When the Obama administration said it would forgive the federal loans of tens of thousands of for-profit college students earlier this month, there were plenty of unresolved questions about the process.
On Thursday, the Education Department took steps to clear up some of the confusion by appointing Joseph A. Smith, who monitored the government’s national mortgage settlement, to oversee the program and develop a system to make it easier for students to apply for loan forgiveness.
“We created this position to help us resolve claims as efficiently, fairly and transparently as possible,” said Education Under Secretary Ted Mitchell, on a call with reporters Thursday. “This is mostly new territory for us at the department, and we want to make sure that we’re improving as we work through the claims. We want to make sure students receive every penny of relief they are entitled to under law.”
The collapse of for-profit giant Corinthian Colleges left 16,000 students without degrees that many took on debt to complete, and hundreds of others fighting for the government to forgive debt they are struggling to repay.
Under pressure from lawmakers and advocacy groups, the Education Department said it would make it easier for Corinthian students to get debt relief by allowing anyone who had attended a school as of June 20, 2014 to apply.
About 4,500 Corinthian students impacted by the school’s closing have applied for loan forgiveness and 500 of those applications have been processed to date, according to the department. Mitchell said fulfilling these requests has been fairly simple because the department has experience with claims related to school closings.
But the agency has far less experience handling what’s known as a defense to repayment claim, an appeal to discharge federal loans on the grounds that a school broke the law–which is what Corinthian has been accused of doing. 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.
There are already 1,400 former Corinthian students who have filed appeals. Many complain that the process is complicated and difficult to navigate.
In a fact sheet detailing the claim process online, the government wants transcripts and registration documents stating specific program of study and dates of enrollment, the kind of information that may be hard to get from a school that has closed down. Corinthian students are also being asked to provide the state law that has been broken by the school’s misconduct.
Here’s where Smith steps in. The independent monitor will 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.
Fixing the process is critical because the department has said all students who believe they have been defrauded by their colleges can apply for relief. The agency will consider erasing the federal debt of students who can prove a school used illegal or deceptive tactics in violation of state law to persuade them to borrow money for college.
The decision has the greatest implications for students at for-profit colleges, a number of which are under government investigation for deceptive sales practices or falsifying job placement and graduation rates. Mitchell said in cases where the department receives an appeal tied to a school in operation, it will try to recover the money from the school, rather than leaving taxpayers on the hook as they are now for Corinthian.
There is no telling how many former or current students of for-profit colleges will apply for debt forgiveness, but it could usher in an unprecedented number of debt forgiveness requests. In the Corinthian case alone, nearly 350,000 students who borrowed $3.5 billion in federal loans to attend the schools could be eligible for forgiveness.
“We need to take some baby steps to get the process right,” Smith said. “We need a little time to set this thing up properly, so we don’t have to retool it later.”
Smith is best known for overseeing some of the largest bank settlements to come out of the housing crisis, including the $25 billion national mortgage settlement to clean up shoddy foreclosure practices. Consumer groups were largely satisfied with Smith’s work on the settlements, praising his responsiveness to complaints from homeowners about banks dragging their feet in providing them help.
“This is an important effort to protect students, and Joe Smith has a strong record of effectively implementing important remedial programs,” said Mike Calhoun, president of the Center for Responsible Lending, an advocacy group.
On Thursday’s call, Smith drew parallels between the millions of Americans devastated by the mortgage mess and the thousands of students left in the lurch by unscrupulous for-profit schools.
“You have a heavy impact on low- and moderate-income people and communities of color and that’s similar to what happened in the mortgage crisis,” he said. “The issue is to try to handle these matters in a way that is humane, that is respectful of the borrowers, but is also fair to everyone.”
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