Some student loans are predatory, and if yours is one of them you may have a path out. The clearest cases involve private loans arranged through for-profit schools that misrepresented job outcomes, along with any loan carrying rates, fees, or repayment terms designed so the balance grows faster than a borrower can pay it down. Federal borrowers have two direct remedies: Borrower Defense to Repayment and closed school discharge. Private borrowers have narrower options, but they exist.
Signs a Student Loan Is Predatory
Start with the interest rate. Federal Direct Loans for undergraduates carry a fixed rate of 6.39% for the 2025–2026 academic year, with a statutory cap of 8.25%.1Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026 Private student loans can run as high as roughly 18%. A rate far above the federal ceiling is not automatically illegal, but it is the first thing to look at. Watch out for introductory teaser rates that reset sharply after a few months.
Look at the fees next. In its enforcement actions against for-profit college chains, the Consumer Financial Protection Bureau documented private student loans with origination fees of 6% to 10% on top of interest rates around 15% to 16%, compared with the low or no origination fees on federal loans made during the same period.2Consumer Financial Protection Bureau. CFPB Sues For-Profit Corinthian Colleges for Predatory Lending Scheme Those fees are typically rolled into the loan balance, so you start owing more than you actually received.
Then look at how the loan amortizes. If your required monthly payment is less than the interest accruing on your balance, the balance grows every month even when you pay on time. That structure, called negative amortization, is a common feature of predatory loans because the lender profits from your inability to make progress.
Deceptive Recruiting That Turns a Loan Predatory
A loan can be predatory because of what happened before you signed it. High-pressure recruiting, misleading placement statistics, and inflated salary claims are the school-side conduct that supports a claim for relief.
Some schools have advertised placement rates as high as 95% by counting graduates in unrelated low-wage jobs as “successfully placed.” Recruiters may quote salaries pulled from the top of a field as if they were typical. Students often discover after enrolling that credits earned at a for-profit school will not transfer to accredited public universities. Any of these can support a federal claim if you took out a loan in reliance on them.
Borrower Defense to Repayment
Borrower Defense to Repayment is the main federal remedy if your school misled you. A successful claim can discharge some or all of your federal Direct Loan balance and refund payments you already made. The legal standard depends on when your loan was first disbursed.
Loans First Disbursed Before July 1, 2017
For the oldest loans, you must show that the school did something, or failed to do something, related to your enrollment or education that gives you a legal claim against the school under your state’s law.3eCFR. 34 CFR 685.206 – Borrower Responsibilities and Defenses Because the standard is state-based, the strength of your claim depends on where you attended.
Loans First Disbursed Between July 1, 2017 and June 30, 2023
A single federal standard applies in this window. You must show by a preponderance of the evidence that the school made a misrepresentation of a material fact, that you reasonably relied on it in deciding to enroll or take out the loan, and that you were financially harmed.3eCFR. 34 CFR 685.206 – Borrower Responsibilities and Defenses A misrepresentation is a statement or omission that was false, misleading, or deceptive and made knowingly or with reckless disregard for the truth.
Applications Received On or After July 1, 2023
The broadest standard applies to applications pending or received on or after July 1, 2023. Relief may be granted based on any of the following school conduct:
- Substantial misrepresentation that influenced your decision to enroll or borrow.
- Substantial omission of a fact you needed to make an informed decision.
- Breach of contract with you.
- Aggressive or deceptive recruitment.
- A favorable court ruling or administrative finding, obtained by you or a government agency, against the school related to your loan or education.
The Department of Education must find by a preponderance of the evidence that the conduct caused financial harm warranting relief.4eCFR. 34 CFR Part 685 Subpart D – Borrower Defense to Repayment There is no statute of limitations. You can file at any point while you still have an outstanding balance.5U.S. Department of Education. Fact Sheet Final Rule Package
How to File
Applications go through the Federal Student Aid website or on a downloadable PDF. The Department estimates the process at about three hours including preparation.6Federal Student Aid. Borrower Defense Loan Discharge You will need your FSA ID, the name of the school and your program, your enrollment dates, and documentation supporting the claim and the harm you suffered.
Evidence matters. Useful documents include emails and other communications with the school, course catalogs, your enrollment agreement, promotional brochures, transcripts, and advertising you saw before enrolling.7Federal Student Aid. Borrower Defense to Repayment Application If the harm you are claiming is difficulty finding work in your field, keep records of job applications, employer correspondence, and any job fairs or resume workshops you attended.
What Happens to Your Loans While the Claim Is Reviewed
When the Department receives your application, it places your non-defaulted federal loans into forbearance so you do not have to pay during review. You can decline the forbearance and keep paying if you prefer. If your loans are in default, collection activity is suspended until the Department decides.4eCFR. 34 CFR Part 685 Subpart D – Borrower Defense to Repayment
Interest generally continues to accrue during the forbearance. If the Department has not decided within 180 days, it stops charging interest from that point until you receive a decision.4eCFR. 34 CFR Part 685 Subpart D – Borrower Defense to Repayment
Closed School Discharge
If your school closed while you were enrolled, or within 180 days after you withdrew, you may qualify for a full discharge of your federal loans without proving that the school did anything wrong.8eCFR. 34 CFR 685.214 – Closed School Discharge Students on an approved leave of absence at the time of closure count as enrolled.
You do not qualify if you completed all the coursework for your program, even without receiving a diploma, or if you accepted and finished a comparable program at another school through a teach-out agreement. In many cases the Department automatically discharges eligible loans one year after the closure date without requiring an application.8eCFR. 34 CFR 685.214 – Closed School Discharge If that does not happen for you, apply through your loan servicer.
Private Loans: Narrower but Real Options
Borrower Defense to Repayment applies only to federal Direct Loans. If your loan is private, the FTC Holder Rule may still help. The rule requires sellers to include a notice in certain credit contracts preserving your right to raise claims about the seller’s misconduct, such as misrepresentation or breach of contract, against whoever holds the loan, even after it is sold.9Federal Trade Commission. FTC Issues Advisory Opinion on the Holder Rule and Attorneys Fees and Costs If the Holder Rule notice appears in your loan contract, you can assert the school’s fraud as a defense against the lender.
State attorneys general have also pursued private lenders for predatory practices. Past multistate settlements have cancelled subprime private student loans, especially those made to students at for-profit schools later subject to state or federal enforcement. If you believe your private loan is tied to school fraud, complaints filed with your state attorney general and the CFPB can trigger investigation.
Taxes on a Discharged Loan
Whether a discharge creates a tax bill depends on the type. The American Rescue Plan Act temporarily excluded all federal student loan forgiveness from federal income tax, but that provision expired on January 1, 2026. The expiration primarily affects borrowers whose forgiveness comes through income-driven repayment plans, which may now be treated as taxable income.
Some discharges remain permanently untaxed. Public Service Loan Forgiveness is not taxable. IRS Revenue Procedure 2020-11 treats borrower defense and closed school discharges as not taxable. Separately, if your total debts exceed the fair market value of your total assets at the time of discharge, you can exclude the discharged amount from income under the insolvency rule.10Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness Talk to a tax professional before filing your next return if any part of your loan is written off.