As I was perusing the playbook for student loan collection agencies a few weeks back, I came across these five school-based criteria for which a student loan can be discharged. This got me wondering about how frequently these discharges might occur. Just to set the context, the total federal student loans outstanding today are north of $620 billion.
Here are descriptions of each of the five criteria:
- School closure: "Closure must have been during, or within 90 days following borrower's enrollment and student did not complete the education at another institution.
- Ability to benefit: "Borrower did not have a high school diploma or GED; and borrower was not properly tested or evaluated before acceptance; and there is corroborating evidence of ATB violations at the school at the time."
- Disqualifying status criteria: "Borrower had a disqualifying physical or mental status, age or criminal record at time of enrollment. Status prevents, by law or regulation, employment in the field of study."
- Unauthorized signature criteria: "If signature is disputed, 5 samples of borrower's signature on other documents, 2 within one year of the disputed signature, must be submitted with Discharge application. If proceeds applied to borrower's attendance, not eligible for discharge.
- Unpaid tuition refund: "Borrower did not complete course or loan period and did not receive a refund of unused tuition."
Here is the data supplied from the Department of Education (Download Number of Federal Loans Discharged for FY07-FY09), based on FOIA request on the volume of loans discharged over the past three years (volumes in millions of dollars):
| 2009 | 2009 | 2008 | 2008 | ||
| Discharge Reason | Loans | Volume | Loans | Volume | |
| Closed School | 5,230 | $27.1 | 5,231 | $26.2 | |
| Ability to Benefit | 1,424 | $11.3 | 988 | $7.5 | |
| Unpaid Refund Discharge | 1,547 | $9.9 | 1,657 | $10.9 | |
| Disqualifying Status | 147 | $1.3 | 68 | $0.5 | |
| Unauthorized Signature | 121 | $1.1 | 114 | $1.0 | |
| YOY Change | YOY Change | YOY Change | YOY Change | ||
| Discharge Reason | Loans | Volumes | Loans | Volumes | |
| Closed School | 0.0% | 3.4% | 3.1% | -1.9% | |
| Ability to Benefit | 44.1% | 50.7% | -8.6% | -5.1% | |
| Unpaid Refund Discharge | -6.6% | -9.2% | -25.0% | -21.6% | |
| Disqualifying Status | 116.2% | 160.0% | -27.7% | -37.5% | |
| Unauthorized Signature | 6.1% | 10.0% | 54.1% | 66.7% |
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Observations:
- About $50 million in loans were discharged in FY09, or .008% of total outstanding federal student loans or less than .07% of federal loans originated in that year.
- The ability-to-benefit (A-T-B) criteria saw the sharpest dollar volume increase with loans discharged for this reason increasing by 44% and volume of loans increasing by 50.7%. A-T-B testing was the subject of a recent Congressional hearing and also one of the issues discussed during the recently completed negreg sessions on program integrity of Title IV programs.
- Since these discharges often spur investigations into A-T-B test irregularities, it would seem that given the number and volume of loans discharged in this category, that there would be more public disclosure of where these incidents are occuring.
- Over 50% of the student loan volume discharged for school-based issues in the last two years came from students whose school closed.
- Given the increased prevalence of identity theft, I was surprised to see that unauthorized signatures only amounted to about $1.0 million over each of the past two years.
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