Dicent v. Kaplan University: An unhappy student sues a for-profit university, but the Third Circuit forces her to arbitrate her claims

Maria Dicent enrolled in an online legal studies program at Kaplan University in 2014. She did not have a good experience. In 2017, she sued Kaplan in a federal court, accusing the for-profit university of making false claims and disseminating false advertisements.

According to Ms. Dicent, Kaplan lured her into enrolling in Kaplan's online program by using deceptive tactics. She said she had not been informed that she would need 180 hours to graduate, far more hours than a typical four-year degree program requires and that she had not been able to keep her eBooks, which she apparently paid to use. She also said Kaplan's financial aid office retaliated against her because she refused to allow her photo to be used to promote Kaplan.

Unfortunately for Ms. Dicent. she signed an arbitration agreement when she enrolled at Kaplan back in 2014. In that agreement, Dicent promised not to sue Kaplan and to arbitrate any claims she might have against the for-profit. She also agreed to waive her right to a jury trial.

Based on the arbitration agreement, a federal trial court threw out Dicent's suit and ordered her to arbitrate her clam. Dicent, who pursued her case without a lawyer, then appealed to the Third Circuit Court of Appeals, which sided with the trial court.

Dicent argued on appeal that she was not aware of the arbitration agreement, but the Third Circuit did not buy her argument. A clearly labeled Arbitration Agreement was included in Dicent's enrollment packet, the court noted; and Dicent admitted having signed the packet with an e-signature.

Dicent v. Kaplan University is an unfortunate decision. The Obama administration recognized that for-profit colleges were using arbitration agreements to prevent students from suing them for fraud or other misconduct. Obama's Department of Education adopted a regulation forbidding the for-profits from forcing their students to sign arbitration agreements.

 Betsy DeVos, President Trump's Secretary of Education, scuttled the Obama ruled shortly after taking office, but a federal court ordered her to implement it. In light of that ruling, Secretary DeVos released new guidance to the for-profit colleges, instructing them to drop enforcement of mandatory arbitration agreements.

In recent years, a few courts have invalidated arbitration agreements on various grounds. Some courts have labeled them adhesion contracts--agreements which a stronger party forces a weaker party to sign on unfavorable terms. Other courts have looked at the inherent unfairness in some of these agreements. For example, a California court refused to enforce an arbitration agreement that required California students to arbitrate their disputes against a medical-training school in Indiana.

Poor Ms. Dicent. Acting without an attorney, she was probably unaware of the legal arguments that can be made against arbitration agreements that for-profit colleges require students to sign as a condition of enrollment. She may not have known that the Obama administration recognized these agreements for what they are--a shyster tactic to protect for-profit colleges from being sued for fraud.

I feel quite certain that Ms. Dicent was telling the truth when she said she did not know about the mandatory arbitration agreement until Kaplan submitted it in district court. Almost all students sign long, turgid documents as a condition of enrollment, and most of them sign without reading. What would be the point? When students enroll at a for-profit college, they are enrolling on the college's terms, and they realize they have no power to negotiate.

What is so bad about arbitration agreements? First of all, the complaining party is usually required to pay half the arbitrator's fees, so arbitration may be more expensive for the student than a lawsuit. Second, arbitration agreements often bar students from banding together to file class actions suits, which is virtually the only way students can obtain justice against the well-funded for-profits with their battalions of lawyers.

Finally, it is well known that arbitration generally favors the corporate party. That is why banks, financial-services institutions, and for-profit colleges force their customers to sign them. The arbitrators know they will see a defrauded student only once, but they will see the corporate party again and again. If they get a reputation for siding with the underdog, the corporations won't choose them to arbitrate their disputes.

The for-profits know they will repeatedly be accused of defrauding their students. The best way to deal with this constant threat is to get the students to promise not to sue before allowing them to enroll. Then when students get defrauded--as many of them will--there will be damn little they can do about it.

References

Dicent v. Kaplan University, Civil Action No. 3:17-cv-01488 (M.D. Pa. June 15, 2018), aff,d No-18-2982 (3d Cir. Jan. 3, 2019).

Dicent v. Kaplan University, WL 158083, No-18-2982 (3d Cir. Jan. 3, 2019) (unpublished opinion).

Kreighbaum, Andrew (2019, March 18).  DeVos Tells Colleges to Drop Arbitration Agreements, Inside Higher Ed.

Parent PLUS loans: African American families are being exploited by HBCUs

Rachel Fishman wrote a report for New America titled "The Wealth Gap PLUS Debt: How Federal Loans Exacerbate Inequality for Black Families."   But a better titled would have been this: "The Parent PLUS student-loan program screws African American families."

Parent PLUS is a federal student loan program that allows parents to take out student loans for their children's postsecondary education. Parents can borrow up to the student's total cost of attending the college of their choice--there is no dollar cap on the amount that parents can borrow.

Originally, the Parent PLUS program had very low eligibility criteria, and the Department of Education was making loans to parents who had a history of bad debts. DOE tightened the criteria in 2011, which raised an outcry from HBCUs (Historically Black Colleges and Universities).

HBCUs favor Parent PLUS loans because DOE does not report default rates on these loans and does not penalizes colleges for high Parent PLUS default rates.  As Fishman explained, "Parent PLUS loans are not included in CDR [cohort default rate] calculations, rendering them a no-strings-attached revenue source for colleges and universities" (P. 9). Indeed, for many colleges, "Parent PLUS loans are like grants; they get money from the federal government and the parent is on the hook to repay."

