The collapse of for-profit giant Corinthian Colleges, a chain felled by charges of fraud and predatory lending, left students fighting to have their federal loans discharged under a little-known law meant for people just like them. But instead of a clear path to debt relief, many found themselves in an overwhelmly complex process.
New rules the Obama administration finalized Friday aim to change the system, but consumer advocates worry that people already contending with the existing process still face an uphill battle.
The regulations overhaul what is known as borrower defense to repayment, a statute that wipes away federal loans if a school used illegal or deceptive tactics to persuade students to borrow money for college. Few people used the defense until 2014, when Corinthian’s closure ushered in a deluge of claims at the Education Department. That forced the agency to fix the system and create a new standard to judge appeals for debt relief.
“To protect students from the start, the regulations seek to deter institutions from engaging in predatory behavior or otherwise exposing the government to risk,” Under Secretary of Education Ted Mitchell said in a statement. “For students who are injured by an institution’s conduct, these regulations provide a clear path to relief with all of their rights intact, and restore their right to sue.”
Education officials kept intact much of the provisions proposed in June, which outlined violations that would make borrowers eligible for loan forgiveness. The government would consider wiping away debt in the event of a “substantial misrepresentation” by the school about the nature of the program, financial charges or the chance graduates have of finding work. Other qualifying violations include a breach of contract as well as a state or federal court judgment against a school related to the loan or the educational services for which the loan was made.
In response to public comment, the Education Department made a few changes in the final regulations, including a full ban on mandatory pre-dispute arbitration agreements regardless of whether students voluntarily sign them. The agency also will provide automatic loan forgiveness for anyone whose school closed on or after Nov. 1, 2013, so long as that person has not re-enrolled in another school within three years. Education officials say they plan to implement this provision before the rule takes effect on July 1, 2017 to streamline loan forgiveness for eligible Corinthian borrowers.
The move in part address concerns raised by Sen. Elizabeth Warren (D-Mass.), who last month urged Education Secretary John B. King Jr. to automatically cancel the federal debt of Corinthian students facing some form of debt collection. Warren’s office found that the government was seizing the tax refunds, tax credits and other benefits of more than 30,000 borrowers eligible for forgiveness, while garnishing the wages of another 4,000.
As it stands, the department estimates that about 250,000 students who attended Corinthian’s Everest and Wyotech schools in 24 states might be eligible for debt relief because the colleges widely misrepresented job placement rates. Yet just 82,000 people have filed claims as of early October, despite efforts to notify former students through mailers, email, partner organizations and other means. Of those claims, the department has approved 15,694 for a total of $247 million in loan forgiveness.
The glacial pace of sorting through the claims has activists calling for blanket forgiveness for Corinthian students covered by the department’s fraud findings.
“If you do the math, there are well over 80 percent of folks who are eligible that either don’t know to apply or have applied and the Education Department hasn’t done anything with their application,” said Alexis Goldstein, senior policy analyst at the progressive Americans for Financial Reform. “I don’t understand why the department is insisting on doing this person by person, instead of just approving students automatically.”
Other advocates are concerned that the final rules still leave group loan discharge to the discretion of the Education Secretary, and the federal statute will supersede stronger state laws.
“The group relief provision will only be effective in actually providing student relief if the department commits to making it so,” said Abby Shaforth, an attorney at the National Consumer Law Center. “Since most students who are defrauded will not know about their right to student loan discharge, it will be essential that the department act to pursue this relief on their behalf.”
By the department’s own estimates, the new regulation could have an annual budget impact of anywhere from $199 million to $4.2 billion. To limit financial risk to taxpayers, the government is expanding the conditions under which colleges have to get a letter of credit from a bank assuring the availability of at least 10 percent of the total amount of federal financial aid funds it receives. Among the circumstances that would trigger a letter are lawsuits filed by federal agencies, defaults on debt obligations and enforcement action taken by an accreditation agency.
The financial obligation and complexities of the new regulations have raised the ire of some education groups.
“The department can continue to mislead taxpayers and Congress about the impact of this regulation, but the truth is this regulation puts the future of career education in America at risk,” said Steve Gunderson, president of the for-profit trade group Career Education Colleges and Universities. “This regulation will limit career education opportunities for new traditional students and ultimately deny millions of Americans a pathway to improving their life and growing the American economy.”
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