Government to Forgive Student Loans at Corinthian Colleges

In a move against what he called “the ethics of payday lending” in higher education, Secretary of Education Arne Duncan announced Monday that the Education Department would forgive the federal loans of tens of thousands of students who attended Corinthian Colleges, a for-profit college company that closed and filed for bankruptcy last month, amid widespread charges of fraud.

Mr. Duncan also said the department planned to develop a process to allow any student — whether from Corinthian or elsewhere — to be forgiven their loans if they had been defrauded by their colleges.

A special master would be appointed within three weeks, department officials said, to create procedures to apply for relief that are “durable, not just for Corinthian but beyond.”

Taxpayers could pay a huge price for forgiving so many federal loans; the government has never before opened debt relief to such a potentially large pool of students. The department estimated that if all 350,000 Corinthian students over the last five years applied for and received the debt relief, that cost alone could be as much as $3.5 billion.

In a news conference call on Monday afternoon, Mr. Duncan emphasized the plight of students who took on huge debt and ended up with a degree that meant little to employers, or no degree at all.

“You’d have to be made of stone not to feel for these students,” he said. “Some of these schools have brought the ethics of payday lending into higher education.”

He added, “This is our first major action on this but obviously it won’t be the last.”

Where students had been defrauded by their colleges, Mr. Duncan said, he was committed to making sure they received all the relief they were entitled to under law.

“We will make this process as easy as possible for them, including by considering claims in groups wherever possible, and hold institutions accountable,” he said.

Lauren Asher, president of the Institute for College Access and Success, praised the department’s move. “It’s important and it’s new, and it means the department is recognizing that students defrauded by Corinthian and other unscrupulous for-profit colleges deserve relief.”

But not everyone praised the plan.

“Students have been hurt, but the department is establishing a precedent that puts taxpayers on the hook for what a college may have done,” said Senator Lamar Alexander, Republican of Tennessee, and chairman of the Health, Education, Labor and Pensions Committee.

“This is one more reason it was a bad idea to make the U.S. Department of Education the banker for students as well as the regulator of their colleges,” he continued. “If your car is a lemon you don’t sue the bank that made the auto loan; you sue the car company.”

At the same time, many advocacy groups said the department’s plan did not go nearly far enough to ensure real relief for defrauded debtors.

“Each student is still going to find out about it, and apply, and it’s a complex process,” said Luke Herrine, a member of the Debt Collective, which organized a debt strike by Corinthian students, the first of its kind. “There’s no reason why they couldn’t have given blanket relief to some of these groups of students.”

Student loan debt is over $1.2 trillion, more than double the amount of a decade ago. Forty million Americans have outstanding student loans.

For-profit colleges typically get the vast majority of their revenue from federal student loans, and account for nearly half of the defaults on these loans. Many of these colleges have been criticized for spending more on marketing and recruitment than on instruction.

Founded in 1995, Corinthian became one of the country’s largest for-profit education companies, buying up struggling vocational colleges across the country. It formerly had more than 110,000 students at 100 Heald, Everest and Wyotech campuses nationwide.