Taxpayer Cost of Corinthian Collapse Soars to $350 Million

The Obama administration has written off $350 million in student debt accrued by thousands of former students of Corinthian Colleges Inc., a taxpayer tab that is likely to soar as alumni of other trade schools come forward with abuse claims.

The Education Department released the figures early Friday as it finalized a plan to help Americans defrauded by colleges, particularly corporate-owned trade schools. Enrollment at the schools soared during the 2000s and through the recession, as millions of Americans, disproportionately poor and minorities, sought to learn new skills. But federal and state regulators have accused many of the schools of illegal recruiting tactics, such as running advertisements that falsely claimed their graduates found jobs at high rates.

The rules announced Friday are intended to make it easier for former students of those schools to take advantage of a two-decade-old law known as "borrower defense" or "defense to repayment." The law, which sat largely dormant for years, relieves borrowers of the obligation to pay back their federal loans if they prove their schools used deceptive tactics.

The rules also will make it easier for prospective students to sue schools individually and in class actions. Specifically, they prohibit the schools from including provisions in contracts with their students that forced aggrieved students into arbitration and prohibited them from joining class-action lawsuits. The Education Department said such clauses have shielded the industry from lawsuits even when companies behaved badly.

Education Secretary John B. King Jr. said in a statement that the plan would ensure "students who are lied to and mistreated by their school get the relief they are owed, and that schools that harm students are held responsible for their behavior."

Steve Gunderson, head of the Career Education Colleges and Universities, the for-profit school industry's main trade group, characterized the rules as government overreach that would cause many schools to downsize or close. "This regulation will limit career education opportunities for new traditional students and ultimately deny millions of Americans a pathway to improving their life and growing the American economy," he said in a statement.

The Education Department estimates the plan will cost taxpayers between $9.5 billion to $21.2 billion over 10 years.

Officials from across higher education h ad criticized the plan, which they said would subject them to frivolous lawsuits and government sanctions even when they never intentionally deceived students. They also argued the plan would force them to turn away the most troubled students, reducing opportunities for poor people and minorities.

The Education Department has already begun using the "defense to repayment" program to help former students of Corinthian. The company liquidated in bankruptcy last year amid state and federal allegations that the company's various schools inflated graduates' employment success in marketing materials.

The agency said it has discharged $247 million in student debt owed by nearly 15, former Corinthian students under defense to repayment. In addition, it expunged $103 million owed by another 7,000 Corinthian students under a companion program known as "closed-school discharge" that helps students whose schools are closed in the middle of their studies.

The government said it is reviewing another 4,000 claims from borrowers who attended schools owned by other companies.

Some of those claims are from former students of ITT Technical Institute, w hich closed abruptly in September. The Obama administration had earlier blocked the chain from enrolling new students that used federal loans to cover tuition, effectively cutting off its main source of revenue. The Education Department made the move amid allegations from its accreditor of chronic financial mismanagement and questionable recruiting tactics. The company denied wrongdoing.

At ITT, which is operated by ITT Educational Services Inc., government officials have estimated that former students could seek forgiveness on as much as $500 million in federal loans, on par with what they projected when Corinthian liquidated last summer.

Write to Josh Mitchell at [e-mail]

(END) Dow Jones Newswires

October 28, 2016 01:25 ET (05:25 GMT)

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