Paul L. Caron
Dean



Wednesday, June 29, 2016

Law Students May Use Department Of Education's New Fraud Defense To Loan Repayment Aimed At For-Profit Colleges To Discharge Law School Loans

BuzzFeed News, Law School Grads Could Be Next To Have Student Loans Cancelled:

Law graduates, many with more than $100,000 in debt, could soon seek to have their loans cancelled. And some may have a convincing case.

They made misleading claims about how many of their students were likely to find a job, obscuring the grim reality of how few get employment in their field. They buried their graduates in piles of debt they could not reasonably repay, and admitted unqualified students in pursuit of tuition revenue. They often failed to educate their students well enough to pass the tests required to land a job. And the watchdog that oversees them is facing sanctions from the Education Department.

This might sound very much like the scandal-ridden world of for-profit colleges. But since the recession, it has also become an accurate way to describe some American law schools.

And just as for-profit schools are leaving taxpayers on the hook for potentially billions of dollars of student loans that may need to be cancelled, some law schools are now also on shaky footing. In proposing an expanded and relatively generous student debt forgiveness rule last week, the Education Department may have opened itself up to an onslaught of claims by law graduates — a group of highly indebted and legally savvy students with a history of being misled by their schools.

If those students can successfully convince the Education Department they were defrauded by schools, it could be brutally expensive for taxpayers. There are far fewer law school graduates than there are of massive for-profits, but they carry much, much higher debt loads: $130,000, on average, for private law school students. That number climbs even higher for some schools that have faced accusations of misleading their graduates — like San Diego-based Thomas Jefferson Law School,  where students owe an average of more than $180,000, or for-profit law schools, where the debt load is above $200,000.

That debt isn’t up for cancellation yet. So far, the vast majority of the 20,000 debt relief claims that poured into the Education Department since 2015 have come from a small cluster of for-profit colleges. They are almost exclusively confined to undergraduate degrees.

But last week, the Education Department proposed a final rule that would codify a so-called “defense to repayment” provision — which allows defrauded students to have their loan debt forgiven — into federal law.

Critics, who say the defense-to-repayment language is too broad, worry that loan forgiveness claims could spread rapidly to non-profit colleges and especially to graduate schools, where students take on far more debt. That would ratchet up the cost to taxpayers significantly. ...

The Education Department’s proposed guidelines for defense to repayment claims may be kinder to law school students asking to have their loans forgiven than the court system.

The original language, buried in a promissory note signed by federal loan borrowers, said only that borrowers could claim loan forgiveness if their school “did something wrong” that “would give rise to a legal cause of action … under applicable state law.”

But the new, more detailed rules specify that student loan borrowers are eligible for forgiveness if their schools made a “substantial misrepresentation,” inducing students to enroll based on “any statement that has the likelihood or tendency to mislead under the circumstances” or “omits information.”

That standard doesn’t require schools to intentionally have intentionally misled students, said Jones, the former Education Department official. And while in court cases law schools can fight back against students’ allegations, that is not usually true in defense to repayment cases, where students simply report to the Education Department what they’ve experienced and provide supporting evidence. ... Even though they’ve failed in courts, the lawsuits could provide significant fodder for law school students in their defense to repayment claims.

https://taxprof.typepad.com/taxprof_blog/2016/06/law-students-may-use-department-of-educations-new-fraud-defense-to-loan-repayment-aimed-at-for-profi.html

Legal Education | Permalink

Comments

This will cause the levy to break! Just wait until Congress learns that it will be holding the bag for $1bln in law loans because of schools deceptive practices. I foresee no more unlimited GradPlus loans for law schools and the shutting of 30 or 40 schools as we right size.

Posted by: Jojo | Jun 29, 2016 6:39:58 AM

And please list the number of successful lawsuits against law schools for deceptive practices, since it is "so obvious" that law schools engaged in fraud. I can wait....