In response to strenuous protests from HBCUs, the Obama administration backed off on its efforts to make borrowing standards more rigorous, and the amount of money parents borrow under the program has increased.  According to Fishman, the percent of Parent PLUS borrowers with debt over $50,000 increased from 3 percent in 2000 to 13 percent in 2014 (p. 19).

Basically, the Department of Education is toadying to the HBCUs by loaning money recklessly to African American families that probably can't pay it back. In fact, Fishman reported that one third of African American parents taking out PLUS loans had incomes so low they were able to make zero estimated family contributions (EFC) to their children's college costs.

As Fishman points out, Parent PLUS loans adds to  a family's total debt for putting a child through college. Black families with zero EFC accumulate an average of $33,721 in "intergenerational indebtedness," which includes an average of $11,000 in PLUS loans in addition to the amount borrowed by the students themselves.

Fishman's report adds to a growing body of evidence showing that African Americans are getting screwed by the federal student loan program. Ben Miller, writing for the Center for American Progress (as reported by Fishman) "found that 12 years after entering college, the median Black borrower owed more than the original amount borrowed."  And default rates for African American college graduates is almost triple the rate for white graduates: 25 percent for black graduates and only 9 percent for white graduates.

A Brookings Institution report also calculates high default rates for black student borrowers. Judith Scott's Brookings report estimates that 70 percent of African American borrowers in the  2003-2004 cohort will ultimately default.

And the student-loan default rate for African Americans who drop out of for-profit schools without graduating is catastrophic.  Three out of four black students who borrow money to attend a for-profit institution and drop out before graduating default on their student loans.

But who gives a damn if the federal student loan program screws African American students and their families? HBCUs like the Parent PLUS program, because the Parent PLUS default rate doesn't penalize the colleges.  Parent PLUS money is essentially "free money" to a HBCU although one third of African American families who take out these loans show zero ability to repay.

References

Rachel Fishman. The Wealth Gap PLUS. How Federal Loans Exacerbate Inequality of Black Families. New America.org, May 2018.

Andrew Kreighbaum. How Parent Plus Worsens the Racial Wealth Gap. Inside Higher Ed, May 15, 2018.

Representative Alma Adams urges limited loan forgiveness for Charlotte Law School Students: Adams' plea does not go far enough

Representative Alma Adams, Democratic congresswoman from North Carolina, wrote a letter to Secretary of Education Betsy DeVos, urging DeVos to forgive student loans held by students who attended Charlotte School of Law (CSL) from December 2016 until the school was shut down last August.

Representatives G.K. Butterfield and David Price, also from North Carolina, joined Adams in the letter.  The three laid out a seething indictment of CSL, which has been in trouble for a couple of years. The American Bar Association put CSL on probation in October 2016 for misrepresenting the law school's accreditation status and bar passage rates. And the Department of Education yanked the school's eligibility for federal student aid a few months later. Finally, in August 2017, the North Carolina Board of Governors pulled CSL's license to operate--dealing a death blow to the school.

 Without question, CSL was a train wreck. The troubled school had high dropout rates and abominable bar passage rates. Only about a third (35 percent) of CSL graduates passed the North Carolina bar exam in February 2016, compared to 51 percent statewide.  According to Adams and her colleagues, this passage rate would have been even lower if the law school had not paid CSL students not to take the exam. Moreover, the North Carolina legislators alleged, CSL students racked up an average of $200,000 in student-loan debt. Those who were enrolled when the school closed have little hope of having their credits accepted at another law school.

Under current Department of Education regulations, students are eligible for student-loan forgiveness if they were enrolled at a school at the time it closed or up to 120 days prior to closure. The regulations give the Education Secretary the authority to extend the 120-day enrollment requirement if circumstances warrant; and Adams and her colleagues asked DeVos to grant loan forgiveness to all students were enrolled at CSL from December 2016 until the day it closed.

Representatives Adams, Butterfield and Price are to be commended for seeking relief for recent CSL students, but their petition does not go far enough. In my view, every student who attended CSL from the day it opened until the day it closed should be granted student-loan forgiveness--without exception.

Before it shut down, CSL was one of the worst law schools in the United States by almost any measure. Based on metrics developed by Law School Transparency, a public interest law-school monitoring organization, 50 percent of CSL's 2014 entering class ran an "extreme" risk of failing the bar exam, and additional 25 percent ran a "very high" risk of failing the exam.

And it fact, less than half of CSL's 2015 graduating class passed the bar. Moreover, less than 25 percent of its 2016 graduates obtained full-time law jobs; and the law school's underemployment rate for that class was 58.8 percent.

Without question, a lot of former CSL students believe they were defrauded by their law school. According to an Inside Higher Ed story, more than 500 former students filed "borrower defense" claims based on allegations of fraud, and several class-action suits have been filed against the school.

Based on CSL's abysmal record, the only fair thing DeVos can do is wipe out all student-loan debt for every individual who took out student loans to attend CSL. And then DOE needs to take a close look at the other for-profit law schools that are still operating. All law schools with bar pass rates below 50 percent should be closed.

Rep. Alma Adams (in hat). Photo credit: Scott Applewhite AP

References

William Douglas. N.C. Democrats urge Charlotte Law School student loan forgiveness.  The News & Observer, November 6, 2017.

Andrew Kreighbaum, Department Lays Out of Options for Charlotte Students. Inside Higher ED, August 25, 2017.

