A federal court has delayed a hearing that would decide whether to preliminarily approve a $6 billion proposed settlement between the U.S. Department of Education and student loan borrowers who allege their colleges misled them.
Last month, the Ed Department announced it had struck a settlement proposal that would automatically forgive the federal student loans of roughly 200,000 borrowers. The deal would resolve a class-action lawsuit that accuses the agency of improperly handling borrower defense to repayment claims, which allow defrauded students to have their loans forgiven.
Four institutions, two for-profit and two nonprofit, filed motions last week to intervene in the case, arguing the settlement would sidestep regulations and harm their reputations. U.S. District Judge William Alsup now plans to hold a hearing in early August on those motions and on whether to grant preliminary approval for the settlement. The preliminary approval hearing had originally been scheduled for the end of July.
The settlement could end a years-long legal fight between the Ed Department and the student borrowers. They filed the lawsuit in 2019, arguing the Trump administration had delayed granting them borrower defense relief. The case continued under the Biden administration.
Alsup could reject the colleges’ arguments or sustain their objections to the settlement, said Aaron Lacey, partner and chair of law firm Thompson Coburn’s higher education practice.
Lacey said California and the 9th U.S. Circuit Court of Appeals, which covers the state, is known for being more friendly to consumers. The case is being considered in the U.S. District Court for the Northern District of California.
“Where you’ve got a class like this, with a bunch of consumers who are looking for protection, I think the expectation is that the court is somewhat predisposed — and the 9th Circuit is somewhat predisposed — to favor the consumers’ interest,” Lacey said.
If the settlement is approved, it could be appealed to the 9th Circuit, Lacey added.
Eileen Connor, director of the Project on Predatory Student Lending, said in a statement that it is disappointing that companies are “looking out for their bottom lines at the expense of students.” Connor's group is helping to represent borrowers in the case.
“However, their meritless filings do not change the facts of this hard fought settlement,” Connor said.
Schools hit back against settlement agreement
U.S. Education Secretary Miguel Cardona lauded the settlement agreement when it was announced in June, contending it would resolve borrower defense claims in a fair way for all parties. Under the terms, students would be automatically eligible for debt relief if they filed a borrower defense claim against one of 150-plus colleges listed in the deal.
The Ed Department determined that attending one of the colleges justified automatic forgiveness because of strong signs of “substantial misconduct” by the schools or high numbers of borrower defense applications against them.
The Chicago School of Professional Psychology, a nonprofit school that filed a motion to intervene, said it was “taken aback” to learn it was on the list.
“Prior to the filing, TCSPP had no notice that it was the subject to any negotiations between the Parties or that it would be referenced in the proposed settlement,” the school wrote in its motion to intervene, filed Thursday.
In January 2021, the institution learned of 39 borrower defense applications filed against it. It reached out to the Ed Department about the claims, but said the Ed Department “quickly fell quiet” after initial contact. The college says it has not responded to any of the allegations contained in the applications.
The Chicago School argued the proposed settlement ignores its due process rights and cited concerns about the department attempting to recoup discharged loans without following required regulatory steps.
The other three schools filing motions to intervene last week include Everglades College, a nonprofit that operates Keiser and Everglades universities, and two for-profits that filed jointly — American National University, a predominantly online college, and Lincoln Educational Services Corp., which oversees campuses nationwide.
Career Education Colleges and Universities, a group that represents for-profit institutions, is leading the litigation on behalf of the two for-profit colleges, according to Nicholas Kent, the organization’s chief policy officer.
“We think that this added time will allow the court to process and fully understand the missteps in the proposed settlement agreement and find that allowing the parties to intervene is necessary to preserving institutions' due process protections afforded under the current borrower defense program,” Kent said.
The two institutions cited concerns about the settlement leading to the Ed Department seeking money from them to cover loan discharges.
An agency spokesperson said in an email that an institution’s inclusion in the settlement agreement “has no independent legal effect on the school.”
Kent, however, said the colleges "would want to explore modifications to the settlement agreement that address that the department would not hold the institutions liable for those discharge amounts.”