Students who previously got partial relief on their federal student loans under a “borrower defense to repayment” claim will get a full discharge.
Update: This article updates the information in Chapter 11 of Solve Your Money Troubles, 18th Edition, by Amy Loftsgordon & Cara O'Neill (Nolo, 2021), in the section called "Borrower Defense to Repayment."
On March 18, 2021, the U.S. Department of Education announced that 72,000 student loan borrowers who previously had part of their federal student loans canceled under a "borrower defense to repayment" claim will now get full student loan relief.
According to the announcement, the previous methodology implemented in December 2019 for canceling student loans in cases of fraud, which often resulted in partial student loan forgiveness, was unfair to student loan borrowers and didn't result in appropriate relief.
Loan Forgiveness Under the "Borrower Defense to Repayment" Law
In 2016, the Obama administration set up a new loan forgiveness program to help defrauded student borrowers cancel their federal student loans. Under a federal law known as " borrower defense to repayment," if your school, say ITT Technical Institute or a Corinthian College, misled you or engaged in other illegal misconduct that convinced you to enroll or remain enrolled, you could get a full discharge of the Direct federal student loans you took out to attend the school. (34 C.F.R. § 685.206).
Former Education Secretary DeVos Set Tougher Loan Forgiveness Standards for Defrauded Students
Former U.S. Secretary of Education Betsy DeVos claimed that the borrower defense to repayment rules provided too much student loan forgiveness and cost taxpayers too much. So in 2019, DeVos rewrote the rules to rely on publicly available earnings data and statistics to determine the harm a borrower suffered. Many bilked student-loan borrowers received only partial debt relief under the revamped approach instead of 100% loan forgiveness. This policy was different from the Obama administration's practice of granting total debt forgiveness after determining that a college committed fraud.
DeVos also changed the qualification requirements so that you had to prove all of the following by a preponderance of the evidence to get a discharge based on borrower defense to repayment:
- The school made a misrepresentation of material fact upon which you reasonably relied in deciding to get a Direct Loan or a loan repaid by a Direct Consolidation Loan.
- The misrepresentation directly and clearly related to your enrollment or continuing enrollment at the school or the school's provision of education services for which the loan was made.
- The misrepresentation financially harmed you. (34 C.F.R. § 685.206(e)(2)(i)).
These standards were much stricter than the Obama-era requirements: The rules narrowed the type of misconduct that could trigger loan forgiveness and also required borrowers to provide more extensive documentation about the financial harm they suffered.
Biden Administration Reverses DeVos' Changes
Current U.S. Secretary of Education Miguel Cardona is rescinding DeVos' formula for calculating partial loan relief and adopting a "streamlined approach" for granting total forgiveness for approved borrower defense claims. The Department thinks this change will provide around 72,000 borrowers about $1 billion in loan cancellation.
Borrowers receiving loan relief can expect:
- 100% discharge of their related federal student loans
- reimbursement of any amounts paid on the loans (when allowed under the law), and
- reinstatement of eligibility for federal student aid.
You can also ask the credit reporting bureaus to remove any related negative credit reporting.
The Department will apply its new approach immediately, and affected borrowers will get notice over the next several weeks, with discharges coming after that. To learn more about making a borrower defense to repayment claim, visit the U.S. Department of Education Federal Student Aid website.
Student Loan Forgiveness is Tax-Free Under the American Rescue Plan Act
The American Rescue Plan Act exempts student debt forgiveness from federal taxation until January 1, 2026. The tax exemption under this law covers Direct Loans, Federal Family Education Loans (FFELs), and private student loans. So, loans forgiven under this new policy change will be tax-free at the federal level.
Will Your Student Loans Get Canceled?
If the federal government decides to forgive any other federal student loans between now and through 2025, the amount that's forgiven won't be treated as income for federal taxation purposes. The Biden administration has indicated that it will encourage Congress to pass separate student loan forgiveness legislation that includes $10,000 in loan forgiveness in the coming months.
Federal Student Loans Are On Hold Until September 30, 2021
Keep in mind that most federal student loan payments, interest, and collections are suspended until September 30, 2021. According to the U.S. Department of Education, suspended payments will count as qualifying payments for student loan forgiveness programs, including Public Service Loan Forgiveness and income-driven repayment forgiveness.
Effective date: March 18, 2021