ED to Forgive Debt, Refund Students From Closed Schools for Erroneous Loan Collections

By Joelle Fredman, NASFAA Staff Reporter

The Department of Education (ED) last week announced that it would forgive the student loan debt of thousands of borrowers who were enrolled in now-defunct ITT Educational Services, Inc. (ITT) schools, as well as refund former Corinthian Colleges students for loan payments that it erroneously collected despite a court order prohibiting it from doing so.

When the troubled for-profit chains ITT and Corinthian Colleges abruptly closed their doors in 2016 and 2015, respectively, tens of thousands of students were left with large amounts of loan debt and no degree to show for it. 

Earlier this summer, the Consumer Financial Protection Bureau (CFPB) settled a lawsuit against the company set up to manage the loans of ITT students, Student CU Connect CUSO, LLC, which resulted in 18,000 former ITT students receiving debt relief totaling more than $168 million.

ED announced on Thursday, according to POLITICO, that it would be forgiving the debt of 7,500 former ITT students — totaling $95 million — complying with a provision within the borrower defense to repayment regulations to automatically discharge loans from certain students whose schools closed. While Education Secretary Betsy DeVos has attempted to delay the borrower defense regulations, a court ruled last year that ED had to continue to implement them. However, ED did rewrite the regulations following a lengthy negotiated rulemaking process last year, and the new rule, which goes into effect July 1, 2020, does not include an automatic loan discharge. 

In December, ED wrote that it had begun to notify certain former Corinthian students that they were eligible for an automatic loan discharge. In a notice in the Federal Register, ED wrote it identified 15,000 borrowers who were eligible for the discharge, based on their attendance at closed schools between November 2013 and December 2015, and that amount of loans to be discharged totalled $150 million — $80 million of which would go to Corinthian students. POLITICO reported that an ED official confirmed that the agency would begin to send similar notices to eligible ITT students as well.

In a new development, a court filing released Wednesday revealed that despite this relief, many former Corinthian students were still being subject to abuse. In the 31-page document, ED wrote that it had been erroneously collecting on the loans of 3,289 students for the past year and a half — citing two system errors in March and July — despite being ordered to cease its collections in May. While 16,034 borrowers received notices incorrectly stating that they had payments due, 3,289 of those borrowers made one or more payments, either on their own or through wage garnishment.   

ED wrote in the filing that it was working to refund students for those loan payments, and noted that one of its federal loan servicers, FedLoan Servicing, a branch of the Pennsylvania Higher Education Assistance Agency (PHEAA), made a large amount of the collection errors. A July “system error” involving FedLoan Servicing, ED wrote, erroneously took 3,000 borrowers out of forbearance. 

ED wrote that those borrowers were put back into forbearance, and added that it is notifying impacted borrowers and refunding them “on a rolling basis, as they are identified.” In addition to refunding borrowers, ED has also reversed the negative effect the errors had on 847 borrowers’ credit reports.

ED wrote that to ensure this does not happen again, moving forward it will be “implementing various processes to enable [ED] to better track compliance with the preliminary injunction and to correct any errors on a timely basis,” and that it will “be enhancing its oversight efforts over the federal loan servicers as well as its own operations and internal controls, such as by initiating an internal audit of its compliance efforts with the preliminary injunction,” among other efforts. 

“[ED] anticipates that these steps will ensure that [ED] is overseeing and monitoring the servicers’ tracking of borrowers’ forbearance or stopped collection statuses on an ongoing basis and will help [ED] determine the need for and develop long-term solutions to assist [ED] with its compliance with the preliminary injunction,” ED wrote.


Publication Date: 9/23/2019

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