Three Takeaways from ED Borrower Defense Claim on UAGC

Borrower defense is arbitrary, but UAGC and U Phoenix should not be surprised

Author

Phil Hill
September 01, 2023

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On Wednesday the US Depart of Education (ED) announced that it would discharge upwards of $72 million in student loan debt from former Ashford University students, using borrower defense to repayment claims.

The Biden-Harris Administration today announced the approval of $72 million in borrower defense to repayment discharges for more than 2,300 students who applied for relief from loans they took out to attend Ashford University (Ashford), which was an online for-profit school based in San Diego. The approvals come from a review by the U.S. Department of Education (Department) of evidence presented by the California Department of Justice during a successful lawsuit brought against Ashford and its parent company, Zovio, Inc. (Zovio), which resulted in a judgment against both entities in March 2022. Based upon evidence presented in that lawsuit, which covered the period from March 1, 2009, through April 30, 2020, the Department concluded Ashford and Zovio made numerous substantial misrepresentations during that period that borrowers relied upon to their detriment. The approved claims are from borrowers who enrolled in Ashford during this period and filed applications for borrower defense with allegations corroborated by these findings.

“As the California Department of Justice proved in court, Ashford relied extensively on high-pressure and deceptive recruiting tactics to lure students,” said U.S. Under Secretary of Education James Kvaal. “Today we are protecting the students who were cheated by Ashford, and we will also hold the perpetrators accountable, protect taxpayers, and deter future wrongdoing.”

The major education coverage can be found with Inside Higher Ed and Higher Ed Dive. The latter article led with the point that the University of Arizona may be liable for a portion of those claims due to its acquisition of Ashford to convert into the University of Arizona Global Campus (UAGC).

Here are some key takeaways from my perspective.

Somewhat Arbitrary, non-Independent Borrower Defense Claims

Borrower Defense to Repayment (BDTR) has undergone a lot of changes since its 1993 / 1994 inception. The once-obscure rule became a bigger issue with its 2016 revision that was partially driven by the large numbers of claims from the shutdown of Corinthian Colleges and and ITT. The rules were revised again in 2019 and in July 2023, although the latest revisions have been blocked by a federal court.

There has been a lot of drama on the four versions of BDTR, and CooleyED has a good set of articles for those wanting the details. Perhaps the biggest issue at play is the change from an individual basis (each student must file a claim and be adjudicated individually) to allowing a group basis (entire groups of students are subject to BDTR actions, whether they knew to apply or not, with the adjudication based on the general case). This change is at the root of much of the legal challenges and drama, but the trend is clear.

My problem with this usage, as with so many other ED actions, is that in reality ED uses slim statutory basis to create far-reaching and arbitrary claims, pretty much at the sole discretion of ED. Unless there is a lawsuit filed in response, ED acts as the prosecutor and judge and jury, which leads to political usage and regulatory activism. However, even though there are legitimate questions about the aggressive BDTR usage, Ashford University clearly had some real problems in its student recruitment and in my opinion Zovio (parent company) deserved to suffer repercussions from the lawsuit.

Closing the Door on UAGC Claims

Once the decision for the University to acquire Ashford University and create UAGC became public, I was critical of the naive or misleading claims made by university leadership about their lack of liability for past Zovio / Ashford actions.

Spokesperson Pam Scott:

UA is not liable or responsible for the actions of Ashford University or Zovio addressed by the court’s decision in the lawsuit brought by the California Attorney General

President Robert Robbins:

It’ll be interesting to see what happens in the California case, but regardless of what happens there this is about Zovio. It is not about UAGC. It’s not about the University of Arizona.

My conclusion at the time of the lawsuit win in Spring 2022:

Beyond the financial risk (how will UAGC and Zovio fund a turnaround in enrollment) and reputational risk, I would add one other – the follow-on action risk. This lawsuit is not occurring in isolation. It comes at the same time that the Department of Education (ED) and several US Senators are pushing for increased regulation and control over OPM relationships. The California lawsuit ruling gives plentiful amunition to these bodies to take further action against Zovio.

The lawsuit is over, but the story is not. I’m guessing that Zovio will appeal, and I’m also guessing that the ED will soon take additional actions that will impact the ability of UAGC to stabilize enrollments and become sustainable.

Well here we are.

Beyond liabilities, UA leadership frequently touted the $37.5 million in pre-payments from Zovio to UAGC as a key basis of the agreement. UAGC would immediately be an income source. Further, UAGC would be insulated from additional marketing spend as that would be Zovio’s responsibility. See this post for quotes.

With the dissolution of Zovio and full acquisition of UAGC, and with Wednesday’s ED actions, so much of the University of Arizona’s claims about the UAGC financial status are gone, or at least in doubt. Zovio doesn’t exist, and UA is on the hook for all marketing spend. UA is or might be on the hook for BDTR claims that might exceed the much-touted $37.5 million pre-payment. All liability rests with UA and UAGC.

The University of Arizona disagrees and is likely to fight any efforts by ED to recoup funds, based on a written statement to the Arizona Star.

The University of Arizona had absolutely no involvement in, and is not directly or indirectly responsible for, the actions of Ashford and its parent company, Zovio Inc. These actions of Ashford and Zovio occurred well before The University of Arizona Global Campus (UAGC) acquired Ashford University . . .

Sending a Message

In the IHE article, I was quoted:

Regardless, Hill said that the department’s intention to recoup money in this case sends a signal to other nonprofit colleges considering a purchase of a for-profit institution.

“I don’t think this action is solely targeted at Ashford and UAGC,” he said. “I think this action is targeted at the Universities of Phoenix and Idaho and any other university considering a nonprofit conversion. This is the Department of Ed sending a warning shot across the bows of Idaho and any other school considering this type of conversion.”

For anyone thinking that the timing of Wednesday’s announcement, coming in the midst of the University of Idaho’s acquisition of the University of Phoenix, is a coincidence, think again. The U Idaho board has approved the sale, but it is not yet complete. I strongly suspect that ED took this action at this time to send a message, particularly to Idaho. Nice nonprofit acquisition you have there. It would be a shame if some liability were to happen to it.

And this message is not just for Idaho / Phoenix - it is for any universities considering a nonprofit conversion.

Whether you agree with ED’s actions with the planned discharge of $72 million student loans tied to Ashford BDTR claims or not, it would be a mistake to not see the bigger picture of what is going on with ED’s continued regulatory activism.

It is possible that ED makes a lot of noise and legal maneuvering with UA but in the end drops its efforts to recoup funds, with the duration of the public dispute likely lasting at least as long as it takes the University of Idaho to finalize its acquisition of the University of Phoenix. We don’t know, but that’s my guess. But even if UA prevails in the end, this is a new headache for UAGC that makes leadership (at least at the time of the acquisition) look even worse.

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