Guest Post: Give Borrowers the Means to Protect Themselves Against Trade School Abuses
Blog Post
April 21, 2010
By Deanne Loonin
At the Student Loan Borrower Assistance Project, we support the U.S. Department of Education’s efforts to rewrite its regulations to strengthen the integrity of the federal student aid programs and to try to better protect for-profit college students from the types of abuses that have become all too common in this sector. If enacted, these potential rule changes could help ensure that government funds are well spent and that there is some minimum level of quality in higher education. They could also put an end to some of the worst recruiting practices that have put low-income students in harm’s way.
But the changes under consideration fall short in one crucial area -- they fail to provide any new relief for student loan borrowers who are harmed by the illegal and deceptive practices of unscrupulous proprietary schools. This is unfortunate because as it stands now, it is extremely difficult, if not virtually impossible, for those who are victimized by these schools to get relief and move on with their lives.
It may be easy to avoid thinking about those most harmed if you never see them or talk to them, but those of us who work with these borrowers know about the heartbreaking human costs of proprietary school abuses. Here are just a couple of examples from clients I met with recently:
- Johanna, 23 years old, lives in a homeless shelter with her daughter. Her only income is from public assistance (about $340/month) plus food stamps. About seven years ago when she was 16 years old, she saw ads for a local proprietary school that encouraged those without high school diplomas to sign up. She had dropped out of high school and was looking for a way to find work. She says they signed her up without giving her any sort of admissions test. The school signed her up for a private student loan of about $3,000 to help cover the tuition. She dropped out after three weeks because she heard that she would only be able to get medical assistant work if she had a high school diploma or G.E.D. Among other problems, the negative entries on her credit report from the defaulted student loan are making it harder for her to find work and housing. The psychological toll is also high -- she is very discouraged about going back to school.
- Lourdes, 21 years old, enrolled at a proprietary school in 2009, but found out quickly that the program did not come close to delivering on the promises that had been made. Dissatisfied, she considered dropping out but decided to stay because she was told that she would owe the loan money regardless. Since graduating, she has not been able find work and has not received any help from the school in her job search. She has over $6,000 in federal loans, but is finding it difficult to pay off as she is a single mother living on public assistance income of about $470/month. She is particularly upset because she said the school misled her into believing she would be able to transfer her credits if she completed the course. She wants to go back to school, but is discouraged and worried she will run into the same problems
Neither of these borrowers qualifies for existing Education Department programs that allow some borrowers to have their federal student loans discharged by the government. Congress created these programs in the early 1990s in response to widespread allegations of fraud and abuse in the proprietary school sector. The three school-related discharges are closed school, false certification, and unpaid refunds. None of these provides general remedies for borrowers who attended schools that engaged in fraudulent practices.
Only Limited Relief Available
The discharges provide some relief, but are limited in the statute and have been diluted even further by the Department of Education. For example, the Higher Education Act provides for discharge in cases where students were falsely certified for enrollment by eligible institutions. In drafting regulations to carry out this provision, the Education Department arbitrarily narrowed this remedy to apply mainly to students who were admitted to a school (and signed up for federal financial aid) even though they lacked a high school diploma or its equivalent, and hadn’t passed a properly administered government approved “ability to benefit” test, as required by law. As a result, students who are admitted on false pretenses but have a high school diploma or G.E.D. are generally not eligible for the discharge.
Even borrowers that should qualify are often wrongly denied. Others run into a wall trying to prove fraud. We have found, for example, that the Department often denies false certification discharges in cases where there is no record of findings or reports of fraud at the borrower’s school. This places most borrowers in an impossible bind. It is extremely difficult for borrowers to gather this information on their own and in many cases, there are no such reports, even for the most unscrupulous schools. As revealed at Congressional hearings during the 1990’s, the Department of Education failed to properly enforce regulations against many offenders. The absence of an investigation does not mean that fraud never occurred.
No Private Right of Enforcement
Relief through litigation is just as elusive. Courts have consistently held that there is no private right of enforcement under the Higher Education Act (HEA), meaning that borrowers generally can’t take schools or lenders to court for violating the statute. The lack of a federal remedy has led many borrowers to attempt to find relief in state courts. But recent court decisions appear to slam this door as well.
It might seem like there has been relief for borrowers given the recent media stories about large False Claims Act settlements. These lawsuits can be very useful to deter illegal behavior and restore funds to taxpayers, but they provide no relief for borrowers. Take, for example, the recent $78.5 million False Claims Act settlement that the University of Phoenix reached with former enrollment counselors who accused the giant for-profit college company of routinely violating a federal law that aims to prevent schools from aggressively recruiting unqualified students. Borrowers who were victims of these practices did not see a single penny from that settlement.
This means that if a school openly violates the prohibition on incentive compensation (compensating recruiters for their success in enrolling students), for example, and a very aggressive recruiter finds someone on the street and pressures her to enroll, the Department could theoretically find that the school violated the law and sanction them (this happens now and then) or the school might face a False Claims suit, but the borrower who was harmed by the illegal behavior is still stuck repaying her debt.
Theoretically, borrowers should not have to go to court. The Education Department certainly has the authority to close down fraudulent schools and could potentially provide borrowers with some relief. But no government agency can possibly police an entire industry. This is not a problem unique to the Department of Education. For example, in the debt collection area, the Federal Trade Commission received over 78,000 complaints against debt collectors in 2008, but filed only three debt collection enforcement actions, relying on individual enforcement to bear the heaviest burden.
Providing Access to Justice
So what can be done to help borrowers who have been victimized by schools engaged in fraudulent practices? We believe that it is essential that Congress revise the Higher Education Act to specify that federal student loan borrowers have a private right of action to enforce the statute. In other words, individuals who have been harmed by unscrupulous proprietary schools should be allowed to have their day in court to seek redress.
Both deterrence and redress are enhanced when laws permit individual enforcement.This is not only because of the limited resources of federal agencies, but also because individuals have much more complete information than agencies looking in from the outside about the effect of practices and are in the best position to identify violations. Individuals are an early warning system that can alert regulators to problems when they first arise. In the end, there is no consumer protection, no accountability, and no access to justice if individuals have no recourse when they suffer harm.
Federal officials also need to take additional steps to provide relief to these borrowers. On the federal loan side, the existing discharge programs should be expanded to provide administrative discharge relief for all fraud victims. At a minimum, we would urge the Department to revise its rules so that they are in line with the statutory authority. For example, any student who is admitted under a false pretense should become eligible for the false certification discharge. In addition, Congress should consider creating a limited amnesty program to write off the debts of certain borrowers who were harmed by illegal and deceptive school practices.
The government must provide relief to borrowers who are buried in debt due to school fraud. Federal officials should seek reimbursement whenever possible from the perpetrators. But the government is also at fault for lax enforcement. Borrowers who are largely shut out from enforcing the laws on their own are stuck waiting for the government to act. Yet all too often the government is more committed to industry and investor interests than borrowers. Ultimately, we are all harmed as the dream of equal access to higher education is lost and potentially productive members of our society are left with no choice but to give up on their dreams.
Deanne Loonin is a staff attorney with the National Consumer Law Center and the Director of the Center's Student Loan Borrower Assistance Project. She focuses on consumer credit issues generally and more specifically on student loans, credit counseling, and credit discrimination. She is the principal author of numerous publications, including "Too Small to Help: The Plight of Financially Distressed Private Student Loan Borrowers," and "Income-Based Repayment: Making it Work for Student Loan Borrowers." Her views are her own and do not necessarily reflect those of the New America Foundation.