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Trump administration sets higher hurdles for defrauded students to erase debt

The Education Department issued rules making it harder for students to have their debt erased when they claim their colleges defrauded them. (Andrew Harrer/Bloomberg News)

Students who say they were defrauded by colleges and want their education loans erased will have a tougher time seeking forgiveness under newly issued regulations from the Trump administration.

A 1995 law known as “borrower defense to repayment” gives the Education Department authority to cancel the federal debt of students whose colleges misled them about graduation or job placement rates to get them to enroll. The Obama administration updated the regulation to shift more of the cost of forgiveness onto schools, after the closure of for-profit giant Corinthian Colleges ushered in a flood of claims.

The Trump administration Friday finalized its rewrite of the Obama-era rules, after two years of trying to delay and then scuttle the regulations. Those efforts have spawned lawsuits, with the courts forcing the Trump administration to implement the 2016 rules and process a backlog of applications for debt relief. Still, more than 180,000 borrowers await answers.

The courts cleared the way for DeVos to grant student debt relief. So why are 180,000 people still waiting for an answer?

The new rules represent a win for conservatives worried about the fiscal effect of the federal government making it easier for student loan borrowers to have their debts erased. The Trump administration estimates the rules will save the federal government $11 billion over 10 years — loan payments that would have gone uncollected under existing rules.

The regulations also hand a victory to for-profit colleges that derided the Obama rules as harmful to their programs. Most borrowers who seek relief from debt attended for-profit campuses.

“I called for this regulatory reset more than two years ago, as it became clear the old rules just weren’t working,” Education Secretary Betsy DeVos said in a statement. “We believe this final rule corrects the wrongs of the 2016 rule through common sense and carefully crafted reforms that hold colleges and universities accountable and treat students and taxpayers fairly.”

The Trump administration is asking students to jump through more hoops than under existing rules. Borrowers will have to show their school engaged in actions or made statements “with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth.” Even if students convince the department that they were defrauded, they must still prove financial harm before loans are canceled.

The department held its ground on refusing to grant relief to an entire group of students when they are defrauded or their school closes. Students must apply individually for relief, with the rationale that everyone in the group may not have suffered the same harm.

Borrowers will have less time to apply for relief — three years from graduation or withdrawal from college. There is currently no statute of limitation on claims filed by borrowers who have loan balances. The new rules also kill an Obama provision that barred colleges from requiring students to sign agreements during enrollment forcing them into arbitration if there is a dispute.

“This rule makes clear that unless defrauded borrowers present a technically pristine case, they will be denied relief simply because they did not learn that they were defrauded early enough, and others will be denied their day in court,” Rep. Robert C. “Bobby” Scott (D-Va.), chair of the House Education and Labor Committee, said in a statement.

Feds to forgive loans for thousands of students whose colleges closed

Still, in some respects, the rules, which take effect in July, don’t go as far as the Trump administration initially proposed.

Students who file a claim will not have to be in default on their loans. Nor will they have to meet a higher burden of proof: The department will continue to let students prove their case with a “preponderance of evidence.”

In addition to addressing student debt relief claims involving fraud, the Education Department’s rules include guidelines for handling loan forgiveness if a school closes. Currently, students are eligible for the discharge if they were enrolled when a school closed or if they had withdrawn within four months of closure. That timeline has been extended to six months. But the department will no longer automatically cancel the debts if the students did not enroll elsewhere within three years.

“Rolling back the automatic closed school discharge provision does absolutely nothing except penalize students who don’t know they are entitled to relief,” said Aaron Ament, former chief of the Education Department’s office of the general counsel under the Obama administration who helped develop the 2016 rule. “We know from experience that most eligible students have no idea they can have their debts forgiven when their college or university closes its doors.”