DeVos Proposes to Curtail Debt Relief for Defrauded Students

WASHINGTON — Education Secretary Betsy DeVos proposed on Wednesday to curtail Obama administration loan forgiveness rules for students defrauded by for-profit colleges, requiring that student borrowers show they have fallen into hopeless financial straits or prove that their colleges knowingly deceived them.

The DeVos proposal, set to go in force a year from now, would replace Obama-era policies that sought to ease access to loan forgiveness for students who were left saddled with debt after two for-profit college chains, Corinthian Colleges and ITT Technical Institute, imploded in 2015 and 2016. The schools were found to have misled their students with false advertisements and misleading claims for years.

Afterward, the Obama administration forgave hundreds of millions of dollars in student loans and began rewriting regulations to crack down on predatory institutions and bolster borrowers’ ability to seek debt relief from the federal government. But higher education institutions, including historically black colleges and universities and for-profit educators, maintained the new rules were far too broad and subjected them to frivolous claims that carried significant financial risks.

In June 2017, just one month before the Obama rules were to take effect, Ms. DeVos announced that she would block and rewrite them.

Now the Trump administration is proposing new rules that would require borrowers to prove that they have fallen into deep financial distress to file a claim for debt relief, or to prove that the higher education institutions they attended had intentionally misled them. The department would also require that relief applicants divulge personal information that could have impacted their job prospects beyond their college experiences, including drug test results, health concerns and performance evaluations.

The proposal would establish a federal standard for what constitutes “misrepresentation” on the part of institutions, requiring that claims show “reckless disregard” through false or deceptive claims. It would also impose penalties on institutions that show signs of poor financial health, such as a high number of loan defaults or court judgments.

The new rules lay out “clear rules of the road for higher education institutions to follow” while “holding institutions, rather than hardworking taxpayers, accountable for making whole those students who were harmed by an institution’s practices,” Ms. DeVos said in a statement. “Our commitment and our focus has been and remains on protecting students from fraud.”

The new rules would save the government about $700 million a year, compared with those proposed by the Obama administration, a senior administration official said. The department will take public comment on the proposals for 30 days, and the rules are set to go into effect in July 2019.

Advocates for student borrowers said that savings was nothing to cheer. The new rules would establish insurmountable barriers to relief for many vulnerable students, and would eliminate accountability for institutions that employ predatory tactics in recruitment and advertising, they said.

“The Department of Education is turning a blind eye to widespread fraud and abuse at for-profit schools that left thousands of students in debt without a meaningful education,” said Suzanne Martindale, a senior attorney for Consumers Union. “Instead of helping defrauded students cancel their debts and move on with their lives, these proposed rules would shield poor-performing schools from being held accountable for their misconduct.”

Critics accused Ms. DeVos of stocking her department with former executives of for-profit colleges and universities to free the industry from oversight. DeVos advisers include her senior counselor, Robert S. Eitel, and Diane Auer Jones, a senior adviser on postsecondary education, both of whom worked for Career Education Corporation, a company that operates for-profit colleges, and reached a $10.25 million settlement with the New York attorney general over charges that it had inflated graduates’ job placement rates. The department’s general counsel, Carlos G. Muñiz, worked as a consultant for the company.

“With the stroke of a pen, Secretary DeVos and her team of former for-profit college executives have proposed giving fraudulent institutions de facto immunity while effectively stripping their victims of a realistic path to debt relief,” said Aaron Ament, the president of the National Student Legal Defense Network.

When Ms. DeVos halted the Obama-era rules, she declared: “Last year’s rule-making effort missed an opportunity to get it right. The result is a muddled process that’s unfair to students and schools, and puts taxpayers on the hook for significant costs.” She also criticized the Obama rules as being too lenient.

In December, she reversed an Obama-era policy of granting full debt relief for students by instituting a tiered system that granted partial relief for federal loans based on whether students went on to be gainfully employed. The decision was made, in part, because the department’s inspector general found that the Obama administration lacked a sufficient infrastructure to process claims.

A California magistrate ruled last month that the program violated the federal Privacy Act because it improperly used earnings data from the Social Security Administration. In its court filings, the department said it has sought information on more than 61,000 students, and had granted 10,000 of them partial debt relief.

Last fall, Ms. DeVos began revising the Obama-era rules, convening a committee of department officials, higher education advocates and for-profit college leaders to hash out a new approach.

Senator Lamar Alexander, Republican of Tennessee and the chairman of the Senate Education Committee, indicated that he thought the new rules got the balance right. The Obama administration set “overly broad and vague standards and, as a result, put taxpayers on the hook for too many loans,” he said.

But Democrats say Ms. DeVos’s policies continue to favor industry leaders over vulnerable students.

“Under the leadership of Secretary DeVos, the Trump administration is sending an alarming message: Schools can cheat student borrowers and still reap the rewards of federal student aid,” said Representative Robert C. Scott of Virginia, the top Democrat on the House Education Committee.

The rules would grant stronger recourse for higher education institutions accused of fraud, including an opportunity to review claims and respond to the department with evidence in their defense.

“Carte blanche approval of batches of applications would only serve to cut off access and opportunity for future students,” said Steve Gunderson, the president of the trade group Career Education Colleges and Universities, which represents several for-profit and trade schools.

The proposal also restores “pre-dispute arbitration agreements,” which allow colleges to force students to sign waivers saying they will settle their disputes with institutions through arbitration. The Obama administration had removed those agreements from its rule because they essentially forced to students to sign away their rights to sue and file federal claims, and shielded student complaints from the public.

The department official said the agreements would allow students to settle their claims more quickly and potentially recoup more compensation beyond their loans. The department said that it would ensure that schools were transparent about students’ rights under the agreements, but that borrowers bore some responsibility.

“Postsecondary students are adults who can be reasonably expected to make informed decisions if they have access to relevant and reliable data about program outcomes,” officials wrote in their proposal.

The rules also tighten criteria for borrowers to seek debt relief if they enrolled in schools that later closed. Under the Obama rules, students would not have been eligible for loan forgiveness if they transferred their credits or completed a program at another school. The new rules would disqualify students from loan forgiveness if the closed institution simply offered an opportunity to finish their coursework elsewhere. The administration is also rescinding an Obama proposal that automatically forgave loans for students whose school had closed and who did not enroll in another one within three years. That process now requires an application.

The department is also considering whether to maintain a “preponderance of evidence” standard or a more stringent “clear and convincing evidence” standard for loan forgiveness. Officials said they wanted to make sure the standard ensures that claims are not lodged over unofficial or offhand comments. They suggested that if students can provide documentation of questionable advertisements, that could qualify as an institution “knowingly” providing misleading information.

But advocates for student borrowers contended that no amount of documentation might matter if relief applicants are required to prove not only the actions of their institutions but also their intent.

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