Student Loan Related

Is This the Beginning of the End for the Borrower Defense?

Written by Steve Rhode

The Borrower Defense to Repayment program was expanded under the Obama Administration to assist student loan debtors who were the victims of fraud and abuse by schools and universities that had profited from federal student loans but defrauded students.

The program is currently described by the Department of Education as “Under the law, you may be eligible for borrower defense to repayment forgiveness of the federal student loans that you took out to attend a school if that school misled you, or engaged in other misconduct in violation of certain state laws. Specifically, you may assert borrower defense by demonstrating that the school, through an act or omission, violated state law directly related to your federal student loan or to the educational services for which the loan was provided.” – Source

But since Department of Education Secretary Betsy DeVos was appointed by President Trump, the Department of Education has embarked in rolling back protections and resources for student loan debtors.

The California Association of Private Postsecondary Schools (CAPPS) just filed a lawsuit against the Department of Education and has asked to have the Borrower Defense program eliminated which was better defined under the Obama Administration.

There is a long way to go in this suit but it could very well be the excuse the current Department of Education is looking for to stop the discharge and refunding of student loans to students who were taken advantage of.

CAPPS is an association of about 150 schools including both for-profit and non-profit members who are eligible for federal student loan funding. Their membership appears to be heavy with the types of schools like ITT that have promulgated the need for the Borrower Defense program.

The last public report by the Department of Education regarding the Borrower Defense program was in June of 2016. At that time the Special Master for Borrower Defense said, “The BD program has made progress, but much remains to be done. To that end, the new Enforcement Office continues to grow, hiring additional attorneys and support staff to work on borrower defense, investigations, and related matters to accelerate progress on providing relief to defrauded borrowers.” And then he was gone. His last public report showed that schools in California accounted for the vast majority of fraud claims filed by students.

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The CAPPS lawsuit seeks to neuter the Borrower Defense program and makes the unfounded claim “The Borrower Defense Regulations are likely to shutter many vocational schools without any reasonable justification and will needlessly leave many non-traditional students with few or no educational options.”

Regardless of the potential underlying issue that students with approved claims to forgive federal student loans under the Borrower Defense program, CAPPS seems to think a defrauded student who is making the payment should not be able to access Borrower Defense forgiveness. CAPPS says, “Congress has never intimated that borrower “defenses” were meant to erase debt for thousands of students who were reliably paying back their loans, or to charge schools for those losses.”

The suit appears to also take exception with the requirement for incoming student seeking federal loans to be aware of the performance of the school. CAPPS says, “Third, the Department unjustifiably requires a new loan repayment rate warning that applies only to proprietary institutions (“Repayment Rate Provisions”). These provisions would require proprietary schools to “warn” prospective students when the median recent alumnus or alumna is not paying his or her loans back quickly enough.”

CAPPS also makes the statement “Repayment Rate Provisions fail to apprise students and prospective students at non-profit and public schools that have failed to meet the same repayment rate requirements as proprietary schools.” It would be better if all schools who received federal student loan funding were subject to those same performance requirements.

But CAPPS isn’t done crying foul. The suit wants the Department of Education to also eliminate the ban against arbitration agreements and the ability for debtors to file class action suits. At the time the Department of Education saw this as a benefit to student loan debtors, “Recent history demonstrates the need to address bans by postsecondary institutions on both class actions and individual lawsuits by borrowers that prevent them from having their day in court. Some schools have limited students’ ability to sue a school for wrongdoing by requiring students to agree to pre-dispute arbitration.” – Source

In fact the Obama Administration said the rules CAPPS wants to overturn and eliminate helped to defend students from:

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“The final regulations will end some of the most common abuses by:

  • Forbidding Schools from Forcing Students to Go It Alone. Unfair practices by colleges don’t just harm one student; they may well harm a large group. Class actions often offer the only feasible legal means for individuals to address wrongdoing given the cost of litigation and the small dollar amounts of individual students’ claims, but many schools require students to agree not to bring class claims. Under the final regulations, schools will no longer be able to forbid class actions for borrower defense-type claims.
  • Ending Day-in-Court Denials. The Obama Administration wants to empower students to seek relief directly from schools that cause harm to the students. Some schools tuck clauses into enrollment agreements that block students from ever taking the school to court and instead commit them to arbitrate their claims before they arise. The final rule allows students to agree to arbitration of their claims, but only after disputes arise.
  • Prohibiting Gag Rules. College enrollment agreements can also be laden with other restrictions that silence students from voicing their concerns to authorities. The Department is concerned that some schools require students to first pursue an internal process before contacting accreditors and regulators about potential violations of the law. The final regulations bar this practice, while also providing more transparency on the outcomes of arbitration by requiring schools to notify the Secretary when arbitration and judicial claims are filed and the decisions and awards issued in arbitration and in court proceedings.

Changes from the NPRM: In the NPRM, the Department proposed to ban all pre-dispute mandatory arbitration agreements for borrower defense related disputes that were a condition of enrollment. Importantly, the final regulations ban any pre-dispute arbitration agreements, whether voluntary or mandatory, and whether or not they contain opt-out clauses. These changes will strengthen protections for students, and further the goals of this regulation, by ensuring that students who choose to enter into an agreement to arbitrate their borrower defense type claims do so freely and knowingly.

You may be interested in reading the CAPPS lawsuit so here it is.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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