ACFE Research Editor
In 2015, Corinthian Colleges, the for-profit education chain that operated schools such as Everest College, shuttered its network of campuses for good. The chain’s demise came following allegations that it falsified job placement records and graduation rates, causing the U.S. Department of Education (DOE) to deny it access to federal student loan money. Thousands of students were not only left without degrees, but also mired in debt.
Corinthian isn’t the only for-profit educational enterprise to close amid fraud allegations. ITT Tech, the behemoth of 130 campuses and 40,000 students, shut down in September 2016 waist-deep in lawsuits, federal and state investigations, and accreditation troubles. FastTrain, a college in South Florida, closed in 2012 after using deceptive pressure tactics like hiring former strippers to recruit for the school. The school’s founder, Alejandro Amor, was sentenced to eight years in prison for fraud.
After Corinthian closed, the DOE was inundated with claims from former students to have their loans discharged. Corinthian’s closure and the subsequent claims were the catalyst for the DOE’s newly formulated rules created to help former students get out of debt if they were defrauded by their schools.
For-Profit Schools and Fraud
At the heart of the matter is that for-profits rely on federal student aid for profits. Reports have shown that to fill classrooms, schools have employed aggressive and sometimes predatory recruiting and deceptive marketing practices. These practices have been aimed at low-income applicants, minorities and veterans. A 2010 Government Accountability Office investigation found that some college employees encouraged undercover applicants to falsify financial aid forms. As the Corinthian case exemplified, schools might inflate their graduation rates and their ability to place students in good jobs to bring the applicants in.
Compounding the problem is that for-profits often have much higher tuition costs than their nonprofit public school counterparts. And those high costs don’t always equal quality. Many for-profit educational programs are not accredited and often provide insufficient instruction to prepare students for careers. A 2016 study published by the National Bureau of Economic Research found that students often experience a decline in earnings after attending for-profit programs in comparison to what they earned before enrollment.
Defense to Repayment
And then there’s that thorny matter of student debt. Even if a school is no longer in existence, its former students are still on the hook for their loans. After Corinthian campuses shut down, some former students went on debt strike, refusing to pay their loans and calling for loan forgiveness. An offshoot of Occupy Wall Street called the Debt Collective organized these students under the little-known “borrower defense to repayment” provision in the U.S. Higher Education Act that allows for the discharge of debts for students defrauded by their colleges.
In February 2016, student debt activists met with DOE officials to negotiate the details of the defense to repayment provisions for debt relief. As a result, the department formulated new regulations meant to ease the process of loan forgiveness for students who are the victims of fraudulent practices by their schools.
The DOE’s new rules stipulate that institutions are responsible for paying back borrowers’ claims, and schools are required to put up collateral if they’re at risk of closure. Student borrowers who don’t re-enroll in another school within three years of their school closing may have their loans forgiven. Additionally, defrauded students can have their Pell Grant eligibility restored.
The new regulations also provide further protections for prospective students by requiring schools with poor loan repayment outcomes to warn students of this in all of their promotional materials.
Another important aspect of the new rules would limit an institution’s ability to force mandatory arbitration clauses on students — clauses that have prohibited students from seeking debt relief as a group or speaking out about their experiences.
For many, the possibility of paying off student debts in full can seem unrealistic. But when you mix in empty promises from a school that no longer exists, students are often left with few avenues of recourse — not unlike the herculean task a fraud examiner often must undertake to recover losses for a victim of fraud. As MarketWatch reported in January 2016, U.S. citizens owe a total of $1.2 trillion in student debt. The latest DOE regulations offer the possibility of easing some of that debt burden, at least for those who became victims of fraud instead of college graduates.