Education Department Gets $100,000 Contempt Fine in Student Loan Case

SAN FRANCISCO (CN) - A federal judge on Thursday ordered the U.S. Department of Education to pay $100,000 in contempt fines for making defrauded students repay loans in violation of a preliminary injunction.

U.S. Magistrate Judge Sallie Kim found the department's efforts to comply with her May 2018 injunction were lackluster at best, resulting in 16,000 borrowers wrongly receiving notices that payments were due.

"Defendants’ attempt to comply with the preliminary injunction consisted of a single email to each service provider and partial confirmation of receipt of those emails," Kim wrote in her 8-page ruling.

The department could have had multiple in-person meetings and telephone calls with the 10 third-party companies that service its loans to ensure compliance, Kim wrote.

More than 3,000 borrowers made at least one payment after receiving erroneous collection notices. Some borrowers had their wages garnished. Others were reported to credit agencies.

The department, run by Education Secretary Betsy DeVos, argued it has "been working diligently" to correct those errors. It urged Judge Kim to only impose sanctions that are "forward-looking" and "designed to achieve the goal of compliance."

Despite those pleas, Kim concluded in her ruling Thursday that a $100,000 contempt fine is "the best method" to remedy the department's "wrongful acts." She ordered the money be used to create a fund, managed by plaintiffs' counsel, to assist borrowers harmed by the collections blunder.

Toby Merrill, director the Project on Predatory Student Lending at Harvard Law School, which represents the plaintiffs, said in a statement Thursday that the decision sends a loud and clear message that Devos' "illegal and reckless violation" of student borrowers' rights will not be tolerated.

"Thousands of students illegally had their tax refunds seized and wages garnished, and the Department still can’t identify all of the affected students nor refund the money," Merrill said.

Kim granted an injunction in May 2018, which has halted collection on 74,800 loans belonging to former students of Corinthian Colleges.

Corinthian Colleges declared bankruptcy and collapsed in April 2015 after investigations by the Department of Education and numerous state attorneys general. The for-profit institution was accused of misleading students about the value of its educational programs and their ability to get higher-paying jobs after graduation.

Reversing an Obama-era policy that gave full debt forgiveness to students of Corinthian Colleges, DeVos unveiled a new formula in December 2017 that assigned a value to each educational program based on graduates' average earnings. Students from each program were to pay back a portion of their loan debt based on that formula.

Lead plaintiff Martin Calvillo Manriquez sued the Department of Education over its new policy in December 2017.

Despite arguments that the department used an unfair method to make the students repay loans, Kim blocked the “Average Earnings” rule for a different reason – because the Education Department obtained earnings data by sharing borrowers’ personal information with the Social Security Administration in violation of the Privacy Act.

An appeal challenging Kim's injunction is still pending in the Ninth Circuit.

The Department of Education did not immediately respond to an email seeking comment Thursday evening.

Follow @NicholasIovino

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