LANETTE SUAREZ—Student loans. Those two words haunt and cause anxiety for many students across the country before and after they receive that precious diploma.
Many students take out loans to attend college or graduate school, incurring in some cases more than $100,000 of debt in order to attain their degree. Law students in particular know that attending law school can be pricey. Over the past decade, law schools have increased their prices substantially and for-profit law school tuitions are on par with that of private law schools. This rise in tuition has caused students to take on more debt than ever before.
The fallout of the college enrollment boom that occurred partly because of the Great Recession has caused a rise in demands for student debt forgiveness. This student debt forgiveness is driven mostly by the surge in students attending for-profit colleges. The enrollment boom caused student debt to nearly triple in the past decade to $1.2 trillion and it has further caused, according to government data, seven million Americans to default on their loans.
The students seeking loan forgiveness are now inundating the U.S. government with appeals to have their student loans forgiven on the grounds that schools deceived them with false promises of a well-paying career. According the Wall Street Journal, “[i]n the past six months, more than 7,500 borrowers owing $164 million have applied to have their student debt expunged under an obscure federal law . . . .” That obscure law provides forgiveness of debt borrowed from the federal government’s Direct Loan program when schools allegedly used illegal recruiting tactics.
The forgiveness program known as “borrower defense” or “defense to repayment” comes from a 1994 forgiveness program. The forgiveness program is overly vague and does not specify what proof is needed to demonstrate that a school committed fraud. The program sat relatively inactive for the last two decades until last year. Before last year, the Department of Education (“DOE”) had only received five applications and granted three of them. Because it sat dormant for so long, the DOE had failed to draft rules after the law was passed. Now, the DOE is attempting to figure out exactly what the law entails and has hired a “special master” to make recommendations to the agency on the existing applications. However, the DOE’s undersecretary stated that borrowers are entitled to forgiveness—as well as potential reimbursement of repaid loans—if they have been defrauded, regardless of the taxpayer cost.
To forgive student loans, students currently do not have many options. Under federal law, student debt is prohibited from being discharged in bankruptcy, except in rare circumstances. Also, the Supreme Court recently declined to hear a case that could expand bankruptcy options for those attempting to get rid of their student loans. Thus, this forgiveness program could prove to be one of the few options for hundreds of thousands of Americans buried in student debt.
Borrowers can apply for forgiveness through the DOE website. Currently, most of the students applying for forgiveness under the 1994 program attended for-profit schools and three-quarters went to the now-defunct Corinthian Colleges. The website for the DOE application specifically addresses Corinthian Colleges, but the program is open to all borrowers with direct federal loans who can establish their school violated state law in getting them to take out the debt. Now, there is a potential danger to all of this: the program may become overly broad. This problem could occur if the program begins to encompass not just outright fraud, but also borrowers simply regretting taking out the debt because they can’t find a job through no fault of the college they attended. Furthermore, the cost of forgiveness could ultimately be in the billions of dollars to taxpayers who will be footing the bill.
The DOE has tough decisions going forward. Many students say recruiters verbally made misleading promises and cited fraudulent job-placement data, but students often lack the documentation to prove it. Also, consumer-protection laws vary by state, and a recruiting practice might be legal in one state but illegal in another.
How does this apply to law schools? Could this program impact student’s that graduated from low-ranked law schools? Law schools that fraudulently reported employment statistics to the A.B.A and U.S. News & World Report? Well, it’s unclear. The DOE can clawback forgiven loans from schools and penalize institutions. However, law schools will furiously fight back and argue that they were not engaging in fraud. The schools can also point to the class action lawsuits where most courts held that schools were not engaging in fraud because law school applicants are college graduates and, therefore, a “sophisticated subset of education consumers.”
Fortunately for those seeking debt forgiveness, the borrower defense program looks at an applicant’s own unique circumstances. While there is a chance that the application will be denied, it is worth the law student’s time to apply because if enough borrowers are granted relief, then “the Department of Education will eventually start investigating law schools that continue to admit under-qualified students who end up with no jobs and are unable to pass the bar exam.” Overall, law students will just have to wait and see how the DOE deals with law student debt to see if they can use the obscure law themselves.