If an attorney can prove a university has violated state laws, the school may have to repay a student's federal loans.
The U.S. Department of Education recently brought to light a section of federal law that could allow federal student loans to be eliminated. Students would be eligible to receive any amount paid toward the loan, and the school would have to repay the federal loan back to the Department of Education.
But earlier this year, the DOE said it was looking closer at the wording of the law and what exactly a borrower would have to put forward in their defense.
The DOE finalized the federal rule in December 1994, but the regulation did not anticipate students suing colleges directly. Instead, their intent was that a student would be able to receive assistance from the state, which would provide debt relief to the student if appropriate. In the event of a loan discharge, the student could potentially demand the school recompense the government, New York lawyer Eric Epstein said.
Since then, the rule has been stagnant and unused in court rulings, Epstein said. Instead of serving as a clear indicator for who's responsible for loan repayment, Epstein said the law is more of an attempt to clarify the guidelines of the Direct Loan Program.
“The regulatory language is almost amazingly unhelpful and vague,” Epstein said. “[It’s confusing] what constitutes a cause of action under state law.”
The language, which Epstein said should have been long gone by now, was supposed to be a temporary, one-year fix. Although revisions have still yet to be made, the DOE's master promissory note — a promise to pay off any loans borrowed — clarifies limitations for a borrower to raise a repayment defense based on alleged acts or omissions of a school.
The note said, “We do not guarantee the quality of the academic programs provided by schools that participate in federal student financial aid programs. You must repay your loan even if you do not complete the education paid for with the loan, are unable to obtain employment in the field of study for which your school provided training, or are dissatisfied with, or do not receive, the education you paid for with the loan.”
“Given this language, it’s still unclear what state law defenses the secretary would recognize as a defense to repayment,” Epstein said.
The regulation only permits students to raise certain state law defenses for disputed proceedings with direct loans. Student loans consultant Amber Thomas said the rule does not automatically assume a student will be eligible for loan repayment relief.
“There are so many types of student loans, and with so many changes that have been happening over the last few years, that can get really confusing for students and their families,” Thomas said. “A lot of students have a hard time keeping track of the loans they already have, so figuring out which ones are eligible for certain types of relief is really a case-by-case thing, nowadays.”
Thomas said with the “lack of apparent explanation” over student loans, many students depend on the school to facilitate financing and loan clarity.
“Ball State appears to do a really good job at giving what students need for an amount that definitely isn’t unreasonable,” Thomas said. “According to [College Scorecard], the school’s cost is below average, while the graduation rates and average salary after attending is higher than what is typical in other universities across the country.”
John McPherson, Ball State’s executive director of financial aid and scholarships, helps oversee loan consultations and student debt plans at the university.
McPherson said 61 percent of Ball State graduates borrow an average of $25,000, with a typical payment of around $278 per month.
“One thing that is unique at Ball State is our partnership with a company called iontuition,” McPherson said. “Through this website, students can actually log in and view their own loan portfolio.”
This free service provided by Ball State helps students manage debt levels and allows students to review potential repayment plan options and speak with student loan counselors.
McPherson said despite recent chatter about the gray area in the federal law, he wasn’t aware of additional cases where Ball State students have used any “loopholes” to get debt or loan relief.
“It will be interesting to watch future court decisions in this regard, as their decisions will likely impact the behavior of colleges who may be using deceptive practices to bolster enrollment,” McPherson said.
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