New Federal Rules Help Students Get Forgiveness in Cases of Fraud

loan forgiveness fraud

On October 28, President Obama’s administration announced a new set of rules designed to help protect students from misleading, predatory, and fraudulent school practices.

The new rules will help potential students evaluate schools and loan repayment prospects before enrolling. In the case of a school’s misconduct, the rules also lay out a clear process for borrowers to apply for loan discharge.

This development comes on the heels of highly publicized fraud charges at several for-profit schools. In some of those cases, the institutions or colleges closed, or the government fined them over misleading and deceptive practices.

State of for-profit schools

For-profit schools are responsible for a disproportionate amount of student loan defaults.

For-profit students make up just 11 percent of college or university attendees, yet account for 43 percent of all student loan defaults. And while the majority of students at community college do not take out loans, the average for-profit student has $14,000 in student loan debt.

More than 25 percent of for-profit institutions receive 80 percent of their revenues from federal student aid. With growing concerns about misconduct, fraud, and skyrocketing student loan numbers, the government has increasingly become involved in for-profit school regulations.

Key issues

Of the issues addressed, some of the new regulations change practices significantly. Below are some of the most notable changes and requirements.

Loan repayment information

The Obama administration now requires for-profit universities and trade schools to provide potential students with information about poor loan repayment outcomes. Schools must include this info on advertising and promotional materials.

Students must also be notified about the possibility of loan discharge if their school closes.

A clearer path to discharging loans

Prior to the new rules, if your school misrepresented their services or otherwise engaged in fraudulent activities, the application and approval process to discharge your student loans was complicated and could vary by state law.

With this new federal standard, the borrower defense process is more straightforward and ensures that applications for discharge are considered more fairly and efficiently. Additionally, loan servicers can no longer require payments while your claim is in review.

Group discharges

To make it simpler for affected students, student loans may now be discharged for an entire group of borrowers — even if you haven’t filed a discharge claim, in some cases.

If, for example, a school is found guilty of fraud and closes down, students who do not re-enroll elsewhere could have their loans automatically discharged.

What the rules mean for students

“Today’s regulations build on [the Obama administration’s] progress by ensuring students who were lied to and mistreated by their school get the relief they are owed, and that schools that harm students are held responsible for their behavior,” said US Secretary of Education John B. King, Jr. in a statement.

Last year, Corinthian College closed or sold all of its campuses while facing allegations of fraud. The Education Department received more than 15,000 claims from students and alumni who had student loans from the school.

The forgiven loans totaled over $247 million, and that process spurred federal officials to create new processes to help victims of education fraud get rid of their debt.

The new regulations will create an automatic discharge of student loans belonging to borrowers whose school closed on or after November 1, 2013 and who have not enrolled in another Title IV participating institution within three years.

Additionally, the regulations eliminate previous agreements that prevented students from suing schools over misconduct. Under the new rules, students who are the victims of fraud or misconduct can seek justice in the form of a lawsuit.

And students who were unable to complete their degrees due to school closure will also be re-eligible for federal Pell Grants, even if they used up their Pell Grant totals at the closed school.

Consequences for schools

The consequences for some schools are severe.

“This complex and burdensome regulation will crush career education with financial requirements not imposed on others in higher education, including institutions that have lower graduation rates and higher default rates,” said Steve Gunderson, president and CEO of Career Education Colleges and Universities, a professional group that lobbies on behalf of for-profit schools.

Colleges are now financially responsible for repaying or forgiving student loans in cases where fraud or misconduct is present. In the past, that burden fell on taxpayers.

For victims of misconduct or fraud

If you attended a school that the government cited for fraud or has closed, you may be eligible for student loan discharge. That means the government and the schools could eliminate your remaining student loan balance.

If your school closed, you can submit a claim for closed school discharge. If your school committed fraud, misrepresented its services, or otherwise violated state laws, you may be able to get your loans forgiven through borrower defense to repayment.

Contact the US Department of Education if you think these situations apply to you; they can walk you through next steps to get your loans forgiven.

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