Posted by: Anon | Jun 29, 2016 7:38:25 AM

@Jojo,

While I also tend to believe that either GradPLUS or IBR plan eligibility for law students will be revisited when the HEA is reauthorized after the election, make no mistake: private lenders will absolutely no hesitate to lend every penny needed for any 0L to attend any law school. This is how it was for many years before GradPLUS, and it is how it will be after GradPLUS, presuming private loans remain nondischargeable and easily securitized. Of course, given that one must always make full payments on private loans or swiftly default, starting salaries for law school grads will become brutally important. To pick one midpack law school at *random,* Seton Hall's median student loan debt, after interest, average undergrad debt, and bar loans, but also including a $25k per year median tuition discount, is about $213k - or a nearly $2400/month student loan payment. The school's median starting salary, per NALP, is but $50,707, which is about $3700/month after fed/state/FICA. Let's see how comfortable people are putting prospectives in a situation where 2/3 of their takehome will go to student loan payments.

Posted by: Unemployed Northeastern | Jun 29, 2016 8:00:57 AM

Yes, anon, nothing wrong with law school outcomes. I mean, it's not like the Department of Education is mulling the removal of the ABA's accreditation powers over "student achievement" and "graduates' debt levels." No, wait - that's exactly how it is. And believe me, the Dept of Ed knows exactly how many recent law school grads are making their standard or even extended student loan payments. $63k median starting salary against $140k average student loan debt (exclusive of undergrad loans, with >80% of law students borrowing)... not a pretty picture.

Posted by: Unemployed Northeastern | Jun 29, 2016 8:31:42 AM

Well done Anon.
Enroll in law school! We're not legally liable for fraud!! Obviously that's good enough for people who can't clear the high 130s/ low 140s on the LSAT. But maybe there's a reason why a good number of people with higher LSAT scores are steering clear, or holding out only for elite schools or unconditional scholarship money before enrolling. But hey law schools didn't commit a prima-facie case of fraud. WOO-HOO!!

Posted by: Cent Rieker | Jun 29, 2016 8:40:30 AM

Anon: Do you honestly believe that fraud didn't take place? That, for example, many schools ranked say 15 to 75 didn't adverstise on their websites, year after year, expected starting salaries in the ballpark of $100k - $160k, fully knowing that the expected outcome was really closer to about $55k (in good times and bad)? You simply deny that this happened? The advent of Law School Transparency, scam blogs, books about this, etc., is all just a coincidence?

Posted by: Jan | Jun 29, 2016 9:38:58 AM

The issue is not "deceptive practices," The problem is that the dozens of law schools accredited since 1990 or so look, taste, smell and feel an awful lot like the correspondence schools found in the ad pages of any 50s-60s era Popular Mechanics or Popular Science Magazine. At least you knew what you were getting (a come on) and it didn't cost the tax payers $200K for that junk.

Posted by: Captain Hruska Carswell, Continuance King | Jun 29, 2016 10:59:31 AM

"Do you honestly believe that fraud didn't take place?"

Yes. That's what court after court and even one jury has concluded, in NY, Michigan, Florida, California, Illinois, etc.

Do you think some all powerful cabal of torts teachers somehow bribed federal and state judges and juries?

Posted by: Courts | Jun 29, 2016 11:48:51 AM

If it is so obviously fraud, there must be dozens/hundreds of successful plaintiffs recovering damages from wrongful conduct. I just missed those headlines where that happened, so thought you could help me.

OTOH: if there arent such cases, then isnt it, by definition, not fraud?

Posted by: Anon | Jun 29, 2016 12:05:11 PM

"if there arent such cases, then isnt it, by definition, not fraud?"

Has it ever occurred to you that most potential plaintiffs had strong reasons not to bring suit?

Posted by: Jan | Jun 29, 2016 12:49:06 PM

The caveat emptor posts here by likely law profs reveal one thing: law schools need to have skin in the game. And for better or worse, pieces are being moved into position for that to happen in the near future. Limited GradPLUS? Limited IBR eligibility for law school grads? A new accreditor, perhaps. Or maybe even law schools being liable to make the government whole for the losses it will take on their grads who are enrolled in IBR/PAYE/REPAYE. All of these ideas and more are actively being floated around DC. You reap what you sow.

