This story has been updated to include comment from the Department of Education.
A group of consumer advocates filed a lawsuit against the Department of Education (ED) for revising an Obama-era rule that was designed to protect students who were defrauded by predatory schools.
The group is challenging the department’s revised rule on borrower defense, calling it “fatally-flawed” and “grounded on the false premise that student borrowers are the bad actors.”
The lawsuit was filed by the Project on Predatory Lending and Public Citizen Litigation Group on behalf of the New York Legal Assistance Group, in the U.S. District Court for the Southern District of New York.
“This devastating rule goes above and beyond the department’s other significant efforts to deny defrauded students loan relief,” Project on Predatory Student Lending Director Toby Merrill said in a press release. “It imposes impossible standards for defrauded students seeking to assert their legal rights to loan cancellation, and relies on explanations that defy logic and rest on no evidence. There is no question this rule is illegal and will not stand up in court.”
In response to the lawsuit, ED Press Secretary Angela Morabito told Yahoo Finance in a statement that the “Department will vigorously defend its regulation, which gives students and borrowers the relief that they’re owed, restores fairness and due process, extends the period for closed school discharges, and saves the taxpayers up to $11.1 billion over ten years.”
‘Arbitrary and capricious’
Under existing federal law, borrowers with federal loans are eligible for loan forgiveness if a college or a university has misled them or engaged in other misconduct in violation of certain state laws. The department has faced an onslaught of these claims, in the wake of the for-profit giant Corinthian Colleges shutting down in 2015.
According to the lawsuit, the department made changes in 2016 to “protect student borrowers and federal taxpayers by strengthening mechanisms for borrowers who were misled, deceived, and defrauded by their schools to obtain relief from federal student loans and disincentivizing schools’ financially risky and misleading practices.”
But in 2017, the department under Education Secretary Betsy DeVos delayed implementation of the 2016 rule three times, the lawsuit asserted, and proceeded to ignore it as “current law.” A federal court had then stated that the department’s delaying of that 2016 rule was “unlawful because the delays were procedurally flawed and arbitrary and capricious.”
But ED later issued a new rule in 2019, which “greatly relaxed the safeguards put in place in 2016, despite mountains of evidence of the harm that unscrupulous schools had caused student borrowers and federal taxpayers,” the lawsuit stated. ED’s new rules were published in September 2019 and are due to come into effect in July 2020.
The department also released a new “methodology” to assess hundreds of thousands of the potential debt relief claims. Experts and lawmakers criticized the new formula used by the department as “bad math” and “mystifying.” Defrauded students called it a “slap in the face.”
DeVos responded to these comments, stating that there has been a 5,000% increase in borrower defense claim since 2015, and was simply trying to find a way to efficiently process them. She added that the Obama administration had caused the chaos as it had “weaponized” regulations to go after for-profit colleges, and used the law in a “discriminatory fashion.”
But the lawsuit added that the department, with its 2019 rule, “embraced positions and reasoning that run contrary to both logic and the experience of student borrowers, as demonstrated by a wealth of data and comments submitted in opposition to its proposals.”
Lawsuits and lawmakers battle DeVos on for-profit issue
The new rules on granting defrauded students relief have been a hot-button issue on Capitol Hill. Previously, House Democrats had voted to overturn DeVos’ borrower defense rule in mid-January, hoping to reinstate the Obama-era rules, but had acknowledged then that the action represented more of a message than an order to DeVos.
The revised rule on borrower defense is “so outrageous that I think it cannot go without comment,” House Education and Labor Chairman Bobby Scott told Yahoo Finance in a previous interview.
But this isn’t the only lawsuit she’s facing on the issue: There’s a separate lawsuit from a teachers union over DeVos’ decision to rescind an Obama-era rule that was designed to protect students from for-profits, called gainful employment.
Yahoo Finance reached out to ED for comment and has not received a response as of publication.
Aarthi is a writer for Yahoo Finance. She can be reached at email@example.com. Follow her on Twitter @aarthiswami.