Borrower Defense to Repayment Regulations: The Obama Administration’s Greatest Higher Education Legacy?

President Obama famously said in 2014 that “I’ve got a pen, and I’ve got a phone.” Although he has used his pen to sign some substantial changes in federal higher education policy (such as ending the bank-based student loan program in favor of federal Direct Loans), his pen has been used more frequently to authorize the Department of Education to start implementing new regulations without going through Congress. The regulatory process has been used to expand income-driven repayment programs, implement gainful employment rules for students in select vocationally-oriented programs, and tie federal TEACH grants to some measure of teachers’ effectiveness. These efforts have been generally opposed by congressional Republicans, which have held a majority in at least one chamber of Congress since 2011.

But from the perspective of colleges, the newest set of regulations may end up being the most influential. The Department of Education recently unveiled the final regulations known as “borrower defense to repayment” in a response to concerns about colleges defrauding students or suddenly closing their doors. These wide-ranging regulations, which will take effect on July 1, 2017 (a summary is available here) allow individuals with student loans to get relief if there is a breach of contract or court decision affecting that college or if there is “a substantial misrepresentation by the school about the nature of the educational program, the nature of financial changes, or the employability of graduates.”

The language regarding “substantial misrepresentation” could have the largest impact for both for-profit and nonprofit colleges, as students will have six years to bring lawsuits if loans are made after July 1, 2017. Notably, this language treats intentional misrepresentation and honest errors in the same way, and also does not define what “substantial” is. For example, if a student enrolls in a program with a posted job placement rate of 98% and later finds out that college administrators e-mailed each other about how to hide a 48% placement rate, most courts would probably consider this to be substantial misrepresentation. But what if a well-meaning person accidentally transposed an 89% placement rate to get 98%? These errors do happen in data submitted to the federal government, and currently there is no penalty for this type of mistake.

As some have warned, the ambiguity of the language will likely open up the door for more lawsuits against colleges with a wide range of misrepresentations—particularly as the regulations allow for class-action lawsuits that colleges could previously restrict. Courts across the country vary considerably in their friendliness toward plaintiffs relative to defendants, meaning that colleges located in more plaintiff-friendly states such as California and Illinois may be more at risk of lawsuits than colleges in defendant-friendly states such as Delaware and Iowa. But even if a college can prevail in a lawsuit, it still has to pay its legal fees and also may be subject to bad publicity.

Although these new regulations are a clear and needed victory for students who attended undeniably fraudulent colleges, the ripple effects regarding the definition of “substantial” misrepresentation could affect a broad group of well-intending nonprofit colleges that either made honest mistakes or happened across a sympathetic judge or jury. Eventually, a series of court cases—perhaps in conjunction with additional federal guidance—should help settle the legal landscape, but in the meantime colleges will be watching these regulations with a great deal of anxiety.

Clinton and Trump Proposals on Student Debt Explained

This article was originally published on The Conversation. Read the original article.

The high price of attending college has been among the key issues concerning voters in the 2016 presidential election. Both Democratic nominee Hillary Clinton and Republican nominee Donald Trump have called the nearly US$1.3 trillion in student debt a “crisis.” During the third presidential debate on Oct. 19, Democratic nominee Hillary Clinton raised the issue all over again when she said,

“I want to make college debt-free. For families making less than $125,000, you will not get a tuition bill from a public college or a university if the plan that I worked on with Bernie Sanders is enacted.”

Republican nominee Donald Trump has also expressed concerns about college affordability. In a recent campaign speech in Columbus, Ohio, Trump provided a broad framework of his plan for higher education should he be elected president.

In a six-minute segment devoted solely to higher education, Trump proceeded to call student debt a “crisis” – matching Clinton’s language. He also called for colleges to curb rising administrative costs, spend their endowments on making college more affordable and protect students’ academic freedom.

The highlight of Trump’s speech was his proposal to create an income-based repayment system for federal student loans. Under his proposal, students would pay back 12.5 percent of their income for 15 years after leaving college. This is more generous than the typical income-based plan available today (which requires paying 10 percent of income for 20 to 25 years). The remaining balance of the loan is forgiven after that period, although this amount is subject to income taxes.

As a researcher of higher education finance, I question whether these proposals on student debt will benefit a significant number of the over 10 million college-going voters struggling to repay loans.

How student loan interest rates work

Typically, students pay interest rates set by Congress and the president on their federal student loans.

Over the last decade, interest rates for undergraduate students have fluctuated between 3.4 percent and 6.8 percent. Rates for federal PLUS loans have ranged from 6.3 percent to 8.5 percent. Federal PLUS loans require a credit check and are often cosigned by a parent or spouse. Federal student loans do not have those requirements.

