DOJ and the Student Loan Crisis

August, 2023

Washington — How much of the nation's student loan crisis can be attributed to the Department of Justice?   It's a question that deserves more exploration than it has received.

There are at least four instances in the past few decades when DOJ made highly questionable calls that exacerbated the crisis.  

1.  In the early 1990s, a group of colleges known as the Overlap Group agreed to limit the amount of grants they were giving to non-needy students, to be able to target the financially needy instead.  DOJ stepped in to say it would be a violation of the Sherman Antitrust Act for the colleges not to compete against each other with grants for the non-needy.  A federal appeals court ruled for the colleges, but DOJ did not change its position.  Congress then carved out a narrow exemption for such colleges, but again DOJ held fast in its interpretation.  This helped set the stage for a merit-based arms race among many colleges that not only remains to this day but has spread widely, short-changing need-based aid that could have been deployed to the financially needy to reduce student loan borrowing.  It has also led to tuition hikes and the practice of discounting to give the illusion of aid.  

2.  In the early 2000s, several student loan lenders began making false claims against the Department of Education.  After Inspector General's audits, Secretary of Education Margaret Spellings ended paying the false claims but did not require the lenders to pay back any ill-gotten gains.  In subsequent litigation over the false claims, DOJ did not intervene against the lenders, despite remarkably detailed discovery evidence documenting the illegal schemes. (If this didn't result in DOJ's intervention, what would?) This sent a signal to the student loan industry that action against it from DOJ under the Higher Education Act was unlikely.  Bending or breaking rules might eventually have to be stopped, but there would be no consequences, even requirements to reimburse.  This set the stage for widespread loan servicer dysfunction in the subsequent decade, adding billions of dollars of debt onto student and parent borrowers.  Secretary Miguel Cardona recently announced the cancellation of $39 billion of such debt, which appears to be only a first installment.

3.  In 2016, another small group of colleges held discussions to try once again to limit college aid to the non-needy, which might have led to reform of legacy admissions as well.  (Legacy admissions are sometimes explained as a way for colleges to raise funds, but those funds are often returned back as aid to non-needy students.)  According to a chapter in a soon-to-be-published book about "enrollment management," when DOJ learned of these discussions, it demanded that the colleges preserve any records as possible evidence of violations of the Sherman Act.  This gave the enrollment management industry (historically associated with lenders) the green light to roar ahead on making so-called merit aid even more of a priority over need-based aid at many colleges.  The financially needy would have to rely on ever greater student loan debt.  

4.  In 2023, DOJ's solicitor general appeared before the Supreme Court on behalf of President Biden's student loan cancellation effort under the HEROES Act.  A key question in oral argument was whether the State of Missouri, out of its relationship with the Missouri-based student loan servicer MOHELA, had standing as a plaintiff.  Elizabeth Prelogar argued for DOJ that Missouri did not have standing, but inexplicably (a huge surprise to me), said MOHELA would have standing if it had been a plaintiff.  This gave the Supreme Court majority an opportunity to make a much shorter leap to give Missouri standing, if DOJ was conceding that MOHELA had it.  

I thought at the time (and still do) that this was a huge gaffe tactically and an abrupt reversal of DOJ policy.  In 2016, the loan servicer PHEAA asked the Supreme Court to take up, on certiorari, a 4th Circuit decision that PHEAA was not an arm of Pennsylvania.  The Court asked the solicitor general to advise it of the position of the United States on the question.  In the summer of 2016, in the DOJ solicitor general's office, both PHEAA counsel and counsel for two plaintiffs against PHEAA gave presentations.  (I was present for the plaintiffs.) In a written response to the Supreme Court's request shortly thereafter, the solicitor general counseled the Supreme Court to deny certiorari to PHEAA, on grounds that it was not an arm of Pennsylvania, which the Court then did in January, 2017.* 

The relationship of PHEAA to Pennsylvania is substantially the same as MOHELA to Missouri.  What made Elizabeth Prelogar suddenly argue that MOHELA would have had standing?  The Supreme Court had denied PHEAA certiorari on essentially the same question.  Why didn't DOJ raise this?  Neither Missouri nor MOHELA had standing until DOJ gave MOHELA away in oral argument.  It was then inevitable for Chief Justice John Roberts to exploit it in his written decision.  

