A group of for-profit colleges have lost their bid to overturn a legal settlement that cancels $6 billion in student debt for more than 230,000 borrowers.
The settlement resolved a long-standing class action lawsuit over the Education Department’s backlog of hundreds of thousands of unprocessed applications filed under a process called “borrower defense,” which offers debt cancellation to students whose colleges use misleading advertising or otherwise commit fraud.
Under the agreement, debt was canceled for borrowers who took federal student loans to attend any of the more than 150 institutions identified by the Education Department. Most of the institutions on the department’s list, known as Exhibit C, are for-profit colleges or universities.
Lincoln Educational Services Corporation, Everglades College Inc., and American National University argued in an appeal that the Education Department didn’t have the authority to cancel student loan debt and that the settlement violated the due process rights of the colleges included in Exhibit C. They also argued that the department damaged their reputation by including them on that list.
Judge Jennifer Sung, joined by Judge Danielle Forrest, rejected the colleges’ claim that they had a protectable legal interest in the litigation. She wrote that the schools should have addressed any alleged reputational harm through a separate lawsuit, not by challenging the settlement.
“The schools do not identify any provision in the settlement agreement or settlement approval order that formally strips them of any legal claim or defense, or any contractual right,” Sung wrote. “The settlement does not compromise any of the Schools’ rights or impose any obligations or liabilities on them.”
Judge Daniel Collins dissented, arguing that the lower court judge had erred in approving the settlement in the first place.
“First, the government lacks the necessary statutory authority to grant the relief contained in the settlement,” Collins wrote. “Given that the relief granted by the department in the settlement exceeds its statutory authority, the settlement is unlawful and should not have been approved.”
Nearly 200,000 class members have received full settlement relief since February 2023, according to Project on Predatory Student Lending, the legal group representing the borrowers in the original borrower defense case.
The borrower defense provision has existed since 1995 but was rarely used until 2015, when Corinthian Colleges, a prominent, for-profit education chain, collapsed, prompting widespread complaints from former students burdened with large amounts of debt.
In response, the Education Department issued a rule in 2016 that established a formal process for borrowers to apply for loan discharges. In 2019, Education Secretary Betsy DeVos revised the rule to tighten eligibility criteria and limit the amount of relief that borrowers could receive, assuming they had gained at least some value from their education.
He said it would increase costs for students and “undermine their ability to make choices about their education in order to best meet their needs.”
In 2022, the Biden administration introduced new borrower defense rules to provide full relief to borrowers who had previously received partial forgiveness under the DeVos-era policy.
