New loan forgiveness regulations should have colleges and taxpayers worried.
Justice Oliver Wendell Holmes once said that hard cases make bad law. They make even worse Department of Education regulations.
“The Education Dept. has the discretion to make colleges cover the cost of forgiveness or charge it to the taxpayer; both ought to be extremely anxious where this could all lead under Hillary Clinton or Donald Trump.”
Before it collapsed, Corinthian Colleges faced multiple lawsuits and investigations, and earlier this year a San Francisco judge found the for-profit education company guilty of fraud for making misleading job placement claims. Thousands of students successfully petitioned the Education Department for loan forgiveness under an obscure provision known as "defense to repayment."
Last month, the Education Department released a 530-page draft regulation to make that forgiveness process easier. Perhaps an update was needed, but this proposal would throw open a wide door for spurious and costly student complaints and executive abuses. The department has the discretion to make colleges cover the cost of forgiveness or charge it to the taxpayer; both ought to be extremely anxious where this could all lead under Hillary Clinton or Donald Trump.
Under the new proposal, former students may apply for forgiveness if a college has made a "substantial misrepresentation" to its students, defined as a statement or omission with a "likelihood or tendency to mislead under the circumstances." This clear-as-mud definition would give wide latitude for complaints. In a typical fraud cause, the burden is on the plaintiff to demonstrate an "intent to deceive." Here, the burden would be on the defendant to disprove a "tendency." The verdict will rest on the whim of a Department of Education hearing examiner; colleges will have no recourse to a court of law.
According to the Education Department, these regulations are aimed primarily at for-profit colleges. But, this standard would apply to all colleges, and all ought to be alarmed. For-profits aren't the only institutions that could find themselves accused of fraud.
Take, for example, Arizona Law School, ranked 40 by U.S. News and World Report's "Best Law Schools." Alumni could point to a flier boasting a 2.8 percent unemployment rate nine months after graduation. Bloggers at Above the Law accused the law school of deception,pointing out that Law School Transparency lists the number at 9.7 percent. Arizona Law School responded that 9.7 percent was the nonemployed number, which included those who are not seeking work, so they were well within their rights to advertise 2.8 percent. No court would call this fraud.
But an enterprising graduate could claim that it "had a tendency to mislead under the circumstances," and recruit all alumni who plausibly could have seen that flier for a joint-action complaint. The burden would be on the "schools to demonstrate that individuals in the identified group did not in fact rely on the misrepresentation at issue." That being plainly impossible, a hearing officer could grant loan forgiveness to all. These graduates wouldn't just see their outstanding balance erased, they'd also recoup the last six years of payments.
The new regulations would also lift the three-year statute of limitations for bringing claims, allowing an indefinite open season on spotting tendencies. A cottage industry is already forming, and under these new regulations, outfits like Budget Buddy Club (which is currently targeting Emory University for reasons unclear) will kick into overdrive.
It's entirely uncertain how many claims may emerge. The government estimates it may cost anywhere between $199 million and $4.23 billion, annually. Given that these estimates assume a low volume of claims from nonprofit and public colleges, it could be considerably higher.
Who gets soaked could depend on who's in charge. Under a Hillary Clinton presidency, taxpayers may have more to worry about. Clinton is already proposing $400 billion in new spending so new students don't have to pay anything; another $40 billion so graduates don't have to pay any more wouldn't be unthinkable.
But, President Donald J. Trump might be less magnanimous. It's no secret that some conservatives have long harbored a desire to smash higher education, which they see as a hotbed of leftist indoctrination. Of course, Trump could appoint rational, disinterested bureaucrats. But Trump's constituents wouldn't much mind making the University of Missouri, Oberlin College and Yale University pay, and these regulations may enable a campaign of vengeance that would make Sen. Joseph McCarthy blush.
Trump wouldn't have to wait for loan forgiveness judgments. The proposal contains "triggers" that would require private colleges to obtain a letter of credit for 10 percent of their assets, an onerous burden intended to cover potential forgiveness claims.
This piece originally appeared in U.S. News & World Report
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Max Eden is a senior fellow at the Manhattan Institute.
This piece originally appeared in U.S. News and World Report