SAN FRANCISCO (CN) — A federal judge gave a tentative thumbs up to a $6 billion deal between the feds and a class of student borrowers to forgive loan debt.
Seven plaintiffs filed a class action against then-Education Secretary Betsy DeVos in 2019, claiming the Department of Education’s refusal to process borrower defense claims left more than 160,000 students with damaged credit and permanently hurt their chances at accumulating wealth.
Senior U.S. District Judge William Alsup on Thursday gave his preliminary OK from the bench to the proposed settlement following more than a year of negotiations. But the feds and the class of borrowers suing for debt relief still have a final hearing before the deal is fully approved.
"This settlement goes beyond adjudication, and just cancels the loan,” Alsup said. "I believe this is a grand slam home run for class members because they don't even have to go through the litigation. They get a complete cancellation."
However, he hasn't decided whether the settlement is "fair and reasonable" for the federal government. Alsup had rejected a 2020 settlement proposal and ordered the Education Department to wipe out interest accrued while borrower defense claims were pending. On Thursday, he asked how the newly proposed settlement clears up the issues and who will be left holding receipts.
"Six billion dollars will be forgiven, and the students don’t have to pay it,” he said. “But somebody’s holding that paper. It’s either the schools or some banks or the federal government. I need to know who is going to be out of pocket, and will the people who believe they’ll be paid … be paid?"
Justice Department attorney R. Charles Merritt told Alsup that the federal government is charged with forgiving and paying out the debt relief.
He and the plaintiffs’ counsel explained the proposed settlement provides automatic relief — federal loan discharges, refunds of amounts paid to the Department and credit repair — for about 75% of the class. The remaining 25% with loans at other schools will receive decisions based on how long they have been waiting for relief.
The relief applies to borrowers who submitted a borrower defense application by June 22. If the Department of Education fails to provide a decision within the required time period, a person automatically receives full relief. The department agrees to give some relief to borrowers who apply before the settlement is given a final approval.
Alsup allowed several institutions to file oppositions to the settlement, saying their input will be valuable. This decision was welcomed by the parties, who argued the opposition is “premature” since they came before Alsup had given preliminary approval.
John Moran, representing American National University, told Alsup they are concerned the settlement overrides any right schools have to demand a say in proceedings. Jesse Panuccio, representing Everglades College, agreed, saying, “They are taking our entire set of rights. We have to protect ourselves.”
Alsup rejected that position.
“You are the luckiest guy in the room. You get all that money, and you don't have to pay it back,” he said. “It’s a proceeding where the government forgives the loans and it gives you the opportunity to give your two cents before you go down that road. I don’t see much harm to you.”
Alsup gave other schools three weeks to apply to intervene, but they will not have discovery rights.
“I want to be clear, I’m not saying any of you have a property interest that’s at stake,” he told the schools' attorneys. “The main reason I’m inclined to let you in to oppose is to keep the system honest, because these two have reached an agreement and they both want to move forward.”
In the six months before President Donald Trump took office in 2017, the Education Department canceled the loan debt of approximately 28,000 students who filed borrower defense claims. Theresa Sweet, lead plaintiff in the class action, says in a 62-page complaint that a “pause” in debt relief in January 2017 under the Trump administration became a “policy of inaction and obfuscation” intended to prevent defrauded students from obtaining lawful debt forgiveness.
The plaintiffs say DeVos left more than 160,000 students who relied on the Obama administration's rule giving students at for-profit colleges a way to have loan debts forgiven "in limbo." That rule was used to begin cracking down on for-profit schools accused of deceiving students about job prospects, like ITT Technical Institute and DeVry University.
A final approval hearing for the settlement must take place before Nov. 3, Alsup said.
The plaintiffs are represented by attorneys at the Project on Predatory Student Lending. President and director Eileen Connor said preliminary approval is another step to "delivering certainty" to borrowers' claims.
“When our clients brought this case in 2019, it was based on the fact that many of them had already been waiting years with no answers, and that harm has only compounded over time," Connor said.
A spokesperson for the Justice Department declined to comment.
In 2021, Alsup authorized DeVos’ deposition but was rebuked by the Ninth Circuit this past February. Alsup found evidence of bad faith in the Education Department's reasons for an 18-month pause in processing debt relief claims as part of a 2020 settlement. But the Ninth Circuit disagreed and found Alsup erroneously concluded DeVos possessed necessary and unique information relevant to the lawsuit.
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