While students pay this high a rate of interest, rates on 15-year mortgages are currently below three percent.

It is also important to note the role of private loan companies that have recently entered this market. In the last several years, private companies such as CommonBond, Earnest and SoFi as well as traditional banks have offered to refinance select students’ loans at interest rates that range from two percent to eight percent based on a student’s earnings and their credit history.

However, unlike federal loans (which are available to nearly everyone attending colleges participating in the federal financial aid programs), private companies limit refinancing to students who have already graduated from college, have a job and earn a high income relative to the monthly loan payments.

Analysts have estimated that $150 billion of the federal government’s $1.25 trillion student loan portfolio – or more than 10 percent of all loan dollars – is likely eligible for refinancing through the private market.

Many Democrats, such as Senator Elizabeth Warren of Massachusetts, have pushed for years, for all students to receive lower interest rates on their federal loans. In the past Republican nominee Donald Trump too has questioned why the federal government profits on student loans – although whether the government actually profits is less clear.

Issues with refinancing of loans

The truth is that students with the most debt are typically college graduates and are the least likely to struggle to repay their loans. In addition, they can often refinance through the private market at rates comparable to what the federal government would offer.

Struggling borrowers, on the other hand, already have a range of income-driven repayment options through the federal government that can help them manage their loans. Some of their loans could also be forgiven after 10 to 25 years of payments.

Furthermore, the majority of the growth in federal student loans is now in income-driven plans, making refinancing far less beneficial than it would have been 10 years ago. Under income-driven plans, monthly payments are not tied to interest rates.

So, on the face of it, as Clinton has proposed, allowing students to refinance federal loans would appear to be beneficial. But, in reality, because of the growth of private refinancing for higher-income students and the availability of income-driven plans for lower-income students, relatively few students would likely benefit.

Focus needed on most in need students

In my view, Clinton’s idea of allowing students to refinance their loans at lower rates through the federal government is unlikely to benefit that many students. However, streamlining income-based repayment programs (supported by both candidates) has the potential to help struggling students get help in managing their loans.

Nearly 60 percent of students who were enrolled in income-driven repayment plans fail to file the annual paperwork. That paperwork is necessary if students are to stay in those programs. And failure to do so results in many students facing higher monthly payments.

At this stage, we know many details of Clinton’s college plan. Her debt-free public college proposal (if enacted) would benefit families in financial need, but her loan refinancing proposal would primarily benefit more affluent individuals with higher levels of student debt.

In order to access Trump’s plan we need more details. For example, the current income-based repayment system exempts income below 150 percent of the poverty line (about $18,000 for a single borrower) and allows students working in public service fields to get complete forgiveness after ten years of payments. The extent to which Trump’s plan helps struggling borrowers depends on these important details.

The Conversation

The Price and Cost of College Are Different Things

As someone who spends a lot of time thinking about some of the wonkier issues of higher education finance, there are some common statements that just drive me nuts. For example, people who refer to the U.S. Department of Education as the “DOE” (it’s “ED” and the Department of Energy is “DOE”) or pronounce the FAFSA as “FASFA” might as well be screeching their fingernails on a chalkboard. But, as much as those things annoy me, they’re examples of inside baseball at their finest—they don’t affect students, but they’re still deviations from the norm. So I’ll try to hide my grimaces in those situations going forward.

However, I will say something every time someone erroneously refers to the cost of college when they truly mean the price of college, as these are two distinctly different concepts. Here are the definitions of the two terms:

Price: This represents how much money a student and/or their family has to pay for college.

Cost: This represents how much money it takes to provide an education.

With the presence of federal, state, and institutional financial aid as well as direct state appropriations to colleges, the price that many students pay can be far below the true cost of providing the education. On the other hand, due to the tangled web of subsidies present in the “awkward economics” of higher education, some students (such as full-freight international students and master’s students as well as those enrolled in large lecture classes) may be paying far more than it costs to provide their education.

From a policymaker’s perspective, it if far easier to propose bringing down the price of college than the cost of college—even though these proposals have large price tags and finding funding can be difficult. (An exception is so-called “last dollar” programs at community colleges, which often leverage other grant aid sources instead of using much of their own money.) Bending the cost curve is a far more difficult endeavor, as technology generally hasn’t done much to reduce costs (a promising master’s degree program at Georgia Tech notwithstanding) and other options such as increasing class sizes or spending less on facilities frequently run into opposition.

Efforts to bring down the price of college have become increasingly popular over the last several years, but they must be accompanied with a willingness to reduce costs in order for these programs to be financially feasible in the long run. To this point, cost control has remained a distant goal for most policymakers—a perfectly reasonable position given the shorter time horizons of most politicians. Bringing down prices today gets attention, while the crucial step of bringing down costs in the future is nowhere near as exciting.