Last fall, in response to several high-profile cases of higher education institutions closing amid allegations of fraud, the Department of Education released updated rules, called the borrower defense to repayment regulations, to provide relief to federal student loan borrowers defrauded by their schools.
These rules were meant to streamline an evaluation process for such claims and help ensure that schools, not the U.S. taxpayer, would foot the bill for loan discharges. The rules also updated disclosures to current and prospective students and banned many mandatory arbitration clauses in school enrollment contracts.
[Read how defrauded student loan borrowers would receive relief with new regulations.]
On June 14, the Department of Education announced that due to pending litigation, it is indefinitely postponing implementing the majorly of these rules, which were due to take effect on July 1. The department also announced its intention to re-evaluate these rules.
The Student Loan Ranger is very disappointed by this decision, since it leaves many victimized students with few options for relief. Thankfully, defrauded borrowers may have options. Here’s what defrauded student loan borrowers need to know.
Q: Does this mean that no loans will be discharged due to school fraud?
A: No. Defense to repayment has actually been in existence for many years, and the existing rule remains in effect. While this is a more difficult burden to meet, federal student loan borrowers may still be eligible for full or partial discharge of their loans due to school fraud. In the future, there may again be new rules for defense to repayment that provide broader access to this type of relief.
[Learn three ways a student loan could be discharged.]
Q: What are the eligibility requirements under the existing rules?
A: Borrowers with federal direct loans may be eligible for full or partial discharge under the existing rules if they can prove that the school violated state consumer protection laws. The laws vary by state, but most essentially prohibit organizations from deceptive practices.
Borrowers with Federal Family Education Loan Program loans may be eligible for full or partial discharge under the existing defense to repayment rules if they can prove that the school violated state consumer protection laws as well as that the school participated in a prohibited referral relationship with the original lender of the loan.
Many of these laws only allow you to file a claim within a certain amount of time after the violation occurs. These same timelines will generally apply to defense to repayment as well. The average time frame is six years.
Q: I was defrauded by my school and have loans or costs that do not fall under the federal direct loan program or FFELP, so how do I receive relief?
A: Neither the existing nor the now-postponed rules provide relief for loans other than those made under the federal direct loan program or the FFELP. Students who feel their schools defrauded them and wish to obtain relief for other loan types or expenses should contact their local attorney general’s office.
Q: How do borrowers apply for a discharge if they meet the existing rules criteria?
A: Borrowers can apply on the Federal Student Aid website.
Q: Must I continue to make payments while my claim is being reviewed?
A: No. Once the Department of Education receives your completed defense to repayment application, it will notify your loan holder to place your account on hold by means of forbearance. Note that if you are pursuing p ublic service loan forgiveness or loan rehabilitation or forgiveness under an income-driven repayment plan, this forbearance time will not count toward the time and payments needed to obtain these benefits.
[Learn how to ensure eligibility for Public Service Loan Forgiveness.]
Additionally, interest may continue to accrue during forbearance — meaning if you are denied the discharge, you could end up with an even bigger balance. You may want to consider requesting the forbearance be removed and continue making payments if you’re not confident about your eligibility for a defense to repayment discharge.
Q: When will the new rules be put into place, and what will they say?
A: The Department of Education announced it will start over to develop new defense to repayment rules. That process, called negotiated rulemaking, will essentially take two years and will likely have an effective date of July 1, 2019. While the Student Loan Ranger hopes that the new rules will be based at least in part on the currently postponed version, the final outcome is unclear.
Q: Anything else we need to know?
A: The postponed rules had also prohibited many mandatory arbitration clauses in school enrollment contracts. Prospective students should make sure they continue to read such contracts in full before signing them to ensure they understand their rights if something does go wrong. Such clauses can prohibit consumers from filing lawsuits or pursuing other avenues when they feel the school has been deceptive or have other complaints.
More from U.S. News
Know Your Options to Reduce Student Loan Payments
Trump Budget Proposals: Potential Impact for Student Loan Borrowers
6-Month Plan to Prepare for Student Loan Repayment
Q&A: Unpacking the Borrower Defense Rules Postponement originally appeared on usnews.com
