Trump Administration May Further Limit Student Loan Forgiveness
Student loan forgiveness is about to change – and it may now become harder for some borrowers to receive student loan forgiveness.
Here’s what you need to know and how it can impact you.
Student Loan Forgiveness: The Proposal
The Trump administration proposed Wednesday to tighten the criteria under which student loan borrowers who accuse their school of fraud to have their student loans forgiven.
The U.S. Department of Education, led by Secretary Betsy DeVos, is considering several options, including:
- Students would need to be in default before they could apply for student loan forgiveness
- Students would need to show their college had an “intent to deceive” or exhibited “reckless regard for the truth”
Importantly, the Education Department said it is focused on protecting the needs of both borrowers (protecting victims of fraud) and taxpayers (protecting them from fraudulent student loan forgiveness claims).
“Our commitment and our focus has been and remains on protecting students from fraud,” said U.S. Secretary of Education Betsy DeVos. “The regulations proposed today accomplish that by laying out clear rules of the road for higher education institutions to follow and holding institutions, rather than hardworking taxpayers, accountable for making whole those students who were harmed by an institution’s deceptive practices.”
The second option would propose a higher litmus test for borrowers than the policy during the Obama administration, which only required borrowers to show their school engaged in false advertising.
These proposed rules are different than federal student loan forgiveness and public service loan forgiveness, which would not be impacted under this proposal.
Like federal student loan forgiveness, student loan forgiveness for defrauded borrowers is funded from taxpayer dollars.
New Rules: The Objectives
The Education Department believes the new rules will achieve the following:
- Enact a borrower defense to repayment adjudication process that is clear, consistent and fair to borrowers
- Replace a state standard with a federal standard that clearly defines misrepresentation and enables more expeditious review of student claims
- Facilitate collection and review of evidence for deciding claims and ensure that the Secretary of Education can recoup, within five years, from institutions the financial losses associated with successful borrower defense claims.
- Encourage students to seek remedies directly from institutions that have committed acts of misrepresentation
- Expand from 120 days to 180 days the period of time during which students who left an institution prior to its closure are eligible for a closed school loan discharge while at the same time incentivize closing institutions to engage in orderly teach-outs, which enable more students to complete their program
- Ensure that institutions requiring students to engage in mandatory arbitration or prohibiting them from participating in class action lawsuits provide plain language explanations of these provisions to enable students to make an informed enrollment decision
- Prevent guaranty agencies from charging borrowers a fee if a defaulted loan goes into repayment within 60 days
- Protect taxpayers by requiring institutions to post a letter of credit when events occur that put the institution’s continuing operations or financial stability at risk
The Wall Street Journal also notes that the new rules would:
- Limit the time that students can file claims, allowing three years from the date they “discovered, or reasonably should have discovered, the misrepresentation.”
- Prevent a student from applying for student loan forgiveness if that student was provided an opportunity to transfer credits to another school, even if the original school closed.
- Prevent state attorneys general from filing class action suits on behalf of affected borrowers.
According to student loan debt statistics from personal finance site Make Lemonade, about 140,000 student loan borrowers have applied for student loan forgiveness under the borrower defense rule over the past three years.
Why The Change
Last year, DeVos said she wants to strike a fair balance between protecting students from predatory practices and creating balanced rules to which colleges can adhere.
DeVos believes that the borrower defense to repaying rule is confusing and unfair to both students and schools. While critics view the move as a win for the for-profit college industry, DeVos says that the rule change will still help students who are victims of fraud.
“Fraud, especially fraud committed by a school, is simply unacceptable,” DeVos said last year. “Unfortunately, last year’s rulemaking effort missed an opportunity to get it right. The result is a muddled process that’s unfair to students and schools, and puts taxpayers on the hook for significant costs.”
The proposed regulations are open for public comment over the next 30 days so that the Education Department can finalize the rule by November 1.
The new rules would impact students who borrow student loans beginning in July 2019.
The Education Department is seeking comment on how to balance the need to protect borrowers from acts of institutional fraud with the need to protect taxpayers from the high cost of unjustified claims.