Student Debt Cancellations Begin: Government To "Forgive" $3.6 Billion After Corinthian Closure

Tyler Durden's picture

In late April, we asked if for-profit college closures would represent the next multi-billion dollar taxpayer-funded bailout. While the country’s $1.3 trillion student debt bubble represents a very real risk to taxpayers over time, for-profit institutions pose a more immediate threat. 

From a ‘big picture perspective, the push for student loan forgiveness and “debt-free” higher education is certainly kicking into high gear, with the likes of Elizabeth Warren and Bernie Sanders pushing ideas such as a tax on stock transactions to fund college education in America. Meanwhile, The White House is exploring more “efficient” ways for students to discharge debt in bankruptcy and the “cancel all student debt” calls have begun in earnest. That said, any kind of sweeping overhaul will likely take years to implement, but in the mean time, IBR repayment programs allow students whose post-graduation disposable income isn’t deemed sufficient, to simply pay nothing on the way to total debt forgiveness in 25 years. Clearly, many borrowers will, at some point in their lives, make enough to pay something each month, but the point is that the government is now actively promoting the fact that the full principal needn’t be repaid and this, in turn, has led to the proliferation of IBR plans and rising default risk for student loan-backed ABS. 

So that’s the long-term outlook, and as we’ve said repeatedly, this likely won’t end well for taxpayers. But there’s a more immediate threat and it comes from for-profit college closures.

To recap, the for-profit sector has been under intense government scrutiny for years due to, among other things, deceptive recruiting strategies and fabricated data on post-graduation job placement rates. These institutions rely heavily on federal student loans for their very existence, even as many are publicly traded and pay their CEOs millions. In addition, tuition rates at for-profit colleges are, on average, double the rates charged by large public universities, a fact which explains why nearly 90% of students at for-profit schools have taken out loans to pay for their education.

 

As we discussed a few months back, the delinquency and default problem that hangs over the student debt bubble is far worse for loans extended to students that attend for-profit colleges than for those who attend or have attended public institutions (note the discrepancy in share of enrollment versus share of defualts):

This, along with poor graduation rates and allegations of deceptive marketing practices, has led to increased government scrutiny of the for-profit sector, scrutiny which ultimately caused Corinthian Colleges to wind down operations last year amid allegations it falsified job placement rates.

The company — which is publicly traded — received nearly $1.5 billion per year in financial aid funding from the government, meaning the US taxpayer was subsidizing federal loans to students who very well may have been getting a subpar education and were thus even more likely to get behind on their loans and eventually default. 

Corinthian was able to sell off many of its campuses in November and although the writing has been on the wall for quite sometime, the company closed its remaining physical campus in late April without notice to students or faculty.

As we noted when the doors were shut, for-profit students won’t have a particularly easy time transferring their credits (meaning they would have to start over at another school if they wanted to complete their degrees), and so will likely seek to take advantage of their 'right' to have their debt discharged. Fast forward to late May and sure enough, the government was scrambling to figure out what to do after Secretary of Education Arne Duncan received a group request from 78,000 students requesting loan forgiveness. 

At the time, Reuters said that because the government had never used its authority to cancel student debt on a large scale, the Department of Education was "unsure how it would work," to which we responded as follows: 

Well Department of Education, allow us to tell you how the debt “relief” will work. You will end up being forced to write it off because you closed down the school.

 

And while your decision to shutter the college was likely the right move given the for-profit industry’s reputation for absurdly predatory recruiting practices, you have no one to blame but yourself for allowing these institutions to live off of billions in federal loans for years (while their CEOs pulled in millions in compensation), when you likely knew that in the end, they would have to be closed down once Congress got wind of how they went about luring students. 

Sure enough, The Department of Education now says it will forgive federal student loans made to Corinthian students who can prove they were victims of fraud. The potential cost to taxpayers: nearly $4 billion. And that is for just one for-profit school. AP has more:

The federal government will erase much of the debt of students who attended the now-defunct Corinthian Colleges, officials announced Monday, as part of a new plan that could cost taxpayers as much as $3.6 billion.

 

Corinthian Colleges was one of the largest for-profit schools when it nearly collapsed last year and became a symbol of fraud in the world of higher education and student loans. According to investigators, Corinthian schools charged exorbitant fees, lied about job prospects for its graduates and, in some cases, encouraged students to lie about their circumstances to get more federal aid.

