Feds Must Stop Collecting Debt From Defrauded Students

SAN FRANCISCO (CN) – A federal judge has blocked Education Secretary Besty DeVos’ plan to force more than 60,000 defrauded students to repay loans for education programs that some borrowers describe as “worthless.”

In a decision issued Friday night, U.S. Magistrate Judge Sallie Kim found the U.S. Department of Education illegally enacted a rule to make former students of the now-defunct, for-profit Corinthian Colleges repay at least some loan debt.

Plaintiffs’ lawyer Eileen Connor, of the Legal Services Center of Harvard Law School, praised the ruling as an important step in providing relief to students who the school duped into wasting valuable time and money on a “valueless” education.

“These people were targeted specifically because they were economically vulnerable,” Connor said in an interview. “The department’s delay and denial of loan cancellation is harming them in a way that can’t be repaired, and that harm accrues on a daily basis.”

Lead plaintiff Martin Manriquez sued Education Secretary Besty DeVos on Dec. 20, 2017, the same day the department announced it would reverse an Obama-era rule that gave full-debt forgiveness to students misled by for-profit colleges about post-graduation job prospects.

With its reversal, the department unveiled a new formula that uses Social Security data to compare former Corinthian students’ average wages to those of non-Corinthian graduates. Under the new rule, most defrauded students are entitled to a smaller portion of debt relief based on how much they earn on average compared to non-Corinthian graduates in each area of study.

The department says it changed the policy to ensure borrowers are only compensated for “actual harm suffered” based on its finding that students obtained at least some educational benefit from the programs. The department also claims cancelling all of the students’ debt would divert vital resources from other important educational programs.

The plaintiffs argued the “Average Earnings” method was flawed and arbitrary because it used only data from 2014 and failed to account for graduates who work in fields that have nothing to do with their areas of study.

But Kim blocked the “Average Earnings” rule for a different reason – because the Education Department obtained the earnings data by sharing borrowers’ personal information with the Social Security Administration in violation of the Privacy Act.

“There is a strong public interest in ensuring that agencies comply with the law in enacting rules and regulations, and here, preventing the use of data in violation of the Privacy Act is a compelling interest,” Kim wrote in her 38-page ruling.

The judge further found that forcing borrowers in “dire financial circumstances” to repay debt under a rule that was enacted illegally would also cause irreparable economic harm.

One of the plaintiffs, Jamal Cornelius, borrowed more than $25,000 to attend an information technology program that recruiters told him would lead to a higher paying job. He now works at a Taco Bell in Hercules, California, with monthly loan payments of $274 in forbearance and accruing interest monthly.

“Given their financial situations, any additional dollar they are required to repay takes away from basic need for food and shelter,” Kim wrote. “In economic terms, the marginal utility of each dollar is extremely high to the plaintiffs.”

The judge also ordered the Education Department to immediately stop collecting loan payments from the defrauded students.

However, Kim refused to reinstate the Obama-era rule that promised to wipe out all federal loan debt for defrauded students.

A Department of Education spokeswoman cast that decision as encouraging for the Trump administration’s plan to change the compensation formula for defrauded students.

“We’re encouraged that the court recognized the Secretary’s discretion to establish a borrower defense claims process that determines compensation based on harm incurred by the borrower,” Education Department Secretary Liz Hill said by email Tuesday. “In implementing the Department’s programs, we are mindful of the Privacy Act’s requirements, and we will carefully review the court’s decision as we assess next steps.”

The judge requested further briefing on what the “status quo” is for the department now that the “Average Earnings” rule has been enjoined.

A hearing on whether the judge should order the Education Department to provide full debt relief for defrauded Corinthian students is scheduled for June 4.

Corinthian Colleges declared bankruptcy and collapsed in April 2015 after investigations by the Department of Education and numerous state attorneys general revealed fraud at more than 100 college campuses.

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