Borrower’s Remorse

The Obama administration promised debt relief to the victims of predatory for-profit colleges. Then came Trump.

In 2006, Christina Hammond made a decision that she will regret for the rest of her life. She enrolled in the Grand Rapids, Michigan, campus of ITT Technical Institutes, a publicly traded chain of for-profit schools, to become an expert in computer network systems.

ITT, Hammond says, persuaded her to enroll by misleading her about her ability to find a job, transfer credits to other schools, and cover her costs with federal grants and loans alone. When she couldn’t cover those costs, ITT pressured her to take out expensive private loans to remain enrolled. Hammond graduated with $104,000 in federal and private student loan debt and hasn’t been able to get a job in her field. She is now working in a factory job she could have gotten before going to ITT and has defaulted on her loans.

Two years ago, Hammond thought she had found a way out: a once-obscure provision of federal law called “borrower defense,” which authorizes the U.S. Department of Education to wipe out the debts of students who have been defrauded by their schools. Hammond filed her claim in September 2015—a full year before ITT collapsed under the weight of multiple federal and state investigations for deliberately defrauding students, shareholders, and the federal government, while raking in billions of dollars of federal financial aid every year.

Hammond was not alone. Spurred by the high-profile cases of Corinthian Colleges and other for-profit schools that were accused of defrauding students, thousands of borrowers had begun petitioning the Obama administration in 2015 to have their loans discharged. Under tremendous pressure from Democratic senators, consumer groups, and student activists, the administration vowed to provide borrower-defense discharges to students who had been harmed by predatory for-profit schools. “Where students have been harmed by fraudulent practices, I am fully committed to making sure students receive every penny of relief they are entitled to under law,” then Secretary of Education Arne Duncan said in June 2015. “We will make this process as easy as possible for them, including by considering claims in groups, where possible, and hold institutions accountable.”

But the administration didn’t come close to meeting that goal. Instead, the Department of Education set up a laborious process that, until the last several months of 2016, moved at a snail’s pace. While the administration ultimately managed to discharge about a third of the claims it received, it struggled with the unprecedented demand for relief. The department’s slow progress left many borrowers and consumer advocates deeply discouraged—including Hammond, whose application for discharge has yet to be reviewed two years after she filed it.

Obama administration officials clearly expected that Hillary Clinton would win the presidency, and that her administration would build on the system they created to make the discharge process easier. Things, of course, didn’t work out that way. Instead, the Trump administration has put a halt to the limited progress Obama made. Many borrowers who were pledged relief have yet to receive it, and in July the Education Department admitted to a group of Democratic senators that it hadn’t approved a single application since Trump took office. Current Education Secretary Betsy DeVos has announced that she plans to rip up the Obama policies and write new rules that are all but guaranteed to be far friendlier to industry. Indeed, a former for-profit executive is helping lead the effort.

All of which means that people like Christina Hammond, victims of both unscrupulous corporations and slow-moving government, could be trapped in financial ruin.

Ever since the federal government began helping people pay for college, many for-profit schools have looked for ways to scam students and taxpayers. The Truman and Eisenhower administration investigated for-profit trade schools’ exploitation of the original GI Bill. In the mid-1970s, Congress held hearings about how they were taking advantage of low-income students to get their hands on federal aid. In the early 1990s, Democratic Senator Sam Nunn of Georgia led a bipartisan investigation that exposed how the most unscrupulous schools were enrolling people straight off of welfare lines and signing them up for the maximum amount of federal student loans available—sometimes without their knowledge or consent.

In the wake of those hearings, Congress added an escape clause to the promissory note that students receive when they take out federal loans: borrowers, the note says, can “assert, as a defense against collection of your loan, that the school did something wrong or failed to do something that it should have done,” as long as the offense “would give rise to a legal cause of action against the school under applicable state law.” This has come to be known as “borrower defense.”

