Dept. Of Education Plans To Overhaul Loan Forgiveness Program For Students Defrauded By Schools

As thousands of former Corinthian College students continue to wait to learn whether or not they’re on the hook to repay billions of dollars in student loans they took out to attend the now defunct for-profit college, the Department of Education announced plans to overhaul the loan forgiveness process for students who believe they have been defrauded by their colleges.

Starting next month, the Dept. of Education will begin working to craft a new process aimed at making it easier for students to have their federal loans discharged if the school they attended was found to have used illegal or deceptive tactics to persuade them to borrow funds to finance their education.

The process to create a more streamlined loan forgiveness process will include field hearings and the creation of an advisory panel, the Dept. said in an announcement.

Specifically, the Dept. will look to clarify:
• the procedures to be used for a borrower to establish a defense to repayment;
• the criteria that the Department will use to identify acts or omissions of an institution that constitute defenses to repayment of Federal Direct Loans to the Secretary;
• the standards and procedures that the Department will use to determine the liability of the institution participating in the Federal Direct Loan Program for amounts based on borrower defenses; and
• the effect of borrower defenses on institutional capability assessments.

“The process we are beginning today aims to create a clearer, more comprehensive system,” Education Secretary Arne Duncan said in the statement. “And we think it is critical that this solution also does right by American taxpayers. That’s what they deserve.”

The Dept. expects to have a rule in place by November 2016, meaning it would likely go into effect in July 2017.

The need to change the current process to have student loans discharged based on the fraudulent practices of a college – known as “borrower defense to repayment” – became clear earlier this year after thousands of former students of Corinthian’s Heald College, WyoTech and Everest University campuses found the system complicated and difficult to navigate, the Dept. says.

In some cases, consumer advocates warned that many student might not bother to apply for discharges because the system was too daunting.

The Washington Post reports that only about 7,000 former CCI students have applied for forgiveness, with just 2,600 applications processed so far.

The upcoming changes will not affect the ongoing debt relief process for CCI that the Dept. announced back in June.

At that time, the Dept. of Education said students who attended (after June 20, 2014) the 30 CCI campuses that closed in April had two options to seek relief:

1. Apply for a closed school loan discharge, which would get rid of the obligation to repay and reimburse the student for any payments made; or
2. Transfer earned credit to another institution to continue their education in a comparable program.

While it’s become increasingly clear to lawmakers that the process is in need of a change, some have expressed their concern that the Department doesn’t require the offending colleges to foot the discharged debt tab.

But Education Under Secretary Ted Mitchell tells the Post that usually isn’t an option, as many schools that fail have few assets to cover the billion-dollar federal loan tabs they created. Such was the case for CCI, which filed for bankruptcy listing just $20 million in assets, a far cry from the $3.5 billion in outstanding federal loans owed by its former students.

Mitchell said that in addition to streamlining the process to apply for forgiveness, the Department will address the need to use enforcement actions to attempt to recoup funds to cover borrower claims.

“This is very important to us,” Mitchell said. “We know borrowers deserve as clear a set of policies and regulations as possible to make it easier, more transparent, more efficient for them to apply for relief.”

Obama administration plans to overhaul rules on student debt forgiveness [The Washington Post]

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.