Delayed Obama-Era Rule on Student Debt Relief Is to Take Effect

A long-delayed federal rule intended to protect student loan borrowers who were defrauded by their schools went into effect Tuesday, after a judge rejected an industry challenge and the Education Department ended efforts to stall it any longer.

The new rule, finalized in the last few months of President Barack Obama’s administration, is intended to strengthen a system called borrower defense that allows forgiveness of federal student loans for borrowers who were cheated by schools that lied about their job placement rates or otherwise broke state consumer protection laws.

The new rule could expedite the claims of more than 100,000 borrowers, many of whom attended for-profit schools, including ITT and Corinthian, that went out of business in recent years.

“We’re really gratified,” said Eileen Connor, the director of litigation at Harvard Law School’s Project on Predatory Student Lending, which represented several student borrowers who challenged the department’s delay. “These regulations have a lot of critical protections in them for student borrowers and taxpayers.”

The new rule requires the Education Department to create a “clear, fair, and transparent” process for handling borrower’s loan discharge requests, many of which have sat for years in the department’s backlog. It also orders the department to automatically forgive the loans of some students at schools that closed, without requiring borrowers to apply for that relief.

The rule was supposed to take effect in July 2017. Shortly before that deadline, Education Secretary Betsy DeVos suspended the rule and announced plans to rewrite it. But federal agencies must follow a specific process for adopting or changing 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 department’s decision to delay the rule was “arbitrary and capricious,” he wrote.

Moss ordered the rule to take effect but suspended his ruling until he could hear arguments in a lawsuit brought by the California Association of Private Postsecondary Schools, an industry group whose members include for-profit colleges.

On Tuesday, Moss rejected the group’s request for an injunction. That removed the last obstacle blocking the rule and put it into immediate effect.

A spokeswoman for the California trade group declined to comment on Moss’ ruling.

Liz Hill, a spokeswoman for the Education Department, said that DeVos “respects the role of the court and accepts the court’s decision.” However, DeVos still hopes to rewrite the rule.

“The secretary continues to believe the rule promulgated by the previous administration is bad policy, and the department will continue the work of finalizing a rule that protects both borrowers and taxpayers,” Hill said.

The soonest any new rule written by DeVos’ department could take effect is July 2020, which leaves the Obama-era rule in place until then. Hill said the department would provide more information “soon” on how it would be carried out.

Of the 166,000 forgiveness claims that had been received as of June 30, nearly 106,000 were still pending, according to department data. The department rejected 9,000 applications and approved almost 48,000, discharging $535 million in student loan debt. Taxpayers absorb that loss.

The new rule tries to cushion the blow to taxpayers by requiring schools that are at risk of generating fraud claims to provide financial collateral. That part of the rule has been fiercely opposed by industry groups.

Legal fights about the rule’s nuances are likely to continue. In his ruling Tuesday, Moss wrote that his decision was “not the first (and presumably not the last) chapter” in the fight.