Debt relief is now harder for students of for-profit colleges

Debt relief is now harder for students of for-profit colleges
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For-profit colleges are accused of deceiving students across the nation and leaving them with a legacy of student debt. Predatory schools allegedly targeted veterans for their GI benefits and also set their sights on lower-income communities and communities of color.

Now, new, controversial rules will make it more difficult for deceived student borrowers to get relief from their loans. The rules went into effect Wednesday (July 1), after President TrumpDonald John TrumpMark Kelly clinches Democratic Senate nod in Arizona Trump camp considering White House South Lawn for convention speech: reports Longtime Rep. Lacy Clay defeated in Missouri Democratic primary MORE — ignoring veterans and consumer groups — vetoed a resolution that would have stopped them.

More than 300,000 student borrowers have applied to the Department of Education for loan relief. based on school misconduct. The collapse of large chains of for-profit schools such as Corinthian CollegesITT, and the Art Institutes have highlighted allegations of false job placement statistics, misleading accreditation claims, deceptive claims about financial aid, and costs of attendance, and more.

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After years of wrangling, in late 2018 a court-ordered into effect rules the Obama administration had drafted to help deceived borrowers. But by that time, the department, now led by Secretary Betsy DeVosElizabeth (Betsy) Dee DeVosThe Hill's Coronavirus Report: GoDaddy CEO Aman Bhutani says DC policymakers need to do more to support ventures and 'solo-preneurs'; Federal unemployment benefits expire as coronavirus deal-making deadlocks Democrats look to go on offense in debate over reopening schools Pence, DeVos visit North Carolina school to advocate reopening MORE, was far along in drafting new rules. 

The DeVos rules make it harder for borrowers to get relief in many ways. One critical change is that the department can no longer handle similar claims in batches, for example providing relief to everyone who entered a program after the school lied about employment statistics. Now each individual borrower is on their own.

Moreover, those individual borrowers now must prove that the school made misrepresentation with the knowledge that it was false or with reckless disregard for the truth. An individual borrower usually will not be able to prove a school’s state of mind — the rules do not say how borrowers can get evidence on the point — so opponents of the new rules have aptly described them as imposing a “near-impossible” standard of proof. 

Although a pending lawsuit challenges the rules, its prospects are uncertain. With the Education Department abdicating its responsibility to protect student borrowers from fraud and deception, it is time to think about consumer bankruptcy as another avenue for relief. 

Despite a perception that it is impossible to escape student loans in bankruptcy, studies have found that 40-60 percent of borrowers who actually seek to do so enjoy at least some success. The main obstacle for the other 40-60 percent is the requirement, unique to student loans, that the borrower show “undue hardship” to get a discharge.

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In evaluating undue hardship, courts typically look to factors such as the debtor’s age, health, and family responsibilities, as well as the repayment efforts the debtor has already made. By contrast, courts almost never consider whether the borrower was tricked into taking out the loan in the first place.

It is not entirely clear why this is so. Perhaps it is because courts developed their tests for undue hardship before enrollment at for-profit schools took off. For-profits reportedly have accounted for over 98 percent of higher education fraud complaints.

It is now time for a change. Bankruptcy courts should start to consider whether the school deceived the borrower into enrolling. Dictionaries tell us that the word “undue” means unjustifiably great. As between two borrowers, each of whom will suffer equally in trying to repay student loans, the one who was deceived has a stronger claim that hardship is “undue.”

The federal government makes most student loans, and it might be argued that the government is not responsible for schools’ misconduct. But since 1976, private consumer lenders have been responsible for sellers’ deception if the seller refers the buyer to the lender. Schools do more than “refer” students to federal student loans; they run the entire process of originating the loans under the department’s supervision.

Chapter 7 bankruptcy can affect credit scores, cause social stigma, and require the sale of the debtor’s property. It will not be an attractive option for all victimized borrowers. 

However, many deceived borrowers must be in such financial distress that bankruptcy makes sense. Courts can apply bankruptcy law to offer a greater chance of relief than the DeVos rules do. And most importantly, bankruptcy courts can provide relief even if the political process in Washington, D.C is stalled.

Student loans are a source of rising anger and frustration, and loans arising from fraud are among the most infuriating. Bankruptcy courts must step in to help where the education department has failed.

John Patrick Hunt is a professor at the University of California, Davis, School of Law. His recent research focuses on student loans and bankruptcy.