Cost of Proposed Student Loan Regulation Could Exceed $43 Billion Estimate

Colleges push back against new rule, fear cost of frivolous lawsuits could be crippling

Female student worrying about money
August 15, 2016

The Obama administration's new regulation on student loans could cost taxpayers more than the Department of Education's estimate of $43 billion, according to experts.

The administration's proposed rule would ease the loan relief process for student borrowers, allowing anybody who claims to have been victimized by a university’s "substantial misrepresentation" to sue that institution.

Taxpayers could be on the hook for the flood of lawsuits that universities will face now that the threshold for legal action has been lowered from intentional deception to any type of misrepresentation, given the fact that $1.2 trillion in student debt is financed by the federal government.

The Department of Education estimates that the rule change could cost anywhere between $1.997 billion and $42.698 billion over 10 years, a wide range that economic experts say proves how little is known about what universities will face once the regulation is finalized this fall.

"Bureaucrats are proposing a rule that imposes costs—they think—of at least $2 billion and quite possibly $40 billion or more on taxpayers," said Phil Kerpen, president of American Commitment, an economic policy institute. "What kind of insane range is that? They clearly have no clue how much this will cost."

Kerpen said the regulation "could easily cost more than $43 billion."

"We’re sitting on over a trillion in student debt, and under this rule anybody whose career didn’t turn out as planned could come up with a ‘statement or omission with a tendency to mislead,’" he said.

The regulation was pushed by student advocates due to egregious misrepresentation by for-profit schools such as Clinton Foundation donors University of Phoenix and Laureate International Universities. However, some of the country's finest non-profit schools will also be impacted.

Kevin Glass, policy director of the Franklin Center, compiled a list of universities that could face lawsuits if the regulation goes into effect, which includes prestigious institutions such as Georgetown University, University of Texas, University of Michigan, University of Virginia, and Vanderbilt University, all of which advertise job placement statistics that lawyers could argue are deceptive.

"Many of them advertise very, very high 'job placement' rates and either count those who have pursued further education as 'placements' or omit them from their placement statistics entirely—or don’t specify if the degree earned actually helped them get the jobs they claim credit for," Glass wrote. "It’s easy to imagine these schools being susceptible to frivolous 'misrepresentation' lawsuits that would happen under the proposed rules."

Credit Suisse, a leading international bank, warned earlier this summer that the regulation could create a "cottage industry of attorneys poring over advertising" by colleges.

College associations are preparing for lawsuits by individuals trying to rid themselves of debt obligations.

"In theory a student could say, ‘I took English 101 and you didn’t teach me Shakespeare and the course description said you’d provide a solid foundation in Western literature,'" David Baime of the American Association of Community Colleges told the Wall Street Journal.

The Wall Street Journal reports that colleges are setting aside money through bank-issued lines of credit to reimburse loan recipients that the Department of Education decides were victimized by misleading advertisements.

Kerpen wrote that the student loan proposal is "likely to be the single most expensive proposed regulation of the year," and recommended it not be instituted without input from Congress.

"Student debt is an explosive issue not just politically but fiscally—with taxpayers on the hook for enormous sums of money," Kerpen wrote. "And that’s precisely why any new loan forgiveness program must be debated in Congress—not enacted via regulatory decree at the Department of Education.