Education Blog Essay

Federal Financing of Predatory Higher Education

On a Friday night in October, the Department of Education delayed by two more years the implementation of rules issued by the Obama Administration that would have governed the process for considering students’ claims that they were defrauded by for-profit colleges. By prevailing on these claims, they would be entitled to discharge of the federal student loans incurred based on the school’s fraud. Borrowers’ right to relief from fraudulent debt arises from decades-old statutes and regulations that govern the federal student loan program, as well as the contract governing the debt, hundreds of years of common law, and the requirements of due process. The delayed rules clarified the administrative process for borrower defense claims on non-defaulted loans and added other protections for borrowers like prohibiting schools participating in the federal student aid program from forcing students to bring claims in arbitration.

While borrowers await a formal legal framework by which their defenses will be evaluated, the Department has not granted or denied a single claim since January 20. As of July, the Department had already accumulated nearly 70,000 such “borrower defense to repayment claims” from former students of for-profit colleges, a small fraction of the borrowers likely entitled to relief. Some borrowers have been waiting for years, and although their claims are mired in complicated administrative law issues, their rights hinge on basic principles of contract and due process.

By denying consumer and contract rights to federal student loan borrowers, and in particular by tightening the vise on those who borrowed to attend for-profit schools, the federal government has exacerbated the disparate legal positions of the companies profiting from the federal student aid program and the students intended to benefit. With its recent unlawful delays, the Administration is further exacerbating the imbalance of rights and risks that has increasingly characterized the relationship between these companies and their students.

For-profit colleges that receive federal student loans are vocational by definition, and therefore are statutorily required to prepare students for “gainful employment” in a specified field. Students attend for job training, but leave with excessive debt and without improved job prospects. The industry targets vulnerable populations and communities of color. One company trained its recruiters to identify “Student Profiles” for enrollment: “Welfare Mom w/Kids. Pregnant Ladies. Recent Divorce. Low Self-Esteem. Low Income Jobs. Experienced a Recent Death. Physically/Mentally Abused. Recent Incarceration. Drug Rehabilitation. Dead-End Jobs-No Future.” Corinthian paid over half a million dollars to BET in a single week just before it shut down in 2014. By targeting communities of color, the for-profit sector exacerbates already-enormous racial disparity in wealth and other resources.

For more than seventy years, the federal government has provided nearly all of the  funding for the scandal-ridden for-profit college industry. For example, in 1945, the House Committee on World War Veterans’ Legislation discussed the marketing costs and high-pressure sales tactics of correspondence schools marketed to veterans. In 1991, a Senate report recommended, inter alia, that the Department of Education set limits on the type of proprietary school programs subsidized and the amount of funding given to those programs, as well as develop assistance for borrowers defrauded by “profiteers.” Still, the problem has only worsened.

This industry, which profits from federal funding intended to increase access to higher education, has sought and obtained extraordinary legal and financial protections for itself. For example, schools have created effective shields against claims from students through the adoption and enforcement of arbitration provisions in enrollment agreements. These provisions almost always include strict confidentiality terms – a practice the Obama Administration rules would have prohibited. (In 2016, ITT Tech went so far as moving to compel the New Mexico Attorney General’s claims for restitution for defrauded student loan borrowers to confidential arbitration.) Through litigation and lobbying, the industry has turned back some of the most serious attempts at federal regulation and has aggressively deployed preemption arguments to shield against state court enforcement. In several instances, companies have sought shelter from regulations by pursuing non-profit tax status while continuing to generate revenue for owners. When they face substantial liability, companies shed it through bankruptcies that reveal their thin capitalization.

Student borrowers, on the other hand, have few protections. Bankruptcy, the fresh start enshrined in the Constitution, became presumptively unavailable to federal student loan borrowers in 1998, after initial contractions in 1976 and 1990. Federal student loans may be collected indefinitely, despite state law limitation periods — mostly between three and six years on written contracts. Unlike private creditors, who must pursue judgments and coercive collections in court, the government garnishes defaulted borrowers’ wages and seizes tax refunds after merely sending a notice, regardless of whether that notice is received or whether the government knows the underlying debt to be invalid. In 1992, Congress eliminated any minimum age requirement for federal student loans. These alterations to the typical legal relationship between debtors and creditors make the obligation of student loan debt more individualized and less socialized than nearly any other form of debt in America.

