Beginning this month, the Obama administration will forgive nearly $28 million in federal student loans for 1,312 former Corinthian Colleges students who say the defunct for-profit chain violated their rights.
The move marks the first major step the Education Department has taken in resolving thousands of defense-to-repayment claims, a petition for the government to discharge federal loans on the grounds that a school used illegal or deceptive tactics in violation of state law to persuade students to borrow. Advocates say the department is still taking too long to approve claims, while some policymakers worry that the government is on a path to losing billions of dollars in taxpayer money.
On Thursday, the independent monitor appointed to oversee the process, Joseph A. Smith, said his team focused on claims from people who attended Corinthian’s Heald Colleges, the heart of a $30 million fine the department levied against the company in April for falsifying job rates. The established evidence in Heald case made it easier to grant relief to Heald students, Smith said in a new report.
The monitor reviewed 1,670 claims from Heald students, 358 of which remain under consideration. Notices will go out to people who have been approved starting Friday. Within 120 days, they will receive confirmation from the department that their loans have been forgiven, and credit reporting agencies will update their reports to reflect the discharge.
Anyone granted a discharge will not have to pay federal income taxes on the money or need to file additional forms declaring the amount forgiven, the Treasury Department said Thursday. Senate Democrats, including Elizabeth Warren (Mass.), Dick Durbin (Ill.) and Richard Blumenthal (Conn.), advocated for the department to relax the tax rules for students harmed by Corinthian.
While Durbin and Blumenthal praised the Treasury and Education departments for taking action to provide Heald students relief, they said in a statement that the Education Department needs to “step up the pace and scope of its Corinthian debt relief efforts to give those students the relief they deserve under the law now.”
Liberal lawmakers and advocacy groups are demanding collective debt relief and say it is taking too long for the government to clear the debts of former students of a chain toppled by evidence of pervasive fraud.
“The department funneled billions of dollars to executives and shareholders of these fraudulent schools for over a decade. It now wants to save face by creating a Rube Goldberg-type contraption to prevent as many people as possible from seeking the relief they deserve,” the Debt Collective, a group of former Corinthian students who have fought to have their loans cancelled, said in a statement.
Education Undersecretary Ted Mitchell has said the department does not have the authority to grant blanket relief but is investigating whether inflated job placement rates were prevalent throughout Corinthian.
“We will continue to provide forgiveness to every student who has been similarly mistreated,” Mitchell said in a statement on Thursday.
Evidence of widespread distortion of job placement rates has emerged at Corinthian’s Everest and Wyotech schools, as the result of a joint investigation between the Education Department and California Attorney General Kamala Harris. Last month, they said about 85,000 students from those schools could have a better chance of having their claims approved, which Smith confirmed in his latest report.
California’s top prosecutor found Corinthian marketing material that said the school set its sights on “isolated, impatient people with low self-esteem and few people in their lives who care about them, and who are stuck and unable to see and plan well for their future.” The for-profit targeted single mothers, veterans and low-income people with promises of jobs that it failed to deliver.
In the past several months, the department has been inundated with claims from Corinthian students. Charges that the company lied about the success of its programs ultimately led to the loss of its access to federal funding and its bankruptcy. The collapse left students unsure of what to do with their debt or even where to complete their education.
Under pressure from advocacy groups and lawmakers, the administration said in June that 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.
Alexis Goldstein, senior policy analyst at Americans for Financial Reform, says the department has done a poor job of reaching out to Corinthian students who might be eligible for relief.
“Many harmed students have not received any information about relief options,” she said. “Instead of this limited, one-time notification, the department should be pursuing a much more comprehensive, multi-pronged outreach strategy in order to ensure that all students victimized by Corinthian are aware of their legal right to pursue debt cancellation.”
Officials at the department say they have sent tens of thousands of emails and other correspondences informing Corinthian students of their options, and will continue to do so.
In his latest report, Smith said his team of lawyers have resolved 5,814 claims from Corinthian students affected by the school closing. Those resolved cases involved about $75 million in federal student loans. There are 5,379 other defense-to-repayment claims that remain open.
It is still unclear how much it will ultimately cost to forgive the debt of all eligible borrowers. Corinthian students have borrowed about $3.2 billion in federal loans since 2010.
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