How Are U.S. Students Using An Obscure Law To Get Loan Debts Forgiven?

Former student Syd Andrade is confident he can get most or all of his college debt forgiven under a little known law.

The news that college loan debt has reached $1.2 trillion is mind boggling, as is the ancillary news that no less than seven million students have defaulted. Thus, it was encouraging to see that proactive former students have uncovered an obscure federal law by which their college loan debts can be forgiven. The law, outlined in the WSJ article, 'Thousands Want Student Loans Cancelled', Jan. 21, p. A3, has already benefited some 7,500 students to a tune of $164 million.

The law entails the student applying to have his or her student loan debt expunged. According to the WSJ:

"This law had only been applied in three instances before last year.  The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as lying about their graduate earnings."

The piece goes on to note that the U.S Dept. of Education has already agreed to cancel nearly $28m of debt for 1,300 former students of Corinthian Colleges - a for profit chain that liquidated in bankruptcy last year.  The Education Dept. indicated "many more" could benefit. This program - as the WSJ points out - "could be one of the few lifelines for hundreds of thousands of Americans buried in student debt." 

This is critical given federal law prohibits students escaping their debt via bankruptcy.

Incredibly, "the sudden surge in claims has flummoxed the Education Department which says the 1994 forgiveness program is overly vague"

This is based on the fact that the law "doesn't specify what is needed to demonstrate a school committed fraud."

To rectify this the Dept. is now commencing a months long effort with students and representatives of school and lenders to set clear rules including when the Ed. Dept. can go after institutions to "claw back tuition money".

In the meantime, thousands are invoking the obscure law though the Education Dept. expects the cost of forgiveness could ultimate be in the billions of dollars and much of that may have to be footed by taxpayer. But Education Dept. undersecretary Ted Mitchell averred that "borrowers are entitled to forgiveness as well as potential reimbursement of repaid loans if they have been defrauded  and regardless of the cost"

The students themselves also merit kudos for discovering the law.  As the WSJ piece puts it:

"The surge in applications reflects the growing savvy of student activists who discovered the law last year after it sat largely dormant for decades."

One of the students highlighted and determined to get his debt forgiven is Syd Andrade, an apparent victim of the Art Institutes chain of schools which promised "great facilities, great teachers, and use of industry standard software".

He graduated from the chain's Tampa, FL school and said the classes "used outdated software and were taught by an instructor who knew less than the students".

Worse, the "school promised an industry job" but he ended up with only a chump change $8/hr gig at the local Office Depot. Stung by the hyper promise Andrade is now documenting the travesty under the 'forgiveness for fraud' law.

If he succeeds he would have $30,000 in federal loans forgiven.

Let us hope that he and other besieged students can get the relief they deserve.