A Memo on the Legal Mechanism For Cancelling Student Loan Debt

Apr 28, 2019

April 28, 2019

Re: Student Loan Cancellation

From: Laura Hanna and Ann Larson, Co-directors and Co-founders

We believe it is time that the Department of Education use its authority to stop collections on federal student loans. Nothing in the law prevents the Secretary of Education from doing so.

When it was first given the power to issue and collect student loans in 1958, the U.S. Department of Education also received the power to “compromise, waive, or release any right” to collect on them. This power is called “Compromise and Settlement” authority. When the Higher Education Act of 1965 made student loan authorities permanent, it solidified their power to compromise. Just as the Securities and Exchange Commission can cut low-dollar deals with banks that break the law, for example, the Secretary can settle with debtors for a fraction of what they owe or suspend the collection of student debt altogether.

Below you will find a detailed memo about this legal authority developed by the Debt Collective in collaboration with attorneys at the Project on Predatory Student Lending at the Legal Services Center at Harvard Law School.

Compromise and Settlement of Student Loans

This memo addresses (I) the sources of authority for the federal government to cancel existing student loan debts; (II) identifies useful interpretive materials; (III) provides examples of student debt cancellation; and (IV) identifies possible arguments against the cancellation of student loans.

I. Sources of Law

Two separate statutes—each with implementing regulations—set out the obligation of the federal government to collect debt owed to the United States, and specify the circumstances in which collection may be suspended and/or the debt cancelled. First, the Federal Claims Collection Act establishes general standards applicable across the government and confers responsibility on Treasury and the Department of Justice for overseeing the process. Second, the Higher Education imposes duties on the Secretary of Education with respect to the collection and compromise of federal student loans. The relevant sections of these statutes and regulations are excerpted below, with annotations in italics.

a. Federal Claims Collection Act of 1966, as amended by the Debt Collection Improvement Act, 31 U.S.C. 3701 et seq.

*§ 3701 Definitions: *

“claim” or “debt” means any amount of funds or property that has been determined by an appropriate official of the Federal Government to be owed to the United States by a person, organization, or entity other than another Federal agency. A claim includes, without limitation, funds owed on account of loans made, insured, or guaranteed by the Government[.]

Federal student loan = claim of the United States.

*§ 3711 Collection and Compromise: *

The head of an executive, judicial, or legislative agency

may compromise a claim of the Government of not more than $100,000 (excluding interest) or such higher amount as the Attorney General may from time to time prescribe that has not been referred to another executive or legislative agency for further collection action.(2)

Each agency has complete authority to cancel a claim if it is under $100,000. But the agency can’t cancel a debt if it has been referred to another part of the government (like DOJ for litigation, or Treasury for offset) for collection.

may suspend or end collection action on a claim referred to in clause (2) of this subsection when it appears that no person liable on the claim has the present or prospective ability to pay a significant amount of the claim or the cost of collecting the claim is likely to be more than the amount recovered. (a)(3)

Suspending/ending collection on a claim is distinct from compromise of a claim. An agency can make a decision that collection is a waste of resources, regardless of merits of the debt.

acts under (1) regulations prescribed by the head of the agency; and (2) standards that the Attorney General, the Secretary of the Treasury, may prescribe. (d)

Agencies have to take into account both its own regulations and the regs of DOJ and Treasury regarding debt collection.

A compromise under this section is final and conclusive unless gotten by fraud, misrepresentation, presenting a false claim, or mutual mistake of fact. An accountable official is not liable for an amount paid or for the value of property lost or damaged if the amount or value is not recovered because of a compromise under this section. (c)

Compromise is final but can be undone. Agency decision makers are not liable for their decisions to compromise debts.

b. Federal Claims Collection Standards (FCCS) (regulations of Department of Treasury & Department of Justice/Attorney General issued pursuant to 31 U.S.C. § 3711(d)(2))

§900.1 Prescription of Standards:

Regulations prescribe standards for Federal agency use in the administrative collection, offset, compromise, and the suspension or termination of collection activity for civil claims…unless specific Federal agency statutes or regulations apply to such activities.