The clause, however, was an empty promise for much of its twenty-four-year existence—a few lines buried in the fine print of loan documents, unnoticed by most borrowers and even consumer advocates. The provision was so obscure that then Secretary Duncan seemed stumped when a Frontline correspondent asked him in a 2010 interview whether the department could “wipe out the debt” of for-profit college students who had been defrauded. “I don’t know if we have the ability to wipe out their debt,” Duncan responded. When the producer followed up by saying, “You can’t wipe that out,” Duncan said, “No, sir.”

One key reason the provision was so obscure was that Education Department officials had never set up a formal process for borrowers to apply for relief. That changed in the spring of 2015 with the bankruptcy of Corinthian Colleges, one of the country’s largest publicly traded for-profit college companies. At its height, Corinthian enrolled more than 110,000 students at 105 campuses in twenty-five states and Canada. In 2010 alone, it received $1.4 billion in federal grant and loan money—more than the entire University of California system got for its undergraduates. But Corinthian’s high rates of dropouts and loan defaults, along with extremely questionable student recruiting practices, brought intense scrutiny from the press, regulators, and Congress. (I wrote about the allegations against Corinthian for this magazine in 2009.) Corinthian also faced more than 100 federal lawsuits from former employees, students, and investors, according to the Center for Investigative Reporting.

One reason borrower defense was so obscure was that officials had never set up a formal process for borrowers to apply for relief. That changed with the bankruptcy of Corinthian Colleges, one of the country’s largest publicly traded for-profit college companies.

Press scrutiny and congressional investigations, along with lawsuits and similar accusations from multiple state attorneys general and the Consumer Financial Protection Bureau, caught the Obama administration’s attention. The Department of Education began its own investigation in 2014. After Corinthian dragged its feet in turning over internal company documents, the department punished the company by placing a three-week hold on federal financial aid dollars. Soon after, Corinthian reached an agreement with the agency to sell most of its schools and shut down others.

As it became increasingly clear that Corinthian was on the brink of collapse, Democratic senators and consumer advocates began pushing the administration to provide debt relief to the company’s former students. But they weren’t exactly sure about how. “What process exists for borrowers . . . to bring claims to the Department that the school’s potential violations of the law are a defense to repayment?” twelve Democratic senators, including Elizabeth Warren, asked Duncan in a June 2014 letter.

One question that even consumer lawyers were unsure about was whether people who had been defrauded, but who hadn’t yet defaulted, could get discharges. That’s because the department’s rules said that borrowers could assert a defense to repayment “in any proceeding to collect on a Direct Loan.” That made it sound like borrowers could raise defenses only when loan collectors were trying to recover defaulted debt.

In his August 2014 response to the letter, Duncan wrote that borrowers didn’t have to be in default to “assert a claim that the loan is not legally enforceable on the basis of a claim against the school.” (Former officials told me that this had always been the department’s position. To argue otherwise would have given borrowers an incentive to go into default to try to get discharges.)

That caught the attention of Julie Morgan, Warren’s top higher education aide. After consulting with a consumer lawyer, she realized that the borrower-defense discharge could be used to provide loan forgiveness for potentially hundreds of thousands of Corinthian borrowers. Morgan alerted the Democratic senators of her discovery, and they wrote a follow-up letter to Duncan prodding him to develop “a simple, clear, and transparent procedure for borrowers to assert defenses to repayment.” If the department failed to do so, they warned, there would surely be more Corinthian-type meltdowns in the future.

The Trump administration plans to cater to for-profit college leaders and lobbyists. Education Secretary Betsy DeVos has tapped Robert Eitel, a former executive at Bridgepoint Education, to help lead the effort. Regulators have accused Bridgepoint of many of the same unscrupulous practices that brought down Corinthian and ITT.

It’s unclear whether the Obama administration would have acted had it heard only from Democratic senators and consumer advocacy groups. The people who made the biggest difference were the borrowers themselves. The Debt Collective, an activist group with roots in the Occupy Wall Street movement, brought these borrowers together and handed them a megaphone.

