Scam is a very good word for it.
After nationalizing student lending, the Obama Administration sought to reduce the government’s $1.3 trillion loan portfolio by allowing disgruntled borrowers to discharge their debt. Last week Education Secretary Betsy DeVos ended this fraud against taxpayers.
After driving Corinthian Colleges out of business in 2014, the Education Department implemented a haphazard process to forgive loans of students who claimed to have been ripped off by the defunct for-profit. Tens of thousands of claims poured in, overwhelming department staff.
The backlog of claims ballooned after predatory regulators forced the closure of ITT Technical Institute in 2016. Liberal groups urged the Obama Administration to forgive loans of borrowers who had attended other for-profits, spurring the department to initiate a “borrower defense” rule-making to allow students who purported misrepresentations by their colleges to discharge their loans. The midnight rule, finalized last November, authorized the Education Department to discharge debts on a class-wide basis—for instance, all borrowers who had attended a certain college within the last five years.
The Obama Administration approved roughly 15,000 claims between June 25, 2015 and January 1, 2017. During President Obama’s final three weeks in office, the department hurried out 16,000 approvals. No claims were denied. The total taxpayer tab for discharges: $450 million.
Obama officials left a backlog of 48,000 claims, many of which were flagged for rejection. But the Education Department had not developed a process for denying claims or a system to prevent fraud—to wit, borrowers who alleged misrepresentations by colleges despite suffering no apparent injury.
Enter the Trump Administration, which suspended claim approvals while the Inspector General reviewed the department’s procedures for discharging debt. In June Mrs. DeVos put the borrower-defense rule on ice and convened a committee of stakeholders to consider changes. The IG in a report this month describes systemic problems with the loan-forgiveness process. For instance, claim data was maintained on more than a thousand spreadsheets with “no controls to prevent or detect problems with the integrity.” This is an invitation to hackers. The Inspector General also found that “information on the status of loan discharges was not readily available” and that “it took [Federal Student Aid] at least 3 weeks to produce outcome data on the status of claims.” This is ironic because the Education Department cut off federal student aid to Corinthian—thus precipitating its bankruptcy—because of the college’s alleged slowness in responding to document requests.
Mrs. DeVos identified a bigger problem: The department was discharging debt carte blanche without accounting for the value students received from their education. Before awarding damages, judges are supposed to consider whether plaintiffs are harmed by alleged misrepresentations and then weigh the severity of their injury. Department adjudicators were doing neither.
A new department directive scales student loan relief based on college employment data. Borrowers who enrolled in programs whose grads earn less than the average of peer institutions will receive 100% debt relief. But those who attended programs with higher earnings will only be able to discharge some debt.
Education officials say this change will save taxpayers billions of dollars. Yet liberals are outraged that Mrs. DeVos is using earnings data that the department collected to punish forprofits to curb dubious claims for debt relief. The Trump Administration deserves credit for restoring due process and protecting taxpayers from another Obama-era student-loan scam.