Appeals court halts new Biden rules on debt relief for defrauded students

The future of the Biden administration’s rules to ease the path to student loan forgiveness for people who were defrauded by their college or whose schools abruptly close is in doubt.

On Monday, the U.S. Court of Appeals for the 5th Circuit issued an injunction to prevent the government from implementing regulations that took effect last month while it considers a lawsuit brought by Career Colleges and Schools of Texas, which represents 70 for-profit colleges. The court will hear the case on Nov. 6.

The Education Department said it is reviewing the order and “won’t back down in our efforts to take on predatory colleges, provide relief to borrowers who have been cheated or had their school close, and hold institutions accountable for deceptive schemes.”

The career college association sued the department in February to block a rule updating regulations that govern the discharge of federal student loans when borrowers are defrauded by their colleges, permanently disabled, spend years in public service or face a school closure. The changes are some of the most significant updates to the federal student loan repayment system in years.

Chief among the group’s complaints is the rewrite of the federal “borrower defense to repayment” statute, which clears the debts of students whose colleges used illegal or deceptive tactics to persuade them to borrow. The Biden administration has relaxed the limits on when people can file an application and expanded the types of violations that would make them eligible for debt cancellation, all of which the association says could harm its members.

The college group also takes issue with the administration easing the criteria for canceling the loans of students whose schools close and banning arbitration agreements that for-profit colleges include in enrollment contracts.

The provisions, according to the association, amount to an illegal overreach by the Biden administration to maximize loan forgiveness at the expense of colleges that are being forced to absorb more liability.

Monday’s court order means the new borrower defense standards cannot be applied, at least for now, to claims pending on or received after July 1, when the rules took effect.

A lower court judge previously denied the association’s motion to stop the regulation, ruling on June 30 that the group failed to show that its members face irreparable harm. Weeks later, the appellate court agreed to bar the Biden administration from applying the new rule to the association’s members, but not to a broader pause. The association fought for the court to extend the injunction and won.

The Texas association could not immediately be reached for comment on the ruling, but its national counterpart, Career Education College and Universities, applauded Monday’s order.

“We are confident that when the case is brought forward the facts will show the new rule to be an agency overreach in violation of the Department’s authority, the Administrative Procedure Act, and the Constitution,” said Jason Altmire, chief executive of Career Education Colleges and Universities, which represents for-profit colleges. “Knowing that this rule has a strong chance to be struck down during the upcoming legal process, it is unjustifiable to allow its implementation while the court proceedings continue.”

Reforming the borrower defense statute, which dates back to the 1990s, has been an arduous task spanning three administrations. After a deluge of applications from former students of defunct for-profit giants Corinthian Colleges and Carmel-bsed ITT Technical Institutes, the Obama administration revised the statute to pass more of the cost of forgiving loans onto colleges. But the rule was rewritten by the Trump administration to limit loan forgiveness. Trump-era policies of sitting on applications for months and refusing to grant full loan discharges led to claims piling up at the Education Department and lawsuits.

To date, the Biden administration has approved $13.5 billion in student loan discharges since 2021 for roughly 1 million borrowers who were defrauded by their colleges. Roughly half of those people have had their balances cleared, according to the Education Department.