In early 2015, the Debt Collective organized around fifteen former Corinthian students, who declared that they were going on a “debt strike” and refused to repay their federal student loans. The strike, which grew to more than 100 students, caught the administration’s attention. In April 2015, Ted Mitchell, the undersecretary of education, met with the strikers. The Debt Collective’s leaders presented him with a box containing 257 borrower-defense claim forms from former Corinthian students. Mitchell promised that the department would respond quickly. Two months later, Duncan made his pledge to provide “every penny of relief” to Corinthian borrowers who had been defrauded and to “make this process as easy as possible.”

But reviewing the ensuing flood of claims ended up being more arduous than the administration had anticipated. At issue was the Department of Education’s decision to require borrowers to file individual claims proving that they had been defrauded, rather than simply wiping out the debt of all students who attended schools found guilty of making false claims to get them to enroll. Even former students from Corinthian’s Heald College campuses—at which the department had found evidence of falsified job placement rates—had to send in forms attesting that they had gone to the schools during a designated time period and that they had been misled into enrolling. As many consumer advocates argued at the time, the department could have simply used its own loan records to determine which borrowers had attended the schools at the time in question, rather than requiring borrowers to file individual forms that the department itself then had to wade through.

That requirement may seem minor, but it created a major practical barrier to relief. According to Department of Education reports, by October 2016 the agency had contacted more than 54,000 former Heald students by email and other means, but only about 8,000 had actually applied for discharges. The department reported that just 30 percent to 40 percent of borrowers were opening the emails it sent.

Why would so many borrowers who needed relief have ignored these notifications? For one thing, the department may not have had up-to-date contact information for some students. For another, borrowers who are in default and are being pursued by debt collectors acting on behalf of the government may have assumed that communications from the agency were loan collection emails or letters. And they may have been skeptical that the messages were legitimate, because many companies that falsely promise debt relief send letters on fake Department of Education letterhead.

By June 2016, the department had provided fewer than 4,000 discharges, nearly all of which went to former Heald students. Meanwhile, the backlog of outstanding claims from Corinthian and other for-profit colleges had grown to 20,000. The department’s slow progress convinced the Debt Collective that the agency was not serious about helping students. In a December 2015 press release, its leaders accused the department of “creating a Rube Goldberg–type contraption to prevent as many people as possible from seeking the relief they deserve.” Former department officials, however, say that while they would have liked to move more quickly, they had to build the process for evaluating the claims from scratch. The department, they point out, has a responsibility to consider the interests of taxpayers as well as students. “The Debt Collective wants all loans written off, so their only interest was in interpreting this provision as broadly as possible,” one former department official, who requested to remain anonymous, said. “Nothing we could do would please them.”

Relations between the department and its critics on the left reached their lowest point in September 2016, when Warren’s staff discovered that the agency was continuing to use its harshest collection tools to go after defaulted Corinthian borrowers with pending discharge claims. That directly contradicted a promise Duncan had made, in his June 2015 announcement, that the agency would hold such borrowers harmless until a final decision was rendered. At the same time, pressure was building on the department after its decision to stop making student aid payments to ITT, which was the subject of a slew of federal and state investigations and appeared to be on the verge of losing its accreditation. With another huge for-profit college collapsing, the already overwhelming backlog on borrower-defense discharge claims was certain to skyrocket.

The pace picked up after the department’s Federal Student Aid (FSA) office took over the job of reviewing claims. Between July and the end of October 2016, FSA provided an additional 12,000 discharges, primarily to borrowers who had attended Corinthian’s Everest and Wyotech campuses. FSA also improved the department’s outreach efforts by working with state attorneys general and experimenting with social media to find people who might be eligible for discharges.

Then, at the end of October, the Obama administration published final rules designed to make it easier for borrowers to obtain discharges. Under the regulations, which were to go into effect in July 2017, the department would no longer use individual states’ consumer protection laws as the basis for determining whether borrowers were eligible for discharges. Instead, the standard would be the same no matter where someone lived: the department would cancel the loans of borrowers who could show that their schools had convinced them to enroll by making a “substantial misrepresentation” related to “the nature of the educational program, the nature of financial charges, or the employability of graduates.” And, if the department found that a particular school had made “widespread misrepresentations,” the rules would allow it to discharge the debt of all affected students as a group.

