Borrower Defense to Repayment

Deceived Student Loan Debtors Victim Punished by DeVos and Trump

Frustrated
Written by Steve Rhode

Personally, I feel for the student loan debtors trapped between the Obama Department of Education and the Trump Department of Education under Betsy DeVos, and by extension, President Trump. He is her boss and in charge.

On June 25, 2019, a class-action lawsuit was filed to resolve the claims made by defrauded students for federal student loan forgiveness.

Loans were forgiven under the Obama administration, but the Trump administration effectively stopped that even though the students were subject to the same fraudulent activities.

Keep reading, specific numbers to follow.

The suit filed on behalf of consumers made the following assertions:

“1. The Higher Education Act (HEA), Department of Education (Department) regulations, and students’ loan contracts allow students to cancel their federal student loans on the basis of their school’s misconduct (borrower defense). More than 160,000 former for-profit college students have done so and are awaiting a decision. But, the Department has not granted or denied a single application since June 2018, and it has no timetable for doing so. The question in this case is whether the Department’s refusal to decide borrower defenses is lawful. It is not.

2. Over the past several decades, hundreds of thousands of students borrowed federal student loans to attend various for-profit colleges, including ITT Technical Institute (ITT), Corinthian Colleges (Corinthian), DeVry University, the Art Institutes, Salter College, Brooks Institute of Photography, and more. The schools promised high-paying jobs, state-of-the-art vocational training, and long and fulfilling careers. These were lies. The schools actually delivered worthless products that left students with thousands of dollars in debt, damaged credit, and depleted access to further student aid.

3. A number of these for-profit colleges have recently closed, including Corinthian, ITT, Brooks Institute of Photography, Vatterott College, Art Institutes, Argosy University, South University, Charlotte School of Law, Arizona Summit Law School, Globe University & Minnesota School of Business, FastTrain College, Marinello School of Beauty, Virginia College, and Brightwood College.

4. The Department was responsible for authorizing and overseeing the participation of each of these for-profit colleges in the federal student aid program.

5. Since 2015, former for-profit college students have increasingly asserted borrower defenses. As the Department explained, “borrowers have a right to assert” such a claim, and so it started to “set up a process to review and adjudicate them.” It developed a universal borrower defense form and created a full-time borrower defense unit. In the six months before January 20, 2017, the Department approved approximately 28,000 borrower defenses.

6. But then the Department hit the brakes. Since January 20, 2017, the Department has claimed to be taking a short “pause” to “re-evaluate” the prior administration’s actions; behind closed doors, the Department’s “pause” has been a full stop. The Department has ignored the growing pile of borrower defenses, reduced its capacity to decide borrower defenses, and diverted its increasingly limited resources to un-do all of the prior administration’s work.

7. In short, the Department has intentionally adopted a policy of inaction and obfuscation.

8. The Department’s abdication of its responsibility is not a neutral choice. Its decision to keep over 160,000 students in limbo—some for over four years—has damaged students’ credit and limited their access to federal student aid. It has caused significant emotional distress, associated physical harm, and a loss of wealth and opportunity that students will never recover. For students who have defaulted on their loans, the Department has invoked its extraordinary extrajudicial powers to garnish their wages or seize their tax credits (for many, their Earned Income Tax Credit).

9. The Department’s failure to properly oversee the for-profit college industry on the front end, and its refusal to remediate the fraud that occurred on its watch, has eliminated any pretense that the government will protect these students.

10. Named Plaintiffs bring this lawsuit under the Administrative Procedure Act on behalf of themselves and all other similarly situated individuals. They do not ask this Court to adjudicate their borrower defenses. Nor do they ask this Court to dictate how the Department should prioritize their pending borrower defenses. Their request is simple: they seek an order compelling the Department to start granting or denying their borrower defenses and vacating the Department’s policy of withholding resolution.” – Source

Flash Forward

The Judge in the case just published a ruling that fantastically distills the issue into its perplexing components.

United States District Judge Alsup wrote the following: [The bolding is me.]

