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Judge Rejects DeVos’s Halt of Rule to Help Defrauded Students

Category: Business,Finance

A federal judge will rule Friday on how to address an improper decision by Education Secretary Betsy DeVos to freeze a plan to help student loan borrowers who were cheated by their schools.

A new Education Department rule would have sped up and expanded a system for erasing the federal loan debts of students at schools that broke state laws and misled their attendees. It may now be revived: Judge Randolph D. Moss, a federal judge in Washington, said Wednesday that the department’s move to postpone the rule just weeks before its start date last year was “arbitrary and capricious.”

The ruling was a victory for attorneys general from 18 states and the District of Columbia, who filed a lawsuit last year challenging the Education Department’s decision.

“It’s time for this rule to go into effect and give thousands of students the relief they’ve been waiting for,” said Maura Healey, the Massachusetts attorney general, who led the multistate coalition opposing the delay.

The Education Department is reviewing the ruling, said Liz Hill, a spokeswoman. She declined further comment.

Judge Moss’s decision may lead to changes in how the government handles tens of thousands of existing claims from students seeking to have their loans discharged. But any remedies he orders may soon be blunted: The Education Department is working to completely revise its system for handling future requests.

Even so, the ruling was the latest in a series of judicial rebukes to the Trump administration for trying to shortcut the government’s formal process for adopting and eliminating agency rules. Judges have rejected attempts by multiple agencies to eliminate or indefinitely suspend rules they disliked, including new restrictions on methane emissions from oil and gas wells and an immigration pathway for entrepreneurs running technology start-ups.

The loan forgiveness system, known as borrower defense, was created in 1995 but was little used until a few years ago, when a series of failures at for-profit chains like Corinthian Colleges and ITT generated a flood of claims from borrowers seeking relief from large debts incurred for credentials that did little to advance their job prospects.

At the end of last year, the Education Department had nearly 100,000 claims queued up, and many of them had languished for years without a decision. Ms. DeVos suspended a rule change set in motion by the Obama administration that would have granted quicker relief to large batches of defrauded borrowers. It also would have required troubled schools at risk of generating claims to put up financial collateral.

At a conference last year, Ms. DeVos criticized that approach.

“While students should have protections from predatory practices, schools and taxpayers should also be treated fairly as well,” she said. “Under the previous rules, all one had to do was raise his or her hands to be entitled to so-called free money.”

After suspending the Obama-era rule, the department devised a new formula for relief under the existing system that, for many applicants, forgave only a portion of their debt. In May, a judge struck down that approach, ruling that the department had improperly obtained the earnings data it used to calculate its relief.

A spokeswoman for Ms. Healey said the attorneys general would ask Judge Moss to order that the Obama-era rule be carried out immediately.

If that happens, tens of thousands of borrowers may finally see their claims resolved, said Toby Merrill, director of the Project on Predatory Student Lending at Harvard University, which represents several borrowers who have sued the Education Department over its handling of their cases.

But the relief could be short-lived. In July, Ms. DeVos proposed a new rule that would completely revise the borrower defense system and grant loan forgiveness only to those who could prove that they had fallen into deep financial distress, among other new requirements.

That new rule is on track to take effect as soon as July.

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