Borrower defense claims (also known as “defense to repayment” or “DTR”) may be raised even if you are current on the loan and there are no collection actions. If you are in default and facing collection, the defenses may be raised in response to all types of collection actions, not just lawsuits. In addition to applying for loan cancellation, you may also seek a refund for amounts you already paid.
Although borrowers have long had the right to raise school-related defenses to repayment, the Department only recently began creating a borrower defense to repayment process. The Department issued final rules on November 1, 2016 that were supposed to go into effect July 1, 2017. However, an industry trade group sued to delay implementation of these rules. The Department subsequently announced a postponement of the July 1 effective date. In October 2017, the Department announced another delay. Negotiated rulemaking sessions on borrower defense and the gainful employment rule began in November/December 2017. In July 2018, the Department issued proposed rules to go into effect July 1, 2019. Stay tuned for more information, and check the Department’s website on borrower defense for current information about seeking relief from the Department.
You do not have to wait to apply for relief because you have the right to raise these defenses under existing law. It is not clear, however, what process the Department will use to consider applications for relief and how it will determine how much relief to provide to borrowers with valid defenses. According to a December 2017 report from the Office of Inspector General, the Department had not approved any borrower defense applications since January 20, 2017. Since the release of the report, the Department announced a new borrower defense process that it is applying to borrower defense claims submitted by certain former Corinthian Colleges, Inc. students who have been subject to a special application process.
This new process for Corinthian students uses a formula focused on average post-school earnings by program to calculate what portion of a borrower’s loans will be discharged if the defense is approved. It is not yet clear if the Department will apply a similar relief formula to students who attended other schools who may be found to have valid borrower defenses. Previously, the Department had provided applicants full discharges of federal loans taken out to attend a Corinthian program that engaged in misconduct. But under the new formula, borrowers with approved defenses may have between 10% and 100% of their federal loans taken out to attend a program that engaged in misconduct discharged, depending on which program they enrolled in. This means that many Corinthian student borrowers who apply for borrower defense relief or who are waiting for decisions will still be on the hook for part of their federal student loans taken out to attend Corinthian. Some former Corinthian students are suing the Department of Education, alleging that its failure to continue providing full discharges is unlawful and asking the court to order the Department to provide full discharges to Corinthian borrowers with valid borrower defense claims. In the litigation, the Department provided the court this table showing, for each Everest, Wyotech, and Heald program, the percentage of the borrower’s federal loans it plans to discharge if their application for borrower defense relief is approved. Because the method for determining borrower defense relief has recently changed and is being challenged in court, more changes to this table and to relief amounts may occur.
On May 25, 2018, a federal court in San Francisco granted former Corinthian borrowers’ motion for a preliminary injunction in Calvillo Manriquez v. DeVos, ordering the Department of Education to stop using its “average rulings rule” immediately, and to stop collecting the loans of certain Corinthian borrowers. You can get updates and more information about this case on the Project on Predatory Student Lending web site.
Borrower Defense Application Process
The Department had previously created a few different borrower defense application processes, which still appear to apply, including:
1. Process for Some Former Corinthian Borrowers. The Department has provided specific information and a streamlined process with special applications for certain borrowers who attended a Corinthian school. Whether you can use this streamlined process depends on when you attended the school.
2. Automatic Group Relief for American Career Institute Borrowers. In January 2017, the Department announced plans to grant borrower defense relief for federal student loan borrowers who attended the now-defunct American Career Institute (ACI) in Massachusetts. Federal student loans taken out to attend ACI should be automatically discharged without requiring students to submit applications. This move follows the Department’s investigation as well as numerous admissions by the school that it made false and misleading representations to students, misstated job placement rates and employed instructors who were unauthorized to teach under applicable state laws.
3. Process for all other borrowers. In January 2017, the Department issued a borrower defense application form for all other borrowers. As of February 2017, the Department says that all borrowers MUST use this application to apply for borrower defense relief. You can complete the online application form or a fillable PDF application form. Information on what to include in your borrower defense application is available on-line and on the application form. According to the Department, ED and/or your federal student loan servicer(s) will contact you once the review of your claim is complete to inform you of whether your claim was successful or denied.
Forbearance and Stopped Collections
Borrowers who submit complete borrower defense claims can choose to have their Direct loans and Department held FFEL loans placed into forbearance or stopped collections. According to the Department, for borrowers who are in default, “…stopping collections means that no bills will be sent, there will be no collection efforts, and there will be no involuntary offsets or garnishments. Interest continues to accrue during stopped collections. Voluntary payments will still be accepted so that, for example, borrowers who are in a rehabilitation agreement can continue their process on that agreement.”
If you request forbearance and you have guaranteed (FFEL) loans that are not held by the Department, the Department says that it will request forbearance on your behalf. The Department issued guidance about FFEL forbearances in January 2017. The Department clarified in August 2017 that the forbearance or suspension of collection activity should begin on the date that the loan holder or guaranty agency receives notice from the Department that the borrower has submitted a DTR application.
It is not clear if the Department is promptly notifying servicers or loan holders that a borrower has submitted a borrower defense and should be placed in requested forbearances or stopped collections or if servicers are correctly and promptly processing these requests. You should not assume that your account is in forbearance or stopped collections after applying for borrower defense. Be sure to check with your servicer. To help avoid an unnecessary tax refund offset, borrowers with defaulted loans may want to confirm that they are in stopped collection status by calling the Default Resolution Group at 1-800-621-3115 before filing their taxes. You should also consider calling the I.R.S. at 1-800-304-3107 to get more information about whether your loan is certified for offset.
The government still needs to clarify whether amounts forgiven through this process will be potentially taxable. The Department of Treasury has issued rulings that discharges of debts for Corinthian borrowers and of American Career Institute (ACI) borrowers will not be considered taxable income. In July 2018, the Department of Treasury (I.R.S.) issued a ruling extending the 2015 relief for Corinthian and ACI federal student loan borrowers to Corinthian and ACI private student loan borrowers
If you have questions about borrower defense, you may call the Department’s borrower defense hotline: (855) 279-6207. Representatives are available Monday through Friday from 8:00 a.m. to 8:00 p.m. Eastern time.