In Re: The Feds and Students vs. Taxpayers

A version of this article was sent to the Wall Street Journal for publication.

Mr. Jorge Klor De Alva and Mr. Mark Schneider have crafted a contradictory, and otherwise erroneous, note on President Obama’s new Student Aid Enforcement Unit (SAEU).  In an article appearing in the Wall Street Journal on March 3, 2016, titled “The Feds and Students vs. Taxpayers,” the two gentlemen take issue with the remedies afforded to students against a institution of higher education’s—profit or nonprofit, private or public—predatory recruiting tactics, and false or misleading statistical data (graduation, employment, etc.).

The SAEU will use remedies in their arsenal to adjudicate claims on a case-by-case basis regarding whether a student’s federal educational loan should be forgiven.  In addition, the government has the option to pursue the educational institution for reimbursement of federal educational loans accepted by the institution.

The gentlemen make much hay that the remedies afforded to SAEU are at the expense of the taxpayer.

Students are Taxpayers and Debt is a Liability at Issuance

Conveniently, the gentlemen forget that students are also taxpayers.  Indeed, whether it was before, during, or upon departing from an educational pursuit a student is a taxpayer in the fullest sense.  Students have, are, and will continue to pay taxes on goods, services, and income.  Therefore, students, like taxpayers at large, pay collectively into the pool of federal educational loans.

Additionally, the gentlemen argue that “federal educational loans that are forgiven become liabilities of the government,” and, in turn, the taxpayers.  This is a weird perception of how federal educational loans work, and is flatly incorrect.

Federal educational loans are liabilities of the government and the taxpayer upon issuance; not, upon default or if the federal educational loan is forgiven.  Even though the student has to repay federal educational loans, the cost of a student’s education is fronted by the government and the taxpayers.  Thus, it becomes a liability the moment federal educational loans are disbursed.  Typically, disbursement for tuition occurs within the first thirty days of the semester.

The Issue of Fraud

Before going any further, categorizing the acts committed by an educational institution is required.  This necessity arises as a matter of law to determine the remedies available to students, the government, and taxpayers.

Where, as is here, educational institutions utilize questionable practices in the form of either predatory recruiting tactics, or have published false and/or misleading statistical data (graduation rates, employment, wages, etc.) and the student relies on such information to their detriment there can be no question that fraud has been committed.  And, where tuition is paid with federal dollars through federal educational loans, the fraud is being committed on the government and taxpayers.

Thus, because taxpayer dollars were provided to an educational institution utilizing questionable practices, and where those questionable practices were determinative factors in eliciting the student’s attendance the educational institution has defrauded the government and taxpayers.

Remedies for Federal Educational Fraud

After creating a spurious world of how federal educational loans operate and their pitfalls, Mr. De Alva and Mr. Schneider turn to “proper” remedies.  Here, the two gentlemen argue that forgiving the debt, or holding the educational institution liable is a mere perversion of policy.

Instead, they opine that the Department of Education (DoE) should continue their current trajectory, where the DoE requires educational institutions to “establish policies and procedures that produce accurate and verifiable documentation on job-placement rates and post-graduation earnings.”  This simply misses the point.

It is true that in the past, and currently, when an educational institution is found to have questionable practices (information, statistics, or recruiting) the DoE can require the institution to “establish policies and procedures that produce accurate and verifiable documentation on job-placement rates and post-graduation earnings.”  What Mr. De Alva and Mr. Schneider fail to recognize is that these remedies only prevent future fraud.  What should we make of the fraud already committed?

Therefore, these remedies fall short of addressing the fraud that has been committed on students, and, in turn, taxpayers.  Indeed, put in this context, no taxpayer would agree that defrauding the government would simply be rectified by the establishment of certain policies and procedures.

Additionally, the overlaxly remedy of establishing certain policies and procedures would be misplaced when compared to other remedies for fraud.  Virtually every act of fraud in other areas of law carry a penal and civil monetary consequence.  Further, what the two gentlemen argue here is that taxpayers should turn a blind eye to fraud, and, instead, offer difference to institutions that knowingly and willing utilized questionable practices to profit from taxpayer dollars.

In Conclusion

Mr. De Alva and Mr. Schneider seem content with allowing educational institutions defraud the government and taxpayers.  Indeed, their form of a “proper” remedy is requiring an educational institution found to have questionable practices to establish certain policies and procedures.

But, this remedy merely prevents future fraud, without speaking to the fraud that has been committed.  Moreover, this remedy is an outlier and extremely lax when compared to remedies for other forms of fraud in law (i.e. health care fraud, securities fraud, etc.).

Therefore, the government’s newly erected Student Aid Enforcement Unit provides the teeth necessary to combat questionable practices adopted by some educational institutions.  Furthermore, it offers the spear necessary for the government and taxpayers to recover funds disbursed under federal educational loans, which the government becomes liable for upon issuance.

Authored by: Jonathan J. Cianfaglione