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Obama Administration Tussles With Students Over Debt Relief

A new rule could put limits on when defrauded students can get their loans canceled.

This week the Obama administration put forward a plan that could fundamentally alter the way the government confronts claims of fraud by student debtors. In three days of meetings that began Wednesday, the Department of Education made a case for limiting how and when the government should compensate students who say they were deceived into taking out federal loans. Already, consumer advocates are attacking the government’s proposal, which they say is intended to prevent many students from receiving debt forgiveness.

“The proposal that I have seen erects significant and arbitrary barriers for borrowers who are entitled to relief,” said Toby Merrill, the director of the Project on Predatory Student Lending at Harvard Law School, referring to the Education Department’s proposal. “This would be worse for borrowers.”

For the government, hundreds of millions of dollars are at stake. Since announcing in June that students could apply for relief if they could prove they were lied to, thousands have asked for loan forgiveness, requesting a total of $164 million. The Education Department has agreed to grant $28 million to former students of Corinthian Colleges Inc., the for-profit college company that shut down last year amid multiple state investigations into its alleged deception of students. Now the government is negotiating with student advocates and loan companies about how easy it should be for other borrowers to get a break on their debt.

In its draft rules, the Education Department excluded parents who took out loans for their kids and a large group of federal borrowers from the pool of people who could get money back if a school committed fraud. The government also said students would need to file a claim two years after a school has violated its contract, which student advocates say could be before many people will have even started repaying their debt.

“Cutting off students’ legal rights to relief creates an impossible barrier for those trying to rebuild their lives,” said Massachusetts Attorney General Maura Healey, in an e-mailed statement. “We urge the Department to remove the proposed statute of limitations … and hold predatory for-profit schools accountable to taxpayers.” 

The short time limit seemed inappropriate to advocates, given that debt collectors are allowed to pursue borrowers well into their golden years. “You are just putting tape on people’s mouths and saying, ‘Don’t mention it and keep paying,’” said Harvard’s Merrill.

“This is just the beginning of the negotiated rule-making process,” Dorie Nolt, a spokeswoman for the Education Department, said in an e-mail, adding that the department “encouraged anyone” to provide feedback on the proposals. Gail McLarnon, the department’s negotiator, indicated she would be open to giving students more time to ask for debt cancellation, the Washington Post reported

“The No. 1 focus is how much is it going to cost,” said Bob Shireman, a fellow at the Century Foundation, a progressive think tank, who served as deputy undersecretary of the Education Department from 2009 to 2010. The government could avoid having to refund a ton of debt by making it hard for students from deceptive schools to qualify for debt forgiveness. But Shireman said another way of saving money would be to make it relatively straightforward for defrauded students to demand relief.

Refunding the student debt held by borrowers who went to abusive schools could spur the government to cut bad actors out of its loan program more quickly, which may mean fewer people take out loans for degrees that don’t prepare them to pay taxpayers back.

“You are putting a tax on the program,” Shireman said. “It would have the effect of internalizing the externalities, making the cost of fraud more apparent to lawmakers.”

On Wednesday a group of students who last year launched a student debt protest, called a “debt strike” because they stopped paying their loans, met with Education Department officials to complain about the new rules and ask why the government has not canceled any of the loans held by students who went to the now-defunct Corinthian Colleges. The group also aired its concerns in a meeting on Thursday with the staff of group of democratic senators, including Elizabeth Warren of Massachusetts.

“None of the people we have been working with have received relief,” said Laura Hanna, a leader of the protesting students. “It seems as if [the Education Department] is actively trying to close off any kind of relief.”