“Attacking the Concept of Debt”

by Matteo Wong
via Harvard Magazine

ONLY A FEW years ago, Douglas Jones, who worked night shifts as a security guard at a nursing home in Roxbury, was hesitant to spend even $10 more than his typical budget allowed. Payments on his student loan debt were being withdrawn directly from his bank account. If the balance was short—for instance, if Jones hadn’t managed to get 40 hours at his job that week—the bank charged an overdraft fee. The debt had ruined his credit score and he hadn’t had a credit card in years. “They were even taking money I didn’t have,” Jones says. “It was stressing me the hell out.”

Along with millions of other Americans, Jones had fallen prey to the for-profit college industry, which is in essence a two-pronged system—federal loans at one end and for-profit schools designed to access those loans at the other. Some for-profit schools have been shown to target vulnerable groups and encourage them to take out student loans—even though many prospective students likely will not be able to repay their debts. Federal student loans comprise most of the income of these proprietary colleges; from the institution’s perspective, the loans, backed by the federal government, are almost akin to free money. (The majority of for-profit schools generate more than 70 percent of their revenue from federal funds; that is not the case for public and private non-profit institutions, which typically have more diversified revenues from tuition not backed by federal loans, state appropriations, endowments, gifts, and grants.) The credentials these schools provide—often trade-specific certificates aimed at adult learners—are often useless.

In 2016, Jones stumbled across an advertisement for the Project on Predatory Student Lending (PPSL) at Harvard Law School (HLS), and lawyers there helped him cancel his debt on the grounds that the Everest Institute had violated federal guidelines. By the time that happened, two years later, his debt had reached $13,700. “Once I finally got the letter saying they were going to dismiss my loans,” Jones recalls, “I felt like jumping in the air.” 

Since its inception in 2012, PPSL has helped eliminate hundreds of millions of dollars of student-loan debt. HLS lecturer Toby Merrill, J.D. ’11, founded the project after seeing similarities between predatory-lending practices in subprime mortgages and for-profit colleges. She hoped tactics like those that lawyers used against the subprime mortgage industry—“litigating on behalf of individuals against underlying bad actors”—could be used against for-profit schools. PPSL does individual casework, but also pursues more systemic change: its “mission is to make it so that these schools can’t exist, that they can’t continue to perpetuate these predatory practices on students,” says Victoria Roytenberg, a senior attorney at PPSL. “We do that first and foremost with litigation; we do that in our work with policymakers and elected officials.” 

She recalls, for instance, working in 2017 to assist students in suing ITT Technical Institutes—a behemoth for-profit school that operated 138 campuses across the country and an online program before declaring bankruptcy in 2016. The court filing accused the company of “churning students through a costly sham” in pursuit of earnings rather than education. “Student-loan debts are almost impossible to discharge in bankruptcy,” Roytenberg says. “The cruelty of it is that even these companies, like ITT, get to go bankrupt and there’s no consequences for them. They get to walk away virtually unscathed.” Regulators and for-profit school executives alike tend to place responsibility for debt on the student borrower, rather than on the schools encouraging students to take out risky loans. The case of ITT, however, would be different: the project not only secured a landmark settlement—the cancellation of $500 million worth of debt for 750,000 former ITT students—but flipped the borrower-creditor script, successfully arguing that students were the largest creditors of ITT’s estate and securing them a $1.5 billion allowed claim against ITT’s estate. (The bankruptcy case that will determine the value of that claim is continuing.)

