DOE Cancels 15,000 Student Loans After Losing in Court

The decision by the DOE affects about $150 million in federal student loan debt and is a result of a federal district court case that the DOE lost. About half of the students affected had attended Corinthian Colleges, which failed in 2015, leaving thousands of students with millions of dollars in debt.

Currently over 100,000 other students have applied to the DOE to have their loans discharged under the so-called borrower defense rule, introduced during the Obama administration, that allows borrowers to seek relief when schools are engaged in fraudulent loan practices. Those rules include a provision for the automatic discharge of loans if a borrower cannot complete his or her program of study because the borrower's school closed. The borrower defense rule was due to take effect in July 2017, but the DOE under President Donald Trump delayed implementation and proposed its own, more limited rule.

(Related: Education Department Wants to Limit Debt Relief for Defrauded Students)

In October, a federal judge in Washington state, Randolph Moss, ruled against the DOE's plans because of failure to follow a specific process for changing federal agency rules, and that is that ruling that precipitated the department's latest announcement.

The DOE was "sitting on applications and then they proposed to change the rules, but those changes were blocked and ultimately a judge ruled that they have to process the applications under the Obama rules," says Mark Kantrowitz, publisher and vice president of research at savingforcollege.com.

It to be seen how and when the DOE will address the more than 100,000 loan forgiveness claims still pending.

"$150 million is a drop in the bucket" for the government, says Kantrowitz, adding that the remaining borrower defense applications could cost the government at least $1 billion.

The DOE says it will begin emailing the 15,000 borrowers whose loans will be discharged, informing them that some or all of the loans will be discharged within the next 30 to 90 days, though some discharges may take longer to complete.

— Check out The CFPB Is Failing Student Loan Borrowers: Report on ThinkAdvisor.