“When it came to identifying defrauded borrowers, we inherited a baroque set of rules and no established process at all,” said James Kvaal, who served in a variety of senior leadership roles at the Department of Education and the White House under President Obama. “Before we left office we put in place a dedicated team to process claims, as well as a stronger, fairer standard for future students and new rules to hold colleges accountable for the costs of their fraud.”

After seventy years of fraud and abuse in the for-profit college sector, it’s clear that borrower defense needs to be strengthened, not weakened. Every time the government make it easier for these schools to access federal student aid, many of them exploit the rules and victimize students.

The advocacy groups applauded the new rules, despite their opposition to some provisions—such as a statute of limitations on reimbursement for past loan payments. They held out hope that a Hillary Clinton administration would make the regulations even stronger.

Trump’s victory threw those plans into disarray. As 2016 came to an end, the only thing that mattered was getting the department to discharge as many loans as possible. In its final weeks, the Obama administration did so for more than 16,000 borrowers. But that left nearly 70,000 claims in limbo.

The Obama administration’s efforts were agonizingly slow, especially for people on the verge of financial ruin. Administration officials seemed deeply wary of the financial costs and potential political fallout of bailing out tens of thousands of borrowers. The worries about cost particularly rankled activists, considering that the government allowed these companies to rake in billions in federal financial aid for years despite evidence of wrongdoing.

But if the Obama administration approach seemed overly cautious at the time, it’s about to look like the good old days. Things are going to get much worse for defrauded borrowers under Donald Trump—who in March agreed to a $25 million settlement to thousands of people who had been defrauded by Trump University, his sham real estate course—and his education secretary, Betsy DeVos, who has already blocked the Obama administration’s borrower-defense rules from going into effect.

DeVos says that her department will write new rules that will “protect students from predatory practices while also providing clear, fair and balanced rules for colleges and universities to follow.” It’s apparent, however, that the Trump administration plans to cater to for-profit college leaders and lobbyists. In fact, DeVos has tapped Robert Eitel, who was an executive at Bridgepoint Education before joining her staff, to help lead the effort. Federal and state regulators have accused Bridgepoint of many of the same unscrupulous practices that brought down Corinthian and ITT.

A suspiciously well-timed lawsuit provides a hint as to DeVos’s thinking. The California Association of Private Postsecondary Schools, the main lobbying group for California’s for-profit colleges, sued the Department of Education to block the borrower-defense rule in May. The group accused the previous administration of exceeding its authority by providing discharges to borrowers who hadn’t defaulted. DeVos cited the lawsuit to justify her decision to stop the regulation from going into effect, raising the possibility that she will reinterpret the borrower-defense provision to only apply to people who have defaulted—radically shrinking the pool of borrowers entitled to relief, and creating the perverse incentive that Obama-era officials warned about.

After seventy years of fraud and abuse in the for-profit college sector, it’s absolutely clear that the borrower-
defense discharge needs to be strengthened, not weakened. Every time federal lawmakers and regulators make it easier for these schools to access federal student aid, many of the institutions exploit the rules and victimize students. The stakes are only getting higher as these schools get more and more expensive. To make matters worse, the federal government has made it virtually impossible for financially distressed borrowers to discharge their loans in bankruptcy.

The government ultimately needs to make a choice: either decide that these schools are too hazardous to participate in federal student aid programs altogether, or allow them to continue to participate but ensure that students are held harmless if abuses occur. For the time being, neither option looks likely. That means continued suffering for students like Christina Hammond, who has paid too high a price for putting her trust in an institution that didn’t have her best interests in mind and a federal government that didn’t have her back.

Stephen Burd

Stephen Burd is a senior policy analyst in the Education Policy Program at the New America Foundation.