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Corinthian Found Guilty of Deceiving Students, Paving the Way for Loan Forgiveness

Judge Gary Feinerman of U.S. District Court for the Northern District of Illinois on Wednesday ordered Corinthian Colleges to pay $531 million to former students of Everest, WyoTech and Heald for deceiving students about potential career prospects.

The lawsuit, filed by the Consumer Financial Protection Bureau, accused the company of “fudging the numbers” and hiring its own graduates to boost job-placement rates and mislead students.

The company did not fight the case and will not pay the judgment because it was dissolved in a bankruptcy earlier this year. The ruling, however, will likely be used by former Corinthian students seeking to use Defense to Repayment as a means of getting their federal student loans forgiven.

Defense to Repayment is a little-used means of getting federal student loans forgiven. In order to get the loans forgiven, the borrower must show that they were a victim of fraud or another violation of state law at the school regardless of whether the school is open or closed.

This stands in contrast to the Closed School Discharge, which allows for a 100% discharge of Direct Loans, Federal Family Education Loan (FFEL) Program loans, or Federal Perkins Loans under either of these circumstances:

  • a school closes while the borrower is enrolled, and the borrower does not complete your program because of the closure. If the borrower was on an approved leave of absence, he or she is considered to have been enrolled at the school;
  • a school closes within 120 days after the borrower withdrew.

Neither Defense to Repayment nor Closed School Discharge are applicable to private student loans.

According to a Wall Street Journal report on the ruling:

Education Department officials said in June that legal rulings such as Wednesday’s would be a key piece of evidence working in the borrowers’ favor. “Certainly judgments in state court would be pretty critical to us,” Education Under Secretary Ted Mitchell said at the time.

David Halperin, a lawyer who advocates for changes to the for-profit college sector, said Wednesday’s ruling marked “a finding that Corinthian engaged in deception” that would pave the way for loan forgiveness. “That is the kind of finding that the Department of Education says it’s looking for in order to forgive debt by a large group of students.”

CFPB Director Richard Cordray said: “We all have much more work to do before current and past students who were hurt by Corinthian’s illegal practices can be made whole. We remain deeply concerned about risks facing student borrowers in the for-profit space and will continue to be vigilant in rooting out harmful practices.

Without Defense to Repayment, thousands of former Corinthian students who graduated years before the school’s collapse would remain liable for federal student debt incurred in connection with a certificate that is now largely useless. Officials estimate that 350,000 students owing roughly $3.5 billion could eventually have their federal student loans forgiven.

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By |October 28th, 2015|

About the Author:

I’ve been a consumer protection lawyer since 1995, working to help people end their bill problems. I’m a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.

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