students, a predatory for-profit college chain that closed in 2015, the department said that it could not recoup the funding without signatures from the executives on official documents.

Nicholas Kent, chief policy officer at Career Education Colleges and Universities, which represents for-profit institutions, said he is concerned that the new proposal does not offer colleges the same level of due process as borrowers.

“The department’s proposed process to recover liabilities from institutions is devoid of logic and lacks basic due process principles,” said Kent. The main concern from the perspective of for-profit colleges was the proposal by the department to split the borrower-defense claim review from the review of a potential recoupment of funding. “The bifurcation of the process of reviewing and approving borrower-defense applications from the recruitment process is being proposed in order to forgive student loans en masse with little to no evidence while abdicating the department’s responsibility of being a good steward with taxpayer dollars.” 

Under the split process, borrowers have multiple opportunities to have their claims re-evaluated and make several choices for standards of evidence.

Although Kent said there are sufficient standards for review under the recoupment process, the standards for colleges in the process to review claims of borrower defense are lacking, and many more protections are given to borrowers.

The proposed regulations give colleges more time to respond to claims of borrower defense, extending the current 60-day time frame to 90 days after the college is notified of the claim. Students can then respond to that claim, and if they are unhappy with the result of the claim, they can appeal the decision, a choice that colleges do not have.

Dimino, on the other hand, said that the new proposed regulations offer a more familiar review process that reflects other federal reviews, such as program liability review, for borrower defense.

“This is the first time where the process that they’re laying out is the same as procedures that are already in place elsewhere, for institutions,” said Dimino.

Recently, the department announced that it will forgive $6 billion for 200,000 borrowers who were involved in a class action lawsuit against the department for borrower-defense claims from nearly over 150 colleges. Many of the colleges involved in the settlement, which was reached in late June, are still open. Although the department has not stated if it will seek to recoup these funds, Kent said that some member schools listed in the case, which he would not name, are concerned because they were not even notified that there had been pending borrower-defense claims involving them.

“We are exploring all our opportunities for legal intervention at this point,” said Kent.

The department would have a six-year period to seek recoupment of funds for student loans that were discharged under borrower-defense claims against a school, applying to all loans disbursed after July 1, 2023, according to the new regulations. Therefore, the borrower-defense claims in the recent settlement would not apply to the newly proposed standards, if finalized by the Nov. 1 deadline.