Updated August 5, 2022 at 3:23 PM ET
Update: On Thursday, a federal judge in San Francisco granted preliminary approval of a settlement that would cancel the loans of more than 200,000 student borrowers who say they were defrauded by their colleges. It's the latest development in the years-long Sweet v. Cardona, formerly Sweet v. DeVos, lawsuit against the U.S. Department of Education.
The settlement names 153 mostly for-profit colleges, and stipulates that students who attended these schools are entitled to full and automatic relief from their federal student loans. But the Education Department has investigated very few of these schools for wrongdoing. Thursday's ruling allows these schools to take action against the settlement.
"The Department is pleased with the court's preliminary approval of the proposed settlement agreement, which we believe will resolve the litigation in a manner that is fair and equitable for all parties," an Education Department spokesperson tells NPR in an email.
Eileen Connor, director of the Project on Predatory Student Lending and co-counsel for the plaintiffs, said in a statement, "Preliminary approval is an important milestone for this settlement and for our clients, bringing us one step closer to finally delivering certainty to borrowers who have fought long and hard for a fair resolution of their borrower defense claims."
Jason Altmire, the president and CEO of Career Education Colleges and Universities (CECU), a group that represents many of the schools on the list, said, "We are pleased that ... Judge Alsup tentatively ruled that he will allow schools to intervene in Sweet v. Cardona to protect their interests. The parties' proposed settlement has unfairly impugned the reputations of more than 150 schools, all without the basic procedural fairness to which these schools are entitled under the [Education] Department's own regulations."
The settlement is set to be finalized in a hearing scheduled for Nov. 3.
Original report: A fight over when and how the U.S. Department of Education can cancel some federal student loans will soon play out in a federal courthouse on Golden Gate Avenue in San Francisco.
On Aug. 4, a federal judge will decide whether to preliminarily approve a settlement that would erase the debts of 200,000 borrowers who say they were defrauded by their colleges.
The lawsuit, Sweet v. Cardona, centers on a federal rule, known as borrower defense, that allows borrowers to ask the department to erase their student debts if a school has lied to them – about their job prospects, their credits' transferability or their likely salary after graduation.
Tens of thousands of borrowers who say they were ripped off, largely by for-profit colleges, have been in limbo, waiting years to have their claims reviewed. During the Trump administration, borrower advocates sued the department, arguing it deliberately and illegally stopped processing claims and wrongfully denied others without considering the merits of their cases.
If the settlement is approved, those 200,000 borrowers will have more than $6 billion in debts erased, and another 64,000 will have their fraud claims reconsidered on the merits.
"This momentous proposed settlement will deliver answers and certainty to borrowers who have fought long and hard for a fair resolution of their borrower defense claims after being cheated by their schools and ignored or even rejected by their government," says Eileen Connor, director of the Project on Predatory Student Lending and co-counsel for the plaintiffs.
The settlement also has its critics, who argue it's a brazen attack on dozens of largely for-profit colleges and could be used, by the department, to erase the debts of many more borrowers beyond the lawsuit.
The settlement names schools that have allegedly done wrong, but haven't been investigated
The settlement has stirred the fury of for-profit college leaders and advocates. The source of that anger is this list of 153 mostly for-profit colleges.
Borrowers who are part of the class action suit and who attended any of those 153 schools are entitled, the settlement says, to full and automatic relief from their federal student loans.
The settlement says these schools were included because of strong signs they had committed "substantial misconduct ... whether credibly alleged or in some instances proven."
Just because somebody accuses a school of fraud doesn't necessarily mean that it happened.
That doesn't sit well with some higher education experts.
"Just because somebody accuses a school of fraud doesn't necessarily mean that it happened," says Carlo Salerno, senior economist at Ellucian and a longtime industry observer. "[A school] could, for example, inadvertently list a graduation rate that was wrong. Maybe it wasn't wrong because they were trying to be deceptive as much as maybe there was a data error or a clerical error."
The settlement's critics also point out that the Education Department has investigated very few of these schools – let alone confirmed wrongdoing.
