The Student Loan Write-offs Have Begun: 78,000 Students File For Debt Discharge After Corinthian Closures

When Corinthian Colleges abruptly shuttered its remaining campuses late last month we asked if for-profit colleges will be the next multi-billion dollar taxpayer-sponsored bailout. That may have seemed like a bit of hyperbole on our part but in fact it was not, because as we explained then, students left out in the cold by Corinthian owed some $200 million in federal student loans and when the government forces an institution to close its doors (which is effectively what happened with Corinthian), students can apply to have their debt discharged. 

Because Corinthian is a for-profit institution, 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), we said that more likely than not, the government (i.e. taxpayers) would end up eating the cost of forgiving their debt. 

Fast forward three weeks and sure enough, the government is scrambling to figure out what to do after Secretary of Education Arne Duncan received a group request from 78,000 students requesting loan forgiveness. 

Via Reuters:

The bankruptcy of Corinthian Colleges Inc, one of the biggest for-profit college chains, has set off a scramble to find a way to wipe away billions of dollars of student loans for those who attended its campuses.

 

More than 50 consumer and labor organizations sent a joint petition on Tuesday to U.S. Secretary of Education Arne Duncan, urging him to cancel federal student loans owed by 78,000 who attended Corinthian schools.

 

The groups, including the National Consumer Law Center, said the Department of Education had the authority because Corinthian misrepresented its job placement rates and defrauded students by enrolling them in high-cost, low-quality classes.

 

Corinthian settled allegations about misrepresenting job placements with the California attorney general in 2007.

 

NCLC lawyer Robyn Smith said there was no precedent for the department to cancel student debt in the way the groups were urging.

 

"Unfortunately, they haven't used this authority before," she said.

 

The Department of Education said it had not decided how any debt relief would work.

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. 

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 tens 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.

Finally, it's worth noting that nearly every student displaced by a for-profit closure will have student loans because when tuition is double that charged by public institutions, taking out loans is the only option for 88% of attendees. In other words, when the government finally goes all-in on its for-profit crackdown, not only will every student have debt, but the outstanding amount will be about 36% larger than that carried by graduates of public schools. 

So yes, this could indeed wind up being a multi-billion dollar taxpayer sponsored bailout, and the first $200 million writedown is just around the corner.