JONES’S STORY began like that of many of the millions of Americans who have enrolled in proprietary colleges. In 2009, he saw a promising commercial for the dental-assistant program at Everest Institute, a for-profit school with a campus in Brighton, Massachusetts, and decided to call. Soon after, an Everest recruiter began calling him daily, eventually selling Jones on upward mobility: “‘A lot of people get ahead in life going through this program,’” he recalls being told. It seemed, at the time, like “the dream of America,” a way to enter the white-collar, higher-salary world. He assumed approximately $8,000 of loans to afford tuition, trusting the college’s guarantee to find him a well-paying job, and commuted from his home in Dorchester to the campus every day for a year while continuing to work as a security guard at night. But after completing the program, he realized he had been sold a false promise: employers didn’t take the Everest Institute credential seriously—and on top of that, he says, many told him that African American men like him simply did not get hired as dental assistants. “They sent you places that they know aren’t going to hire you,” he says. A grueling year of coursework (Jones had been near the top of his class) resulted in no change in his employment prospects—and devastating debts. 

The for-profit college industry, explains Eileen Connor, PPSL’s legal director, preys on low-income and minority individuals, as well as single parents and veterans, for many of whom higher education seems like a distant dream. It is a relationship ripe for abuse, she says. When meeting with a for-profit college recruiter, few people realize they are dealing with a salesperson working on commission and thus are likely being taken advantage of, “because they’ve been conditioned over their entire lives to think education is something good and public-minded.” Yet for these schools, Toby Merrill adds, education is often not a priority: many for-profit colleges spend far more on marketing and executive compensation than education, use false advertising practices, and are more expensive compared to similar programs at other schools. Although predatory-lending behaviors also exist at public and private nonprofit universities, the HLS project focuses on proprietary colleges as the worst actors in higher education. Students at for-profit colleges are more likely to default on their debt than obtain the credential they sought; for-profit schools enroll 13 percent of the total student population in the United States but account for 33 percent of federal student-loan defaults. “Instead of just celebrating the availability of loans for higher education,” Connor says, “we need to ask: ‘Why are we doing things this way, and who are we really helping?’”

MERRILL TRACES the origins of the predatory student-lending industry to the Servicemen’s Readjustment Act of 1944, or GI Bill, which paid for World War II veterans to attend college or vocational school. The bill created a voucher model for higher-education funding: the federal government distributed money to individuals, rather than to schools. Later, the Higher Education Act of 1965 created the Federal Family Education Loan (FFEL) program, under which the government insured bank-provided loans (rather than government grants under the GI Bill) to students seeking to attend college. The voucher model continues today.

The GI Bill and the first Higher Education Act were designed to provide opportunity to those in need—veterans and the poor. But this flood of money created a system in which students became a means for private actors to receive federal funds. The federal guarantee on bank-issued student loans, combined with the government’s extraordinary debt-collection powers, made these loans virtually risk-free for companies. The for-profit college industry began to proliferate in the 1970s and 1980s. According to PPSL, for-profit colleges receive more than $30 billion annually in federal student aid—in 2010, this amounted to one-quarter of all Department of Education (DOE) student-aid program funds. “The federal student-loan program is itself a motivator for these companies,” Merrill explains, “because it provides potentially unlimited access to federal funds.” 

The Project on Predatory Student Lending considers the federal government, in particular its lending practices and lackluster regulation, just as responsible for predatory student lending as the schools themselves. “This is really a two-party problem, and it always has been in terms of influence and capture,” Connor says—the DOE and for-profit schools form the ends of this two-pronged system. For instance, in 2005 the government lifted a rule that prohibited colleges with more than 50 percent long-distance (i.e. online-only) enrollment from receiving federal funds, leading to tremendous growth in the size and profits of proprietary schools that could now offer mostly online classes. “[The DOE’s] clientele, to the extent that they have one,” Merrill says, “is really schools and not students.”  

Although both Democratic and Republican administrations have contributed to the for-profit college industry the Obama administration took at least some steps to reign in the industry, though they were not always effective. Secretary of Education Betsy DeVos, appointed by President Trump, has instead deregulated for-profit schools. In 2010, the Obama administration ended the FFEL program, to ensure that all federal student loans came directly from the DOE—in theory adding another check against abuse by consolidating information. The DOE “wouldn’t lend if it wouldn’t approve,” Merrill says.

