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Obama administration plans to overhaul rules on student debt forgiveness

Corinthian Colleges shut down all of its remaining 28 ground campuses in April, displacing 16,000 students. (Christine Armario/AP)

The Obama administration said Wednesday it will overhaul the loan forgiveness process for students who believe they have been defrauded by their colleges, in light of the collapse of controversial for-profit Corinthian Colleges.

Students can apply to have their federal loans discharged if they can prove a school used illegal or deceptive tactics in violation of state law to persuade them to borrow money for college. But critics say the process, known as a “defense to repayment claim,” is complicated and difficult to navigate. And the demise of Corinthian, with thousands of former students muddling their way through the claims process, has shown that the system needs fixing.

Starting next month, the Education Department will begin holding field hearings and convene an advisory panel to develop regulations to streamline the loan forgiveness process. The department also wants to strengthen provisions to hold colleges accountable for the discharged loans, limiting the cost to taxpayers.

“The process we are beginning today aims to create a clearer, more comprehensive system,” Education Secretary Arne Duncan said in a statement. “And we think it is critical that this solution also does right by American taxpayers. That’s what they deserve.”

Officials at the department said they are aiming to have the rule in place by November 2016, which means it would take effect the following July. Given the timeline, the rule could be subject to changes if a Republican takes the White House; the GOP has tried to block tougher regulations for for-profit colleges.

[The toughest for-profit college rule in years are here. And lawmakers are still fighting over them.] 

Still, Republicans have been calling on the administration to go after lawbreaking colleges for redress, rather than sticking taxpayers with the bill.

“Students have been hurt, but the department is establishing a precedent that puts taxpayers on the hook for what a college may have done,” said Sen. Lamar Alexander (R-Tenn.), chair of the Senate education committee. “If your car is a lemon you don’t sue the bank that made the auto loan; you sue the car company.”

In the case of Corinthian, there isn’t much the government could go after. When the company filed for bankruptcy in May, it barely had $20 million in assets, not nearly enough to cover the $3.5 billion in federal loans eligible for forgiveness.

On a call with reporters Wednesday, Education Under Secretary Ted Mitchell said when there are institutions like Corinthian without substantial assets, the department will try to use enforcement actions to help students before the company collapses. He said the department can also try to recoup money to cover the borrower claims, and plans to flesh out the details through the rule-making process.

“This is a vexing and complicated topic,” said Barmak Nassirian, director of federal relations and policy analysis for the American Association of State Colleges and Universities. “ED has a built-in conflict when it comes to fraud. As a financier, it loses money when it concedes that students were defrauded, but when it attempts to explain how the fraud was possible in the first place, it ends up having to point its finger at itself, as the inept gatekeeper who let the fraudsters in to begin with.”

Corinthian, which ran Everest Institute, Wyotech and Heald College, is being sued by state attorneys general and the Consumer Financial Protection Bureau for trapping students in predatory loans and deceptive sales practices. Those allegations and charges that Corinthian lied about the success of its programs ultimately led to the loss of its access to federal funding and bankruptcy.

The company’s implosion left thousands of students unsure of what to do with their debt or even where to complete their educations. Under pressure from lawmakers and advocacy groups, the administration in June said anyone who had attended a Corinthian school as of June 20, 2014 could apply for what’s known as a closed school discharge of their federal loans. All other students were invited to file a claim if they could prove they were defrauded by their colleges.

[How the government plans to help students left hanging by for-profit Corinthian Colleges]

About 7,000 Corinthian students impacted by the school’s closing have applied for loan forgiveness and 2,600 of those applications have been processed to date, according to the department. Another 3,450 students have filed claims, 161 of which attended other for-profit schools.

The new rule-making will not affect the students already going through the claim process, Mitchell said. The department has appointed an independent monitor, Joseph A. Smith, to oversee the current program.

The monitor is supposed to hammer out the details of the claims process, including what counts as a violation of state law and how to factor in the findings of state and federal investigations. He is also creating a simpler appeal application. Smith will present recommendations by the end of the summer for streamlining an appeal process that has only been used a few times in the last 20 years.

“This is very important to us,” Mitchell said. “We know borrowers deserve as clear a set of policies and regulations as possible to make it easier, more transparent, more efficient for them to apply for relief.”

Want to learn more about for-profit colleges, check out these stories:

For-profit colleges lose bid to scuttle government rules

SEC charges executives at for-profit college ITT with fraud

How dozens of failing for-profit schools found an unlikely savior: a debt collector