Changes in the Student Loan Laws That Affect the Closed-School, False Certification and Borrower Defense Discharge

The closed-school discharge:


This discharge applies to FFEL, Direct, Perkins loans and Parent PLUS Loans. This applies mostly to student loan borrowers at for-profit schools.


The discharge right applies when:
1. The student is attending classes when the school closes even if other school locations remain open.
2. The student did not complete their program by teach-out or transferring one or more credits to the same or comparable program at another school.


Loans issued before July 1, 2020:


1. U.S. Department can automatically discharge student loans if the school closed after November 1, 2013 and certain other conditions.
2. A student who opted-in but later dropped out of a teach-out program is still eligible for a discharge.
3. A student who withdrew from the school within 120 days of the school’s closure date, is eligible for this discharge. The 120 days can be extended in exceptional circumstances.


Loans Issued after July 1, 2020:


1. Students have to apply individually for a discharge.
2. A student who opted-in for a teach-out program and dropped out is only eligible for a discharge if the teach-out does not “materially meet the requirements of the approved teach-out plan.”
3. A student who withdrew from the school within 180 days of the school’s closure date, is eligible for the discharge. The 180 days can be extended in exceptional circumstances.


The false certification discharge:


This discharge applies to FFEL, Direct, Perkins loans and Parent PLUS Loans where the borrower’s eligibility to borrow was falsely certified by the school.


Loans Issued after January 1, 1986:


1. A student did not have a high school diploma or equivalent
2. The student was ineligible for employment in their state based on a disqualifying condition or
3. The Borrower’s signature was forged or the Borrower’s identity was stolen


Loans issued after July 1, 2020


1. A student did not have a high school diploma or equivalent, unless the Borrower submitted a written declaration under the penalty of perjury that the borrower had a high school diploma and was unable to provide the school with an official transcript or official copy of the high school diploma, then the Borrower does not qualify
2. The Borrower’s signature was forged on the Loan Document, the Borrower must provide 5 samples of his or her signature, 2 of the sample must be within 1 year before or after the date of the contested signature.
3. The Borrower’s signature was forged on a payment, the Borrower must provide 5 samples of his or her signature, 2 of the sample must be within 1 year before or after the date of the contested signature and the proceeds of the payment were not delivered to the student or applied to charges owed by the student to the school.
4. The Borrower’s identity was stolen, the Borrower must provide a copy of a local, State, or Federal court verdict or judgment that conclusively determines the Borrower was the victim of identity theft or provide 5 samples of his or her signature, 2 of the sample must be within 1 year before or after the date of the contested signature and a statement of facts that demonstrates eligibility for the loan was falsely certified as a result of identity theft.
5. The Borrower must state if he or she made a claim with any 3rd Party such as a performance bond or a tuition recovery program and if any amounts were received or credited to the borrower’s loan.
6. The Borrower must cooperate with the Secretary and transfer any right to recovery against a 3rd party to the Secretary of the U.S. Department of Education.


The Borrower Defense Discharge:


The borrower’s defense to repayment based on certain types of school misconduct relating to the borrower’s recruitment, enrollment, or taking on of federal student loans


Loans issued before July 1, 2017


This discharge applies to Direct loans
1. The U.S. Department issued discharges based on the borrower’s written testimony when the Borrower was an individual applicant or included in a class of students Department-initiated group discharge; and/or
2. The School breached a contractual promise; and/or
3. The school made a substantial misrepresentation that the borrower reasonably relied on to his or her detriment in deciding to attend, or to continue attending the school, or in deciding to take out a federal loan


Loans issued between July 1, 2017 and June 30, 2020


This discharge applies to Direct Loans and Direct Consolidation loans used to repay a Direct Loan, FFEL Program Loan, Federal Perkins Loan, Health Professions Student Loan, Loan for Disadvantaged Students, Health Education Assistance Loan or Nursing Loan.


1. The U.S. Department issued discharges based on the borrower’s written testimony when the Borrower was an individual applicant or included in a class of students Department-initiated group discharge; and/or
2. The School breached a contractual promise; and/or
3. The school made a substantial misrepresentation that the borrower reasonably relied on to his or her detriment in deciding to attend, or to continue attending the school, or in deciding to take out a federal loan.
4. The relevant underlying school’s “act or omission” must relate to the making of a Direct Loan for enrollment at the school or the educational services for which the loan was provided within 3 years the student attended the school or applicable State Law.


Loans issued after July 1, 2020.


The discharge added a requirement for the following evidence:
1. A claim must be submitted within 3 years of leaving the school by an individual;
2. The School breached a contractual promise; and/or
3. The school made a substantial misrepresentation that the borrower reasonably relied on to his or her detriment in deciding to attend, or to continue attending the school, or in deciding to take out a federal loan established by written evidence and his or her testimony.
4. The relevant underlying school’s “act or omission” must relate to the making of a Direct Loan for enrollment at the school or the educational services for which the loan was provided, established by written evidence and his or her testimony,
5. The Borrower demonstrates he or she suffered “financial harm” in the form of “monetary loss” as a result of the school’s misrepresentations, beyond the loss of incurring a student loan obligation. Unemployment counts as financial harm only if involuntary, or caused by intervening economic or labor market conditions. Personal injury, inconvenience, aggravation, emotional distress, pain and suffering, punitive damages or opportunity costs do not count as financial harm.


Also, the following cannot establish a borrower defense:
1. A violation of other borrower defense standards that do not meet the 2019 standard
2. A claim that fails to directly and clearly relate to enrollment or continuing enrollment at the school or educational services for which the loan was made,
3. A claim relating to the “general quality of the student’s education”,
4. Academic disputes or disciplinary matters, personal injury, sexual harassment, a violation of civil rights, slander or defamation, property damage, or informal communications from other students, or
5. A breach of contract, unless the schools conduct also violates the 2019 federal standard.


Special Rules for Arbitration Agreements:


1. For loans prior to July 1, 2017 they were not allowed.
2. For loans issued after July 1, 2017 to June 30, 2020, schools were required to give notice that Arbitration Agreements were not binding.
3. For loans issued after July 1, 2020 and Arbitration Agreements entered after July 1, 2020 may be enforceable.


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