Borrowers left in lurch as U.S. mismanages student debt relief: lawsuit

(Reuters) - Millions of teachers and other public sector workers have been denied relief of their student loan debt under government programs because of mismanagement by the U.S. Department of Education, a lawsuit filed on Thursday charged.

The lawsuit by the American Federation of Teachers and several alleged victims says the department has long bungled its management of the programs, leaving borrowers who followed the rules stuck with their entire student debts.

"(The department) has eviscerated the statutory promise of loan forgiveness for those who have spent a decade or more in public service dutifully repaying their loans," said the 107-page complaint filed in U.S. District Court in Washington.

The two programs at issue were created by Congress in 2007 and last year to forgive the remaining student debt of graduates who work as teachers, nurses and in public sector jobs who make timely payments on their loans, typically for 10 years.

The suit, which also names Education Secretary Betsy DeVos as a defendant, alleged that borrowers have fallen into a bureaucratic nightmare in which their loan forgiveness requests were improperly denied or they were not told of technical errors that could be easily fixed that left them ineligible.

The department's press secretary, Liz Hill, said in an email responding to a request for comment: "The department does not comment on pending litigation, but I would point out, that the department is faithfully administering the complex program Congress passed."

As of March, the department had forgiven the loans of fewer than 1% of borrowers who applied under the first of the two programs, and only 3.6% under the second one, according to the suit.

It also alleges that the department failed to give borrowers a meaningful way of contesting denials, as well as failing to oversee properly the private subcontractors that service and administer the programs.

One plaintiff, Tulsa, Oklahoma, public school teacher Deborah Baker, was assured by the servicer of her loan for nine years that she would qualify for debt forgiveness, only to learn her loan was ineligible, something she could have corrected had she known, the suit said.

As a result, Baker was left with $76,000 of unforgiven student debt, she told NPR.

The suit asks the court to hold the department accountable, to order it to take steps to fix the alleged shortcomings and to forgive plaintiffs' debts.

(Reporting by Peter Szekely in New York; Editing by Dan Grebler)