The Obama administration announced new rules Monday that, if enacted, will pave the way for thousands of students to have their student loans forgiven. The new rules are welcome news for students who claim they were scammed by shady for-profit colleges, but they may also leave taxpayers on the hook for billions of dollars.
Existing federal law allows for students to request loan forgiveness if they can prove the school they attended used illegal or fraudulent tactics to get them to attend. But this process is difficult, and many students burdened by debt don’t even know about it.
Now, the Department of Education is planning to expand the criteria that allow debtors to seek forgiveness to include any breach of contract, court judgments against a school, or any “substantial misrepresentation” made by the school regarding its educational offerings or the job prospects and debt burdens of its students.
The proposal, which officials plan to finalize in November to take effect July 2017, will allow students to seek loan forgiveness up to six years after they discover alleged wrongdoing by their school, a big increase from the two-year limit the Department of Education was considering earlier this year. Instead of offering full forgiveness to every wronged student, the Department of Education will attempt to calculate the harm inflicted on students, providing only partial forgiveness for students who may have received at least partial benefit from their degrees.
The federal government estimates these new rules could result in as much as $4.2 billion in student loans being forgiven each year, though there is no strict upper limit. (RELATED: Obama Admin Plans To Forgive Up To $3.6 Billion In Student Loans)
The new rules have been in the works for months, and come in response to the high-profile failure of several for-profit college, in particular Corinthian Colleges, which collapsed in 2014 when the federal government blocked its access to federal student loans.
Besides making it easier to have loans forgiven, the new rules also make it easier for dissatisfied students to sue colleges they believe have wronged them. Currently, many colleges require students to sign contracts in which they agree to resolve complaints through mandatory arbitration. Other clauses prohibit class-action lawsuits or require students to use a school’s internal complaint-resolution process before seeking an external solution. The new rules would prohibit these arrangements at all schools that receive federal funding (which includes almost every college in the country), potentially exposing schools to a wave of new litigation. (RELATED: 40 Percent Of Americans Aren’t Paying Their Student Loans)
These lawsuits, it is hoped, will reduce the new rules’ cost for taxpayers by allowing debtors to sue their schools for financial relief rather than having to turn immediately to the federal government.
“Our message is clear. The Obama Administration will not sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag,” Secretary of Education John King told reporters during a press call.
The new rules apply to all schools, but mainly serve as the latest salvo in the Obama administration’s long conflict with for-profit colleges. It comes less than two years after the implementation of the gainful employment rule, which cuts off student loan access to for-profit programs whose students struggle to pay off debt after graduating.
The for-profit college industry was quick to denounce the new regulations as potentially ruinous.
“The regulation put forth today by the U.S. Department of Education will cause millions of students to lose access to higher education and leave American taxpayers on the hook for billions of dollars,” said Steve Gunderson, president of Career Education Colleges and Universities, an advocacy organization for for-profit schools, in a press release. “The steps the Department is taking today puts the future of career education in America at risk. If the Department limits career education opportunities for new traditional students, it will deny millions of Americans a pathway to improving their lives and growing the American economy.
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