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Judge rejects settlement over stalled student debt relief claims, blames DeVos for harming borrowers

A federal judge slammed Education Secretary Betsy DeVos for violating the spirit of a proposed settlement over student debt relief claims. (Matt York/AP)

A federal judge on Monday rejected a proposed settlement between the Trump administration and defrauded borrowers after the Education Department revealed its widespread denials of requests for student debt cancellation.

U.S. District Judge William Alsup in the Northern District of California blasted Education Secretary Betsy DeVos for denying 94 percent of the debt relief claims the department has processed since reaching the agreement in April.

“The Secretary’s new perfunctory denial notices undermine the proposed settlement, contradict her original justification for delay, raise substantial questions under [federal law] and may impose irreparable harm upon the class of student-loan borrowers,” Alsup wrote in his decision.

Attorneys for borrowers in the class-action lawsuit were alarmed when the department revealed in September that of the 78,400 decisions it issued since inking the agreement, 4,400 requests for relief were approved and the remainder denied.

Trump administration’s handling of stalled student debt relief claims threatens proposed settlement

The Education Department had agreed to clear out nearly 170,000 unresolved claims within a year and a half under the proposed settlement. Borrowers who are still awaiting a decision after 18 months would get 30 percent of their federal loans discharged for every month that the department is late, and those who are denied reserve the right to an appeal.

But borrowers said the rejection letters they have received lack detailed explanations for the denials, making it difficult for people to appeal the decisions. In a public hearing held over Zoom this month, borrowers told the judge that the hasty disposals of their claims without rationale violated the agreement and made them distrustful of the process. They asked the judge to enforce the agreement, which they understood to be a thorough, reasoned review of their claims.

Alsup agreed in his ruling Monday that DeVos had failed to provide a thoughtful response to people who have waited years for a decision. He questioned the legality of DeVos’s denial notice and is threatening to bar the department from using it. The judge wants more details about the federal agency’s procedures for reviewing claims and issuing denials within the next two months.

“Students came together to speak up for themselves and show the court the massive scope of the trauma they have endured at the hands of the Department of Education, and the courts are listening,” said Eileen Connor, the legal director of the Project on Predatory Student Lending, a group representing the borrowers.

The settlement stems from a lawsuit brought against DeVos and her agency in June 2019 by a group of borrowers seeking debt relief under a federal program known as “borrower defense to repayment.” That program, which dates to 1994, provides federal loan forgiveness to students whose colleges lied to get them to enroll.

The collapse of for-profit chains Corinthian Colleges and ITT Technical Institutes — which spent their final days fighting state and federal charges of fraud and steering students into predatory loans — ushered in a flood of claims. The Trump administration’s refusal to process the applications and its methods of limiting relief spawned lawsuits against the Education Department.

The settlement was one of the first significant moves toward a resolution, but the department’s handling of the claims covered by the agreement upended the deal.

Angela Morabito, a spokeswoman for the Education Department, said the federal agency is studying the ruling.

“Just because a claim was filed does not make it valid and eligible for taxpayer-funded relief,” Morabito said. “The Department is following the publicly available process for resolving claims as quickly as possible, so those students who are eligible and were harmed get the relief they deserve.”

After taking office, DeVos refused to approve or deny applications for debt relief, saying her administration needed time to review the process created under the Obama administration. Tens of thousands of claims piled up before the secretary decided to grant partial debt relief, which led to a lawsuit from former Corinthian students. DeVos said the case ground the system to a halt. But borrowers argued that it had no bearing on their applications and took legal action against the secretary.

“After justifying eighteen months of delay largely on the backbreaking effort required to review individual applications, distill common evidence, and ‘reach considered results,’ the Secretary has charged out of the gate, issuing perfunctory denial notices utterly devoid of meaningful explanation at a blistering pace,” Alsup wrote.

Signs of trouble with the settlement emerged over the summer after hundreds of borrowers received denials using boilerplate language without any rationale for the decision, Connor said. In some of the denials she reviewed, the rejected applicants had provided extensive evidence, some of which came from state and federal authorities.

The department told Connor in July that not only had 45,000 borrowers been rejected, but at least 17 of those who had been approved received no debt cancellation. The Trump administration uses a sliding scale based on a borrower’s wages to determine relief, which economists say results in limited loan forgiveness.