New student debt rules trigger frenzy

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The Obama administration is moving ahead with a new regulation that could make it easier for students to seek forgiveness of their federal student loans.

The proposal is roiling the higher education industry, with the backlash particularly fierce among for-profit colleges that feel they are being singled out.

{mosads}Public interest groups have largely applauded the rule, but they are also upset with the Education Department and say the 530-page proposal released on June 13 does not go far enough in some cases.

The regulatory push has stirred a flurry of activity at the White House.

Representatives from 50 organizations — including the offices of 14 state attorneys general — had a total of 20 meetings about the proposal in late May and early June with White House and executive branch officials.

“There’s a sense of urgency here,” said Steve Gunderson, president and CEO of Career Education Colleges and Universities (CECU), the main trade group representing the for-profit education industry.

Gunderson said that his organization is meeting with both Democrats and Republicans on Capitol Hill and asking its member schools to file comments on the regulation.

“What we are going to do is put the rule in the context of the totality of the assault on the sector and reality of the impact,” he said. “The reality is, this regulation, as drafted, destroys the sector.”

Officials drafted the rules in the wake of the bankruptcy of Corinthian Colleges Inc., which ran for-profit colleges including Heald, Everest and WyoTech. The company misrepresented the success of its students in the job market after graduation and eventually shut its doors and filed for bankruptcy.

The ability to request loan forgiveness due to a school’s illegal action, called “borrower defense to repayment,” was already on the books. But the rules had rarely been used until the collapse of Corinthian, primarily because the process was so convoluted. The Obama administration ultimately agreed to discharge more than $171 million in loan debt owed by thousands of former Corinthian students.

Among other things, the new rules would clarify and strengthen the process under which students could have their debt erased if a college had misled or defrauded them.

“We won’t sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag,” said Education Secretary John King about the new rules. “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.”

Public interest advocates say the proposal still lacks needed elements, such as making it easier for students to have their debt discharged in full. Groups are also working to ensure that the regulations become a floor for enforcement so states with stricter requirements can enforce them.

CECU says the rules that would give students greater ability to sue universities for fraud are written too broadly, opening up the door to frivolous litigation.

Both for-profit and nonprofit groups in higher education are also concerned with more robust financial reporting standards, though the rules generally focus on the for-profit sector. Those institutions, the department says, are more likely to perform poorly on things like loan-repayment rates.

For example, if a for-profit school were to hit certain “triggers,” it would be required to set aside a letter of credit worth at least 10 percent of its annual federal aid revenue to help cover borrower defense claims. A trigger might include a lawsuit being filed against the school, among other factors.

For-profit universities can accept up to 90 percent of their funding from federal loans, an amount the Education Department says should be 85 percent.

The standards are intended to verify whether an institution is not in good financial health and might be on the brink of shutting down.

The proposal, however, would “penalize non-profit colleges and universities for circumstances that are unrelated to student outcomes and not indicative of potential risk to the federal government,” the National Association of College and University Business Officers argued in a notice to its members about the proposal.

The triggers aimed at ensuring financial health, the organization says, “are not comprehensive financial indicators and do not suggest that an institution is about to close precipitously.” 

In some cases, multiple letters of credit would be required, which higher education advocates say could, ironically, put schools in financial trouble.

Groups that support the rulemaking effort — including the Center for American Progress, Public Citizen, Americans for Financial Reform, the Debt Collective, and The Institute for College Access and Success — are concerned about protections for students.  

The proposal would pan forced arbitration and gag rules for students, for example, but would allow universities to have arbitration agreements in optional paperwork.

“When you consider who this rule is designed to target — schools who engage in fraud … predatory schools are going to use that loophole to maybe give students a contract that maybe says in the fine print, ‘This is an optional contract, you do not need to sign these to enroll,’ ” said Public Citizen’s Julie Murray.

In addition to making it easier for students to have their debt forgiven, the proposal also would give students the ability to have their loans discharged as a group, rather than having to apply individually. This makes it easier for borrowers to obtain relief from the Education Department if a wave of similar claims arises, such as in the event of a school shutting down unexpectedly.

Many advocates are still pushing for those debts to be forgiven in full.

The regulation’s development is playing out against the backdrop of the presidential election, where affordable education has become a major focus for Democrats and their presumptive nominee, Hillary Clinton.

Comments from interested parties are due by Aug. 1, and the Education Department is scheduled to release the final rules on Nov. 1, a week before Election Day. 

The date is also the standard deadline for the rules to be able to take effect within the next school year.

Last year, the department announced its intent revise the borrower defense rules and received more than 200 comments in response — primarily from students of for-profit colleges.

Advocates from all sides of the student loan and higher education sectors attempted to work with the Education Department during a negotiated rulemaking earlier this year, but they could not come to a consensus by the deadline.

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