Biden has quietly forgiven billions in student loans despite setbacks for his signature debt plan

WASHINGTON —  Sara Diaz was feeling emotional when she checked her email Tuesday. She was among the hundreds of Neiman Marcus employees laid off last month and had just finished a stressful phone call about her health insurance.

As she went through her inbox, she noticed an email from the Department of Education. Diaz had applied to have the government cancel $69,314 in federal student loan debt she took on to attend the Art Institute of Pittsburgh, a for-profit school that closed in 2019.

Two and a half years, two Education secretaries and one class-action lawsuit later, her application had finally been approved.

“I almost couldn’t believe it,” she said. “I reread it probably five times.”

For decades, a lesser-known program for federal student loan recipients has allowed borrowers to assert a defense to repayment if a school misled them or broke state law. Since the Education Department introduced a formal application in 2015, more than 770,000 people have applied. Nearly half a million applications were still pending at the end of January.

After a modest start at the tail end of the Obama administration, the program stagnated under former President Trump. But under President Biden, the Education Department has ramped up processing borrower defense applications, overhauled the regulations governing the program and used it to cancel billions in debt for people who attended for-profit schools accused of defrauding students.

It’s part of a broader strategy the Biden administration has used to offer debt relief to the borrowers struggling the most with their loans. At a time when Biden’s plan to cancel up to $20,000 in debt for some borrowers is a nonstarter in Congress and at risk of being blocked by the Supreme Court, his administration has tried to bolster the existing web of programs, policies and regulations meant to protect student loan borrowers.

The Education Department has agreed to forgive more than $14.5 billion for borrower defense cases and people whose schools closed before they finished their degrees, including $5.8 billion for 560,000 Corinthian College students and $3.9 billion for 200,000 borrowers who were enrolled at ITT Technical Institutes, as well as an additional estimated $6 billion as part of a settlement in a class-action lawsuit over delayed borrower defense application decisions.

That’s far less than the $400-billion cost of Biden’s debt relief plan, which would cancel $10,000 in federal student loans for people making less than $125,000 and an additional $10,000 for people who received Pell grants for low-income students, according to an estimate from the Congressional Budget Office. Of the 43 million Americans who hold a total of $1.6 trillion in federal student loan debt, 95% are eligible and 45% would have all their debt wiped out.

The fate of Biden’s plan is uncertain. Supreme Court justices appeared skeptical Tuesday when they heard oral arguments in two cases challenging the effort.

Former students seeking debt forgiveness through borrower defense have fared better in the courts. In November, a federal judge approved a settlement in Sweet vs. Cardona, an ongoing class-action lawsuit against Education Secretaries Betsy DeVos and Miguel Cardona, over delays in borrower defense application processing.

“Since day one, the Biden-Harris Administration has worked to address longstanding issues relating to the borrower defense process,” Cardona said in a statement on the settlement. “We are pleased to have worked with plaintiffs to reach an agreement that will deliver billions of dollars of automatic relief.”

More than 200,000 loan holders from a list of more than 150 schools will receive more than $6 billion in loan cancellation, including refunds of what they have paid along with repaired credit reports. An additional 64,000 people will receive a response from the Education Department on their applications in the coming months, or their loans will be forgiven. Despite an appeal by three schools, a judge denied a motion to postpone the implementation of the settlement for most borrowers.

“I think that the Biden administration recognizes that there is this legal obligation [to borrower defense applicants], in that there has to be a process, it has to be fair, it has to be timely,” said Eileen Connor, president and director of the Project on Predatory Student Lending. “People can’t be waiting for seven, eight years with their entire life on hold.”

Before her settlement application was approved, Diaz, 36, spent more than two years waiting for an update on the pending status, checking every three months.

The Art Institute of Pittsburgh’s online division was not her first choice, but it seemed like the best one at the time.

As a high school student on Long Island, Diaz earned a certificate in fashion merchandising from a trade school and was accepted to the Fashion Institute of Design and Merchandising in Los Angeles. Then she became pregnant her senior year and “school took a back seat to everything,” she said. She spent the next few years working in retail and sales jobs.

By her mid-20s she was ready to go back to school, but she needed something that would allow her to keep working, take care of her family and earn a better living afterward. She enrolled in a part-time program to study fashion merchandising at the Art Institute of Pittsburgh’s online division in 2012.

“It was appealing because it seemed like it was flexible with your schedule if you were someone ... in my case, where you have to work a job or two jobs, you can still work towards that goal of achieving a higher education,” she said.

She later learned that a coalition of state attorneys general won a $102.8-million settlement against the Art Institutes’ parent company, the Education Management Corp., in 2015 over allegations that the company artificially inflated graduation and job placement numbers, and used aggressive recruitment tactics. In 2019, the Art Institutes shut down several campuses, as well as the online program division Diaz enrolled in.