If there is a more specific agency statute or regulation on point, it controls the actions of that agency. ** § 900.4 Compromise, waiver, or disposition under other statutes not precluded:**

Nothing precludes agency disposition of any claim under statutes and implementing regulations. The laws and regulations that are specifically applicable to claims collection activities of a particular agency generally take precedence over the FCCS.

Same.

§ 900.6 Subdivision of claims not authorized:

Debts may not be subdivided to avoid the monetary ceiling. A debtor’s liability arising from a particular transaction or contract shall be considered a single debt in determining whether the debt is one of less than $100,000 (excluding interest, penalties, and administrative costs).

Multiple loans made under the same master promissory note would be treated as a single debt.

§ 900.8 No private rights created:

The FCCS do not create any right or benefit, substantive or procedural, enforceable at law or in equity by a party against the United States, its agencies, its officers, or any other person. Failure of agency to comply with FCCS is not a defense to a debt.

Private citizens can’t sue the government for not following these regulations.

§ 902.1 Scope and Application (Standards for the Compromise of Claims):

Any agency may exercise such compromise authority for debts arising out of activities of, or referred or transferred for collection services to, that agency when the amount of the debt then due, exclusive of interest, penalties, and administrative costs, does not exceed $100,000 or any higher amount authorized by the Attorney General.

Treasury and DOJ can compromise federal student loan debts if the Department has referred the account for collection/litigation, up to $100,000.

§ 902.2 Bases for compromise:

Agencies may compromise a debt if the Government cannot collect the full amount because…the debtor is unable to pay the full amount in a reasonable time, as verified through credit reports or other financial information (a)(1)…the cost of collecting the debt does not justify the enforced collection of the full amount (a)(3), or there is significant doubt concerning the Government’s ability to prove its case in court (a)(4).

If there is significant doubt concerning the Government’s ability to prove its case in court for the full amount claimed, either because of the legal issues involved or because of a bona fide dispute as to the facts, then the amount accepted in compromise of such cases should fairly reflect the probabilities of successful prosecution to judgment, with due regard given to the availability of witnesses and other evidentiary support for the Government’s claim. In determining the litigative risks involved, agencies should consider the probable amount of court costs and attorneys fees pursuant to the Equal Access to Justice Act, that may be imposed against the Government if it is unsuccessful in litigation. (d).

The “significant doubt” basis is the closest fit to borrower defense, although the language of (d) implies that compromise occurs in a litigation context.

§ 902.3 Enforcement policy:

Agencies may compromise statutory penalties, forfeitures, or claims established as an aid to enforcement and to compel compliance, if the agency’s enforcement policy in terms of deterrence and securing compliance, present and future, will be adequately served by the agency’s acceptance of the sum to be agreed upon.

An empirical study of agency behavior in compromising/not pursuing statutory penalties it obtained in its enforcement activities shows that agencies do not collect these penalties. In the higher education context, the Department is authorized to levy fines and penalties on participating institutions for violating Department regulations (e.g., Corinthian was fined $15 million for misrepresentation). It’s interesting to put fines and penalties on the same plane as student loans and compare the Department’s actions.

** § 903.2 Suspension of Collection activity:**

Agencies may suspend collection activity on a debt when…the debtor has requested a waiver or review of the debt. (a)(3)

Agencies shall suspend collection activity during the time required for consideration of the debtor’s request for waiver or administrative review of the debt if the statute under which the request is sought prohibits the agency from collecting the debt during that time. (c)(1)

The Department argues that no statute precludes it from collecting student loans while a borrower defense application is pending.

