A federal court has stopped yet another attempt by the U.S. Department of Education to cancel student loans—for now. On Aug. 7, the Fifth Circuit Court of Appeals issued a nationwide injunction against key parts of a recently revised rule that would have let the department erase billions of dollars of student loans and make private colleges and/or taxpayers pay for it.

The ruling comes in a case brought by a consortium of for-profit schools, the Career Colleges and Schools of Texas, challenging a department rule that affects, among other things, borrower defenses for nonrepayment of federal student loans.

The rule, finalized in November 2022, was supposed to implement Congress’ limited directive in the Higher Education Act that the secretary of education should identify acts or omissions by a school that are egregious enough for the department to cancel a borrower’s loans.

But the department has been operating well beyond this power. Usurping the role of Congress, the department has created an affirmative right for borrowers to assert a legal claim for loan cancellation where Congress had authorized only the creation of defenses. Typically, a legal claim is a way to assert a right. But in a loan relationship, the lender has the right to repayment while the borrower has the obligation to repay. Thus, a borrower defense claim is an oxymoron—the borrower is not vindicating his or her legal right but finding a way to avoid the obligation. 

And usurping the role of judges, the department devised an in-house adjudication process for these new claims and for recouping the loan money from the schools, complete with its own rules about liability, evidence, and who can get relief in which circumstances and how. The department’s latest revisions to its internal procedures severely curtail due process by, for example, providing no opportunity to cross-examine a borrower who makes a claim.

Letting borrowers (and even outside advocacy organizations) bring claims to avoid obligations, letting them do so en masse, and resolving these so-called claims within a department of the executive branch, the administration is surreptitiously giving itself a previously unknown power to cancel student loans on a grand scale.            

Most colleges are not fraudulent, but the department treats colleges seeking a profit as inherently suspect. Through the burdens of proof imposed by the new rule, the department nearly makes these colleges guilty until proven innocent.

Even an unintentional misstatement or failure to disclose something to a student “potentially triggers liability to the entire ‘affected’ cohort and for the full amount of their loans,” according to the plaintiffs’ complaint, costing millions or hundreds of millions of dollars and forcing the college out of business. 

As Career Colleges and Schools of Texas plausibly contends, the new rule puts “a thumb on the scale to maximize the number and amount of loan discharges with little regard for the merits of the claims or the rights of schools.”

The department is using this rule to pave the way for billions of dollars in loan cancellations while knocking many private colleges out of the education system.

To stop its implementation, the plaintiffs argued that the new rule exceeds the department’s authority under the Higher Education Act and violates both the Constitution and the Administrative Procedure Act, the law that governs the process by which federal agencies develop and issue regulations. Essentially, that means that both the substance of the regulations and the process leading to them are unlawful.

For instance, the plaintiffs argued that by putting contract disputes into the regulation, the department took upon itself an authority to decide disputes that are supposed to be reserved for a jury or at least a judge to decide.

On its face, assigning a judge’s role to persons within the executive branch is in tension with Article III of the Constitution, though this controversial practice is a longstanding feature of federal administrative agencies. Furthermore, adjudications within agencies, rather than in courts, appear to violate the Seventh Amendment right to a jury in civil cases, though this, too, has been standard practice in federal agencies.

The Supreme Court recently agreed to hear a case challenging the constitutionality of these practices this fall in SEC v. Jarkesy, and its decision there could have serious ramifications for Career Colleges and Schools’ challenge to the department’s rule. 

While these issues are weighty, it was another of Career Colleges and Schools’ claims that led the Fifth Circuit to prevent the department from enforcing the new borrower defense rule. While the Fifth Circuit’s order is short, it clearly shows the core of the department’s mistake.

In enjoining the department’s rule, the Fifth Circuit cited a single 2018 decision in which the U.S. Chamber of Commerce successfully sued the Department of Labor. In that case, a different panel of the Fifth Circuit wrote that “only Congress may create privately enforceable rights, and agencies are empowered only to enforce the rights Congress creates.”

Here, as in that case, Career Colleges and Schools argued that the department acted unlawfully when it went further than Congress directed and created rights that the department had no authority to create.

That’s a great principle when enforced (it often isn’t) because it keeps the legislative power in the legislative branch. The executive branch isn’t allowed to make things up, which is what the Department of Education did (and has been doing) with the borrower defense rules.

This is just an early step in the litigation, but it is very promising. The same three-judge panel will hear arguments in the case in November. Sometime thereafter, it will make a final ruling on the merits. But the early signal from the Fifth Circuit is that, as we are now accustomed to, the Biden administration has dramatically exceeded its authority.

Let’s hope the courts continue to keep the executive branch in its own lane.

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