Department of Education Sides Against Students to Feather Its Own Bed in For-Profit Corinthian Colleges Debacle

We hadn’t reported much on the horrorshow of for-profit Corinthian Colleges’ creative and varied ways of ripping off its students simply because the scandal seemed to be ably covered elsewhere. Par for the course for many for-profit colleges, its students had taken on hefty amounts to attend when they were unlikely to land jobs that made that much borrowing a sensible proposition. But Corinthian Colleges departed substantially from the already-dubious norms of the debt-peddaling practices of the for-profit educational-industial complex. From Distance Education:

Faced with dropping enrollment numbers as well as investigations from the Consumer Financial Protection Bureau, attorneys general in multiple states, and regulators from the Department of Education, Corinthian Colleges is on the verge of declaring bankruptcy. The charges against it include presenting false job placement data to prospective students in its marketing, altering student grades and attendance records, and questionable recruitment and student loan advisory practices. The federal government recently announced it would withhold some student aid from the company, causing a delay that the company claims necessitates the bankruptcy.

Corinthian Colleges looked to be on the way to a well-deserved demise as a result of CFPB and Department of Education interventions, as well as investigations and lawsuits by state attorneys general in twenty states along with the SEC. That seemed to imply that students were going to come out as well as they could given the abuses they’d suffered.

It turns out we were naive. After all, this is America, where debtors routinely get the short end of the stick even when the lender engaged in fraud.

The Department of Education moved, in what appeared at first to be an effort to shut down Corinthian Colleges. It demanded that the education complex produce records on its job placement rate among students. When Corinthian Colleges failed to comply, it instituted a 21-day waiting period on the company being able to access federal student aid funding. That is what precipitated a cash flow crisis and the bankruptcy threat mentioned above.

But the DoE action may instead have been to put the agency out in front of the other legal actions and investigations, particularly that of the CFPB, so as to get control of the situation. As WSWS notes:

Not uncharacteristically, the Obama administration responded with an immediate $16 million life preserver, with a total of $35 million pledged in the form of accelerated financial aid payments. The government move was unprecedented, and some have likened it to a bank-style bailout….Among CCI’s 108 institutional stockholders, the largest is Wells Fargo, a bank, followed by a whole series of hedge funds, including Shah Capital Management, FMR LLC, Dimensional Fund Advisors, Vanguard Group and Blackrock. According to a congressional report, profits increased eleven-fold at Corinthian between 2007 and 2010, growing to $240.8 million.

And as Matthew Bruckner explains today in Credit Slips, not only did the Administration rescue enable the government to escape losses on debt that otherwise could have been wiped out, but the DoE even reaped fees for salvaging this toxic operation:

While the CFPB continued to prosecute its lawsuit, the ED worked with Corinthian Colleges to find a buyer and prevent its campuses from shutting down. Why didn’t the ED join the lawsuits or pending investigations by “nearly half of the country’s state attorneys general, the Department of Justice, Securities and Exchange Commission, and the Consumer Financial Protection Bureau”?

The deal that the ED has apparently blessed may save the ED approximately $600 million, but it seems to do so at the expense of the students the ED serves. Ordinarily, when an institution of higher education closes, its students can avail themselves of the “closed school discharge,” which enables students to discharge 100% of certain federal student loans if they meet certain criteria.  But the ED has apparently approved a deal struck between Corinthian Colleges and the Education Credit Management Corporation (“ECMC”), pursuant to which many students will not be able to avail themselves of the closed school discharge.  Moreover, the terms of the sale to ECMC provide for various payments to the ED, including $12 million at closing and a $17.5 “earnout” to be paid over the next seven years. In short, the ED is preventing some students from discharging debts that many think they were fraudulently induced to take out, and will receive a direct financial benefit from an entity that appears to benefit from this decision. As a result, some consumer advocates have claimed that the ED is hopelessly conflicted.

How the ED can claim that it’s protecting students when it’s depriving some them of the choice of whether to continue their studies or discharge many of their federal, student loan obligations, especially when the ED is collecting a fee in the process?

So just like homeowners who served to foam the runway for banks, students continue to be cannon-fodder for predatory lenders, with the Department of Education taking its cut for protecting Corinthian Colleges’ allies from suffering the full consequences of being in bed with such a persistent bad actor. There seems to be no limit to the willingness of this Administration to grind down what it apparently regards as little people to do damage control for itself and its powerful allies.

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17 comments

  1. Northeaster

    “demanded that the education complex produce records on its job placement rate among students.”

    This should be demanded for all colleges and universities in addition to graduation rates. My undergrad alma mater graduates only 54% of the student body, most of which take six years to graduate, and it’s a PUBLIC university. 46% never graduate, but will still be responsible for those student loans, of course, the Chancellor of the school is a former CONgress Member and still uses his campaign coffers (after over a decade removed) to spread the partying/wealth around his cronies.

