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Education Department discharges $500 million in debt for 18,000 ITT students in sign of borrower defense progress

The Education Department (ED) is discharging $500 million in student loan debt held by 18,000 borrowers who had been defrauded by now-defunct for-profit chain ITT Tech, a sign that the Biden administration is working to address the borrower defense backlog

“Our action today will give thousands of borrowers a fresh start and the relief they deserve after ITT repeatedly lied to them,” Education Secretary Miguel Cardona said in a statement. “Today’s action is part of the Biden-Harris Administration’s continued commitment to stand up for borrowers when their institutions take advantage of them."

The action applies to certain borrowers who had filed for borrower defense, which students with federally-backed debt can apply for if they think a college or career school education misled them "or engaged in other misconduct in violation of certain state laws," according to the ED's Federal Student Aid office.

"Many of these borrowers have waited a long time for relief, and we need to work swiftly to render decisions for those whose claims are still pending," Cardona stated. "This work also emphasizes the need for ongoing accountability so that institutions will never be able to commit this kind of widespread deception again.”

NEW YORK, NEW YORK - JUNE 14: U.S. Secretary of Education Miguel Cardona speaks during a roundtable discussion at Mercy College on June 14, 2021 in the Pelham Bay neighborhood of the Bronx borough in New York City. Secretary of Education Miguel Cardona was joined by Rep. Jamaal Bowman (D-NY), University of the State of New York Commissioner of Education and President Dr. Betty Rosa, New York City Department of Education Chancellor Meisha Porter as well as NYC students and teachers to discuss education and how to improve the teacher pipeline, especially for students of color.   (Photo by Michael M. Santiago/Getty Images)
U.S. Secretary of Education Miguel Cardona speaks during a roundtable discussion at Mercy College on June 14, 2021 in the Pelham Bay neighborhood of the Bronx borough in New York City. (Photo by Michael M. Santiago/Getty Images)

Borrower defense applications surged after the Obama administration cracked down on predatory for-profit colleges in 2015 and created new regulations, but the mechanism for defrauded borrowers seeking debt relief broke down during the Trump administration. (ED noted that Wednesday's announcement is the "first approval of a new category of borrower defense claims by the Department since January 2017.")

"This is good news ... it represents a crack in the door and some of our clients are finally starting to see daylight trickling through," Eileen Connor, legal director at the Project on Predatory Student Lending, who represents various former for-profit students in various ongoing lawsuits, told Yahoo Finance.

As of December 2020, according to ED data obtained by Yahoo Finance, 208,486 borrower defense claims were unresolved while more than 100,000 other claims were "resolved" by being systematically denied during the Trump administration. It's unclear if the Biden administration will re-adjudicate any claims found to be improperly denied.

"This is good news for 18,000 borrowers who have waited too long, and it appears the Biden Administration genuinely wants to help people who are owed discharges,” Alex Elson, vice president and co-founder of Student Defense, an advocacy group, told Yahoo Finance. "But that makes it all the more confounding that they are so hesitant to use their authority to immediately and automatically help the countless additional borrowers who are still waiting."

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'We cannot ask these borrowers to wait another day'

ITT Technical Institute filed for bankruptcy in 2016 and shut down all campuses, affecting 149 locations and roughly 40,000 students, amid lawsuits and investigations over alleged predatory lending practices.

According to an ED official who requested anonymity to discuss details of the announcement, the 18,000 ITT students seeing their loans discharged were identified based on their "individual borrower defense application" and evaluated based on "accompanying evidence" in addition to "any relevant information in records in ED’s possession and in submissions from the school, as well as any other information obtained in connection with the fact-finding process."

Evidence was provided by agencies including the Iowa Attorney General's Office, the Consumer Financial Protection Bureau, and Veterans Education Success.

"To date, ED has approved more than 18,000 claims from former ITT students, but our work continues to evaluate additional claims from former ITT students and students from other institutions," the official added.

The latest action cuts through about 72% of the ITT borrower defense claim backlog. The agency will start notifying borrowers of their approvals "in the coming weeks," according to the official, and then work to discharge $500 million in loan balances.

An ITT commercial. (screenshot)
An ITT commercial. (screenshot)

In a press release, ED stated that ITT "made repeated and significant misrepresentations to students related to how much they could expect to earn and the jobs they could obtain after graduation between 2005 and the institution’s closure in 2016."

ED also found that ITT "misled students about the ability to transfer their credits to other institutions from January 2007 through October 2014. The Department found that credits rarely transferred and borrowers made little to no progress along their educational journey, yet were saddled with student loan debt as a result of their time at ITT."

Yan Cao, senior fellow at the Century Foundation, noted that an additional 25,000 borrower defense claims have been filed since the start of the Biden administration and stressed that the ED "needs to pick up the pace" on providing relief to defrauded borrowers.

"Come September, it will be five years since ITT filed for bankruptcy and that is also when student loan collection is slated to restart," Connor said, referring to the end of the pandemic pause on federally-backed loan payments. "We cannot ask these borrowers to wait another day or pay another dollar toward loans that never should have been made in the first place. We need more from the Department of Education on borrower defense and we need it fast."

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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