Education Department Delays Relief For Defrauded Student Loan Borrowers

Students who claim they were defrauded by for-profit schools owned by Corinthian Colleges Inc. into taking out federal student loans will have to wait several more months before the Obama administration decides whether to cancel their debts, the Department of Education said Thursday.

The delay in promised relief comes despite a June pledge  by Education Under Secretary Ted Mitchell that the administration would "fast-track" debt relief claims filed by students who attended  the Corinthian-owned career school Heald College. In April , the department said Heald had systematically misled students and accreditation agencies about graduates’ employment rates and showed a “blatant disregard” for the federal student loan program.

The new timeline is one of many troubling issues student advocates identified in a report  by Joseph Smith, a former North Carolina banking regulator whom Mitchell appointed as a "special master " to help the department handle what many experts reckon will be a deluge of debt relief claims from former for-profit college students. Smith's report, which the Education Department released on Thursday, says applicants who attended Heald may have to wait as long as three months for a decision on whether their loans will be canceled as part of so-called "defense to repayment" claims. 

While the Obama administration decides what to do, borrowers' debts will continue to grow as the department allows interest to accumulate and be added to loan balances. Since defaults damage credit reports, Heald borrowers in default on their loans will likely face difficulties securing new credit, applying for jobs and qualifying to rent homes during the interim. About 40,000 student borrowers who attended Corinthian schools are in default on their federal loans, a Justice Department lawyer reportedly said  in June.

"The Education Department doesn't value students' time nor does it believe that students are suffering in any real way," said Luke Herrine, an organizer with the Debt Collective group, which has helped borrowers file debt cancellation claims. "So they're taking all the time in the world to make sure there's nothing Republicans can criticize them for."

The dispute that has pitted consumer advocates and former for-profit college students against the Education Department concerns a 1993 law that gave borrowers the right to have their debts cancelled if their schools misled them into taking out federal student loans.

The previously little-used provision, which the department hadn't advertised to student borrowers, has grown in importance over the past year as the Education Department bailed out, then oversaw the implosion of, Corinthian amid a number of lawsuits alleging misconduct. The Education Department, the federal Consumer Financial Protection Bureau and state attorneys general in California and Massachusetts have formally accused the company's schools of routinely misleading prospective students into enrolling and taking out loans with false job placement and graduation rates.

Corinthian, which at its peak operated more than 120 colleges with more than 110,000 students across North America under the Everest, Wyotech and Heald brands, filed for bankruptcy  in May in the largest failure of a college chain in U.S. history.

The company has repeatedly denied it acted improperly and has fought the government lawsuits alleging wrongdoing.

In just the past few months, more than 4,100 borrowers have submitted claims to the Education Department requesting debt forgiveness by asserting they were duped into taking out federal student loans, according to Smith's report.

Among them were nearly 2,000 claims filed by Heald students, a figure that's relatively low considering the department sent students some 54,000 emails informing them of their eligibility for debt relief.

Some consumer advocates and state attorneys general wonder why the department is allowing aggrieved borrowers' debt balances to grow while their debt relief claims are evaluated. On debt-cancellation application forms , the department gives borrowers the option to delay monthly payments through a forbearance plan but doesn't inform them of their eligibility for repayment plans that limit payments to what they can afford. Such plans, which the White House has prioritized in its efforts to combat the rising burden of student debt, would put borrowers on the path to eventual loan forgiveness if their applications are denied.

"Creating a new system to handle thousands of claims will take a little bit of time," Mitchell said on a conference call with reporters, during which Smith also spoke.

While the Education Department and Smith took pains Thursday to note that their ultimate goal is to cancel defrauded borrowers' debts through a fair and efficient process, former students and their advocates fear the department, which makes loans that are ultimately used to pay schools the department oversees, is too conflicted or incompetent to ensure that borrowers who have been cheated get the relief they deserve.

"They're the ones who allowed this to happen for years on end," said Jessica King, 32, a former Everest medical assistant student from Newport News, Virginia, who belongs to a group of former students that is refusing to make payments on their federal loans as part of a "debt strike" against the department. King said a prospective employer once told her to remove Everest's name from her resume to bolster her job prospects.

"I don't know of one thing the Education Department has done to show that they're trying to do right by students," she said.

The department has a conflict of interest in deciding whether to cancel borrowers' debts because of its role in making the loans and overseeing schools, said Toby Merrill, the director of the Project on Predatory Student Lending at Harvard Law School. Its surveillance of Corinthian represents "a massive failure in terms of oversight of federal funds and programs funded by [taxpayers]," she said.

Consumer advocates have previously said  they're "concerned that the [Education] Department’s primary focus is protecting the federal government’s investment, rather than protecting the people who are least responsible for this situation -- the students."

On Tuesday, at a public event in Boston convened by Massachusetts Attorney General Maura Healey, senior Education Department officials mostly stood around while more than 20 prosecutors and mediators from Healey's office helped former Everest students fill out paperwork to have their debts canceled.

