If you’re one of the millions of Americans living with student debt, you’re likely praying for relief. The Federal Reserve tells us U.S. student loan borrowers owed $1.67 trillion as of June 2020, so it’s a burden many Americans carry.
Borrowing robust amounts of money to get an education can be beneficial when you have a valuable degree to show for it, but unfortunately many don’t. Borrower defense was created to compensate federal loan borrowers who spent thousands of dollars on an education that was later rendered useless because of fraud and deception on part of the schools.
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 recently announced positive changes to the federal student loan cancellation program. These new provisions 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?
Also known as borrower defense to loan repayment forgiveness, it’s a loan discharge program for federal Direct Loans, also known as federal student loans. The regulation came from the U.S. Department of Education to help 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.
If you fall into this category, borrower defense could wipe your federal loan debt away. What 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. In 2016, following the collapse of Corinthian Colleges, the Obama Administration made this easier by creating regulations that established processes for determining 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 making it difficult for student loan borrowers who attended a school that defrauded them or suddenly closed to qualify for loan cancelation. 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.
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 recently announced the Department of Education will rescind the formula used by the Trump administration to determine partial relief. In its place, they’ll create a streamlined process that enables full loan discharges.
Q:Who will be affected by the new rules on borrower defense to repayment for student loans?
Key changes you should know include:
- 100% discharge of federal student loan debt
- Reimbursements of any money paid on loan in accordance with regulations
- Negative reporting removed from credit report
- Reinstating federal aid eligibility
Q:Am I eligible for borrower defense?
- You must have federal direct loans (Direct Loans), Federal Family Education Loans (FFEL), or Perkins Loans consolidated into direct consolidation loan.
- Your application/claim must be submitted within three years of graduation or withdrawing from the school to file a claim
- You must prove school misled you, deceived you, or violated state law relating to education services or your loan
Also note, you can still apply if your loan is in default.
How to apply
For those ready to make a borrower defense claim, here is the step-by-step process.
Fill out an application
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.
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:
- Promotional materials from the school
- Enrollment agreements
In addition to supporting documents, you need your school name, program of study and enrollment dates.
Decide 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.
The success rate for borrower defense applications isn’t high. According to federal data from Nov 2020, just 18% (338,062) of borrower defense claims had been approved. Seeing as there are no concrete plans on how or when the Biden administration plans to overhaul the borrower defense process, there’s no guarantee the success rate for new claims will increase soon.
However, 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 BorrowerDefense@ed.gov or by sending a letter to the address you sent your application to.
According to the Student Aid website, you must include the following information in your request for reconsideration:
- What you think was decided incorrectly
- Why you believe the decision was incorrect
- Any evidence that you believe establishes that you are eligible for a different decision
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.
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.
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 one. It doesn’t lower your interest rate but can lower payments and make them more manageable as it extends your repayment timeframe.
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, they 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. Monthly payment account 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.
Crushed by student loan debt and worried you’ll never pay it off? There is help available.
Article last modified on March 26, 2021. Published by Debt.com, LLC