The little loophole that could let tens of thousands of students wipe out their federal debt


That group of 15 students refusing to pay off their federal student loans?

They’re standing on pretty solid legal ground, according to the Occupy offshoot group called Debt Collective—not to mention 12 U.S. senators led by Elizabeth Warren and the attorneys general of two states.

And countless other students could potentially have their federal debt wiped clean off, depending on whether the government agrees with them.

The argument comes down to a little-used statute in the the U.S. Higher Education Act, a law passed in 1965. According to that Act, the Department of Education has the authority to specify “acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan.”

UPDATE, APRIL 28, 2015: The Department of Education has removed the section mentioned below from its website and now directs visitors here.

What exactly does that mean? The Department gives a little more detail on its website, although it is buried within Clause 17 of its “discharge” section. Here’s the important part:

“In some cases, you may assert, as a defense against collection of your loan, that the school did something wrong or failed to do something that it should have done,” it says. “You can make such a defense against repayment only if the school’s act or omission directly relates to your loan or to the educational services that the loan was intended to pay for, and if what the school did or did not do would give rise to a legal cause of action against the school under applicable state law. If you believe that you have a defense against repayment of your loan, contact your servicer.”

“In some cases, you may assert, as a defense against collection of your loan, that the school did something wrong or failed to do something that it should have done.” — Department of Education

So the strikers’ argument goes like this: Corinthian Colleges, American’s biggest chain of for-profit schools that enrolled some 110,000 students at its peak in 2012, is facing a multitude of state and federal probes alleging that it forced students into bad debt by lying about job placement and graduation rates.

That’s sufficient reason to invoke the “defense against repayment” option, Debt Collective says.

And they argue there are many other cases—especially in the for-profit industry, that would also be covered. The Consumer Financial Protection Bureau alleged in a suit filed earlier this month that for-profit college chain ITT “exploited its students and pushed them into high-cost private student loans that were very likely to end in default.” ITT enrolls more than 70,000 students a year. The company has said the government’s accusations are without merit.

And last year, two schools run by Premier Education Group, which operates a total of seven for-profit institutions, faced suits over fraud accusations. In December, its Salter chain settled with the Massachusetts Attorney General for $3.75 million. The second, a federal lawsuit from former employees of Harris, a group of trade schools, was dismissed, though the court did not rule on the substance of the employees’ complaints.

“The most optimistic scenario would be millions of students who have the possibility of claiming defense to repayment,” said Luke Herrine, legal coordinator for Debt Collective. He said they had not yet reached out to ITT or Harris students about using the clause as they are focusing on the Corinthian case.

One hitch is that the Department of Education has not provided guidance on how exactly a student can go about requesting a student loan discharge. The clause has been used just twice in the past few years, Debt Collective says, and the results of the cases aren’t publicly available. The group’s legal team says it has repeatedly requested information on the cases, including through Freedom of Information Act requests, but has so far received nothing.

Debt Collective is not pulling their argument from a void. In December, the 12 U.S. senators led by Warren submitted a letter to the Department of Education asking for clarification on defense to repayment.

“We are writing to request that the Department…put teeth into its legal authority to discharge federal student loans when borrowers have legal claims against their schools — and to call on the Department to utilize that authority to immediately discharge federal student loans incurred by borrowers who have claims against Corinthian Colleges Inc.,” they wrote.

Massachusetts Attorney General Maura Healey recently published a letter in support of the senators.

“Based on our investigative findings, we believe the federal loans of Corinthian students in Massachusetts should be cancelled,” she wrote.

The Department of Education has yet to reply to either letter. Assistant press secretary Denise Horn said in an email that the agency is “working on a response.”

Mallory Heiney, 21, one of the strikers, still has approximately $24,000 in student debt, including $10,000 in federal loans. She attended a Corinthian school, Everest College, in Grand Rapids, Michigan, with the goal of becoming a nurse. She says she has been forced to donate plasma and busk with her guitar to pay off debt she said she had little understanding of when she agreed to take it on.

“There were a lot of lies,” she said. She has embraced the strike, even though her credit score could deteriorate and her wages could be garnished and her credit score hit.

“They didn’t deliver so why should we?” she said.

Rob covers business, economics and the environment for Fusion. He previously worked at Business Insider. He grew up in Chicago.

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