As you may recall, thousands of borrowers began petitioning the federal government to forgive their federal student loans following the collapse of the for-profit college chain, Corinthian Colleges. Students argued that they should not be held responsible for student loans issued by a predatory company that took advantage of people and actively misled them. The students requested student loan relief and forgiveness under a little-known contractual and regulatory clause called “Defense to Repayment.” Since then, ITT Technical Institute has also collapsed, and many ITT graduates are requesting similar forms of relief.
The Dept. of Education had no formalized procedure for addressing Defense to Repayment, and so it began a long bureaucratic process to implement new rules and standards so that officials can determine who may be entitled to relief. After months of work, the Dept. of Education finally issued its new rules. Here are the highlights:
- Under the new rules, borrowers can request that their federal student loans be forgiven if their school engaged in material misrepresentations (for example, if the school lied about the quality of educational programs or job placement statistics).
- Borrowers can also request student loan forgiveness or discharge if their school violated their contractual agreement with the student.
- Borrowers can apply for federal student loan forgiveness individually or as a group.
- The U.S. Dept. of Education has discretion to grant some students a discharge even if they don’t affirmatively apply.
- The rules are not limited to for-profit schools like Corinthian and ITT. So borrowers can seek relief for actions by traditional nonprofit universities, and perhaps even state schools as well.
- The new rules will only apply to federal student loans disbursed on or after July 1, 2017. For student loans issued prior to this date, the older (and stricter) Defense to Repayment standard will apply – namely, that students must show that the school engaged in an act or omission that gave rise to a cause of action under state law. This is a much more difficult standard to meet.
- There is no time limit (or statute of limitations) regarding when borrowers can seek relief under Defense to Repayment, but there is a time limit for borrowers seeking a refund of payments already made: six years.
- Only Direct federal student loans are eligible for relief under the new rules. Older FFEL program federal loans and Perkins loans can be discharged under the older stricter standard, or borrowers can consolidate their non-Direct federal loans into the Direct loan program. Private student loans are not eligible for this form of relief.
The new rules take effect on July 1, 2017. As with any new federal student loan program, I anticipate there being fairly significant delays, mistakes, and inconstancies in the early months. The rules provide the U.S. Dept. of Education with complete discretion in granting relief, and we ultimately don’t know how officials will handle tens of thousands of applications (over 82,000 requests have already been formally made by students).
Stay tuned for more updates.