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Biden Administration Agrees to Cancel $6 Billion in Student Debt Over Fraud Claims


The Biden administration has reached a settlement with more than 200,000 students who said they were defrauded, mostly by for-profit colleges, paving the way for the immediate cancellation of around $6 billion in student loans.

The proposed settlement, which must be approved by a federal judge, was agreed to by a group of borrowers who sued the Education Department in 2019 during the Trump administration, because they believed their fraud claims were being ignored by the department. The department, under Secretary

Miguel Cardona,

has made it a priority to resolve the longstanding backlog of borrower defense claims and agreed to the discharge late Wednesday.

The borrowers initially applied for relief by using a regulation known as borrower defense to repayment, which since 2016 has allowed the Education Department to decide whether schools have deceived students about their job prospects, broken state consumer-protection laws, or otherwise harmed them financially. If they have, borrowers are entitled to the discharge of their federal student loans.

Along with the 200,000 borrowers who qualify for immediate relief, because their schools were already determined by the Education Department to have misled students, another approximately 64,000 student borrowers could get relief under the settlement once the Education Department completes its reviews of their cases on a rolling basis. Their loans would bring the total settlement to around $7.5 billion.

“We are pleased to have worked with plaintiffs to reach an agreement that will deliver billions of dollars of automatic relief to approximately 200,000 borrowers and that we believe will resolve plaintiffs’ claims in a manner that is fair and equitable for all parties,” Mr. Cardona said.

The settlement follows a move earlier this month by the Biden administration to forgive all of the loans outstanding held by 560,000 students who attended Corinthian Colleges, which at $5.8 billion amounted to the largest single action of student-debt cancellation ever by the federal government.

“This momentous proposed settlement will deliver answers and certainty to borrowers who have fought long and hard for a fair resolution of their borrower defense claims after being cheated by their schools and ignored or even rejected by their government,” said

Eileen Connor,

director of the Project on Predatory Student Lending, which represented the borrowers.

The 200,000 who qualify for immediate relief includes approximately 74,000 borrowers whose borrower-defense claims were rejected summarily by the Trump administration. Trump administration officials said the Obama-era rules were too broad and vague and threatened to drive up the taxpayer costs of covering canceled debt. The Trump administration denied more than 100,000 borrower-defense claims in 2020, and borrowers whose claims were approved were often granted partial rather than full debt forgiveness.

Student-loan interest rates have risen to their highest in years. WSJ’s Dion Rabouin explains how they’re calculated and why this year’s rates are so high after touching a record low in 2020. Illustration: David Fang

The settlement is a major step toward the Biden administration’s goal of clearing borrower-defense claim backlogs. The backlogs have been the source of frustration for borrower advocates and congressional Democrats, who have urged the administration to act more quickly to resolve outstanding claims. As of the end of 2021, 423,000 borrowers had filed claims under the program and around 157,000 applications had either not been processed or borrowers hadn’t yet been told whether their claims were approved.

The administration is in the process of updating the borrower-defense regulation, aiming to make it easier for borrowers to apply for loan forgiveness under the program.

For-profit colleges raised concerns during the rule-making process that the administration could make it too easy to apply for and obtain loan forgiveness, potentially damaging the schools’ reputations and forcing some schools to close.

The administration’s efforts come as it plots its way forward on the politically potent issue of student-debt forgiveness ahead of the 2022 midterm elections. Around 40 million borrowers hold $1.6 trillion in federal student debt. Mr. Biden on Monday told reporters that he is nearing a decision on whether to pursue mass cancellation of student debt, which would be legally risky.

Rather than pursue broad-based student-debt cancellation, as some political allies urge, the administration instead has taken a piecemeal approach using the borrower-defense rule, canceling billions in debt held by borrowers with disabilities and revamping the forgiveness process for those who have pursued careers in public service.

Prior to the settlement, the Biden administration had canceled $25 billion worth of federal student loans since taking office.

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