Debt Relief for Corinthian Students?

Congressional Democrats and consumer groups are pushing the Obama administration to use a little-known provision of federal law to relieve the federal loan debt of some Corinthian borrowers. 

March 5, 2015

The Obama administration, under pressure from Congressional Democrats and consumer advocates, is deciding whether to relieve the debt of some federal student loan borrowers who attended Corinthian Colleges.

Under Secretary of Education Ted Mitchell wrote to lawmakers last week that the department is “carefully considering the issue.”  

His letter comes several weeks after the government gave final approval to the sale of many of Corinthian’s campuses. The sale agreement included $480 million in forgiveness of private student loans. Federal regulators alleged that Corinthian pushed students into those private loans with false and misleading information about their likelihood of getting a job.

But the loans that Corinthian students owe to the federal government, which likely total more than half a billion dollars, weren’t addressed as part of the sale.

Some student and consumer groups have been calling for widespread loan forgiveness since Corinthian first began crumbling last year. Adding to that pressure now is a group of former students who grabbed headlines last month with a “debt strike” against their federal loans.

And a group of Senate Democrats, consumer advocates and the Massachusetts attorney general are also charting a legal case that they want the department to follow to cancel some of the loans. They’re turning to a relatively obscure provision of federal law that lets borrowers cite a college’s misconduct as a reason why they shouldn’t have to repay the federal loans they took out to attend that institution.

“It’s really a tool that has been underutilized,” said Robyn Smith of the National Consumer Law Center. “Primarily because we don’t have any clarity from the department on how to utilize it.”

It’s not clear, for instance, under what circumstances the department will accept borrowers’ claims that they shouldn’t be obligated to pay or how much evidence they need to back up their claims.

Aside from the murky process, say the Senate Democrats and consumer advocates, the department has been using its discretion to provide debt relief far too conservatively.

Congress in 1993 gave the Education Department authority to decide the circumstances under which a college’s misbehavior could be a reason why federal direct loan borrowers who attended that college should be relieved of their debt.  

The Clinton administration the next year adopted a rule outlining one such circumstance: when the college’s behavior was illegal under state law. At the time, the department said it wanted to create additional categories of misconduct by a college that could render a borrower’s federal debt legally unenforceable. But the department soon backed away from that plan after its own rule-making panel recommended against creating any new regulations on the issue.

In the Corinthian case, the senators and consumer advocates are arguing that state lawsuits against the embattled for-profit college should constitute a reason why borrowers in those states should have their loans canceled.

The attorneys general of Massachusetts and California are both suing Corinthian, accusing the company of misrepresenting job placement rates and graduation rates, among other things.

Massachusetts Attorney General Maura Healey has penned her own letter to the Education Department, urging it to cancel the federal loans of Corinthian students in that state.

More Widespread Relief

Beyond loan cancellations based on state lawsuits, advocates for debt relief also say the department should use its other powers to help borrowers.

The secretary of education, for instance, has the power to unilaterally reduce any student debts, they say. In addition, the department could more expansively interpret the existing categories of loan discharges available to borrowers, or grant group discharges in cases, like Corinthian, that involve thousands of students.

The Higher Education Act requires the department to discharge the loans of students that meet certain criteria. It must, for example, discharge the loans if a school closes, if a borrower becomes permanently and totally disabled, or if the student was never actually eligible for the loan in the first place.

The New York Legal Aid Group last year sued the Education Department over its use of the discharge relating to a college falsely certifying a student as eligible for student aid. The group argued that former students of a now-defunct for-profit college, found by the department’s inspector general to have fraudulently pushed students into loans, should have their loans discharged.

The department successfully fought the suit. It argued, in part, that it had discretion over how and when to notify students that they might be eligible for loan discharges.

That was an example, consumer advocates argue, of the department’s historical reluctance, spanning various administrations, to grant relief to borrowers from the debt they incurred to attend a college that engaged in predatory practices.

Before Corinthian, the debt relief issue most recently came up as part of the Obama administration’s negotiations over its “gainful employment” rule aimed at cracking down on for-profit colleges.

Consumer and student groups wanted the department -- using the same legal authority that the Senate Democrats are now eyeing -- to declare that a program’s failure under the gainful employment debt and income metrics constituted the type of misconduct by a college that borrowers could cite as a reason why they shouldn’t have to repay their loans.

The department rejected proposals for student debt relief in the gainful employment rule, writing that “these are very complex issues that warrant further exploration.”

Smith, of the consumer law center, said that the department has generally been unwilling to use the full range of legal tools at its disposal to grant loan discharges or wipe out the debt of students who were harmed by unscrupulous colleges.

“Its primary duty is to administer the Title IV [student aid] program and protect taxpayers,” she said. “It’s not a consumer protection agency first and foremost.”

Cost to the Feds

One consideration in loan cancellations is the cost to the federal government of tearing up the debt owed to the Department of Education.

In the Corinthian ordeal, Education Department officials have defended their decision to step in and let the company sell off most of its campuses and wind down operations at the rest, in part, because of its benefit to taxpayers.

A precipitous closure of the company’s 107 campuses last year would have left taxpayers on the hook for the federal loans of students who were unable to continue their education elsewhere. At that time, Corinthian said in a legal filing last June, its students had $1.2 billion in outstanding federal loans.

Department officials last year estimated that they would have had to provide $30 million in “closed school” loan discharges had Corinthian not been allowed to sell some of its campuses to ECMC. That was based on 6 percent of students applying for such a discharge, which officials said was in line with previous college closures.

More widespread loan forgiveness of the type that Senate Democrats and others are seeking is likely to cost much more. In California alone, there were about 27,000 students enrolled at Corinthian when the attorney general filed her lawsuit against the college in 2013.

The Wisconsin attorney general is also suing Corinthian. State regulators there have looked at whether the lawsuit might help borrowers pursue debt relief from the federal government. But they're waiting to see how a judge rules in the case before pursuing that strategy, according to David Dies, the executive secretary of the state board that oversees for-profit colleges. 

A spokeswoman for Wisconsin Attorney General Brad Schimel said that the lawsuit remains "pending" but declined to comment further. 

Beyond Corinthian

The high-profile case of Corinthian Colleges, much of which was sold last month to ECMC Group-owned Zenith, is the most immediate situation in which borrowers deserve debt relief, advocates say.

Adding to the pressure on the department to cancel federal student loans was a debt strike by former Corinthian students that grabbed headlines last month. Rep. Maxine Waters of California, the top Democrat on the House Financial Services Committee, said Tuesday that she supported that cause.  

But the largely left-leaning coalition of groups pushing for Corinthian loan cancellations also sees long-term implications for the student loan program.

How and when the Education Department flexes its legal muscles to relieve student debt is increasingly important, especially as the department has in recent years morphed into the largest student lender in the country.

Maggie Thompson, director of Higher Ed Not Debt, a group of mostly progressive groups and unions, said she views how the department handles the Corinthian situation as "precedent setting."

"We know that Corinthian is not the only bad actor," she said. "If you were defrauded by a school, you deserve a full refund and a chance to start over."


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