The Biden administration released a proposal that will make it easier for students who claim they were defrauded by for-profit colleges to get their federal student loans forgiven, moving to reverse Trump administration limits.
The proposal would update the borrower defense to repayment regulation, a rule initiated by the Obama administration, that has allowed hundreds of thousands of students who attended for-profit colleges to obtain relief if the government determines that schools misled them about job prospects or otherwise committed fraud.
In a separate move, the administration also plans to expand loan forgiveness for students entering public-service professions and seeks to limit accrued interest on some borrowers’ loans.
The proposals are the Biden administration’s latest steps to ease student debt burdens through a series of moves that so far has resulted in around $26 billion in forgiven loans. The administration also is considering a broader debt cancellation that could affect millions more borrowers.
The updated borrower defense rule would change the criteria for forgiveness in a number of ways opposed by for-profit schools, such as extending time limits for submitting claims and making it easier for borrowers to show evidence of fraud and by creating a group-claims process in which borrowers with similar experiences of being misled by a school could team up to allege they were defrauded.
In addition, the rule would allow borrowers to stake their claims for relief on determinations made by state attorneys general rather than just the Education Department. It seeks to limit the use of arbitration as a way of resolving borrower claims by prohibiting colleges from requiring borrowers to sign mandatory pre-dispute arbitration agreements or class-action waivers.
“These proposed regulations will protect borrowers and save them time, money, and frustration, and will hold their colleges responsible for wrongdoing,” said Education Secretary
Progressive Democrats and borrower advocates have been largely supportive of President Biden’s efforts to revamp and revive the borrower defense program, which was largely mothballed during the Trump administration. Congressional Republicans have decried Mr. Biden’s increased use of debt-forgiveness programs, casting it as a bribe to primarily Democratic constituencies ahead of the 2022 midterms.
For-profit colleges raised concerns during the rule-making process that the administration could make it too easy to apply for and obtain loan forgiveness, potentially damaging the schools’ reputations and forcing some schools to close.
“For students who allege that they have been defrauded, there should be a careful and deliberative process for considering and resolving their claims,” said
the head of Career Education Colleges and Universities, an association of for-profit schools. “[T]he Department intends to use the rule-making process to discharge federal student loans en masse while hurting unfavored institutions and their students in the process.”
As part of the rule-making process, the department convened a committee of so-called stakeholders—parties with interests in the outcome, including schools, borrowers and state attorneys general—to negotiate the details of the proposal before it is released for public comment. The group was unable to reach consensus, allowing the Education Department to draft its own rule.
The proposal release is behind schedule—most stakeholders expected it to come out earlier in the spring. Under the arcane calendar provisions of the Higher Education Act, the department must issue final rules no later than Nov. 1 for the rules to become effective by July 1, 2023. The department said it would aim to finish by that deadline. If they don’t, the regulation wouldn’t go into effect until July 1, 2024, at the earliest.
Meanwhile, stakeholders will have a 30-day comment period, after which the department must review suggestions and decide what to incorporate into a final rule.
In addition to the borrower defense proposal, the Education Department also released a planned regulation to revamp the Public Service Loan Forgiveness program, which was created by Congress in 2007 to encourage students to enter professions such as teaching, nursing and public-interest law.
A waiver instituted last year was intended to make it easier for more public-service workers to qualify for debt relief, after few got relief in the previous format of the Public Service Loan Forgiveness program. Since then, the department has approved $8.1 billion in relief for 145,000 borrowers. The new rule would build on those changes, which allow more types of payments and deferred payments to count toward ultimate forgiveness.
The rule proposal also tries to tackle the issue of interest capitalization, by which interest compounds on interest that has accrued to the loan and balances for some borrowers balloon. The new rule would remove interest capitalization where it isn’t required by law.
The Biden administration borrower defense proposal would amount to a reversal of the Trump administration’s tightening of the rules it inherited from the Obama administration. The Obama-era rules were in part drafted to forgive the debt of borrowers who attended schools that the administration accused of deceptive marketing, including the defunct for-profit chain Corinthian Colleges.
Trump officials said the Obama-era rules were too broad and vague and threatened to drive up the taxpayer costs of covering canceled debt. The Trump administration denied more than 100,000 borrower defense claims in 2020, and borrowers whose claims were approved were often granted partial rather than full debt forgiveness.
Still, the Biden administration has turned the tool into the workhorse of its piecemeal student debt forgiveness agenda. As of early June, the administration had forgiven $7.9 billion for 690,000 borrowers through borrower defense and a related tool for students whose schools close while they are enrolled or shortly thereafter. The Education Department also reached a landmark settlement with more than 200,000 students who said they were defrauded, mostly by for-profit colleges, paving the way for the immediate cancellation of around $6 billion in student loans.
The $7.9 billion figure includes the single largest student debt cancellation action ever, when in June the administration canceled all $5.8 billion in outstanding federal loans held by 560,000 former Corinthian students.
Implementation of the new rule will be closely watched by borrowers and their advocates, who have repeatedly sued the Education Department over delayed relief, even for borrowers whose claims were accepted.
The rule proposal comes as Mr. Biden continues to weigh his options for dealing with the politically fraught issue of mass debt cancellation. Around 40 million borrowers hold $1.6 trillion in federal student debt. Mr. Biden is considering canceling $10,000 for all borrowers under a to-be-determined income threshold around $125,000.
Payments and interest on federal student loans are paused until Aug. 31, after a half-dozen extensions of a pandemic-era policy by the Trump and Biden administrations.
Write to Gabriel T. Rubin at [email protected]
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