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Proposed Regulatory Expansion Threatens The Education Market - Pacific Research Institute

Proposed Regulatory Expansion Threatens The Education Market

The federal government has taken over the student loan market and currently guarantees (or directly holds) about 90 percent of the 40 million student loans valued in excess of $1.2 trillion. The millions of people at risk of defaulting on this huge student loan portfolio is a large and growing problem. For instance, as of September 2015, and within three years of when people start repaying their student loans, the default rate is 11.8 percent.

Sustainably addressing the student debt problem is an imperative. But as always, the devil is in the details.

The Obama Administration’s approach to the problem fails to improve the situation, and, in fact, it makes matters worse. Specifically, the Department of Education (ED) has issued new rules that would allow current and former students to ask the ED for loan forgiveness if they believe that the school made fraudulent or substantial misrepresentations. These revisions to existing rules known as “borrower defense to repayment” regulations directly resulted from the Corinthian Colleges case.

Back in March 2016, California Attorney General Kamala Harris won a nearly $1.2 billion judgement against Corinthian Colleges based on the school making untrue and misleading statements. For instance, Corinthian Colleges made false claims regarding its job placement rates and advertised programs and degrees that the college did not actually offer.

Undoubtedly, practitioners of outright fraud need to be held accountable and prosecuted to the fullest extent of the law. But, there is no reason to believe that the current consumer protections aren’t sufficient to give students who have been defrauded sufficient recourse.

Unfortunately, the Obama Administration is ignoring the legal adage that “hard cases make bad law,” and is instead proposing a regulatory expansion that will likely adversely impact all colleges and universities, and put taxpayers at risk of billions of dollars in losses.

The new regulations remove the current ban on class action lawsuits and specifies three scenarios in which a student may apply for loan forgiveness; the third one (accusations that the college made a “substantial misrepresentation” to its students) being the most troubling due to its legal vagueness.

Making matters worse, the misrepresentation clause does not require that any misrepresentations be intentional. Inadvertent errors are enough for the entire student loan debt to be forgiven.

If promulgated, the vague language associated with this scenario is rife for exploitation by creative lawyers inviting a flurry of litigation – particularly class action lawsuits – making it significantly easier for trial lawyers to earn a windfall profit. The problems of litigation abuse experienced by other industries, such as the health care industry, are bound to grow.

Due to these clauses, and the ED’s ability to hold the universities responsible for these loan losses, both for-profit colleges and traditional public or private universities are subject to significant financial risks. And, taxpayers will share in these risks through their public financing for traditional public colleges and universities.

In 2014, state and local funding for higher education was more than $86 billion nationally. That’s an enormous amount of exposure, especially for states and municipalities still digging their way out of the Great Recession.

The ED has projected that the net budget impact from this rule could cost anywhere from $2.0 billion to more than $43 billion over the 2017 – 2026 loan cohorts. The enormity of this range should be telling – projecting the cost of a rule so loosely written is incredibly difficult, and the $43 billion number could be low due to the regulation containing no statute of limitations for loan defaults on unpaid loans.

Facing these higher risks, schools and colleges will undoubtedly need to pass along at least part of these higher costs from the frivolous litigation to future students through a combination of higher tuition, increased fees and/or reduced education services. As a consequence, future students will bear the burden through more expensive and/or lower quality education services.

Instead of the proposed regulations, the Department of Education should focus on ensuring that current and former students are aware of their rights when a college commits fraud or intentional misrepresentation, and ensuring a streamlined process that expedites such claims.

Making it easier for trial lawyers to earn a windfall profit, as the Obama Administration’s proposed rule would do, does not solve the problem. In fact, by incentivizing dubious claims and distracting the Department of Education from legitimate claims of fraud, the proposed new standards makes the current situation worse.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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