If the statute does not prohibit collection activity pending consideration of the request, agencies may use discretion, on a case-by-case basis, to suspend collection. Further, an agency ordinarily should suspend collection action upon a request for waiver or review if the agency is prohibited by statute or regulation from issuing a refund of amounts collected prior to agency consideration of the debtor’s request. However, an agency should not suspend collection when the agency determines that the request for waiver or review is frivolous or was made primarily to delay collection. (c)(2).

The Department claims discretion to suspend collection while a borrower defense claim is pending. However, its imposition of a statute of limitations on refunds of amounts paid by a borrower who later establishes a borrower defense, means that it should not collect while a borrower defense application is pending. The Department’s continued collection implicitly suggests that it views borrower defense applications as frivolous.

§ 903.3 Termination of collection activity:

Agencies may terminate collection activity when the costs of collection are anticipated to exceed the amount recoverable (a)(3), the debt is legally without merit or enforcement of the debt is barred by any applicable statute of limitations (a)(4), or the debt cannot be substantiated (a)(5).

Substantiation does not include resolution of affirmative defenses.

§ 3711 requires agencies to sell a delinquent nontax debt upon termination of collection if such a sale is in the best interests of the United States.

§ 904.1 Prompt referral:

Agencies shall promptly refer to the Department of Justice for litigation debts on which aggressive collection activity has been taken and that cannot be compromised, or on which collection activity cannot be suspended or terminated. Preferably within one year. (a)

DOJ has exclusive jurisdiction over the debts referred to it. The referring agency shall immediately terminate the use of any administrative collection activities. The referring agency shall refrain from having any contact with the debtor and shall direct all debtor inquiries concerning the debt to the Department of Justice. (b)

The Department’s PCA manuals address its parameters for referring student loan debts to DOJ for litigation, but it is only available in redacted form. However, publicly available information shows that less than 1000 student loan collection actions are initiated every year. A recent review of such complaints shows that they largely seek to collect defaulted FFEL consolidation loans. I have no idea what this means, but one way of reading it is as an acknowledgment that student loan debts can be compromised.

c. Higher Education Act

§ 1082 Legal powers and responsibilities:

The Secretary may enforce, pay compromise, waive, or release any right, title, claim, lien, or demand, however acquired, including any equity or any right of redemption. (a)(6) (Part B, FFEL)

This provision was added by the 1986 amendments to the HEA and was inserted in the FFEL section of the statute, but is read to apply to Direct Loans as well, as reflected in Department regulations.

d. Department of Education regulations

34 C.F.R. § 30.70 How Does the Secretary exercise discretion to compromise a debt or to suspend or terminate collection of a debt?

The Secretary may compromise a debt in any amount, or suspend or terminate collection of a debt in any amount, if the debt arises under the FFEL, Direct, or Perkins Loan program. (e)(1)

The Secretary refers a proposed compromise, suspension, or termination of collection of a debt exceeding $1,000,000 arising under the FFEL, Direct, or Perkins Loan program to DOJ for review. (e)(2)

For non-student loan debts, the Secretary uses the standards of the FCCS. (a)-(c)

The Department’s compromise authority is not cabined to claims/debts under a certain amount, although the Department would ask DOJ’s view of a compromise/suspension/termination of a claim over $1,000,000. The Department does not look to FCCS for standards when it comes to student loan debts. Those are just entirely within its discretion (except if it has referred the debt to a different agency for litigation/collection).

*e. Common law * Even absent the statutory and regulatory authority identified above, the government has (and has always had) the authority to settle and compromise claims and debts. Intuitively, the power to create debt includes the power to cancel it. However, there has been some question over the years as to which part of the government is authorized to exercise this power. On some theories, the Constitution gives to Congress the power to dispose of the property of the United States. Article IV, section 3 provides that Congress “shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States[.]” This provision means that “[p]ower to release or otherwise dispose of the rights and property of the United States is lodged in Congress,” and thus “[s]ubordinate officers of the United States are without that power, save only as it has been conferred upon them by an Act of Congress or is to be implied from other powers.” Royal Indemnity Co. v. United States, 313 U.S. 289, 294 (1941). The creation of the Attorney General by act of Congress has long been read to encompass the power to compromise claims of the United States, so much so that

“argument would seem to be unnecessary to prove his authority to dispose of…cases[.]” Confiscation Cases, 74 U.S. 454, 458 (1868); id. at 457 (“Under the rules of the common law it must be conceded that the prosecuting party may relinquish his suit at any stage of it….”).

