New Federal Rules Could Make It Easier to Escape Your Student Loans

If you owe on federal student loans for a college you think defrauded you, the government’s new rules should make it a little easier to sue for relief from those debts.

But experts say the rules issued this week will do much more for future borrowers than for the millions of Americans currently struggling with student debts. And some worry the new rules on "borrower defense" may open floodgates for debt relief lawsuits against colleges that inadvertently make less-than-accurate claims to recruit students.

The good news for anyone with federal student loans is that the rules released today should lead to, for example, a standard form that borrowers can fill out to request relief and a standard process by which requests those will be judged, says Karen McCarthy, director of policy analysis for the National Association of Student Financial Aid Administrators.

The new rules should also provide relief from federal student loans for anyone who attended a college that closed after Nov. 1, 2013. Borrowers from schools such as Corinthian or ITT Tech who did not re-enroll in another college should have their federal student loans automatically discharged, the Department of Education said today. And students from those schools who used federal Pell Grants to pay for their tuition the semester the school closed will see that semester’s eligibility for a Pell Grant reinstated.

The new rules do not cover private student loans—such as those taken out from banks or credit unions.

But the biggest improvements will apply only to federal student loans taken out after July 1, 2017.

For example, next year's borrowers will have more rights because the rules get rid of forced arbitration agreements. Some colleges have made students sign agreements requiring them to take any dispute to an arbitrator rather than sue in court. In many cases, arbitrators have been biased for the companies that funnel business to them, rather than complainants. Starting next year, borrowers will be able to take disputes with colleges to court instead.

The new rules also state that federal student loans taken out next year can be cancelled if borrowers can show that they took on federal student debt because of a “substantial misrepresentation” by their college. An example of a “substantial misrepresentation” could be inflated job placement statistics, McCarthy says.

To make sure taxpayers don’t have to bear the full burden of the student loan forgiveness, the new rules require troubled colleges—such as those facing financial difficulties or indictments for fraud—to put up letters of credit to cover student loans that could be discharged due to future claims. McCarthy says the nation’s financial aid administrators generally supported getting rid of arbitration agreements and protecting students against fraudulent colleges.

Some experts worry, however, that the new rules may set off a torrent of lawsuits. “Although these new regulations are a clear and needed victory for students who attended undeniably fraudulent colleges, the ripple effects regarding the definition of 'substantial' misrepresentation could affect a broad group of well-intending nonprofit colleges that either made honest mistakes or happened across a sympathetic judge or jury,” Robert Kelchen, an assistant professor of higher education at Seton Hall University, wrote on his blog.

“Eventually, a series of court cases—perhaps in conjunction with additional federal guidance—should help settle the legal landscape," he wrote. "But in the meantime, colleges will be watching these regulations with a great deal of anxiety.”