Education Department Settles Lawsuit, Agrees to Process 170,000 Student Loan Forgiveness Claims

April 13, 2020 Updated: April 13, 2020

The U.S. Department of Education has agreed to process student loan forgiveness applications for nearly 170,000 borrowers who claimed they were defrauded by for-profit colleges, as part of a settlement in a long-standing federal lawsuit.

If approved by the U.S. District Court in California, the settlement would end a case file June 2019, when consumer groups complained about the Education Department’s unwillingness to implement the Obama-era “borrower defense” rule, which allows students defrauded by for-profit colleges to have their loan debt wiped out. Instead, the Department came up with a new plan that would provide partial relief to most of the borrowers, based on their present-day income.

The Department, under the settlement, would begin processing some 170,000 debt cancellation claims by borrowers allegedly misled by for-profit education chains, including the now-defunct Corinthian Colleges, that falsely advertised their ties to employers and the transferability of credits. The borrowers would receive a final decision on their application within 18 months, and if approved, their debt would be canceled within 21 months.

Any interest that accrued on student debt for the time period that borrower defense claims were pending would also be wiped out, regardless of the final decision on the loan forgiveness application.

“It is an enormous relief to know that students will finally have answers on their borrower defense,” said Theresa Sweet, a leading plaintiff in the lawsuit. “For years, people have been paralyzed with debt and forced to put their education, personal goals and financial plans on hold because we didn’t know if or when we might get a decision.”

U.S. Secretary of Education Betsy DeVos blamed the Obama administration for creating a massive backlog of claims for the next administration to deal with.

“We inherited from the Obama administration more than 64,000 borrower defense claims,” she said in December 2019 when explaining her sliding-scale debt relief plan before a House Education and Labor Committee. Her plan is based on a complex formula that compares the median salary of graduates from the for-profit colleges to those of graduates from similar non-for-profit schools. The for-profit graduates will receive relief if their earnings are at a deficit.

DeVos said that the previous administration had “no process in place” for verifying that these students had actually been defrauded by their schools.

“In fact, the prior administration was encouraging claims to be filed knowing full well it lacked the ability to even accurately track them,” said DeVos. “Rather than deal with the claims, they just walked away and left these tens of thousands [of] claims behind for this administration.”