This week marks the one-year anniversary of the debt strike initiated by 15 former students at Corinthian, a predatory chain of for-profit colleges that lied about job placement to lure borrowers. Now thousands have joined the cause, refusing to repay hundreds of millions of dollars in student loans on the grounds that they were fraudulently issued.
Corinthian is now out of business, and the Consumer Financial Protection Bureau secured a judgment in federal court that the company illegally issued loans to students. But though former Education Secretary Arne Duncan and his cohorts have promised that student victims would receive “every penny of debt relief” they deserved, the Education Department is trying to push through a new rule that would make it exceedingly difficult for borrowers to receive justice.
At issue is the “defense to repayment” clause inserted in all student loan contracts since 1994, which gives defrauded borrowers the opportunity to challenge their loans. In its first 21 years of existence, only five students even attempted to use it. But activists dusted off defense to repayment after Corinthian engaged in a widespread scheme to overpromise students a worthwhile education, sign them up for multiple loans without their knowledge, and pump out useless diplomas that could not possibly deliver debt-ridden borrowers the jobs and careers they were assured.
The Education Department vowed to forgive federal loans for Corinthian students last June. But since then, it has made the loan forgiveness process unnecessarily burdensome, forcing the majority of students to individually re-prove the fraud rather than using its authority to provide blanket relief. The department made defense to repayment applications hard to use, required detailed and often impossible-to-retrieve information, added an additional layer of bureaucracy by appointing a Special Master to review claims, and generally delayed the process to prevent having to immediately forgive billions of dollars.
As of December, the only defense to repayment borrowers receiving relief were 1,312 Heald College attendees who benefited from an official Education Department finding of misleading career placement rates. This represents just 1 percent of all for-profit students eligible for relief. Thousands of other applications have not been approved.
Because the Education Department never specified the steps to assert defense to repayment, it initiated a negotiated rulemaking last October to formalize the process for future borrowers, even while Corinthian students and others filed forms and demanded relief. This week, the department issued a draft proposal to guide a second negotiation session.
“There are a number of really important problems with the draft,” said Toby Merrill, Director of the Project on Predatory Student Lending at the Legal Services Center of Harvard Law School. She highlighted four key areas.
First, instead of all the causes of action that would trigger defense to repayment, the draft limits them to two: “breach of contract” and “substantial misrepresentation.” Most loan contracts leave the causes of action more open-ended, rather than narrowing the definition and excluding standard benchmarks like abusive, unfair or unlawful conduct. “It’s really surprising and deeply problematic when borrowers suffer a violation of their rights and aren’t allowed to raise that as a defense,” Merrill said.
Second, the proposed language adds a two-year statute of limitations for raising a defense. The Education Department can continue to collect on these loans until the borrower dies, but the borrower must assert fraud within two years, shorter than any current state statute for these types of claims, and in many cases before they would even enter into repayment on the loans.
Third, the draft excludes Parent PLUS and Family Federal Education Loans where the parent is the borrower, even if the loans were sold in the same fraudulent manner.
Finally, the proposal sets up an adversarial proceeding — specifically, “a fact-finding process established by the Secretary” — between the student and their school, if it’s still open. “This is a dramatic mismatch of resources, sophistication and access to facts and records,” Merrill said. And the Education Department, which has a financial stake in keeping that loan payable, as well as a reputational stake since it accredits the school as eligible for federal loans, would sit in judgment of the two sides.
In short, the language narrows borrower defenses and tilts toward the colleges, protecting the Education Department from having to deliver widespread debt cancellation. Merrill concluded, “From a lawyer’s point of view, it’s hard to imagine that a borrower could really prevail.”
Student activists and legal aid counselors descended on Washington this week to object to the draft proposal in the negotiation session. Dozens of students testified to the lies and deceptions from their for-profit colleges, with several adding that they still receive harassing debt collection calls daily. One, identified only as Paul, ripped up his degree in front of the meeting. “This is a $52,000 piece of paper not worth putting in a birdcage,” he said. Representatives from the for-profit industry attended the session as well, but chose not to testify in public.
The negotiated rulemaking does give stakeholders a voice at the table, but ultimately the Education Department can set the agenda by drafting the language, and if no consensus is reached among all negotiators (including industry representatives), the Department is not bound to follow any of the negotiating committee's dictates. So while the students fighting the proposal “are not powerless, nor are they terribly powerful,” said Merrill.
Various federal agencies have tried to look tough on for-profit colleges recently, with lawsuits and cash settlements for misleading students. But the settlement with a company called EDMC, which operates several school brands, didn’t force the admission of wrongdoing, which would have helped students assert defense to repayment. And despite the legal actions, the Education Department continues to supply billions in profits to EDMC, DeVry and other colleges by allowing them to participate in the federal student loan system.
This is just another example of the Obama administration disappointing defrauded students. The fact that investors with close ties to the president and the Education Department just bought the University of Phoenix suggests that they know for-profit colleges are relatively safe to pursue their business model of tricking students for profit. Meanwhile, borrowers get the run-around, if not worse: U.S. Marshals arrested Paul Aker last week (on a four-year-old warrant) for not paying his student loans.
The Corinthian debt strikers, who also met with Special Master Joseph Smith this week, have persevered in the face of shameful conduct by the agency charged with looking out for them. As negotiations continue, the Education Department has a choice to make: respect the debt strikers’ cause for justice, or ignore them in favor of corporate criminals.