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Lawsuit alleges ‘gross mismanagement’ of student-loan forgiveness by the Department of Education

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Too many student-loan borrowers are missing their chance to get the debt relief they deserve because Department of Education Secretary Betsy DeVos and her staff have botched the administration of a loan-forgiveness program, a new lawsuit charges.

A federal program allows teachers and certain government and non-profit workers to wipe away their student-loan debts if they fit the right criteria — most importantly, 10 years of repayment — but the lawsuit filed Thursday by a powerful teacher’s union and several borrowers alleges DeVos’ Education Department is engaging in “gross mismanagement.”

The Public Service Loan Forgiveness Program, a 2007 initiative that started accepted applications in 2017, has allowed loan forgiveness for 518 borrowers applications out of the 73,554.

The Public Service Loan Forgiveness Program, a 2007 initiative that started accepted applications in 2017, has allowed loan forgiveness for a mere 518 borrowers applications out of the 73,554 applications it has received as of late March, according to Education Department data.

The American Federation of Teachers’ lawsuit attributes the less than 1% success rate to the department’s alleged failure to correctly review the loan-forgiveness applications. The department is also disregarding how student-loan servicers are misrepresenting eligibility rules to borrowers, according to the lawsuit filed in Washington D.C. federal court.

Millions of workers are relying on the Public Service Loan Forgiveness program, but the Department of Education — “the very agency that is supposedly the champion of our nation’s education system — has failed to live up to its role in administering this program,” the suit said. As a result, the department “has eviscerated the statutory promise of loan forgiveness for those who have spent a decade or more in public service dutifully repaying their loans.”

The Public Service Loan Forgiveness Program has been drawing fire for its complicated set of rules and, what borrower advocates say, is a lack of communication about those rules — even alleged misdirection in some cases.

The Public Service Loan Forgiveness Program has been drawing fire for its complicated set of rules and, what borrower advocates say, is a lack of communication about those rules.

One of the lucky few applicants who did have her debts wiped away previously told MarketWatch that getting her loans forgiven turned into a personal “crusade.” The process was filed with dozens of calls and a folder that became stuffed with documents as the process wore on, Tamar-Mattis, a Sonoma County, Calif.-based attorney

The Department of Education has discharged $30.6 million in debts as of March, according to department data on the program. That’s a fraction of what student loan borrowers owe.

Student loans accounted for $1.49 trillion of the nearly $14 trillion in American household debt as of 2019’s first quarter, according to the Federal Reserve Bank of New York.

Within all those household debts, student loans can pack a particularly nasty punch, some say. Student loans can squelch career and life plans for young workers just finding their way in the workplace, according to critics. JP Morgan Chase JPM, +0.60%   CEO Jamie Dimon recently called the student loan system “a disgrace, and it’s hurting America, we see it hurting household formation, mortgages etcetera.”

The Education Department did not immediately respond to a request for comment.

JP Morgan Chase CEO Jamie Dimon recently called the student loan system ‘a disgrace, and it’s hurting America, we see it hurting household formation, mortgages etcetera.’

The new lawsuit is the latest set of allegations to claim borrowers are getting turned away from the debt relief to which they are entitled.

In another lawsuit linked to the AFT, several teachers last year said the loan servicer Navient gave them bad information about how to successfully apply to the loan forgiveness program.

Earlier this week, a Manhattan federal judge tossed many of the teachers’ claims but said they could proceed with the argument Navient was violating New York’s law against deceptive practices.

Navient argued the lawsuit was defective from the start because federal laws overrode state consumer protection laws. Southern District of New York Judge Denise Cote called the argument “unavailing.”

Last month, a federal appeals court revived a similar class-action case against another loan servicer accused of offering questionable advice about the best payment plan for debtors with tight budgets. Like Navient, Great Lakes Educational Loan Services also argued that federal laws prevented state law claims. The Seventh Circuit Court of Appeals said federal laws didn’t protect the servicer from allegedly going out of its way to misrepresent repayment options.

In both cases, the companies said a 2018 memo from DeVos bolstered their cases. The memo said state laws were basically null and void when it came to student loan servicers, because only federal laws applied to the servicers.

In both cases, the courts said they weren’t persuaded by the memo’s reasoning.

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