Student loan forgiveness: Education Department discharges $1.1 billion in debt for 115,000 ITT students

The Education Department (ED) is discharging $1.1 billion for 115,000 defrauded former students of the for-profit ITT Technical Institute (ITT) after a new review of existing regulations.

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.

“For years, ITT hid its true financial state from borrowers while luring many of them into taking out private loans with misleading and unaffordable terms that may have caused borrowers to leave school,” U.S. Secretary of Education Miguel Cardona said in a statement. “Today’s action continues the Department’s efforts to improve and use its targeted loan relief authorities to deliver meaningful help to student borrowers.”

The affected borrowers did not complete their degree or credential at ITT and left on or after March 31, 2008. ED estimates that 43% of these borrowers had defaulted on their loans.

“To be eligible for a closed school discharge, the borrower must not have completed their program or transferred their credits or hours to another school,” ED explained in a press release. “Discharges are also available to any borrower who withdrew from the institution within a few months of its closing.”

Eileen Connor, legal director of Harvard's Project on Predatory Student Lending, which represents many defrauded student loan borrowers, asserted that the $1.1 billion discharge still doesn’t go far enough.

“One of ITT’s notorious scam tactics was enrolling students in a worthless associate’s program, and once a student completed that program, ITT convinced them to enroll in a bachelor’s program, which students were often unable to complete,” Connor told Yahoo Finance. “Many of our clients experienced this particular scheme, talked into multiple degrees and a mountain debt. It is unclear from today’s announcement whether all of their loans, including from the associate’s degree, would be canceled.”

An ED official told Yahoo Finance that ITT Tech associate program debt, if the program was completed, did not qualify for the latest discharge.

Connor added that it’s been five years since ITT shut down, “yet the Department still has not addressed the more than 700,000 borrowers with over $3 billion in fraudulent debt from ITT. ... We are again calling on the Department to do what is right when it sees evidence of widespread fraud. Our clients should not have to wait another day for the cancellation of loans that never should have been made in the first place.”

In any case, the move is a step toward addressing the borrower defense backlog, which began in the Obama administration and was exacerbated by ED policies during the Trump administration. (Around 7,000 of the affected ITT borrowers also had approved borrower defense to repayment claims.)

In his statement, Cardona stressed that “the continued cost of addressing the wrongdoing of ITT and other predatory institutions yet again highlights the need for stronger and faster accountability throughout the federal financial aid system.

Secretary of Education Dr. Miguel Cardona answers questions during the daily briefing at the White House August 5, 2021 in Washington, DC. (Photo: Win McNamee/Getty Images)

The House Education and Labor Committee Chairman Bobby Scott (D-VA) applauded the move, stating: “Today’s announcement will give hundreds of thousands of students and families the long overdue relief they need and deserve.”

Rep. Scott added that the action “is also a reminder that taxpayers are frequently forced to pay for the deceptive practices of predatory colleges... I hope this announcement will prompt my Republican colleagues to stop blocking reasonable accountability measures that would shield future students and taxpayers from the costs of predatory colleges.”

'There are countless others who attended other predatory institutions'

U.S. citizens and eligible non-citizens with federally-backed student debt can apply for borrower defense if their 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.

“Thanks to Secretary Cardona and President Biden, tens of thousands of former ITT students will finally get the relief they’ve been owed for far too long,” Alex Elson, senior counsel at the National Student Legal Defense Network, told Yahoo Finance. (Elson had previously recommended ED take this route in October last year when he wrote a policy paper as part of a '100 Day Docket initiative.')

Elson added that “there are countless others who attended other predatory institutions who are still waiting,” added Elson. “We hope the Department will continue to implement our recommendations to make things right for all of them, too.”

With the $1.1 billion cancellation announcement on Thursday, the total amount of loan discharges by ED during the Biden administration is roughly $9.5 billion, affecting over 563,000 borrowers. Recent actions include loan forgiveness for borrowers who are totally and permanently disabled, the extension of the payment pause to Jan 2022, and the discharge of $500 million in debt for 18,000 ITT student based on their "individual borrower defense application."

Clearing a five-year backlog

The borrower defense process, in which students who believe they were defrauded can apply for loan forgiveness, was created in 1995, though it was barely used until the Corinthian Colleges closed in 2015.

A flood of claims followed.

“For years, Corinthian profited off the backs of poor people — now they have to pay,” then-California Attorney General Kamala D. Harris said in a 2016 statement. “This judgment sends a clear message: there is a cost to this kind of predatory conduct … My office will continue to do everything in our power to help these vulnerable students obtain all available relief, as they work to achieve their academic and professional goals.”

The Obama administration created special rules to address the problem, making it easier for defrauded students to get their loans cleared — with some getting automatic loan forgiveness if they qualified.The Trump administration rolled back Obama-era regulations, limiting how applicants could access the program, and eventually set up a rubber stamp system for denials.

According to the latest government data as of April 30, 2021, 107,825 borrower defense claims are still awaiting adjudication while 137,413 have previously been deemed ineligible.

At the same time, it's unclear if those 137,413 ineligible claims involve borrower defense claims that were systematically denied during the Trump administration — including nearly 130,000 in 2020 alone. (The ED did not respond to requests for comment on this specific question.)

Addressing 'ITT’s malfeasance' with loan forgiveness

The Education Department provided the relief to former ITT students through what is known as the closed school discharge, which is generally used for newly-closed schools.

ED noted that the Education Secretary has the authority, under the Higher Education Act, to extend this period “based on exceptional circumstances.” ED said that the agency will start processing discharges in September 2021, and borrowers will get automatic discharges in the following weeks.

The choice of March 31, 2008, for former ITT students was based on evidence from ITT's bankruptcy court proceedings, filings with the U.S. Securities and Exchange Commission, and from the Consumer Financial Protection Bureau.

March 31, 2008, was when “the company’s executives publicly disclosed the start of a financial scheme that kicked off a series of misrepresentations to hide the true nature of the school’s finances following a public loss of outside financing, which led to shifting additional costs to students and hindered its ability to invest in delivering quality education to students,” ED stated.

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