Defrauded Students Will Stay Indebted

SAN FRANCISCO (CN) – Education Secretary Betsy Devos need not provide full debt relief to more than 60,000 defrauded students, but she must stop collecting on their loans, a federal judge said in court Monday.

Lawyers for a proposed class of borrowers had asked U.S. Magistrate Judge Sallie Kim to revive an Obama-era policy that promised full debt forgiveness to students defrauded by the now-defunct, for profit Corinthian Colleges.

Last month, Kim issued an injunction temporarily voiding the less generous debt relief formula enacted by Devos in December 2017 and ordering the Education Department to stop collecting on those loans.

During a court hearing Monday, Kim sided with the federal government’s position that returning to the “status quo” means delaying processing claims for debt relief, not going back to the Obama-era policy of forgiving all loan debt.

Kim acknowledged that borrowers will still suffer harm to their credit and interest growing on their loans, even though she has ordered the government to stop collecting.

“I haven’t frozen all the harm, but I’ve frozen as much as I can,” she said.

After the hearing, plaintiffs’ attorney Joshua Rovenger said in an interview that the “invalid debt” causes emotional distress and denies defrauded students the opportunity to take out loans to go back to school.

“That harm is particularly salient because these are people who wanted to go to school and did go to school, and they can’t get training elsewhere,” Rovenger’s co-counsel, Eileen Connor, said.

Rovenger and Connor are with the Legal Services Center of Harvard Law School in Jamaica Plain, Massachusetts, near Boston.

Corinthian Colleges declared bankruptcy in April 2015 and shut down 100 college campuses after federal and state investigators found it misled students about post-graduation job prospects.

On May 25, Kim issued an injunction voiding the “average earnings” rule that forced borrowers to repay at least some loan debt. Kim found the formula relied on Social Security data that was obtained by improperly sharing borrowers’ information in violation of the Privacy Act of 1974.

On Monday, Kim said she would alter the injunction to make clear that the Education Department must stop collecting loan payments from all former Corinthian students who applied for debt relief, not just the four named plaintiffs in the case.

Also on Monday, Kim heard arguments on a motion to dismiss a separate lawsuit filed by the state of California challenging the Education Department’s refusal to provide full and immediate debt relief to defrauded students.

The federal government says the state lacks standing to sue because only borrowers can seek relief for alleged harm to their finances, credit and educational opportunities.

California argues it has standing because the Education Department hurt its public colleges and universities by making thousands of students ineligible for school loans; caused it to waste state money investigating Corinthian Colleges and reaching out to defrauded students; and interfered with its enforcement and interpretation of state consumer protection laws, which were previously cited as a basis for providing full debt relief under the Obama administration.

Kim hinted that she might dismiss the state’s lawsuit because any harm to its colleges seems far less direct than injuries alleged in a separate lawsuit over the federal government’s termination of the Deferred Action for Childhood Arrivals program, which gives some 800,000 young immigrants the right to work and be shielded from deportation.

“I do see a more direct link to harm to the universities [in that case] because they actually had people enrolled or working in the universities affected by the government’s actions,” Kim said. “I’m concerned there’s not quite enough now in your complaint to show the link to the harm to the state of California’s propriety interests.”

Kim said if she does dismiss California’s lawsuit, she will likely do so with leave to amend.

U.S. Justice Department lawyer Robert Merritt III said the federal government is still considering appealing Kim’s May 25 order partially granting the plaintiffs’ request for a preliminary injunction.

The judge set a hearing date of Sept. 17 to hear arguments on the plaintiff borrowers’ motion for class certification.

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