Because the Fifth Circuit had issued a preliminary injunction to that effect last summer, the ruling preserves the status quo at least until the district court rules on remand.  However, the decision’s broad scope and critical analysis suggests the rules may not fare well. The Fifth Circuit’s opinion can be found here.

Background

On November 1, 2022, ED promulgated a rule that, among other matters, made substantive and procedural changes to ED’s regulations concerning borrower defense to repayment (BDR) and closed school loan discharge (“2022 Rule”). See Institutional Eligibility Under the Higher Education Act of 1965, 87 Fed. Reg. 65,904 (Nov. 1, 2022). The 2022 Rule (1) expands the bases for BDR relief; (2) establishes new borrower-friendly procedures for BDR claims, including reinstatement of an Obama-era procedure for groupwide adjudication of BDR applications and establishment of procedures and standards of proof for administrative recoupment of discharged loan amounts from institutions; and (3) broadens borrower eligibility for closed school loan discharge. More information about the 2022 Rule is available in this webinar.

On February 28, 2023, Career Colleges and Schools of Texas (“CCST”), a trade association of 54 private postsecondary career schools, brought suit alleging that the 2022 Rule exceeds ED’s statutory authority under the Higher Education Act; is arbitrary and capricious under the Administrative Procedure Act; and violates the U.S. Constitution under various theories. On April 5, 2023, CCST moved for a preliminary injunction to stop implementation of the 2022 Rule, which was scheduled to take effect on July 1, 2023. On June 30, 2023, the U.S. District Court for the Western District of Texas denied CCST’s motion on grounds that CCST’s asserted financial and reputational injuries were too remote and speculative to meet the required showing of irreparable harm. CCST appealed, and on August 7, 2023 the Fifth Circuit granted a nationwide emergency preliminary injunction to postpone the effective date of the 2022 Rule pending resolution CCST’s appeal.

Fifth Circuit decision

On April 4, the Fifth Circuit reversed the district court’s preliminary injunction denial. See No. 23-50491 (5th Cir. April 4, 2024). The appellate court ordered the district court to delay implementation of the 2022 Rule’s BDR and closed school loan discharge provisions until the case is fully resolved. 

Some key aspects of the Fifth Circuit’s decision are as follows:

• The Fifth Circuit’s decision is broad and highly critical of the 2022 Rule. On appeal, the Fifth Circuit not only rejected the district court’s irreparable harm analysis but further determined that CCST is likely to succeed on the merits of its legal claims and that the balance of equities favored granting injunctive relief to parties beyond those involved in the litigation, i.e., a nationwide injunction. 
• The Fifth Circuit recognized irreparable harms arising from the 2022 Rule. The Fifth Circuit found irreparable harm based on CCST members’ compelled compliance and compliance costs; altered business operations and missed opportunities; and “imminent threat” of “costly and dubiously authorized administrative adjudications”. According to the appellate court, such irreparable harm is not merely conjectural: “[U]nder both the borrower defense and school closure provisions, a successful claim leads to full discharge of the borrower’s loans, which leads to actions for recoupment from the schools.” Based on the recoupment process combined with the “greatly expanded number of claims and potential claimants,” the Fifth Circuit determined that the 2022 Rule “contemplates the imposition of significant financial charges” on institutions. 
• The Fifth Circuit endorsed the merits of CCST’s challenge to the BDR provisions, calling the 2022 Rule “almost certainly unlawful.” The Fifth Circuit concluded that CCST has a “strong likelihood” to succeed on the merits of its claims that the 2022 Rule exceeds ED’s statutory authority; is arbitrary and capricious; and violates the U.S. Constitution. The Fifth Circuit determined that the 2022 Rule unlawfully converts “defenses” into affirmative “claims” (which raises the broader question whether the Department could promulgate any version of a BDR rule that would allow borrowers to affirmatively seek a discharge); breaks the required causal connection between an institution’s conduct and a claimant’s relief with full discharge of consolidated loans; “affixes strict liability on schools for undefined misconduct,” with vague standards that encompass “even inadvertent misrepresentations by a school’s contractors not subject to its day-to-day supervision”; and violates due process through a group adjudication process that grants full loan discharge to “third-party beneficiaries of liability for misconduct that inflicted no injury on them.” The Court also indicated that the Department’s approach to BDR raised Constitutional separation of powers concerns by creating an administrative adjudication process without proper authorization from Congress. Finally, and significantly, the Fifth Circuit found that ED created the recoupment process “out of whole cloth and lacking any statutory basis,” and the group-claim procedures are “policy-driven mechanisms designed to selectively target proprietary schools.” Taken together, the Fifth Circuit deemed the challenged provisions “almost certainly unlawful.”
• The Fifth Circuit likewise endorsed the merits of CCST’s challenge to the closed school discharge provision, “which is likely unlawful on several grounds.” The Fifth Circuit was similarly skeptical of the 2022 Rule’s closed school loan discharge provisions, which it reasoned “expanded” the definition of “closure” in a manner that “exposes a school to financial liability for actions that Congress clearly did not intend to cover,” with language that is “vague, subject to arbitrary and unequal enforcement, and potentially sweeping.” Additionally, the 2022 Rule “eliminates the causation requirement Congress included in the statute.” 

We are closely monitoring developments in the case. If you have any questions regarding the ruling or BDR and/or closed school loan discharge relief more generally, please contact an author of this alert or the Hogan Lovells lawyer with whom you regularly work.

Authored by Stephanie Gold, Joel Buckman, and Shana Hurley.