Judge Gives Preliminary Approval to Settlement in Borrower Defense Case, Forcing ED to Process 170,000 Cases

By Owen Daugherty, NASFAA Staff Reporter

A federal judge has given preliminary approval to a final settlement agreement that would put an end to a dispute between a group of student loan borrowers and the Department of Education (ED), forcing ED to process roughly 170,000 applications for loan forgiveness that have largely sat idle, in some cases for years.

The settlement agreement calls on ED to process the outstanding borrower defense applications within 18 months and would waive any interest that accumulated on the loans while the applications were pending, regardless of the outcome of the application.

ED must now notify all members of the class action lawsuit about the proposed settlement and their opportunity to comment or object, after which the judge will hold a hearing and grant or deny final approval of the settlement. If the judge grants final approval, the settlement will take full effect.

Additionally, if ED takes longer than 18 months to process the applications that were pending as of April, those impacted would get 30% of their federal student loans discharged for every additional month of delay. If ED continues to engage in “improper debt collection” on impacted federal student loans — for which the agency has come under fire in the past — borrowers will get 80% of their loan balances forgiven. And under the settlement agreement, ED will be required to file quarterly reports detailing its progress.

The Project on Predatory Student Lending, which represents the borrowers in the lawsuit, lauded the settlement, which it agreed to with ED in April, calling it a win for defrauded borrowers.

“This settlement is a very important step that will allow [defrauded students] to finally get a decision and move forward. The law is clear — students cheated by for-profit colleges should have their student loans cancelled,” said Toby Merrill, Director of the Project on Predatory Student Lending, in a statement. “The Department of Education’s refusal to cancel these loans quickly and in their entirety is a stain on the federal student loan program.”

The judge’s preliminary approval of the settlement closes one chapter of conflict over the borrower defense regulations, which have been plagued by litigation for years. The regulations, expanded under the Obama Administration in 2016 and implemented recently by court order, were designed to provide relief to students who have been victim to certain types of institutional misconduct.

However, the application and approval processes for borrower defense claims have been bogged down as Education Secretary Betsy DeVos’ rewritten borrower defense regulations finalized in 2019 faced political and legal challenges since they were announced, culminating when ED reached the settlement and agreed to process the backlog of borrower defense applications.

As the legal battles prolonged, about 170,000 applications for student loan forgiveness were caught in limbo, as ED cited the ongoing litigation.

As of the end of March, ED had approved about 56,000 applications out of the nearly 320,000 it had received, according to Federal Student Aid (FSA) data from the March borrower defense to repayment report. It had more than 155,000 pending applications awaiting adjudication. Additionally, another 60,000 applications had been adjudicated, but borrowers had not been notified.

Of the 56,000 approved applications, about 41% received a partial discharge of student loans and roughly 59% received a full discharge.

Additionally, FSA data shows that nearly 9,500 cases have been closed with no need for adjudication. As of March 31, nearly nearly $540 million in loans have been discharged.

Previous data shows the number of pending borrower defense claims steadily swelled over the years as ED paused making any decisions on applications after a federal court ruled a tiered relief formula established by DeVos was illegal. ED has been able to move forward with partial relief in some instances, however, as DeVos in December announced a revised methodology, which was called into question by many experts.

Meanwhile, Congress recently passed a resolution to block implementation of DeVos’ borrower defense rule, sending the resolution to President Donald Trump’s desk. It is unclear whether Trump will sign it into law. The White House in January released a statement saying that if the resolution passed, advisors would recommend that Trump veto it. However, news reports in March indicated that during a closed-door meeting with Republicans, Trump said he had "sort of a neutral position."

Devos’ proposed rules are set to take effect July 1, 2020 if Trump vetoes the resolution and Congress is unable to pass it with a veto-proof supermajority.

 

Publication Date: 5/28/2020


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