A long-delayed federal rule meant to protect student loan borrowers who have been defrauded by their schools came into effect on Tuesday, after a judge dismissed an industry challenge and the Education Department shut down to his efforts to block it longer.
the new rule, finalized in the last few months of President Barack Obama’s administration, aims to strengthen a system called defending the borrower which allows the cancellation of federal student loans for borrowers who have been deceived by schools who have lied about their placement rates or who have violated state laws on consumer protection.
The new rule could speed up claims from more than 100,000 borrowers, many of whom attended for-profit schools, including ITT and Corinthian, which have gone bankrupt in recent years.
“We’re really thrilled,” said Eileen Connor, director of litigation at Harvard Law School’s Predatory Student Loans Project, which represented several student borrowers who challenged the department’s delay. “These regulations contain many essential protections for student borrowers and taxpayers.”
The new rule requires the education ministry to create a “clear, fair and transparent” process for handling loan discharge requests from borrowers, many of whom have been years in the ministry’s backlog. It also orders the ministry to automatically cancel loans for certain students from closed schools, without forcing borrowers to apply for this relief.
The rule was due to go into effect in July 2017. Shortly before that deadline, Education Secretary Betsy DeVos suspended the rule and announced her intention to rewrite it. But federal agencies must follow a specific process to pass or change the rules, and Judge Randolph D. Moss, a federal judge in Washington, ruled last month that the Education Department had failed to meet that standard. The ministry’s decision to delay the rule was “Arbitrary and capricious,” he wrote.
Justice Moss ordered the rule to come into force but stayed his ruling until he could hear arguments in a lawsuit filed by the California Association of Private Post Secondary Schools, an industry group whose members include for-profit colleges.
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Judge Moss dismissed the group’s injunction request on Tuesday. This removed the last obstacle blocking the rule and put it into effect immediately.
A spokeswoman for the California trade group declined to comment on Judge Moss’ decision.
Liz Hill, spokesperson for the Department of Education, said Ms DeVos “respects the role of the court and accepts the court’s decision.” However, Ms. DeVos still hopes to rewrite the rule.
“The secretary continues to believe that the rule promulgated by the previous administration is bad policy, and the ministry will continue work on finalizing a rule that protects both borrowers and taxpayers,” Hill said.
The earliest a new rule written by Ms. DeVos’ department could go into effect in July 2020, which leaves the Obama-era rule in place until then. Ms Hill said the ministry would provide more information “soon” on how this would be done.
Of the 166,000 rebate requests received as of June 30, nearly 106,000 were still pending, according to department data. The ministry rejected 9,000 applications and approved nearly 48,000, paying off $ 535 million in student loan debt. Taxpayers absorb this loss.
The new rule attempts to cushion the blow to taxpayers by requiring schools at risk of generating fraud claims to provide financial security. This part of the rule has been fiercely opposed by industry groups.
Legal battles over the nuances of the rule are expected to continue. In his decision on Tuesday, Judge Moss wrote that his decision was “not the first (and probably not the last) chapter” of the fight.