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A Little-Known Student Loan Protection Remains Mired In Mystery

A group of Democratic senators identified a clause in federal student loan contracts that could lead to billions in debt being forgiven. But nobody, including the Education Department, knows how the clause works in practice.

Susan Walsh / ASSOCIATED PRESS

They were searching for a way to help thousands of students nationwide who had been mired in debt by predatory for-profit colleges. And a group of Democratic senators found the solution buried deep in a federal promissory note signed by every student who takes out government loans: the "defense to repayment" provision, a little-known clause that has become a rallying point for lawmakers and activists in the wake of the shutdown of the for-profit giant Corinthian Colleges.

The defense to repayment clause, they say, obligates the federal government to forgive the federal loans of tens of thousands of former students at Corinthian's Everest College chain, which has been accused of a litany of abuses, and potentially at other colleges that have broken state laws.

"Of course there's always secret passageways and back doors, but they're usually not within federal law," said Toby Merrill, the director of the Project on Predatory Student Lending at Harvard Law School's Legal Services Center. "It was really surprising that this exists."

Earlier this week, hundreds of former Corinthian students, with the help of a group of activists, submitted defense to repayment claims to the Education Department. The department played a central role in Corinthian's exit from the for-profit college world, essentially forcing it to sell off or close its campuses amid a storm of complaints, lawsuits, and investigations into the company's Everest College chain.

Though state lawsuits seek debt relief for students, Corinthian, Everest's parent company, is essentially bankrupt. With little to no cash on hand, it is operating on a lifeline from the federal government as it tries to find somebody to buy the last of its schools. Even if the states win their lawsuits, there's nowhere near enough money left in the company to pay back Everest's former students, who have somewhere around $1 billion in outstanding loan debt. The only relief is loan forgiveness from the federal government — meaning, essentially, that taxpayers would ultimately foot the bill.

Almost nothing is known about the defense to repayment clause: the Education Department has not specified how defense to repayment works or whether it has ever been used successfully in the past, and would not respond on the record to BuzzFeed News' questions about its usage. There is no form for students to fill out, no fact sheet to consult. Legal aid lawyers, who have begun to file the defenses for poor clients mired in debt, are forced to do so with no guidance: The Education Department has not responded to a four-months-old Freedom of Information Act request by the New York Legal Assistance group meant to gather any possible shred of information about the clause, its usage, or its history.

That is making it exceedingly difficult for borrowers who believe they have been wronged by their schools to take advantage of the clause.

"We're operating in a complete void of information," said Eileen Connor, an attorney with NYLAG who has submitted two defense to repayment claims to the department on behalf of clients at another troubled for-profit school, Sanford-Brown. "We need to be able to understand the department's reading of their own regulations."

All that Connor and others have to go on, for now, is two brief mentions in federal law. The Higher Education Act gave the authority to forgive loans to the department, and required the department to "specify which acts or omissions" by a college might allow a student to claim they did not have to repay their loans.

Then there is the promissory note itself. "In some cases," it reads, "you may assert, as a defense against collection of your loans, that the school did something wrong." The clause specifies that students can only claim the defense if what their school did was directly related to their loans or schooling, and if it "would give rise to a legal cause of action ... under applicable state law."

After Democratic senators brought the little-known clause to light in a June letter to Secretary of Education Arne Duncan, a second letter, in December, pressed the department for details and urged it to develop a "clear, reasonable, and transparent procedure" for borrowers to assert such claims. The department issued no substantive response to those questions.

"My guess is that they don't have an active policy, not that they would admit that," said Connor. "By their own inaction, this provision is so deeply underused that they only have a handful of borrowers who ever seek to invoke it."

The shutdown of Corinthian Colleges appears to fit perfectly into the loan loophole created by the promissory note. In Massachusetts, California, and Wisconsin, lawsuits by attorneys general have carefully documented a long list of abuses by Corinthian schools that relate directly to students' loans and educations: falsifying job placement rates; misrepresenting program quality, cost, and transferability; and high-pressure sales tactics designed to coerce students into enrolling. In a letter to the department, Massachusetts Attorney General Maura Healey wrote, "The need to cancel student loans is particularly acute in Corinthian's case."

But lawmakers' requests for information about defense to repayment appeared to languish until the Debt Collective, an Occupy Wall Street offshoot, organized a "debt strike" by former students, the "Corinthian 15," who publicly announced they were refusing to pay back their federal loans. Fifteen students became 100, and the group developed a legal strategy, based around defense to repayment, to bolster the strikers.

The Debt Collective built a form on its website where former Everest students could submit detailed information, then used it to create reams of defense to repayment claims: 300 in total, which it submitted to the Education Department early this week. The goal, said Luke Herrine, a Debt Collective organizer, is to compel a response, ultimately making it easier for more students to file such claims on their own.

The department, so far, appears to be listening: It sent its third-highest-ranking official, Undersecretary Ted Mitchell, to a meeting with Debt Collective representatives, and has promised to respond to the claims within 30 days.

"Finally, we will review every claim to borrower's defense and continue to investigate Corinthian to help students as much as possible," department spokesperson Denise Horn said in a statement.

"This is something interesting that the Debt Collective is doing with this online template — they're creating something that should exist already from the government," Connor said.

Connor and the NYLAG have filed two defense to repayment claims on behalf of former students wronged by Sanford-Brown, whose parent company, Career Education Corp, settled claims of misleading students with the New York Attorney General for $10.5 million.

"Representing these two clients has taken hours and hours of attorney time," said Connor. "I don't have the capacity to do that for the number of people that I believe are entitled to this."

Merrill, of the Project on Predatory Student Lending, said that even if the government does agree to some loan discharges based on the defense to repayment claim, the process will likely remain complex and fraught with legal issues for borrowers and the government.

Another possible issue: The government that decides whether Corinthian loans should be discharged also has a major financial stake in the decision. A court filing from last year by Corinthian said the government stood to lose $1.2 billion if all Corinthian students' federal loans were forgiven.

Though it was widely considered the worst offender, Corinthian is also far from the only for-profit college to have been accused of extensive legal wrongdoing, meaning tens of thousands more students could be eligible for defense to repayment claims. Students at some of the country's biggest remaining for-profit chains, such as ITT Technical Institute and the Art Institutes, could follow suit.