Administration Seeks to Up the Bar for Student Loan Forgiveness Based on Fraud

The Trump administration is looking to stiffen the criteria for borrowers to obtain forgiveness of their student loans based on fraud. If enacted, this higher criteria would mark a significant shift for students who seek forgiveness under the established borrower defense claim.

According to Secretary of Education Betsy DeVos, the Department of Education’s “commitment and our focus has been and remains on protecting students from fraud. 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 proposed Institutional Accountability regulations would, among other things:

  • Require students to be in default before they could apply for the loan forgiveness
  • Require students to show that the school had an “intent to deceive” or exhibited reckless disregard for the truth.
  • Replace a state standard for adjudicating claims with a federal standard to expedite review of student claims
  • Facilitate collection of evidence to decide claims and ensure the Secretary of Education can recoup losses from the institutions where there are successful borrower defense claims.
  • Reduce the time to file a borrower defense application from six years to three years.
  • Would allow schools to use arbitration agreements during enrollment, which previously resulted in the loss of federal funding.
  • Encourage students to seek remedies directly from the schools that committed the misrepresentation

The Obama administration established the “borrower defense” to allow student loan forgiveness if a school misled students or engaged in other misconduct, but the borrower was only required to show that the school had engaged in false advertising. The proposed requirements, however, would establish a higher test to show that the misrepresentation was done intentionally or with “reckless disregard of the truth.” Additionally, the Obama-era rule allowed for forgiveness of a group all at once if the school was shown to be clearly fraudulent, but the new rule would consider each application on a case-by-case basis.

Although consumer advocates have sharply criticized the proposal as making it more difficult for victims of fraud, the department responded that it is only proposing stronger requirements to document the fraud and that “if a student has actually been defrauded, it is not harder at all to receive loan relief,” according to Department of Education Deputy Press Secretary Sara Broadwater. The department reiterated that it seeks to protect both the borrowers as victims of fraud as well as taxpayers who pay for fraudulent loan forgiveness claims.

According to one source, about 140,000 student loan borrowers have applied for forgiveness under the borrower defense rule in the past three years. Most fraud claims to the Deptarment of Education relate to for-profit schools, which receive approximately 15 percent of the government’s financial aid.

The proposed regulations are open for public comment over the next 30 days to allow the Education Department to finalize the rule by November 1. The new rules would go into effect in July 2019. Stay tuned in the coming months as both industry and consumer advocates provide reaction to the proposals.