As many of you might have heard, there is a growing “debt strike,” where graduates of the collapsed for-profit college chain, Corinthian Colleges, are refusing to repay their federal student loan debt. They are calling on the U.S. Department of Education to voluntarily waive their federal student loans. I’ve recently discussed the debt strike with The Washington Post, Vice, and Inside Higher Ed.
Here’s the background. Corinthian Colleges recently collapsed under pressure from multiple state and federal lawsuits alleging that the company defrauded tens of thousands of students: first by luring them to enroll with unrealistic promises of gainful employment, then saddling them with predatory debt and a sub-par education, and finally leaving them out to dry with no viable career prospects. This has left thousands of Corinthian graduates with useless degrees and massive amounts of student loan debt. While a recent settlement with the Consumer Financial Protection Bureau will provide some relief to borrowers who took on predatory private student loans, many more are still left with crippling federal student loan debt.
Activists supporting the growing debt strikers, who are refusing to repay their federal student loans despite the very real and ominous debt collection weapons of the federal government, are invoking an obscure and little-known clause in the Higher Education Act and federal student loan contracts called “Defense To Repayment” (DTR).
The DTR clause basically says that in an action to collect on a federal student loan by the U.S. Department of Education, “the borrower may assert as a defense against repayment, any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law.” In other words, if the school engaged in practices that violated state law which resulted in the disbursement of the federal student loans for which the borrower is now being hounded, the borrower can assert the school’s actions as a “defense,” and the U.S. Department of Education has the authority to do something about it—including relieving the borrower of the obligation to repay the debt. In essence, loan forgiveness.
The idea behind the DTR clause is not that students in general should be able to walk away from their debts. It’s that a school such as the Corinthian Colleges chain, which must comply with state and federal regulations in order to be eligible to receive federal student aid, should never have been allowed to disburse federal student loans to begin with.
DTR sounds great, doesn’t it? Then it might surprise you to know that the DTR clause has rarely been used or invoked successfully. There are a few reasons why:
- Unlike other federal student loan discharge options that are presently available to borrowers (such as where a school closes before a borrower can complete a program, or where a school unlawfully forges the student’s signature on a loan contract, or where a borrower becomes totally and permanently disabled), there is no standardized form, application, or process for asserting DTR, requesting a discharge, and obtaining relief.
- Furthermore, unlike all of the other federal student loan discharge options, there is no inherent right of appeal if the relief is not granted. For the DTR clause, the U.S. Department of Education has total “discretion” as to whether to grant the relief requested, and that’s the end of it.
- Finally, some attorneys and experts have interpreted the plain language of the clause (“defense to repayment”) to mean that it may only apply to contexts in which the U.S. Department of Education sues the borrower in a court of law. Only then may the borrower assert the DTR clause as an “affirmative defense” to the lawsuit. Since the U.S. Department of Education rarely sues borrowers in court, this severely limits the applicability of DTR. (For the record, I disagree with this interpretation.)
There is no way to know how this is ultimately going to turn out, and the situation is certainly in flux. But from a legal perspective, the debt strikers’ invocation of DTR is a fascinating and creative legal strategy, and I think that what happens next is going to be hugely important for borrowers in similar situations as the Corinthian graduates.