Federal regulations that aim to protect and refund student loan borrowers defrauded by their schools could end before they even go into place, thanks to a lawsuit filed by the for-profit college industry.

The California Association of Private Postsecondary Schools, a trade group representing for-profit and private colleges in the state, filed a lawsuit [PDF] against the Department of Education and Secretary Betsy DeVos this week seeking a court order to stop the planned July 1 implementation of so-called Borrower Defense rules.

The lawsuit, filed with a federal court in Washington, D.C., claims that these rules could lead to more closures of vocational schools, leaving students with fewer choices when seeking higher education.

According to the lawsuit, the Dept. of Education lacks the legal authority to uphold the “arbitrary and capricious” rules.

“The Final Rule threatens the existence of many CAPPS member institutions,” the lawsuit states. “The increased costs and the dramatically escalated threat of meritless claims and litigation, both before the Department and in court, will be crippling for many schools.”

The Rules

A bit of a refresher on the rules: The Department of Education unveiled the massive proposed overhaul of the Borrower Defense rules in June 2016 and finalized the measures in Oct. 2016, aiming to hold schools accountable in a court of law when they screw over students.

The 927-page rule touched on everything from how and when a student should be reimbursed for loans when their school unexpectedly closes to how schools can employ anti-lawsuit arbitration clauses.

Under the rules, schools that want federal aid would be prohibited from using mandatory arbitration clauses that prevent students from filing lawsuits in court and ban class actions altogether. In the education field, forced arbitration is almost exclusively used by for-profit schools. The would allow students to <i>choose</i> arbitration for resolving disputes but they could no longer be forced into giving up their right to sue.

In an effort to add more transparency to the process, schools would also be required to tell the Secretary of Education each time arbitration or judicial claimed were filed against it. Additionally, the schools would have to share information about whatever comes out of those disputes, regardless of whether they happen in the courtroom or in arbitration.

As for students who attend a school that closes, the regulations provide a number of specific benchmarks for situations in which the previously seldom-used Borrower Defense process would be available to students.

For instance, in order for students to be eligible for relief, there would have to have been a breach of contractual promises between the school and the student; a state or federal court would have had to rule against the school regarding the educational services for which the loan was made; and the school would have had to make a “substantial misrepresentation” about the nature of its educational program.

The rules opened the door for the consideration of a group-wide discharge in cases where a school shuts its doors and borrowers’ claims are similar.

Additionally, schools would be monitored for a number of early warning signs of closure or fraudulent activity:
• Lawsuits from a state attorney general, the Federal Trade Commission, or the Consumer Financial Protection Bureau;
• Schools defaulting on their debt obligations;
• A substantial number of Borrower Defense claims brought against the school;
• Schools that receive more than 90% of their revenue from federal aid;
• Schools where more than half of its eligible graduates are not meeting federal Gainful Employment standards;
• The school’s accrediting body takes an action that could result in the loss of accreditation.

More Rules, More Closures?

CAPPS contends these rules will likely “shutter many vocational schools without any reasonable justification and will needlessly leave many non-traditional students with few or no educational options.”

The group maintains that it isn’t just looking out for its own members with the lawsuit, instead claiming that many traditional schools are at risk under the proposed regulations.

“The final rule exposes all schools to massive new liability, and likely will be particularly harmful to schools serving low-income and minority students,” the suit states.

Of course, CAPPS’ argument raises the question of why the industry is so afraid of being sued or of being monitored for potential fraud.

One need only look at the massive scandals and failures at some of the nation’s biggest names in for-profit education to see why supporters say these rules are needed.

For-Profit Failures

The Dept. of Education first announced its planned overhaul of the regulations in Aug. 2015, shortly after mega-for-profit education chain Corinthian Colleges Inc. filed for bankruptcy and closed the doors of its Everest University, Heald College, and WyoTech campuses.

The proposal was finally unveiled after the University of Phoenix began losing students, Brown Mackie College announced the closure of dozens of locations, and lawsuits and investigations were opened into ITT Technical Institute and other colleges.

In just the year since the proposal was made, the for-profit college industry has seen even more problems:

• July 2016 — Bridgeport Education, the he operator of for-profit colleges Ashford University and the University of the Rockies, revealed it was being investigated by the Department of Justice over its federal student aid funding. Two months later, the company was ordered to forgive $23 million in student loans and pay an $8 million penalty over allegedly illegal student lending practices.

• Sept. 2016 — ITT Education Services abruptly closed all 130 locations of its ITT Technical Institute campuses, leading to yet another rash of students seeking borrower defense certification. The for-profit operator had been subject to a number of inquiries in recent years, including a federal fraud investigation and lawsuit from the Consumer Financial Protection Bureau.  

• Sept. 2016 — The Dept. of Education revoked the recognition of troubled for-profit college accreditor The Accrediting Council for Independent Colleges and Schools following increased scrutiny after the collapse of Corinthian Colleges in 2015.

• Sept. 2016 — Lawmakers called for the Department of Veterans Affairs to restrict federal aid from Computer Systems Institute after an investigation found evidence the schools allegedly defrauded students.

• Sept. 2016 — Minnesota-based Regency Beauty Institute announced it would close the doors of its 79 campuses across the country.

• Oct. 2016 — DeVry Education Group was ordered to stop claims in advertisements that 90% of students get jobs after graduation.

• Nov. 2016 — Heritage College and Heritage Institute — which operated 10 campuses around the country focusing on health sciences — closed their doors abruptly.

• Dec. 2016 — DeVry Education Group agreed to pay $100 million to settle federal regulatory charges that it used deceptive ads to recruit students.

• Feb. 2017 — New Attorney General Eric Schneiderman’s office announced a $2.75 million settlement with DeVry University related to the company’s use of deceptive ads to recruit students.

While the above isn’t a complete list of the for-profit colleges to face trouble in the last year, they are examples of why the new Borrower Defense rules are needed.

“These rules didn’t come out of thin air; they were in direct response to the well-documented abuses committed in previous years by failed schools like Corinthian and ITT Tech,” Suzanne Martindale, staff attorney for our colleagues at Consumers Union, tells Consumerist. “For too long, predatory education companies like these engaged in aggressive and deceptive marketing to students, promising great education and job prospects. What those students got in return was all too often just a pile of debt.”

The Department created these rules and standard processes to right these wrongs and to ensure they didn’t happen in the future.

“All these rules do is balance the scales, so that a school that breaks the law can’t take the money and run while students are left holding the bag. The Department must vigorously reject these attacks and stand up for students,” Martindale adds.

The question now is whether Education Secretary Betsy DeVos — a noted supporter of the for-profit college industry — will fight to save the rule or if the Department intends to cede victory to CAPPS. A rep for the Dept. tells Consumerist that it does not comment on pending litigation.

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