Andrew Kreighbaum, The Slow Death of a For-Profit Law School. Inside Higher Ed, August 16, 2017.

Like a Galapagos tortoise, Education Department ponders debt relief for students victimized by the for-profit colleges

Corinthian Colleges filed for bankruptcy in 2015, and ITT Tech went bankrupt a year later. Together, the two for-profit college companies left more than half a million students and former students in the lurch. Thousands of these victims filed so-called borrower-defense claims with the Department of Education, asking DOE to forgive their student loans on the grounds that they were defrauded.

The Obama administration approved regulations for processing these claims, but Betsy DeVos put them on hold. She was concerned, she said, that the Obama rules might give undeserving students "free money."

Now DOE has approved a panel of 17 experts to overhaul the Obama regulations. According to a story in Inside Higher Ed, the DeVos Department anticipates the new rules won't go into effect until 2019. Under that timetable, defrauded borrowers won't even have an avenue of relief until four years after Corinthian filed for bankruptcy.

Meanwhile, hundreds of thousands of student borrowers who attended one of the Corinthian schools, ITT Tech, and dozens of other dodgy for-profit colleges will be making monthly loan payments for worthless education experiences. Hundreds of thousands of others will put their loans into deferment, which will relieve them from making loan payments but will cause their loan balances to go up due to accruing interest. And thousands more will simply default, which will allow the federal government's sleazy loan collectors to slap on penalties and fees to their loan balances.

But DeVos doesn't give a damn about the carnage wreaked by the corrupt for-profit college industry. In fact, she is doing everything she can to prop it up.

And so, Betsy DeVos, Amway heiress and for-profit co-conspirator, lumbers along like a Galapagos tortoise, oblivious to the misery experienced by millions of student debtors--who are now defaulting at the rate of 3,000 a day.

The DeVos Education Department ponders student-loan debt relief.

References

Danielle Douglas-Gabriel. Former ITT Tech students fight for some money in the company's bankruptcy case. Los Angeles Times, January 3, 2016.

Andrew Kreighbaum. Education Dept. Borrower-Defense Negotiators. Inside Higher Ed, October 26, 2017.

Shahien Nasiripour. Corinthian Colleges files for bankruptcy. Huffington Post, May 5, 2015.

The Wrong Move on Student Loans. New York Times, April 6, 2017.

Betsy DeVos sabotages Obama's borrower-defense rule for processing student borrowers' fraud claims: She fears students will get "free money"

The collapse of Corinthian Colleges and ITT Tech shined a light on the seedy for-profit college industry.  Both for-profit college companies filed for bankruptcy under a cloud of accusations of fraud and misrepresentation.

Together, Corinthian and ITT Tech had more than half a million former students. Thousands of them filed so-called "borrower defense" claims, petitioning the Department of Education to forgive their student loans because they were defrauded by the institutions they attended. About 65,000 borrower-defense claims are now pending.

What to do? The Obama Administration prepared borrower-defense regulations that were scheduled to take effect on July 1, 2017; but Secretary of Education Betsy DeVos blocked their implementation, saying the rules would be rewritten through the "negotiated rule making" process. DeVos' decision will allow the for-profit industry a voice in reshaping the rules to their liking.

Why did DeVos block the Obama-era regulations? She said the regulations drafted by the Obama administration would allow students to get "free money" by having their loans forgiven.  In other words, DeVos apparently assumes students who file fraud victims are themselves engaging in fraud by seeking debt relief.

This latest caper from DeVos' Department of Education tells us all we need to know about President Trump's least qualified cabinet appointee . Time and time again, DeVos has made decisions to benefit the for-profit colleges at the expense of students; and she has hired consultants who have worked in that sleazy industry.

Millions of people have borrowed money to attend overly expensive for-profit colleges only to receive educational experiences that are virtually worthless. Some were defrauded, some obtained degrees that did not lead to good jobs, and some just paid too much for substandard postsecondary programs. Unless these people obtain relief from their student-loan debt, they will never get on their feet financially.

The Obama administration's borrower-defense regulations were drafted to determine which for-profit students are fraud victims entitled to student-loan debt relief. In my mind, however, it is impossible to efficiently decide on a case-by-case basis which student borrowers are entitled to debt relief due to fraud. That would require hundreds of thousands of individual due-process hearings.

No, the only way to give worthy student-loan debtors a fresh start is through bankruptcy. Congress must amend the Bankruptcy Code to treat student loans like any other consumer debt.

If insolvent student-loan debtors were given reasonable access to bankruptcy, millions of cases would be filed and at least half a trillion dollars in debt would be wiped out.

A half trillion dollars in student-loan debt relief would be a big hit to the U.S. treasury, but let's face it. Millions of student loans will never be paid back. It would be far better for the overall national economy if student borrowers were given a fresh start rather than be forced into 20- and 25-year repayment plans in which borrowers make token monthly payments that don't even cover accruing interest.

DeVos either doesn't understand the magnitude of the student-loan debt crisis or she doesn't  care. Either way, she is a disaster who needs to be cashiered.

Betsy DeVos: Having a good laugh at college students' expense

References

James Briggs. Former ITT Tech students got promise of help, then silence. USA Today, May 22, 2017.

Corinthian Colleges Students Eligible For Loan Discharge. National Bankruptcy Forum, June 22, 2017.

Andrew Kreighbaum. Devos: Borrower-Defense Rule Offered 'Free Money'. Inside Higher ED, September 26, 2017.