Within the administrative state, agencies considered themselves powerless to compromise claims of the United States absent a specific congressional directive authorizing them to do so. Prior to the enactment of the Federal Claims Collections Act in 1966:

[E]xisting law, with a few exceptions, restrict[ed] the authority of the agencies to deal adequately and realistically with claims of the United States arising out of their respective activities. If the agency c[ould] not collect the amount it believe[d] due the Government, it c[ould] do little more than refer it to the General Account Office which in turn must attempt collection on the same basis. Very few of the agencies c[ould] compromise such claims; that is, accept a lesser amount in full settlement even if such a settlement would be in the interest of the Government and justified by normal practice in business in the light of the debtor's ability to pay and the risks and costs inherent in litigation. Similarly the agencies c[ould] not terminate or suspend efforts to collect a claim even when the very futility of these efforts serve to add to the cost of government and therefore compound the loss to the United States. It [wa]s not until the matter is finally referred to the Department of Justice that it [wa]s possible to make compromise settlement. The committee notes that it is the present inflexibility in the law which has resulted in recurrent appeals to the Congress for relief. Many of the cases which ultimately became the subjects of private relief bills could have been resolved promptly and equitably on the agency level if the provisions of this bill were a part of the law.

1966 U.S.C.C.A.N. 2532, 2533

II. Interpretive Materials ** a. United States Department of Justice, Justice Manual**

Read in conjunction with 28 C.F.R. §§ 0.160-0.17, Authority to Compromise and Close Civil Claims and Responsibility for Judgments, Fines, Penalties, and Forfeitures, which delimit the authority of Assistant Attorneys General to accept settlement offers. Per these regs and the Justice Manual, 4-3.110, AAgs can accept compromises in civil cases where the difference between the gross amount of the original claim and the proposed settlement does not exceed $10 million or 15% of the original claim, whichever is greater.

b. PCA Manual i. Relevant parts redacted c. OMB Circular A-129

Revised January 2013

Applies to all credit programs of the Federal Government, including Direct loan programs and loan guarantee programs and loan insurance programs in which the Federal Government bears a legal liability to pay for all or part of the principal or interest in the event of borrower default.

OMB is responsible for monitoring agency conformance with FCRA; reviewing agency credit reporting standards; formulating and reviewing agency implementation of credit management and debt collection policy.

Departments and agencies shall manage credit programs and all non-tax receivables in accordance with their statutory authorities and the provisions of this Circular to protect the Government’s assets and to minimize losses in relation to social benefits provided.

d. Other Secondary Sources

Colin S. Diver, The Assessment and Mitigation of Civil Money Penalties by Federal Administrative Agencies, 79 Colum. L. Rev. 1435, 1443–44 (1979)

Mitigation clauses are found in conjunction with all types of statutes. The function served by, and indeed the need for, an express mitigation authority depends on the precise context. A mitigation power, in the classical sense, is most obviously useful in the enforcement of statutorily fixed penalties. The mitigation authority makes it clear that the decisionmaker need not be bound to impose the fixed penalty amount where it would be unjust to do so. In fact, Congress has delegated an express mitigation power in 178 of the 197 fixed-penalty statutes. A second function apparently served by mitigation clauses in court-assessment statutes is to delineate the *1444 allocation of settlement authority among the regulatory agency, the Justice Department, and the courts. A clause expressly authorizing the agency to mitigate a court-assessable penalty removes any doubts that the agency may accept payment in compromise of a prospective prosecution without approval by the Justice Department or a court.

