Judge slams Education Department for rejecting 94% of loan-relief claims

Months after vowing to process a backlog of 160,000 requests for loan forgiveness from students who say they were defrauded by their schools, the U.S. Education Department has rejected 94% of claims it has reviewed, according to a federal judge who is demanding justification for the “blistering pace” of denials.

In a biting decision issued Monday in California, U.S. District Judge William Alsup said the department has been denying claims using template letters that are “alarmingly curt.” Alsup threatened to suspend the agency from rejecting further requests, saying its approach “hangs borrowers out to dry.”

He said that although Education Secretary Betsy DeVos blamed the backlog on the hard work that goes into processing claims, she has now “charged out of the gate, issuing perfunctory denial notices utterly devoid of meaningful explanation at a blistering pace.”

The Education Department said it is studying the ruling. Spokesperson Angela Morabito said many claims were submitted by borrowers who attended ineligible programs or who failed to make a valid claim for loan forgiveness.

“Just because a claim was filed does not make it valid and eligible for taxpayer-funded relief,” she said in a statement. “The Department is following the publicly available process for resolving claims as quickly as possible, so those students who are eligible and were harmed get the relief they deserve.”

The dispute stems from a 2019 lawsuit brought by 160,000 borrowers who say the Education Department illegally stalled their claims for loan relief. The claims were filed through a program known as borrower defense, which forgives federal student loans for borrowers who are cheated by their colleges. It’s most often used by students who attended for-profit colleges.

In a proposed settlement in April, the Education Department agreed to process the backlog of claims within 18 months. But Alsup scrapped the deal Monday, saying it was undermined by the recent spate of rejections. Instead, he called on the lawsuit to proceed and he authorized the deposition of up to five department officials to explain the denials.

“We need to know what is really going on,” wrote Alsup, who was appointed to the court by President Bill Clinton. He said DeVos will not be required to appear for deposition “at this time,” but he suggested it may be necessary later.

DeVos set out to overhaul the loan forgiveness program in 2017, and last year released new rules making it more difficult for borrowers to get loans erased. In the meantime, claims were piling up. When the lawsuit was filed, it had been a year since the department issued a final decision on any claim.

The program had been expanded by President Barack Obama to erase loans for students who attended the now-defunct Corinthian Colleges and ITT Tech chains and other for-profit colleges that were found to have lied about the success of their graduates. DeVos opposed the expansion, saying it made it too easy for students to get their loans erased at the expense of taxpayers.

Alsup’s decision was based on the department’s latest update on its work to clear the backlog. As of August, he wrote, the agency had denied 74,000 claims linked to the lawsuit while granting 4,400, amounting to a 94% rejection rate.

Rejections were delivered through standardized letters that included information on how to appeal the decision, but Alsup said the letters fail to explain the decision. It leaves borrowers in a “disturbingly Kafkaesque” situation, he wrote.

Alsup said he is considering whether to forbid the department from issuing any further rejections until the case is decided. He has asked both sides to submit arguments around the question.

Harvard Law School’s Project on Predatory Student Lending, which represents borrowers in the suit, said it looks forward to deposing agency officials to get an explanation for their actions.

“The class members in this case have suffered harm at every turn, but in this court order they are finally seeing a change in the tides after years of waiting for justice,” said Eileen Connor, the group’s legal director.