Closed schools discharge system not working, government watchdog says

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Canceling a key provision of a federal student loan cancellation program has likely left thousands of people struggling to pay off their debt, according to a new report from a government watchdog, with the vast majority being for-profit college students.

In 2018, the Department of Education (ED) created an automatic loan cancellation process, especially for students whose colleges abruptly closed while they were in school. But two years later, in July 2020, the Trump administration made loan cancellation optional – rather than automatic.

The move meant that “borrowers affected by future closings will have to apply for a discharge,” according to a preliminary Government Accountability Office report obtained by Yahoo Finance, warning that for those who do not know how to apply “could face long-term financial burdens from financial institutions. past due or past due student loans, even though these loans can be canceled. ”

Ruby Maldanado, 20, a medical assistant student checks a note given to students who were turned away at the door of Everest College on April 27, 2015 in Alhambra, Calif. Corinthian Colleges Inc., a Santa Ana-based company that was once one of the nation’s largest for-profit university chains, has announced it will close its remaining two dozen schools – a move that leaves 16,000 students looking for alternatives. (Photo by Al Seib / Los Angeles Times via Getty Images)

Students enrolled in a college that is closing may be eligible for full exemption from their student loan if they are unable to complete their program due to the closure. If they qualify, ED reimburses borrowers “for all amounts previously paid or received on these loans” and removes the credit implications from borrower reports. This could also include Parent PLUS borrowers.

Currently, borrowers have one major option to obtain a closed school discharge: they must submit an application.

But between October 2018 and July 2020, when the automatic cancellation provision was in place, the ED paid off about $ 360 million in student loans for more than 27,600 borrowers who never filed a single form, according to the. GAO report. (At the same time, ED also paid off $ 529 million in loans to more than 38,700 borrowers who requested loan forgiveness.)

Sylmar CA - September 18, 2016: Headquarters of ITT Educational Services in Indiana.  The ITT technical institute has decided to shut down all of its campuses following devastating federal sanctions.  The school closes its doors a few days after filing for bankruptcy for misleading students and putting them in debt.

Sylmar CA – September 18, 2016: Headquarters of ITT Educational Services in Indiana. The ITT technical institute has decided to shut down all of its campuses following devastating federal sanctions. The school closes its doors a few days after filing for bankruptcy for misleading students and putting them in debt.

The automatic discharge was exceptionally helpful for the group that did not proactively apply, GAO said, because more than 70% of them “were in default or past due on their loans,” 52% had done. defaulted on their loans and 21% were seriously past due on their debt.

The borrowers had faced wage garnishment, credit breaches and even the garnishment of their tax repayments, despite being unaware their loans could be canceled, the borrowers said. GAO.

On top of that, having debt and no diploma meant that “borrowers receiving automatic discharges defaulted at about five times the national average,” GAO said. Not knowing they were eligible for a loan forgiveness also meant that “automatic discharge borrowers defaulted at about nine times the rate of those who applied for and received a discharge.”

But since the Trump administration’s ED removed the automatic discharge process in July 2020, GAO said, borrowers will need to know they can request a loan forgiveness if schools end up closing in the future. . If they don’t realize they have this option, they could face serious financial hardship – without a degree to justify.

GAO

GAO

The GAO report also found that the majority of students affected by an institution’s closure were enrolled in for-profit college.

For example, between 2010 and 2020, approximately 246,000 student loan borrowers were enrolled in 1,100 schools that closed. 43% of them did not complete their program before closing and about 86% of them were enrolled in a for-profit college. Just over 80,000 ended up having their loans canceled through the process of releasing closed schools.

GAO’s findings “once again demonstrate that low-quality, for-profit schools cost students and taxpayers billions of dollars,” said the chair of the hearing of the Subcommittee on Higher Education and investment in the workforce, Frederica Wilson (D-FL) in her prepared remarks. “Congress and the Department of Education must work together to crack down on predatory schools that continue to deceive students and taxpayers.”

(GAO)

(GAO)

The report, which highlights the plight of Americans in debt but without a degree, comes as the ED announces its negotiated rule-making committee, which will meet in the coming weeks to address a wide variety of student loan issues.

The government’s watchdog findings “demonstrate that students affected by the brutal college shutdown are not receiving the timely support they need,” said Congressman Bobby Scott (D-VA), chairman of the House Education and Labor Committee, in a statement.

“The Biden administration has already taken steps in the right direction to help student borrowers affected by school closures,” Scott added. But as ED “begins to consider changes to the closed school exit process, I hope and expect it will focus on streamlining student relief and improving college oversight. failing “.

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Aarthi is a reporter for Yahoo Finance. She can be contacted at [email protected] Follow her on Twitter @aarthiswami.

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