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Politico recently released a 3,000-word investigative article detailing the planned takeover of Apollo Education Group, the company which owns the University of Phoenix for-profit college chain. Pending approval by the U.S. Department of Education and accreditors, Apollo will undergo an acquisition by Vistria Group, for which the COO, Tony Miller, is President Obama’s former second-in-command at the Education Department. This, as authors Michael Stratford and Kimberly Hefling write, “raises questions.”

Unfortunately,

As Deputy Education Secretary from 2009 to 2013, Tony Miller oversaw the writing and implementation of regulations which explicitly targeted for-profit colleges such as the University of Phoenix. When President Obama was inaugurated in 2009, Apollo Education Group’s stock traded at around $87 per share. It has since fallen by nearly 90%, to just $9 in the past week.

Now, Miller’s company is set to acquire Apollo for a bargain. He is not the only Vistria official with connections to the Obama Administration—the group’s co-founder and co-CEO is Marty Nesbitt, a longtime friend of the president. Politico reports:

What stands out about the proposed deal is that several key players are either close to top administration officials, including the president himself, or are former administration insiders — especially Miller, who was part of the effort to more tightly regulate for-profit colleges at the very agency now charged with approving the ownership change. […]

“There is at least a taste of unseemliness involved in this,” said Mark Schneider, a former top education official under President George W. Bush. “They regulate it. They drive the price down. …They are buying it for pennies on the dollar.”

Apollo Education and the University of Phoenix may have deserved to collapse, and might have gone down even without tighter regulation. The institution has been subject to fines and enforcement actions that long predate the Obama Administration. It is subject to investigations by state attorneys general of both parties. Without the cash cow of federal student aid, perhaps the school would have never reached the heights it did.

But the affair underscores how regulation can serve purposes other than the public interest, when the regulators or their allies have a stake in one outcome or the other. And the susceptibility of regulators to such bad incentives is about to get much worse.

Earlier in June, the Obama administration unveiled a new proposed rule which would cut a for-profit or non-profit college off from federal aid programs when a federal or state oversight entity, such as a state attorney general or a federal regulator, sues the institution for a substantial amount. (Public institutions are exempt.) The oversight entity does not have to prove anything in court—the suit itself will trigger loss of federal funds unless the college puts up, within 30 days, letters of credit equal to 10% or more of its student loan revenues.

Many colleges, particularly for-profits which do not have large endowments or government grant money to cushion the loss of student loan funds, will collapse if a state attorney general or federal regulator files a lawsuit. Independent verification of whether the suit’s claims are compelling might not happen until it is already too late for the college. The whims of individual politicians and regulators, each of whom face their own set of incentives that might not align with the public interest, could determine whether a private college survives or collapses.

If the University of Phoenix affair raises eyebrows, imagine the opportunity for questionable conduct under the new regulations. Any attorney general could unilaterally drive a private college to the brink of bankruptcy, thus allowing a political ally to buy it up at a fire-sale price. These regulations could spawn a dozen Tony Millers. Moreover, the colleges they take down could be much less deserving of their fate than the University of Phoenix.

It is perfectly reasonable—and desirable—to place standards on receipt of federal money. However, those standards should be clear and objective, not based on the subjective decisions of individuals. That is because individuals are imperfect and always will be. Colleges, and the students who attend them, will suffer accordingly.

The Biden administration on Thursday unveiled unprecedented policy changes designed to make it easier for federal student loan borrowers to discharge their student debt in bankruptcy.

Here are the details.

It Is Very Difficult to Discharge Student Loans In Bankruptcy

While it is by no means impossible for borrowers to discharge their student loans in bankruptcy, it can be quite difficult.

Student loans are treated differently in bankruptcy from other consumer debts, like medical bills and credit card debts. Under the bankruptcy code, student loan borrowers generally have to show that they have an “undue hardship” which is a challenging legal standard to meet. Federal statute does not expressly define in detail “undue hardship” actually means, so bankruptcy courts have established standards, rules and tests (which can vary by jurisdiction) to allow judges to make a determination. In many states, student loan borrowers must demonstrate that there is a “certainty of hopelessness” — an extremely difficult hurdle.

