DeVos Settles Suit Over Debt Relief for Defrauded Students

Students defrauded by for-profit colleges will finally get the U.S. Department of Education to make decisions on their requests for debt relief. But it could take up to 18 months.

Education Secretary Betsy DeVos. (AP Photo/Pablo Martinez Monsivais)

SAN FRANCISCO (CN) — Students who claim they were defrauded by for-profit colleges will get decisions on their requests for debt relief within 18 months under the terms of a proposed settlement reached with the U.S. Department of Education Friday.

“It is an enormous relief to know that students will finally have answers on their borrower defense,” said Theresa Sweet, lead plaintiff in a class action filed against Education Secretary Betsy DeVos in June 2019.

The lawsuit claimed DeVos left more than 160,000 students “in limbo,” damaged their credit and permanently delayed their accumulation of wealth by halting decision-making on borrower defense applications.

Enacted in 2015 by the Obama administration, the borrower defense rule gave students who attended predatory for-profit colleges an avenue to have their loan debt forgiven. The rule was enacted as the government started cracking down on for-profit schools including ITT Technical Institute, Corinthian Colleges and DeVry University, which were investigated for deceiving students about post-graduation job prospects.

After Trump’s inauguration on Jan. 20, 2017, the Education Department announced it was taking a “pause” in processing those claims in order to “re-evaluate” the Obama-era policies.

Sweet and six other named plaintiffs claimed the “pause” became a “policy of inaction and obfuscation” intended to prevent defrauded students from obtaining debt forgiveness as required by law.

Under the terms of the proposed deal, the department will render decisions on all borrower defense claims pending as of April 7 within 18 months and provide any debt relief as required by those decisions within 21 months after the settlement is approved.

The settlement also requires the department to wipe out interest that accrued on student debt for the time period that borrower defense claims were pending.

Toby Merrill, director of the Project on Predatory Student Lending at Harvard Law School, which represents the plaintiffs, called the settlement an important step in allowing nearly 170,000 students to finally get an answer on their borrower defense applications.

“It’s just outrageous that students who were cheated by their schools have also had to go to court and wait and fight for years to get the Department of Education to even consider their requests.,” Merrill said in a phone interview.

She added that these students will never get back time spent worrying about this uncertain debt, which has blocked many of them from pursuing an “actually meaningful” education at a reputable school or purchasing a home, permanently delaying their accumulation of wealth.

“That time they have been hamstrung by this debt they will never get back,” Merrill said. “You can’t undo that.”

The department’s decisions will be based on a new methodology unveiled in December 2019 that offers a sliding-scale debt relief based on a complex formula that measures the median salary of graduates from the fraudulent for-profit colleges compared to the median salaries of graduates from similar schools. If the graduates’ earnings are at a deficit, they will be entitled to relief.

Merrill called that new formula “extremely problematic” in that it “forces people to pay fraudulent debts that never should have existed in the first place.”

For student borrowers who manage to move on after being scammed and find higher-wage jobs, this formula empowers the department to effectively use that against them, Merrill complained. The department could use the formula to support an unfounded conclusion that no fraudulent advertising occurred and deny students debt relief on that basis, she said.

“For some borrowers to get full relief, they’d have to earn less than minimum wage,” Merrill said. “There’s no way that the math makes sense.”

Merrill declined to say if her team is considering legal action to challenge the new formula.

If the new methodology is blocked by a federal court, the settlement agreement would temporarily excuse the department from its obligations until the injunction is dissolved or a new methodology is developed.

The proposed settlement also requires the department to submit reports every 90 days on how many decisions were made, how many class members obtained debt relief, names of schools related to those decisions, and the status of applications for schools that had 100 or more borrower defense claims.

If the department fails to report every 90 days, it will then be required to start submitting monthly reports.

If a class member is subjected to involuntary collection while their request is pending, the department will discharge 80% of that borrower’s debt. Failure to issue a decision or debt relief by the required due dates would also obligate the department to discharge 30% of each class member’s debt for every 30 days beyond the deadline.

The settlement excludes about 75,000 former students of Corinthian Colleges who are seeking debt relief in a separate class against Secretary DeVos. DeVos was slapped with a $100,000 contempt fine in that case for forcing defrauded students to repay loans in violation of a court order. A motion to increase the contempt fine based on findings that far more students were forced to repay loans than was originally estimated is currently pending.

Education Department spokesman Jim Bradshaw said if approved, the proposed settlement will be an important win for students and taxpayers.

“Rather than have their claims needlessly delayed by unnecessary litigation, students will now have their cases adjudicated promptly,” department spokesman Jim Bradshaw said. “The department put a sound adjudication methodology in place and Federal Student Aid has been adjudicating claims. This proposed settlement is validation of that process and of the department’s longstanding goal to resolve all of these claims as quickly as possible.”

The settlement must be approved by U.S. District Judge William Alsup.

A hearing on preliminary approval of the deal is scheduled for May 21 in San Francisco.

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