For-profit colleges lose appeal to stop debt relief settlement

A group of for-profit colleges that challenged a legal settlement that canceled $6 billion in student loans lost its appeal to stop that agreement from taking effect.

A divided three-judge panel of the U.S. Court of Appeals for the Ninth Circuit ruled Tuesday that the colleges lacked the necessary standing to challenge the settlement, which was approved in November 2022 and ended a long-running lawsuit over the Education Department’s handling of applications for debt relief under a process known as borrower defense to repayment. Under borrower defense, borrowers can apply for loan forgiveness if they’ve been defrauded or misled by their college.

The settlement discharged the loans for more than 200,000 borrowers who attended one of the more than 150 institutions identified by the Education Department, including those that appealed. Most of the institutions on the department’s list, known as Exhibit C, are for-profit colleges or universities.

Lincoln Educational Services Corporation, Everglades College Inc. and American National University argued in an appeal that the department didn’t have the authority to cancel loans and that the settlement violated the due process rights of the colleges included on the list. Additionally, they argued that the department damaged their reputation by including them on Exhibit C. A district court judge rejected the colleges’ challenge in February 2023. They appealed to the Ninth Circuit.

Judge Jennifer Sung, joined by her appeals court colleague Danielle J. Forrest, wrote that while the department’s actions could cause reputational injury, nothing in the settlement prevented the colleges from suing “to remedy the alleged reputational harm in a separate lawsuit.”

“The schools do not identify any provision in the settlement agreement or settlement approval order that formally strips them of any legal claim or defense, or any contractual right,” Sung wrote. “The settlement does not compromise any of the Schools’ rights or impose any obligations or liabilities on them.”

Judge Daniel P. Collins wrote a dissenting opinion, arguing that the lower court judge had erred in approving the settlement.

“First, the government lacks the necessary statutory authority to grant the relief contained in the settlement,” Collins wrote. “Given that the relief granted by the department in the settlement exceeds its statutory authority, the settlement is unlawful and should not have been approved.”