 

In a plan orchestrated by the Department of Education, some of the Corinthian schools closed while others were sold before the chain filed for bankruptcy this spring. The biggest question has been what should happen to the debt incurred by students whose schools were sold. The law already provides for debt relief for students of schools that close, so long as they apply within 120 days.

 

The latest plan expands debt relief to students who attended a now-closed school as far back as a year ago. And it streamlines the process for students whose schools were sold but believe they were victims of fraud.

 

"We will make this process as easy as possible for them, including by considering claims in groups wherever possible, and hold institutions accountable," Education Secretary Arne Duncan said in a statement.

 

As an example, the department said it has already found that many programs at a California subsidiary of Corinthian Colleges, known as Heald College, were "misrepresented" to students. So any student enrolled in that school between 2010 and 2015 would likely qualify for relief.

 

The amount of debt relief could be staggering. Officials estimate that some 40,000 borrowers at the Heald College alone took on more than $540 million in loans that potentially qualify for debt relief.

 

But the final amount could climb significantly when looking across all Corinthian Schools, which include Everest and WyoTech. In all, the department estimates that about $3.6 billion in federal loans was given to Corinthian students.

This precedent set by this decision is precisely what we warned about nearly two months ago. In essence, this means that if the government continues to crack down on for-profit schools, the ensuing debt cancellations will run into the tens, if not hundreds of billions.

WSJ has more on the fallout:

Officials said that under the emerging plan, the government will consider forgiving any loans made directly by the government—those held by the majority of the 43 million Americans with student debt—so long as the borrower can document a school persuaded him or her to take out the loan under conditions that would violate state laws.

 

The Education Department plans to use a provision of a decades-old federal law that allows borrowers to have loans discharged if they can prove their schools broke a state law—such as by using false advertising or other deception—to lure them to apply and borrow funds.

 

Federal officials acknowledged the potentially high cost of the policy. In the case of Corinthian alone, the Education Department said 350,000 Americans who owe roughly $3.5 billion in loans could be eligible for forgiveness. In all, Americans owe more than $1.2 trillion in outstanding student debt.

 

Federal officials declined to disclose the potential total amount of loans that could be eligible for forgiveness.

 

Under Secretary of Education Ted Mitchell said the agency realized the move could invite applications from across higher education, whether from community college students or law-school graduates. The agency said it would hire a “special master” to figure out many of the details, including what standards the department should use to determine whether a school had violated state law. The department also would likely hire additional personnel to handle the applications.

 

Mr. Duncan, the education secretary, said Corinthian won’t be the last company to come under close government scrutiny. “There may be more,” he said.

 

Various arms of the federal government have become more aggressive in pursuing for-profit schools for misrepresentations. Ashworth College, an online college based in Norcross, Ga., agreed late last month to settle Federal Trade Commission allegations that the school misrepresented how well it prepared students for certain vocational licenses and whether students could transfer credits from Ashworth to other schools.

 

Meanwhile, the Securities and Exchange Commission announced in May that it had brought fraud charges against ITT Educational Services Inc. and two of its top executives, alleging they misled investors about the financial prospects of some internal student-loan programs.

We'll close with what we said last month when we last discussed the idea of debt discharge for Corinthian students because, frankly, our assessment proved extremely prescient.

The real question now is whether continued pressure on for-profit colleges will result in further closures and more petitions from hundreds of thousands of students with hundreds of billions of loans they now know can be legally discharged. Note that we have not used the term "canceled", because as we like to remind readers, liabilities are never "canceled", they are simply written off by the person for whom they are an asset.

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kowalli's picture

someone will pay for this. YOu can't "forgive" the work

Deathrips's picture

Governments have no money. They just forced americans and future generations to collectively take another up the ass for the team.

 

Wheres my refund on my loans?

 

RIPS

max2205's picture

And again,  poof it's gone

And Again nobody goes to jail

And again the govt washes it's hands

And Again there will be no reform

 

Perfect

 

FSA FSA FSA in the USSA!

greenskeeper carl's picture

Sorry, but this is kinda a non-story. AT LEAST half of that trillion dollar plus student loan debt is going to be written off eventually, and that amount grows each and every day. 4 billion dollars isn't shit. And, as I like to remind everyone to put things into perspective, the bernank was conjuring that amount out of thin air about every day and a half for quite a while. This little debt write off is but the tip of the iceberg.

