Education Law

US uses 'compromise and settlement' to erase law grad's $329K debt; would it work on grander scale?

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A little-known procedure has helped a recently retired 91-year-old law school graduate who took out about $29,000 in federal loans that have ballooned to $329,000 in the 35 years since her graduation.

The U.S. Education Department used its “compromise and settlement” authority to cancel the woman’s debt after receiving a call from a New Yorker reporter who wrote about her plight. The New Yorker’s latest coverage is here.

The woman identified as Betty Ann enrolled at the New York University School of Law at age 52 in 1983. Later, she worked for about 30 years at a nonprofit that paid her close to the minimum wage.

An Education Department ombudsman contacted by the New Yorker checked the records and “realized that Betty Ann had endured numerous administrative bungles,” the article reports. Those bungles included a failure to notify Betty Ann of a repayment plan that offers lower monthly payments and forgiveness after 20 or 25 years.

The ombudsman said Betty Ann could pursue two ways to cancel her debts with the department. She could claim a total and permanent disability with a doctor’s note. Betty Ann didn’t like that opinion, partly because she had recently retired and it wouldn’t be truthful to say she couldn’t work.

The second option, which resulted in the cancellation of Betty Ann’s debt, was for the department to use its “compromise and settlement” authority. It stems from the 1965 Higher Education Act that created the federal student loan program. That law granted the secretary of education the right to “enforce, pay, compromise, waive, or release any right, title, claim, lien or demand.”

Typically, people pursing a compromise and settlement send a letter to the Education Department that petitions for a discharge. Robyn Smith, legal counsel for the National Consumer Law Center, told the New Yorker that such requests are typically granted when it’s too costly to pursue collection of a loan or the original promissory note has been lost.

The Biden administration used compromise and settlement authority on a broad scale to cancel debts for students who attended Corinthian Colleges before the chain’s collapse. Those students had credits that couldn’t be transferred to other schools.

Biden relied on a different authority for his debt-relief program, which aims to cancel up to $20,000 in student debt for borrowers below certain income levels. The administration said it could act under the Higher Education Relief Opportunities for Students Act, or the HEROES Act. The 2003 law allows waiver of student-aid program rules in times of war or national emergency—in this case, the administration said the COVID-19 pandemic constituted an emergency.

Biden’s debt-relief program has been challenged and is currently before the U.S. Supreme Court. One issue before the court is whether the states that sued have standing. The second is whether the administration exceeded its authority or acted in an arbitrary and capricious manner in adopting the plan.

If the Supreme Court rules the Biden administration exceeded its authority under the HEROES Act, the administration could theoretically cite its “compromise and settlement” authority, according to the New Yorker.

Luke Herrine, an assistant professor at the University of Alabama School of Law, told the New Yorker that the compromise-and-settlement authority should “still be on the table as an option.”

But University of Texas School of Law professor Stephen Vladeck saw a downside. “Probably, the Supreme Court would take that as Biden thumbing his nose at them,” he told the New Yorker.

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