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  /  News   /  Extra Credit: Taxpayers are owed more than $1 billion related to the student loan program — but not from borrowers

Extra Credit: Taxpayers are owed more than $1 billion related to the student loan program — but not from borrowers

Hello and welcome to Extra Credit, a look at the news through the lens of debt. 

After a hiatus for parental leave, I’m back and digging into who pays for schools’ alleged misconduct.

The debate over expanding the benefits of the student loan program, including canceling loans, is often framed as a battle between taxpayers and borrowers. Provide help to borrowers, critics allege, and other Americans, who didn’t go to college or who already paid off their debt, will be on the hook. 

But in many cases, there’s actually another entity that could pay for borrowers’ relief, advocates argue. The problem, they say, is that those entities almost never do. 

As of January 31 of this year, higher education institutions owed roughly $1.375 billion to the Department of Education, according to a report released Wednesday by the National Legal Student Defense Network, an organization founded by former Department of Education officials that does litigation and advocacy on behalf of student loan borrowers. 

That figure is up about $174 million from last year, when Student Defense first released a report tracking funds owed by institutions to the Department based on government records. The reasons the Department assessed liabilities against the schools varied; some may have closed and so the agency had to discharge the money enrolled students borrowed to attend, others perhaps overdrew from the government’s coffers or applied loan money to an ineligible student.

But regardless of the reason the Department assessed a liability against a school, the reports uncovered little evidence indicating the agency would get the money back. As of February 2021, schools had repaid just $50 million of outstanding debt owed to the government, according to last year’s report, and the Department of Education does not appear to be trying to collect from the schools or the people that own them. That’s even though Department officials have the authority to do so, according to the report. 

The Department of Education did not immediately provide a comment on the report.

The $1.375 billion figure doesn’t account for the nearly $8 billion in loans the Biden Administration has discharged over the past several months for students who were scammed by their schools, the report notes. That relief came largely through a process known as borrower defense, which allows the government to cancel borrowers’ federal debt if their schools have been found to engage in wrongdoing. The Student Defense investigation didn’t find any instances where the Department assessed a liability — part of the process required to attempt to collect the funds — against the schools whose former students have had their loans wiped out. 

When the government fails to pursue schools and executives for these funds, taxpayers wind up on the hook for schools’ misconduct and there’s little to deter school leaders from repeating the behavior, said Aaron Ament, president of Student Defense. 

“If they know they’re not going to be held liable, you’re very likely to see them as repeat offenders, whether it’s the same company or moving onto another entity,” he said. And in some cases, institutions are still participating in the federal financial aid program and “drawing down millions of dollars in federal funds and enrolling students while their liabilities go uncollected,” he added.

Nicholas Kent, the chief policy officer for Career Education Colleges and Universities, an association representing for-profit colleges, said it was “inaccurate” that the Department isn’t moving to collect on liabilities owed to it. He noted that, for example, a school may be using a payment plan to repay the debt and therefore the institution’s progress on paying down the liability wouldn’t be reflected in the data. 

Part of the challenge of understanding the true extent of the funds owed to the Department is its “slipshod record keeping,” Student Defense argued in the report. Both this year’s and last year’s reports are based on Department records. After publishing its initial investigation last year, which included a list of schools the Department had assessed liabilities against, the group became aware of at least one for-profit college complaining that they had actually repaid or were on a payment plan for the liabilities they owed to the Department even though they were still listed as owing that money. They also found evidence indicating last year’s report undercounted the funds owed to the Department by some schools.

Findings come amid evidence schools and owners face few consequences

The findings come amid evidence that institutions and their owners face few consequences when their schools crumble, even as students have to contend with the financial and educational fallout and taxpayers are on the hook. Some of the most prominent examples of this dynamic include Corinthian Colleges and ITT Tech, which collapsed in 2015 and 2016 respectively, resulting in billions of dollars in discharged debt for borrowers. 

Because the companies had filed for bankruptcy by the time the Department wiped out the loans and the government was treated like an unsecured creditor, there was little money available for the Department to pursue to pay for the costs of the discharge. It’s these scenarios in which the agency should be going after executives and owners for the funds, Student Defense and other advocates argue.   

“The best way to protect taxpayers is to not have institutions perpetuating these kinds of mass frauds that we’ve seen,” said Kyle Southern, the associate vice president at the Institute for College Access and Success, a research and advocacy organization. “That’s why the deterrent effect of these regulations and actually using the muscle and the tools at the Department’s disposal should create an environment where folks are on notice.” 

MarketWatch reported last year on a college chain that collapsed, leaving students and taxpayers in the lurch, while the owners of the chain turned to receivership — a process similar to bankruptcy — to wind down its operations and asked the judge overseeing the case to shield them from liability. As part of the same series we highlighted executives who continued to lead institutions participating in the financial aid program even after overseeing schools that had been accused of wrongdoing during their tenure. 

