DEVOS DEFEATED In Court, FORCED To REFUND STUDENT LOANS
The Education Department is wiping $150 million in federal student loans off the books, and has begun the process of informing thousands of borrowers that they no longer owe the government money because the schools they attended shut their doors.
The loan forgiveness, announced this week, applies to about 15,000 borrowers as federal education officials begin to carry out new rules that they fought in court for more than a year before giving up in October.
The department said it began notifying some of the borrowers by email on Friday that their loans would be discharged within the next few months. Any payments that the borrowers made toward a loan will be refunded, it said.
About half the borrowers attended Corinthian Colleges, a large for-profit chain that went bankrupt in 2015 after a deluge of lawsuits accusing it of predatory recruiting practices and false marketing. The rest attended one of the more than 1,000 other schools that shut down between November 2013, the start date for the automatic-discharge rules, and November 2015.
The new rules require the department to automatically forgive the loans of eligible borrowers three years after their school closed, although they can apply before then. The universe of eligible borrowers is growing: Last week, Education Corporation of America, a for-profit chain of vocational schools with about 20,000 active students at more than 70 campuses, closed without notice.
Under the Education Department’s closed school forgiveness program, federal student loan borrowers can apply to have their loans wiped away if they attended a school that closed while they were enrolled, or soon after, and they do not transfer their credits elsewhere.
The program is based on the principle that lenders bear responsibility for ensuring that a loan is sound, and that borrowers shouldn’t be responsible for loans taken out for an education that turned out to be worthless.
For years, borrowers who thought they qualified had to submit an application for relief. The change authorized in 2016 added the automatic forgiveness provision. This week’s loan discharges were the first to be done automatically.
As part of the Obama-era crackdown on for-profit colleges like ITT Tech and Corinthian Colleges, the Education Department wrote something called the “borrower defense rule.” It specified how students could get their loan money repaid if their schools were found to be shady. Borrowers had to submit an application and show how they were being defrauded. But if the school was shut down altogether, the loan discharge was supposed to be automatic.
Under Education Secretary Betsy DeVos, the department took a series of steps to try to delay borrower defense from going into effect, as it was supposed to do in the summer of 2017. DeVos called it: “a muddled process that’s unfair to students and schools, and puts taxpayers on the hook for significant costs.”
But the department lost in court repeatedly and also missed a key technical deadline for replacing the rule. In October, a federal judge ordered that the department begin forgiving loans under the rule. Now, per a statement, the government seems to be complying with the closed-school portion of the rule, at least.
Ms. DeVos has said she intends to rewrite the rules for some of the agency’s debt-forgiveness programs. The soonest those changes could take effect is July 2020.
At an industry conference last month, she reiterated her criticisms of how the federal government, the primary lender to students who borrow for college, handled its $1.4 trillion student loan portfolio.
“The federal government must become a more responsible lender,” Ms. DeVos said, and students “need to understand the implications of their decisions.”
Since 2013, 3,600 schools have closed at least one campus, according to the National Student Legal Defense Network, an advocacy group that has filed many lawsuits against the department. Education Corporation of America, another for-profit college chain, officially closed on Dec. 5, stranding another 20,000 students.
So the department’s liability could ultimately mean many more millions of dollars beyond the initial $150 million being returned or canceled now, NSLDN says.
“There are thousands of students entitled to automatic relief who in all likelihood don’t know it,” says NSLDN’s chief counsel, Dan Zibel. He pointed out that the department is still working to weaken the borrower defense rule and, NSLDN argues in another suit, to slow-walk the claims of students who say they are being defrauded.
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