A decades-old provision called “compromise and settlement” authority allows the Department of Education to opt out of collecting debt
by / 9/23/2019

“Right now, more than 44 million Americans hold nearly $1.6 trillion in student debt, and this debt is ruining lives. It prevents people from buying a house or car, getting married, and starting a family. To activists, it’s a policy failure. “The idea of making individuals and families pay out of pocket for something that’s a right and public good is wrong,” says Ann Larson, co-founder of the Debt Collective, an organization that advocates for student debt cancellation. Both Elizabeth Warren and Bernie Sanders have boldly called for student debt to be forgiven, giving students financial freedom and allowing a reset for the tragic way we finance higher education.

Clearly, such a plan would run into resistance from Mitch McConnell and Republicans in Congress, and perhaps even some Democrats.  But Warren and Sanders don’t need Congress to cancel at least 95 percent of all outstanding student debt. The answer, according to Luke Herrine, a Ph.D. student in law at Yale, lies with an obscure statute dating back to the Eisenhower presidency known as “compromise and settlement” authority. This authority was granted to the Department of Education first in 1958 and then codified further in the Higher Education Act of 1965.

Herrine, who recently finished a public draft of a paper on the subject, explained in an interview that compromise and settlement operates similarly to the concept of prosecutorial discretion, a “whole line of jurisprudence” that “is not really something the courts can question.” For example, if someone hits your car, you have standing to sue. But there’s nothing that says you must sue. Similarly, the Department of Education can just decide not to collect on student loans.

Compromise and settlement gives the Education Department this explicit authority. Herrine writes: “ED has absolute discretion to determine when to stop collections, when to collect less than the full amount, and when to release debtors’ claims in toto.” This power has grown in potential scope over time. In 2010, President Obama signed the Student Aid and Fiscal Responsibility Act, a bill ushered in as part of the Obamacare law. SAFRA eliminated middleman banks that issued student loans with a government guarantee, instead creating new lines of credit for students directly from the Department of Education. This meant that after 2010, virtually all student loans became public loans. Today, the government is responsible for $1.5 trillion of the $1.6 trillion in student debt. And these loans are the easiest to cancel through compromise and settlement: The government can simply opt out of collecting on them.

The few privately collected student loans still out there would be more difficult to deal with; Herrine writes that the Department of Education “would have to use its powers creatively to obtain possession.” In his paper and in our interviews, Herrine explains that much of this thinking dates back to a Supreme Court case. In Heckler v. Chaney (1985), several inmates on death row argued that the drugs that would be used to kill them were not approved by the FDA for that purpose, and therefore the drugs’ manufacturers violated the Federal Food, Drug, and Cosmetic Act. But the FDA declined to enforce the act in this case.


This upheld an important precedent: An agency’s actions are presumptively unreviewable by the court when it comes to refusing to exercise enforcement. For the student debt case, Herrine argues, this precedent means that a court may view any decision to settle or cancel debt as similarly unreviewable. “I think there’s a real question about who the fuck would sue and what would their suit be?” Herrine says.

It would be hard for someone to show that they had been harmed by a decision not to collect on student loans, and therefore hard to show that they have standing in court. The most likely possibility would be a private servicer whose job it is to collect on student loans because, with the government declining to collect on them, they’re out of a job. But even so, Heckler v. Chaney seems to indicate that this is just not reviewable by the courts.

That’s not to say there won’t be roadblocks. The scale of the debt forgiveness might require sign-off by the attorney general. If the debt is considered revenue to the federal government, the Office of Management and Budget would similarly have to approve a large, long-term loss. And finally, the next president would need to make sure that the debt forgiveness isn’t taxed, given that cancellation of debt is considered a form of earnings. “That would turn debt to the Department of Education into debt to the IRS, [with] no repayment plan, just liens on the house,” Herrine says.


But the next president could surmount all of these hurdles, should he or she instruct the agencies accordingly. To pull this off, a president would need strong convictions amid what would surely be howls of protest from deficit hawks, says Elizabeth Popp Berman, sociology professor at the University of Michigan. “I can’t think of another example where an executive agency has made a budgetary decision on the scale of the amount of money involved with a widespread debt cancellation.”


Canceling student debt is no new idea. The Department of Education already uses a bevy of programs to alleviate debt for certain populations. There’s a program to discharge the debt of permanently disabled veterans, a program that reduces interest rates to zero for service members deployed to a combat zone, and a program to cancel loans that were fraudulently issued, like for worthless diplomas from predatory for-profit colleges.