“Title IV of the Higher Education Act directs the Secretary of Education “to assist in making available the benefits of postsecondary education to eligible students” through financial-assistance programs. Education affords most a significant opportunity, but all too often, for-profit colleges, using fraudulent enrollment tactics (such as inflated job-placement numbers), leave students saddled with debt and little to show for it. To remedy this misconduct, Title IV authorizes the Secretary to cancel a federal student loan (in whole or part) and directs her to “specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan.” 20 U.S.C. §§ 1070, 1087e(h).” [The links to the code are mine.]

“In May 2015, Corinthian Colleges, Inc., a for-profit college with more than 100 campuses and over 70,000 students, collapsed. Secretary John B. King found “that the college had misrepresented its job placement rates.” Predictably, Corinthian students submitted a “flood” of student-loan borrower-defense applications. So, Secretary King quickly moved to update the infrastructure for adjudicating borrower-defense applications and appointed a special master in June 2015 “to create and oversee a process to provide debt relief for these Corinthian borrowers.” 81 Fed. Reg. 39,329, 39,330, 39,335 (June 16, 2016). But it remained a game of catch up.

Over the next year, the special master granted full loan discharges to 3,787 applicants. Yet by December, borrowers had submitted 6,691 defense applications, and by June 2016, they’d submitted 26,603. The newly created “Borrower Defense Unit” (“BDU”) took over and by October approved 11,822 applications and denied 245, for a total of 15,609 approvals and a 98.5% grant rate. But by that time, borrowers had submitted a total of 72,877 defense applications (AR 339–40, 347, 369, 384–85, 392–94, 502).

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In November 2016, the BDU promulgated the new borrower-defense regulations — scheduled to take effect on July 1, 2017 — to codify the process for adjudication and to set a new standard for borrower-defense claims. 81 Fed. Reg. 75,926 (Nov. 1, 2016). The regulations would require a borrower to submit an application with evidence supporting his or her claim and allow the Secretary to designate an official to resolve the claim. See 34 C.F.R. §§ 685.206, 685.222 (2018).

In the new year, the Secretary approved another 16,164 applications, but failed to discharge the loans before January 20. In total, by the end of the Obama Administration, the Secretary had approved 31,773 applications for discharge (though not necessarily effected relief) and found 245 ineligible, for a 99.2% grant rate. Borrowers, however, had had submitted 72,877 applications (AR 392–94, 502–03).

With the new administration came new policy. In March 2017, newly-installed Secretary Elisabeth DeVos (our present defendant) created a Borrower Defense Review Panel to examine the entire review process and recommend changes. After the panel also requested an Inspector General review, the BDU “was advised” that “no additional approvals would be processed” until the completion of both the panel and IG reviews. Nevertheless, the panel honored — and the Secretary approved, though “with extreme displeasure” — the 16,164 borrower-defense applications that the prior administration had approved but not discharged before January 20, 2017. By July, however, borrowers had submitted 98,868 applications in total (AR 348–49, 502–05; Dkt. No. 66-3, Ex. 7).

The IG ultimately recommended only “improved documentation and information systems” and “did not recommend any changes to existing review processes and protocols.” The Secretary, however, decided to develop new method for awarding relief to eligible borrowers. She disagreed with the previous administration, which had granted full loan discharges on (as the Secretary puts it) the assumption that borrowers subject to school misconduct had received no value from their education. Instead, the new method would discharge more or less of a loan based empirically upon the difference between the average earnings of borrowers subjected to school misconduct and of students who completed similar programs from other, misconduct-free schools (AR 006–007, 349–50, 590–91).

