Obama Plan Eyes Debt Relief for Defrauded Students

June 15, 2016
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In this April 28, 2015 photo, students wait outside Everest College in Industry, Calif., hoping to get their transcriptions and information on loan forgiveness and transferring credits to other schools. Thousands of students are asking the federal government to discharge their college loan debt, asserting that their school either closed or lied to them about job prospects. (AP Photo/Christine Armario)

Students who have been defrauded by their colleges will have a clearer path toward debt forgiveness and legal recourse under a set of education reforms to be issued by the Obama administration on Thursday.

The proposed rule, drafted by the Department of Education and aimed at for-profit colleges, would allow borrowers to have their federal student loans forgiven in cases of fraud. It would also bar any university that accepts federal student loan dollars from forcing students into mandatory arbitration agreements. These agreements are common across the for-profit college industry, and have been widely criticized as a way to strong-arm students into settling claims against their school out of court.

The regulation would also bring increased transparency to what the administration describes as “predatory institutions.” Colleges experiencing financial distress or facing major consumer lawsuits would be required to prove their solvency to the Department of Education. “Financially risky” schools would also be obligated to warn its students if alumni are struggling to repay their loans.

The proposal comes more than a year after the for-profit chain, Corinthian Colleges, closed its doors following a federal investigation that found widespread “misrepresentation of job placement rates” to students. Roughly 16,000 students were left in limbo after it collapsed.

“We won’t sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag,” Secretary of Education John B. King Jr. said in a statement announcing the plan. “All students who are defrauded deserve an efficient, transparent, and fair path to the relief they are owed, and the schools should be held responsible for their actions.”

The rules are the latest in string of measures by the Obama administration designed to crack down on the for-profit college industry, which has come under fire from critics who say it leaves graduates with inadequate training, meager job prospects and mounting loan payments.

In 2015, the Education Department instituted the “gainful employment” rule, which requires colleges to track their graduates’ success in the workforce and cuts funding to poor-performing programs. That came after the administration repealed loopholes enabling colleges to incentivize recruitment over program quality. 

But the closing of institutions like Corinthian has accelerated calls for more of a focus on loan forgiveness. According to Inside Higher Ed, nearly 100 for-profit colleges ceased operation between 2012 and 2015. By comparison, an average of five nonprofit intuitions closed annually during that time.

Many of those students are now seeking loan assistance. As The Chronicle of Higher Education reported, in the time since Corinthian’s collapse, more than 23,000 borrowers who attended Corinthian or other for-profit schools have filed so-called borrower-defense claims with the Education Department. As of late March, less than 10 percent of those borrowers have been granted forgiveness totaling $42.3 million.

The new proposal would clarify details in the borrower defense regulation, enabling more students to expunge their debt. But that’s only for students who borrowed from the government — those who used private bank loans will likely still be on the hook for payments unless they successfully sue their school for damages.

After a 45-day period for public-comments, the administration plans to finalize the rules by November so they take effect in July 2017.

The plans have met quick resistance from the for-profit industry. Career Education Colleges and Universities, a trade group representing for-profit schools, released a statement this week warning that the rules neglect to crack down on poor-performing nonprofit institutions and would “cause millions of students to lose access to higher education.”

“We agree that poor performing institutions, as well as those institutions that are financially at risk, should be monitored closely to protect students,” said Steven Gunderson, the group’s CEO, in the statement. “But what the Department fails to acknowledge is that these issues exist across all of higher education, not just private sector institutions.”

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