Personal Finance

DeVos proposal would slash student loan forgiveness

Key Points
  • The Trump administration's proposed re-write of an Obama-era regulation meant to help defrauded borrowers was met with fierce criticism from consumer advocates.
  • The new rule would result in much less student loan forgiveness. 
Monthly student loan payments can dictate when people have children and how much they'll retire with.
Pat Greenhouse | Boston Globe | Getty Images

It could soon become a lot harder for people who say they've been defrauded by their schools to have their student loans cancelled.

A new proposal released by the Trump administration on Wednesday re-writes an Obama-era regulation from 2016, known as "borrower defense," which aimed to establish a way for students to have their federal student loans forgiven if their school misled them or engaged in other misconduct.

More than 160,000 people have made this claim against their school to the Education Department, and new applications continue to pour in. Almost all of these complaints come out of for-profit schools, of which there are some 7,000 around the country, that take in around 15 percent of the government's financial aid.

The Trump administration's new proposal was met with harsh criticism from consumer advocates.

Public service employees have another chance at loan forgiveness
The government may forgive your student loans

"This is a day where the Department of Education is saying to students, we’re not on your side," said Yan Cao, a fellow at The Century Foundation, a liberal think tank.

Sara Broadwater, deputy press secretary for the Education Department, said they're only proposing stronger requirements to document and prove fraud.

"If a student has actually been defrauded, it is not harder at all to receive loan relief," Broadwater said. 

Steve Gunderson, the president and CEO of Career Education Colleges and Universities, a trade group for the for-profit college sector, said the proposed rule was fair to both students and schools.

“After much stakeholder engagement, the rule carefully developed and put forth by the Department stands on two strong pillars: protection for all parties involved and respect for due process,” Gunderson said. "There should be no doubt that this rule will help students who are victims of fraud find relief, and ensure colleges and universities are part of a fair and objective adjudication process."

The new rule would bring relief to fewer borrowers, advocates say. While the Obama-era rule would have cost the government around $15 billion in loan forgiveness, this proposed rule would cost it just around $2 billion.

President-elect Donald Trump and Vice President Mike Pence met with Betsy DeVos on November 19, 2016.
Andy Katz | Pacific Press | LightRocket | Getty Images

The changes

Under the previous rule, student borrowers had six or more years from the time they left their school to file a borrower defense application. The new rule would give them just three years to do so.

This new rule could mandate that students not only prove that their school deceived them, but that it did so intentionally or with "a reckless disregard of the truth."

James Kvaal, president of The Institute for College Access & Success, said it's unrealistic to expect defrauded borrowers to have maintained the kind of extensive records such a requirement demands.

"It's very hard to get that information even in a lawsuit, and in this context it's hard to imagine how more than a handful of students could meet that standard," Kvaal said.

Under the new rule, people's student loans might have to be in default for them to qualify for loan forgiveness. Going into default can trigger a host of problems, including wage garnishments and a lower credit score, and advocates warn these problems could dissuade borrowers from even applying.

"Students who have been wronged by their colleges would have to suffer damaging consequences in order to even gamble on this unsympathetic bureaucracy," Kvaal said.

It’s clear the Department plans to nickel and dime on how they plan to calculate relief.
Clare McCann
a federal policy expert at the New America Foundation

The Obama-era rule left room for the government to forgive the loans of a group all at once, if, say, their school was clearly fraudulent, while this new rule would have the government consider each application on a case-by-case basis. “That’s likely to result in less relief," said Clare McCann, a federal policy expert at the New America Foundation. “It’s clear the Department plans to nickel and dime on how they plan to calculate relief.”

Schools that required students to sign arbitration agreements during enrollment would lose their federal funding under the Obama-era rule. This new rule, however, would allow schools to use these agreements, which advocates say silence students and keep them out of court.

It also spells out that schools don't need to share information on its arbitration cases. “It’s hard to find fraud when you’re telling the school 'Don’t tell us about fraud'," said Julie Murray, an attorney at Public Citizen Litigation Group.

Betsy DeVos
Win McNamee | Getty Images

In response to a rash of complaints by students that they'd been defrauded by their schools, the Education Department under President Barack Obama announced a regulation in 2016 that would establish an administrative process for people to have their federal loans canceled if their school turned out to be predatory. That rule was set to take effect July 2017.

Shortly before that date, the department announced it was postponing certain provisions of the regulation. A few months later, the department announced yet another delay.

Speaking at a conference last year, Secretary of Education Betsy DeVos said that under the current rule, “all one had to do was raise his or her hands to be entitled to so-called free money.”

Now, its new proposed rule all but green-lights fraud, said Barmak Nassirian, director of federal relations at the American Association of State Colleges and Universities.

“It signals to the market, 'Hey the feeding frenzy is back on, go out and do whatever you want to do'," he said.

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