An Open Comment To The Proposed Borrower Defense Regulations: Hold Tax-Exempt Law Schools Accountable
Law schools need to be held accountable financially for admitting applicants who can't pass the bar exam or find jobs.
On June 16, 2016, the Department of Education released its proposed regulations on the Borrower Defense provisions in the Federal Register, Volume 81, Number 116. The document can be found here. The department is soliciting comments on the proposed regulations before releasing the final version in November. The final regulations will take effect on July 1, 2017. The deadline for comments is August 1, 2016. A lightly modified version of my comment below will be sent to the department for consideration.
My comment will focus on law schools. I will argue that the borrower’s defense relief be available to law school graduates who attended due to false post-graduate employment information provided by their schools, particularly those who enrolled before 2011, for the reasons below.
Before 2006, most people enrolled in law school on the belief that they would obtain a steady job, pay off their student loans within a reasonable time, and live without having to struggle financially. At the time, their only source of information on law schools’ post-graduate employment and income was supplied by U.S. News and World Report’s annual law school rankings. Due to very lax reporting standards and lack of verification procedures at that time, most law schools reported post-graduate salaries of over $100,000 for over 90% of their graduates who chose to work in the private sector.
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For the majority of law students who did not attend a top law school nor graduate in the top of their class, they were not even considered for high-paying attorney positions in major law firms and competitive positions in the government and the public sector.
Many of these people ended up graduating with no job offers. Even people who graduated with above average grades struggled to find jobs. They were ashamed to report their dire employment situation to their schools, which also compounded the problem because schools were supposed to report this information to U.S. News.
But starting in 2007, anonymous internet users through blogs and conversations in law school forums warned future law students that U.S. News’s post-graduate income numbers were false. They were told that law schools reported only the numbers that were supplied by alumni who participated in the survey, usually the ones that report high salaries. Law schools counted a graduate as employed even if she was working a non-legal job making minimum wage with no transferable skills. Some schools even resorted to hiring their own graduates temporarily in order to boost their employment figures.
But this discussion entered the mainstream when it was featured in David Segal’s New York Times article, “Is Law School A Losing Game?,” in 2011. In the article, some commentators suggested that law schools may be engaging in fraud and may one day face a lawsuit by their former students.
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Some time later, former students sued their law schools. Most of these lawsuits were dismissed. But in most of these decisions, the judges acknowledged that law schools have misled their students and should do a better job reporting better numbers.
Due to the negative publicity, the American Bar Association and U.S. News and World Report have both demanded that law schools provide more detailed and accurate post-graduate employment information. For many law schools, this resulted in a significant change. It turns out that most law school graduates did not get a full-time lawyer position with respectable firms. Some schools, particularly for-profit, proprietary law schools, reported very low post-graduate employment figures.
Since then, law school applications have declined steadily since 2012. Applicants today are advised to be very aggressive about demanding tuition discounts, even during the final weeks before the semester starts.
The above timeline suggest that law schools did indeed mislead students into enrolling at least on a moral level. And now that prospective law students have enough information to make an informed decision, many talented students are choosing another career. As a result, law schools are experiencing a brain drain and a revenue shortfall. However, many schools have resorted to lowering their admission standards under the guise of providing opportunity to minorities and the poor.
As for those who graduated before the truth became known, their outcomes vary. Some are doing well. Others are getting by. And many are still unemployed or underemployed. Some of them have defaulted on their loans and are facing wage garnishments and tax refund seizures.
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Most of the above students who attended law school prior to 2011 have been deceived and deserve some form of debt relief. A few months ago, I argued that law school graduates can take advantage of the borrower’s defense relief program even though they were primarily designed to address the grievances of former Corinthian College students. But I believe that students from non-profit universities have been deceived just as badly. I ask that the department review and implement the following three suggestions.
The department should make it clear that all students, even graduates from non-profit, tax-exempt schools, are eligible to apply.
The impetus for these regulations is the aftermath of the deceptive practices of Corinthian Colleges, a for-profit education system. However, many schools are designated non-profits because according to the IRS, education is an exempt purpose that qualifies them for tax-exempt status. However, many of these tax-exempt entities are just as profitable as some large businesses. And some of their top administrators are highly compensated. Many of the law schools sued for fraud were designated non-profits.
Just because a school is a non-profit should not automatically give them a pass from the borrower defense provision. Their students should be subject to the same opportunity for loan forgiveness if their school engaged in substantial misrepresentation.
The department should provide examples as to what is a substantial misrepresentation.
Under proposed § 685.222(d), a borrower would have a borrower defense if the school or any of its representatives made a substantial misrepresentation that the borrower reasonably relied on when the borrower decided to attend or to continue attending the school.