Furthermore, even the process of trying to prove that a borrower meets the undue hardship standard an be a huge obstacle. A borrower must initiate an “adversary proceeding” — which basically involves suing your student loan lender in bankruptcy court. In most cases, student loan lenders, including the federal government (if it is a lender) will oppose the borrower. Adversary proceedings can be a lengthy and draining experiences for borrowers, as well as expensive if the borrower hires private counsel. The government and private lenders, meanwhile, have significant resources that can be utilized against the borrower. The result is that many undue hardship claims fail, and more don’t even get started because of the challenges.

Biden Administration Announces Changes to Federal Student Loan Bankruptcy Policies

This week, the Education Department and Justice Department announced new policy guidance that would alter how the Biden administration handles undue hardship bankruptcy discharge requests by federal student loan borrowers.

“The new process will leverage Department of Education data and a new borrower-completed attestation form to assist the government in assessing a borrower’s discharge request,” according to the U.S. Department of Justice in a press release on Thursday. “The Justice Department, in consultation with the Department of Education, will review the information provided, apply the factors that courts consider relevant to the undue-hardship inquiry and determine whether to recommend that the bankruptcy judge discharge the borrower’s student loan debt.” In other words, there may be some cases — specific to a borrower’s overall circumstances — in which the federal government may decide not to oppose a federal student loan bankruptcy discharge, clearing the way for a borrower to eliminate their federal student loan debt without having to complete a full adversary proceeding.

“The new guidelines advise Department of Justice attorneys to stipulate to the facts demonstrating that a debt would impose an undue hardship and recommend to the court that a debtor’s student loan be discharged under certain circumstances,” according to a statement by the National Consumer Law Center (NCLC), which has been advocating for bankruptcy reform for student loan borrowers for years. “The guidance provides a framework for Justice [Department] attorneys to apply in evaluating the factors that courts typically consider in determining undue hardship.”

Advocacy groups praised the administration’s reform.

“The current undue hardship method of student loan discharge is random, arbitrary and unfair,” said NCLC Staff Attorney John Rao in a statement. “Even though a borrower is in such desperate financial circumstances as to need to file bankruptcy, the government would typically argue that the borrower is not suffering ‘undue hardship’—a requirement for discharging student loans. This additional barrier to debt relief for student loan borrowers was put in place by Congress and was not the result of careful analysis and thoughtful policy debate. Instead it was based on the false premise that student borrowers were more likely to abuse the bankruptcy system, even compared to other consumers with debts owed to the government. The government's prior approach of fighting borrowers' claims of hardship indiscriminately exacerbated the problem.”

“For years, federal student loan borrowers in financial distress have sought relief from crushing debt loads through bankruptcy courts, only to be defeated by the Departments’ policies and litigation choices,” said Student Borrower Protection Center (SBPC) Deputy Executive Director Persis Yu in a statement. “Borrowers deserve a consistent and predictable pathway towards relief. Relief should not depend on the whim of individual judges and attorneys.”

Student Loan Bankruptcy Reform Legislation Would Provide More Permanent Changes

While the Biden administration’s policy reforms regarding the treatment of undue hardship bankruptcy cases for federal student loan borrowers is significant, it would take an act of Congress to change the bankruptcy code on a broader and more permanent basis.

Last year, a bipartisan group of senators unveiled the Fresh Start Through Bankruptcy Act. The bill, sponsored by Senator Richard Durbin (D-IL) and Senator John Cornyn (R-TX), would more easily permit federal student loan bankruptcy loan discharges. However, the bill has not advanced, and it would not have addressed the dischargeability of private student loans in bankruptcy.

“This is a great interim step,” said Yu regarding the Biden administration’s new bankruptcy guidelines. “But Congress must act to provide complete bankruptcy reform.”

Further Student Loan Reading

8 Signs Biden May Actually Extend The Student Loan Pause Again

Court Approves $6 Billion In Student Loan Forgiveness For 200,000 Borrowers To Resolve Lawsuit

Student Loan Forgiveness Status: 6 Updates After Multiple Courts Block Relief

Can You Apply For Multiple Student Loan Forgiveness Programs? Yes — With Some Caveats