U.S. Eyes New Path to Debt Relief

A guide to the Education Department and Corinthian borrowers.

May 6, 2015

The unprecedented collapse and now bankruptcy of Corinthian Colleges has left in its wake a large political battle over student debt relief. At the center of the storm is the U.S. Department of Education, which is now deciding how to structure a debt relief process. Its decisions are likely to have long-term implications for student loan borrowers regardless of whether they attended Corinthian institutions.

Here’s an explanation of some of the moving parts to Education Department debt relief.

Corinthian declared bankruptcy on Monday. Will that affect debt relief for students?

The Education Department’s decision making about loan forgiveness for Corinthian students will not change because of Corinthian’s bankruptcy, a department official said.

Federal regulators earlier this year negotiated $480 million of loan forgiveness for students who took out private loans to attend Corinthian campuses. The bankruptcy won’t affect relief because it was not funded by Corinthian. Instead it’s being provided by the ECMC Group under an agreement with the Consumer Financial Protection Bureau. ECMC purchased 53 Corinthian campuses earlier this year.

What about the department’s nearly $30 million fine against Corinthian?

“We will do everything we can to make our claim to the $30 million,” a department official said.

Corinthian’s bankruptcy filing, which shows $19.2 million in total assets and $143.1 million in debt, names the Education Department as one of the company’s 30 largest creditors, though it lists an “unknown” amount owed.

Corinthian on Tuesday formally appealed the fine. The company says the department unfairly rushed to judgment and lacked proper justification for its findings that Corinthian misrepresented job placement rates.

Various groups are lobbying the department on Corinthian debt relief. Who’s asking for what?

Perhaps the most high-profile advocates have been a group of more than 100 former Corinthian students who organized a debt strike. Calling themselves Debt Collective, they’re refusing to pay their federal loans and say they were scammed by Corinthian.

Congressional Democrats have, since last year, been pushing the Education Department to provide direct relief to Corinthian borrowers. Senator Dick Durbin of Illinois and Senator Elizabeth Warren of Massachusetts have been among the most vocal.

The attorneys general of nine states have similarly called for debt relief. There’s also a coalition of student, consumer, education and labor groups.

They’re pushing the department on several fronts: defense to repayment claims, closed school discharges and other powers the agency has to forgive debt. Some issues are settled; others remain up in the air.   

OK, first up: the defense to repayment claims. What’s the deal with those?

The Higher Education Act says that a college’s wrongdoing can relieve a borrower of his or her obligation to repay the federal loans used to attend that college. This is known as a defense to repayment -- a reason why the government can’t legally force a borrower to repay the loan.

The department’s current rules, written by the Clinton administration, say that borrowers can use the defense to repayment escape hatch when their college’s wrongdoing rises to the level of violating state law.

How often have borrowers pursued this option?

Rarely. In the past 15 years, the department received a total of five claims under this provision of the law. Those cases were each handled on an “ad hoc basis,” an official said.

As of April 30, the department had received defense to repayment claims from 254 borrowers, the vast majority of which are from former Corinthian students. Luke Herrine, one of the advisers to Debt Collective, said he sent an additional 785 claims to the department on Friday.

Is the Education Department receptive to those claims?

For months, the department has said it’s been “carefully considering” ways to make it easier for borrowers to make defense to repayment claims. On Monday, department officials took a firmer stance, saying they were committed to debt relief for students “defrauded by Corinthian” -- but said they hadn’t decided on the process.

What, exactly, are department officials deciding?

Officials are setting up a mechanism for handling defense to repayment claims -- a task they’ve described as a challenge.

“We don’t have a lot of practice on this,” Education Secretary Arne Duncan said last month. “The rules aren’t very clear.”

Among the questions still unresolved: Who will collect and process the claims? How will they be judged -- and by whom?

“We’re guided by the law here,” a department official said. The standard for reviewing the claims, the official said, will be “if students can prove they have the equivalent of a claim in state court.”

One sticking point is whether the department will require borrowers to individually prove their claims or grant relief to entire group of Corinthian borrowers. A case-by-case process is a nonstarter for the Corinthian debt strikers, who pulled out of a meeting with Secretary Duncan Monday over concerns the department would use the meeting to announce such a system.

The department says it hasn’t made any decisions yet. “We have four to five different models on the table for how we would set this process up,” an official said. “Nothing is off the table.”

“We need clearer guidance on what latitude, if any, we have to do this affirmatively,” the official said. For example, the official added, department lawyers are unsure whether they can grant across-the-board relief for borrowers enrolled at Corinthian during a specific time period.

Will the defense to repayment process have implications beyond Corinthian?

Yes, and department officials say they’re mindful of the precedent they are setting for future claims. There are other large for-profit colleges that, like Corinthian, have been accused by federal and state authorities of defrauding students or that are under investigation.

“We need to have a process that works for Corinthian and other institutions,” a department official said. 

Beyond setting up a process for collecting and judging claims, department officials want to make sure they have a system for recouping from colleges the value of the loans canceled under a successful defense to repayment claim.

That issue is largely moot in the Corinthian case because the company is bankrupt. Going forward, though, the department wants to reserve its authority to go after colleges for the value of the loan forgiveness, the official said.

For example, if the department agreed with a borrower that his $10,000 in federal loans should be wiped out because of his college’s wrongdoing, the department would be able to collect $10,000 from that college.

Next, what’s going on with the loans of Corinthian students whose campuses suddenly closed last week?

While the defense to repayment claims remain in limbo, the 16,000 Corinthian students displaced by last week’s sudden closure of 28 campuses have a clearer debt relief option: a closed school discharge.

Has this been used before?

Yes, this type of relief is relatively common. The department routinely discharges the federal loans of borrowers when a campus closes, which happens hundreds of times a year. What’s different in the case of Corinthian, though, is the scale.  

The Education Department said that in the past two fiscal years it granted a total of $29.9 million worth of closed school discharges to 2,975 borrowers. By contrast, Corinthian’s closure has left the department on the hook for as much as $214 million. That’s the total amount of loan forgiveness if all 16,000 students were to apply for a discharge.

How does this loan discharge work?

All students enrolled at a campus when it shuts down, as well as those who had dropped out within the past 120 days, are eligible for the discharge -- so long as they don’t transfer their credits elsewhere. They must apply through their loan servicer, the company that manages their federal student loans on behalf of the government.

The Obama administration in 2013 extended the eligibility period to 120 days preceding the campus closure. It was previously 90 days.  

But the department also has discretion to further extend the look-back period when a college closes under “exceptional circumstances.” Some consumer advocates and other groups, like the Institute for College Access and Success, are urging officials to exercise that power.

The department hasn’t yet made a decision on expanding the pool of borrowers eligible for loan discharges, a department official said. It has, however, ruled out automatically granting this type of loan discharge for Corinthian borrowers. Such a move, the official said, would take away borrowers’ option to transfer their credits elsewhere.

What other types of debt relief decisions is the department considering?

The Corinthian debt strikers as well as consumer advocates point to other powers that the Education Department could exercise to cancel student loans.

They say that another provision of the Higher Education Act as well as the department’s own regulations allow the education secretary (or his designee) to unilaterally wipe out student loan debts.

The department is in “the first quarter of legal analysis” on deciding whether it will use this power to grant relief for Corinthian borrowers, an official said.  

What is the timeline for decisions on these debt relief decisions?

Department officials declined to say this week, noting only that they felt a sense of “urgency” to resolve them soon.

“We’re trying to be quick but not hurry,” an official said. 




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