New Debt Relief Rules Coming

Obama administration plans to clarify when defrauded student loan borrowers can have their loans forgiven -- and give the Education Department new tools to go after colleges.

August 20, 2015

The Obama administration is planning new regulations that will set clearer standards for discharging the federal student loans of defrauded borrowers and give the U.S. Department of Education new tools to recoup money from colleges where it finds misconduct.

Department officials said Wednesday that they would write new rules that more clearly explain the circumstances under which federal direct loan borrowers can assert a “defense to repayment” because of some type of misconduct by a college.

The announcement follows months of confusion over how the Education Department should interpret its own regulation, used only a handful of times since it was enacted in the mid-1990s, that allows borrowers to have their loans canceled if their college engages in conduct that’s illegal under state law.

It’s not clear, for instance, what type of proof is needed to establish the debt relief claim or how borrowers should apply for the discharge. 

After Corinthian Colleges began collapsing last year, a group of student activists, state attorneys general, consumer advocates and members of Congress pressed the Education Department to provide debt forgiveness under the defense-to-repayment regulation.

The Obama administration announced earlier this year that it would review the debt relief claims of former Corinthian students and agreed to fast-track the applications for some students at Heald College (for which the Education Department said it already has evidence the college misled students).

The new rule making is aimed at developing a debt relief process going forward, and won’t affect the department's evaluation of the thousands of defense-to-repayment claims it has already received from students at Corinthian-owned campuses.

Ted Mitchell, under secretary of education, said Wednesday that 1,500 Heald College students eligible for fast-tracked debt relief had submitted paperwork. An additional 338 Heald students not eligible for that benefit submitted standard defense-to-repayment claims, as did 104 WyoTech students and 1,300 students from Corinthian's Everest programs.

The department has received 161 debt relief claims from students at colleges other than ones previously owned by Corinthian.

(The department has also granted about 7,000 loan discharges for former Corinthian students whose campuses suddenly closed earlier this year when the company shuttered its operations. That’s about 43 percent of the eligible borrowers, Mitchell said, which is five to six times the usual take-up rate on such loan forgiveness when a college closes.)

Taxpayers will likely foot the bill of the loans discharged for former Corinthian students since the company is now bankrupt.

But Mitchell said that the new rules would include a mechanism for the Education Department to claw back from colleges the amount of student loans it cancels under defense-to-repayment claims.

Aside from seeking to recoup from the colleges the dollar amount of the forgiven loans, Mitchell said he wanted the rules to address how such successful claims of fraud would count against colleges for receiving additional federal student aid.

"We want institutions to know, in no uncertain terms, that they are responsible for the malfeasance that they create," he said.

The department plans to hold two public hearings -- on Sept. 10 in Washington and Sept. 16 in San Francisco -- to solicit feedback on how to develop the new regulations.

After going through a negotiated rule making process, Mitchell said, the department expects to finalize the rules by next November so that they take effect on July 1, 2017.


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