Corinthian Student Debt Forgiveness: Loan Discharge Challenges Emerge As Education Department Develops Process After For-Profit College Collapse

When Corinthian Colleges Inc. shut down its remaining 28 of 97 for-profit campuses in April after being fined for misleading students about potential post-graduation employment prospects, it was left without a buyer and classes and degree programs for 16,000 people promptly disappeared. But students’ loans remained.

Students turned to the government for help, and the U.S. Department of Education responded with a plan to extend loan discharges, or cancellations, for those left without schools. Then it went a step further by offering any former students who felt they were defrauded by Corinthian the chance to take advantage of a little-known statute called "borrower defense to repayment." With this, around 350,000 people became eligible to contest about $3.5 billion in federal loans, an amount unlike anything the Education Department ever had seen.

Now, as the administration for U.S. President Barack Obama prepares to process the influx of loan forgiveness requests from former Corinthian students, advocates are requesting an uncomplicated application process to ensure all the people who deserve discharges get them. But financial aid experts say creating a streamlined system that simultaneously supports students and protects taxpayers puts the federal government in a precarious position: If the process is too simple, people will abuse it; if it's too hard, they'll ignore it. Either way, how the authorities deal with the large-scale debt disagreement could set a precedent for loan forgiveness scenarios.

One thing's certain: Something in the application process needs to change, said Ben Miller, senior director of postsecondary education at the Center for American Progress, a policy institute based in Washington. The application system for Corinthian borrowers arguing they were defrauded and shouldn't have to pay is now "an undefined, burdensome mess," he said, adding, "You basically have to be a lawyer to have any hope of filling out that process."

Consequences Of The Corinthian Collapse

About 4,000 of the nation's roughly 7,300 postsecondary institutions are nonprofit colleges and universities, which are funded by states and endowments. Both public and private, they typically take the money from students' tuition and fees and pour it back into the schools.

The rest are private for-profit colleges run by corporations at the mercy of stakeholders. As such, they tend to be focused on generating earnings, which they do by targeting older, nontraditional students who have jobs or families and are drawn to their promises of job offers and night classes.

The price tag is another difference. At public colleges in 2013, tuition, room and board totaled about $15,022 a year, whereas at for-profits, they added up to $23,158. Because of this, for-profit college students have notoriously high debt. They make up only 13 percent of the student population, but they account for about a third of all student loans. The average debt of a public college student in 2012 was $25,550, compared to $39,950 for for-profit students.

The Obama administration has started to crack down on for-profit colleges, which can receive as much as 90 percent of their revenue from federal dollars, in recent years. It introduced gainful employment regulations that curtail aid if an institution's graduates don't make enough money to pay back their loans and also levied fines on for-profit colleges investigated for predatory lending practices, aggressive recruiting techniques and misleading advertisements.

The Corinthian shutdown was the result of a years-long battle between the huge for-profit college corporation and the Education Department. Last summer, the government ordered 12 campuses to be shut down and the other 85 sold. The Zenith Education group bought 56 with the intent of transitioning them into nonprofit schools, and in April Corinthian closed the rest. It had been unable to sell them, it argued, because the government scared away potential buyers with its fines and conditions.

Afterward, about 7,000 students chose to forfeit their credits and request closed school loan discharges, which was "five, six, seven times higher than anything we've ever seen before," Department of Education Undersecretary Ted Mitchell said last Wednesday during a press conference call. The department appointed Joseph A. Smith as a special master to come up with a streamlined process for the borrower defense to repayment applications.

As it stands, anyone can apply for a discharge of federal direct student loans if they attended a school that "committed fraud by doing something or failing to do something, or otherwise violated applicable state law," the department said. They can be reimbursed for what they've paid toward the loan and forgiven for what they still owe. But with their submissions they must attach documentation that proves their schools, programs of study and dates of enrollment, as well as details including the state and applicable laws violated, specific acts of misconduct and statements on how they were affected.

People like Miller, from the Center of American Progress, said they think that system is too difficult. "There are a lot of processes in government that are very complicated, but the goal should be to keep that complexity in the backroom with the people paid to deal with it and keep the front-facing items as simple and clear for students as possible," he said.

Requesting Reasonable Requirements

Ease of use was one of the main worries mentioned in a recent letter to the department from a group of 11 state attorneys general. Officials from Massachusetts, New York, California and other states requested the Education Department involve them in developing the process and loosen the application requirements.

"These are people that are working, that have debt, their time is valuable and they may not have the expertise or financial sophistication or legal expertise to be able to navigate a really difficult process," Connecticut Assistant Attorney General Joseph Chambers said.

The officials asked the department to consider discharging the loans of groups of students instead of requiring individual application, a system similar to one in place for certain classes of students from Heald College, a set of colleges under Corinthian. The department found Heald misrepresented job placement rates from 2010 to 2014, so all borrowers who attended the school and are seeking forgiveness have to do is submit a form attesting to the fact that they were enrolled at the time -- no citations necessary. Mitchell said about 1,500 people have used this option so far.

These sorts of suggestions could help avoid a widespread scamming trend where businesses offer to handle people's claims in return for a cut of the money, something that is a "huge concern," Chambers said. "Students may read in the paper or hear on TV [their loans can be forgiven] ... and then they get a phishing scam in their email that says, 'Pay $500 and we'll help you submit a claim' that they could easily do on their own," he said.

The attorneys general also asked the government to ensure immediate relief to borrowers by stopping interest accrual in addition to forbearance, or temporarily stopping loan payments and pausing collections, which students currently can request.

A Financial 'Push-Pull'

Making the application more straightforward may not be the no-brainer it seems. Because the department's decision will likely set a precedent, it must be careful not to create a process that people can exploit, student financial aid expert Mark Kantrowitz said. Otherwise, the department could see waves of alumni from non-Corinthian schools, maybe even nonprofits, wanting their loans erased.

"If you're dissatisfied with the quality of your education, or graduated and couldn't get a job, that might be grounds for defense of repayment," Kantrowitz added.

He surmised the government also may not want to simplify the application because of the money involved, with most of it likely coming from taxpayers. The department probably estimated how many applicants it would have before extending borrower defense for repayment to former Corinthian students, Kantrowitz said. But after larger-than-normal numbers of students requested closed school loan discharges, it may be realizing now demand will be higher than expected, he said.

"There's a push-pull going on between what they thought that the cost would be and what the reality is going to be if students are very aggressive in seeking a refund," Kantrowitz said. "They have a financial incentive to not make this process too easy."

Though it's still unclear what the final process for Corinthian borrowers will be, the Education Department maintained in an announcement last week its priority was caring for students while supporting taxpayers. It revealed Wednesday a new regulatory effort to create procedures for borrowers seeking to assert a defense to repayment, guidelines for what justifies it and ways for the department to hold the schools accountable if too many of their students request it. The department has planned public hearings for Sept. 10 in Washington and Sept. 16 in San Francisco to gather additional input.

The idea is to set up a legal process by which the department can reclaim the money from schools they have to pay back to students who say they were defrauded. Corinthian filed for bankruptcy earlier this year, so the rules will likely affect future situations more than this one.

Undersecretary Mitchell said he hopes the regulations will cater to students as well as build on the Obama administration's commitment to protecting taxpayer investment in higher education.

"We know that borrowers deserve as clear a set of policies and regulations as possible to make it easier, more transparent and more efficient for them to apply for borrower relief," he said. Later, he added: "This is a new process, and we're learning a lot as we go forward."