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Billions in Federal Loans Involving For-Profit Schools to Be Forgiven

By Joseph Fawbush, Esq. | Last updated on

The federal Borrower Defense to Repayment program has become a financial lifeline to many student borrowers, particularly as for-profit schools proliferated during the 2000s and 2010s. This glut of for-profit schools left hundreds of thousands of students with a subpar or incomplete education and tens of thousands of dollars in student loan debt.

The program permits borrowers who were defrauded by their schools (such as ITT Tech) to have their federal student loans forgiven. As of this writing, the federal government has forgiven almost $8 billion in federal student loans to students who were defrauded or whose schools closed before they could complete their degrees.

Class-Action Lawsuit Against Department of Education

Unfortunately for student borrowers, that is not the whole story. Back when Betsy DeVos was the secretary of education, she made the decision to freeze the Borrower Defense to Repayment rule, citing lax rules that allowed anyone to "raise his or her hands to be entitled to so-called free money."

After a class-action lawsuit reinstated the rule, DeVos continued to deny relief to students, denying the claims of 130,000 students in her final year in the position. Only 9,000 claims were rejected during the previous five years .

This refusal to grant relief led to another class-action suit, in which seven plaintiffs claimed that DeVos left hundreds of thousands of students permanently harmed due to damaged credit.

Tentative Settlement Reached, Still Needs Final Approval

There is good news for defrauded student borrowers, however. The class and the Department of Education recently reached a settlement after a year of negotiations in which $6 billion in federal student loans will be canceled.

The presiding judge has yet to sign off officially on the settlement. U.S. District Judge William Alsup said he still needs to determine that the settlement is "fair and reasonable." He called the settlement "a grand slam home run" for the plaintiffs, but was unsure of who ultimately would be responsible for making any payments. The schools themselves — those that remain — will not have to pay any of the money back. According to the Justice Department, the federal government will ultimately forgive the loans and pay out any relief to the class. Alsup seems to be indicating he wants more details before approving the settlement.

What is clear is that under the current settlement proposals, the Department of Education will discharge any remaining loans involving the schools named in the class action. In order to receive the settlement, student borrowers must have submitted a completed Borrower Defense to Repayment application by June 22 of this year.

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