Using Borrower Defense to Cancel Student Loan Debt

If you borrowed robust amounts of money to get an education but fraud or deception by your school rendered the degree useless, you may qualify to have your loans fully or partially discharged through the Borrower Defense Loan Discharge program. Borrower defense protects student loan borrowers who attended an educational institution that participated in misconduct and/or misled them. If you fall into this category, borrower defense could wipe your federal loan debt away.

Although forgiving these loans seems like the ethical thing to do, the Trump administration made it increasingly difficult for students to qualify for borrower defense. However, the Department of Education announced positive changes to the federal student loan cancellation program with new provisions that will help approximately 72,000 borrowers with $1 billion in student loan cancellations.

Here is what you need to know about recent updates to borrower defense and how it may impact your student loans.

Table of Contents

What is borrower defense?

Borrower defense is a loan discharge program for federal Direct Loans (also known as federal student loans) that may partially or fully discharge individuals with federal student loans obtained from a for-profit college, university, or career institution that misled them or violated state laws related to their loan or education. This program is offered by the U.S. Department of Education.

Here are some examples of being misled or a school violating state laws:

• Lying about job placement statistics
• Promising you a set salary upon graduating
• Lying about accreditation
• Promising inflated graduation rates
• Lying about credit transfers
• Promising specific titles/positions upon graduating
• Dishonest representations about financial assistance
• Different licensure passage rates than advertised

Trump administration vs. Biden

Before 2015, the Borrower Defense to Repayment Program existed, but it was difficult to hold schools accountable.^[1] In 2016, following the collapse of Corinthian Colleges, the Obama Administration made this easier by regulating processes that determined whether students were eligible for borrower defense relief. It would hopefully relieve them from debt and remove any negatives they got on their credit score because of the loan.

Unfortunately, under the Trump administration, the former education secretary Betsy DeVos revised the program. The changes made it difficult for borrowers who attended a school that defrauded them or suddenly closed to qualify for loan cancelation.

For example, students used to have six years after leaving their school to apply for borrower defense. DeVos shortened this to just three years.

Her justification for revising the program was that individuals were trying to get free money. It became mandatory for students who took out loans on or after July 1, 2020, to prove the school wronged them and caused financial impairment.

Additionally, she made the amount of loan discharge borrowers were eligible for dependent on their income.^[2] To qualify for full discharge, a borrower had to have an income much lower than the median income of grads from similar schools. Otherwise, they might only qualify for partial discharge.

These changes meant many students could only get partial relief or nothing at all. Why? Proving a school intentionally misled you or caused you financial harm is tough and impossible for some.

Biden administration updates

United States Secretary of Education Miguel Cardona announced the Department of Education will rescind the formula used by the Trump administration to determine partial relief. In its place, they created a streamlined process that enables full loan discharges.

Eligibility for full loan discharge is no longer determined by income, and approved applicants can receive full discharge. Those who were previously approved but only received partial discharge are now eligible to have their remaining balance discharged as well.

It’s worth saying again: This Biden Administration’s update will cancel over $1 billion in federal student loans for 72,000 people.

Unfortunately, the plan’s 2021 rollout was less than stellar.^[3] Some graduates received letters referencing the wrong school, and some links sent to borrowers’ emails led to unsecured pages containing the borrower’s personal information.

Though the plan’s execution had a rocky beginning, don’t wait to apply if you think you qualify. The sooner you apply, the sooner you can potentially get financial relief.

How many people have benefitted from the Biden Administrations’ changes so far?

The Biden administration’s significant changes to the borrower defense program were announced in the first quarter of 2021. Since then, there have been multiple new approvals of claims from various schools.^[4]

In June of 2021, $500 million of relief was granted to 18,000 former ITT Technical Institute (ITT Tech) students.

In July of 2021, 1,800 borrower defense applications were approved for three different institutions:

• Marinello Schools of Beauty
• Westwood College
• Court Reporting Institute

They will receive a full discharge of their loans, resulting in $55.6 million of relief.

Check back here for updates on new borrower defense approvals.

How to apply

Ready to make a borrower defense claim? Follow this step-by-step process.

Step 1: Fill out an application

You can apply for your loans to be discharged directly at StudentAid.gov. The application takes approximately 30 minutes. Alternatively, print the application and mail it to:

U.S. Department of Education, Borrower Defense to Repayment

P.O. Box 1854

Monticello, KY 42633.

Be as detailed as you can in your application, as your approval hinges on your ability to prove the school misled or deceived you. You’ll also need to explain how your experience has led to financial difficulties.

Step 2: Prepare documentation

As mentioned earlier, the more supporting evidence you have, the better. Gather as much documentation as possible, no matter how minuscule it seems. Some examples of documents you can provide with your application include:

• Emails
• Transcripts
• Promotional materials from the school
• Enrollment agreements

In addition to supporting documents, you need your school name, the program of study, and enrollment dates.