There’s also the Public Service Loan Forgiveness Program. It forgives the remaining balance on direct loans for public servants—including public employees, teachers, and nonprofit workers, equaling roughly one-third of all Americans—after they’ve made monthly payments for 10 years. The Trump administration has looked coolly on many of these programs. In the past year, over 54,000 requests for Public Service Loan Forgiveness were processed and just 661 were granted relief.

But Trump did just recently speed the cancellation of debt for 25,000 disabled veterans, under the Higher Education Opportunity Act of 2008, after criticism that the vets weren’t getting the relief they were owed. In other words, the conservative idea that canceling debt is immoral—students made these choices, after all—holds no water. We cancel debt for students all the time. The difference is that compromise and settlement would completely alter the current student debt ecosystem.

The issue of student debt cancellation reached its highest pitch after revelations about the for-profit college sector. These companies used deceptive marketing promising students job placement for technical training that never materialized, inducing them to borrow heavily to enroll. The same recruiting tactics are applied to forcing students to stay enrolled so that they keep taking out loans. In the end, students were largely unable to make more than they had before going to college—and now they owe thousands in debt.

Two lawyers for the National Consumer Law Center, Robyn Smith and Deanne Loonin, first identified compromise and settlement authority as a way to cancel for-profit debt in the spring of 2015, in a letter they wrote to the Obama Department of Education. But the department resisted the idea. Herrine picked up on Smith and Loonin’s suggestion, as one of many student activists who banded together to defend for-profit college students from having to pay fraudulent debts.

The activist work—which included a debt strike — refined their thinking about the essential unfairness of the higher-education finance system. One of the activists, Thomas Gokey, still carries about $37,000 in debt. “The value of education was drilled into me as a kid,” Gokey told me. “You should sacrifice anything else for it with the idea that there’s some economic mobility with it. I believed all of that. I no longer do but I still believe in education.” In interviews, several people told me that the Education Department feared that using compromise and settlement to cancel broad swaths of debt for defrauded students would be an implicit admission of its failure—over decades—to ensure sufficient oversight of for-profit colleges.

Robyn Smith rejects that line of thinking. “The federal government isn’t there to just make money,” she says. “They’ve got to grant relief when they fail to do their job.” Or maybe the department officials wanted to keep their career options open. One of then-Education Secretary Arne Duncan’s deputies now works for the company that owns the for-profit University of Phoenix, and another works for a for-profit company that sells online technology to colleges.

Using compromise and settlement authority would be transformative. First, it would help end abuse by student loan servicers, which have been repeatedly cited in lawsuits for failing to identify alternative payment options for students and squeezing them for unnecessary payments and extra fees.  It would also have powerful macroeconomic effects. The Federal Reserve has released numerous papers indicating that runaway student debt has hampered the housing market. A student who doesn’t come out of college with a mortgage, in the form of loan debt, is more likely to purchase a home or a car, and that money cycles through the economy.

Levy Economics Institute paper even makes the case that canceling debt is affordable, because of the positive economic effects. The paper estimates that canceling student debt could increase gross domestic product by $86 billion to $108 billion per year, which offsets the effect on the deficit. It would also reduce unemployment, creating at its peak 1.2 million to 1.5 million jobs annually. Some of the biggest beneficiaries of student loan forgiveness would be working-class people who often don’t land high-paying jobs or inherit wealth, and thus have little cushion to pay off mammoth loans.


Black borrowers in particular struggle to pay off their student debt due to the historic racial wealth gap. Leaving them saddled with it only compounds this inequity. While some have criticized student debt cancellation as not doing much in the way of wealth redistribution, the benefits to students of color and those who happen to be poor would be life-changing.

Canceling student debt doesn’t solve the whole problem. If colleges remain as expensive as they are now, debt will continue accruing. But cancellation could force a conversation about a better way to finance higher education, one that doesn’t inevitably result in a $1.6 trillion debt burden on people who are just starting their working lives. We’re already seeing that conversation begin. “I think it’s been kind of amazing of what’s happened over the last four months or so that all of a sudden that debt cancellation has gone into being one of these fringe-y ideas to something that’s seriously being debated by Democratic presidential candidates,” says Berman.

As Herrine says, a president who wants to forgive student debt doesn’t need to do anything except appoint the right person as education secretary. “The fact that we are not helping these people really reflects badly on who we are and our leadership,” says NCLC’s Smith. “You can look at a country and see what kind of country it is by seeing how it treats poor people.”




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