Chad Miller.  Understanding 'Borrower Defense to Repayment": A New Yellow Brick Road to Federal Student Loan Forgiveness. American Action Forum, November 1, 2016.

Michael Stratford. More Debt Relief for Corinthian Students. Inside Higher Ed, March 28, 2016.

The SIMPLE Act is misnamed. It's really a Federal Sharecropper Enrollment Program for Distressed Student Borrowers

Hello, Americans. If you think you got screwed by Obamacare, brace yourselves. There may be more Congressional skulduggery ahead. A gang of wooden-headed legislators has conspired to introduce a bill called the SIMPLE Act, which, if passed, will push millions of Americans into becoming sharecroppers for the government for a majority of their working lives.

In keeping with Congressional tradition, the bill is known by a tortuous acronym. SIMPLE stands for Streamlining Income-Driven Manageable Payments on Loans--cute! But let's take a look at the guts of this pernicious legislation, and we will see that a more accurate title of the bill would be the Federal Sharecropper Enrollment Act:

If enacted into law, this is what the SIMPLE Act will do:

First, the bill authorizes the Internal Revenue Service to automatically recertify the income of student borrowers in income-driven repayment plans (IDRs).

Second, the bill allows the government to automatically enroll delinquent student borrowers into IDRs. The enabling language is complicated, bu this is how Representative Ryan Costello (one of the bill's cosponsors) described an earlier iteration of the bill in 2016:

Under our bill, the Department of Education would auto-enroll certain borrowers who have missed payments into a lower monthly payment plan in order to reduce administrative burdens and decrease the risk of those borrowers being placed into more expensive plans. 

Admittedly, the bill has some good features. It makes sense for the IRS to certify the annual income of IDR participants rather than force the borrowers to do it themselves. In fact, the Government Accountability Office noted last year that about half the people in IDRs get kicked out of those plans for failing to certify their income on an annual basis.

Second, automatically putting delinquent borrowers in IDRs with lower monthly payments is sensible if the alternative is default. And the bill allows borrowers to opt out of being placed in an IDR.

But here's the overarching problem with the SIMPLE Act.  The bill assumes the status quo for the federal student loan program, and its only solution for people who are overwhelmed by their student loans is to shove them into twenty- or twenty-five year repayment plans.

In other words, the SIMPLE Act is streamlining the process of transforming student borrowers into sharecroppers--bound to pay the government a percentage of their income for the majority of their working lives.  And most people in these plans will be making payments so low they won't even be servicing their interest. People in IDRs will see their debt grow larger with each passing year even if they faithfully make payments for a quarter of a century.

The SIMPLE Act is not a solution to the student loan crisis. Basically, its a form of accounting fraud that maintains the fiction that people are paying back their student loans when in fact almost everyone in these plans will never pay off their student loans.

How will Americans react to being transformed into sharecroppers for Uncle Sam? Not well, I predict. Eventually, student borrowers will rise up in fury. Let's hope they vent their anger at the ballot box and not in destructive acts of desperation.

Look on the bright side. We only have to do this for 25 years. 

References

Andrew Kreighbaum. Bipartisan Legislation Tackles Student Loan Defaults. Inside Higher ED, August 4, 2017.

Press release of Representative Suzanne Bonamici. Bonamici, Costello Introduce Bill to Reduce Student Loan Defaults. September 8, 2016.

Trump should fire Betsy DeVos as Secretary of Education for gross incompetence. If Trump fails to act, Congress needs to do whatever is necessary to drive her from office

Let us take our minds off Russia for just a moment and focus on a massive economic problem that affects millions of Americans: the collapsing student loan program. Forty-three million Americans now hold about $1.4 trillion in student loan debt, and a lot of that money will never be paid back. 

As the New York Times recently reported, borrowers defaulted at the rate of 3,000 a day last year; and a total of more than 8 million people are in default. Default rates are highest in the for-profit college industry; five-year default rates in this sector are almost 50 percent.

The Department of Education is trying to keep default rates down by pressuring borrowers into income-driven repayment plans, but that tactic isn't working. Nearly half the people who sign up for those plans drop out within three years; and a lot of defaulting borrowers don't even bother to sign up.

In short, the federal student loan program is a train wreck, a catastrophe, an unmitigated disaster. 

As President Trump's Secretary of Education, it is Betsy DeVos's job to address the student-loan crisis; but in a series of wrongheaded decisions, DeVos has demonstrated that she is either grossly incompetent or in bed with the sleazy for-profit college industry. President Trump must fire her immediately, and if he does not, then Congress needs to bring all its forces to bear to drive her from office.

Here is a brief list of DeVos's fumbling misbehavior:

First, she hired consultants from the for-profit industry to give her advice, which is like a hiring a burglar to be a bank guard.

Second, she canceled the Obama administration's order that restrained loan processors from slapping huge fees on student-loan defaulters who quickly brought their loans back into repayment status.

Third, she is overhauling the Department of Education's new regulations for processing borrowers' applications to have their student loans forgiven based on claims of institutional fraud. This bureaucratic delay tactic will leave thousands of defrauded college borrowers in limbo for months and even years.

And finally, DeVos blocked implementation of a Department of Education directive banning for-profit colleges from forcing students to sign mandatory arbitration clauses as a condition of enrollment.

In my view, allowing the for-profit colleges to continue including mandatory arbitration clauses in their student enrollment documents is DeVos's most outrageous decision. Mandatory arbitration clauses bar students from suing their institution for fraud and prevent students from banding together to file class actions suits against colleges that engage in massive fraudulent behavior.

