The problem with student loan debt forgiveness

Before getting too excited about the possibility of student loan debt forgiveness, one ought to examine the Department of Education’s 530-page draft regulation, which was highlighted by Max Eden for U.S. News & World Report.

If former students with debt feel that their school made a “substantial misrepresentation” to its students, defined as a statement or omission with a “likelihood or tendency to mislead under the circumstances,” they can apply for loan forgiveness. A hearing examiner of the department, whose bureaucracy has already been criticized for a whole host of reasons including handling of sexual assault cases and Title IX exemptions, would have sole discretion.

The department is focusing on for-profit colleges, including Corinthian Colleges, which was found guilty, by a judge, of fraud. As a result, students petitioned for loan forgiveness options, which Eden said is “under an obscure provision known as ‘defense to repayment.'” However, the department’s regulations could affect non-profit colleges as well, depending on interpretation.

Eden used the example of Arizona Law School, which advertised its 2.8 percent unemployment rate, and differentiated that from its 9.7 non-employed rate (which includes those not seeking work).

…an enterprising graduate could claim that it “had a tendency to mislead under the circumstances,” and recruit all alumni who plausibly could have seen that flier for a joint-action complaint. The burden would be on the “schools to demonstrate that individuals in the identified group did not in fact rely on the misrepresentation at issue.” That being plainly impossible, a hearing officer could grant loan forgiveness to all. These graduates wouldn’t just see their outstanding balance erased, they’d also recoup the last six years of payments.