$6 billion in loan relief to defrauded students signals change ahead
(NerdWallet) – More than 200,000 federal student loan borrowers who were misled by their schools are in line for $6 billion worth of debt relief as a result of a preliminary settlement approved by court order on Aug. 4.
It’s a whopper of a settlement and a big win for borrowers. But these discharges are only the latest in a series of efforts by the Department of Education to clear application backlogs and grant relief to borrowers whose schools defrauded them.
Borrower defense offers loan discharge to borrowers whose schools — mostly for-profit — misrepresented such things as graduation and employment rates, financial aid, or even school classroom resources. The program launched in 2015, but discharges slowed to a near-complete halt during the previous administration due to rules changes and inaction.
The Biden administration has made those untouched borrower defense claims a priority, resulting in approximately $8 billion in discharges through the program since January 2021, federal data show. The $6 billion settlement is the result of a class action lawsuit, Sweet v. Cardona, and it bumps up the total amount of borrower defense discharges to more than $14 billion.
Even before the Sweet v. Cardona settlement, federal data show that total federal student loan forgiveness under all programs had reached $26 billion and 1.5 million borrowers. This includes the $8 billion in borrower defense discharges, as well as:
- $8 billion under the Public Service Loan Forgiveness program.
- $9 billion to borrowers who are totally and permanently disabled.
- $1 billion in closed school discharges.
Billions for borrowers at for-profit schools
Since 2021, new reviews of claims have resulted in billions in discharges for millions of borrowers. That includes students who attended for-profit schools like DeVry University and the now-shuttered ITT Technical Institute.
The department also started changing regulations, such as rescinding calculations for partial relief done under the previous administration. That resulted in full relief to 72,000 borrowers for a total of $1 billion, according to federal data.
The Education Department also started doing group discharges without requiring applications this past spring when it got rid of $238 million in student loan debt for 28,000 borrowers who attended Marinello Schools of Beauty.
And the largest discharges happened recently through a $5.8 billion group discharge of federal student loans borrowed by 560,000 borrowers who attended Corinthian Colleges since its founding in 1995 through its closure in April 2015.
Flaws in the program and change to come
There are also more changes coming to the borrower defense program.
On July 6, the Biden administration proposed new regulations that would impact borrower defense, among other programs. The changes include establishing categorical standards for misconduct, under which a borrower could file a claim such as “aggressive and deceptive recruitment practices” or “substantial misrepresentations.”
Additional proposals would allow for group applications, eliminate timing limitations on filing a claim, make colleges cover discharge costs and create a reconsideration process for borrowers denied full discharge.
The new regulations are expected to be finalized this fall and go into effect July 1, 2023.
These additional changes are needed as some borrowers have filed claims the department never addressed — in one group claims case, it’s been six years, according to the National Consumer Law Center.
It’s also unclear how many borrowers are actually receiving loan discharges, says Aaron Ament, president of Student Defense, a litigation and advocacy nonprofit.
“We are getting a number of people contacting us saying they got an email nine months ago approving their borrower defense claim, but the discharge has not been effectuated,” says Ament. “A lot of them are getting denied mortgages or can’t rent an apartment because it’s still on their credit report — that loan still shows up.”
How you can get relief under Sweet v. Cardona
The Sweet v. Cardona lawsuit was first brought by borrowers whose borrower defense applications were denied or not processed by the Education Department.
Eligibility for relief under Sweet v. Cardona will depend on when a borrower submitted a borrower defense application:
- Those who submitted applications before June 22, 2022, and who didn’t receive a decision or were denied in or after December 2019, are included in the class of applicants eligible for discharge.
- Those who submitted after June 22, 2022, could qualify as a “post-class applicant” until the settlement is approved — sometime in the fall.
If the settlement gets final approval, all discharges and refunds will be distributed to 75% of class members within one year. The rest of the class members would receive individual borrower defense decisions. It would also result in credit report adjustments.
Now that the settlement has been preliminarily approved, individual borrowers can expect to receive email or mail notifications from the Department of Education of their eligibility. It’s unclear when qualified borrowers would receive loan discharges.
However, it is possible that the preliminary settlement could face legal challenges.
To apply for borrower defense discharge, you must visit the student aid website.