U.S. Supreme Court building in Washington
The U.S. Supreme Court building is seen in Washington, U.S., April 6, 2023. Reuters

The U.S. Supreme Court on Thursday refused to halt a legal settlement that would erase more than $6 billion in debt owed by former students of colleges - many of them for-profit institutions - who have said they were misled by schools about academics and job prospects.

The justices turned away a request from three colleges that are challenging a settlement between the U.S. Education Department and borrowers that linked the colleges to claims of "substantial misconduct," an allegation they dispute.

Three of the schools identified in the settlement - for-profit Lincoln Educational Services Corp <LINC.OO and American National University Inc as well as nonprofit Everglades College Inc - challenged the agreement after it was approved by a federal judge in California last November. Around 3,500 borrowers entitled to automatic loan discharge under the settlement attended one of the three schools.

The decision was separate from a case pending before the high court over the legality of President Joe Biden's plan to cancel $430 billion in student debt for about 40 million borrowers. A ruling in that case is expected by the end of June.

The latest dispute stemmed from a class-action settlement under which the Education Department would automatically cancel the debt of nearly 200,000 borrowers who attended 151 schools.

The schools have been accused of boosting enrollment through aggressive sales tactics as well as misrepresentations about the quality of their academic offerings, graduates' career prospects and networking opportunities, according to Eileen Connor, director of litigation at the Project on Predatory Student Lending, a group that represents borrowers involved in the settlement.

The three schools argued in court filings they had suffered reputational harm, comparing their inclusion on the settlement's list of schools to being "branded with [a] scarlet letter." They also argued the Biden administration lacked the legal authority to cancel the debt.