Settlement would forgive $6B for defrauded college students

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

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

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

The deal has yet to be approved by a federal judge. A hearing on the proposal is scheduled for July 28.

If approved, it would mark a major step in the Biden administration’s efforts to clear a backlog of claims filed through the borrower defense program, which allows students to get their federal loans erased if their schools made false advertising claims or otherwise misled them.

The class-action suit was initially filed by seven former students who argued that President Donald Trump’s education secretary, Betsy DeVos, had intentionally stalled the borrower defense process while she rewrote its rules. When the suit was filed, no final decision had been made on any claims for more than a year.

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

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

Under the proposed settlement, anyone who attended an eligible school and applied for cancellation as of Wednesday would get their federal student loans and interest fully forgiven. They would also get refunds for past payments made on those loans.

An additional 68,000 plaintiffs who did not attend eligible schools will get a “streamlined review” of their claims. The oldest claims will get reviewed first, while the most recent ones will get a decision within 2½ years.

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

The Project on Predatory Student Lending, which represented students in the suit, said the agreement will help create a “fair, just and efficient for future borrowers.”

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

Borrower defense claims are typically reviewed individually, but the Education Department decided to grant automatic cancellation in this case because of “common evidence of institutional misconduct” at the schools in question, according to the settlement.

At some schools, there was already proof of “substantial misconduct,” while others were included because of high rates of claims coming from their former students, according to the deal.

The borrower defense process was started 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 findings of fraud, prompting thousands of students to apply for debt cancellation.

That led the Obama administration to expand the program and create clearer rules. It became the centerpiece of the administration’s efforts to crack down on for-profit colleges that lied or used high-pressure tactics to recruit students. Students at Corinthian and other chains said they enrolled on promises that they would land high-paying jobs, only to graduate with few 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 action will erase $5.8 billion in debt for more than 560,000 borrowers, the largest single discharge in the Education Department’s history.

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

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

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