About a year ago, the Century Foundation urged the Department of Education to require the for-profits to stop including mandatory arbitration clauses in their enrollment documents, and two for-profits--University of Phoenix and DeVry University, publicly agreed to abandoned them voluntarily.

Numerous commentators have criticized the use of mandatory arbitration agreements when they are used by corporations to insulate them from lawsuits. Just within the last year, two courts have struck down mandatory arbitration clauses that for-profit education providers tried to enforce. In one case, a university's arbitration agreement required California students to arbitrate their claims in Indiana!

Since taking office, DeVos has shown herself to be a stooge for the for-profit college industry. If she knowingly does the bidding of this shady racket, then she behaving reprehensibly. If she is acting on the industry's behalf out of ignorance, then she's grossly incompetent.

But her motivations don't matter. Betsy DeVos has got to go. If Trump doesn't fire her soon, then federal legislators should join in a bipartisan call for her removal. Americans deserve a competent Secretary of Education who will act in the public interest, not the interests of the venal for-profit college industry. 

References

Patricia Cohen. Betsy DeVos's Hiring of For-Profit College Official Raises Impartiality Issues, New York Time, March 17, 2017. 

Danielle Douglas-Gabriel. Trump administration rolls back protections in default on student loans. Washington Post, March 17, 2017.

Seth Frothman & Rich Williams. New data documents a disturbing cycle of defaults for struggling student-loan borrowers. Consumer Financial Protection Bureau, May 15, 2017. 

Andrew Kreighbaum. Advocates say department inaction forced arbitration,defrauded borrowers in bind. Inside Higher ED, June 26, 2017.

Andrew Kreighbaum. Education Department to hit pause on two primary Obamaregulations aimed at for-profits. Inside Higher ED, June 15, 2017.

Consumer Financial Protection Bureau. New Data Documents a Disturbing Cycle ofDefaults for Struggling Student Loan Borrowers. May 15, 2017.

Tariq Habash & Robert Shireman. How College Enrollment Contracts Limit Students' Rights. Century Foundation, April 28, 2016.

Magno v. The College Network, Inc.. (Cal. Ct. App. 2016).

Morgan v. Sanford Brown Institute, 137 A.3d 1168 (N.J. 2016).

News Release. Apollo Education Group to Eliminate Mandatory Arbitration Clauses. May 19, 2016.

Federal court orders the Department of Education to rule on Everest College student's request for debt cancellation: Sarah Dieffenbacher v. Betsy DeVos

Dieffenbacher v. U.S. Department of Education: A Student Borrower seeks debt relief on grounds of fraud

From 2007 to 2012, Sarah Dieffenbacher attended Everest College-Ontario Metro, a for-profit college located in Ontario, California. She took out $50,000 in federal student loans to fund her studies.

In March 2015, Dieffenbacher filed a "borrower defense" application with the U.S. Department of Education, petitioning to have her loans cancelled on the grounds that Everest had engaged in fraudulent conduct in violation of California law.

In August 2015, Dieffenbacher defaulted on her loans. Educational Credit Management Corporation, her loan servicer, sent her a notice stating that it intended to begin garnishing her wages.

Dieffenbacher filed a timely objection and a request for a hearing. This objection consisted of a 29-page letter accompanied by 254 pages of exhibits. These exhibits included Diefenbacher's sworn statement and records from the California Attorney General's Office showing documented misconduct by Everest and its parent company, Corinthian Colleges.

On January 20, 2017, Dieffenbacher's attorney received a letter from the Department of Education stating that DOE was denying Dieffenbacher's objection to having her wages garnished. DOE said its decision was conclusive and that Dieffenbacher's only recourse was to file a lawsuit in federal court.

This Dieffenbacher did. In her lawsuit, Dieffenbacher claimed that DOE's decision was arbitrary and capricious and violated the Administrative Procedure Act.

Without admitting fault, DOE filed a motion to remand Dieffenbacher's case back to the Department so that its decision could be "reconsidered and re-issued in a way that would not be arbitrary, capricious, or contrary to law."

Judge Virginia Phillips' decision

Last week, Judge Virginia Phillips, a California federal judge, denied DOE's request for a voluntary remand. In Judge Phillips' view, the Department "[had] not established a substantial or legitimate concern guiding its request for a remand."

The judge pointed out that Dieffenbacher's application for loan forgiveness had been pending for more than two years and that the Department had made contradictory arguments about what it intended to do.

Indeed, Judge Phillips' suggested that the Department of Education was attempting to get Dieffenbacher out of court so that it could garnish her wages. "The Department's request for remand appears to be an attempt to evade judicial review so that it can retain the ability to garnish [Dieffenbacher's] wages without a conclusive ruling as to the enforceability of her loans," the judge observed. "Under such circumstances, the remand request appears both frivolous and in bad faith" [emphasis supplied].

Judge Phillips concluded her opinion by ordering DOE to rule on Dieffenbacher's loan cancellation application within 90 days. If the Department fails to comply, the judge added, she would proceed to hear Dieffenbacher's claims on the merits.

The Dieffenbacher case: More Evidence of the Department of Education's Stall Tactics

The Dieffenbacher case is the latest example of the Department of Education's efforts to avoid dealing with student borrowers' legitimate applications for loan forgiveness.

In the Price case, which I wrote about recently, DOE took six years to rule on a University of Phoenix graduate's application for loan forgiveness based on her claim that Phoenix falsely certified that she had a high school diploma when she began her studies. Ultimately, DOE disallowed the claim. A federal court in Texas countermanded DOE's ruling and discharged the debt.

