Background

The U.S. Department of Education is seeking to expand the right of all federal student loan borrowers to seek loan forgiveness. Specifically, it has begun a negotiated rulemaking proceeding to promulgate regulations clarifying the process for students to obtain forgiveness of their federal loans. 

Negotiated rulemaking hearings will take place from January-March 2016, and then the Department will set a schedule for public comment. The Department’s goal is to issue a final regulation by November 2016. 

The statutory basis for loan forgiveness is a provision of the Higher Education Act, called the "Borrower’s Defense to Repayment" provision, which provides that student borrowers can be relieved of the obligation to repay their federal loans if they can prove that the school committed "any act or omission...that would give rise to a cause of action against the school under applicable State law." If the defense to repayment is successful, the Secretary can initiate a proceeding against the school to recovery the amount of the loan forgiven. 

Loan Forgiveness is NOT just a For-Profit Problem 

While federal student loan forgiveness has been a much discussed topic of concern for many for-profit schools, it is unlikely that most traditional public and private schools have even considered that they might face similar problems. Unfortunately, the possibility of more lenient federal student loan forgiveness is a looming problem for all schools, regardless of their profit status. 

We do not mean to suggest that traditional schools have or are acting deceptively, but there already have been claims against traditional schools that—if successful—would have qualified for loan forgiveness. For example, a few years ago, recent graduates of John Marshall Law School, IIT Chicago-Kent College of Law, and DePaul University College of Law brought lawsuits alleging that the schools misrepresented their employment statistics. While those claims were not successful, those lawsuits may be the tip of the iceberg. Between 1995 and 2015, there were only five claims made under the "Borrower's Defense to Repayment" provision. In 2015, through September there have been more than 4,100 claims made under that provision. 

Any school that advertises its post-graduate employment statistics, the transferability of its credits, or makes any affirmative representations in its advertising at all, may be at risk if it later turns out that those representations were not entirely accurate. Indeed, claims have been made that purchase of search terms on Google can be considered deceptive if not employed properly. Also, online programs, many of which target the same student population that up until recent times may have enrolled in for-profit schools, would be a high risk of such claims. Finally, nothing in the statute limits defense of repayment to “acts or omissions” only under state law, raising the specter of the Department expanding actionable acts or omissions to include federal law claims. 

Conclusion 

At a time when student debt has become a hot political topic, it is hard to see the process for loan forgiveness becoming more difficult. While it is not known how the Department intends to remake this rule, it seems likely that the goal is to redefine the somewhat ambiguous standard of an "act or omission" necessary to invoke relief. Even if the Department’s unstated goal is to simplify the process for students of for-profit colleges, it is likely that lowering the bar may ensnare traditional schools, as well. Regardless of how the Department’s rulemaking process comes out, the topic of loan forgiveness should be a topic of concern for all schools. Thus, all institutions of higher education should closely watch this rulemaking proceeding and consider participation.