Settlement would forgive $6 billion for defrauded students

The Biden administration has agreed to cancel $6 billion in student loans for about 200,000 former students who say they have been defrauded by their colleges, according to a proposed settlement in a Trump-era lawsuit.

The agreement, filed Wednesday in federal court in San Francisco, would automatically cancel federal student debt for students enrolled at one of more than 150 colleges who later filed for debt forgiveness for alleged misconduct by the schools.

Nearly all the schools involved are for-profit colleges. The list includes DeVry University, the University of Phoenix, and other chains that are still in business, along with many that have shut down in recent years, including ITT Technical Institute.

Education Minister Miguel Cardona said in a statement that the settlement would resolve the claims “in a manner that is fair and equitable to all parties”.

The deal has yet to be approved by a federal judge. There will be a hearing on the proposal on July 28.

If approved, it would be an important step in the Biden administration’s efforts to clear a backlog of claims filed through the borrower defense program, which allows students to have their federal loans cleared if their schools make false advertising claims or otherwise mislead them.

The class action lawsuit was initially filed by seven former college students who alleged that Betsy DeVos, President Donald Trump’s education secretary, deliberately shut down the borrower’s defense process while rewriting the rules. By the time the charges were filed, no final decision had been made on any claims for over a year.

When the department under DeVos began deciding claims months later, it issued tens of thousands of denials, often without explanation. At the time, the judge was overseeing the case blasted DeVos for the “frantic pace” of rejections, saying her approach “hangs borrowers to dry.”

Tens of thousands of borrowers were still in limbo when the Biden administration took over and began negotiating a settlement in 2021, according to court documents. The latest federal data shows that there are more than 100,000 pending borrower defense claims.

Under the proposed settlement, anyone who attended an eligible school and filed for cancellation effective Wednesday would have their federal student loans and interest waived in full. They would also get refunds for payments made on those loans in the past.

Another 68,000 claimants who have not attended eligible schools will receive a “streamlined assessment” of their claims. The oldest claims will be reviewed first, while the most recent will receive a decision within 2½ years.

All borrowers caught up in DeVos’s flurry of denials will be rejected and their claims treated as if they had been pending since the date they were originally filed.

The Project on Predatory Student Lending, which represented students in the lawsuit, said the agreement will help create a “fair, equitable and efficient solution for prospective borrowers.”

“This momentous proposed settlement will provide answers and assurance to borrowers who have fought long and hard for a fair resolution of their borrower defense claims after being defrauded by their schools and ignored or even rejected by their government,” said Eileen Connor , director of the project.

Borrowers’ defense claims are typically reviewed individually, but the Department of Education decided to allow automatic cancellation in this case due to “general evidence of institutional misconduct” at the schools in question, according to the settlement.

There was already evidence of “significant misconduct” in some schools, while others were included under the deal due to the high number of claims from their former students.

The borrower defense lawsuit was initiated by Congress in 1994 but was rarely used until the collapse of the Corinthian Colleges chain in 2015. The for-profit company closed its campuses amid widespread fraud findings, prompting thousands of students to file for debt forgiveness.

That prompted the Obama administration to expand the program and create clearer rules. It became the focus of the government’s efforts to crack down on for-profit colleges that lied or used high-pressure tactics to recruit students. Students from Corinthian and other chains said they signed up with the promise of getting high-paying jobs, only to graduate with little job prospects.

Earlier this month, the Biden administration agreed to cancel federal student debt for anyone who attended a Corinthian school from the company’s founding in 1995 to its collapse two decades later. The move will clear $5.8 billion in debt for more than 560,000 borrowers, the largest discharge in the history of the Department of Education.

The settlement adds to the administration’s efforts to cancel student debt for certain groups of borrowers. It has billions of extra dollars erased in debt to other former for-profit college students, along with borrowers with severe disabilities and the one with public service jobs

Biden has also faced increasing pressure to pursue mass student debt forgiveness. The White House recently signaled that it is considering canceling $10,000, but no decision has been made.

The Associated Press education team is supported by New York’s Carnegie Corporation. The AP is solely responsible for all content.

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