In a legal memo protesting the settlement, attorneys for Everglades College, Inc., whose schools are listed among the 153, complain that, "in most instances, all the Department has before it are unproven and yet-to-be-adjudicated allegations, but the agency is nonetheless deeming schools guilty without further process or explanation."
"This is a farce," the memo says.
In another legal protest of the proposed settlement, The Chicago School of Professional Psychology (TCSPP) "vigorously denies these accusations and is eager to submit contrary evidence and argument to this Court that the Parties plainly will not."
Many of the schools on the list have been the target of federal or state-level consumer protection inquiries, though not all. Some have settled without acknowledging wrongdoing. Most have never been the subject of enforcement by the department, or lost access to federal student loans.
"We have many concerns," says Jason Altmire, the president and CEO of Career Education Colleges and Universities (CECU), a group that represents many of the schools on the list.
"It does not appear that the department has done an individual review of each of these claims. In fact, they have themselves said that they did not do that," Altmire says.
One reason is practical: The department has an enormous backlog of complaints to process. The whole point of the lawsuit and settlement is to finally and efficiently do that.
In a statement, Education Secretary Miguel Cardona said the department was "pleased" to have reached an agreement "that will deliver billions of dollars of automatic relief to approximately 200,000 borrowers and that we believe will resolve plaintiffs' claims in a manner that is fair and equitable for all parties."
And there's no doubt, Altmire says, many of these borrowers deserve help.
"Any student who has been part of a school that has intentionally misrepresented information to that student, and the student has been harmed by that, without question, that student should be first in line to have their claims heard," says Altmire. But, "without any kind of individual review, we wonder how you can make a determination whether or not a student has been harmed."
Altmire says some of the schools on the list had no idea they were included – or that borrower defense complaints had even been filed against them.
"We see that as a problem," Altmire says, because it's causing schools "reputational damage."
Some of the schools on the list are still enrolling students
Among the still-open schools on the settlement's "substantial misconduct" list is the popular University of Phoenix, which listed its degreed enrollment in 2020 at nearly 84,000 students.
In 2019, Phoenix agreed to cancel $141 million in debts owed to the school and pay $50 million back to students after the Federal Trade Commission alleged the school had used deceptive advertising.
But, by settling, the university avoided litigation. In a statement after the settlement, it said it "continues to believe it has acted appropriately and has admitted no wrongdoing."
Its inclusion in the Sweet settlement, along with other open schools, feels to Altmire like the department is using borrower defense "to weaponize against the [for-profit college] sector."
University of Phoenix did not respond to multiple NPR requests for comment.
Everglades and Keiser Universities – both part of Everglades College, Inc. – are also open. In the Everglades legal memo protesting the settlement, the organization says it didn't know students had filed claims against its schools.
"The Department's inclusion of [Everglades and Keiser] is already causing reputational harm, as third parties are treating it like a neutral finding of wrongdoing by the schools, rather than a litigation concession cooked up in a secret deal with the schools' accusers," the memo says.
Salerno, too, worries about the message this sends.
"While I'm sympathetic to the department trying to clear the decks ... there is a lot of inadvertent harm that comes from telling current students ... that, you know, your degree may be a sham, even before you've received one or tried to get employed with it."
What it looks like when a college defrauds its students
Borrower Alicia Davis wants to be clear: Her educational experience was a sham.
She remembers the Florida Metropolitan University salesperson who assured her, back in 2006, that the school was a great fit.
"She hustled me good," Davis recalls. " 'You're guaranteed to get a job!' "
But after enrolling, Davis quickly realized the school had little to offer her. And when she transferred, she was surprised to hear her credits were worthless.
"That's when I realized, I was like, 'OK, there's something really wrong with this.' "
Davis was furious and refused to pay back the federal student loans she had taken out.
She hustled me good.
"I was like, 'Take me to court, I'm not paying you a penny.' "
Ultimately, it was Davis who took the Education Department to court – as one of seven named plaintiffs in Sweet v. DeVos, now Sweet v. Cardona.
