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Arne Duncan
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For-Profit Schools Get Bailed Out, Students Get Sold Out?

Will the Department of Education abandon Corinthian students because it profits off their debt?


When the subprime crisis hit, Congress agreed to bailout the financial industry only after they were promised homeowners would see relief, too. But in the years since, it’s become clear even to Tim Geithner, the architect of the bailouts, that while the Administration went out of its way to save the arsonists of the crisis, the people burned by it were left without an Emergency Room.

Today, history risks repeating itself, as students scammed by a predatory for-profit school have yet to see meaningful relief — even as the school itself was bailed out by the government. And just as in the foreclosure crisis, the very entity in charge of providing relief to victimized borrowers has a financial incentive to leave them screwed.

Corinthian Colleges, Inc. was a chain of for-profit schools that finally collapsed yesterday after facing charges of predatory lending, false job placement statistics, deceptive marketing, securities fraud, and the unlawful use of military seals in advertisements. These abuses all happened at a school that essentially lived off taxpayer support — Corinthian received $1.2 billion in federal student loan money last year. But instead of closing the failed school down — which would have made over 72,000 students eligible for a refund — the Department of Education decided to save it. The Department facilitated a sale of 56 Corinthian campuses to the debt collector ECMC, and even bailed the school out — providing a $16 million emergency cash infusion last June.

Corinthian, like the big banks built on fraud that came before it, was Too Big To Fail.

Students of Corinthian have not seen the same government generosity, despite supportive rhetoric directed their way from the Obama Administration. In his debut post for Medium, Secretary Duncan wrote that “in the United States, education is meant to be the great equalizer.” But Duncan acknowledged in a recent Senate hearing that “bad actors” like Corinthian had taken “a massive influx of taxpayer resources” only to leave students “in a worse position than where they started.” Yet, despite comments like these, the Department continues to not only defend their bailout of Corinthian, but to also collect on federal student loans incurred by the failed school’s students.

An all-volunteer group called the Debt Collective — which I am a part of — has called on the Department to cancel all current and former Corinthian students’ debt, and to set up a clear system for how other wronged borrowers can pursue the same. And even politicians have taken notice, with lawmakers and law enforcement alike — including thirteen Senators, nine state Attorneys General, and three members of the House of Representatives — sending letters to the Department calling on the students’ debt to be extinguished, given how fraudulently it was incurred.

Despite this chorus of calls, the Department has yet to act. They are, however, hinting to the press at what their approach to debt discharge might be. An anonymous Department official told BuzzFeed News that borrowers would need to “prove injury and the amount of his or her loss’ as the result of a school’s illegal acts.”

Requiring individuals to jump through legal hoops to re-prove injury already demonstrated by the lawsuits Corinthian faces means that many borrowers who deserve relief likely won’t get it. A similar case from the mid-1990s provides an appropriate, if worrying, case study. At that time, a for-profit chain of beauty and trade schools called Wilfred was found to have routinely falsified the eligibility of students for financial aid, leaving thousands of its former students eligible for debt discharges. But the Department did not help these students get the debt cancellation they deserved. As attorney Eileen Connor wrote in the Huffington Post:

“[M]ost of those who attended a Wilfred school — often immigrant women without a high school education — have no way of knowing, unless the Department tells them, that they may be eligible for discharge. Yet nearly 20 years after reaching the conclusion that Wilfred falsified loans, the Department is still actively enforcing at least 60,000 of these loans, often by means of involuntary collection such as wage garnishment and tax refund offset…the Department vigorously opposed our request that it send a notice to every borrower who attended this fraudulent institution, and temporarily suspend collection.”

The rumblings in the press about the Department’s approach to Corinthian echoes its approach with Wilfred.

The Department appears more interested in collecting defrauded students’ debt than in providing relief to all who were victimized.

The impulse to limit possible relief to victims of fraud isn’t new. The same hesitation doomed the foreclosure crisis-era relief plan known as the Home Affordable Mortgage Program, or HAMP for short. HAMP was added to TARP to assuage Congressional concerns that the bailout would only help the banks. It provided a cash incentive to banks and mortgage companies to modify loans for borrowers facing foreclosure. But the requirements were so convoluted that only about 1 million Americans actually saw relief through the program — far short of the 3–4 million Americans the Administration promised the program would help. And as David Dayen reported for Salon, Bank of America whistleblowers alleged that HAMP was not so much of a relief program, but instead was viewed by banks as a way “to squeeze as much money as possible out of struggling borrowers before eventually foreclosing on them.”

Part of HAMP’s failure came from perverse incentives: the banks and servicers making the decisions on modifications had an interest in gouging borrowers. Academics and legal experts like Diane Thompson, Adam Levitin and Tara Twomey have all written about how servicers were incentivized to laden borrowers with hefty, improper fees, and then foreclose, rather than provide sustainable mortgage-saving loan modifications. This same perverse incentive to squeeze borrowers — with long-term sustainability of the situation be damned — is present in the Department of Education’s impending decision on Corinthian debt relief. After all, the Department of Education makes a profit off the student loan program, something a number of policymakers like Senators Elizabeth Warren and Jeff Merkley have pointed out again and again.

In the foreclosure crisis, regulators missed the fraud to begin with, and then mediated the aid meant to mitigate the harm through the same intermediaries that caused it — aka, the banks. In the case of Corinthian, the Department of Education is doing the same — asking borrowers to muddle along and pay their fraudulent debts, and telling them to turn to bailed-out schools, now owned by ECMC, to complete their degree programs.

For-profit colleges and the financial industry have a lot in common. Both regularly targeted vulnerable populations — veterans, minorities, and low-income people. Both used high-pressure sales tactics to pressure borrowers into high-interest loans with deceptive terms. Both sold the same story about “respectability” and the American Dream to entice low-income people to take on massive, predatory debt, and then used shame to convince people of their moral obligation to pay it. And both have armies of lobbyists, massive government subsidies, and bailouts when they run into trouble.

But there’s one key difference between the foreclosure crisis and the Corinthian one: Corinthian students are organizing. 107 Corinthian students (and counting) have said they aren’t going to wait for the Department of Education to cancel their debts — they are refusing to pay them now. Their brave act applies not just a clear moral pressure on the Department, but one that hits its profits as well.

The Administration has a chance to write a new ending to the Corinthian crisis, and to create a legacy much different from the one they left with the foreclosure crisis — and they don’t need Congress to do it. The Department of Education has the authority to cancel Corinthian debts — and they should do so immediately. Given how long the Department knew about Corinthian’s fraud before they finally acted, anything less would be just another betrayal.