Rule Change Could Lead to $1B in Forgiven Student Loans

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The Department of Education expects to cancel $1 billion in student loans after doing away with a Trump-era policy limiting the amount of forgiveness that borrowers who were misled or defrauded by their schools could receive.

Student loan borrowers who gained prior approval from the Department of Education (ED) on claims for so-called “borrower defense” debt relief will receive full forgiveness of their loans, the department announced Thursday. Under the borrower defense program, federal borrowers are allowed to seek cancellation of their direct loans if the school they attended engaged in certain misconduct. The change could help about 72,000 federal borrowers, the ED said.

The move came just weeks into the tenure of new ED secretary Miguel Cardona. It’s the first of several actions Cardona has promised to ensure a more generous stance toward easing student loan debt, representing a change in course from his predecessor, Betsy DeVos. Previously, such claims were subject to a formula providing 25%, 50%, 75%, or full forgiveness.

“Borrowers deserve a simplified and fair path to relief when they have been harmed by their institution’s misconduct,” Cardona said in the press release. “A close review of these claims and the associated evidence showed these borrowers have been harmed and we will grant them a fresh start from their debt.”

The new ED rules, which include borrowers who previously received only partial forgiveness, discharge 100% of federal student loans related to the borrower defense claims, an amount the department anticipates will total $1 billion. The rules also provide for the potential reimbursement of any amounts paid on the loans, reinstatement of federal student aid eligibility, and requests to credit bureaus to remove any related negative credit reporting.

Affected borrowers will receive notices from the ED in the coming weeks, with the loan discharges to follow.

Borrower defense has existed since the 1990s, but was rarely used until the Obama administration expanded the existing rules in 2016, after the closure of for-profit Corinthian Colleges caused an influx of claims.

Saying the Obama administration rules “furiously” gave away taxpayer money, DeVos, ED secretary under President Donald Trump, introduced a new formula in December 2019 that used earnings data to determine whether a borrower had actually suffered harm.