Tidal Wave of Students Seek Debt Forgiveness

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By Jonathan R. Tung, Esq. on January 22, 2016 3:08 PM

The year of the 2015 will now be marked as year of the student loan-crisis. Last year, the number of students who applied to have their student debts forgiven under the Education Department's obscure defense to repayment (DTR) program capped out at somewhere north of 7,500.

This doesn't sound like much, but it's a jump from the five that were filed between 1990 to 2015.

For Profit Fraud

When students try to escape their loans, the general rule is, "tough luck." Everybody wants to keep free money.

But a recent trend has gripped the country: the sudden increase in the number of attendees of for-profit-schools. The usual business-model of these schools is to accept students who are academically on a lower tier and performance scale than students who attend top four year universities. Such schools have been accused by their former students of luring them with false promises of career advancement -- or something as mundane as a job in the industry of their interest.

So far, the major players in this business arena are Corinthian Colleges, Education Management, and ITT Technical Institutes. All three of them have been in federal crosshairs for a while now.

"Defense to Repayment"

The "defense to repayment" provision that has gotten students all abuzz is a rather ambiguously worded clause. For approximately 20 years, the back door essentially remained closed. When the Department of Education officials drafted the main law sometimes in the 1990s, there was little incentive to tighten up the language because only five applications were made for student-debt relief. Three of those five were granted.

Now that number has very definitely jumped upward. The total amount of debt owed by the 7,500 applicants from the last six months equals $164 million. They seek to recoup money from the monolith that is the for-profit-business which has been largely seen as helping boost student debt to climb over $1.2 trillion. And already, the Educaton Department has granted relief to some.

You Made Your Bed, Now Sleep in It

From a legal standpoint, its a difficult case to make. Conservative thinkers worry forgiveness will cover cases of obvious fraud and will also enable students to enrich themselves unjustly just because they don't want to pay back debts. Que moral hazard concerns.

The fact that the law is ambiguously worded makes each potential petition feel like it is subject to review very much in the style of "shoot-from-the-hip." As it stands, there is no requirement that the school actually committed fraud in order for the student to qualify, but apparently it's being worked on.

Bad News for People Who Graduated From "Real" Schools

The fact that the grand majority of the applicants attended "for-profit-schools" doesn't bode well for the student who attended a decent university and still can't get a job. In other words, this isn't necessarily great news for those who graduated law school with a ton of debt and haven't been able to establish a legal career.

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