Department of Education Serious About Discharging Fraudulent Student Loans

The Department of Education is getting very serious about a process that would allow those with federal student loans to apply for a full discharge of their loans if the schools deceived them. It’s an approach and subject I’ve talked about here.

Recently the U.S. Department of Education released a proposal that would establish borrower-friendly processes for seeking and obtaining loan relief triggered by unscrupulous conduct by higher education institutions. The Department also provided options to negotiators that would protect students from the use of mandatory arbitration provisions in enrollment agreements.

By updating existing borrower defense regulations with these provisions, the Department will build on the Obama Administration’s efforts to protect students and taxpayers, and ensure transparency and accountability among colleges and universities.

“These actions would establish a simpler, more uniform standard of relief for students, hold schools accountable if they engage in unlawful practices, and put an end to using fine print to trap students into signing away their rights,” said Acting U.S. Secretary of Education John B. King Jr.

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Last September, the Department began a negotiated rulemaking process to clarify how Direct Loan borrowers who believe they have been defrauded by their institutions can seek relief and strengthen provisions to hold colleges accountable for their wrongdoing. Current provisions in federal law and regulations called “defense to repayment” or “borrower defense” allow borrowers to seek discharge of their Direct Loans if their college’s acts give rise to a state law cause of action.

The Department plans to discuss with the negotiating committee how to protect students from forced arbitration and incorporate crucial elements of state consumer protection laws in these regulations. Forced arbitration provisions used by many schools in their enrollment agreements – often buried in the fine print – effectively prevent students from seeking redress for harm caused by their school and hide wrongdoing from the Department and the public. Such agreements often bar students from bringing their legal claims in a group, making it financially impossible for individual students to challenge schools. Some agreements require disputes to be filed in secret tribunals where little or no records are kept; some prohibit students from speaking about the claims they file. The Department will discuss with negotiators how to end such outrageous practices.

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“The Department is working to ensure that no college can dodge accountability by burying ‘gotchas’ in fine print that blocks students from seeking the redress they’re due. Legal aid, veteran, consumer, and student advocacy groups have all shared with us how mandatory arbitration has harmed students across the country. We heard them and agree. Which is why we’ve incorporated ideas from non-federal negotiators to limit mandatory arbitration agreements,” said Under Secretary Ted Mitchell. “These efforts build on our work to protect students and require institutional accountability.”

In addition to addressing arbitration, the language sent to negotiators would accomplish the following:

  • Allow students to pursue a discharge of their student loan balances without the constraints of a statute of limitation;
  • Establish a simpler, more uniform standard for relief that incorporates crucial elements of state consumer protection laws;
  • Create borrower-friendly processes for determining whether discharges are merited, including pathways for group relief without individual applications from borrowers;
  • Hold schools accountable and ensure they have skin in the game when discharges result from their unlawful actions; And
  • Ensure that schools disclose information to prospective students when various risk indicators are triggered like too many former students struggling to repay their loans; and
  • Provide more information more often to affected borrowers on their closed school discharge rights, and grant discharge without an application in certain circumstances.

But these releases and claims for forgiveness are not without some substantial risks to students applying for relief. I cover those issues, here.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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