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By Suzanne Blake
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More than 170,000 federal student loan borrowers who say they were defrauded by their schools are set to have their debts erased after a federal appeals court rejected the Education Department's effort to delay relief.
The ruling affects borrowers covered by Sweet v. McMahon, formerly known as Sweet v. Cardona and Sweet v. DeVos, a yearslong class-action case over the Department of Education's handling of borrower-defense applications.
Specifically, the settlement covers borrowers who alleged that their schools misled them about issues such as job prospects or earnings potential. In some cases, the schools even misled students about their accreditation and program costs.
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“For over 170,000 borrowers, cancellation could eliminate years of payments and more importantly free up money for housing and other essential items that they may have delayed because of student loan repayment,” Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, told Newsweek.
Why It Matters
The latest decision means additional borrowers whose claims were not decided by court-ordered deadlines are entitled to what the settlement calls "Full Settlement Relief.”
That includes discharge of the relevant federal student loans and refunds of certain amounts paid to the Education Department.
The federal student loan portfolio includes tens of millions of borrowers and roughly $1.7 trillion in outstanding federal student loans.
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What To Know
For borrowers who attended schools found or alleged to have engaged in serious misconduct, the financial impact can be especially severe.
The Government Accountability Office said borrower defense is designed to protect student loan borrowers when colleges engage in misconduct, such as the case of misrepresenting graduates' employment prospects.
As of April 30, 2024, the Education Department had discharged $17.2 billion in federal student loans for 974,820 borrowers through borrower defense, according to GAO's review of agency data.
But with the new ruling, the Sweet v. McMahon settlement now totals at least $23 billion in relief and has triggered automatic relief for more than 170,000 additional borrowers.
“These roughly 170,000 borrowers followed the proper borrower defense process and may now see their federal student loans discharged,” Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek.
“Many of these now-defunct or bankrupt schools inflated tuition costs, misrepresented educational outcomes, and received federal loan dollars while failing to deliver on the promises made to the students.”
The case began in 2019, when borrower-defense applicants sued the Department of Education in federal court in California. The lawsuit challenged how the department had handled borrower-defense claims, including delays in issuing decisions and denials of certain applications beginning in December 2019.
“This is another sign that there has to be improvement in how fraudulent claims are handled, as administrative delays can translate into billions of dollars in automatic relief,” Beene said.
Borrower defense to repayment is a federal protection that allows borrowers to seek discharge of certain federal student loans if their school engaged in misconduct related to the loan or educational services provided, and if that misconduct caused harm warranting discharge.
The Education Department and borrowers originally reached a settlement on June 22, 2022, and the court granted final approval on November 16, 2022.
Under the settlement, borrowers whose applications were pending as of June 22, 2022, are considered class members, while borrowers who submitted applications between June 23, 2022, and November 15, 2022, are considered post-class applicants.
The new relief is for post-class applicants whose applications were not decided by the required deadlines.
The settlement required the department to decide post-class applications by January 28, 2026. If the department did not issue a decision in time, those borrowers are now entitled to Full Settlement Relief.
“The Department of Education will likely feel the effects of this for years after losing so many of these cases on appeal,” Thompson said. “Regardless of how you view the outcome, the litigation has weakened the Department's credibility and highlighted failures in its oversight of institutions participating in the federal student loan program.”
How Borrowers Were Defrauded
The schools under this lawsuit misled students in ways that affected their decision to enroll or take out federal loans.
Federal Student Aid says borrowers may qualify if they enrolled in or continued attending a school based on misleading information and suffered harm warranting a full discharge of federal loans.
The GAO found that the most common type of misconduct was misrepresentation of graduates' employment prospects, including job placement rates or expected earnings. GAO also said six of the seven colleges in its review engaged in more than one type of misrepresentation.
Some Schools Fought Back
Several schools challenged their inclusion in the Sweet v. McMahon settlement, arguing that being named on the Department of Education's list unfairly implied wrongdoing and damaged their reputations, according to Higher Ed Dive. [caselaw.findlaw.com]
Among the most prominent challengers were Everglades College, Lincoln Educational Services Corporation and American National University, which appealed the settlement in court. The schools also argued that borrowers were receiving relief based largely on school attendance rather than individualized reviews of their claims. [caselaw.findlaw.com]
Those challenges were ultimately unsuccessful, with federal courts allowing the settlement to move forward. Many other schools on the list, including now-defunct chains such as Corinthian Colleges and ITT Technical Institute, did not publicly contest the agreement.
Who Is Eligible?
Borrowers in Sweet v. McMahon attended 151 predatory schools, including ITT Technical Institute, Corinthian Colleges, University of Phoenix and the Art Institutes. The full list of schools covered under the Sweet v. McMahon (formerly Sweet v. Cardona) settlement is contained in Exhibit C of the settlement agreement, here:
sweet-v-cardona-school-list.pdf.PDF
Borrowers who believe they are part of the Sweet v. McMahon settlement should first check whether they received notice from the Education Department and log in to their account at StudentAid.gov to view their borrower-defense activity and discharge status.
Sweet class members with pending borrower-defense applications, or approved applications that have not yet been fully discharged, are not required to make payments on the covered loans while the application or discharge is pending, according to Federal Student Aid.
“Relief only covers loans tied to the specific school named in the claim. A borrower who attended 3 schools and got defrauded by one still owes the loans from the other two,” Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek.
“And since this is automatic, nobody needs to pay a company to speed it up. If someone's asking for a fee to 'guarantee' the discharge... that's the scam, not the relief.”
Student Loan Debt Remains Massive
Americans carry roughly $1.7 trillion in outstanding federal student loans.
Of that, the Project on Predatory Student Lending said the Sweet v. McMahon settlement totals at least $23 billion, and now more than 170,000 additional borrowers are set to have $11 billion in debt erased.
What Happens Next
Borrowers covered by Sweet v. McMahon should monitor their StudentAid.gov accounts and email notices from Federal Student Aid.
For borrowers not covered by the settlement, the borrower-defense process is still available for those who believe their school misled them or engaged in covered misconduct.
However, the automatic relief under Sweet v. McMahon is specifically tied to applications filed on or before November 15, 2022, meaning new applicants should not assume they are part of this settlement.
Contact Newsweek editors on this story: Jason Lemon and Gray R. Thomas
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