Remember to pay your taxes serf, this shit isn't "free" in every meaning of the word....

wee-weed up's picture

 

 

Unfortunately, all the non-producer voters who put Obozo in office - twice...

And all the same non-producer voters who will vote for Hitlery next year...

Don't have a lot of "skin in the game" and don't give a shit when it comes to paying taxes like us "producers" who work full-time every day...

Actually, they're laughing at us. And in their hilarity, they're being joined by all the other non-producers our Gov't is letting stream across our southern border.

DeadFred's picture

Until the EMP, oops, wrong article.

LetThemEatRand's picture

The problem is much deeper.  The schools were for profit and it seems everyone agrees they lied and committed fraud upon their students.  The executives made hundreds of millions if not billions of dollars, and were allowed to file corporate bankruptcy while keeping the loot.  The government never should have underwritten these loans in the first place, and there should be criminal prosecutions if there was fraud by the school management.  The students also share fault for taking out loans for crappy schools, but I would say of all the players they were the least culpable.  The money should be clawed back from the school's management, not covered by taxpayers.

sun tzu's picture

Prison, not petty fines. Same goes for Wall Street and DC.

SoCalBusted's picture

Sounds like the housing buble - rinse and repeat

NoDebt's picture

Government owns higher ed.  They aren't going to let private for-profit companies muscle in for a quick buck.  Don't expect this to be the start of broader student loan forgiveness.  The government needs it's debt slaves like everyone else does.

Fish Gone Bad's picture

The important phrase here was:

who can prove they were victims of fraud

Is that ever going to happen?  Everyone wrings their hands and shakes their fists, and in the end (pun intended), the students will get double penetrated.  First by the school and then by whomever is carrying the loan papers. 

 

 

 

tenpanhandle's picture

Its my (taxpayer idiot) money and I do not forgive them!!!

THE 4th Quadrant's picture

"Governments have no money."
This is the first time i disagree with you.

Your money/wealth is a .gov asset bitches! Wake up!

kchrisc's picture

Technically, the banksters have no money either.

Liberty is a demand. Tyranny is submission..

gimme-gimme-gimme's picture

These student loans are un-secured.

 

I'm sure when the un-employed student with a diploma from a useless for profit post secondary education goes bankrupt they have nothing to their name and a worthless piece of paper.

 

The sad thing is that they could even get a loan for some of the universities/colleges.  I've read articles claiming a lot of these for profit schools fill out all the student loan application forms for the students and mis-represent a lot of the facts.  They then get the dumb suckers to sign for a crap loan to go to a crap school.

 

The only winners are these schools who charge through the ass for tuition and leave the students/government bakced loans to be taken on by the end users. 

TeamDepends's picture

So you want your debt to go away? Assume the position.

tenpanhandle's picture

You mean standing in the voting booth?

mojine's picture

standing in voting booth

bending over

same thing 

doctor10's picture

sooo now ..exactly which colleges and which "students" do we taxpayers get to pay for?

In addition to the college tuitions we have already paid in our families?

ted41776's picture

and how about all those poor saps that spent all that time working their asses off to pay off their loans? are they going to get their money back? this whole system is a fucking joke, it punishes those who work hard and rewards the failures

TungstenBars's picture

This whole system is a fucking joke.

 

You can say that again. 

NoPension's picture

Okay,
" this whole system is a fucking joke."

onewayticket2's picture

Moral hazard. Again. Sad.

Hillary to take credit for the forgiveness in 3,2,1....

Son of Loki's picture

<< and how about all those poor saps that spent all that time working their asses off to pay off their loans? >>

 

Like me! I regret working overtime and taking a 2nd job....phuk this !

 

 

" This whole sytem is a fucking joke! "

~ Famous 21st Century ZH Philosopher

Ballin D's picture

fuck, what about the poor saps who were smart enough to research their school who are equally unemployed? Theyre more deserving than these idiots (though nobody 'deserves' a bailout). This is a bailout straight to the pockets of the weakest and dumbest members of the young population.

greenskeeper carl's picture

True, but that segment of the population is also the dumbest and therefore most likely to spend their new disposable income of mindless consumption, which is exactly what our owners want. Free of that debt, they will now have the ability to run up new credit card debt and help keep the Ponzi alive a little longer.

