The U.S. Department of Education is considering new hurdles for student loan borrowers seeking to get out of their debts by claiming their schools swindled them.
Days after the abrupt shutdown of for-profit chain Corinthian Colleges Inc., the department is discussing additional requirements for debt-forgiveness applications and hiring an outside party to rule on claims made by aggrieved borrowers, according to people briefed on the plans.
Doing so would effectively ignore demands by more than a dozen Senate Democrats, nine state attorneys general and borrower advocates, who have urged widespread debt relief to defrauded student borrowers.
The result may be a lifetime of crippling debt for thousands of Americans who obtained questionable credentials at schools that misled them into enrolling. The department, which plans to announce its move next week, hasn’t finalized a decision and may ultimately adopt more borrower-friendly measures.
Outstanding federal student debt has nearly doubled to $1.1 trillion since President Barack Obama and Education Secretary Arne Duncan took office in January 2009, federal data show. A greater share of Americans are late on their student loan payments than on their credit cards, home mortgages or auto loans, according to the Federal Reserve Bank of New York.
Debt forgiveness applications are based on an obscure provision in federal law dating to the mid-1990s, and in borrowers’ loan contracts, that give them the right to seek loan discharges when they believe they’ve been defrauded by their schools.
The issue has recently commanded attention in Washington amid state and federal allegations that Corinthian Colleges Inc., the faltering for-profit chain, systematically duped people into enrolling and taking out federal student loans with false job prospects and fake graduation rates.
Corinthian's shutdown this week leaves 16,000 students scrambling for options. The company once had more than 110,000 students spread across more than 120 campuses under the Everest, Wyotech and Heald brands, but it collapsed under the weight of state and federal lawsuits and investigations alleging the company defrauded its students. Corinthian denies wrongdoing.
Hundreds of former Corinthian students have filed applications in recent weeks with the Education Department to get their debts discharged under the “defense against repayment” provision. The applicants have cited pending state and federal lawsuits against the company that allege Corinthian misled students into enrolling with false job placement and graduation rates.
Separately, more than 100 former Corinthian students have declared a “debt strike” and are publicly refusing to repay their student loans until the Education Department wipes out all federal debts owed by all former Corinthian students.
Federal law allows the department to recoup from colleges whatever losses it sustains as a result of forgiving former students’ debts. But because of Corinthian’s troubled finances, the Education Department likely would sustain losses if it were to heed the calls of borrower advocates, such as Sen. Dick Durbin (D-Ill.).
The Obama administration has presided over what many for-profit college advocates view as a crackdown on their industry, with rhetoric that disparages the schools and new rules meant to rein in institutions that grant credentials of questionable value yet leave students mired in debt.
Several major for-profit college chains also are under investigation for potentially misleading students by advertising false job placement or graduation rates. The Education Department has funneled billions of dollars in federal financial aid in recent years to for-profit schools under state or federal investigation. If borrowers saddled with those loans win debt forgiveness, the department could face billions of dollars in losses.
It is against this backdrop that the Education Department plans to announce next week what borrowers need to demonstrate in order for their debts to be wiped. Department officials have told student advocates they plan to announce new details about the application process for forgiveness.
Dorie Nolt, an Education Department spokeswoman, declined to answer questions.
People familiar with the department’s plans said the Education Department will require aggrieved borrowers to submit applications that effectively force them to prove that they were misled by their school and to demonstrate their losses.
Robyn Smith, a former California deputy attorney general who now works on student loan issues for the National Consumer Law Center, said the individual application process would be burdensome for former students, since there are so few legal aid attorneys to help them. “It would be a disappointment,” she said.
Borrower advocates, including Durbin, the National Consumer Law Center and Massachusetts Attorney General Maura Healey, have recommended that the Education Department rely on evidence compiled by state prosecutors and the federal Consumer Financial Protection Bureau to cancel former Corinthian students' debts.
The federal consumer bureau and state attorneys general in California, Massachusetts, and Wisconsin have filed separate lawsuits, alleging Corinthian fraudulently induced students to take out loans to attend its schools by misleading them about future job prospects.
The Education Department itself alleges it has uncovered evidence that Heald College, once the jewel of the Corinthian chain, misled students and accreditation agencies about graduates’ employment rates and showed a “blatant disregard” for the federal student loan program. The department said on April 14 that it had found 947 false job placement rates dating back to at least 2010.
Smith, of the consumer law center, said Duncan has the authority to grant mass loan discharges of former Corinthian students’ debts.
Laura Hanna, an organizer who works with the so-called “Corinthian 100” debt strikers, said it “absolutely makes no sense” for the Education Department to impose new forgiveness requirements, given the evidence dug up by state prosecutors, the federal consumer bureau and the department itself.
The department also is considering outsourcing review of debt-forgiveness applications to a third party that would rule on the claims.
Such a move, said Barmak Nassirian, an expert on higher education policy, would make sense in cases where the Education Department had to investigate whether a school had misled its students. There is additional merit in the idea, he said, because the Education Department would have a conflict of interest in deciding whether to cancel borrowers’ debts. For every loan it cancels, the department would lose money and effectively acknowledge it failed to properly supervise the college and protect students and taxpayers from fraud.
But when it comes to applications from former Corinthian students, Nassirian said, “what would be a fair process is actually being used as a delaying tactic and as a roadblock.”
“The entire educational experience apparently was subpar and questionable and fraught with misrepresentations and lies,” Nassirian said of Corinthian. “So if you know that, what is the need for individual adjudication? I just don’t get it.”
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