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In the past six months, more than 7,500 borrowers owing $164 million have applied to have their student debt expunged under an obscure federal law that had been applied only in three instances before last year. The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as by lying about their graduates’ earnings.
The U.S.
Education Department has already agreed to cancel nearly $28 million of
that debt for 1,300 former students of Corinthian Colleges—the for-profit chain that liquidated in bankruptcy last year. The department has indicated that many more will likely get forgiveness.
The program
could prove to be one of the few lifelines for hundreds of thousands of
Americans buried in student debt after attending disreputable schools
that failed to land them a decent job. Federal law prohibits student
debt from being discharged in bankruptcy, except in rare circumstances,
and the Supreme Court last week declined to hear a case that could have
expanded bankruptcy options.
The sudden
surge in claims has flummoxed the Education Department, which says the
1994 forgiveness program is overly vague. The law doesn’t specify, for
example, what proof is needed to demonstrate a school committed fraud.
Last week, the department began a monthslong negotiation with
representatives of students, schools and lenders to set clear rules,
including when the department can go after institutions to claw back
tuition money funded by student loans.
Education
Department officials say they are still trying to grasp the potential
bill that will be footed by taxpayers. They say the cost of forgiveness
could ultimately be in the billions of dollars.
“We just don’t
know” the potential scope, said Ted Mitchell, the Education Department’s
undersecretary. “This is new territory for us.”
Mr. Mitchell
added that borrowers are entitled to forgiveness—as well as potential
reimbursement of repaid loans—if they have been defrauded, regardless of
the taxpayer cost. “The law is clear about giving students redress when
they’ve been defrauded,” he said.
Andrew Kelly of
the American Enterprise Institute, a conservative think tank, said
there is a danger that the program will become overly broad,
encompassing not just instances of outright fraud, but also cases in
which borrowers simply regret taking out the debt because they can’t
find a job, through no fault of the colleges.
“It gets much
more difficult when students say, ‘Well, I was told this would improve
my job prospects.… I don’t have a job, and I’m mad about it, and I think
I’m defrauded,’” Mr. Kelly said.
The surge in
applications reflects the growing savvy of student activists, who
discovered the law last year after it had largely sat dormant for two
decades. Education Department officials say the agency failed to draft
rules after the law was passed in the early 1990s and lacked the urgency
to do so because it had only received five applications—three of them
granted—before last year.
The clamoring
for forgiveness represents the fallout of a college-enrollment
boom—driven by a surge in students attending for-profit colleges—that
caused student debt to nearly triple in the past decade to $1.2
trillion, New York Federal Reserve figures show. Seven million Americans
have defaulted, government data show.
So far, almost
all of the borrowers applying for forgiveness under the 1994 program
attended for-profit schools. Three-quarters went to Corinthian-owned
institutions, while hundreds of others attended the Art Institutes,
owned by Education Management Corp.; and ITT Technical Institutes, owned by ITT Educational Services Inc. All three have been the subject of federal investigations into illegal recruiting tactics in recent years.
An Art
Institutes spokesman declined to comment. Corinthian Colleges was
liquidated in bankruptcy last year; the company denied allegations of
illegal recruiting tactics.
ITT said it
wants “to assist students with a legitimate grievance.” But it added
that it believes the company has been unfairly targeted by the Obama
administration in what it characterized as a broad campaign against
for-profit colleges.
In letters to
the Education Department, borrowers speak of frayed lives after taking
on huge debts to attend schools that they say provided inept instructors
and failed to land them the industry jobs they promised.
“I feel robbed of my life,” wrote one student who
said she owes $114,000 in federal student debt—most of it in her
mother’s name—for her time at a branch of the Art Institutes chain of
for-profit schools. “Even after paying my student loans on time and in
full every month for over seven years, I’ve barely made a dent.”
Syd Andrade’s
story is emblematic. He said in an interview that during his high-school
senior year, he received a call from an Art Institutes recruiter
promising “great facilities, great teachers, use of industry-standard
software” for a game-art design program.
Mr. Andrade,
who graduated from the company’s Tampa, Fla., location, said the classes
used outdated software and were taught by an instructor who knew less
than the students. “Most of the time spent in her classes were us
teaching her,” he said. “It was a group effort of everyone trying to
learn together.”
The school had
also promised to help him land an industry job, he said. But when he
graduated in 2011, the school placed him in an $8-an-hour job working
behind the counter at a local Office Depot. He said they did the same for his girlfriend, another graduate of the school.
Mr. Andrade and
his girlfriend moved to Austin, Texas, where he now makes $44,000 a
year working in technical support for a major media company, outside his
desired field. “They promised us to get jobs in the field, and most of
us ended up at Office Depot,” he said.
The Art Institutes spokesman, Bob Greenlee, declined to comment.
The case of Mr.
Andrade, who is trying to document the school’s actions, points to
tough decisions facing the Education Department. Many students say
recruiters verbally made misleading promises and cited fraudulent
job-placement data, but the students often lack documentation to prove
it. Moreover, consumer-protection laws vary by state, and a recruiting
practice might be legal in one state but illegal in another. The
Education Department has hired a special master to sort through existing
claims as it drafts permanent rules.
