Early on in the Trump administration, Betsy DeVos’s Department of Education blocked an Obama-era regulation from going into effect that would overhaul how defrauded student loan borrowers could obtain debt relief.  A few weeks ago, the Department issued its own set of proposed rules that will make relief harder to obtain for hundreds of thousands of borrowers who were either misled by their schools or whose schools closed their doors.

These new changes were widely criticized by borrower advocates, who pointed out that many of the new rules were clearly aimed at protecting for-profit schools rather than average citizens.

However, one part in particular of the proposed rules leaped out at me.  The Department repeatedly claims that borrowers who obtained a closed school, false certification, or borrower defense discharge are at risk of having their official school transcripts withheld.

Withholding a transcript can have a devastating effect on already at-risk students.  A borrower may need that transcript to transfer to another school and finisher her degree, or prove to a potential employer that she’s completed the requisite coursework for a job.  Withholding a transcript can put a borrower’s life on hold and take away the promise that education offered in the first place.

The Department’s assertion that borrowers with discharged loans were at risk of having their transcript withheld came as news to me — and I research the issue of transcript withholding.  My paper on the topic will be presented at a higher education law conference this fall.

According to the Department’s notes,

The proposed regulations also would remind borrowers submitting affirmative or defensive claims that if the borrower receives a 100 percent discharge for the loan, the institution has the right to withhold an official transcript for the borrower, as has always been the case in instances in which the borrower has been awarded student loan discharge through false certification, closed school or defense to repayment discharge.

Sounds like this issue is pretty cut and dry to the Department: schools have always had the right to withhold an official transcript after a discharge.  However, the problem is that I cannot figure out where the Department is getting this assertion from.   And, despite no obvious evidence to back it up, this claim is being used by the Department to threaten scammed student borrowers, discouraging them from obtaining relief.

There are no rules or regulations about transcript withholding in the federal statutes or code of regulations.  Moreover, there is no mention of transcript withholding in the federal student loan master promissory notes, the contracts that govern the student loans that might later be subject to discharge.

Indeed, withholding a transcript has always been seen as a state law issue, one governed by the relationship between the student and the school, not the relationship between the student and the Department of Education.  Transcript withholding only occurs when a student defaults on a debt owed directly to the school such as unpaid library fees or a tuition bill that was never covered by student loans.

Does the Department of Education think that students will end up owing a debt directly to their school when they obtain a discharge on their student loans?  It’s true that the Department of Education is able to seek reimbursement for discharged student loans directly from the school.  For example, when ITT Tech went into bankruptcy, the Department of Education made a claim on the bankruptcy estate for more than $230 million to cover closed-school discharges and borrower defense discharges received by ITT Tech students.

In other words, does the Department of Education think that after paying back the Department of Education schools like ITT Tech have a corresponding claim against the individual borrowers—the ones whose student loans were discharged because of the school’s own closure?  If so, there are some obvious issues with this theory.

This supposed debt is unlikely to hold up in court.  Borrowers would have state unfair and deceptive acts and practices claims.  And equitable defenses would seem particularly appropriate.  When a student is relieved of her obligation to pay a student loan because of her school’s bad behavior, she cannot then be saddled in turn with a debt owed directly to that same school.

Alternately, what if the Department of Education is merely claiming that schools always have the ability to withhold official transcripts and they can choose to do so after a borrower obtains a discharge?  Again, this would be incorrect.

In 2009 the Seventh Circuit addressed a transcript withholding case after a student’s loans have been discharged in bankruptcy.  The Court held that “providing a transcript is an implicit part of the education contract” and that the student had a right to the transcript because, even though she hadn’t paid her school fees directly, the obligation to pay the debt had been discharged.  This case does depend on the state property law at issue, but it demonstrates that the Department of Education is misleading borrowers if this the grounds on which it claims that all schools have always had the right to withhold a transcript after a discharged student loan.

To be honest, I’m not entirely sure what the Department of Education was referring to when it claimed that schools could withhold transcripts after a borrower obtained a student loan discharge.  I have never heard of such a case happening and cannot think of a theoretical basis for it to be true.  Nevertheless, they repeat the assertion 5 times in the notice of proposed rulemaking.  At this point, I have to conclude that the Department is misleading the public to support their agenda of discouraging discharge applications.

 

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