Posted by: Unemployed Northeastern | Jun 29, 2016 1:32:01 PM

@Anon,

"Come to law school! Like Trump University, we haven't yet been found guilty of fraud!" Great marketing line, that.

Posted by: Unemployed Northeastern | Jun 29, 2016 2:53:31 PM

You said there was fraud, and my response was: I dont think so because if there was, someone would prove it. Then you mock me for suggesting there was no fraud, saying a law school would affirmatively advertise as such. I remind you that my response - there is not fraud - was not an advertisement, but a response to an unfounded allegation that you, UNE, and others seem to throw around like it doesnt mean anything. But it does. And it would mean that someone has proven it. Which they havent.

No wonder no one comments on here except scambloggers anymore.

Posted by: Anon | Jun 29, 2016 6:26:43 PM

Anon.: Did the following happen, yes or no? Many schools ranked say 15 to 75 advertised on their websites, year after year, expected starting salaries in the ballpark of $100k - $160k, fully knowing that the expected outcome was really closer to about $55k (in good times and bad).

Posted by: Jan | Jun 29, 2016 8:56:38 PM

No, Anon, I never said there was fraud. But good reading analysis.

Posted by: Unemployed Northeastern | Jun 29, 2016 9:12:50 PM

I don't believe the law schools committed fraud. They were loose with the data or were like weather forecasters....attempted to predict the weather. Car makers when they predict gas mileage and one never achieves it. VW committed fraud. An intentional act to deceive. They just didn't get it wrong. Law Schools now have the data and employment statistics and refuse to change or close. They refuse to acknowledge the crisis in the legal profession. 1.8 million lawyers and multiplying. The pie is not large enough for everybody with a law license.

Posted by: Captain Hruska Carswell, Continuance King | Jun 29, 2016 9:34:51 PM

"I dont think so because if there was, someone would prove it."

Reminds me of a joke on the efficent market hypothsis. two economists are walking down the street, and one spots a 20$ bill on the sidewalk. The other says "Don't bother picking it up, if it was real someone else would have picked it up already."

Posted by: terry malloy | Jun 30, 2016 3:25:24 AM

@ terry malloy

In this case it's more like 10 judges and ten jurors pick the dollar bill (fraud claim) up, test it for authenticity carefully, and then discard it, and then you go dumpster diving to dredge it up.

Posted by: Courts | Jun 30, 2016 9:49:57 AM

If these law school grads truly are "a group of ... legally savvy students," it suggests that the law education was sound. So the fraud would be .....

Posted by: L Belle | Jun 30, 2016 10:10:29 AM

The reason more lawsuits weren't filed is very simple: the defrauded students didn't want to start their careers bringing lawsuits against their alma maters. For those who are in disbelief that schools reported expected salaries that were more than double what should have been reported, do a quick Google search, for example, for the WSJ article about Scott Bullock in 2007 (before the downturn, mind you). Also, consider the precipitous decrease in law school matriculants coinciding directly with the time when schools came under increasing pressure not to post deceptive salary figures -- the difference in the number of matriculants roughly represents the number of students who were getting defrauded each year.

Posted by: Jan | Jun 30, 2016 2:20:22 PM

oh, I am not convinced of fraud, but the cases are so close as to put law schools in the same category as hair tonic salesman and real estate seminar classes. If a financial advisor sold a security to an pensioner with the kind of pitch, the financial industry regulators would pull their license and send them out of the industry on a rail.

Thats the sleaze with whom law schools share the 'puffery' defense.

Posted by: terry malloy | Jun 30, 2016 4:18:06 PM

"also, consider the precipitous decrease in law school matriculants . . . " which followed a lot of inaccurate press claiming law school was a sure route to unemployment and crushing debt.

Unfortunately, people do believe what they read in the newspapers, even when its not fact checked or remotely connected to reality.

Posted by: Cause and effect | Jun 30, 2016 5:58:32 PM

@ terry malloy

It's not a "puffery" defense. The courts have said that students understood what the employment stats meant, or would have with a minimum amount of research, and there was nothing misleading or fraudulent.

