Education Department (ED) data obtained by Yahoo Finance details a backlog of claims from U.S. college students who felt defrauded, underscoring the Trump administration's deregulatory actions toward U.S. higher education and the regulatory issues inherited by the Biden administration.
U.S. citizens and eligible non-citizens with federally-backed student debt can apply for borrower defense if their college or career school education misled them "or engaged in other misconduct in violation of certain state laws," according to the ED's Federal Student Aid office.
Borrower defense applications surged after the Obama administration cracked down on predatory for-profit colleges in 2015 and created new regulations, but the mechanism for defrauded borrowers seeking debt relief broke down during the Trump administration.
Students who believed they had been defrauded filed a total of 337,190 borrower defense claims as of December 2020, according to ED data obtained through a Freedom of Information Act (FOIA) request.
The vast majority of 267 institutions subject to at least 100 borrower defense claims were for-profit schools, despite for-profits comprising less than 10% of U.S. higher education enrollment.
More than half of all borrower defense claims were filed against now-defunct for-profit schools, and 33% of all "unresolved" claims were filed by students of a for-profit school that shut down in 2015.
While 208,486 (or about 62%) of all borrower defense applications listed were "resolved," meaning that the applications "are closed in system or in which the applicant has been notified of a decision on their application (eligible or ineligible)," many were systematically denied during the Trump administration — including nearly 130,000 in 2020 alone.
There are several for-profit schools on the borrower defense claim list that are still operating, with access to federal financial aid funding, despite concerns about allegedly predatory marketing.
ED confirmed to Yahoo Finance that the data comprises "all borrower defense claims submitted through December 2020" and did not clarify whether the agency would re-adjudicate any "resolved" claims that were found to be improperly denied.
“In a period of just a few months, the DeVos administration, after not letting borrowers know anything, basically churned through about 125,000 applications," Eileen Connor, the legal director for the Project on Predatory Lending, which represents various borrowers in lawsuits against ED over the claims, told Yahoo Finance. "And 'resolved' [in those cases] means denied."
Overall, the new data highlights a lack of accountability related to for-profit schools during the Trump era and provides context to the Biden administration's focus on targeted student loan forgiveness.
“It is a privilege to be able to enroll students, and it is a privilege to be able to put students in debt with the federal government’s dollars backing them,” Yan Cao, a higher education policy expert at TCF who worked on the analysis, told Yahoo Finance. "Schools really have to earn that privilege — those have always been the rules of the game. But the rules haven't always been followed.”
How the borrower defense backlog began
The borrower defense process, meant to deliver federal loan forgiveness for defrauded students, was created in 1995 but barely used until for-profit chain Corinthian Colleges closed in 2015.
More than 70,000 students were affected by the Corinthian closures, and a deluge of borrower defense applications followed as the Obama administration updated borrower defense rules.
“For years, Corinthian profited off the backs of poor people — now they have to pay,” then-California Attorney General Kamala Harris stated in 2016 when announcing a $1.1 billion judgment against Corinthian. “This judgment sends a clear message: There is a cost to this kind of predatory conduct ... My office will continue to do everything in our power to help these vulnerable students obtain all available relief, as they work to achieve their academic and professional goals.”
The revamped borrower defense system deteriorated during the Trump administration, which overturned regulations related to for-profit colleges and began systematically denying borrower defense claims, leading to the current heap of unresolved and hastily-resolved claims.
“What you see in these numbers is how hundreds of thousands of borrowers ripped off by predatory for-profit schools continue to remain in limbo," Seth Frotman, a former student loan official and current executive director of the Student Borrower Protection Center, told Yahoo Finance. "And this is the critical and seminal work of the Biden administration, which is actually delivering on the promise that the government made to [protect student borrowers] in exchange for their willingness to take on debt."
In March 2021, Education Secretary Miguel Cardona threw out a Trump-era policy that canceled roughly $1 billion in student loans held by about 72,000 defrauded for-profit college students who had seen their borrower defense claims "approved" but didn't receive a full discharge.
