Judge Temporarily Blocks $6B in Debt Forgiveness for 200K Defrauded Borrowers

• A settlement reached in June would provide instant student loan debt forgiveness to 200,000 borrowers who say their schools defrauded them.
• Three university owners appealed the settlement, saying it would harm their reputation.
• A judge told the federal government to hold off on granting relief until he can hear the appeal in full.

A four-year-old lawsuit will drag into 2023 after a federal judge Thursday temporarily blocked a settlement that would provide student loan debt forgiveness for more than 200,000 borrowers who say they were defrauded by their institutions of higher education.

The ruling by Judge William Alsup puts on hold a June 2022 settlement agreement that he had previously approved between borrowers and the Department of Education

Three companies involved in the settlement as intervenors appealed the court’s settlement approval on Jan. 13 and requested a stay.

A full hearing for that appeal is set for Feb. 15, Alsup said Thursday. In the meantime, ED hoped to begin sending letters to loan servicers on Monday so that they can start discharging loans as soon as next week.

The settlement sets strict deadlines for when loans need to be forgiven, attorney Stuart Robinson of the Department of Justice (DOJ) said during Thursday's hearing.

"To delay things a few weeks or more without extending the deadline would be very detrimental to the department,” Robinson said.

Lucas Townsend, an attorney representing the three intervening schools, argued that if ED begins to discharge loans on Monday, it will create too much confusion because the appeal is still pending.

Jesse Panuccio, another attorney representing the intervening schools, asked that Judge Alsup block any administrative actions from the department until he hears the appeal.

Alsup originally declared the department can move forward with loan forgiveness for all borrowers except those with borrower defense claims filed against the three intervening parties, which own the following institutions:

• American National University
• Lincoln College of Technology
• Lincoln Technical Institute
• Everglades University
• Keiser University

However, Robinson of the DOJ said it would not be feasible for ED to discharge debts for students from the other 150 institutions, but not these five. The department would have to redo the entire list of loans it planned to send to servicers.

Judge Alsup responded by issuing a stay on all debt forgiveness under the settlement.

"I want to make sure that the three intervenors have a fair opportunity to have their motion heard before it's too late,” Alsup said. "We'll get to this in two weeks, but not now."

He added that ED can move forward with any other preparations needed to carry out the settlement. The stay only blocks the department from sending a list of loans to forgive to servers.