Goldberg Examines Potential Drawbacks to Student Debt Program Reform

Shook, Hardy & Bacon Washington D.C. Partner Phil Goldberg discusses potential pitfalls of new proposed student loan discharge rules in a July 15 The Hill blog post, “New Student Debt Rule Could Harm Taxpayers and Spur Speculative Litigation.”

The Department of Education recently put forth a reform proposal that Goldberg believes will make it “too easy for students to get out of paying back their student loans.” In evaluating the new rule, Goldberg states, “The problem is that it could stick American taxpayers with the bills, lead to speculative litigation against colleges, and deprive students of valuable courses.” Goldberg’s article cites the financial impact on taxpayers, as estimated by the Department of Education, to be $43 million over the next 10 years.

Regarding the original loan discharge program adopted in 1995, Goldberg explains it “provides a legal backstop for vulnerable students when a college commits fraud or otherwise violates state law related to the loan or services for which the student paid.” Goldberg further explains that the Education Department is “fundamentally changing the program” by “reducing the standards for when loans can be discharged.” This means students will no longer “have to show fraud or prove the college broke a state or federal law” and that the Department “could discharge a loan whenever it concludes a college made a ‘statement that has the likelihood or tendency to mislead under the circumstances’ or ‘omits information.’”

Goldberg also points out that the proposed rule “puts too much power in the hands of the Education Department,” and states, “In addition to giving the agency full discretion over when to discharge a loan, it sets up an inherent conflict of interest.” This is because the Department would have the “unprecedented ability to order large-scale student debt relief, even when many students in that group have not filed claims,” which Goldberg explains is problematic as “the lack of protections here raises major due process concerns.”

Finally, Goldberg notes that the reform “bars colleges from including in enrollment agreements clauses requiring disputes to go to arbitration, rather than litigation,” and says, “These clauses have grown in popularity across economic sectors because arbitration is much less expensive for both sides than litigation.” Therefore, Goldberg believes that “any Department determination to discharge a loan under this program will undoubtedly be followed by individual and class actions, even when no law was violated.”

Goldberg concludes, “The Department should pull back this proposed rule and look for other ways to address the student debt crisis.”