New rules proposed by the Obama administration to expand federal student loan forgiveness for borrowers at schools that defrauded or misled students have been suspended by the U.S. Department of Education, pending further review. One such rule, the “Borrower Defense to Repayment” rule, would permit the Department to discharge student loans, thereby relieving the student of any obligation to repay the loan, if the borrower can demonstrate that there was a substantial misrepresentation by the school and that the borrower reasonably relied on that misrepresentation when deciding whether to attend, or keep attending, the school.
This action will not affect student borrowers who currently have claims being processed under the current Borrower Defense to Repayment Rule, which has been in effect since the 1990’s although little used. The collapse of the for-profit Corinthian Colleges in 2014 prompted hundreds of claims by student borrowers who incurred substantial student loan debt but received no degree. The proposed new rule is an attempt by the Obama administration to make these students, and students in similar situations, whole.
This action is consistent with recommendations in a recent Florida TaxWatch research report. Despite the good intentions of the rule to go after institutions that are defrauding students, Florida TaxWatch is concerned that the broadness of the rule would encourage student borrowers to abuse the system, even where no fraud existed. TaxWatch recommended the rule be amended to make sure it is fair to both the student borrowers seeking debt relief and the institutions from which relief is sought. This will require the rule to be amended to ensure that it is financially risky institutions and institutions that are attempting to defraud students that are penalized; ensure that actions against institutions be limited to cases where there is clear evidence of intent to defraud; and establish an appeals process.
Student loan debt is a significant and growing problem for the millions of college graduates who are in danger of defaulting each year. Nationwide, approximately 40 million loans totaling more than $1 trillion are guaranteed or held by the federal government. Almost seven in 10 seniors (68 percent) who graduated from public and nonprofit colleges in 2015 had student loan debt, with an average of $30,100 per borrower.
Frivolous claims filed under the overly broad rule would cost Florida taxpayers significantly. TaxWatch estimated that the financial liability to Florida taxpayers would be substantial. Based upon the Department’s estimates of financial impacts, the financial liability to Florida taxpayers could be as little as $131.36 million over the next decade or as much as $2.81 billion. Every one percent of student debt discharged by the Department under this rule would cost Florida taxpayers an additional $10.92 million.
Eighteen states and the District of Columbia have filed lawsuits in response to the Department’s decision to delay implementation of the new rule, alleging the Department violated federal law in suspending the new rule without soliciting or receiving input from stakeholders or the public, and that the suspension harmed students who are entitled to relief.