But the for-profit college industry still flourished: merging regulator and lender into a single identity means “there’s no external check,” Connor explains. The government did stop dispensing federal financial-aid dollars to a few of the most egregiously abusive for-profit chains, such as Corinthian Colleges and ITT, near the end of President Obama’s second term, and those companies went bankrupt—efforts the project applauds. But the DOE continues to make and collect on loans it knows cannot be repaid, Connor says. Default rates remain high, and DeVos repealed the Obama-era rules that led to the denial of federal funds to some proprietary colleges. “The department can hide its failure in gatekeeping by continuing to collect on the loans,” Connor adds, “and ignore the fact that borrowers were shortchanged.” 

IN 2015, representatives from the Debt Collective, an organization that works to cancel debt for basic needs such as health care and education, met with DOE officials to discuss predatory student lending. The collective had just organized the first student debt strike, creating a network of tens of thousands of people suffering from student-loan debt. Searching for a legal strategy, the collective worked with Connor to make borrower-defense claims on behalf of these former students, invoking a then-underutilized provision in the Higher Education Act stating that federal student loans can be canceled if the debtors have been defrauded by school misconduct. “We had a red box full of [borrower-defense] paperwork and at one point in the meeting [with DOE] we pulled it out from under the table and slammed it on the desk,” says Debt Collective co-founder Thomas Gokey. “And they couldn’t ignore it. The law was on our side.”

There are significant obstacles to suing for student-loan cancellation. Enrollment contracts at for-profit colleges usually include a forced arbitration clause that prevents students from suing. Time to bring claims can run out. Lawyers are expensive. Although the schools are one potential counterparty, much of the debt itself is held by the federal government, which involves another set of challenges. And borrower-defense claims were nearly impossible to mount individually, because neither the DOE nor state governments had a formal process for asserting those debt-cancellation claims. 

The Debt Collective and PPSL collaboration changed that. (“Our litigation has been in support of organic organizing movements,” Connor says.) Their cooperation forced the DOE to establish a formal process for former for-profit college students to make borrower-defense claims. Since 2015, hundreds of thousands of students have filed such applications, and borrower defense has become one of the project’s main litigation tactics. In July it won the case Vara v. DeVos, in which a judge ordered the cancellation of debt for more than 7,200 students: the first time a federal court has ordered the discharge of federal student loans due to borrower defense.

But changing the for-profit college industry through litigation remains challenging because “the litigation model is often retrospective,” says Jessica Ranucci, a former student who, after spending half of her HLS semesters at the project, now works on consumer law and student loans at the New York Legal Assistance Group (NYLAG). One way to balance that, she explains, is to make “explicitly prospective litigation.” Ranucci is currently back at work with PPSL, which is representing NYLAG in a lawsuit to invalidate DOE changes to borrower-defense rules that make it substantially harder to cancel federal student-loan debt.

Such class-action suits, whether they seek to correct past harms or create future protections, fulfill two goals Merrill has for the project: to be, she says, “outcome-oriented and expressive.” She aims to reach the broadest number of people possible through PPSL’s litigation, creating political and economic incentives to change the industry. And the work also gives voice to the experiences of those who have suffered.  

Their litigation, Connor says, is “attacking, from a lot of different fronts, the concept of debt.” Yet even in a successful lawsuit, “sometimes the best thing we can do is just wipe away debt, but that doesn’t really make people whole.” There remains a moral component. Connor says she has sensed “more hostility toward my clients who are debtors than my clients with murder convictions.” The idea that student borrowers have an obligation to repay and that creditors have an obligation to collect is in many ways the moral foundation of the for-profit college industry—and one that PPSL seeks to unsettle. “What’s moral about having a regulator that’s so captured by an industry that is just allowing for the utter destruction of people’s lives in the administration of this federal program?” she asks. “[We’re] trying to change people’s perceptions about why people have student-loan debt, and why it is that we even structure higher education in a debt-financed way in the first place.”