Even in the absence of an express mitigation power, agencies have a general authority to compromise civil money penalty claims under the Federal Claims Collection Act of 1966,51 which authorizes the “head of an agency” to “compromise ... claims of the United States for money or property arising out of the activities of, or referred to, his agency.”52 This authority is more limited, however, than that arising from an express mitigation clause. First, there are several exclusions from the Act.53 Moreover, an express mitigation clause appears to confer a broader range of discretion to settle cases; the grounds upon which an agency may compromise a claim under the Claims Collection Act are implicitly limited to issues relating to the collectibility of the claim.54 A mitigation authority, by contrast, *1445 permits the agency to reduce the penalty for other reasons, such as the gravity of the offense or the culpability of the violator.

III. Examples a. Borrower Defense memos (redacted) i. Line from ITT memo makes it seem as though Department may be viewing borrower defense discharge as an exercise of its compromise and settlement authority in that it weighs the likely outcome of litigation:

January 10, 2017 Memo from BDU to Ted Mitchell re: Recommendation for ITT Borrowers Alleging That They Were Guaranteed Employment—California Students

“Given this extensively well-documented, pervasive, and highly publicized misconduct, the Department has determined that the value of an ITT education—like Corinthian—is likely either negligible or non-existent. In a court proceeding, ITT would very likely be unable to produce any persuasive evidence showing why the amount of recovery should be offset by value received by the borrowers from ITT education so as to preclude full recovery. Accordingly, it is appropriate for the Department to award eligible borrowers full relief.”

b. IRS Rev Procs on 1099 issue around 1) Corinthian and 2) ACI might contain information about the legal basis of the debt cancellation c. Is Public Service Loan Forgiveness an exercise of compromise, a specific authorization to Secretary of Education for compromise, or an allocation of funding by Congress? Same question regarding income driven repayment plans, Elizabeth Warren’s proposal.

d. DMS (Treasury) annual report to congress on debt collection activities of agencies FY 17 https://www.fiscal.treasury.gov/files/dms/debt17.pdf i. Department of Education had $1,183.3 (billion) out of $1,519.6 (billion) total government outstanding non-tax receivables (highest) ii. Department of Education collected $102.3 (billion) out of $337.4 (billion) total receivables iii. Department of Education had 81.3% of delinquent debt owed to US (non-tax) ($150.4 (billion) out of $185.0 (billion) total) iv. Department of Education collected $14.2 billion in delinquent non-tax debt (out of $30.7 billion total collected by government) 1. The entire government only collected $1.1 billion in delinquent debt through AWG 2. DOJ collected $14.3 billion in delinquent debt (owed to entire government) v. Department of Education wrote off and “closed out” (meaning all debt collection activity has terminated and write off may be required to be reported to IRS as potential income to the debtor) $6.6 billion (out of $8.8 billion across entire government) 1. See OMB Circular A-129 for write-off requirements vi. Department of Education only referred 44.2% of delinquent “eligible” accounts to Treasury for TOP (11,137,699 out of 25,171,655) 1. This compliance reporting is required by the Digital Accountability and Transparency Act of 2014

IV. Anticipated Arguments

a. Antideficiency Act

The Antideficiency Act prohibits federal employees and agencies from obligating or expending federal funds in advance or in excess of an appropriation.

31 U.S.C. § 3711 states that “an accountable official not liable for an amount paid or for the value of property lost or damaged if the amount or value is not recovered because of a compromise under this section.” 31 U.S.C. § 3527 and § 3528 authorize the Comptroller General to relieve accountable officials and agents from liability for the physical loss or deficiency of public money in certain circumstances, which do not seem applicable to a deliberate act of compromise. 31 U.S.C. § 3529 allows the head of an agency to request a decision from the Comptroller General on a question involving a “payment” or “voucher,” and it is not clear whether this would apply to a decision to compromise.

*b. Cost * i. Stephanie Kelton, Macro Effects of Student Debt Cancellation (next section coming soon)