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A string of recent for-profit college closures has led to tens of millions of dollars in student loan cancellation, creating new costs for the federal government on top of disruptions caused for thousands of former students.

According to numbers recently provided by the U.S. Department of Education to Senate lawmakers, the federal government as of May had discharged more than $43 million in student loans for borrowers who attended programs operated by Education Corporation of America, Dream Center Education Holdings, Vatterott College and Charlotte School of Law.

Students who attended ECA campuses, including Virginia College and Brightwood College, have so far received more than $22.6 million in debt cancellation. About 3,300 students at those campuses were approved for loan discharge as of May. Students at campuses operated by Dream Center have received more than $10 million in debt relief. And more than $5 million in student loans have been discharged for former students of Vatterott College and Charlotte School of Law.

Those numbers likely will continue to rise as more students learn about their eligibility for loan relief and submit applications for what’s known as a closed-school discharge. Student borrowers can apply for a full discharge of their federal loans if they were enrolled when their college closed or withdrew within 120 days of the official closure date and didn’t transfer to another institution.

The federal government wiped out nearly $200 million in student debt for borrowers enrolled in Corinthian Colleges programs after the for-profit chain’s shutdown in 2015. And it’s forgiven another quarter billion in loans for former students of the ITT Tech chain, which shut down the following year.

The latest data provided to Senate lawmakers show that for-profit closures have continued to create big costs under the Trump administration.

Clare McCann, deputy director of New America’s higher education program and a former Obama administration official, said those closures create big liabilities for the federal government because the colleges involved are large -- most institutions that close have fairly nominal enrollments by the time they shut down; not so with for-profit college chains. The costs are also bigger because students may not be opting to take their credits elsewhere, she said.

“Many people do want to get their degree,” McCann said. “For others, if this isn’t the program they thought it was going to be going in, it might not be worth the time.”

Outside of Corinthian and ITT, the last college to create comparable liabilities for the federal government was Dade Medical College, which closed in 2015. That institution’s owner, Ernesto Perez, was put on trial last year for violating state law with the closure. The Education Department wiped out roughly $10 million for borrowers who attended Dade Medical.

Costs for debt cancellation involving Dream Center, which briefly operated the former Education Management Corporation's Argosy University and Art Institutes chains, had surpassed discharge costs for Dade Medical in a matter of weeks.

Debbie Cochrane, vice president of the Institute for College Access and Success, said the loan discharge costs show the need for better policing of problematic colleges on the front end.

“Regulations by the prior administration were designed to provide incentives for schools to leave their students better off and to give colleges a financial stake to do so,” she said.

Limited Student Options, Lack of Collateral From Colleges Drive Up Costs

The costs involving student loan discharge are dictated in part by whether a college facing closure has secured opportunities for students to complete their degree through a process known as a teach-out. Students are supposed to either have the opportunity to finish their credential or transfer to a comparable college.

Teach-out agreements weren't in place last December, when Education Corporation of America, the parent company of the Virginia College and Brightwood College chains, made a surprise announcement that it was closing 70 campuses across the country. Quality issues identified at ECA campuses also meant transferring credits likely would be a difficult proposition for many students, although a number of programmatic teach-out agreements were agreed to after the company's closure.

At the time of the chain's closure, the Education Department hadn't secured a letter of credit -- a kind of financial collateral that colleges may be required to set aside when they show signs of financial instability.

Diane Auer Jones, the department's deputy under secretary, said at a Bipartisan Policy Center event in April that the department did not have the authority to request a letter of credit after the company received a passing financial responsibility score in its most recent audit. The lag time for those audits, however, means the financial information about colleges is already two years old by the time the federal government receives it, so the department doesn't have the most up-to-date picture of an institution's financial health.

"We're always going to be in this place where some people think we can look into our magic ball and at any moment see what the financials are at an institution at any given moment in time," she said. "It doesn't work that way."

Jones said deciding when to request a letter of credit can be tricky for the department -- if officials don't seek enough collateral, for example, it won't cover liabilities like closed-school discharge claims.

"On the other hand, if the letter is too large, you'll probably end up forcing a precipitous closure," she said.

The department sought another letter of credit and imposed new cash restrictions after ECA sought to enter a court-appointed receivership. Company executives blamed the December shutdown on those measures and a looming suspension of recognition from their accreditor.

By the time Dream Center began closing campuses earlier this year, the department had cashed out the proceeds of a letter of credit secured from Education Management Corporation, which previously owned the Argosy and Art Institute campuses. Those funds supported teach-out efforts at about 30 campuses, according to an agreement outlined by federal officials last year. After the chain’s closure, the department held about $24.5 million from the letter of credit, which will cover closed-school discharges as well as liabilities like borrower-defense applications.

Liabilities for closed-school discharge claims will still be assessed against the institution itself. The Education Department, however, is just one of several entities with potential claims against Dream Center. The company's creditors include landlords who say they are owed hundreds of thousands in rent that was never paid.

Abby Shafroth, a lawyer at the National Consumer Law Center, said borrowers who had their degree interrupted by a college closure are at a higher risk to be unable to pay back their loans.

“Part of a degree or part of a certificate isn’t worth much. The value of an education comes largely from accessing that credential,” she said. “Those borrowers can labor under that debt for years and ultimately default on it.”

Shafroth said the department is in a better position to assume liability for that debt than students and should do so because it approved the colleges’ access to federal financial aid.

Representatives of the for-profit college sector have offered another idea to cover the costs of closed schools. Career Education Colleges and Universities proposed in the wake of ECA's shutdown last year that federal policy makers consider imposing a $5 per student fee each year on proprietary colleges. The fee would fund a new Office of Continuing Education Services tasked with working with colleges to make sure students can continue their education in the event of a closure, said Steve Gunderson, the group's president and CEO.

"Every institution has the right to make an appropriate business decision," Gunderson wrote in Inside Higher Ed last year. "But we must find better ways to handle this process, most importantly because we need to find ways to protect students’ ability to complete their education when their college shuts down."

Potential Changes to Loan Discharge

After the ECA shutdown, the department communicated loan discharge options to borrowers through transfer fairs at locations around the country as well as webinars and direct email communications. The Obama administration undertook similar efforts to inform former ITT students about closed-school discharge, but the application rates remained low.

The department settled on a solution in the 2016 borrower-defense regulations, which required that if students eligible for closed-school discharge hadn’t enrolled elsewhere within three years, their federal loans would be automatically canceled.

“If after three years' time they haven’t enrolled, it’s fair to assume these students aren’t using those credits elsewhere,” Cochrane said.

After the rule went into effect last year, the department canceled about $150 million in student loan debt, including $80 million for borrowers who attended Corinthian programs.

A Trump administration overhaul of 2016 borrower-defense regulations, however, includes significant changes for closed-school discharge. The new rule will extend the window for eligibility to withdrawals 180 days before a college’s closure. It also eliminates automatic debt forgiveness after three years. Those changes are expected to save the federal government roughly $1.26 billion over 10 years.

The department dropped a proposal that would have denied closed-school discharge eligibility to students whose colleges offered a teach-out option approved by an accreditor. Jones said department officials realized after receiving public feedback that the change would have eliminated student choice.

Congressional Democrats like Senator Patty Murray, the ranking member of the Senate education committee, criticized the elimination of automatic loan forgiveness -- as did student advocates.

“The fact that students aren’t aware of this option and aren’t applying is why during the Obama administration they created the rule that provides for automatic discharges for eligible students,” Shafroth said.

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