Politics & Policy

How the Department of Education Uses Student Loans as a Weapon

(Dreamstime image: Spirokwok)
Follow government ‘recommendations’ on transgender bathrooms, for instance, or lose federal funding.

This week, the Obama administration issued a finalized regulation that will allow the Department of Education (DOE) to cancel the debt of students who claim that their colleges have made a “substantial misrepresentation,” such as false or misleading statistics on promotional materials. The DOE can then recover any forgiven balance from the colleges themselves — a major, possibly fatal, financial burden for institutions.

The rule, known as the “defense to repayment” rule because it allows borrowers to defend themselves against repaying their student loans, is another installment in a long saga of government officials using student-aid programs to wield influence over American higher education. Whoever writes the checks makes the rule, and the DOE uses its power to advance an agenda far beyond merely ensuring that taxpayers’ money is put to good use.

During the 2015–16 academic year, the DOE disbursed $28 billion worth of Pell Grants and $95 billion worth of student loans. All of the DOE’s “Title IV” programs represent nearly 1 percent of GDP in taxpayer-funded largesse for our higher education system. Many colleges and universities would not be able to survive without these federal funds: nine in ten for-profit colleges get more than half their revenues from Title IV programs.

While a few institutions, such as Hillsdale College in Michigan, do not take federal funding, for most it constitutes an indispensable revenue stream. In addition to disbursing Pell Grants that keep many for-profit and community colleges afloat, the DOE also originates 90 percent of student loans made in America.

Nominally, many of America’s colleges and universities are private. But the federal government has an effective monopoly over college finance. As a result, institutions must obey the demands of the Department of Education — an unelected bureaucracy with a penchant for aggressive regulations.

Take the defense-to-repayment rule: Processes already exist to deal with cases in which institutions perpetrate fraud, but the new regulations go much further and define “misrepresentation” so broadly that even perfectly innocent advertisements for schools could be considered deceptive. No doubt, an army of trial lawyers will come up with plenty of creative ways to use colleges’ past statements against them.

For instance, Arizona Law School advertises that its graduates’ unemployment rate is 2.8 percent. As my Manhattan Institute colleague Max Eden pointed out in US News & World Report in August, the share of Arizona Law graduates without jobs — when you include those not looking for work — is actually 9.7 percent. Reasonable people would conclude that Arizona Law is nonetheless well within its rights to advertise the 2.8 percent figure, since by definition unemployed people must be looking for work. But the Department of Education could easily cite this “misrepresentation” as an excuse to punish Arizona Law and cancel the debt of students. Further, in deciding which “misrepresentation” claims pass muster, the DOE opens the door to selective enforcement and raises the specter of witch hunts against colleges that fall out of political favor.

Mind you, the Obama administration did all of this without the consent of Congress. But at least the regulatory process has some safeguards, such as public review and comment periods, to prevent (in theory) executive-branch agencies from acting outside the boundaries the law sets down for them. Yet the DOE has consistently found ways to flout these.

The DOE frequently issues so-called Dear Colleague letters, which ostensibly are interpretations of existing laws or regulations. In practice, however, these letters provide a way to regulate on the go. One such letter, issued in 2011, required colleges and universities to set up campus tribunals — often with untrained administrators as judges — to adjudicate sexual-assault cases under a very low standard of proof. Another letter, issued earlier this year, required colleges to allow students to use the restroom of their choice regardless of biological gender. Each letter carried the implicit threat that a college would lose access to Title IV funding if it did not comply.

Such divisive social issues should be hashed out through the democratic process — or, better yet, through debate in the public sphere, without any sort of government involvement. Yet the Obama administration, convinced of the purity of its own cause, has chosen to prosecute the culture war through regulatory back channels, using colleges’ reliance on Title IV programs as a weapon.

Liberals should not cheer the administration’s prowess. President Obama has set the stage for future presidents to use Title IV programs as a political tool. It would be possible for a President Trump to use Title IV to carry out his promise to deport 11 million illegal immigrants: He could threaten to cut off federal funding if colleges refused to turn over information on their undocumented students. Both sides should fear that a president of either party could use Title IV to silence institutions critical of his administration.

Such behavior might not stand up in court. But Title IV is a fast-acting poison; by the time a college wins a suit to have federal funding restored, it might be too late. After ITT Technical Institute lost access to Title IV funds earlier this year, it took only twelve days to shut down for good.

Colleges are not innocent victims. They choose to take Title IV funding and thus voluntarily expose themselves to Department of Education dictates.

Colleges are not innocent victims. They choose to take Title IV funding and thus voluntarily expose themselves to Department of Education dictates. Many have used Title IV as a means to raise tuition or to stay in business while delivering substandard outcomes to their students. While some government support of higher education may be appropriate, we should make a distinction between assistance and dependence.

A prosperous society requires a healthy, depoliticized higher-education sector that can stand on its own two feet. To check the administrative state, conservatives should support Title IV reform to help wean colleges off federal funding. First, total aid per student should be capped. Second, colleges should be required to derive a larger share of their revenues from private sources to reduce their dependence on government. Not only would this reduce the sway the DOE has over American higher education, but it would also encourage schools to improve their quality in order to attract more private funding. Higher education must be rescued from the bureaucrats — and from itself.


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