Fact Checked

Federal judge unblocks Obama-era student debt relief rule

Shot of a group of university students working on computers in the library at campusImage: Shot of a group of university students working on computers in the library at campus
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted.

Thousands of student loan borrowers could see their federal loans disappear.

Thanks to a newly unblocked Obama-era Department of Education regulation (dubbed the borrower defense to repayment), it’s now easier for students who were defrauded by their schools to apply and qualify for federal student loan forgiveness.

After a yearlong delay, a federal judge on Tuesday ordered the borrower defense rule to go into effect immediately.

What’s the background?

The borrower defense rule was originally created in 1995.

But in recent years, following a series of high-profile school closures at for-profit schools Corinthian Colleges and ITT Tech, the Obama administration attempted to modernize the rule in an effort to make it easier for students who attended these and other colleges to qualify for loan forgiveness.

The changes established a clear framework for applying for and processing student loan forgiveness claims. They also penalized colleges and universities that defrauded students by allowing students to sue them in court, as long as the student hadn’t signed an agreement otherwise. The updated rule also required that schools whose graduates have a poor track record of repaying their loans begin warning prospective students about this in advertising and promotional materials.

The changes to the borrower defense rule were finalized in October 2016 while President Obama was still in office; however, the rule wasn’t scheduled to go into effect until July 2017.

But following the election of President Trump and his appointing of a new education secretary, Betsy DeVos, the rule had been stuck in a political power struggle between the two administrations.

Shortly before it was scheduled to take effect, DeVos delayed the rule, announcing plans to rewrite it, which amounted to blocking the regulation from going into effect. In response, attorneys general from 18 different states and Washington, D.C., sued DeVos over her decision to block the rule.

Last month, Federal Judge Randolph D. Moss sided with the states, saying that the Trump administration’s delay did not follow proper rulemaking procedures. On Tuesday, the judge’s ruling went into effect, paving the way for the Education Department to forgive the loans of students who were defrauded by their schools.

Why does this matter?

The Department of Education is sitting on a backlog of more than 100,000 claims from student loan borrowers. Many of these claims come from students who were defrauded by for-profit schools, like Corinthian Colleges and ITT Tech, that shut down while students were in the middle of earning their degrees.

The newly enacted borrower defense to repayment rule should expedite the loan forgiveness process for these students. It will also install other protections to help guard against colleges and universities defrauding students in the future.

But the federal government and, by extension, taxpayers, could be left picking up the bill on millions (maybe even billions) of dollars’ worth of student loans.

How could this impact you?

Many borrowers who didn’t get a degree before their school closed may find themselves living paycheck-to-paycheck, struggling to pay for expensive student loans while also stuck in a low-paying job.

But now that the Obama-era regulation has finally gone into effect, students may finally get some relief. If you were defrauded by your school, you might qualify for student loan forgiveness — potentially saving you tens of thousands of dollars in the long run.

You may find it’s easier to make ends meet without budgeting for a heavy student loan payment each month.

What can you do?

With the backlog of student borrower claims totaling more than 100,000, we recommend you apply for student loan forgiveness sooner rather than later.

The new regulations make it easier for borrowers whose schools shut down to have their student loans forgiven — the Department of Education even has a special application for students from Corinthian Colleges.

But even if your college didn’t shut down like Corinthian Colleges or ITT Tech, you might still qualify for student loan forgiveness if school officials misled you about postgraduation information, like job-placement rates and the average salary of graduates. Just keep in mind, this doesn’t apply to any private student loans that you may have taken out.

To help the application process go smoothly, we recommend you provide a copy of your transcript to confirm you were enrolled at the school. You can also include promotional materials, school catalogs, or emails from school officials that provided misleading information.

Take note: It’s important that you continue making payments on your student loans while your claim is being reviewed, until told otherwise by the Department of Education or your loan servicer. If you stop making payments prematurely, it could hurt your credit, even if your loans are eventually forgiven.

About the author: Tim Devaney is a personal finance writer and credit card expert at Credit Karma. He’s a longtime journalist who prides himself on being a good storyteller who can explain complex information in an easily digestible wa… Read more.