Obama’s student loan forgiveness proposal misses target

It’s hard to argue with the fact that student loan debt is a significant, and growing, problem for the millions of recent grads in danger of default each year. With approximately 40 million of these loans guaranteed or held by the federal government to the tune of over $1 trillion, the solvency of our student loan system is also a serious policy and fiscal issue. How we choose to address the crisis will have vast implications for students, educational institutions and taxpayers alike. And the Obama administration has just chosen to address the crisis in perhaps the most ineffective — and costly — way imaginable.

{mosads}New rules issued by the Department of Education on Monday would allow current and former students to file claims for loan forgiveness if they felt their school made a “substantial misrepresentation” regarding the school on its programs. The Department of Education itself estimates that the proposed change to the “borrower defense to repayment” regulation would cost taxpayers up to $43 billion over the next 10 years.

It is also practically guaranteed to prove a legal nightmare in practice if implemented, and one that is likely to benefit trial lawyers more than anyone else. The proposal removes the current ban on class action lawsuits, which opens up an opportunity for massive payoffs by going after educational institutions with big coffers, however frivolous or unsubstantiated the charges. The language of the amended rule is so vague that it invites plaintiff’s attorneys to challenge anything and everything about the way an educational institution represents itself in hopes of finding something that can be adjudged a “substantial misrepresentation.” This overly broad phrase is defined as a “statement” or “omission” with a “likelihood or tendency to mislead under the circumstances.” Schools would have little legal recourse to defend themselves, since final determinations will be made by a non-independent arbiter within the Department of Education itself.

The rhetoric of advocates for the new rule is directed at providing additional protections against purported misrepresentations and money-making schemes on the part of for-profit educational institutions, which indeed award a greater percentage of college degrees than ever before and have a student debt default rate of 21.8 percent, compared with 13 percent for public colleges and 8.2 percent for private colleges. But the fact is, default rates have been on the rise in all of these categories, and it is not surprising that professionally oriented for-profit colleges with a larger percentage of low-income applicants have a higher percentage of graduates who default on their student debt.

In itself, this is no argument that more misrepresentation is going on at these institutions; if anything, it argues that federally backed loans are being provided too readily to applicants with dubious qualifications in an attempt to achieve the desired end of boosting the college graduation rate of lower-income Americans. For an administration that has vigorously championed the goal of college degrees for all on the argument that economic success is virtually impossible without that piece of paper in the modern global economy, it is somewhat ironic that they are going after the institutions providing those degrees rather than acknowledging the failure of this economic recovery to create good-paying jobs that will employ recent graduates so that they can hope to repay loans they have incurred.

This is not to say that misrepresentation never occurs or that students should not have recourse: Consumer protections already exist, and schools engaged in fraudulent behavior should be prosecuted to the fullest extent of the law. Under the current “borrower defense to repayment” (DTR) regulation, an individual student or group of students may be eligible to file a claim for a discharge of their student loan debt if it is determined that the school violated a state law. The process should be streamlined by the Department of Education and made clear to the average user, so that students who feel they have been defrauded know of its availability.

Since the proposed rule will apply to all types of higher-education institutions, public, taxpayer-funded schools would also be implicated for shouldering loan discharges, with the obligation for repayment potentially falling on taxpayers. And it’s not just the loans themselves that make taxpayers potentially liable for loan forgiveness: Because state tax dollars directly support public colleges and universities, forcing those schools to fight nonstop litigation will put taxpayers on the hook for legal costs.

It’s clear that the Obama administration is trying to slip through as many new regulations as possible under the wire before the president’s second term ends, but because of the potentially significant economic impact and legal chaos that this proposed rule would engender, Congress should step in and reassert its authority to make legal changes of this magnitude. As the Senate Committee on Health, Education, Labor, and Pensions recently noted, “students have been hurt, but the department [of Education] is establishing a precedent that puts taxpayers on the hook for what a college may have done.” Congress, and the American people, can’t afford to let this one slip through.

Robertson is CEO of Crispin Solutions, a public affairs and communications consulting firm.