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How to Improve New Student Loan Regulations


How to Improve New Student Loan Regulations

July 21, 2016

PDF iconRead the full comment here.

The Department of Education recently released a proposed rule which would enable former students to bring “defense to repayment” claims against colleges which they feel have defrauded them. If successful, these claims could result in the cancellation of most or all of the claimants’ federal student loan obligations on the dime of the allegedly fraudulent institution or (more likely) the taxpayer. The proposed regulation would also threaten colleges with revocation of their access to Title IV funds if they violate one of several “triggers” enumerated in the rule.

The proposal, which would take effect in 2017, has several substantial problems that need to be addressed in the final rule. I discussed these in a comment submitted to the Federal Register and posted on E21. These problems include:

  • Retroactively changing regulations to allow the Department of Education to recoup defense to repayment losses from colleges after a three-year record retention period has expired. This is a welcome move for taxpayers, who will bear fewer losses, but the Department should not apply the standard retroactively, as it currently does. Such a move amounts to changing the rules of the playoffs after the Super Bowl has concluded.
  • The Department only applies the “triggering events” (which would force the loss of Title IV funds such as student loans and Pell Grants unless the school makes a substantial financial commitment) to for-profit and private nonprofit colleges, but excludes public colleges. This creates an uneven playing field, and the Department ignores evidence suggesting that public schools violate the “triggers” at a rate comparable to their private counterparts.
  • Lawsuits by federal or state oversight entities against a college qualify as “triggering events.” However, no test of the lawsuit’s validity is required before the institution faces financial sanctions. Similarly, some lawsuits by private parties qualify as “triggers.” These lawsuits only have to survive a minimal test of their validity before the institution in question faces repercussions. Such provisions will increase the incentive for public and private entities to pursue frivolous litigation.
  • Another “trigger” would penalize colleges for large increases in enrollment. This would disproportionately affect small institutions, discouraging their growth and cementing the status of dominant industry players.
  • The Department will start requiring for-profit schools with low loan repayment rates to warn students about this fact. This transparency is welcome, but it is not justifiable to restrict the requirement to for-profits, as public and private nonprofit institutions enroll more than half of students attending schools with poor repayment outcomes. This is another case of an uneven playing field that the Department should work to correct.

The Department of Education is well within its rights to attach new conditions to the disbursement of Title IV aid. However, the Department ought to reconsider some of the provisions in its proposed rule, as many act against its stated purposes. Hopefully these problems will be rectified in the final iteration of the rule, due out in the fall.

Preston Cooper is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.

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