Global Observer's picture

Theyre more deserving than these idiots

Hillary will promise to forgive their debts once elected.

SkySavage's picture

Eventually, everybody will stop paying. Then we can finally get this thing over with and start fresh.

fingers crossed...

you enjoy myself's picture

it's exactly like those immigrants that were foolish enough to come here legally, pay thousands for lawyers, pay their taxes, and wait a decade for citizenship.  they're pissed.  which makes me wonder if, politically, student loan forgiveness is really in the cards.  you can argue we don't have the money, but really, what's another trillion on top of the other $100T?  that won't stop a politician.  but the millions of grads that bothered to pay off their debt will be insane with rage, and likely demand a refund.  and that we really don't have the money for.

XitSam's picture

Or enlisted in the Army (peacetime), maxed the educational benefits, got out, worked part time while getting a degree. Can I get 4 years of my life back?

jazz571027's picture

The potential cost to taxpayers: nearly $4 billion

What a crock of crapola...

The student's promissory note (with ONE signature - not even close to being a contract) was shuttled to the Federal Reserve Window and DEBT was created - NOT money, USD, or cash. 

DEBT - plain old simple DEBT

So the Taxpayer's should tell the FED to go pound sand...

booboo's picture

meh, it's just jew confetti, it won't be worth shit in a few years and the pensioned praetorian guard standing on the ramparts will turn their guns 180 degrees.

TungstenBars's picture

I'm looking forward to the day those criminals with badges protecting criminals in suits realize their pension is gone too.

 

That will be a fun day. 

rlouis's picture

Besides not having learned anything from a BS "school" the lesson here is... getting ripped off by shysters is ok becasue the government will make it alright? 

This sounds like one of Krugman's ideas.  Next on the list is the war on Mars.

 

Joebloinvestor's picture

Why weren't car loans forgiven when GM went BK?

 

When was Goldman Sachs selling bundled student loans?

 

They must have.

Earl Slaughter-- Truck Driver.'s picture

"When was Goldman Sachs selling bundled student loans?"

 

http://www.structuredfinancenews.com/news/consumer_abs/sofi-ups-protecti...

 

Heh-heh-heh! The vampire-squid's way ahead of you!

bthunder's picture

Did anyone ask how do the students that paid their own money feel about this? They don't get anything out of the deal, but they're still jobless!

I bet they're rethinking voting for  "hope and change"

A new definition of "sucker" is he, who lives within his/her means and does not borrow money.

And there's a sucker born every minute. 

THE 4th Quadrant's picture

Obama girl was soooooooooooo cute!

booboo's picture

"did anyone ask how do the students that paid their own money feel about this? They don't get anything out of the deal, but they're still jobless!"

ahh, getting their first taste how the state actually operates. No soup for you bitchez!

mademesmile's picture

Is the ONLY case where for profit is worse than a public, govertnemt run system?

I must be missing something.

Normalcy Bias's picture

If those dumb bastards had just stuck with making soft, rich leather for Chrysler Cordobas, this mess would never have happened in the first place!

Manipuflation's picture

LOL!!!  For those who do not know what is being referred to on that post it is this.

 

https://www.youtube.com/watch?v=vIL3fbGbU2o

Thanks for that one NB.:-)

booboo's picture

That's Corintian leather.

LawsofPhysics's picture

Who decides who's debt is forgiven? Everyone who is making student debt payments should stop immediately. Fascism bitchez, if you are white, you pay, for everyone else shit's free.

LawsofPhysics's picture

Moral hazard is real motherfucker once everyone figures out there are no "rules"...

Miffed Microbiologist's picture

This is truly a dilemma. I just recently found out I will be paid more on State disability when I take a medical leave of absence for surgery than my take home pay. Simply unbelievable. I see some other fertile minds have been turning in regards to this fact.

Miffed

Miffed Microbiologist's picture

Too late for mine. She just paid off her 50k on her own a few weeks ago. I guess I should have told her, welcome to our world and enjoy manning the oars.

Miffed