Duane Morris LLP - A Look At The Student Loan Case Pending At Supreme Court

Pending before the U.S. Supreme Court is U.S. Department of Education v. Career Colleges and Schools of Texas, in which the court will review the U.S. Court of Appeals for the Fifth Circuit's decision preliminarily enjoining, on a nationwide basis, the U.S. Department of Education's 2022 Borrower Defense to Repayment final rule.[1]

The Supreme Court is limiting its review to one of the two questions in the department's petition, namely, "whether the court of appeals erred in holding that the Education Act does not permit the assessment of borrower defenses to repayment before default, in administrative proceedings, or on a group basis," as the 2022 BDR rule purports to do. The other question — not up for review — is whether the Fifth Circuit's nationwide injunction is proper.

On Feb. 5, at the request of the acting solicitor general of the U.S., the court held briefing in the case in abeyance so that the government could reassess its position on the validity of the 2022 BDR rule.

The case is significant for institutions participating in programs covered by Title IV of the Higher Education Act because the Biden administration argued that there were millions of dollars in potential borrower defense liability that the department was poised to address under the 2022 BDR rule.

CCST filed its lawsuit on Feb. 28, 2023, in the U.S. District Court for the Northern District of Texas to enjoin and vacate the 2022 BDR rule, though the case was transferred to the U.S. District Court for the Western District of Texas.[2]

Among other claims, CCST argues that the 2022 BDR rule creates unlawful administrative processes, fails to serve any legitimate purpose under the Higher Education Act and "represents enormous executive overreach" by the Biden administration in violation of the department's statutory authority and the U.S. Constitution's separation of powers.

CCST pursued an interlocutory appeal to the Fifth Circuit after the district court denied its motion for a preliminary injunction.

On April 4, 2024, the Fifth Circuit held that the district court erred in denying a preliminary injunction and, over the department's objection to nationwide relief, ordered the district court to postpone the effective date of the 2022 BDR rule pending final judgment in the case.[3] The department unsuccessfully sought rehearing en banc in the Fifth Circuit, and then petitioned the Supreme Court for review.

Overview of 2022 BDR Rule

"Borrower defense to repayment" is a concept emanating from a single arcane provision in the Higher Education Act: Title 20 of the U.S. Code, Section 1087e(h). The provision directs the secretary of education to specify, by regulation, "which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan."

For decades, presidential administrations on both sides of the aisle interpreted this provision to mean that an individual borrower, if defending against a collection proceeding, could assert defenses based on state law to relieve his or her obligation to repay loans.[4]

Beginning with the Obama administration, the department reinterpreted Section 1087e(h) in ways that greatly expanded the reach of, and relief available under, the BDR provision of the Higher Education Act.

In issuing the 2022 BDR rule, President Joe Biden's administration took an even more expansive view of Section 1087e(h), finding that it permits a complex regulatory regime that allows borrowers to assert "borrower defenses" as affirmative claims; that permits such claims to be adjudicated administratively by the department with resulting loan discharge relief to the borrower; and that permits the department to recoup the amounts that have been discharged from the institution involved, also administratively, without any of the procedural protections that otherwise would apply to a government action to collect a monetary amount from a regulated party in federal court

By the department's own account, the 2022 BDR rule is "more expansive" than its predecessors and explicitly intended to cause "changes in institutional behavior that benefit borrowers."[5] The 2022 BDR rule makes the following changes to the previous iteration of the BDR rule, issued by the Trump administration in 2019:

Expands grounds for borrowers to receive a discharge and purportedly clarifies processes for BDR claims, including "aggressive and deceptive recruitment" and "federal or state judgment or departmental showing of harm";
Loosens evidentiary standard for borrower applications to include the concept of "detriment," which is a lower requirement than the showing of "harm" required under the 2019 BDR rule;
Allows for department-driven group claims as well as "third-party requestor" claims that are filed by state attorneys general, other state-level higher education regulators, and, in some circumstances, legal assistance organizations;
Includes three rebuttable presumptions in the borrower's favor — and, in effect, against schools' interests; and
Broadens, in the department's favor, again, to schools' detriment, recoupment provisions including the processes, adjudication procedures and timelines of a recovery action.

Trump Administration Forgiveness Policies

The Biden administration prioritized student loan forgiveness.[6] In all, the Biden administration claims it forgave over $189 billion[7] in federal student loans for more than 5 million borrowers through programs including the Public Service Loan Forgiveness initiative, income-driven repayment plans and BDR claims.

President Donald Trump is not expected to continue prioritizing loan forgiveness. On the campaign trail, Trump criticized Biden's student loan forgiveness policies. The first Trump administration issued its own BDR rule in 2019, which is largely seen as more favorable to institutions, then vetoed a congressional attempt to nullify the 2019 rule.

To the extent the 2022 BDR rule is not invalidated by the Supreme Court — or if the administration does not want to wait for the court to act — the second Trump administration may undo the 2022 BDR rule, potentially either via an executive order or through the negotiated rulemaking process mandated by Title 20 of the U.S. Code, Section 1098a.

Impact on Currently Outstanding BDR Claims

The 2022 BDR rule was to take effect on July 1, 2023, but the Fifth Circuit decision stays the effects of the rule as to all parties that would have been affected. When the Supreme Court granted certiorari, it did not stay the Fifth Circuit's decision pending appeal, leaving it in effect for now.

This means that, with respect to BDR claims, the regulations in effect prior to July 1, 2023, govern any application for BDR relief that is still pending or that is submitted by a borrower from this point forward.

The existing regulatory regime is a web of rules whose applicability depends on the date a student's loan was disbursed. However, since the Obama administration issued its 2016 BDR rule, the fundamental premise of all iterations of the BDR rule is that the Higher Education Act permits the secretary to take what is a "defense" to repayment of the loan and convert it into an "offensive" claim for debt relief.

If the Supreme Court hears the case on the merits, it could present an early opportunity for the court to apply, refine or expand last year's decision in Loper Bright Enterprises v. Raimondo.[8] As in Loper Bright, the central issues in CCST's case are whether the department properly interpreted the Higher Education Act and what the "boundaries of the [department's] delegated authority" are.

If the court finds that the Higher Education Act does not authorize offensive borrower defense claims, then all iterations of the BDR rule issued since the Obama administration — each of which authorize offensive BDR claims — are likely to be invalid as well.

Were that to happen, the department would still be obligated to "specify in regulations which acts or omissions … a borrower may assert as a defense to repayment," as the Higher Education Act requires. It is possible that the department could revert to the original BDR rule issued in 1994. That rule, which stood for more than 20 years, allowed only defensive reliance on borrower defenses, and only when an institution's actions would have given rise to a state law cause of action.[9]

Future of BDR Claims

The Trump administration is not expected to continue with the adjudication of BDR claims at a rate comparable to the Biden administration. The department could halt the entire BDR adjudicative process as it works to enact revised regulations, which is what it did during Trump's first term.

In its latest filing to the Supreme Court, the department stated that it is currently determining "the basis for and soundness of" the 2022 BDR rule. If the department elects to revise or rescind the 2022 BDR rule, the department may drop its appeal to the Supreme Court — which, in turn, would allow the preliminary injunction to remain. We expect the department will do this.

If the case actually goes forward in the Supreme Court, it will likely further illuminate the reach of the Loper Bright standard for assessing whether an administrative interpretation of a statute constitutes the best meaning of statutory language.

This will have particular importance as it arises in the context of a federal agency that was attempting to flex regulatory muscle on the basis of an interpretation that was advanced more than 30 years after the statutory provision at issue was enacted.