“That’s when I started researching: Can I get it forgiven?” she said of her debt.

In her borrower defense application, Diaz wrote that an Art Institute admission counselor told her in early 2012 that 92% of graduates get jobs within six months of graduation; that the school would help her secure an internship her senior year that would lead to a high-paying job; that her class credits would be fully transferable; and that most of her degree costs would be covered by grants and federal student loans.

Most of what she’d been told didn’t pan out, Diaz wrote to the Education Department. She had to take out a loan directly with the school on top of her federal debt. Top fashion schools including Parsons School of Design wouldn’t accept her class credits. When she struggled to land job interviews after graduating, the school sent postings for jobs with salaries under $25,000, none of which were in her field.

“I’ve been struggling with depression the past two years because I had such high hopes and from what it seems, my degree and 6 years of hard work are worthless in the workforce, let alone help land me a job making $75k,” Diaz wrote in her application. “It doesn’t help that the school has been sued and closed down.”

The private for-profit college industry has long been criticized over the practices some schools use to recruit and retain students, the quality of the education provided and the financial outcomes of those who attend. A 2017 analysis by the Federal Reserve Bank of New York found that students at for-profit colleges took out more loans and had a higher rate of default than public college students, fueled by the higher cost of for-profit schools and worse outcomes in the job market.

State and federal investigations have found evidence that several schools misrepresented the number of graduates who find jobs, using aggressive or misleading recruitment tactics and targeting low-income, minority or other vulnerable students.

In 2013, then-California Atty. Gen. Kamala Harris sued Corinthian Colleges Inc., accusing it of misrepresenting job placement rates and advertising programs its schools didn’t offer. The complaint, citing internal Corinthian College documents, said the school saw its target demographic as “‘isolated,’ ‘impatient,’ individuals with ‘low self-esteem,’ who have ‘few people in their lives who care about them.’”

Several large for-profit college chains closed in the mid-2010s under pressure from investigations, legal settlements and declining enrollment, including Corinthian Colleges, which filed for bankruptcy in 2015.

“Our job is to protect consumers,” said California Atty. Gen. Rob Bonta. “It’s not their fault that someone acted in bad faith and broke the law.”

After debt activists started organizing students to apply for borrower defense, the Obama administration appointed a special master to help organize the process in June 2015, and introduced formal regulations a year later. But the Education Department took a new approach to borrower defense applications under then-President Trump and Education Secretary DeVos.

DeVos chose former for-profit officials for some key roles, including hiring a former DeVry University dean to head the enforcement unit tasked with holding for-profit schools accountable.

She also unsuccessfully tried to block implementation of the 2016 Obama administration regulations, arguing they were too lenient and put taxpayers on the hook for canceled debt, before introducing her own more stringent set of standards for borrower defense in 2019. Overall, the pace of borrower defense application processing slowed to a trickle, prompting the Sweet vs. DeVos lawsuit.

“The Department has ignored the growing pile of borrower defenses, reduced its capacity to decide borrower defenses, and diverted its increasingly limited resources to un-do all of the prior administration’s work,” reads the complaint.

Theresa Sweet, the named plaintiff in the suit, filed for borrower defense in 2016, the same year her alma mater, the Brooks Institute of Photography in Ventura, closed.

“It’s weird, because I never thought that having a bachelor’s degree would actually limit me in life,” said Sweet, a 48-year-old Oakland nursing assistant who said she has been unable to find photography work with her degree.

According to Sweet’s initial complaint, Brooks Institute officials allegedly made several misrepresentations to her, including inflating postgraduate job placements, falsely claiming there would be no tuition increases, claiming the school was competitive when it wasn’t and telling Sweet she would have no trouble paying back her loans. Attending Brooks Institute was “the worst mistake of Ms. Sweet’s life,” the complaint states.

It has also been the most costly. Sweet took out $46,000 in federal loans and $140,000 in private loans to attend the school. She estimates her federal loan balance is now $80,000 and her private loan balance — which lack the consumer protections of federal loans — was close to half a million dollars when she defaulted.

Sweet found out the settlement had been approved when she was at home in the bedroom she rents in Oakland. Her phone started buzzing. First she was silent, then she screamed. After that, tears.

“I always felt strongly that justice was on our side,” she said.

Soon after Diaz learned her loans would be canceled, she shared the news with her followers on TikTok. Dozens responded that they, too, had received news that their debt was gone, she said.

“After having years’ worth of feeling like you were taken advantage of, getting that redemption at the end finally makes it feel like it was worth it,” Diaz said.