A federal appeals court has determined that former beauty school students can pursue claims that the U.S. Department of Education violated federal law by collecting student loans it knew may have been fraudulently obtained.
The U.S. Court of Appeals for the Second Circuit brought back the lawsuit by former students of Wilfred Academy over the Department of Education’s alleged failure to abide by two federal laws requiring student loan holders to be told that their loans could be discharged if issued under fraudulent premises.
Plaintiffs in Salazar v. King, 15-832-cv, claimed the agency had knowledge, as evidenced by its conclusion in 1996 that misconduct at Wilfred Academy was widespread and that students enrolled improperly. As early as 1988, the U.S. Justice Department brought charges against Wilfred employees for misuse of federal funds and falsifying loan applications.
The plaintiffs argue that to this day they are burdened with loans from education and job training that did not prepare them for a profession.
Judge Gerard Lynch, writing for the panel, found that the Department of Education did not provide notice about the possibility of discharge that is required by the Federal Family Education Loans and Direct Loans statutes.
“Plaintiffs plausibly argue that the fact that the DOE has already determined that any Wilfred borrower who presents a facially valid application alleging false certification will automatically receive a discharge is powerful evidence that the DOE has in its possession reliable information all such Wilfred borrowers ‘may’ be eligible for discharge,” Lynch wrote.
Plaintiffs are also asking the court to compel the department to do something that is not a discretionary function of the agency: comply with the two loan laws and stop collecting loans from the students.
“The presumption in favor of judicial review applies to this case, because plaintiffs challenge what they contend are unlawful actions that the agency has taken, and continues to take, against the plaintiffs themselves,” Lynch wrote. “Such challenges are at the core of the judicial review function.”
According to the Department of Education’s investigation of Wilfred Academy in the 1990s and to the circuit’s ruling, the question of fraud surrounding the student loans focused on whether the school ever certified that students who did not graduate high school had an “ability to benefit” from its program. The plaintiffs allege that they were never asked if they had a high school diploma or given any test to determine if they had an “ability to benefit.”
It is unclear how many former Wilfred students would be involved in the putative class, or how many are still paying loans arranged through Wilfred that could be discharged. More than 61,000 Federal Family Education Loan program loans were issued to Wilfred students between 1986 and 1994. When the action before the Second Circuit was filed in 2014, lawyers for the plaintiffs estimated that there were 40,000 or more students who took out federally guaranteed loans to attend Wilfred campuses.
At its height in the late 1980s, Wilfred operated 58 schools and had an annual enrollment of 11,000 students. Its advertisements featured an eager young student promoting the tagline, “That Wilfred winner—she knows where she’s going.” The Wilfred American Educational Corporation filed for Chapter 11 bankruptcy in May 1990 and the last Wilfred school shut down in 1994.
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