Moreover, for decades, federal policy has actively sought to keep this bad debt “on the books” by limiting access to statutory grants of federal debt relief. The Department of Education, to cite just one example, litigated for two years to avoid suspending collections and notifying former students of Wilfred Academy that they were eligible for debt relief despite the agency’s findings that, as a result of pervasive fraud throughout the company, all applications for discharge it received should be granted. The agency went so far as to try to moot the named plaintiffs’ claims by granting their individual applications for relief while the appeal was pending before the Second Circuit. The appeals court rejected the Department’s argument that its decision to suspend collection and notify borrowers subject to the type of fraud at issue was discretionary, despite statutory language to the contrary. In other cases, courts have repeatedly admonished the Department for imposing extra-statutory or conflicting restrictions on discharges for borrowers, including students whose schools have closed, who were unlawfully enrolled without a high school credential, or who have become unable to work because of a disability. A bankruptcy appeals panel even criticized the company that litigates bankruptcies on behalf of the Department, finding that its collection activities “constituted an abuse of the bankruptcy process and defiance of the court’s authority.”

When the debt in question is the result of a predatory transaction, students are particularly poorly positioned. Usually, consumers harmed by debt-financed transactions may obtain relief by suing original sellers of goods or services, the financiers of those transactions, or any subsequent holder of their debt. For-profit colleges, protected by arbitration which in turn has prohibited class actions and limited the development of case law, have essentially blocked this avenue for relief. Students seeking to hold their federal lender accountable face an initial barrier of sovereign immunity. These significant impediments are more challenging still because of the communities targeted by the for-profit college industry.

While their claims have been re-routed to the government from their more typical expression in courts or in bankruptcy, more and more borrowers have come forward to assert their legal rights in recent years.

Still, the pending claims of defrauded borrowers—not one of which has been adjudicated since the change in administration—are a minuscule percentage of the billions of dollars of unenforceable student loan debt currently held by the federal government. In its final five years, the defunct Corinthian Colleges chain enrolled 350,000 students, who now owe more than $3.5 billion in federal student loans, the enforceability of which is now belied by the company’s pervasive and well-documented fraud. That money will never be recouped from Corinthian, which declared bankruptcy in 2015. In the ten years before its 2016 bankruptcy, ITT Tech enrolled more than 750,000 students and took in more than $11 billion. Overall, the student loan debts originated by for-profit colleges total more than $200 billion. And, because of its role, the federal government is responsible—morally and financially—for the liability of the uncollectable loans.

Ultimately, federal taxpayers will be forced to acknowledge the financial loss of these debts, even if this and future administrations ignore the defenses statutorily provided to student borrowers and refuse to ever officially acknowledge the volume of uncollectable loans for which the government is responsible. Despite the government’s ability to pursue nearly every dollar in federal student loan debt and the scant ability of borrowers to escape collections, the government cannot collect where there is no money to take. Called to account, the federal government frames its utter disregard for debtors’ rights as a choice to protect taxpayers and higher education against rogue and greedy student debtors. Secretary DeVos recently told a group of Michigan Republicans: “While students should have protections from predatory practices, schools and taxpayers should also be treated fairly as well . . . . Under the previous rules, all one had to do was raise his or her hands to be entitled to so-called free money.” Rather than choosing between relieving defrauded borrowers and protecting taxpayers, the Department of Education is in fact choosing to further subsidize predatory businesses at extraordinary expense to students. Taxpayers are on the hook either way.

The Department of Education has for many years chosen to enforce debt that increases existing inequality. It has attempted to alter the relationship of debtors and creditors to an unrecognizable point. And it has enabled and promoted a predatory industry. The fundamental incoherence of this approach matches its fundamental unfairness. If higher education is to be treated as a private good, student loan borrowers must have the rights and remedies of consumers, and the for-profit companies involved in the transactions should face commensurate liabilities. Alternatively, the government’s disbursement of more than $100 billion per year to more than ten million students suggest that higher education continues to be treated as a public or quasi-public good, and the treatment of debt used to finance it should be reconsidered accordingly. Otherwise, debt-financed higher education becomes a trap for the unwary and inexperienced, increasing instead of diminishing inequality.