Over the past few years, advocates and lawmakers pushed the Department of Education to hold executives liable when mismanagement of their schools cost taxpayers. U.S. Rep. Bobby Scott, a Virginia Democrat and the chair of the House Committee on Education and Labor, wrote to Secretary of Education Miguel Cardona last year, saying “it is clear the Department has a responsibility to pursue any and all legal avenues available to recoup money that was allocated through financial aid programs.” 

Officials have said they’re interested in holding executives liable

Department of Education officials have indicated that they’re interested in holding executives liable. 

Richard Cordray, the chief operating officer of the Office of Federal Student Aid, told Scott in October that he thought his letter was “a good bit of a kick in the behind for us to make sure that we’re moving down the road on this.” 

“We have that letter from you,” Cordray said during the Congressional hearing. “I heard you loud and clear on that. We see eye-to-eye on this, we absolutely agree, more needs to be done to prevent people from abusing these student aid programs, from cheating taxpayers, from cheating students.” 

Earlier this year, James Kvaal, the under secretary of education, told reporters that the Department planned to try and recover the $71.7 million in student loans the agency discharged for former students of DeVry University from the school’s parent company, Cogswell Education. The discharges were based on Department findings indicating that between 2008 and 2015 the school advertised a 90% job placement rate, when the school’s actual rate was 58%. DeVry officials have said that the Department “mischaracterized DeVry’s calculation and disclosure of graduate outcomes in certain advertising.” 

“There will be liabilities for the current owners of these schools to deter wrongdoing not just at DeVry but everywhere that it might otherwise occur,” Kvaal said in February. 

Still, the report didn’t uncover any evidence that the Department is trying to get that money back. (DeVry did not respond immediately to a request for comment on the report.) DeVry is still part of the federal student aid program, meaning the school continues to draw money from government coffers on behalf of students. That’s likely true of dozens of other schools where former students could or already have had their debt discharged. 

‘The luckiest guy in the room’

In addition to the $8 billion highlighted in the report, hundreds of thousands of borrowers who say they were scammed by their schools are poised to receive at least $6 billion in debt relief after years of waiting.  

Earlier this year the Department agreed to settle a class-action lawsuit filed on behalf of student loan borrowers who had submitted borrower defense claims and accused agency officials of stalling in their decision about whether they would discharge the debt. Under the agreement, which received preliminary approval from the court earlier this month, about 200,000 borrowers, or the bulk of the class, would have their debt automatically wiped away. 

The Department determined that these borrowers are justified relief under the deal because they attended one of 153 schools where there is a “strong indicia regarding substantial misconduct,” according to the settlement agreement filed with the court. But the colleges won’t have to pay taxpayers back for the loans the Department will likely cancel as part of the agreement on behalf of the colleges’ former students.

Some of the colleges on the list have moved to intervene in the settlement, arguing that, among other things, the deal would harm the reputation of the schools on the list without giving them a chance to plead their case.    

“We believe that if a school acted improperly, they lied to their students, they defrauded their students, there was a misrepresentation and the student was financially harmed, the institutions — after they’ve received their appropriate due process — should be held liable for the amounts discharged,” Kent said. “The Department, under this administration, has heavily weighted the due process rights of students while forgoing them for institutions,” he added, arguing that the settlement is an example of this dynamic. 

Lawyers representing the government and the borrowers have said the schools don’t have an interest in the settlement that’s protected by law. “They are seeking simply to disrupt the orderly process for approval of a settlement they do not like—one which they cannot modify, are not entitled to negotiate, and do not have standing to block,” lawyers representing the former wrote in documents opposing the motion to intervene. 

William Alsup, the federal court judge overseeing the case, indicated that he would grant the schools permissive intervention to “keep the system honest” by allowing him to hear arguments opposing the settlement. But he also highlighted the schools’ ability to walk away from the discharges the government would grant on behalf of the institutions’ former students without being held financially liable. 

“The thing that bothers me about your position: You’re the luckiest guy in the room,” Alsup told one of the lawyers representing a school requesting to intervene. “You’ve already gotten the money and you don’t have to pay it back. You get the money and can go to Hawaii on a vacation, the school can give its people big time raises, and pay big-time lawyers to come in. And you’ve already gotten the money and there’s no way they can take that money back from you except through a recoupment action.”

The question of whether to hold schools and executives financially liable for alleged wrongdoing — and often the loan discharges that come with it — comes amid debate over more broad-based student debt cancellation. 

The government has paused federal student loan payments and interest through August 31, but Democratic lawmakers are pushing the Biden Administration to extend the freeze. The administration is reportedly contemplating providing up to $10,000 in student loan relief per borrower and limiting the relief to those making under a certain income cutoff. Advocates and lawmakers have pushed for more. 

As the debate rages on and borrowers wait for an answer, Wednesday’s report indicates that there may be some out there who are receiving debt forgiveness through inaction — those schools and executives who are on the hook to the Department for more than $1 billion. 

Learn how to shake up your financial routine at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. Join Carrie Schwab, president of the Charles Schwab Foundation. 

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