Defrauded Student Loan Borrowers May Soon Have Discharge Options

In 2015, the Corinthian College conglomerate collapsed after federal officials found that the school had fraudulently inflated its job placement rates. The Department of Education sanctioned Corinthian while further investigations continued, at which point the school filed for bankruptcy, essentially leaving U.S. taxpayers with possibly tens of millions of dollars in federal student loans.

Student Loans in India

Student Loans in India 

In response, the Department of Education is undertaking a negotiated rulemaking procedure to clarify definitions and a process for borrower defense to repayment, an old and rarely used rule. This rule provides federal student loan borrowers with relief if their school violates certain state laws. Note that this rule is separate from the eligibility and process currently in place for students affected by the Corinthian situation.

Earlier this month, the Department of Education released the draft version of the rule for public review and comment, with the final version expected to be published no later than Nov. 1, 2016, with an effective date of July 1, 2017, although some aspects of the rule could be implemented sooner.

Although this is only a draft, here is an overview of how this rule is shaping up to provide relief for defrauded borrowers. Note that rules cannot be made retroactively, so new and existing loans will have different eligibility requirements.

Discharge Eligibility for Direct Loans Made Prior to July 1, 2017

The draft borrower defense to repayment rule maintains the existing eligibility definition only for direct loans made prior to July 1, 2017. To be potentially eligible for full or partial discharge under the existing rule, borrowers will need to show that the school violated state law in relation to their federal student loans or in the education it provided – or didn't provide – them. In most cases, this state law means the state's consumer protection laws, which are usually outlined on the local attorney general's website.

One example of a violation that may fall under this particular eligibility definition is a school stating that its job placement rate is 100 percent for a particular major when the actual rate is much lower. Another is a school advertising that students who complete a certain credential at the school will be eligible for certain employment but, in reality, the courses do not fulfill the necessary licensing requirements for that field.

Examples of circumstances that don't fall under this discharge eligibility include slip-and-fall accidents on campus, allegations of sexual harassment and most grade disputes.

In most cases, borrowers must submit applications directly to a special unit that the Department of Education created to review these applications. If applicable, that same unit will pursue the schools for restitution of the discharged funds.

It's important to note that, in most cases, whether the Department of Education can or will pursue a school for restitution on these discharges has no bearing on borrowers' chances of the department approving their discharge application.

With that said, again in most cases, the majority of the evidence will have to prove the borrowers' claims, which in some situations may be difficult for consumers to prove unless the school has already faced some legal or other action or if the Department of Education already has evidence in its files that support the borrowers' claims.

Discharge Eligibility for Direct Loans Made on or After July 1, 2017

Although the process for discharge is the same for new borrowers, the eligibility for discharge under the draft rules is much broader.

Under the proposed rule, borrowers may be eligible for full or partial discharge if they can show that a court found that the school violated state or federal law; that the school committed a breach of contract; or that the school or a representative of the school substantially misrepresented something – such as cost, employability or the education provided – that the students reasonably relied on when deciding to attend the school or remain at the school.

For both older and newer loans, borrowers can apply for discharge at any time, as long as they have an outstanding loan balance. If they also want to seek a possible refund for payments they already made, borrowers in most cases will need to make the claim within about six years of when the violation occurred. For claims made based on court findings of state or federal law violations, there is no statute of limitations.

Discharge Eligibility for Federal Family Education Loan Program or Other Federal Loans

In general, potentially eligible borrowers will face a much larger hurdle for discharge under certain federal loan programs, such as the Federal Family Education Loan Program. However, we won't go into the details on why there's differences between the programs here.

To make a discharge claim for these federal loans, borrowers must prove that the school violated state law and that the school and the lender had a referral relationship. Most consumers will have a difficult time proving this, especially considering that, at best, these Student Loans in India are at least six years old now.

In recognition of this challenge, the Department of Education is proposing to allow FFEL, Perkins and other federal loan borrowers to consolidate into the direct loan program if they can show that they would be eligible for full or partial discharge under the direct loan eligibility definition.

We realize that many of our readers will fall into this federal loan category. However, since the rule is currently only a draft and full details remain unclear, we will wait to discuss this further when the details have been clarified.

Source: https://educationloansinindia.wordpress.com/2016/07/01/defrauded-student-loan-borrowers-may-soon-have-discharge-options/