Supreme Court greenlights student loan forgiveness for defrauded borrowers. What's next?
The Supreme Court has declined to a block a $6 billion settlement between the U.S. Education Department and nearly 300,000 student loan borrowers who were defrauded or mislead by their colleges.
The decision last week stems from a 2019 class-action lawsuit that is unrelated to the cases challenging President Joe Biden’s plan for mass debt relief. During oral arguments for those cases earlier this year, the court’s conservative justices signaled significant skepticism of the plan, which would forgive up to $20,000 in loans for low- and middle-income Americans.
The Supreme Court’s recent decision, however, shows its openness to debt forgiveness for at least some students – and hints at another vehicle for doing so if Biden’s plan is shot down.
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Debt relief coming for thousands of defrauded students
Student loan borrowers who are defrauded by their schools are eligible for relief through what’s known as “borrower defense to repayment.” The process is designed largely to support former students of for-profit colleges who default on their loans and struggle to find employment at much higher rates than their counterparts who attended other types of higher-education institutions.
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In 2019, a lawsuit now known as Sweet v. Cardona was brought by former students whose borrower-defense claims had been halted by the Trump administration’s education department. Under Biden, the department proceeded with the case, agreeing to a settlement that provides 290,000 borrowers more than $6 billion in debt relief. A federal judge granted final approval to the borrowers in November.
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But then, earlier this year, three of the institutions named in the settlement – Lincoln Educational Services Corp., American National University and Everglades Colleges Inc. – filed a petition asking for a stay on the relief. The institutions, all for-profits at the time of the alleged fraud, argued the settlement amounts to federal overreach that scars the institutions’ reputation and asked for time to respond to the claims and allow the appeals process to play out.
“The schools set their sails to catch political headwinds by falsely equating the settlement of long-standing and hard-fought litigation with a completely distinct program of broad-based debt cancellation that is currently under review by the Supreme Court,” said Eileen Connor, president and director of the Project on Predatory Student Lending, in a statement. "It's unfortunate that people who have been waiting for so long to simply have their legal rights recognized are now being caught up in political and ideological agendas that have nothing to do with them.”
Last week, the court denied the requests for a stay, meaning the department can continue discharging loans. All in all, the Education Department will have forgiven $20 billion in student loan debt through borrower defense claims or closed school discharge.
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The Higher Education Act: An alternative means of canceling student loans?
Biden’s beleaguered mass debt relief plan relies on the 2003 HEROES Act, which gives the U.S. education secretary the authority to provide relief to borrowers in national emergencies.
Sweet v. Cardona concerned the loan forgiveness provisions of a different law, though: the Higher Education Act (HEA). The law gives the secretary the authority to "enforce, pay, compromise, waive, or release any right, title, claim, lien, or demand" related to its obligations, including student loans.
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The three institutions seeking the stay argued the HEA wasn’t a valid tool for canceling debt, concluding – as in the other cases – that relief requires congressional approval. They said greenlighting the Sweet v. Cardona settlement would open the doors to the Biden administration using the HEA for broad debt relief if the Supreme Court rejects the Biden administration's plan.
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“To compare this to a broad-based administrative action under the HEROES Act that would touch 40 million people is an attempt by three schools to distort reality," Connor said.
Still, the court, in denying the petition, may have signaled its willingness to continue exploring HEA as a vehicle for some student debt relief.
Luke Herrine, a law professor at the University of Alabama who has advocated for defrauded borrowers, believes it’s the best path forward. The Biden administration has said it doesn’t have a Plan B for broad student loan forgiveness, but given the precarious outlook for its current plan, Herrine speculates that’s just its public position.
The constraints of the HEROES Act – broad authorities in a national emergency – may have made it a more “politically useful” tool for relieving debt, Herrine said. “The department – the Biden administration – wants to be able to say to people who want debt cancelation: ‘We did it: We used this emergency authority, the emergency is over and that’s the best we can do.”
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What this means for borrowers
For borrowers who weren’t part of the class-action suits, this latest development in many ways means very little.
“I would caution against reading too much into it,” Herrine said. “The situation leaves us basically where we were – at the status quo. All the options are still on the table for the administration. Nothing further has been said about the scope of its authority.”
In this case, the Supreme Court has simply allowed the Education Department to settle its debts.
But Herrine says he was pleasantly surprised at how the court “so decisively dismissed” the request for a stay: “It's overall good for the cause of student debt cancellation by any means possible.”
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Contact Alia Wong at (202) 507-2256 or awong@usatoday.com. Follow her on Twitter at @aliaemily.