Regulatory Ping-Pong And Borrower Defense

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Earlier this week, ten Republican Senators joined Democrats to pass a measure that would overturn Education Secretary Betsy DeVos’ rewrite of the borrower defense to repayment rule, which governs how student borrowers can receive loan forgiveness if defrauded by their colleges. Though President Trump is expected to veto the measure, it marks another installment in the never-ending saga of borrower defense.

The regulation has now whiplashed through three different iterations in the past four years as administrations come in and out of power. Depending on when students’ loans were issued, their applications for forgiveness under borrower defense could be processed under one of three different regimes. These inconsistent and often contradictory rules create unnecessary confusion for students and institutions. Moreover, different versions of borrower defense may raise or lower the deficit by tens of billions of dollars, without ever seeing a vote in Congress.

The saga started back in 1994, when Congress passed a law allowing federal student loan borrowers to have their debts discharged if their school defrauded them. However, “defrauded” is a tricky concept-what constitutes fraud, and how can it be proven? Congress shrugged and punted those decisions to the states. Between 1994 and 2017, borrower defense claims were adjudicated under applicable state laws.

The 2015 collapse of Corinthian Colleges, a major for-profit college chain, exposed the need for a unified federal standard as thousands of borrower defense claims began to roll in. Student loans are a federal program, and so the federal government should decide how provisions of that program like borrower defense should operate.

In 2016, the Obama administration issued a borrower defense regulation that supplanted the state laws and created a lenient standard. Too lenient, I argued at the time: the Obama rule defined fraud so broadly that even perfectly legitimate colleges could become the subject of claims under borrower defense. The rule could have cost taxpayers over $40 billion.

The following year, the incoming Trump administration tried to overturn the Obama rule entirely, but were blocked by the courts until they came up with a replacement rule. As a result, the Obama borrower defense rules apply to student loans issued between 2017 and 2020. Secretary DeVos issued a replacement rule in 2019. Her version still makes it possible for defrauded borrowers to receive financial relief, but it seeks to avoid frivolous claims by requiring borrowers to show that they suffered financial harm, among other things. These standards are projected to save taxpayers over $10 billion relative to the Obama rules and will apply to loans issued after July 2020.

Democrats cried foul and have tried to overturn the Trump rule in Congress. Likely Democratic presidential nominee Joe Biden has called for restoring the old Obama regulation. If Biden wins this fall’s presidential election, we can probably expect another version of borrower defense to take effect for loans issued after 2022 or 2023. Politicians are playing regulatory ping-pong with borrower defense, while students and institutions strain their necks watching the ball.

Borrower defense rules are patchwork for loans issued before 2017, lenient between 2017 and 2020, strict after 2020, and possibly lenient again in 2022. One can understand why so many different versions of the rule have come about, since different administrations come in to power and bring with them different values and priorities. But it is far from ideal for the rules that govern one of the federal government’s principal loan forgiveness programs to change radically after every presidential election.

This has happened because Congress has ceded so many of its responsibilities to the administrative state. Tens of billions of taxpayer dollars are on the line with every borrower defense rewrite. A borrower defense regime could offer more relief to borrowers at greater taxpayer expense, or offer less relief at smaller expense. Decisions like these should be in the hands of elected legislators, rather than an unaccountable and unelected executive-branch agency.

Congress should put an end to the regulatory ping-pong match and write its own borrower defense rule into law. Let legislators debate how strict or lenient the rules should be, and let them be openly responsible for how much taxpayer money they spend. Congress created the federal student loan program; it should not outsource a key aspect of its operation to state laws or executive-branch rulemaking.