Obama Administration Simplifies Loan Forgiveness for Defrauded Students

Posted By Eliana Osborn on June 14, 2016 at 1:18 pm
Obama Administration Simplifies Loan Forgiveness for Defrauded Students
Secretary of Education John B. King Jr. announces loan forgiveness for Corinthian Colleges students in March 2016. Image: Bob Salsberg, AP

When Corinthian Colleges closed their campuses, students alike were left in the lurch. Some were able to transfer to other schools and finish their degree programs. Most, however, didn’t have that opportunity. Instead, they were left with student loan debt and college credits with little to no value. Similar stories have played out across the country, as other for-profit institutions have shut down with little notice. There was a process for getting rid of such loans, but it was difficult and limited in scope.

Now, the Obama administration is stepping in with new regulations on how to handle student loan debt when schools don’t hold up their end of the bargain. Loans can be discharged, technically, if an institution is proven to be deceptive or fraudulent. Most complaints against for-profit schools fall under this category, with attorneys general charging them with a lack of transparency or dishonest tactics.

The change, announced on June 13, will amend current federal student loan procedure. It makes it easier for students to file for loan discharge and broadens the conditions under which they are eligible to do so. It also eliminates mandatory arbitration clauses, which allow loan companies to avoid court cases. Finally, the new regulations serve to make sure taxpayers are not stuck covering these discharged loan balances. Schools and their parent companies could be required to pay back student funds themselves.

The essential component of the proposed regulation concerns who is eligible for relief: “The new Federal standard would allow a borrower to assert a borrower defense on the basis of a substantial misrepresentation, a breach of contract, or a favorable, nondefault contested judgment against the school for its act or omission relating to the making of the borrower’s Direct Loan or the provision of educational services for which the loan was provided,” according to the proposal summary. If schools have hidden information—about default rates or graduation employment data, for example—that could now be considered actionable for loan discharge.

Some student loan advocates had hoped for even more borrower-friendly policy. There are still statutes of limitation on when claims can be made, though the timeline has ben extended from two years to six. And how much a student is affected will be part of the equation – if your school lies to you but you are still able to succeed, graduate, and get a job, your application for redress will be a lower priority.

The draft of the proposed regulation changes covers more than 500 pages and is open to public comment for the next 45 days. What comes next in terms of actionable policy is still unknown – however, colleges and universities who take student money and don’t provide the education promised will likely no longer be able to hide.

Eliana Osborn
Eliana Osborn is an associate English professor at Arizona Western College, with degrees from Brigham Young University and Northern Arizona University. She’s published widely in forums such as The New York Times, the Washington Post, the Christian Science Monitor, and the Chronicle of Higher Education.

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