Last January, DOE sent a letter to 23,000 former students at Corinthian Colleges, assuring them that their loans had been approved for cancellation and that the loans would be forgiven within the next 60 to 120 days. Almost six months later, DOE has not kept its promise, which prompted a protest letter from 19 states' attorneys general.

So what's going on?

I think Betsy DeVos's DOE pencil pushers have added up the costs associated with discharging students loans under DOE's own rules and regulations and have found those costs to be enormous. DOE is trying to put the brakes on its administrative loan forgiveness process. The Department announced this week that it is rewriting the "borrow defense" regulations that Dieffenbacher relied on.

BUT IT IS TOO LATE. DeVos's efforts to slow down the loan forgiveness process will not withstand scrutiny in the federal courts, as the Price case and the Dieffenbacher case demonstrate.

The Consumer Financial Protection Bureau said in a recent report that eight million student borrowers are in default, with nearly 1.1 million defaulting in 2016 alone. As CFPB pointed out, people are defaulting at the rate of 2 borrowers every minute!

Two things must be done to bring the federal student loan program under control. First, the federal government must stop sending student aid dollars to for-profit colleges, which have shockingly high student-loan default rates.

Second, Congress must amend the Bankruptcy Code to allow distressed student borrowers to discharge their student loans in bankruptcy like any other unsecured consumer debt.

But Betsy DeVos's Department of Education refuses to face reality while it stalls for time. In the end, this approach is going to enrage millions of student borrowers. These borrowers are also voters, and they will vote for any politician who promises real debt relief to the legions of student borrowers who will never pay back their loans.

References

Dieffenbacher v. U.S. Dep't of Educ., ED CV 17-342-VAP (KK) (C.D. Cal. June 9, 2017).

Seth Frotman & Rich Williams. New data documents a disturbing cycle of defaults for struggling student loan borrowers. Consumer Financial Protection Bureau, May 15, 2017.

Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 2017.

Andrew Kreighbaum. Court Orders Education Department to End Delay in Ruling on Loan Discharge. Inside Higher ED, June 9, 2017.

Andrew Kreighbaum. Education Department to hit pause on two primary Obama regulations aimed at for-profits. Inside Higher ED, June 15, 2017.

Andrew Kreighbaum. State AGs Want Action on Student Loan Discharge. Inside Higher Ed, June 6, 2017.

Lisa Madigan, Illinois Attorney General. Letter to Betsy DeVos, US. Secretary of Education, June 5, 2017.

Price v. U.S. Dep't of Educ., 209 Fed. Supp. 3d 925 (S.D. Tex. 2016). [Link is to U.S. Magistrate's opinion, which was affirmed by a U.S. District Judge.] 

Department of Education is slow to forgive loans of student borrowers defrauded by Corinthian Colleges: State Attorneys General urge DOE to move more quickly

Yesterday, nineteen state attorneys general and the Director of the Hawaii Office of Consumer Protection delivered a letter to Betsy DeVos, U.S. Education Secretary, urging the Department of Education to quickly process fraud claims brought by former students of Corinthian Colleges.

The state AGs asked DeVos to approve "swift automatic group discharge" to students in Corinthian cohorts where fraud has been found. Alternatively, the AGs asked DeVos to process individual fraud claims faster.

Corinthian Colleges closed and filed for bankruptcy in 2015, leaving behind more than 350,000 former students who took out loans to pay Corinthian's tuition. Many of these student borrowers were induced to attend Corinthian through fraud, and the nineteen AGs claim there are defrauded Corinthian students in all 50 states.

So far, DOE has discharged 27,000 borrowers from their federal loan debt, but that number is a small fraction of the former students who are entitled to debt relief. Thousands have filed "borrower defense" claims, asking DOE for loan forgiveness, but DOE is not processing these claims quickly. Meanwhile, many Corinthians students are still paying on their loans or defaulted and are subject to having their wages garnished and their credit ruined.

According to the state AGs, DOE notified 23,000 Corinthian student borrowers in January that their loan forgiveness applications had been approved and that "forgiveness should be completed within the next 60-120 days." It's been nearly 180 days since that announcement, and these loans have still not been discharged.

What's going on?

I think the Department of Education is simply overwhelmed by the meltdown of the student loan program. Almost half the people in a recent cohort of students who attended for-profit colleges defaulted within five years. According to a recent article in the Wall Street Journal, half the students who attended more than 1,000 colleges and schools have not paid down one dime of their student loans seven years after their repayment obligations began.

In addition, the first beneficiaries of the Public Service Loan Forgiveness Program will be eligible for debt relief before the end of this year, and DOE has no idea how many people are eligible to have their loans discharged under that program.

Personally, I think Secretary DeVos should adopt the AGs' suggestion and grant swift automatic group discharges to all Corinthian students who were in DOE's "Designated Fraud Cohorts." Or better yet, I think DOE should forgive the loans of all 350,000 former students.

Admittedly, there are probably some people who completed a Corinthian program and actually got a good job, but I'll bet there aren't many. Undoubtedly, the default rate for Corinthian students is extraordinarily high largely due to the fact that Corinthian's students did not get well-paying jobs at the conclusion of their studies.

I recognize there are risks associated with a mass loan forgiveness program. If all 300,000 of Corinthian's former students are granted a discharge, then ITT Tech's former students will ask for blanket loan forgiveness. ITT Tech also closed and filed for bankruptcy, and it has 200,000 former students.

