Education Secretary DeVos Announces Tough New Rules for Student Loan Forgiveness Claims

The U.S. Department of Education’s new plan provides only partial loan forgiveness for many defrauded borrowers.

By , Attorney

On December 10, 2019, U.S. Secretary of Education Betsy DeVos announced that the Education Department will implement a new methodology for evaluating borrower defense to repayment claims. (A "borrower defense to repayment" claim is a claim for federal student loan forgiveness based on a for-profit school's false advertisement about ties to employers and the transferability of credits.)

The revamped approach for determining debt relief relies on publicly available earnings data and statistics to determine the harm that a borrower suffered. Under the updated system, many bilked student-loan borrowers will receive only partial debt relief, instead of 100% loan forgiveness. This policy is different from the Obama administration's practice of granting total debt forgiveness after determining that a college committed fraud.

How the New Methodology for Determining Debt Relief Works

The new methodology compares the median earnings of graduates who've made borrower defense to repayment claims to the median earnings of graduates from comparable programs. The bigger the difference, the more relief an applicant will receive. Specifically, earnings lower than two standard deviations from the median will result in full relief. Program earnings that are lower than the median, but higher than two standard deviations from the median, will receive tiered relief of 25%, 50%, or 75%, based on the program's earnings deviation from the median.

To calculate harm and determine the relief amount, the Department emphasized that it will rely on publicly available 2017 Gainful Employment earnings data, Social Security Administration earnings, College Scorecard data, and IRS information. But why is the Education Department emphasizing its use of publicly-available data? DeVos previously tried to limit loan forgiveness for defrauded students based on specific earnings information from the Social Security Administration (SSA), but a court stopped the Department from using this approach because it violated privacy laws.

DeVos' History of Trying to Limit Debt Recovery for Defrauded Students

In December 2017, the U.S. Department of Education came up with modified loan forgiveness standards for students who were deceived by a for-profit school, like a Corinthian College (Everest, Heald, and Wyotech). Under the revised guidelines, the forgiveness process involved looking at a borrower's income, as compared to peers, to determine whether the debt should be totally or partially forgiven. To complete this process, the Department of Education used earnings data that the SSA supplied.

The Project on Predatory Student Lending at Harvard University, a legal services clinic, subsequently filed a lawsuit on behalf of several former Corinthian students seeking a preliminary injunction to stop the practice on privacy grounds. The suit also argued that the SSA data could only be used for evaluating vocational programs, not for student loan forgiveness purposes.

On May 25, 2018, Magistrate Judge Sallie Kim of the U.S. District Court in San Francisco agreed that the Department violated privacy laws because it shared former students' personal information, including birth dates and Social Security numbers, with the SSA and then used additional SSA information to calculate what percentage of students' loans to forgive. The judge also ordered the U.S. Department of Education to stop attempting to collect student loan payments from students who attended a Corinthian College.

The judge's ruling, though, indicated that the Department of Education could be able to partially cancel the students' debts—rather than providing full forgiveness—if it followed a proper and legal procedure like, perhaps, the newly-introduced methodology. The latest approach won't immediately apply to students in the Corinthian lawsuit, though, because the Magistrate Judge in that case must approve any new relief formula applied to the group.

Is the Latest Methodology Legal?

Whether the recently-announced method for determining debt relief will face legal challenges is yet to be seen. The Project on Predatory Student Lending at Harvard University, the legal aid group representing the Corinthian students, has argued that any partial relief formula is illegal under the 1995 debt relief statute that entitles defrauded students to full loan cancellation. We'll provide updates as legal developments arise.

Effective date: December 10, 2019