Department of Education Tips Hand on Student Loan Defense

The Department of Education is scheduled to publish a request that seems to tip their hand about a borrower defense that could allow lots of students from having to repay their student loans.
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The Department of Education is scheduled to publish a request that seems to tip their hand about a borrower defense that could allow lots of students from having to repay their student loans.

Clever attorneys will find a way to confirm if schools have violated state laws, as the government has claimed some have. If proven the school had violated state laws, the Direct Loans the student owes could be eliminated in full.

The notice from the Department of Education says they are looking closer at "borrower defenses are specified in 34 CFR 685.206(c). The regulation states, in part, "(c)(1) [i]n any proceeding to collect on a Direct Loan, the borrower may assert as a defense against repayment, an act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law."

Prior to 2015, the borrower defense identified above was rarely asserted by any borrowers and no specific methods of collecting information was defined or found necessary." - Source

It will be interesting to see how effective this defense will be in dealing with overwhelming student loans, especially from those for non-traditional schools. These schools include vocational, technical and for-profit colleges. According to a recent Brookings Papers on Economic Activity paper, "Of all students who left school and who started to repay federal loans in 2011 and who had fallen into default by 2013, 70 percent were non-traditional borrowers. In contrast, the majority of undergraduate and graduate borrowers from 4-year public and private (non-profit) institutions, or "traditional borrowers" experience strong labor market outcomes and low rates of default, despite having the largest loan balances and facing the severe headwinds of the recent recession." - Source

The authors of the paper, Adam Looney of the U.S. Treasury Department and Constantine Yannelis of Stanford University, state "Between 2000 and 2014, the total volume of outstanding federal student debt nearly quadrupled to surpass $1.1 trillion, the number of student loan borrowers more than doubled to 42 million, and default rates among recent student loan borrowers rose to their highest levels in twenty years. This increase in debt and default and more widespread concern about the effects of student loan debt on young Americans' lives has contributed to a belief that there is a crisis in student loans."

These for-profit schools have been the subject of large actions by the government like that by the Consumer Financial Protection Bureau against Corinthian College, which included Everest College, Everest Institute, Everest University, Everest University Online, Everest College Phoenix, Everest College Online, WyoTech, and Heald College.

Recently the for-profit Art Institute announced the close of some of its campuses as well.

In fact, some of these vocational and for-profit school loans have been able to be discharged in a consumer bankruptcy because the schools never met the Title IV standards required by Department of Education. It's something I've been talking about for quite some time now.

In my experience, these same niche non-traditional schools are also big into pushing private student loans. These loans have the least favorable repayment options and if it is proven the schools have massively higher default rates then it could be said an entire generation of students was led to financial slaughter.

The falsification of school performance and failure to live up to the promises made to enrolling students could be used by clever attorneys to show how the schools violated state unfair and deceptive practice laws and that could possibly lead to an elimination of the student loans in full. Just saying, keep your eyes open for more on this to come.

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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.

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