The Department of Education announced last week that it is changing how it determines relief for borrowers who assert “borrower defense claims.” Such claims allege that the borrower was misled by his or her school or that the school engaged in other misconduct in violation of certain laws. Borrower defense claims only apply to federal loans made under the William D. Ford Direct Loan Program. ED anticipates that this change will impact approximately 72,000 borrowers and result in $1 billion in loan cancellation.
Under ED’s new approach, a borrower will receive full loan relief when evidence shows that the school engaged in certain types of misconduct that impacted the borrower’s decision to apply to or remain enrolled in that school. In making the change, ED plans to rescind the formula used by the ED under the Trump Administration for calculating partial loan relief. (Based on information on ED’s website, that formula calculated the amount of borrower defense discharge relief by comparing the earnings of those who completed the same or a similar program at a borrower’s school to the earnings of those who completed the same or a similar program at other schools.)
An article published in The Hill reports that, according to an ED representative, after reviewing the formula used under the Trump Administration, ED determined that it did not result in appropriate relief for borrowers. The Hill article indicates that in order to grant full relief to eligible borrowers, ED will reimburse amounts paid on the loans, request credit bureaus to remove negative reporting associated with the loan, and reinstate federal student aid eligibility.
ED’s announcement states that full relief “will apply to borrower defense claims approved to date; the change applies to claims for which borrowers only received partial loan relief and for applications approved to date that have yet to receive a relief determination.”
The changes, while not unexpected, presage ED’s tougher stance toward for-profit institutions under new Secretary of Education Miguel Cardona. Attorneys in our Consumer Financial Services and Higher Education groups are working with for-profit colleges and universities, as well as non-traditional bootcamps and other training programs, to prepare for additional regulation by both ED and the CFPB.