"This initial report highlights the urgent need for debt relief for students preyed upon by for-profit schools in Massachusetts and across the United States," Healey said in a statement on Thursday. Her office sued Corinthian last year for allegedly cheating students in her state. 

Smith said in his report that he would continue to evaluate the claims over the next several months as part of a campaign to ensure that borrowers' claims are treated uniformly.

"Readers should know, however, that the leadership of the department and I well understand that the success of this effort will be measured in the relief granted to aggrieved borrowers who requested relief and the establishment of fair and transparent rules for future assertion of the defense," the report said. The process will be "as easy as possible for borrowers to navigate," Smith said on the conference call. 

"We're identifying a number of issues, a number of problems with the law and regulation that we hope to square away so that we can better protect students," Mitchell said.

One of the reasons that the Education Department wants to create formalized procedures to handle debt relief claims is because the department and its loan contractors incorrectly told some borrowers earlier this year  that they had no right to seek cancellation of their debts as a result of their schools' alleged frauds. An Education Department spokeswoman later apologized.

But consumer advocates  and state and federal officials outside  the Education Department have questioned why the department is spending months -- and potentially years -- to create a process that would be unnecessary if Education Secretary Arne Duncan used his existing authority, and evidence amassed by his own department's investigators as well as by state and federal regulators and prosecutors, to cancel defrauded borrowers' debts. In these cases, advocates argue, debt forgiveness should be automatic and not require formal applications.

Herrine, of the Debt Collective, said borrowers shouldn't have to prove they were defrauded simply because the Education Department isn't doing "its job as a regulator."

Rep. Maxine Waters (D-Calif.), the top Democrat on the House Financial Services Committee, said in May  that defrauded student loan borrowers faced a potential Obama administration "boondoggle" as a result of the Education Department's failures.

"It seems kind of farcical to build up this whole process to determine whether Corinthian has defrauded borrowers" given the evidence, Merrill said.

Smith's report is the first in a series, which he said will document the department's progress in handling debt-cancellation claims. Herrine dismissed the report as "self-serving" after Smith lavished praise on the department for the "significant steps" it has taken to help allegedly defrauded borrowers and others who are eligible  for debt forgiveness as a result  of Corinthian's abrupt shutdown.

One of those steps was contacting former Heald students to notify them of their eligibility. The Education Department, which had previously fought attempts to notify defrauded borrowers of their rights, emailed the students after a bankruptcy judge reportedly  criticized the department for its lackluster efforts.

Yet the department hasn't contacted students at other Corinthian campuses whom either the department or state and federal regulators have alleged were victims of fraud. The Education Department didn't respond to inquiries about why this is the case.

For example, at one Corinthian campus in Georgia that allegedly falsified  its former students' job placement rates, "many students are now without the jobs they were led to believe they would get when they enrolled in Everest Institute," the Education Department told Corinthian executives in August of last year .

Those student borrowers would seem to be perfect candidates for debt relief based on the school's allegedly fraudulent actions, which the department itself detailed.

A 2013 lawsuit  against Corinthian filed by Kamala Harris , California's attorney general, alleged similar behavior at the company's campuses in her state.

Smith said Thursday that the Education Department was working to establish broad relief for groups of former Corinthian students who attended the company's Everest schools, similar to what it did for former Heald students.

He also said in his report that the Education Department will use evidence obtained by regulators to determine whether entire classes of borrowers -- for example, all the students in a particular program at a particular campus during a specific period -- are eligible to have their loans canceled. Prior to Smith's report, some state attorneys general had already begun to share their findings with the department.

Separately from the fraud claims, of the roughly 15,000 former Corinthian students eligible for debt forgiveness as a result of the college chain's closure, some 7,800 have filed applications with the Education Department, Smith said. The department has approved applications for about 3,100 borrowers, who collectively carry about $40 million in federal student loans.

Consumer advocates, citing federal rules, have said that Duncan could use his existing authority to wipe those debts without requiring an application. For example, the department could determine how many former Corinthian students eligible for a so-called "closed school discharge " have remained eligible by not transferring their credits to other schools, and forgive those debts based on that information.

Education Department officials didn't provide a response when asked whether the department knows how many eligible Corinthian students have yet to transfer their credits elsewhere. They also didn't explain Duncan's reluctance to use his existing authority to cancel borrowers' debts.

Nor did the Education Department answer questions about why it is apparently limiting eligibility for debt-cancellation claims to loans made directly by the department, excluding bank-based loans that are ultimately guaranteed by the department under the Federal Family Education Loan program.

The Education Department said in 1995  that borrowers with debt from the FFEL program who were defrauded by their schools were eligible to apply to have their loans canceled. However, subsequent public statements from the department have neglected to make any mention of FFEL debt relief.

Merrill said she's hopeful the Education Department will eventually cancel all loans owed by defrauded student borrowers. But she's not confident.