Between December 2017 and May 2018, the Department reportedly decided more than 26,000 more claims — approving over 16,000 and denying over 10,000 — before a court in this district preliminarily enjoined this new “partial relief methodology” for its likely violation of the Privacy Act, 5 U.S.C. § 552a (AR 006–07, 350). Calvillo Manriquez v. DeVos, 345 F. Supp. 3d 1077 (N.D. Cal. 2018) (Magistrate Judge Sallie Kim). So, in total by June 2018, the Secretary had granted 47,942 applications (though not necessarily effected relief) and denied or closed 12,314, for a 79.6% grant rate (or, Secretary DeVos’s decisions taken alone, a 61.5% grant rate). Yet the flood continued. By that point, borrowers had submitted, in total, 165,880 applications, leaving 105,998 still to be decided (AR 401).

Then, despite the backlog, the decisions stopped. By September, 139,021 applications awaited review. That count rose to 158,110 by the end of December, and to 179,377 by the end of March 2019. By June 2019, borrowers had filed 272,721 applications and 210,168 languished. For eighteen months, from June 2018 until December 2019 — well into this suit — the Secretary issued no decisions at all (AR 397–404, 587–88).

Plaintiffs Theresa Sweet, Chenelle Archibald, Daniel Deegan, Samuel Hood, Tresa Apodaca, Alicia Davis, and Jessica Jacobson filed borrower-defense applications. Contending the Secretary’s delay to be unlawful stonewalling, they sued in June 2019 to compel the Secretary to begin deciding applications again. An October 2019 order certified a nationwide class of approximately 160,000 borrower-defense applicants who still awaited decision and were not already members of Calvillo Manriquez v. DeVos, No. C 17-07210 SK, 2018 WL 5316175 (N.D. Cal. Oct. 15, 2018) (Magistrate Judge Sallie Kim).

In November, the Secretary certified an administrative record to explain her delay and cross motions for summary judgment followed (Dkt. Nos. 56, 63, 67). On December 10, 2019, with around 225,000 claims pending, the Secretary released an updated “tiered relief methodology” which, similar to the previously enjoined method, would award partial loan discharges based upon the difference in earning potential between borrowers subjected to school misconduct and those not; though this method appeared to use data gathered at a higher level to assuage the earlier privacy concerns (AR 589–601).

The next day, the Secretary issued 16,045 decisions; but in a marked departure from the previous grant-denial ratio, she approved only 789 applications and denied the remaining 15,256 (AR 587–88). Previously, as noted, the Secretary’s grant ratio had been 61.5%. These December decisions, however, represented a 95.1% denial rate. Though class counsel knew of these early numbers, they maintain that they did not learn of the form denials, and, it seems, could not know of the scope of their use, until later (Dkt. Nos. 121 at 13–14; 129-1 at 2–3).

Before the undersigned ruled on the motions for summary judgment, however, the parties apparently reached a proposed class settlement. A May 22, 2020, order preliminarily approved the proposal as it appeared to impose an adequate eighteen-month deadline for the Secretary to decide claims and a twenty-one month deadline to effect relief, penalties for the Secretary’s failure, reporting requirements, and it did not prejudice the merits of borrowers’ applications. Following preliminary approval, the parties distributed class notice and solicited comments in time for the October 1 fairness hearing. About one hundred thirty borrowers timely responded.

Then came the snag. Class counsel discovered that the Secretary had been issuing alarmingly-curt denial notices for several months, in violation (as class counsel put it) of both the spirit of the proposed settlement and the Administrative Procedure Act. The undersigned requested more information from the Secretary and, given the lack of briefing, reserved the problem for the October 1 fairness hearing (Dkt. No. 121).

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In her requested response, the Secretary admitted to using four different form denial notices. Continuing her rate of denials from December, the Secretary had, as of April, granted only 8,800 applications and denied 36,200. By August, she had approved 13,500 applications, yet denied 118,300, for an 89.8% denial rate. Of those applications from our class of borrowers, the Secretary has denied 74,000 applications and granted only 4,400, for a 94.4% denial rate (Dkt. No. 116).

As the fairness hearing approached, it became clear the parties could not jointly move for approval. A September 16 order kept the fairness hearing on calendar to ensure borrowers would be heard, whatever the outcome, but invited the parties to move for relief as they wished on the standard 35-day track (Dkt. No. 123).