Posted by: Cause and effect | Jun 30, 2016 6:01:36 PM

It looks like Mr. Bullock has done okay for himself.
http://yournjattorneys.com/about-the-firm/

Posted by: bullock | Jun 30, 2016 6:05:08 PM

So all these law students, defrauded by their schools and angry as the comments make them seem, all forego a valid legal claim in order to preserve career options which they themselves do not believe exist? Sorry, you're going to have to do better than that.

Posted by: Anon | Jun 30, 2016 6:48:09 PM

"The reason more lawsuits weren't filed is very simple: the defrauded students didn't want to start their careers bringing lawsuits against their alma maters."

A lot of law suits were filed. More than 20 by one lawyer alone.
http://www.anziskalaw.com/law-school-litigation.html
This list isn’t counting all of the lawsuits that have failed—Cooley, Thomas Jefferson, Florida Coastal, New York Law School, Brooklyn, around 4 cases in Illinois and around 4 more in California.

So we’re talking about maybe 30 or 40 lawsuits.

And there are only 200 ABA approved law schools.

If the typical law school is graduating between 100 and 500 students every year, and graduates up to 10 years out are considering suing, that’s between 1,000 and 5,000 potential litigants for every law school.

It just takes one to sue a law school. One unhappy person out of several thousand. It costs plaintiffs nothing since plaintiffs lawyers work on contingency. And if law students really are so hopeless and miserable, they have nothing to lose by suing.

So plenty of law suits; just no successful law suits. Tried, and failed.

If this one plaintiffs lawyer sues enough law schools and forum shops the heck out of his theory, he might eventually find a judge willing to play along. But most judges who have heard these suits think they are not meritorious, and that's with the lawyers going after the easiest targets first.

Posted by: litigation | Jun 30, 2016 9:22:15 PM

No question there was deception by the schools. Courts actually found such deception before bending over backwards to excuse liability on the ground that students were sophisticated consumers or that certain consumer statutes do not apply to Ed services. Translation "it's your own fault for believing the lies, kid."

A new rule from DOE, however, can define "fraud" differently and here does so. I'd think that given the Sixth Circuit's finding that some published Cooley come-ons were objectively untrue.

Posted by: Jojo | Jul 1, 2016 4:59:22 AM

That the DOE might forgive loans taken out in reliance on such untruths (aka lies!!!!)

Posted by: Jojo | Jul 1, 2016 5:00:43 AM

"So all these law students, defrauded by their schools and angry as the comments make them seem, all forego a valid legal claim in order to preserve career options which they themselves do not believe exist? Sorry, you're going to have to do better than that."

Let's say your law school was posting $120,000 but knew the reality was closer to $55,000 (less than half), and you were especially diligent and landed an opportunity for $65,000 at graduation (or some similar variation of this with the numbers slightly adjusted). Are you going to turn around and sue your alma mater, which is the school on your bio and the school your friends attended, or are you just going to be pissed as hell and warn friends and family considering law school that the $120,000 figure is fraudulent? (Surely, $65,000 is not a bad salary, but consider that you passed up the opportunity to attend another law school or an MBA, etc.) Just because most plaintiffs in this situation didn't bring claims doesn't mean it wasn't textbook fraud. It would have been interesting to see someone bring suit against a school ranked 15th to 50th, as presumably the fraudulent stats would have been more believable than a school ranked say 150th and posting a six figure salary. Now that the cat is completely out of the bag about the real stats at the T50 schools, look at the drop off in matriculants.

Posted by: Jan | Jul 1, 2016 7:12:30 AM

"also, consider the precipitous decrease in law school matriculants . . . " which followed a lot of inaccurate press claiming law school was a sure route to unemployment and crushing debt."

Yes, how dare newspapers print publicly available, required employment and debt figures from the ABA, NALP, and law schools themselves. Truly shameful.

Posted by: Unemployed Northeastern | Jul 1, 2016 7:31:10 AM