Supreme Court won't block student loan settlement

WASHINGTON >> The Supreme Court on Thursday refused to block a class-action settlement that forgave $6 billion in federal loans for students at for-profit schools or vocational programs.

The court's brief order gave no reasons, which is typical when the justices act on emergency applications. There were no noted dissents. The case is not related to the Biden administration's pandemic-related debt relief program, which involves $400 billion in student loans owed by 40 million Americans. The justices heard arguments in challenges to that program in February and are expected to rule by June.

The new case arose from accusations of fraud against 151 institutions, nearly all of them for-profit schools or vocational programs. A federal law allows the education secretary to cancel federal loans based on misconduct by the borrower's school. The settlement was prompted in part by an enormous backlog in the government's processing of applications for relief under the law after the 2015 collapse of Corinthian Colleges after the emergence of extensive evidence of illegal recruiting tactics. (Last year, in a separate development, the Education Department announced that it would wipe out $5.8 billion owed by 560,000 borrowers who attended Corinthian Colleges.)

The class action at issue in the new case was filed in 2019, seeking to require the government to reduce the backlog. An initial settlement collapsed after the Trump administration issued 128,000 form-letter denial notices that a federal judge called “disturbingly Kafkaesque.”

The case was settled for a second time in June 2022, granting automatic debt forgiveness to almost 200,000 borrowers who had attended the 151 schools and streamlined procedures for about 100,000 others. Still other borrowers who were not part of the initial class would have their applications considered in the usual way, but with a three-year deadline.

As of Tuesday, the government told the Supreme Court, 78,000 borrowers in the first group had received discharges.

Three schools — Everglades College, Lincoln Educational Services Corp. and American National University — challenged the settlement, saying it was a moving target and the product of a collusion between the Biden administration and lawyers for the borrowers.

“Through a collusive, nationwide class settlement of a lawsuit that sought to compel the department merely to restart adjudication of applications for loan cancellation,” the schools' lawyers told the justices, “the department instead has ignored its regulations, foregone adjudication altogether and plans to cancel and refund billions in loans for hundreds of thousands of borrowers.”

The schools' brief said, “The secretary's claimed authority amounts to nothing less than the power to cancel, en masse, every student loan in the country.”

The schools argued that they were harmed by the settlement because it hurt their reputations and subjected them to the possibility that the government would seek to recoup the forgiven loans from them.

“Being publicly branded a presumptive wrongdoer by one's primary federal regulator based on undisclosed evidence (or no evidence at all) — without any opportunity to defend oneself — seriously damages a school's reputation and goodwill,” the brief said.