On October 1, approximately 620 participants, counsel, borrowers, and members of the public joined the proposed-settlement fairness hearing by telephone. Of the approximately three hundred requests to speak, the Court chose fourteen representative borrowers to comment on the proposed settlement. The representatives expressed serious concern with the proposed settlement, particularly in light of the Secretary’s recent string of form denials.

In the meantime, class counsel have moved for approval of the proposed settlement and for its enforcement, seeking an order requiring the Secretary, in denying applications, to issue explanatory details under the Department’s own regulations, the Administrative Procedure Act, and due process. The Secretary would consent to approval of the settlement as written, but opposes class counsel’s view of it. This motion has been fully briefed. Time is of the essence. The parties have been heard at two recent hearings. This motion is appropriate for disposition on the papers.”

You’ve Got to Ask Yoruself

I understand those different political administrations may have a different reading of the law, but it is incredulous that one would approve most applications and the other deny most. A variation up or down would be logical. The law is what the law is. But Secretary DeVos appears to have forced her opinion of forgiveness on student loan debtors that have been shown to have been deceived.

Why punish deceived students?

And Secretary DeVos tipped her had when she agreed to give student loan forgiveness to the debtors determined to be eligible by the Obama administration when she approved them “with extreme displeasure.”

See Betsy DeVos is giving defrauded student debtors the back of her hand for more information.

As it says in that article, “Defrauded student debtors are victims. They — and not the victimizers — deserve protection from the Department of Education.”

Anger should not be directed at the students. They were at the end of the food chain. The lack of supervision by the Department of Education that led to the indebted students went back years.

The Department of Education is refusing to honors its promises and duty to supervise the schools. Instead, it is pouring the pain onto the backs of students that fell for the deceptive and fraudulent recruiting practices of the schools. This, in turn, ruins the futures and financial lives of the debtors.

Perplexing Denial Numbers

As mentioned above, the DeVos Department of Education was inconsistent in its own denials.

And as the Judge noted, “The next day, the Secretary issued 16,045 decisions; but in a marked departure from the previous grant-denial ratio, she approved only 789 applications and denied the remaining 15,256 (AR 587–88). Previously, as noted, the Secretary’s grant ratio had been 61.5%. These December decisions, however, represented a 95.1% denial rate.”

How is that possible if not arbitrary and without any smooth application of the law?

The Judge stated, “The Court is disappointed that it has come to this. This settlement was supposed to jumpstart a long delayed regulatory process, intended to at least get reasoned decisions, even if reasoned denials, to hundreds of thousands of student-loan borrowers.”

Lack of Explanation is Perplexing

The Judge writes, “This lack of explanation becomes more all the more galling given Ms. Colon, as so many of our borrowers did, attended a school that has since been found to have misled students. Indeed, after the New York Attorney General sued Sanford-Brown College, Ms. Colon received a restitution check. Her denial notice even acknowledges that the Secretary had the NY AG’s evidence (Dkt. Nos. 129 at 11; 142; 145). Which begs the question, why did a student who already qualified for relief based on her school’s misconduct under state law not now qualify for relief based on a claim “that would give rise to a cause of action against the school under applicable State law?” See 34 C.F.R. § 685.206(c). These cases call for adequate explanation — just as the Secretary told us they would when justifying her delay — and yet the Secretary’s perfunctory denial notice does not come close to offering such an explanation.”

“Simply put, where there’s smoke, there’s fire. After justifying eighteen months of delay largely on the backbreaking effort required to review individual applications, distill common evidence, and “reach considered results,” the Secretary has charged out of the gate, issuing perfunctory denial notices utterly devoid of meaningful explanation at a blistering pace.”

The form denial, frankly, hangs borrowers out to dry.

Judge Alsup sums it up, succinctly, “This is not an attorney-driven case. Class members have a genuine interest; they sought opportunity via higher education only to be to be deceived by for-profit institutions and, at least in some cases, saddled with crushing debt.”

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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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