The Biden-era ED has also erased roughly $1.3 billion in student debt for 41,000 borrowers with total disabilities and halted collections on about 1.14 million defaulted loans in the Federal Family Education Loan Program (FFELP).
Defunct for-profits top list of borrower defense claims
Ever since the Obama administration, for-profit institutions have dominated the list of schools subject to borrower defense claims.
And of the 267 schools that generated over 100 student borrower defense complaints, according to the latest data, 264 of them were for-profit or what TCF calls "covert for-profits" — for-profit institutions that have sought to switch their schools to nonprofit status.
“One of the most incredible things is how stark the data demonstrates that the schools that are ripping off students are concentrated in the for-profit sector,” Cao said, “And that includes schools like Ashford University that have a history of harming students as for-profit schools but are trying to convert, so they can represent themselves as not-for-profit or publicly affiliated.”
Furthermore, roughly half of all borrower defense claims were submitted by students who attended now-closed institutions such as ITT Technical Institute and Corinthian Colleges.
“It's not surprising to me that the people who've gone to for-profit colleges are often misled and mistreated by their schools," Connor, the legal director for the Project on Predatory Lending, which represents various borrowers in lawsuits against ED over the claims, told Yahoo Finance. "So I think that it makes sense that that is reflected in the distribution of borrower defense claims."
Many of the claims against now-defunct for-profit schools that faced regulatory action are still unresolved. Around 77% of ITT students' applications — 25,639 out of 32,923 — are pending while roughly one-third of all unresolved claims — 41,966 — were filed by former Corinthian College students.
Pressure is building on ED to conclude these kinds of cases. Twenty-three attorneys general recently urged Cardona to grant forgiveness to anyone who enrolled in ITT Tech between 2007 and 2010. The Project on Predatory Student Lending, which is part of the Legal Services Center of Harvard Law School, has been advocating for the cancellation of all student debt from Corinthian Colleges.
“What we want is for this to never happen again,” Connor said. And aside from reinstating Obama-era standards such as the gainful employment rule, she added, “we need a robust safety valve that doesn’t take three years of violating [laws] before there are any consequences.”
At stake: Access to the federal aid hydrant
Dysfunction in the borrower defense process has raised questions about accountability for certain schools alleged to have defrauded students but continue to have access to billions of dollars in annual federal financial aid — as well as stimulus from pandemic aid packages passed by Congress during the coronavirus pandemic.
Cao stressed that for the still-operating schools that have been credibly accused of fraud, “there is a real obligation to make sure that there is not a single additional student who is enrolled and will perhaps go into debt under false promises and deceptive recruitment tactics."
In 2016, ED cut off the flow of federal financial aid to Medtech College after an auditor hired by the department found that the school had “significantly overstated the job placement rates” when filing information under gainful employment regulations. The school, which operated in Indiana and Virginia, subsequently shuttered.
Former Medtech students filed borrower defense applications, citing the misconduct that ED identified, but ED documents released under court order revealed that the agency's borrower defense team found only 16 claims from Medtech students that were “potentially approvable" while the rest showed “no patterns … [of] misrepresentations."
Connor stressed that the Medtech saga exemplified how extraordinarily confusing the borrower defense process had become.
“How can you say that a school engaging in that kind of misrepresentation that was so serious that the department itself took this step to cut them out of the federal program, that only 16 people who went there might possibly be able to get cancellation?” she said. “That’s perverse.”
Beyond borrower defense, experts stressed, graduates of for-profit schools consistently lag graduates of public and nonprofit colleges when it comes to earning enough income to pay back student loans.
"What we've seen is that for-profit institutions disproportionately leave students earning too little, paying too much, or both,” Michael Itzkowitz, a senior fellow at the public policy think tank Third Way, who has analyzed the return on investment for various types of schools, told Yahoo Finance. “In fact, half are shown to leave the majority of their students earning less than someone with no college experience whatsoever. Being that their post-collegiate earnings are so low, it’s unlikely that students who attend these institutions will ever be able to recoup their educational investment."
Aarthi is a reporter for Yahoo Finance. She can be reached at email@example.com. Follow her on Twitter @aarthiswami.