Unrelated to the case, the Biden administration finally processed and approved Davis' borrower defense claim earlier this year. In February her Florida Metropolitan debts were erased.
"I cried at the restaurant we were at with all these tourists," Davis remembers, "and they were looking at me like I was crazy. But, you know, at that moment, I realized that all my hard work and everything – I was finally free of this debt that has been haunting me for 15 years."
Davis says she hopes the Sweet settlement will be approved so the other borrowers in the lawsuit can experience the same joy, the same freedom.
The settlement may include a backdoor to broader student loan cancellation
Because this suit was triggered by the department's refusal to review claims, the settlement offers a timed guarantee to any borrower who files a claim between when the settlement was announced on June 22, 2022, and when it's finalized (if it is).
Eileen Connor, co-counsel for the plaintiffs, says these borrowers "will have a deadline" – a three-year review period. "And if the department isn't able to resolve their borrower defense applications within that time frame, their loans will be canceled."
It doesn't matter where these borrowers went to school or if they can prove they were defrauded. If the department takes more than three years to review their cases, their loans will be erased.
There's no reason to believe the department won't meet this timeline – as part of the settlement, it has committed to processing claims more efficiently. But, in its legal memo, Everglades College, Inc., suggests the department could choose to drag its feet to achieve broader loan cancellation.
"If the Department of Education encourages every loan holder in America to submit a borrower-defense application prior to this Court's final approval of the Proposed Settlement, within three years the Department of Education can unilaterally cancel ALL federal student loan debt – and refund prior payments on student debt – by simply not acting," the memo warns.
But Connor says "the suggestion that this settlement is a disguised debt-cancellation pact ... is either a deliberate misrepresentation or an embarrassing misunderstanding of basic facts."
According to a department spokesperson, as of early July, the Department had already received more than 60,000 borrower defense applications since the parties agreed to the proposed settlement.
Borrower advocates say there's still one thing missing: accountability
The Biden administration appears much more inclined than the Trump administration to cancel the debts of students who say they were defrauded.
Earlier this month, the Education Department unveiled a rewrite of the borrower defense rule – to streamline it and, in many ways, lower the burden of proof for borrowers.
What's less clear is the department's willingness to investigate bad actors and hold them accountable.
"The fact that this settlement is necessary represents a failure by the government to have actively policed these institutions better in the first place," says Dan Zibel, chief counsel and co-founder of the borrower advocacy group Student Defense.
The fact that this settlement is necessary represents a failure by the government to have actively policed these institutions better in the first place.
"We're not necessarily addressing the root of the problem," says Dominique Baker, a professor of education policy at Southern Methodist University. "If you know that an institution has done enough wrong that, if someone applies to get their student loans waived and you're going to automatically approve it, a real question is: Why would you ever allow someone to take another student loan from them?"
What's more, Connor says, there's nothing in the settlement that commits the Education Department to investigate any of the schools on its misconduct list.
Real accountability would require that the department officially investigate a school, gather evidence and make its case while also allowing the school to defend itself – a kind of due process that some for-profit college advocates and experts welcome.
"Schools deserve their day in court," Salerno says.
In response to questions from NPR about its enforcement efforts, the department, through a spokesperson, says it cannot comment on institutional oversight activities, program reviews, or investigations but that it reestablished the Federal Student Aid Office of Enforcement last fall and has filled key positions in the areas of borrower defense, strategy, and investigations.
"Our actions to date demonstrate our renewed focus on holding schools accountable for putting students' interest first," the department spokesperson tells NPR.
For proven bad actors, the department could hold executives personally liable for the costs of their fraud. It could also cut schools off from the federal student loan program – a likely death sentence for any school. Otherwise, what's to prevent more students from being defrauded?
Think of it this way, Zibel says: The Department of Education is standing at the edge of a hole, helping defrauded borrowers climb out by canceling their student debts. Meanwhile, on the other side, stand a host of potentially fraudulent schools, continuing to push more borrowers in.
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