Get Out of Debt Guy - Steve Rhode

Things Get Real on Student Loan Elimination by Borrower Defense


The Department of Education has released a massive proposed rule that aims at finalizing a process to allow people who have been defrauded by their schools, a process to eliminate their federal student loans. It also would create a process for student loan borrowers to also seek to get back loan payments they made to schools found to have misled students into loans.

I’ve reported in the past on the borrower defense claim strategy that has the potential to wipe away loads of student loans. Click here to read the articles.

The proposed new rules would amend the regulations of the Direct Loan program to make allowances for this loan forgiveness approach.

The basis of the approach is sound. Why should schools benefit when it can be proven they misled and deceived students into enrolling. It’s a straight up issue surrounding unfair and deceptive practices. It just so happens many students may be able to have their student loans forgiven because there was just that much fraud by both public and private schools.

The new proposed rule asks for consumer feedback and comment. You can comment by going to Go to to submit your comments electronically.

The new proposed rules attempt to address several issues like loan fraud and arbitration agreements in student loan agreements.

The proposed rule states, “However, when postsecondary institutions make false and misleading statements to students or prospective students about school or career outcomes or financing needed to pay for those programs, or fail to fulfill specific contractual promises regarding program offerings or educational services, student loan borrowers may be eligible for discharge of their Federal loans.

The proposed regulations would give students access to consistent, clear, fair, and transparent processes to seek debt relief; protect taxpayers by requiring that financially risky institutions are prepared to take responsibility for losses to the government for discharges of and repayments for Federal student loans; provide due process for students and institutions; and warn students, using plain language issued by the Department, about proprietary schools at which the typical student experiences poor loan repayment outcomes–defined in these proposed regulations as a proprietary school with a loan repayment rate that is less than or equal to zero percent, which means that the typical borrower has not paid down at least a dollar on his or her loans–so that students can make more informed enrollment and financing decisions.”

The major provisions of this new proposed rule are:

The proposed regulations would also revise the Student Assistance General Provisions regulations to–

The proposed regulations would also–

While some may be outraged that some students may be able to have their student loans eliminated under this program we can’t lose sight that this program is designed to help the government also recover money that was disbursed to postsecondary education entities that misled students and took advantage of taxpayer money.

For example, the new proposed rule says when a postsecondary entity entices students using advertising that makes untruthful statements about placement rates that it would give rise to a borrower defense claim.

The new proposed rule also limits the school from using agreement language that would prevent students from engaging in class action lawsuits. That’s important since a class action victory could be used as a basis for a borrower defense claim.

I agree there are problems with class action lawsuits and attorneys can win big fees. But class action lawsuits also allow people to seek relief who would have never been able to afford to go up against their school.

But the rule does not limit misrepresentation to just placement rates. It says, ” a borrower would have a borrower defense if the school or any of its representatives, or any institution, organization, or person with whom the school has an agreement to provide educational programs, or to provide marketing, advertising, recruiting, or admissions services, made a substantial misrepresentation that the borrower reasonably relied on when the borrower decided to attend, or to continue attending, the school.”

Substantial misrepresentation is defined as “any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person’s detriment.”

“The definition would also be expanded to specify that a misrepresentation includes any statement that omits information in such a way as to make the statement false, erroneous, or misleading.”

But another claim that could be made, outside of misrepresentation is if the schools actually breeched the enrollment agreement or contract that promised a certain level of service or statements made in school catalogs, student handbooks, or student regulations.

For now, I’ll leave you to enjoy the 530 page proposed rule document to read. I’ll cover this in more depth when the final rule is published.

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