How to Legally Ditch Your Student Loans

January 21, 2016, 7:53 PM UTC
Harvard Business School students cheer as their MBA degrees
UNITED STATES - JUNE 07: Harvard Business School students cheer as their MBA degrees are conferred during commencement ceremonies at Harvard University in Cambridge, Massachusetts, June 7, 2007. (Photo by Neal Hamberg/Bloomberg via Getty Images)
Photograph by Neal Hamberg — Bloomberg via Getty Images

Anyone with student debt will quickly find out it’s nearly impossible to escape. Begging or even bankruptcy won’t make the loans go away.

But now, a flood of former students are turning to an obscure federal law to lose their loans – and for many of them, it’s working.

The law in question lets students ditch their loans if they can show their school made false or fraudulent claims to recruit them. This could involve showing that a college lied about what a student would earn after graduation.

The law has been on the books for years, but it was only applied in three cases. Until last year, that is. As the Wall Street Journal reports, the floodgates opened after the Department of Education announced it would forgive the loans of students who attended Corinthian College, a vocational school that went bankrupt amid a scandal over its marketing and lending practices.

According to the Journal, the government agreed to cancel the debt of 1,300 Corinthian students, and now more than 7,500 student borrowers are asking the Department of Education to wipe out loans worth more than $164 million. Successful claimants can also recoup money they’ve already paid.

The law the students are citing is from 1994 and is known as a “borrower defense.” Last year, a government official appointed to investigate the Corinthian scandal cited the law in a report, and said he would create a process that “would apply more broadly to students at all institutions who believe they have been defrauded by their colleges.”

Now, the process is here and students can use this form to ask for a time-out on payments while they prepare and submit a fraud claim. (Note, though, the loan interest will still accrue, and a student will have to pay it if their claim fails). Ultimately, the Department of Education will advise the student if the claim is accepted; Uncle Sam can then go after the college to recover the money – so long as the college is still solvent, or else the taxpayers will pick up the tab.

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So, who is going to qualify under this process? For now, that’s unclear, especially as no one appears to be sure what constitutes fraud versus simple marketing. And not everyone is sympathetic. As Andrew Kelley of the American Enterprise Institute told the Journal, some borrowers may claim a “borrower defense” simply because their education didn’t land them the job they wanted.

Meanwhile, some are fretting that mountains of student loan, which is often packaged in larger loan portfolios, could be the next version of the 2008 mortgage crisis.

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