Lawsuit Says Education Department Still Reports $4.6 Billion In Cancelled Student Loans

Two former for-profit college students filed a proposed class action against the U.S. Department of Education on September 24, 2026, alleging the agency keeps telling credit bureaus they owe federal student loans it cancelled years ago. The case, Woods v. U.S. Department of Education (No. 1:26-cv-3335), was filed in the U.S. District Court for the District of Columbia by the Project on Predatory Student Lending (PPSL), the legal group behind the Sweet v. Cardona borrower defense settlement. The lawsuit seeks damages under the Fair Credit Reporting Act.

At issue are the Department’s group discharges that were announced by the Biden Administration between April 2022 and January 2025, which covered more than 1.5 million borrowers and $23.4 billion in loans tied to schools where the agency found widespread fraud and misconduct.

Those schools, including Corinthian Colleges, ITT Tech, the Art Institutes and Ashford University, appear on our for-profit college loan forgiveness list. PPSL estimates, based on public data, that the Department is still reporting $4.6 billion of that cancelled debt as owed, affecting more than 300,000 people. This aligns with a lot of the comments that we saw on our videos reporting on this, where borrowers reported that their loans are still not showing as canceled.

Why It Matters

If a student loan was supposed to be forgiven and the balance is still showing up on a borrower’s credit report, in all practical ways, it was not forgiven. That loan will still count against borrowers when it comes to their credit score, potential underwriting for new loans, and more. In more extreme cases, it could open a borrower up to collections if the loan was falsely reported as being in default.

According to the complaint, Fannie Mae guidelines treat 1% of a deferred or forbearance balance as a monthly payment, so $25,000 in cancelled debt adds $250 a month to a borrower’s debt-to-income ratio. PPSL notes that lenders offering federally insured home loans must also count deferred student debt when deciding whether a buyer qualifies.

The damage extends beyond mortgages. The complaint says landlords, auto lenders, card issuers, employers and security clearance reviewers all see these balances, and because the reported balances grow with interest, the “amounts owed” factor in a FICO score gets worse each month instead of better.

We’ve reported on how student loan reporting can knock 100 points or more off a credit score, and these borrowers are dealing with that for debt the government already said they don’t owe.

The Two Named Plaintiffs

Mandy Woods borrowed about $65,000 to attend Ashford University from 2013 to 2015. The Department announced on January 15, 2025, that it would discharge Ashford loans for roughly 261,000 borrowers automatically. Woods called her servicer, MOHELA, and Federal Student Aid (FSA) repeatedly, and says each sent her back to the other. She also complained to the Better Business Bureau, her member of Congress and the FSA ombudsman’s office.

On February 9, 2026, Woods disputed the reporting with Equifax, Experian and TransUnion, attaching her Ashford transcript, diploma and the Department’s own announcement. MOHELA responded on March 17, 2026, calling her dispute “frivolous” or “irrelevant,” according to the complaint (PDF File).

A September 10, 2026 email from FSA confirmed the problem, stating: “As of the date of this letter, FSA has not directed MOHELA to process your loan discharge.” Her August 2026 credit reports showed a $71,901 balance, about $2,000 more than when she disputed it.

Jorge Cortes, a Marine Corps veteran, borrowed about $54,000 to attend ITT Technical Institute between 2006 and 2013. His loans fell under the Department’s August 16, 2022, ITT discharge covering 208,000 borrowers, and he received an individual notice in November 2022.

After he disputed the reporting with all three bureaus in May 2026, his servicer, Aidvantage, wrote that “the information we provided to the [CRAs] is accurate.” His August 2026 reports still showed $21,586 owed, nearly four years after the borrower defense discharge was announced.

Why The Loan Balances Are Still There

The complaint points to the Department’s own loan servicing instructions. A directive called Change Request 6346 tells servicers to complete discharge accounting within 15 to 45 days and to “delete all related credit tradelines at the regular next reporting to the CRAs after the discharge is complete.”

Until then, accounts sit in forbearance or a collection hold, and the lawsuit says they’re reported to the bureaus as “Deferred,” with a balance and a future payment due date, a similar issue to what a GAO review found when servicers were left waiting on Department instructions.

In other court cases cited by the complaint, the Department reported it had not finished discharge steps for about 13,500 Westwood College borrowers (17%) and roughly 108,700 Corinthian borrowers (19%), and said it “will not have meaningful additional availability during 2026” to finish the Westwood cases.

FSA’s full-time staff fell from 1,433 to 777 during 2025, and a March 2026 GAO report found the Department stopped checking servicer accuracy, a collapse in oversight we covered when the report came out.

The Legal Claim

The Fair Credit Reporting Act requires companies that furnish data to credit bureaus to reasonably investigate disputes and to fix or delete information that is inaccurate, incomplete or unverifiable. In February 2024, the Supreme Court ruled unanimously in Department of Agriculture Rural Development Rural Housing Service v. Kirtz that federal agencies can be sued for damages under that law just like private lenders.

Borrowers have always had the right to challenge student loan errors on their credit reports, and Kirtz is what lets them seek money from the Department when it ignores those challenges.

The plaintiffs ask for statutory damages of $100 to $1,000 per violation, actual and punitive damages, attorneys’ fees and a jury trial. The proposed class covers anyone with a U.S. address who held Direct or FFEL loans, met the criteria for one of the Department’s group discharges and had those loans reported with an outstanding balance, from two years before the filing through a class certification order.

That definition reaches across the Department’s school-specific forgiveness programs from Marinello Schools of Beauty in 2022 to the CEHE, Drake and Lincoln Tech discharges in January 2025.

What Affected Borrowers Can Do

This case was just filed today. No class has been certified, so borrowers don’t need to sign up for anything yet. Anyone whose loans were covered by a group discharge can still protect their own credit file:

Pull reports from all three bureaus, which you can do for free every week, and look for discharged loans still showing a balance or a “Deferred” status. Save your discharge notice, the Department’s announcement for your school, and proof of your attendance dates, which are the same documents both plaintiffs used for their disputes. Download your loan history from StudentAid.gov to get proof of your balances. File written disputes with each bureau, then escalate to the FSA ombudsman and the Consumer Financial Protection Bureau.

How This Connects

This is PPSL’s second lawsuit over the same discharges. Earlier this year the group sued the Department over 15 unanswered FOIA requests seeking records on whether the $23 billion in promised relief was delivered.

The new case lands weeks after 89 advocacy groups asked Congress for an emergency hearing on servicing errors, and it adds credit damage to a list of problems that already includes a complaint backlog of 27,000 borrowers after the Department of Education layoffs.

What’s Next

The Department has not yet responded in court and federal agencies generally get 60 days after service to answer a complaint.

The next milestones are a motion to dismiss, if the Department files one, and a class certification ruling. Borrowers should watch whether servicers start deleting group discharge tradelines before the court acts, since the Department’s own staffing cuts are the reason it gave for the delays.

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