Education Dept. Seeks to Clear a Path to Loan Forgiveness and Recover Lost Loans

February 17, 2016

Student-loan borrowers who were defrauded by their colleges would have clearer paths to loan forgiveness — and the federal government would be more likely to recover its losses on the debt — under changes being proposed by the Education Department.

The changes, which a panel of negotiators will take up on Wednesday as part of a rule-making process that began last month, would create a new federal standard for judging borrowers' appeals for debt relief and for determining how much forgiveness they should receive. The department’s proposal also suggests several warning signs that could serve as "triggers" requiring colleges to submit letters of credit to the department.

The government's goals are twofold: to provide for a more uniform treatment of borrowers and to limit losses in the federal student-loan program.
The government’s goals are twofold: to provide for a more uniform treatment of borrowers and to limit losses in the federal student-loan program. Right now, borrowers’ chances of receiving loan forgiveness depend on which state they live in, while troubled colleges, like the now-defunct Corinthian chain, can leave taxpayers holding the bag. By creating a federal standard for fraud claims, and by expanding the number of "triggers" for letters of credit, the department hopes to make the process more equitable, and to reduce the risk to taxpayers.

But the revisions are likely to face pushback from student and consumer advocates on the panel, who will argue that the proposed new standard would be narrower than the existing "defense to repayment" rule, which simply requires claimants to show that their institution committed an "act or omission" that "would give rise to a cause of action against the school under applicable state law." The advocates will say it’s unfair for the department to place a statute of limitations on some fraud claims when it can continue to collect on a borrower’s debt forever.

Meanwhile, panelists representing colleges will probably object to the potentially broad expansion of conditions compelling letters of credit. While the department’s proposal does not contain specific triggers, it offers a long list of candidates, including penalties from an accreditor, high loan-default rates, and failing to derive at least 10 percent of revenue from sources other than federal student aid (what’s known as the 90/10 rule). Colleges would have to warn enrolled and prospective students when they posted a letter of credit to the department or had low loan-repayment rates.

An Influx of Claims

This week’s negotiations occur as the department is reviewing thousands of claims from borrowers who say they were defrauded by Corinthian Colleges and other for-profit institutions, and should have their debt forgiven. Last week department officials said they had approved more than 1,300 of those "borrower defense claims," totaling $28 million, along with almost $86 million in "closed school" discharges, for students who attended shuttered Corinthian campuses. Because Corinthian went bankrupt, the government will recover none of that money.

Under current law, borrowers are eligible to have their student loans discharged if they were attending a college when it closed, or if they withdrew within 120 days of its closing. In addition, borrowers can raise a "defense to repayment" if they believe they were defrauded by their institution under state law.

A chief criticism of the current rules is that they treat borrowers differently, depending on where they live.
Such "borrower defense" claims have been rare, until recently. Corinthian’s collapse, in 2014, led to an influx of the claims and prompted the department to revisit what had long been a sleepy corner of federal regulation.

A chief criticism of the current rules is that they treat borrowers differently, depending on where they live. Because the regulations require borrowers to prove a cause of action under state law, students in states with strong consumer-protection laws or aggressive attorneys general are more likely to obtain relief than those in states with weak laws or lax regulators. A case in point is Corinthian: So far, the only borrowers who have received blanket relief are those who attended an institution investigated by the attorneys general of California.

Penalized for Beating the Odds?

Under the proposed rules, borrowers with loans issued after July 1, 2017, could obtain debt relief if they — or an agency acting on their behalf, such as a state attorney general — successfully sued the institution for an act or omission related to lending or educational services. In addition, borrowers could get loans forgiven if they could prove a "breach of contract" or a "substantial misrepresentation" by the college. In the latter case, the borrower would have only two years from the date of the breach or the date they discovered the misrepresentation to file a claim.

While borrowers’ claims were being considered, they would be eligible for forbearance on their debt; if their loan was in default, the department would not collect on it. The secretary of education would rule on claims involving closed colleges; a "hearing official" would decide cases involving open ones.

The amount of forgiveness a borrower could receive would depend on the extent of his or her "injury," as determined by the department or a hearing official, but it could be no greater than the cost of attendance. Borrowers who found a job after graduating or who received transferable credits might qualify for only partial relief.

That limit isn’t likely to sit well with student and consumer advocates on the panel. During the first rule-making session, in January, they argued that students who attended shoddy institutions — and who succeeded nevertheless — shouldn’t be penalized for beating the odds.

The panel meets here Wednesday through Friday, and will convene for a final time in March.

Kelly Field is a senior reporter covering federal higher-education policy. Contact her at Or follow her on Twitter @kfieldCHE.