Education Department adopts “Borrower Defense” rules to protect students and taxpayers

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New Rules Will Help Students Cancel Loan Debts When Schools Engage in Misconduct   

WASHINGTON, D.C. – New rules adopted by the Department of Education today will provide a pathway for students to cancel their debts when schools have misled them or broken the law, and will make it harder for schools to commit fraud and stay in business, according to Consumers Union, the policy and mobilization division of Consumer Reports.

“Hundreds of thousands of students have been harmed in recent years by predatory schools that have treated them as little more than dollar signs,” said Suzanne Martindale, staff attorney for Consumers Union.  “Today’s action by the Department will help assist students get the relief they deserve and ensure schools are responsible for the cost of cancelled loans when they engage in fraud.”

The final rules create a clear process for students to assert a defense to repayment of their federal education loans when they’ve been harmed in such circumstances.  Groups of students who have been defrauded may be eligible to have their loans automatically discharged instead of having to submit individual applications for relief.  The rule also sets forth a series of triggering events that will require schools to post letters of credit to the Department if early warning signs emerge – an important financial protection for students and taxpayers when schools are at risk of failing.  The final rule also includes an outright ban on all pre-dispute arbitration clauses in school contracts, as well as automatic loan discharges for students who attended schools that closed since November 1, 2013.

The Department also announced a separate action to restore Pell Grant eligibility to students who were unable to complete their studies because of a school closure.

While praising the new rules, Consumers Union expressed disappointment that they set forth a narrower, federal borrower defense standard for students with loans taken out after July 1, 2017, instead of ensuring that all borrowers can assert defenses based on applicable state law.  The consumer group is concerned that students’ borrower defense claims are taking a long time to process even when the Department already has substantial evidence of the school’s misconduct in its possession, as is the case with former Corinthian students who are still waiting for relief.

“We urge the Department to use its full authority to swiftly resolve borrower defense claims, and to stop collections on students’ debts where the Department already has evidence that they were defrauded,” said Martindale.

Students across the country – especially those from low-income communities and communities of color, as well as servicemembers and veterans – have been subjected to aggressive sales pitches from schools that market training that will lead to good jobs without delivering on those promises.  Too often, students take on significant debt to attend these programs only to struggle to find a good paying job when they graduate.  Students who attended schools that recently failed, like scandal-plagued Corinthian College and ITT Tech campuses, have been left in debt without getting the training they sought after those schools closed when regulators took action to stop abusive practices.

Contact:  Michael McCauley, mmccauley@consumer.org, 415-431-6747, ext 7606 (office) or 415-902-9637 (cell) or David Butler, dbutler@consumer.org, 202-462-6262