Loans Revolt by Thousands Claiming Trickery For-Profit Colleges Face

Brittany Prock of Merit, Tex., had a longstanding dream of becoming a detective. To pursue her ambition, she enrolled in the criminal justice program of , operated by , one of the nation’s largest for-profit education companies.

“The rep I talked to told me how great it would be, how they’d help me find a job when I graduated, and how their grads were highly sought after,” she said.

loans students

But when she graduated in 2010, Ms. Prock said, the only career help she got was a listing

of jobs from sites like Craigslist — and one call about a job with a janitorial service. Now 36, she owes $83,542 in federal and private debt, and is no closer to a criminal justice job.

So she has gone on strike — refusing to pay back her loans.

About 150 former students have joined the debt strike. More than 1,000 others are formally asking the to wipe out their debt, arguing that the school used false graduation and placement statistics to entice them into taking out burdensome debt. And many of the 16,000 students whose schools were closed last week are also likely to apply for loan discharges.

Their effort could cost the department — and ultimately taxpayers — millions of dollars, raising questions about the department’s double role as both lender and collector of .

Founded in 1995, Corinthian bought more than a dozen struggling vocational colleges, and by 2010 enrolled more than 110,000 students online and at 100 Everest, Heald and WyoTech campuses nationwide. But it has long come under fire from federal and state regulators, with a host of investigations and lawsuits charging falsified placement rates, deceptive marketing and predatory recruiting — targeting the most vulnerable low-income students.

The Education Department forced it to sell most of its campuses last year, and on April 26 its last campuses closed, leaving 16,000 students, most of them in California, in the lurch. Also last month, the department fined Corinthian $30 million for 947 misrepresentations of placement rates, findings that Corinthian disputed.

In dealing with higher education institutions, the Education Department has several different — and some say, conflicting — roles to fill.

The department itself provides the money for federal student loans, and collects payments from students. It also decides when colleges do not meet the basic eligibility standards to receive federal student funds, which provide almost all the revenue of for-profit colleges like Corinthian.

“At this point the department is primarily a debt collector, but it’s supposed to protect students from predatory colleges while simultaneously making money as a mass issuer of loans,” said , a member of the , a volunteer group that organized students like Ms. Prock in their debt strike.

“So the department first makes the loans that lets students go to these fraudulent for-profit colleges,” he continued, “and then when the students can’t pay back the loans, the department goes after them.”

, under secretary of education, said in a recent interview that he saw no conflict in the department’s role. “We actually think the convergence of these responsibilities allows us to focus on student welfare,” he said.

But as the Corinthian saga illustrates, it can be hard to sort out which interests the department considers paramount.

Last year, department officials suspended Corinthian’s flow of federal student aid after the company failed to produce required records. This brought on an acute cash crisis.

If Corinthian had closed its doors, the department might have had to pay an estimated $1.2 billion to wipe out the debt of the 72,000 enrolled students. So instead the department brokered the sale of most of the campuses to ECMC, a loan-servicing company that had never run an educational institution, and in the process sidestepped the problem of federal loan forgiveness.

As part of the sale, the negotiated $480 million of forgiveness for students’ private loans. Their federal loans, which can be discharged only by the Department of Education, stayed intact.

The California campuses stayed open because the state attorney general, , who has a pending lawsuit against the company, refused to give the buyer a waiver from Corinthian’s liability. Those last campuses were closed, though, on April 26.

Mr. Mitchell, who arranged the sale, said that it avoided disruption of student lives, that ECMC had been an attractive buyer and that the department was pleased with its performance so far.

In recent years, for-profit colleges like Corinthian produce a disproportionate share — almost half — of students who default on their loans. Student loan debt now stands at $1.2 trillion, more than double the level of a decade ago. Forty million Americans have outstanding student loans, up from 29 million in 2008. The growth of this debt has many economists and public officials worrying that a whole generation of young Americans will be stalled, unable to buy houses or cars or get an education that leads to a good job.

“There was urgency before, but now there is even more, that the Education Department step in to help the thousands of former Corinthian students starting their lives with boatloads of debt,” said , the attorney general of Massachusetts, who has a pending lawsuit against Corinthian.

Ms. Healey and eight other state attorneys general, as well as a group of Democratic senators and a coalition of labor, consumer and education groups, are pushing the department for broad debt relief.

“Given the extensive evidence of widespread fraud at Corinthian Colleges, we believe all current and former students deserve federal loan discharges,” the coalition said Friday in a letter to Education Secretary Arne Duncan. The letter also urged the department to stop telling students from the 30 newly closed campuses that they could transfer to other for-profit colleges that are also under investigation.

The students seeking debt relief fall into different categories. The 16,000 students whose schools closed last week have a right to loan forgiveness as long as they do not transfer their credits to another institution. The legal status of claims by the debt strikers and other former students who say they were defrauded is murkier, but they may have their debt wiped out if they can show that the company violated state law, and injured them.

The Debt Collective and its backers want the department to deal with the debt-forgiveness claims on a group basis, much like complaints under lemon laws, in which the claimants must show that they purchased a defective car, but not that their particular car malfunctioned and caused them a particular injury. Otherwise, the group says, claimants would have “to jump through hoops to receive debt relief,” which it called “wasteful.”

But Mr. Mitchell said in the interview that he was leaning toward requiring each individual to prove his or her own injury because the injuries could be different in each case.

Mr. Duncan had been planning to hold a meeting on Monday to propose a solution to students’ claims. But on Friday afternoon, the Debt Collective said it would not attend such a meeting because it opposed the individualized process that it believed the department would present.

, a spokeswoman for the department, said in a statement that the department was “disappointed.”

“We are committed to ensuring that students who have been the victim of fraud receive all debt relief to which they are entitled,” she said.

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