How the PROSPER Act Stacks Up for Student Debt: Narrowing of Borrower Defense Eligibility, Limiting of Closed School Discharge, and Preemption of State Consumer Protections Would Harm Student Borrowers
This blog post is one in a series that explores how the House proposal to overhaul the Higher Education Act would impact student debt. This bill, the PROSPER Act, was passed out of the Committee on Education and the Workforce in December 2017. Here we focus on the PROSPER Act’s changes to protections for students who have been mistreated by their schools or attended schools that closed.
In recent years, a surge in documented cases of deceitful and predatory practices at colleges has harmed tens of thousands of borrowers. Many are now seeking protection from the compounding damage caused by outstanding student loan debts. Rather than strengthening protections that would prevent and address this damage, however, the PROSPER Act makes it more difficult for students to be made whole after they took out student loans under deceptive or other unfair circumstances. Specifically, it narrows the borrower defense rule, makes closed-school loan discharges more difficult to obtain, and preempts states’ rights to legislate student loan protections, each of which leaves student loan borrowers more vulnerable to abuse.
Narrowing borrowers’ eligibility for relief sets unrealistic and harmful standards for mistreated students.
The borrower defense rule authorizes the Department of Education to discharge and refund student loans used to attend colleges that broke their contractual promises or engaged in predatory practices. Under the rules finalized by the Education Department in 2016, borrowers can assert one of three categories of claims: those based on certain types of judgments against their college, a broken contract, or a “substantial misrepresentation” made by the college. The 2016 rule also protects students from predatory behavior, while deterring unscrupulous conduct by giving the Department the explicit ability to hold colleges accountable for the cost of loan relief rather than the taxpayer.
The public overwhelmingly supports providing relief to mistreated students: 78% of Americans say they support loan relief for borrowers whose schools provided deceptive information about their programs or outcomes, including 87% of Democrats and 71% of Republicans. While the PROSPER Act maintains the three categories of claims, it makes it far more difficult for wronged students to get debt relief in several ways.
First, the PROSPER Act requires borrowers to apply within three years of the time an institution engages in misconduct. But this period is unrealistically short. Many students may not even be aware of the school’s misconduct within three years, and applications supported by successful court judgements are especially unlikely to be completed within three years.
Imagine a student who finished a bachelor’s degree in four years, only to realize that the school lied to them during their recruitment, when they were unable to find a decent job in their field of study. They would have already lost the opportunity to apply for borrower defense with a three year statute of limitations. When the Education Department investigated Corinthian Colleges’ misrepresentations, it uncovered serious, widespread abuse stretching back over five years.
In 2016, based upon a survey of similar state laws, the Department of Education concluded that no statute of limitations was appropriate for cases based on certain judgments or broken contracts. Claims based upon substantial misrepresentations could be brought within six years of the date the borrower reasonably could have discovered the misrepresentation.
Second, the House proposal adds language that stipulates students must submit individual applications for borrower defense. This means that even in instances where the Department has evidence that an institution engaged in widespread misconduct that negatively affected entire cohorts of borrowers, the Department would be precluded from granting them relief as a group – needlessly adding burden and expense to this process. For example, given the overwhelming evidence of widespread malfeasance, the Department granted former students of American Career Institute in Massachusetts automatic loan discharges, without placing the burden on each borrower to apply and justify their application. Because the most socioeconomically distressed borrowers are least likely to be aware of the availability of relief and the least comfortable with navigating individual applications, it is those borrowers who stand to be most harmed by eliminating the Department’s authority to provide group discharges.
Finally, as a condition of applying for relief, the PROSPER Act requires borrowers to convert their existing student loans to the new ONE loan it creates. This requirement would force borrowers to forfeit benefits like interest-free deferment during periods of unemployment and lower monthly payments in order to pursue a borrower defense discharge.
Any steps forward in the bill regarding borrower defense are overshadowed by large, new obstacles to providing full and immediate relief where the Department has evidence to act, and creating a process that is least burdensome for mistreated borrowers, and offering a pathway for group relief.
Codifying new limits on closed school discharges will make it harder for students to get a fresh start when their schools close.
Currently, students who are enrolled in a school within 120 days of its closure may either transfer their credits to a comparable program or seek a discharge of their student loans. There are several reasons why students might prefer a discharge rather than transferring their credits. A student may have gotten halfway through their program but realized the school was providing a low-quality education by the time the school closed, and prefer to start over. Available comparable programs that will accept all of the students’ credits may have poor student outcomes, and more reputable options may only accept a small fraction of the students’ credits.
The PROSPER Act would curb the ability of students in these situations to receive discharges, by requiring students to show that they attempted, but were unable, to complete the program elsewhere – even if they had not gained necessary relevant knowledge from the time they spent in a substandard program. When Corinthian closed, many schools did in fact refuse to take students’ transfer credits because of concerns about the quality of that education.
Students who are unfortunate enough to have their schools close deserve a fresh start. Congress should retain the provision in the borrower defense rule finalized in 2016, which would provide automatic closed school discharge to students do not enroll again within three years, with no requirement to attempt to transfer credits.
Preempting states from creating improved protections against misconduct in student loan servicing and debt collection will leave borrowers vulnerable.
The Consumer Financial Protection Bureau (CFPB) has received over 60,000 complaints from borrowers about student loan servicers. These complaints describe loan servicers providing wrong and inconsistent information, losing documents, and charging borrowers random or unexpected fees. The CFPB has even found that through their own misconduct, servicers drive borrowers into default. Unfortunately, the Department of Education recently withdrew its existing policy memoranda to improve student loan servicing, adding even more confusion to loan servicer oversight while the Department undergoes an overhaul of servicing and other student aid systems in its NextGen financial services environment.
In light of lax federal standards currently in place, some states have felt compelled to put in place minimum standards for servicers, and as a result state standards can be more robust than federal protections. For example, several states, including California, Connecticut, and the District of Columbia have given their local agencies authority to assess whether student loan servicers are complying with federal laws.
Yet the PROSPER Act would gut states’ ability to protect student loan borrowers from servicer misconduct. This provision would allow the federal government to preempt state laws governing student loan servicing and debt collection and would also bar states’ ability to govern licensing of these companies. Without the ability of states to create important state-based protections, and with an unclear picture of the future of federal policy on loan servicing, this would create additional opportunities for misconduct on the part of loan servicing companies. States must be allowed to continue to protect borrowers from poor servicing and debt collection practices.
The reauthorization of the Higher Education Act could mean the difference between relief for mistreated borrowers and students attending closed schools, or an increase in the number of borrowers struggling to repay student debt. Instead of making it harder for students to get a fresh start at a high quality, affordable education, Congress should provide meaningful, student-centric pathways for debt relief.