Court Freezes Part of Biden's Debt Relief for Defrauded Students
Court Freezes Part of Biden's Debt Relief for Defrauded Students

By Tom Ozimek

In the latest challenge to President Joe Biden’s wide-ranging efforts to find ways to forgive student debt, a federal appeals court has blocked parts of an Education Department rule that sought to make it easier for student borrowers to get relief if they were the victims of fraud or were misled by colleges.

In a case that pits the Career Colleges & Schools of Texas (CCST) against the U.S. Department of Education, the New Orleans-based U.S. Court of Appeals for the 5th Circuit issued an order on Aug. 7 (pdf) that puts a hold on implementation of the so-called “borrower defense” provision of a Biden administration rule that meant to expand the triggers for student debt relief.

“It is ordered that appellant’s opposed emergency motion for injunction pending appeal of the borrower-defense and closed-school provisions of a ‘rule’ governing student loan discharges is GRANTED,” the judges wrote in the decision, which freezes the provisions while the case is under appeal.

The Education Department earlier argued that its revamped borrower defense rule struck the “right balance” between denying meritless claims by student borrowers while making it easier for those who legitimately experienced harm due to misleading recruitment claims and other forms of questionable or illicit activity by schools to receive some sort of compensation.

On the other hand, CCST, which represents over 70 for-profit educational institutions in Texas, argued in court filings that the borrower defense rule—which no longer requires borrowers to prove individualized harm in most circumstances—imposes an unfair burden of cost on educational institutions and that it was part of Mr. Biden’s campaign promise to forgive student debt on a wide scale.

The Education Department did not immediately respond to a request for comment.

Career Education Colleges and Universities (CECU), a group that opposed the Education Department’s borrower defense rule during the comment period on proposed rulemaking, issued a statement noting it was pleased with the appeal court’s decision.

“Imposing these two provisions would have been detrimental to career schools in Texas and across the country,” CECU president and CEO Jason Altmire stated.

By contrast, Aaron Ament, president of the National Student Legal Defense Network and a former senior lawyer at the Education Department, issued a statement critical of the ruling.

“Until these protections are restored, countless students are at risk of being taken advantage of by higher ed profiteers who are exploiting students with little accountability,” Mr. Ament said in a statement.

The rule was initially supposed to go into effect on July 1, with the legal challenge brought by Career Colleges & Schools of Texas (CCST) putting the brakes on implementation.

‘Broad Forgiveness of Student Loans’ With No Avenues for Challenge

The lawsuit filed in February 2023 (pdf) by CCST stems from a rule adopted by the Education Department in November 2022, which implemented the borrower defense statute, giving borrowers new ways to avoid repayment of their federal student loan debt.

Specifically, the borrower defense statute let student borrowers seek relief from their federal student loan debt if they were defrauded or misled by a school. The program provides a process for borrowers to have their federal student loans forgiven in full by the Education Department if they can demonstrate that their school engaged in certain types of deceptive or illegal practices.

However, CCST argued in its complaint that the program was heavily skewed toward borrowers unproven claims, to the detriment of schools. They also noted that the Biden administration had pledged in its election promises to forgive student debt on a large scale.

“The apparent goals of this new framework are to accomplish massive loan forgiveness for borrowers and to reallocate the correspondingly massive financial liability to institutions of higher education,” CCST attorneys wrote in the complaint.

They argued further that the rule would “cause financial and reputational harm to schools, educational harm to students, and budgetary harm to the public,” while representing “massive” government overreach.

CCST also noted that one of the more remarkable parts of the rule was to create a new way of forgiving student loans via a so-called “group process,” basically a form of class action that lacked procedures for schools to challenge it; for instance, as part of the discovery process or individual witness examination.

Calling the rule part of the Biden administration’s “arsenal to pursue broad forgiveness of student loans,” CCST argued in its complaint that the revamped borrower defense rule creates more favorable outcomes for borrowers in group versus individual proceedings and so is “arbitrary and capricious, and violates fundamental principles of due process.”

‘Unreasonable Burdens on Borrowers’

By contrast, the Education Department said in a November 2022 announcement that in the course of public comment on the proposed rulemaking, many commenters backed the borrower defense rule revamp because the previous version “required borrowers to meet an unrealistic standard that made it extremely difficult to prove harm.”

“Other commenters supported the proposed regulations citing that they are more streamlined, easier to administer, less confusing, and they eliminate unreasonable burdens on borrowers,” the Education Department said at the time.

Prior to the CCST lawsuit, there was also some opposition expressed to the new rule as part of the commenting process, including the argument that the Education Department lacked the legal authority to issue them, that the rules are too vague, and that institutions were not given enough due process.

Commenters who opposed the rule also argued that it would lead to frivolous claims and impose greater costs on institutions, both in terms of defending against recoupment efforts and reputational harm for institutions, as well as the potential for actions by other regulators, loss of private financing, and the possibility of borrower lawsuits.

In its Aug. 7 order, the appeals court has set a hearing for Nov. 6 in the case, with the CECU chief executive saying he believes there’s a “strong chance” the rule will eventually be overturned in a final ruling.

“CCST’s legal case against the Department of Education’s unlawful BDR rule is strong and we are confident that when the case is brought forward the facts will show the new rule to be an agency overreach in violation of the Department’s authority, the Administrative Procedure Act, and the Constitution,” Mr. Altmire said in a statement.

“Knowing that this rule has a strong chance to be struck down during the upcoming legal process, it is unjustifiable to allow its implementation while the court proceedings continue,” Mr. Altmire added.

By contrast, Mr. Ament said the appeals court’s injunction amounted to open season on students by unscrupulous institutions.

“We cannot afford a green light for dishonest schools to continue harming students. Defrauded borrowers are legally entitled to relief and their institutions should be held accountable,” he said.

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