Proposed student loan forgiveness rule would leave universities, taxpayers on the hook for billions

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In response to pressure from the Obama administration, the Department of Education proposed an amendment to the regulation governing debt relief for federal student loans. The proposed amendment could have a severe economic impact, with the Department of Education estimating that the new regulation could cost taxpayers up to $43 billion over the next 10 years.

The current regulation was introduced to protect students from being victimized by colleges or universities. The regulation provided borrowers who had been deceived by schools an opportunity to avoid repaying their student loans. In its amended form, however, the regulation’s language is so vague that there is a real danger of it being interpreted too broadly, leaving colleges and universities vulnerable to meritless claims.

{mosads}The proposed rule would make schools responsible for repaying the loans of their students if the institution is found to have made a “substantial misrepresentation.” This overly broad phrase is defined as a “statement” or “omission” with a “likelihood or tendency to mislead under the circumstances.”

In contrast, the legal definition of fraud is narrow. Fraud exists when a person with the “intent to deceive” causes financial harm.  The new rule extends far beyond that.

The proposed rule’s substantial misrepresentation provision does not require intentional misconduct by the school. This omission could cause academic institutions to face claims brought by former students who feel entitled to certain job prospects or salary expectations. If, for example, a statistic such as the average salary of alumni is skewed by an outlier, the school may be liable for students’ loans.

Schools would also have little chance to defend themselves. Instead, judgments will be passed down unilaterally by an non-independent arbiter from within the Department of Education—a department recently criticized by the Government Accountability Office for irresponsibly spending billions of stimulus dollars.

Now, the proposed regulation will grant the Department of Education the power to adjudicate claims regarding the more than $100 billion worth of student loans issued each year and much of the $1.2 trillion in outstanding student loans. As academic institutions will not have the right to an appeal, there is little legal recourse should the Department of Education reach an improper conclusion.

Even worse, taxpayers will be on the hook for more than just the student loans. By exposing publicly-funded academic institutions to nonstop litigation, the new rule will put taxpayers directly on the hook for the astronomical legal fees that will result.

The Senate Health, Education, Labor and Pensions Committee aptly described the situation by stating, “Students have been hurt, but the department [of education] is establishing a precedent that puts taxpayers on the hook for what a college may have done.”

But taxpayers won’t be the only ones left hurting. Increasing student debt discharges and the resulting recovery efforts could lead our nation’s colleges and universities into financial ruin. They simply won’t be able to overcome being held liable for student loans the Department of Education forgives.

Given the potentially enormous economic impact of the proposed rule, it is essential that the Department of Education redraft the rule to avoid undue financial risk to colleges, universities, and taxpayers. The proposed rule should be narrowly tailored to only apply to schools that intentionally misrepresented themselves, as this would meet the rule’s original objective. Even then, loan forgiveness hearings should be handled by an independent arbiter within the civil justice system, rather than a Department of Education insider, to provide for a fair and unbiased hearing.


Stephanie Downey is a Young Voices Advocate and a J.D. candidate at the University of North Carolina School of Law.

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