Betsy DeVos’s Loan-Forgiveness Rule Gets Slimed by the College Cartel

Education Secretary Betsy DeVos attends the National Teacher of the Year award at the White House in D.C., May 2, 2018. (Carlos Barria/Reuters)
The new standard is clearly better for colleges, taxpayers, and students who are willing to repay their debts.

Secretary of Education Betsy DeVos has issued new guidelines on federal student-loan forgiveness in an attempt to more sensibly balance the rights of borrowers and taxpayers. Predictably, the higher-education cartel and its media allies were aghast. The New York Times headlined its story “DeVos Proposes to Curtail Debt Relief for Defrauded Students.” Other headlines included “Betsy DeVos’ Message to Students: You Have the Right to Be Ripped Off” and “Betsy DeVos’ New Proposal Aligns Her With For-Profit Colleges Over Debt-Saddled Students.” The Center for Responsible Lending’s Ashley Harrington huffed that the proposal was “a roadmap for institutions seeking to abuse students.”

What made this so bizarre, even by the standards of the mud-slinging higher-education debate, is that it’s unclear whether all students seeking loan forgiveness have actually been defrauded. Indeed, the impetus for DeVos’s action was the likelihood that the previous rules, put forward under President Obama, were going to put taxpayers on the hook for billions to bail out students who hadn’t been victimized.

Certainly, one can quibble about the particulars of the new rule — including an unfortunate and arbitrary provision stipulating that only borrowers who enter into default can apply for borrower defense. But to allege, for example, that DeVos is curtailing “Debt Relief for Defrauded Students” is to beg the key question.

The new guidance concerns a provision of the federal student-loan program known as “Borrower Defense to Repayment.” This is a mechanism for forgiving the loans of students who attend colleges that engage in fraud, such as by misrepresenting program information or future employment and earnings. So far, so good.

The problem is that the Obama administration, as part of its larger crusade against for-profit colleges, issued guidance that created an astonishingly far-reaching definition of fraud — opening the floodgates for across-the-board loan discharges, at taxpayer expense, if “public interest” minions could show merely that colleges made modest, inadvertent mistakes in marketing or advertisements.

Quite sensibly, the new guidance narrows that all-encompassing definition to something that would be more recognizable in a traditional court of law: as knowingly making false, misleading, or deceptive claims. The new standard will better serve taxpayers and provide a more predictable and defensible basis for adjudicating claims of fraud.

The new rule also corrects other components of the Obama guidance. For example, the old rule would have allowed the secretary of education to grant across-the-board loan forgiveness to all borrowers in a given program, including those who could not show any evidence of harm and never filed a claim. The secretary was even empowered to grant loan forgiveness to every student at an entire college — regardless of how long they attended, whether they could show any evidence of harm, and the particulars of their experience.

The fact that the new rule was met with hysteria from the higher-education cartel and the mainstream media may hold a clue as to why those institutions are less and less trusted by half the nation.

And since the Obama-era rules did little to distinguish between accidental misinformation and deliberate fraud, colleges and taxpayers could be turned into targets for even innocuous or unintended mistakes — with a projected price tag of more than $12 billion over the next decade. The guidance issued by DeVos requires students seeking loan forgiveness to actually file claims and provide evidence of harm.

When assessing the new rule, keep in mind that there are two constituencies in the federal loan program — borrowers and taxpayers — and that both deserve protection. Borrowers deserve better than caveat emptor, since students who accept federally backed loans do so with the understanding that eligible colleges are accredited, meaning they have (in theory) met quality standards set by the Department of Education. And the non-dischargeable nature of student loans means they create a particular burden, one that can be crushing for a student victimized by fraud.

But taxpayers, who already provide substantial benefits to students via the federal loan program, shouldn’t be expected to bail out borrowers who use dubious claims of “fraud” as a way to get out of unpleasant loan obligations. The big problem with the Obama guidance was its incentive to manufacture claims of fraud. Beyond just ripping off taxpayers, illegitimate claims add to the backlog of casework at the department, increasing the time it takes to help students who have truly been defrauded. They also threaten to erode public support for the whole enterprise of student lending.

The new standard is clearly better for colleges, taxpayers, and students who are willing to repay their debts. And the fact that the new rule was met with hysteria from the higher-education cartel and the mainstream media may hold a clue as to why those institutions are less and less trusted by half the nation.

Frederick M. Hess is director of education policy studies at the American Enterprise Institute. Cody Christensen is a research assistant at AEI.

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