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Education Dept. to cancel $6 billion in debt for defrauded borrowers

The proposed settlement attempts to settle a three-year-old legal case

Education Secretary Miguel Cardona's agency will cancel $6 billion in student loan debt for defrauded borrowers. (Oliver Contreras for The Washington Post)

The Education Department will erase about $6 billion of student-loan debt for borrowers who argued in a class-action lawsuit the agency ignored their claims for loan cancellation, public officials announced.

Under the proposed settlement, the department will immediately approve thousands of applications filed by people who claimed they were defrauded by their colleges, resolving a three-year-old case between the government and borrowers.

In a statement, Education Secretary Miguel Cardona said the Biden administration has worked to address issues regarding the “borrower defense to repayment” process, designed to provide federal loan forgiveness to students whose colleges lied to get them to enroll.

“We are pleased to have worked with plaintiffs to reach an agreement that will deliver billions of dollars of automatic relief to approximately 200,000 borrowers and that we believe will resolve plaintiffs’ claims in a manner that is fair and equitable for all parties,” Cardona said.

Education Dept. to clear $5.8B in debt of Corinthian Colleges students

The agreement between the department and borrowers will provide automatic relief, including refunds of amounts paid to the federal agency and credit repair, according to the Project on Predatory Student Lending, a legal organization that represents former college students. It will affect 200,000 people who attended schools the department says have engaged in misconduct.

Another group of about 64,000 borrowers, who took out loans to attend schools that are not on the department’s list of disgraced schools, will get decisions on their borrower defense loan applications on rolling deadlines, the legal organization said in a release.

Eileen Connor, director of the legal group, said the settlement will not only benefit defrauded borrowers, but also future students.

“This momentous proposed settlement will deliver answers and certainty to borrowers who have fought long and hard for a fair resolution of their borrower defense claims after being cheated by their schools and ignored or even rejected by their government,” Connor said in a statement. “It will not only help secure billions of dollars in debt cancellation for defrauded students, but charts a borrower defense process that is fair, just, and efficient for future borrowers.”

Among the schools the department has identified as having evidence of “institutional misconduct” — many of which are for-profit colleges — are the University of Phoenix, Capella University and Brooks Institute, according to the settlement agreement.

“We are deeply concerned that in its haste to respond to outside political pressure, the U.S. Department of Education is attempting to approve wide swaths of claims without regard to individual merit,” Jason Altmire, president and chief executive of Career Education Colleges and Universities, a lobbying group for for-profit colleges, said in a statement. “The Department has an obligation to take a more measured approach to determine if each student has been financially harmed based on an unlawful act. The Court should look carefully at the settlement agreement to ensure it is fair for all parties involved.”

A court will next review the proposed agreement and set a hearing date before the settlement is approved.

The collapse of for-profit chains Corinthian Colleges and ITT Technical Institute brought in a wave of debt-relief claims.

Under the Donald Trump administration, Education Secretary Betsy DeVos refused to approve or deny applications, saying more time was needed to review the process created by the Barack Obama administration. Applications piled up before DeVos decided to grant partial debt relief, which led to a lawsuit from former Corinthian students in 2019.

DeVos said the lawsuit slowed the system down. But borrowers argued that it had nothing to do with their applications and took legal action against the secretary.

In 2020, the Trump administration proposed a settlement agreement that included a promise to process 170,000 debt cancellation claims within a year-and-a-half. A federal judge, however, rejected that proposal.