Pursue a Federal Student Loan Discharge as a Victim of College Fraud

Last week, the Department of Education announced significant progress in its evaluation of claims that some federal student loan borrowers have made against the now - closed Corinthian College.

The journey for former Corinthian students has been a long one, and one that still has a long way to go . In February , Corinthian College, formally one of the largest for-profit higher education companies in North America, announced it had sold the majority of its schools and locations. For the six months leading up to the sale, Corinthian had experienced enforcement action by the federal government and other authorities for actions including misleading some students on things such as job placement rates of graduates, accreditation and the transferability of its credits. In April , the school closed its remaining campuses.

While some Corinthian students who were attending the school when it closed are eligible for relief under the long-established closed school loan discharge benefit, many others had already completed their credentials or withdrawn from the schools well before the closing happened, making them ineligible for this discharge.

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That's when the the Department of Education announced it was invoking a never-used, 20-year-old provision in the direct loan program called the borrower defense to repayment. The rule releases borrower s from their federal direct loan obligations if they can show that the school defrauded them via state law. If this should happen, the rule instructs the Department of Education to attempt to obtain reimbursement for the any loan discharges from the school.

There were no processes or guidelines in place to determine eligibility for this discharge. So in June, Under s ecretary of Education Ted Mitchell gave consumer advocate Joseph Smith the mission of reviewing the borrower defense issues and recommend systems to both evaluate borrower applications for this discharge and to recover these funds from schools found to have committed these offenses. Smith previously served as monitor under the national mortgage settlement .

Smith's first report, issued in September, stated that the Department of Education had received thousands of borrower defense applications from borrowers who attended Corinthian Colleges and other for- and non profit institutions. The report announced decisions regarding students who had attended Corinthian's Heald College, where there was already clear and definitive proof showing that the school published incorrect and misleading job placement rates.

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Students who attested that they had relied on these published rates would be considered for discharge. Eligibility for closed school discharge was also expanded to those students attending the remaining Corinthian campus that closed in April to allow discharge if they attended as far back as June 20, 2014.

The new report, issued last week, announced the discharge of the direct loans of 1,312 borrowers, all of whom attended Heald College, along with an additional 5,814 closed school discharge claims. This resulted in a total of over $75 million in discharged loans, an amount that is passed on to federal taxpayers if not collected from Corinthian.

The report also confirmed that the Treasury Department had issued guidance confirming that these discharged amounts did not need to be included as taxable income , as some other discharges -- including death and disability discharges -- currently are.

The update also notes that in recent months, the Department of Education has issued official findings against Corinthian schools Everest and WyoTech, which included misstate d placement rates. Smith expects that these findings will allow further discharge applications for alumni of these schools to move forward.

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Finally, the report confirms that applications for borrower distress discharges from students who attended schools other than Corinthian Colleges are being examined to determine if there is enough evidence as presented by the borrower to allow the loans to be discharged. The Department of Education has also announced a negotiated rulemaking process, expected to begin in January, to promote official eligibility rules for this discharge. It is expected that Smith will make the initial recommendations for this process.

It's important to note that this rule does not apply to other federal loans such as Federal Family Education Loan Program or Perkins loans, nor does it apply to private loans. Borrowers with loans other than direct loans who feel their school defrauded or misled them must take action, such as litigation, against the school themselves and use any relief they might obtain from such actions to repay their loan debts.

If you think you might be eligible for this discharge, you can submit an inquiry online. It's important to note that if you did not attend one of the schools mentioned above, the burden of proof that the school committed fraud or misrepresented itself to students will be on you to provide.

Betsy Mayotte, director of regulatory compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, is a frequent contributor to ASA's SALT Blog; responds to public inquiries via the advice resource "Just Ask;" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.