New Rules Clear Debt in Fraud Cases

BOSTON —The government has issued new rules meant to help students get their federal loans erased in cases involving fraud and misconduct by their schools.

Federal education officials have been working to create a more detailed system for students to file claims since the Education Department received thousands of claims from former students of the now-defunct Corinthian Colleges chain, which closed or sold all of its campuses last year amid allegations of fraud.

The process had previously been guided by rules from 1995 that provided little detail about when and how students could submit claims, and how the department should resolve them.

New rules announced by the department on Friday will clarify that students are eligible to have loans erased if their college misrepresents the quality of its programs or the success of students; if the college breaks a “contractual promise” with its students; and if a state or federal court rules that the loan should be forgiven.

The rules also put colleges financially on the hook for repaying loans instead of taxpayers, and ban schools from forcing students to sign agreements saying they won’t sue over misconduct.

“Today’s regulations build on that progress by ensuring that students who are lied to and mistreated by their school get the relief they are owed, and that schools that harm students are held responsible for their behavior,” Education Secretary John B. King Jr. said in a statement.

Among other changes, the rules also create a process for the Education Department to forgive loans for groups of students in cases of widespread misconduct, even to students who don’t apply for loan forgiveness. Colleges with many students who fail to repay their loans after graduating will also be required to include a warning in their advertisements.

For-profit colleges have been lobbying against the rules since they were proposed, describing them as unfair regulation meant to take down their industry.

“This complex and burdensome regulation will crush career education with financial requirements not imposed on others in higher education – including institutions that have lower graduation rates and higher default rates,” said Steve Gunderson, president and CEO of Career Education Colleges and Universities, a for-profit college lobbying group.

Gunderson said his group is still reviewing the rules to “determine our appropriate action.”

The administration of President Barack Obama has led a crackdown on for-profit colleges accused of misconduct. The Corinthian Colleges chain was under heavy pressure from the Education Department when it shut down last year. In that case, more than 15,000 student claims of misconduct have been approved, leading the government to clear $247 million in loans.

This year, the ITT Technical Institute, one of the nation’s largest chains of for-profit colleges, shut down, saying it couldn’t survive sanctions by the department. The chain had been accused of misleading students about the success of its graduates and was at risk of losing its academic accreditation.

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