Feds On Hook for Beauty School Loan Claims

(CN) — Former beauty school students who were saddled with student loan debt may sue the Department of Education for not telling them their loans were dischargeable, the Second Circuit ruled Thursday.

Wilfred American Education Corporation operated beauty schools in the 1980s and 90s that allegedly targeted low-income women in order to secure federal financial aid but did not prepare them to pass state cosmetology licensing exams.

Over 61,300 student loans were given to individuals to attend now-defunct Wilfred schools, according to court records. Up until recently, many of the students still faced thousands of dollars of debt.

In a class-action lawsuit, former Wilfred students sued the U.S. Department of Education (DOE) for failing to notify them of their eligibility for a loan discharge based on the school's fraudulent certification.

A federal judge found the claims moot now that the DOE has discharged the named plaintiffs' debts.

But, on Thursday, the Second Circuit reinstated the case on appeal.

"The text of the relevant statute directs that the DOE 'shall' discharge a borrower's loan liability when a school has falsely certified a student's [ability to benefit, or ATB]," Judge Gerard Lynch said, writing for a three-judge panel.

The panel said the case is not moot under the exception for class-action claims that are "inherently transitory."

"Legislative history strongly supports our reading of the statute as a mandatory command to the agency, not a grant of unbridled discretion," Lynch wrote.

Congress clearly intended that students who have been "victimized by unscrupulous profiteers" should not be burdened by debt due to failures of the DOE's oversight systems, the ruling states.

The panel said that the department's own action granting discharges to Wilfred students who requested them is powerful evidence that it had reliable information that all Wilfred borrowers "may" be eligible for a discharge.

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