Obama’s Student Loan Pardon

As a parting gift to young voters, the Obama Administration last week issued a rule allowing borrowers to discharge billions of dollars in student debt. Tucked in are knick knacks for the plaintiffs bar and another whack at for-profit colleges.

The “borrower defense” rule purports to clarify a provision in the Higher Education Act of 1965 that allows the secretary of education to forgive student loans based on “acts or omissions of an institution of higher education.” Progressive groups have been helping for-profit graduates file claims for debt relief, so the Education Department has been inundated by applications. Last year the department set up a committee to streamline and standardize the administrative process. After the committee couldn’t agree, the department unilaterally rewrote the law.

The rule creates a process in which loans can be discharged if a department official concludes that a college engaged in a substantial misrepresentation based on a preponderance of evidence. This is a lower burden of proof than the clear and convincing standard required in most states to demonstrate fraud. The definition of misrepresentation would be amended to include “omissions of information and statements with a likelihood or tendency to mislead under the circumstances,” so students wouldn’t have to demonstrate fraudulent intent by the college.

The education secretary could approve a class of claimants (e.g., borrowers who attended a for-profit) who would be represented by a department advocate. Another department bureaucrat would resolve claims and assess a college’s liability; the secretary would adjudicate appeals. No taxpayer advocate is anywhere in sight.

As a bonus, the department said it has “determined it has the authority to restore semesters of Pell Grant eligibility” (usually limited to 12 semesters) for those who attend colleges that the Administration has shut down. This authority was never delegated by Congress and could multiply the taxpayer tab. Notably, the department didn’t extend the same courtesy to veterans who lose their GI benefits.

The new rule also specifies several “triggers” such as a lawsuit or citation by a state agency that could impel a college to post a letter of credit. This requirement is supposedly intended to reduce the taxpayer bill for discharged loans if a college closes. However, regulators could also use it to bludgeon for-profits. ITT Tech closed this summer after the department demanded an unusually large letter of credit, and a department spokesman told us this week that there are $6.4 billion in outstanding loans from ITT.

Colleges would also be prohibited from requiring students to sign class-action waivers and arbitration agreements. This would open big-game hunting season for plaintiff attorneys, and for-profit investors will be the top target.

The rule ostensibly covers all colleges, but the secretary in effect has carte blanche authority and can apply the regulations selectively. Many of the financial triggers such as a late report filing with the SEC apply only to for-profits. Public institutions also wouldn’t be required to post letters of credit because they are backed by “the full faith and credit of the State.”

While the department pegs the taxpayer cost of the rule at between $9.5 billion and $21.2 billion over the next decade, it has repeatedly lowballed the costs of its loan-forgiveness programs. Here is the Administration’s regulatory model: Destroy businesses while doling out favors to political constituents. Later, bill taxpayers.

[Source:-Wall Street Journal]

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