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.
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 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:
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.
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:
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.
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.
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.
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