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With one small loophole, people whose finances contribute to the country’s total $ 1.2 trillion student loan debt might not have to raise the stakes.
More than 7,500 people, who owe an estimated $ 163 million in student loans, have requested debt cancellation in the past six months. The majority say their schools have deceived them with false promises of placements and well-paying positions, according to an article by The Wall Street Journal.
The increase comes after the US Department of Education agreed to write off the nearly $ 28 million debt owed by 1,300 former Corinthian Colleges students after it was liquidated and closed. During the case, several prominent lawmakers backed the students’ claims in a letter urging the court to rule in their favor. After the decision, ministry officials said more students would also be likely to be forgiven.
Related: The Changing Student Loan Debt Economy: How To Pay It Off and Get Started
The legal dispute is the direct result of a law included in a 1994 version of the Higher Education Act, which introduced “borrower’s defenses”. Although it was supposed to be temporary, it was eventually forgotten and left untouched by lawmakers.
“Notwithstanding any other provision of national or federal law, the secretary must specify in the regulations what acts or omissions of a higher education institution a borrower can assert as a defense to the repayment of a loan granted under this part ”, the legislation reads.
A policy segment is also always included at the end of the forms for the Federal William D. Ford Direct Lending Program:
“In some cases, you can argue, as a defense against your loan collection, that the school did something wrong or didn’t do something it should have done. You can only make such a defense against repayment if the school’s act or omission relates directly to your loan or the educational services for which the loan was intended to pay, and if what the school has doing or not doing would give rise to a cause of action against the school under applicable state law. If you think you have a defense against repaying your loan, contact your service agent.
As college enrollments increased and loan companies allegedly took advantage of students, activists from movements such as the Debt Collective began to take a closer look at the issue. The group teamed up with former Corinthian students, which is when the dormant law was discovered.
Because of the snaffu, the Department of Education commissioned a special master of borrower advocacy, Joseph Smith, to provide a summary and analysis of the legislation and events in a series of reports.
“The sad reality is that some colleges, including some career colleges, have used abusive practices to prey on students,” Smith says in the first report.
The effort coincided with the goal of the Under Secretary of the Federal Department of Education, Ted Mitchell, to “hold career colleges accountable for giving students what they deserve: a high quality education and affordability that prepares them for their careers ”.
“We just don’t know” the potential reach, says Mitchell in an article by The Wall Street Journal. “It’s new territory for us.”
Despite an effort to provide insight into the issue, debate surrounds the potential application of the law, as the ministry says it is “too vague.” For example, Smith’s report states that the law does not specify what evidence is needed to prove that the school has committed fraud or wrongdoing.
Nonetheless, most lawmakers agree that reimbursement could eventually be received if the students were defrauded. In this case, the long-forgotten law could end up costing the government billions of dollars first and foremost.
For this reason, Steve Rhode, a consumer debt expert known as the “Get out of Debt Guy,” writes in a Huffington Post blog post that he expects the loophole to be closed quickly.
In fact, negotiations began last week between the education department, students, schools and lenders to create a clear set of rules. For example, when the ministry can go after institutions to recover tuition fees funded by student loans will be part of the discussion.
But even with an ongoing discussion, officials still struggle to understand the possible implications of the law or what the bill would look like.
Related: How To Stop Student Loans From Slowing Down Your Entrepreneurial Dreams