What if you were defrauded, but your school doesn’t have your money any more?

What happens if your school defrauded you, and then goes bankrupt before you can get your money back?  Or maybe it just doesn’t have enough money to compensate all of its victims.  Do you have any recourse, or will you be stuck paying your student loans anyway?

Well, there’s some hope in this situation.  To protect against exactly this kind of problem, the Federal Trade Commission established a rule which requires all student enrollment agreements, and all student loan promissory notes, to contain a “holder clause.”  The holder clause means that if you have a claim or defense against the school, you can also assert it against your student lender.  If the school isn’t around any more, but you’re still paying on your loan, you should consider whether this clause can help you.

The basic reason for the holder rule is that the lender usually has more information about the school, and can better assess the risk of school misconduct, than the student can.  So, if a loss arises, it should fall on the lender which could have protected itself, instead of the student who couldn’t.  Makes sense, doesn’t it?  Especially since the lender is profiting from you right along with the school!

This is another arrow in your quiver if you were ripped off by your school.

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