Some 200,000 students who claim they were defrauded by educational institutions in the United States are set to have their student loans canceled after the Biden administration this week settled a $6 billion class-action lawsuit.
The settlement was filed (pdf) with the U.S. District Court for the Northern District of California on Wednesday.
The 2019 lawsuit against the Department of Education made by seven plaintiffs on behalf of student loan borrowers asked for loan cancellation, also known as borrower defense applications. The claims were allegedly ignored by both the Trump and the Biden administrations.
According to the lawsuit, the department sent out tens of thousands of rejection letters to borrower defense claimants in 2020, in which many former students were denied relief due to a “lack of evidence” according to the lawsuit.
Students in the lawsuit had attended various for-profit colleges, including ITT Technical Institute, Corinthian Colleges, The Art Institutes, the New England Institute of Art, Salter College, Brooks Institute of Photography, and more.
They claimed that they were defrauded by their institutions which had falsely promised students “high-paying jobs, state-of-the-art vocational training, and fulfilling careers” and that the department should discharge their student loans because of alleged misconduct, according to the lawsuit.
Wednesday’s settlement still needs to be approved by a federal judge and a hearing for a final sign-off on the proposed agreement is scheduled for July 28.
Specifically, the settlement states that the department will immediately approve the borrower defense applications of approximately 200,000 individuals who took out federal student loans to attend certain schools, meaning those students will automatically see their loans completely canceled and will receive refunds for loan payments previously made, and have their credit repaired.
A second group of approximately 64,000 students who took out federal student loans but did not attend a school on the list included in the settlement will have their loan cancellation applications considered within “rolling deadlines” and get a decision based on how long their application has been pending.
Those applications will be reviewed using a “streamlined” process that is “favorable to borrowers” and students will be able to revise and resubmit their applications if they are not approved under the initial review.
If the department fails to meet any of the deadlines included in the settlement agreement, the affected individual will automatically receive a full settlement relief, according to the settlement.
The department said in the proposed settlement it determined that attendance at the schools “justifies presumptive relief, for purposes of this settlement, based on strong indicia regarding substantial misconduct by listed schools, whether credibly, alleged, or in some instances proven, and the high rate of class members with applications related to the listed schools.”
Education Secretary Miguel Cardona in a statement following the settlement said: “We are pleased to have worked with plaintiffs to reach an agreement that will deliver billions of dollars of automatic relief to approximately 200,000 borrowers and that we believe will resolve plaintiffs’ claims in a manner that is fair and equitable for all parties.”
‘Cheated And Ignored’
Student loan debt in the United States totals $1.762 trillion, according to educationdata.org, and around 43 million Americans have federal student loan debt. The average American with a federal student loan has a debt balance of $37,014.
Eileen Connor, the director of the Project on Predatory Student Lending, which represented the plaintiffs praised Wednesday’s settlement which she said will “deliver answers and certainty to borrowers who have fought long and hard for a fair resolution of their borrower defense claims after being cheated by their schools and ignored or even rejected by their government.
“It will not only help secure billions of dollars in debt cancellation for defrauded students, but charts a borrower defense process that is fair, just, and efficient for future borrowers,” Connor added.
Wednesday’s settlement comes as President Joe Biden continues to consider canceling hundreds of millions of dollars of federal student loan debt across the country, having promised during his 2020 presidential campaign that he would cancel $10,000 debt for each borrower.
Biden previously approved $25 billion in student debt forgiveness for about 1.3 million borrowers.
However, with inflation at 40-year-highs in the United States, some experts are concerned that such a mass cancellation of student debt could further harm the economy.
The White House in May said it had not yet analyzed how wiping out huge sums of student loan debt would impact inflation.