Law Grad’s $329K Debt Erased by US Through Compromise and Settlement

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The US Department of Education has used a little-known provision called “compromise and settlement” to cancel the $329,000 debt of a retired 91-year-old law school graduate. The woman, known only as Betty Ann, enrolled at New York University School of Law at 52 in 1983 and later worked for a non-profit organization for about 30 years, earning close to the minimum wage. She had taken out around $29,000 in federal loans that had ballooned to their current sum over the years.

The Education Department canceled Betty Ann’s debt after an ombudsman checked her records and realized that she had suffered numerous administrative bungles, including a failure to notify her of a repayment plan that offered lower monthly payments and forgiveness after 20 or 25 years. The ombudsman said Betty Ann could pursue two options to cancel her debts with the department. The first option was to claim total and permanent disability with a doctor’s note. 

Betty Ann rejected that opinion as she had recently retired and didn’t want to lie about her ability to work. The second option, which resulted in the cancellation of Betty Ann’s debt, was for the department to use its “compromise and settlement” authority, granted under the 1965 Higher Education Act that created the federal student loan program. This law grants the secretary of education the right to “enforce, pay, compromise, waive, or release any right, title, claim, lien or demand.”

  

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People typically pursue a compromise and settlement by sending a letter to the Education Department, which petitions for a discharge. Robyn Smith, legal counsel for the National Consumer Law Center, said such requests are usually granted when it is too costly to pursue collection of a loan or the original promissory note has been lost. The Biden administration previously used compromise and settlement authority on a broad scale to cancel debts for students who attended Corinthian Colleges before the chain’s collapse. Those students had credits that couldn’t be transferred to other schools.

President Biden relied on a different authority for his debt-relief program, which aims to cancel up to $20,000 in student debt for borrowers below certain income levels. The administration said it could act under the Higher Education Relief Opportunities for Students Act, or the HEROES Act, passed in 2003, which allows waiver of student-aid program rules in times of war or national emergency. In this case, the administration said the COVID-19 pandemic constituted an emergency. However, Biden’s debt-relief program has been challenged before the US Supreme Court. One issue before the court is whether the states that sued have standing. The second issue is whether the administration exceeded its authority or acted arbitrarily and capriciously in adopting the plan.

Suppose the Supreme Court rules that the Biden administration exceeded its authority under the HEROES Act. According to the New Yorker, the administration could theoretically cite its “compromise and settlement” authority. However, some legal experts have warned that this could be seen as Biden thumbing his nose at the court.

Luke Herrine, an assistant professor at the University of Alabama School of Law, said the compromise-and-settlement authority should “still be on the table as an option.” However, University of Texas School of Law professor Stephen Vladeck saw a downside, saying, “probably, the Supreme Court would take that as Biden thumbing his nose at them.”

Betty Ann’s debt cancellation has been seen as a positive outcome for those struggling to pay off student loans. While “compromise and settlement” remain relatively unknown, it could offer a lifeline to many struggling with student loan debt.

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US uses ‘compromise and settlement’ to erase law grad’s $329K debt; would it work on grander scale?