The regulations state that substantial misrepresentation may exist if the borrower “reasonably relied” on a misrepresentation to his or her detriment. In determining whether a borrower’s reliance on a misrepresentation was reasonable, the decision maker could consider, among other things, if the school or its representatives engaged in conduct such as:
- Demanding that the borrower make enrollment or loan-related decisions immediately;
- Placing an unreasonable emphasis on unfavorable consequences of delay;
- Discouraging the borrower from consulting an adviser, a family member, or other resources;
- Failing to respond to the borrower’s requests for more information, including about the cost of the program and the nature of any financial aid; or
- Otherwise taking advantage of the borrower’s distress or lack of knowledge or sophistication.
Unfortunately, some people who have loans that go back years or even decades are not likely to have the evidence (other than declarations) to prove the above. It may be easier to obtain a copy of the U.S. News law school rankings directly from the publishers. The rankings and accompanying post-graduate information can be used to determine whether a reliance was reasonable under the circumstances.
I also recommend that the department provide examples as to the types of conduct that do and do not constitute substantial misrepresentation. These examples can provide some guidance on the meaning of substantial misrepresentation and deter frivolous borrower’s defense claims.
To illustrate, suppose the U.S. News ranking report of a particular law school in a previous year shows that over 90% of the graduates in private practice earned an average of over $100,000, and the borrower claims that she relied on those figures when deciding to attend. That reliance should be reasonable unless the school can prove that they told the borrower that those figures would not apply to her. Or if something extraordinary happened to the borrower that made her unemployable.
The dismissal of the law school class action lawsuits should not deter eligible students from applying for borrower defense relief.
If approved, the final regulations adopting the substantial misrepresentation rule will apply to loans disbursed after July 1, 2017. But the current rule allows a borrower defense claim if any act or omission of the school would give rise to a cause of action under applicable State law.
While almost all of the law school lawsuits have been dismissed, this is ultimately irrelevant. The fact that the lawsuits were initiated should be enough to allow a borrower defense claim. After all, the very definition of “give rise” means to cause to happen. Accordingly, graduates should be encouraged to apply for borrower defense relief based on the wording of the regulations.
The students of schools that were not defendants should also be entitled to borrower defense relief on the grounds of equity. The plaintiffs’ attorneys had plans to sue more law schools for fraud and misrepresentation. But due to early losses in other jurisdictions, they felt that expanding the lawsuits would be futile and a waste of money.
Other thoughts.
Some have argued that the proposed regulations may be draconian and overbroad, and they will cripple good schools. I acknowledge that a few schools have been honest about their employment figures. I also recognize that many law schools have changed their ways in recent years, although it has been by force. Still, some law schools will continue to mislead students. With the exception of a few dissenters, most law schools turned a blind eye to this issue and refuse to condemn their less ethical colleagues. There are still some people who claim that law school is a good investment for most people, despite overwhelming evidence to the contrary. One law school professor even claims that going to law school will result in on average a $1,000,000 earnings premium without taking into account tuition and student loan interest. If law schools continue to take a united front, then they should be punished collectively as well. Perhaps it will require a financial hit for good schools to condemn the bad.
Secondly, others argue that the proposed rules will prevent minorities from attending law school, particularly African-Americans and Latinos. While schools have recently reached out to underrepresented minorities in order to fill their seats, their motives should be questioned. Unfortunately, many leave with large student loan debts, poor job prospects and a harder time paying back their student loans. And the amount of help that law schools provide them is, at the lack of a better term, niggardly.
Finally, some will argue that an easier standard for loan forgiveness will result in a floodgate of applications and create a moral hazard. First of all, my comment requests borrower defense relief for a large but select group of people who went to law school based on false and incomplete post-graduate employment information. This group also paid substantially less tuition compared to today’s rates. Students who applied after 2011 should be considered on an individual basis. So in the bigger scheme of things, the amount forgiven for law school graduates is not that high.
The bigger moral hazard is to let the system continue as it is. Law schools are continuing to raise tuition every year with no incentive to publicly price competitively. The “smart” students with other options are choosing other career paths. Law schools are more afraid of offending U.S. News than the Department of Education.
Judge Melvin L. Schweitzer, in his decision ordering the dismissal of one of the first law school lawsuits, stated:
In this court’s view, the issues posed by this case exemplify the adage that not every ailment afflicting society may be redressed by a lawsuit.
I agree. It is now in the Department’s hands, and I urge the decision makers to consider the financial impact of keeping the status quo. Student loan balances will increase, and law school graduates will continue to struggle to find the jobs that will pay the bills. Law schools – both profit and non-profit – need to know that they will be held accountable financially for admitting applicants who will have a hard time passing the bar exam and finding a job.
Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at sachimalbe@excite.com and via Twitter: @ShanonAchimalbe.
