January, 2021
Washington – The Trump administration is making an eleventh-hour attempt to limit the ability of the incoming Biden administration to provide relief to federal student loan borrowers.
A new memorandum from an acting deputy general counsel at the Department of Education interprets very narrowly the Secretary of Education's statutory powers to compromise and settle loans. The memorandum, however, is off-base in describing the provision in question and makes major omissions regarding its historical interpretation and use.
In the 1990s, I worked at the Office of Legislation and Congressional Affairs at the department; the following decade I initiated litigation (largely successful) involving the provisions in question. So I am familiar with the territory covered by the memorandum.
I recall many internal department discussions in the 1990s about the use of 20 U.S.C. 1082, which gives the Secretary powers and duties to compromise and settle loan disputes. The statute was enacted many decades ago for the purpose of protecting the interests of the United States, which included the integrity of federal student loan programs. If other remedies to straighten out disputes failed, the Secretary could step in by law.
At that time, most disputes involved guaranty agencies, which handled the majority of federal student loans; the federal direct loan program was in its infancy and would not fully replace the bank-based loan system until 2010. Guaranty agencies' extensive powers and duties, for which they were funded by fees and federal payments, included authority over "cancelled loans...[and] borrower refunds, including those arising out of student or other borrower claims and defenses."
More than a few times at OLCA I had occasion to call guaranty agencies about loan disputes and request that they resolve them or else the Secretary would have to act. Those who administered the bank-based program in the early and mid-1990s, including secondary markets, were government agencies or non-profits, and usually resolved problems without further conflict.*
That changed toward the end of the decade, as government-sponsored enterprises and non-profits began to convert to for-profit status. In the early 2000s, previously unheard of profit levels tempted many student loan entities to cut corners on servicing and on federal subsidy claims. After successive audits by the department's inspector general showed fraudulent claims by lenders, Secretary of Education Margaret Spellings concurred with the audit conclusions in a January, 2007, decision, but notably gave blanket amnesty to all lenders that had made false claims. They would not have to repay so long as they agreed not to make more.
This action was approved by the Department of Justice and the Office of Management and Budget, based on the Secretary's power to compromise and settle. The generous treatment of lenders cost federal taxpayers hundreds of millions of dollars, at a minimum. The Secretary said the total amount was unknowable and did not offer an estimate. She said she acted so as to prevent even greater losses.
All of which undermines the new memorandum's assertion that the Secretary is required to collect debts under the Federal Claims Collection Act**, which obligates agencies to “try to collect a claim of the United States Government for money . . . arising out of the activities of, or referred to, the agency." That was brushed aside in 2007. It also undermines arguments in the memorandum that settlements must be done on an individual, "case-by-case" basis, and that settling creates an unacceptable "moral hazard."
To omit decades of history of the application of the statute at issue is a fundamental flaw of the new memorandum.
As to what the limits of the powers are in 2021, I have suggested previously that compromise and settlement of borrowers' loans apply to all issues of program integrity, a long-standing interpretation going back decades. That includes the mishandling of "borrower defense" loan discharges, for which Secretary Betsy DeVos was once threatened with jail by a federal judge for failing to cancel loans as required by law; and the maladministration of the Public Service Loan Forgiveness program, which once was described in a headline, "Your Student Loan Servicer Will Call You Back in a Year. Sorry." It may also extend to borrowers who never had an opportunity to raise issues about their loans because of the DeVos-created doctrine of "preemption," under which consumer protection investigations by state attorneys general, among others, were never allowed to proceed by Secretary DeVos. That doctrine has now been set aside by many federal courts, but borrowers have had no relief from the deprivation of their consumer rights.
The compromise and cancellation powers clearly can be used to provide protection of the United States from huge financial losses. Through the use of the powers in cases where institutions have defrauded borrowers, and by requiring the schools to contribute to paying the costs, a strong signal would be sent to institutions to re-think business plans that rely on misleading and defrauding students (and sometimes parents) so as to profit from defenseless federal taxpayers left holding future defaults.
As to more general student loan cancellations, a case can be made that the very size of total borrower debt, and the troubling numbers of those unable ever to pay off their debts, indicate a breakdown of the federal loan program itself. There have been many recent proposals to reduce debt interest or principal, to adjust terms, to assign loans to reformed programs, and to target relief by demographic categories. Many of these ideas have merit and should be pursued through legislation. Some might be accommodated through the Secretary's compromise and settlement authority, if appropriately tied to historical interpretation and precedent. It is worth the effort, should legislative remedies not succeed.
However that turns out, it can already be said that the eleventh-hour memorandum from the Trump administration is not well-founded and should be disregarded by the incoming administration.
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* All were mindful of the late 1980s' collapse of the Higher Education Assistance Fund (HEAF), a Minnesota-based guaranty agency that federal taxpayers bailed out at a cost of hundreds of millions of dollars.
** On the occasion of the new memorandum's mention of the Federal Claims Collection Act, it seems appropriate to ask whether the Secretary has collected $22 million from a lender's false claims, which unpaid debt is over a decade old. See https://oha.ed.gov/oha/files/2019/03/2016-42-SA.pdf.
