Corinthian Colleges Loses Federal Lawsuit As Education Department Faces Reckoning

A federal court's ruling could bolster debt-forgiveness claims by allegedly defrauded Corinthian students.
Education Secretary Arne Duncan said he was "thrilled" to shut down Corinthian Colleges Inc.
Education Secretary Arne Duncan said he was "thrilled" to shut down Corinthian Colleges Inc.
Patrick Semansky/Associated Press

Defunct for-profit college chain Corinthian Colleges Inc. violated federal law by using false job placement rates to deceive 115,111 former students into taking out student loans, a federal district court judge ruled on Tuesday.

In a lawsuit brought last year, the Consumer Financial Protection Bureau alleged that Corinthian duped prospective students into enrolling and taking out loans by falsely advertising future job prospects. The company, which declared bankruptcy in May, operated for-profit schools under the Everest, Heald and Wyotech brands and had previously denied wrongdoing.

The ruling by Judge Gary Feinerman in Chicago could force the Department of Education to forgive the former students' federal student debt, thanks to a provision in federal law that gives student debtors the right to apply for total debt forgiveness if schools mislead them into taking out federal student loans. Former Corinthian students have taken out nearly $4 billion in loans from the Education Department over the last five years.

In the past, the Education Department has fought efforts by aggrieved former students who claim their schools cheated them. Many students have had to prove they were defrauded -- a particularly tough standard for people who don't have the resources to hire attorneys. Few have received the kind of relief top Education Department officials, like Under Secretary Ted Mitchell, have repeatedly promised them in the face of severe criticism over the government's alleged inaction. Mitchell said in June that the Education Department would attempt to "fast-track relief" for defrauded borrowers based on legal findings.

Feinerman's ruling should compel the Education Department to do just that by discharging the former Corinthian students' debts, consumer advocates said. Education Secretary Arne Duncan said in July that he was "thrilled" to shut down Corinthian.

"It would be smart, just and entirely appropriate for Secretary Duncan to cite this ruling as a strong basis for providing comprehensive debt relief for former Corinthian students," said David Halperin, a Washington lawyer and former senior vice president at the Center for American Progress who is critical of the for-profit college industry.

Richard Cordray, CFPB director, alluded to the uphill climb former Corinthian students may face in battling a reluctant Education Department, noting in a statement, "We all have much more work to do before current and past students who were hurt by Corinthian’s illegal practices can be made whole."

Last month, Corinthian told Feinerman that the company would no longer defend itself against the CFPB's allegations. As a result, Feinerman ruled in favor of the CFPB in a default judgment, finding that the company owed its former students who took out its private student loans $531,224,267 in restitution.

But Corinthian has little in the way of assets or funds that would make defrauded students whole. The company paid its former executives handsomely, many of whom now work for Zenith Education Group, an arm of debt collector and Education Department contractor ECMC Group that purchased more than 50 former Corinthian schools in a sale engineered by the Education Department. Mark Collins, a Delaware lawyer representing Corinthian in its ongoing bankruptcy case, didn't immediately respond to a request for comment.

The significance of Feinerman's ruling lies in its description of how Corinthian misled its former students and how that deception led them to take out student loans. Corinthian marketed its own private Genesis loans to students because the Education Department requires for-profit schools to obtain at least 10 percent of their revenue from sources besides federal student loans and grants from the department.

Feinerman said that Corinthian induced students to take out its Genesis loans from at least July 2011 to July 2014, "through a series of misrepresentations about the likely employment outcomes for Corinthian students," such as falsified and overstated job placement rates.

That deceptive move, he said, was both "material" and likely to mislead borrowers who were acting reasonably. Therefore, Feinerman concluded, Corinthian violated the Consumer Financial Protection Act, a section of the 2010 financial reform law known as Dodd-Frank. That is key, consumer advocates said, because students misled into taking out Genesis loans would have been misled into taking out federal student loans, too.

Aggrieved former Corinthian students can now use Feinerman's ruling to get Duncan to discharge their federal debt. Under the Education Department's interpretation of a 1993 law that responded to earlier abuses by for-profit schools, borrowers have the right to claim a "defense against repayment” if they believe that their school's deception violated their state's laws and led them to take out a loan.

And since all states have statutes that prohibit the kind of conduct Feinerman said Corinthian engaged in, consumer advocates believe the judge's ruling should be sufficient for the Education Department to discharge much of the debt Corinthian students have incurred over the last five years.

"The Education Department needs to take immediate action," said Chris Hicks, an organizer who leads the Debt-Free Future campaign for the Washington-based nonprofit Jobs With Justice. Former Corinthian students, he said, "shouldn’t have to once again prove on a case-by-case basis that they were victims of these practices."

What's more, consumer advocates said, Feinerman has explicitly declared that Corinthian violated the law -- a big change from past cases in which government authorities have sued for-profit schools, only to settle the charges and allow schools to either deny or avoid the question of whether they engaged in wrongdoing.

"The Education Department can take this court order and say it compels us to wipe away these debts," said Maura Dundon, senior policy counsel at the Center for Responsible Lending. "I don't know why the department wouldn't do that. The department has serious responsibilities to these students it permitted to enroll in Corinthian's schools and incur so much debt."

The Education Department ultimately could deny aggrieved Corinthian borrowers' claims for debt relief, Dundon and Halperin said. But both stressed that Feinerman's ruling should constitute enough evidence for the department to forgive former Corinthian students' federal student loans.

"The ruling gives Arne Duncan the opportunity to set a new course where the federal government takes responsibility for what it has allowed to happen," Dundon said.

Duncan announced earlier this month he would leave office by December. Dorie Nolt, an Education Department spokeswoman, declined to comment.

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