It is shocking to contemplate, but millions of Americans will never pay back their student loans. In addition to the for-profit college students, there are the law graduates who accumulated mountains of debt and can't find law jobs. And then there are the poor saps who got liberal arts degrees from expensive liberal arts colleges; many of them will never pay back their loans.

The 19 state AGs are right to urge Secretary DeVos to grant automatic group discharges for thousands of former Corinthian students. But Corinthian Colleges is the tip of the iceberg. Millions of student borrowers will never pay back their loans, and the ultimate loss to taxpayers will be in the billions.

References

Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 2017.

Tamar Lewin. Government to Forgive Student Loans at Corinthian. New York Times, June 9, 2015, p. A11.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015).

Andrew Kreighbaum. State AGs Want Action on Student Loan Discharge. Inside Higher Ed, June 6, 2017.

Lisa Madigan, Illinois Attorney General. Letter to Betsy DeVos, US. Secretary of Education, June 5, 2017.

The Department of Education's "Heightened Cash Monitoring" list and its list of programs that failed DOE's Gainful Employment Rule: Big Trouble Ahead for American Higher Education

As the Obama administration limps to a close, the U.S. Department of Education issued two lists that should scare the heck out of anyone working in the field of higher education.

First, a few days ago, DOE issued its most recent list of colleges that it flagged for "Heightened Cash Monitoring." More than 500 colleges are on that list.

At about the same time, DOE also released its list  of post-secondary programs that failed DOE's "gainful employment" rule.  More than 800 programs are on that list.

DOE's Heightened Cash Monitoring List: 539 institutions

Let's look first a DOE's Heightened Cash Monitoring List. Most of the schools on this list are for-profit institutions, which shouldn't surprise anyone. Is anyone shocked to discover that Lubbock Hair Academy in Lubbock, Texas and the Institute for Therapeutic Massage in Haskell, New Jersey are on that list?

A lot of the colleges on DOE's Heightened Cash Monitoring List are nonprofit liberal arts schools, and that isn't surprising either. The small liberal arts colleges are finding it more and more difficult to attract students, and a number are on shaky financial ground.  Colleges on the list include secular institutions like Pine Manor College and Mount Ida College in Massachusetts and religious institutions like St. Gregory's University in Shawnee, Oklahoma and St. Mary of the Woods College in Indiana.

But I was surprised that DOE put 38 foreign colleges on its Heightened Cash Monitoring List. Who would have thought the federal government would issue student loans to Americans studying abroad? But it does, and some of those foreign schools have financial concerns that got them on DOE's Heightened Cash Monitoring List.

Here are just a few of the foreign schools that made the list: Medical University of Gdnask in Poland; Tyndale University College and Seminary in Toronto, Canada; and the University of Gloucestershire in Cheltenham, England.

But what surprised me most was the number of public institutions that were flagged by DOE for Heightened Cash Monitoring--84! In Minnesota, more than 30 public colleges and universities made the list, including regional universities like Bemidji State University and Minnesota State University in Mankato. Nine public institutions in Alabama are also on the list, including the University of North Alabama and the University of West Alabama.

In short, DOE's latest Heightened Cash Monitoring list shows us that a lot of for-profit colleges, non-flagship public colleges, and small liberal arts colleges are under financial strain. Not all of the 539 schools on that list will fail in coming years; but certainly some of them will.

More Than 800 Programs Failed DOE's Gainful -Employment Rule

The Department of Education adopted a Gainful-Employment Rule in 2014, which was designed to protect students from enrolling in expensive for-profit colleges that did not prepare them for good jobs. Under this rule, programs risk losing federal student aid money if their graduates do not make enough money on average to justify the expense of getting their education. Specifically, programs fail the Gainful-Employment Rule if their graduates have student-loan payments that exceed 12 percent of their total earnings or 30 percent of their discretionary income.

Over 800 higher-education programs failed DOE's gainful-employment test, which it released this week. As reported by the Chronicle of Higher Education, 98 percent of the failing programs were offered by for-profit institutions. But even the mighty Harvard University made the list for one of its programs--a certificate program in theater arts.

Here is what surprised me about the list of programs that failed the gainful-employment test: Only two law schools were on it. Florida Coastal School of Law and Charleston School of Law, both for-profit law schools failed to meet the debt-to-earning ratio that the Gainful Employment rules requires.

Given the damning evidence compiled by Law School Transparency, I was puzzled by the small number of law schools that failed DOE's gainful employment rules.  After all, LSAT scores for students at 7 law schools are so low that Law School Transparency estimates that 50 percent of their graduates are at "extreme risk" of failing their bar exams. And LSAT scores at 26 schools are so low that a quarter of their graduates run an extreme risk of failing their licensing exams.

Conclusion: Big Trouble Ahead For Higher Education

DOE's Heightened Cash Monitoring List and its list of programs that failed the Gainful-Employment Rule are warning signs that a number of higher education institutions are in trouble. For-profit institutions, non-prestigious public college, and small liberal arts schools are all surviving on federal student-aid money. If DOE turns off the spigot to any of the schools on these two lists, those schools will certainly close within a few months.

If higher education leaders are not concerned about the financial health of their industry, they certainly should be.

Gee, I'm scared!

References

Andrew Kreighbaum. Latest Heightened Cash Monitoring List. Inside Higher Ed, January 12, 2017.

Law School Transparency. 2015 State of Legal Education.

