Obama-era rule leads to $150M in student loan forgiveness

The U.S. Education Department said it will forgive $150 million in federal student loans as part of a 2016 rule that Secretary Betsy DeVos previously tried to block.

Department officials began notifying 15,000 students on Friday that their loans will automatically be erased because they attended colleges that closed while they were still in school or shortly after they finished. About half of them attended campuses under the for-profit Corinthian Colleges chain, which collapsed in 2015 amid widespread accusations of fraud.

The students are eligible for loan relief under an Obama-era rule that was intended to make it easier for defrauded students to get their loans cleared. Part of the rule granted automatic loan forgiveness to students who attended colleges that closed more than three years in the past and who never attended another school afterward.

DeVos delayed the rule in 2017 following a legal challenge from a California association of for-profit colleges, and she later moved to scrap the rule entirely and proposed her own replacement, which would have eliminated automatic loan discharges and raised the bar to prove fraud by schools.

But a federal judge ruled in September that her delay was unlawful, siding with Democratic attorneys general from more than a dozen states who sued over the postponement. A month later, the same judge dismissed another challenge by the California association, effectively clearing the way for the rule to take effect.

DeVos has continued to oppose the rule, calling it “bad policy,” and says she still plans to write new rules that will protect borrowers and taxpayers. Still, the Obama-era law could remain in effect until at least July 2020, when any new policy written by DeVos could take effect.

The automatic discharges were hailed as a victory by groups that represent borrowers, but they said it’s just the first step in the rule’s implementation. Several drew attention to more than 100,000 other students who say they were swindled by their schools but are still waiting on the Education Department to decide their applications for loan relief.

James Kvaal, president of the Institute for College Access and Success, said the initial round of discharges was “welcome news” for the borrowers it will help.

“But these 15,000 borrowers are a small fraction of those eligible for loan discharges because their schools closed or committed illegal acts. It’s long past time for the Department of Education to meet its legal obligations to students,” Kvaal said.

Sen. Patty Murray, the top Democrat on the Senate committee that oversees education, said she was “pleased” that the department has started implementing the rule.

“This is a good first step, but it’s not good enough - and I call on Secretary DeVos to abandon her attempts to rewrite the borrower defense rule to let for-profit colleges off the hook, and instead fully implement the current rule and provide relief to more than 100,000 borrowers who were cheated out of their education and savings,” Murray said.

The 2016 rule was created to improve the loan forgiveness process following the closure of Corinthian Colleges, which left thousands of students stuck with loans and little to show for them. It was part of the Obama administration’s broader effort to root out schools that misled students and to police the sector through new regulation.

But DeVos said the rules made it too easy for students to shirk their debt, and left taxpayers on the hook.

Separately, she has successfully delayed another 2016 rule intended to weed out for-profit college programs that left students unable to pay off their loans, and she recently reversed the Obama administration’s decision to cut ties with an accrediting agency that supervises dozens of for-profit college chains but has been accused of lax oversight.

Of the $150 million in automatic loan relief, $80 million will go to former students of Corinthian Colleges, which included the Everest, Heald and WyoTech college chains. The department did not identify other schools tied to the relief.

Along with Corinthian, several other major for-profit chains have fallen in recent years. Others that followed include ITT Technical Institute and, most recently, the Education Corporation of America, which announced its closure Dec. 5.

Although the Education Department says it will automatically wipe loans for students whose colleges closed more than three years ago, it noted that students can separately apply for relief from more recent closures. That includes the roughly 15,000 students who recently attended Education Corporation of America chains, including Brightwood College and Virginia College.

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