It can be argued that the Supreme Court majority was bent on making the student loan case another notch in its belt supporting a "major questions doctrine," regardless of roadblocks in its way, but why was DOJ such a willing party to it on the question of standing?** On such points is the course of history determined.  

It is another example of how DOJ has made dubious decisions on student loan matters for decades, which have disadvantaged borrowers and have actually undermined the federal government's own programs to help the financially needy.  DOJ actions have driven up borrowing and its inactions have contributed to a broken student loan servicing system.  Its gaffe hangs over future attempts to provide student debt relief.  

What will done about it?  DOJ has recently shown signs that it is beginning to understand how it has been hurting the financially needy, and how some colleges have tried to use their (now-expired) statutory exemption from the Sherman Act to collude in favor of merit-heavy enrollment management schemes.  Is DOJ's decision to file a statement of interest with the court in the Henry case a long-overdue reversal?  Probably not.  DOJ still has a long way to go.***   


*See Dan E. Moldea, Money, Politics, and Corruption in U.S. Higher Education (2020), pp. 125-126.

**DOJ and the Solicitor General were more impressive in defending the use of the HEROES Act as the basis for student loan relief, although many experts believe the HEA would have been a better choice.  Unfortunately, DOJ also disadvantaged itself on the matter of the relief apparently being so costly that it triggered a "major question" in the view of some on the Court.  The relief could and should have been scored at a "minor question" level by subtracting debt cancellation already (April, 2022) announced and owed borrowers as a result of servicer dysfunction, as well as subtracting uncollectible amounts already subject to the Federal Claims Collection Standards (FCCS), 31 C.F.R. Subt. B, Ch. IX, which is under DOJ and Treasury jurisdiction.  The numbers presented to the Court were double- and triple-counting, and should have been unduplicated.  Had they been, the sharpest written exchange among justices in modern Court history, which has shaken the Court's standing in the eyes of the public, could have been avoided.

***From the DOJ statement of interest: "The United States offers no view on Plaintiffs’ antitrust standing, their factual claims, the proper definition of “need-blind,” the application of any applicable statute of limitations, or the separate motions to dismiss...."  In other words, in its statement DOJ offered the court a way out of the case without ever looking at how exactly financially needy students were being forced into higher levels of debt, despite the plaintiffs' detailed descriptions of enrollment management schemes that were illegal if for no other reason than they were secretive and not disclosed as required by the Higher Education Act (see citations below).  Rather than dealing these schemes a coup de gras, DOJ is choosing to soft-pedal them. 

34 CFR § 668.42 Financial assistance information.


(1) Information on financial assistance that the institution must publish and make readily available to current and prospective students under this subpart includes, but is not limited to, a description of all the Federal, State, local, private and institutional student financial assistance programs available to students who enroll at that institution.

(2) These programs include both need-based and non-need-based programs.

(3) The institution may describe its own financial assistance programs by listing them in general categories.

(4) The institution must describe the terms and conditions of the loans students receive under the Federal Family Education Loan Program, the William D. Ford Federal Direct Student Loan Program, and the Federal Perkins Loan Program.

(b) For each program referred to in paragraph (a) of this section, the information provided by the institution must describe -

(1) The procedures and forms by which students apply for assistance;

(2) The student eligibility requirements;

(3) The criteria for selecting recipients from the group of eligible applicants; and

(4) The criteria for determining the amount of a student's award. 
[Emphasis added]    

34 CFR § 668.71 Scope and special definitions.

(a) If the Secretary determines that an eligible institution has engaged in substantial misrepresentation, the Secretary may -

(1) Revoke the eligible institution's program participation agreement, if the institution is provisionally certified under § 668.13(c);

(2) Impose limitations on the institution's participation in the title IV, HEA programs, if the institution is provisionally certified under § 668.13(c) ;

(3) Deny participation applications made on behalf of the institution; or

(4) Initiate a proceeding against the eligible institution under subpart G of this part.