There has been some controversy surrounding the proposed Department of Education regulation, which may allow for a huge, multi-billion dollar default on millions of student loan balances. It is essentially a broadly written rule that will let students discharge their federal loan debt if they can prove that they were “defrauded or deceived” by a university’s “substantial misrepresentation.”
This will leave the burden of the costs on taxpayers. The execution of the regulation will be brought about by an expansion of the department’s “Borrower Defense to Repayment” program. The program has been around for over two decades as a limited consumer protection agency designed to help victims fight against diploma mills and bad actors in the education industry. With a student loan debt crisis, the Obama administration wants to greatly expand the program.
Based on the proposed rule, all a borrower has to do is say that the college in question “ substantially misrepresented” facts in one form or another. There aren’t any details yet as to how this can be proved. It appears it may also escalate litigations. Some critics say it is the backdoor route to free college for all. American Commitment President Phil Kerpen is railing against the proposal. He has said:
We do not need another federal bailout. The existing rules were designed to permit students to sue for loan forgiveness when they were victims of intentional fraud or another violation of state law. But these newly proposed rules are so broad and vague that complaints will proliferate based on innocent errors and alleged misunderstandings — with the costs shifted to federal taxpayers.
The Department of Education estimates that the proposal would cost between $2 billion to $43 billion over the next 10 years.
In March of 2016, California Attorney General Kamala Harris won a $1.2 billion judgement against Corinthian Colleges stating the school made untrue and misleading statements. In short, Corinthian Colleges made false statements around programs and degrees the college did not actually offer and about its job placement rates. This is something the borrower defense to repayment program was designed to fight. Also, with the new proposal, the current ban on class action lawsuits will be removed.
Moreover, a misrepresentation clause does not require misrepresentations to be intentional. Even unintended errors can be on the hook for student loan forgiveness. As a result, class action lawsuits may be on the rise. It might also cause failures for some colleges that can’t handle more debt. Public, private and for-profit colleges will all be subject to the proposal–taxpayers will share the risk through public financing of state colleges and universities.
Based on numbers from 2014, state and local funding for higher education was over $86 billion. Litigation costs and loan forgiveness will ensure that some colleges have to pass these costs along in terms of higher tuition, increased fees or a decrease in education services. Future students may have to deal with more expensive schools and/or lower quality of education services. On the other hand, it may weed out more of the bad actors in this industry.