From 2007 to 2012, Sarah Dieffenbacher attended Everest College-Ontario Metro, a for-profit college located in Ontario, California. She took out $50,000 in federal student loans to fund her studies.
In March 2015, Dieffenbacher filed a “borrower defense” application with the U.S. Department of Education, petitioning to have her loans cancelled on the grounds that Everest had engaged in fraudulent conduct in violation of California law.
In August 2015, Dieffenbacher defaulted on her loans. Educational Credit Management Corporation, her loan servicer, sent her a notice stating that it intended to begin garnishing her wages.
Dieffenbacher filed a timely objection and a request for a hearing. This objection consisted of a 29-page letter accompanied by 254 pages of exhibits. These exhibits included Diefenbacher’s sworn statement and records from the California Attorney General’s Office showing documented misconduct by Everest and its parent company, Corinthian Colleges.
On January 20, 2017, Dieffenbacher’s attorney received a letter from the Department of Education stating that DOE was denying Dieffenbacher’s objection to having her wages garnished. DOE said its decision was conclusive and that Dieffenbacher’s only recourse was to file a lawsuit in federal court.
This Dieffenbacher did. In her lawsuit, Dieffenbacher claimed that DOE’s decision was arbitrary and capricious and violated the Administrative Procedure Act.
Without admitting fault, DOE filed a motion to remand Dieffenbacher’s case back to the Department so that its decision could be “reconsidered and re-issued in a way that would not be arbitrary, capricious, or contrary to law.”
Judge Virginia Phillips’ decision
Last week, Judge Virginia Phillips, a California federal judge, denied DOE’s request for a voluntary remand. In Judge Phillips’ view, the Department “[had] not established a substantial or legitimate concern guiding its request for a remand.”
The judge pointed out that Dieffenbacher’s application for loan forgiveness had been pending for more than two years and that the Department had made contradictory arguments about what it intended to do.
Indeed, Judge Phillips’ suggested that the Department of Education was attempting to get Dieffenbacher out of court so that it could garnish her wages. “The Department’s request for remand appears to be an attempt to evade judicial review so that it can retain the ability to garnish [Dieffenbacher’s] wages without a conclusive ruling as to the enforceability of her loans,” the judge observed. “Under such circumstances, the remand request appears both frivolous and in bad faith” [emphasis supplied].
Judge Phillips concluded her opinion by ordering DOE to rule on Dieffenbacher’s loan cancellation application within 90 days. If the Department fails to comply, the judge added, she would proceed to hear Dieffenbacher’s claims on the merits.
The Dieffenbacher case: More Evidence of the Department of Education’s Stall Tactics
The Dieffenbacher case is the latest example of the Department of Education’s efforts to avoid dealing with student borrowers’ legitimate applications for loan forgiveness.
In the Price case, which I wrote about recently, DOE took six years to rule on a University of Phoenix graduate’s application for loan forgiveness based on her claim that Phoenix falsely certified that she had a high school diploma when she began her studies. Ultimately, DOE disallowed the claim. A federal court in Texas countermanded DOE’s ruling and discharged the debt.
Last January, DOE sent a letter to 23,000 former students at Corinthian Colleges, assuring them that their loans had been approved for cancellation and that the loans would be forgiven within the next 60 to 120 days. Almost six months later, DOE has not kept its promise, which prompted a protest letter from 19 states’ attorneys general.
So what’s going on?
I think Betsy DeVos’s DOE pencil pushers have added up the costs associated with discharging students loans under DOE’s own rules and regulations and have found those costs to be enormous. DOE is trying to put the brakes on its administrative loan forgiveness process. The Department announced this week that it is rewriting the “borrow defense” regulations that Dieffenbacher relied on.
BUT IT IS TOO LATE. DeVos’s efforts to slow down the loan forgiveness process will not withstand scrutiny in the federal courts, as the Price case and the Dieffenbacher case demonstrate.
The Consumer Financial Protection Bureau said in a recent report that eight million student borrowers are in default, with nearly 1.2 million defaulting in 2016 alone. As CFPB pointed out, people are defaulting at the rate of 2 borrowers every minute!
Two things must be done to bring the federal student loan program under control. First, the federal government must stop sending student aid dollars to for-profit colleges, which have shockingly high student-loan default rates.
Second, Congress must amend the Bankruptcy Code to allow distressed student borrowers to discharge their student loans in bankruptcy like any other unsecured consumer debt.
But Betsy DeVos’s Department of Education refuses to face reality while it stalls for time. In the end, this approach is going to enrage millions of student borrowers. These borrowers are also voters, and they will vote for any politician who promises real debt relief to the legions of student borrowers who will never pay back their loans.
Dieffenbacher v. U.S. Dep’t of Educ., ED CV 17-342-VAP (KK) (C.D. Cal. June 9, 2017).
Seth Frotman & Rich Williams. New data documents a disturbing cycle of defaults for struggling student loan borrowers. Consumer Financial Protection Bureau, May 15, 2017.
Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 2017.
Andrew Kreighbaum. Court Orders Education Department to End Delay in Ruling on Loan Discharge. Inside Higher ED, June 9, 2017.
Andrew Kreighbaum. Education Department to hit pause on two primary Obama regulations aimed at for-profits. Inside Higher ED, June 15, 2017.
Andrew Kreighbaum. State AGs Want Action on Student Loan Discharge. Inside Higher Ed, June 6, 2017.
Lisa Madigan, Illinois Attorney General. Letter to Betsy DeVos, US. Secretary of Education, June 5, 2017.
Price v. U.S. Dep’t of Educ., 209 Fed. Supp. 3d 925 (S.D. Tex. 2016). [Link is to U.S. Magistrate’s opinion, which was affirmed by a U.S. District Judge.]