A judge on Wednesday largely upheld strict new regulations enacted by former Education Secretary Betsy DeVos to limit relief under a federal student loan forgiveness program for borrowers who were defrauded by their schools.
Borrower Defense To Repayment
The ruling concerns the Borrower Defense to Repayment program. The Obama administration enacted regulations governing this loan forgiveness program in 2016 to provide student debt relief to students who were misled, defrauded, or otherwise harmed by predatory colleges and universities – often, for-profit schools.
Under Secretary DeVos, however, the Department of Education rewrote the rules governing the Borrower Defense program. New regulations that went into effect on July 1, 2020 substantially weakened the Borrower Defense relief provided to student loan borrowers by increasing the burden of proof required to prevail, requiring the borrowers to show they were harmed financially, and narrowing the definition of school-related misrepresentations. The new rules also allowed for partial (instead of complete) student loan forgiveness for approved applications, and imposed a new, strict three-year statute of limitations for raising Borrower Defense claims.
Under these new regulations, DeVos’s Education Department issued mass denials to thousands of applicants, many of whom had been waiting months or years for a decision. Student loan borrowers, led by the New York Legal Assistance Group (“NYLAG”), challenged the new rules by filing a lawsuit in federal court.
Court Decision on Borrower Defense To Repayment Regulations
The basic argument put forth by student loan borrowers in its lawsuit was that the Education Department’s new regulations were “arbitrary and capricious.” NYLAG argued that the process of establishing the new rules ran afoul of the Administrative Procedures Act, a federal statute that mandates specific procedures for good faith engagement with the public and stakeholders when drafting and enacting new rules.
The Court rejected these arguments, finding that rather than being arbitrary and capricious, the new regulatory regime “simply reflects a competing view of the appropriate policies for student loan defenses.” The Court held that the Department of Education “provided reasoned justifications” for the rule changes, including striking a “balance between protecting borrowers and taxpayers by requiring a quantum of proof that misrepresentation had occurred” and preventing frivolous claims.
While the decision ultimately favored the Department of Education, it was not a total loss for student loan borrowers. The Court rejected the new three-year statute of limitations imposed on borrowers under the new rule, arguing that it was not a “logical outgrowth” of the rule-making negotiations that had taken place prior to the issuance of the finalized regulations, and that the imposition of the seemingly arbitrary limitations period “depriving the public of the opportunity to participate meaningfully in the… required notice and comment rulemaking process.”
The Biden administration could potentially roll back the 2020 Borrower Defense regulations and enact new, more borrower-favorable rules in their place. However, this could be a long, drawn-out process, since the regulatory process must comply with the Administrative Procedures Act and include substantial public input. Education Secretary Miguel Cardona, who was recently confirmed to replace DeVos, has not expressly indicated his intentions for the program.
Alternatively, Congress could pass legislation undoing the current rules and establishing a Borrower Defense regime that makes it easier for student loan borrowers to obtain relief. Congress passed such legislation last year on a bipartisan basis, but the bill was vetoed by President Trump. It is unclear if the bill will be passed again this session.
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