Texas For-Profit Colleges Sue to Block Biden Borrower Defense Rule

If successful, it will become more difficult for borrowers defrauded by their college to have their federal loans discharged.
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  • The Department of Education plans to institute new rules that erase student debt for borrowers whose college defrauded them.
  • A Texas trade association representing for-profit colleges filed the lawsuit to block the rule from going into effect.
  • The suit claims the department overstepped what it is legally allowed to change with this rule.

A new lawsuit puts at risk a Biden administration rule designed to make it easier for defrauded students to have their loans forgiven.

Career Colleges and Schools of Texas, a trade organization representing 70 for-profit institutions, filed a lawsuit Feb. 28 that seeks to block the new borrower defense to repayment (BDR) rule from going into effect on July 1.

The trade group argues that the changes proposed by the Department of Education (ED) go beyond its authority. The group likewise argues that the proposed changes will unfairly impact its member institutions.

The revised BDR rule dates back to negotiated rulemaking sessions from late 2021 during which ED and other higher education stakeholders jointly created a rule that would lower the bar for borrowers to qualify for loan discharges under BDR.

Among the significant changes in the new rule is the ability for an ED secretary to group claims against the same school together and for "aggressive recruitment" by an institution to qualify as an avenue for debt relief.

ED failed to reach consensus with negotiators for the proposal in late 2021. The for-profit representative in the rulemaking sessions was the sole holdout.

Outline of the Allegations

Career Colleges and Schools of Texas' suit boils down to a handful of issues with the new BDR rule:

  • Group claims unfairly lower the bar for a successful BDR claim.
  • ED's description of "aggressive recruitment" is too vague.
  • The department unlawfully removed "intent" as a necessary factor for a BDR claim.
  • Institutions have fewer due process rights under this rule.
  • All these changes mean institutions will have to foot the bill for discharged loans more often.

That last point is most crucial for this suit.

Essentially, ED's proposed changes make it easier for borrowers to win a BDR claim and have their federal student loans forgiven. That's well and good for borrowers, but this also means ED can turn around and tell institutions that they have to pay back the balance of discharged loans.

ED recently told DeVry University that it needed to pay $24 million for discharged loans. DeVry sued the department in October.

Career Colleges and Schools of Texas' complaint adds that the proposed BDR rule cuts institutions out of the decision process. That means that if ED later seeks to recoup the cost of discharged loans, schools are at a disadvantage if they want to prove they didn't defraud borrowers.

"If a recoupment proceeding is brought against a school, no mechanism is provided to enable the school to rebut the presumption. The final rule does not permit a school in a recoupment proceeding to take discovery, at trial or otherwise, even though the borrower ostensibly possesses evidence regarding the causation and extent of injury," the lawsuit states. "The presumptions are rebuttable in name, but not in practice."

The suit also alleges that ED has no legal authority to add the group claims language to the BDR rule through rulemaking. Congress would need to create this process, the suit claims.

"Congress authorized the department merely to specify which 'acts or omissions' 'a borrower may assert as a defense,'" the suit states.

Allegations By Texas For-Profit Colleges Not New

These claims shouldn't come as a shock to the department.

The allegations in this case mirror concerns that Jessica Barry, the representative for for-profit colleges during negotiated rulemaking, raised in December 2021. At the time, she was the only representative to vote against approving the department's proposed rule.

Barry's main priority was to include due process rights for institutions during the rulemaking. She repeatedly raised the issue of reputational harm, but the department and negotiators were not receptive to her concerns. Negotiators prioritized expanding the BDR rule so that defrauded borrowers had an easier path to debt relief.

Other institutional representatives notably voted in favor of ED's proposal, including representatives from four-year public, four-year private nonprofit, and two-year public institutions.

Historically, for-profit institutions make up the bulk of borrower defense claims.

According to a 2017 analysis from the Century Foundation of over 98,000 borrower defense claims, nearly 99% of claims were made against for-profit schools.