Step 3: Decide the next steps for the loan.

You can choose to put your loan into forbearance—temporarily pausing your payments—as part of your claim. The process is usually automatic, but you want to contact your student loan servicer to ensure they receive relevant information about your forbearance.

Be aware that unsubsidized loans in forbearance accrue interest, so you’ll have to pay interest on any balances that aren’t forgiven.

If you feel you can’t fill out the application alone and need help, look for a non-profit or legal aid near you. A National Consumer Law Center may also provide helpful resources.

What if my application is denied?

The success rate for borrower defense applications is one of the highest of all other loan forgiveness programs; approximately 30% of applicants are approved, with nearly half receiving a partial discharge.^[7] However, the program is still quite competitive and denials aren’t uncommon.

If you applied for borrower defense and were denied, you can appeal. Write to the Department of Education and ask them to reconsider your application. You can do so via email at [email protected] or by sending a letter to the address you sent your application.

According to the Student Aid website, you must include the following information in your request for reconsideration:

1. What you think was decided incorrectly.
2. Why you believe the decision was incorrect.
3. Any evidence that you believe establishes that you are eligible for a different decision.

Tax implications

Federal student loans forgiven under the Borrower Defense to Repayment program aren’t taxable. This means the 72,000 approved borrower defense applicants won’t have to pay tax on the amounts forgiven.

Until recently, some forms of student loan forgiveness were taxable, such as those under income-driven repayment plans. The forgiven amount would be added to the borrower’s income on their annual income tax. However, under new provisions in the $1.9 trillion stimulus bill (American Rescue Plan), loans forgiven between December 31, 2021, and January 1, 2026, will be tax-free.

Alternatives

If you’re one of the millions of Americans living with student debt, you’re likely praying for relief. If you don’t qualify for borrower defense, there are alternative ways to manage your student loan debt. Here are a few suggestions you may find useful.

Consolidate loans

One option to help manage overwhelming student loan debt is to consolidate them. You could do federal student loan consolidation which is when you combine all federal loans into a single loan. It doesn’t lower your interest rate but can lower payments and make them more manageable as it extends your repayment timeframe.

Refinance

For those with private loans, consider refinancing your loan with your private lender. If successful, you could get a better interest rate, lowering the total amount you pay by the end of your loan term. An advantage is you can combine both private and federal loans using this method. Just be careful because if you use a private loan to refinance your federal loans, you will no longer be eligible for any federal repayment plans or forgiveness programs.

Alternative repayment plans

If you have a federal loan you can’t afford, you may be eligible for income-driven payment plans. They come in different shapes and sizes depending on your circumstances. There are five types which include:

• Pay as You Earn Plan (PAYE): Only open to individuals who received a direct loan on or after Oct 1, 2011. Payments are calculated as 10% of your discretionary monthly income, although it can be less in cases of financial hardship. Payments will never exceed what you’d pay on a standard repayment plan.
• Revised Pay as You Earn Plan (REPAYE): Similar to PAYE, but open to all federal direct loan borrowers. Payments will be set as 10% of your discretionary monthly income or less. However, payments may increase as your income increases. There’s also no payment cap, meaning you could end up paying more than you would with a standard repayment plan. If so, you can move to a different repayment plan.
• Income-Based Repayment Plan (IBR): Monthly payments of 15% of your discretionary income divided by 12 months.
• Income Contingent Repayment Plan (ICR): 20% of your discretionary income divided by 12 or the cost of fixed monthly payments if you were to repay in 12 years. You can choose the lesser of the two.
• Income Sensitive Repayment Plan: Only assists borrowers to pay off loans under Federal Family Education Loan Program. The monthly payment account is determined by total debt, gross monthly income, debt-to-income ratio, and interest rate. Could fall between 4% to 25% of your monthly income.

You may be eligible for forgiveness after 20 -25 years of payments depending on the program.

[1] https://studentloanhero.com/featured/defense-to-repayment-rule-changes/
[2] https://www.nasfaa.org/borrower_defense
[3] https://www.forbes.com/sites/adamminsky/2021/09/08/biden-administration-cancels-1-billion-in-student-loans-but-bungles-the-rollout-concerning-advocates/?sh=6a5c39b6efa3
[4] https://studentaid.gov/announcements-events/borrower-defense-update
[5] https://www.ed.gov/news/press-releases/department-education-approves-borrower-defense-claims-related-three-additional-institutions
[6] https://www.washingtonpost.com/education/2020/02/06/feds-give-former-art-institute-students-new-opportunity-loan-forgiveness/
[7] https://www.nerdwallet.com/article/loans/student-loans/borrower-defense-repayment