Democratic attorneys general from 18 states and the District of Columbia filed a lawsuit on Thursday against the Education Department and its secretary, Betsy DeVos, challenging the department’s move last month to freeze new rules for erasing the federal loan debt of student borrowers who were cheated by colleges that acted fraudulently.
The rules, known as borrower defense, were finalized in October by the Obama administration after years of negotiation and review, and they had been scheduled to take effect on July 1. But after President Trump took office, Ms. DeVos paused the planned changes, citing a federal lawsuit filed in May by an association of for-profit colleges in California that is seeking to block the rules.
Ms. DeVos also criticized the rules, calling them “a muddled process that’s unfair to students and schools,” and she said she would establish a new rule-making committee to reconsider the matter from scratch.
In their lawsuit, filed in Federal District Court in Washington, the states called the agency’s rationale for the delay — the California lawsuit — a “mere pretext” for repealing and replacing rules that had already been finalized. The states are seeking to have the rules restored.
“Since day one, Secretary DeVos has sided with for-profit school executives against students and families drowning in unaffordable student loans,” said Maura Healey, the Massachusetts attorney general, who led the multistate coalition. “Her decision to cancel vital protections for students and taxpayers is a betrayal of her office’s responsibility and a violation of federal law.”
A spokeswoman for the Education Department declined to comment directly after the lawsuit was filed, saying that the department’s lawyers were reviewing it.
Also on Thursday, two student borrowers sued the Education Department in the same federal court over the delayed rules.
The students both attended the New England Institute of Art in Brookline, Mass., a for-profit school that stopped enrolling new students in 2015. Its parent company, Education Management Corporation, agreed that year to pay $95 million to settle a government lawsuit charging the company with making illegal payments to recruiters.
The Obama administration’s push to streamline and expand the borrower defense process came after hundreds of for-profit colleges were accused of widespread fraud and collapsed, leaving their enrolled students with huge debts and no degrees. The failure of two mammoth chains, Corinthian Colleges and ITT Technical Institute, gave the issue added urgency.
An existing federal law allows borrowers to apply for loan forgiveness if they attended a school that misled them or broke state consumer protection laws. Once rarely used, the system was overwhelmed by applicants after the wave of for-profit failures. Corinthian’s collapse alone led to more than 15,000 loan discharges, with a balance of $247 million.
Taxpayers get stuck with those losses. The rules that Ms. DeVos froze would have shifted some of that risk back to the industry by requiring schools at risk of closing to put up financial collateral. They would also ban mandatory arbitration agreements, which have prevented many aggrieved students from suing schools that they believe have defrauded them.
The two student borrowers who sued the Education Department, Meaghan Bauer and Stephano Del Rose, focused in their lawsuit on that arbitration clause. They plan to sue the New England Institute of Art, which they said misled them about its graduates’ job prospects and earnings, but they expect that lawsuit to be thwarted by the contract they signed with the school, which included a clause requiring that disputes be addressed through arbitration.
The new rules would have blocked many schools from enforcing those clauses. Ms. Bauer and Mr. Del Rose said they were waiting for those rules to take effect before filing their lawsuit.
Both borrowers submitted applications to have their federal loans discharged under the existing borrower defense system. Those applications have been pending for nearly two years, they said.
Correction: July 6, 2017
An earlier version of this article misstated the day Massachusetts filed its lawsuit. It was filed on Thursday, not Tuesday.
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