Karen Sloan. Two Law Schools Get an 'F' for High Debt From Education Dept. Law.com, January 11, 2017.

U.S. Department of Education press release. Obama Administration Announces Final Rules to Protect Students from Poor-Performing Career College Programs, October 30, 2014.

U.S. Department of Education press release. Education Department Releases Final Debt-to-Earnings Rates for Gainful Employment Programs. January 9, 2017.

Fernanda Zamudio-Suarez. Over 800 Programs Fail Education Dept.'s Gainful-Employment Rule. Chronicle of Higher Education, January 9, 2017.

Fernanda Fernanda Zamudio-Suarez. Here Are the Programs That Failed the Gainful-Employment Rule. Chronicle of Higher Education, January 9, 2017.

Defrauded students file debt-relief applications with the Department of Education: Bankruptcy courts can provide relief faster and more efficiently than DOE bureaucrats

When Betsy DeVos takes over as the new Secretary of Education next year, she will inherit one huge headache--thousands of pending applications for loan forgiveness from students who claim they were defrauded by various for-profit universities.

As Andrew Kreighbaum explained in a recent article for Inside Higher Ed, the Department of Education had received 80,000 loan discharge applications as of last October; and the total number has likely grown to at least 100,000.

So far, DOE has approved 15,694 applications for discharge from students who attended three campuses owned by the now defunct Corinthian Colleges system, but many more of Corinthian's former students are surely eligible for loan forgiveness based on fraud claims. After all, Corinthian has 350,000 former students.

And there are hundreds of other student borrowers who may file loan-forgiveness applications: students from ITT Tech Services, Globe University, Minnesota School of Business, and several more for-profits that closed after being accused of wrongdoing.

I. Problems with forgiving loans through the DOE administrative process

DOE has been extremely slow to process borrower defense applications; I know one young woman who filed her application in August based on a claim she was defrauded by DeVry University. She has yet to receive a response from DOE.

New federal regulations for processing borrower defense claims will become effective next summer, but there are several fundamental challenges that new regulations won't solve:

1. Tax consequences. First, all former for-profit student who have their student loans forgiven will have a one-time tax liability because the amount of their forgiven loans is considered taxable income by the IRS. 

2. Forfeiture of college credits. Under the current debt-relief program, students whose student loans are forgiven due to fraud will forfeit any credits they received from the institution they attended.

3. Insufficient DOE resources. Third, the Department of Education simply doesn't have the resources to process thousands of loan forgiveness claims in a timely manner, not to mention the thousands of new claims that will inevitably be filed as more for-profit colleges close their doors.

II Bankruptcy is a better way to process loan forgiveness applications

Fortunately, there is a solution to these problems; it's called the bankruptcy courts.

First, debtors whose student loans are discharged in bankruptcy will not suffer tax consequences for a forgiven loan because under current IRS rules forgiven debts are not taxable to an individual who is insolvent at the time the loan is forgiven.

Second, a student debtor who discharges student loans from a for--profit college through the bankruptcy process will not forfeit credits or degrees conferred by the college.

Finally, the bankruptcy courts clearly have the resources to process hundreds of thousands of bankruptcy petitions filed by distressed student-loan debtors. Filing an individual Chapter 7 action is relatively simple and does not require a lawyer.  Bankruptcy petitions could be routinely resolved in the bankruptcy courts, which have the expertise to weed out fraudulent or unworthy claims.

III. DOE has the authority to reinterpret the  "undue hardship" standard 

Critics might argue that my proposal is unworkable because anyone seeking to discharge student loans in bankruptcy must meet the "undue hardship" standard, a very difficult standard to meet.  But there is a solution for that challenge as well.

All DOE needs to do to ease the path to bankruptcy relief for insolvent student-loan debtors with fraud claims is to write an official letter expressing its view that every insolvent debtor who attended a for-profit college that has been found to have acted fraudulently meets the undue hardship standard.

In essence, such a letter would be a a revision of DOE's letter issued on July 7, 2015, giving the Department's interpretation of the "undue hardship" rule. In all likelihood, the bankruptcy courts would defer to DOE's revised interpretation of "undue hardship" and begin discharging student loans routinely.

Of course, DOE would also need to direct the various student-loan guaranty agencies to stop opposing bankruptcy relief for any insolvent debtor with a fraud claim against a for-profit college.

Easing the path to bankruptcy relief for distressed debtors who took out student loans to attend dodgy for-profit colleges will cost taxpayers billions. But most of the people who took out these loans will never pay the money back anyway. Almost 50 percent of the people who took out loans to attend for--profit colleges default on those loans within five years. Others enter into income-driven repayment plans that lower monthly payments, but according to the Government Accountability Office, about half the people who begin these plans are kicked out for failing to verifying their income on an annual basis.

So let's begin cleaning up the mess our government created when it began shoveling federal student-aid money to  the rapacious for-profit college industry. Let's shut these colleges down and wipe out the student-loan debt accumulated by millions of victims of massive fraud. Incoming Secretary of Education Betsy DeVos will have the authority to grant relief to these victims by easing the path toward bankruptcy. Let's hope this is what she does.

Incoming Secretary of Education Betsy DeVos

References

Andrew Kreighbaum. Activists and borrowers call on Obama administration to provide debt relief to defrauded students. Inside Higher Ed, December 14, 2016.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015.

Eric Rosenberg.You Need to Know How Student Loan Forgiveness Is Taxed.  Studentloanhero.com, July 18, 2016.

US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016.