    Until RISK is put back on schools and financial institutions, there is simply no incentive for this economic raping of this nations youth to end, in an era where the ROI on a degree is diminishing (abet better than nothing). Lowering interest rates will just allow borrowers borrow more money, sending costs even higher. The demographics of those being raped isn’t just young students, there’s a lot older folks who think it’s their ticker out, or “new” job, but that story isn’t panning out either.

    http://research.stlouisfed.org/fred2/graph/?g=XOy
    http://www.newyorkfed.org/studentloandebt/

    1. Larry

      I would rather we dispense with the market fundamentals in the education market and just close the donut hole in education in this country. What I mean by that is that we fund education right up through the Ph.D. level. K-12 is an established right, an affordable education for nearly all Americans. Then we stop paying for college, which makes no sense. If you go on to get a Ph.D. in many disciplines (or an MD-Ph.D.), your education will be paid for in full. How does that make sense at all? In fact I was paid a small stipend to obtain my Ph.D. which allowed me to afford my living expenses, such as they were.

      So let’s stop being so damn cheap as a society and fund all education at every level like a civilized nation should. That will get rid of the hucksters like Corinthian right quick.

      1. Banger

        Of course what you say makes sense but it can’t happen in the U.S.–why? Besides that the oligarchs depend on a society where no sensible solution is ever used to solve any collective problem because it would create a bad precedent (the main reason sane health care policies are opposed) the fact is that this Americans that can afford post-sec education want their kids to have a leg up on those that can’t afford it–simple as that.

        1. Michael Cairns

          I agree to a point but one of the driving forces against healthcare reform is the profit motive of financial elites. If elites cared about US manufacturing, the country would have national healthcare to reduce overhead. Of course you have to get the South to enter the 20th century. I don’t think we can push them into the 21st century.

          I think the issues have more to do with profits than fear of sensible solutions. Although sensible solutions tend to hurt elites…

    2. bmeisen

      American universities and colleges are legally forbidden from sharing certain kinds of student performance data:

      http://chronicle.com/article/Colleges-Concerted-Campaign/136303/

      Accoring to the author (and I don’t see why we shouldn’t believe him), this is a restraint that the industry itself sought. They sought it because transparency would probably drain the punch bowl. The industry, both for-profit and non-profit, private and public institutions, must enjoy its extraordinary pricing power – they raise tuition, and students and their families pay. They raise it again and students et al pay again. The ED kicks in with serious money. They raise it AGAIN, probably thinking, “We’re not going to get away with it again, are we?”, and they get away with it again!?!?! And the perps jet off to the next education conference in Las Vegas where there are high 5’s all around!

      This exclusive party is happening I suggest because the vast majority of Americans think that higher education is primarily a personal investment in future earnings potential, an investment that, according to the American Creed, pays off big time – no need to worry. With a BA you can make tons more than without one, easily enough to pay back your 25k loan. It’ll take a while, but hey man, it’s worth it.

      The only real threat to this fairy tale’s amazing legs is if students start to get smart about how individual institutions compare based on the actual returns of individual graduates. This information however is not available for the purposes of evaluating the success of individual institutions. The information is however available, as I understand the article that I’ve linked to, if you want to evaluate the credit-worthiness of individual students – the banking industry has set up a data bank for that purpose and apparently college presidents don’t have much of a problem sharing with it.

      1. Elizabeth H

        Thank you very much for that excellent article you provided a link for. Yes, the colleges don’t want the students to actually see how much of a benefit they’ll actually get from their wage-slavery-inducing 4-6 year investment; much better to just keep on telling them they need it and it will pay off, and hide the damned evidence. Call it protecting privacy! This is, after all, just business Amerikan-style.

    1. jgordon

      Emigration is one out for an educated serf. Serfs have no obligation to support a corrupt and illegitimate regime, nor its financial system, so it’s not like there’s anything wrong with dipping out at the end of their education tenure. That such passive-aggressive activity will hasten the demise of the system is just a pleasant and fortuitous bonus.

      1. guest

        This way out has already been taken care of: US citizens who emigrate to another country are still required to pay US taxes.

        1. Stratos

          Are mass renunciations of US citizenship and a brain drain in our future?

          People might want to rethink support of stringent border security; walls designed to keep others out can also keep you in against your will.

          1. guest

            Compared to other countries, very few US citizens have the experience or the will to settle in a foreign country for very long or for good during their working age years.

            It is mostly cases like Jews moving to Israel or pensioned people retiring to Costa Rica. There has been a sharp increase in people renouncing their US citizenship — but the absolute levels are quite low, and the evolution seems to affect first and foremost wealthy people.

            Fun fact: giving up the US citizenship or a green card entails paying a special “exit tax” to the IRS. As you see, they have planned for every eventuality.

            If there is a brain drain, it will probably result from foreigners no longer emigrating to the USA, or leaving the USA altogether — the Indians, Chinese, Koreans, etc.

        2. jgordon

          I’m curious about that. If you’re not paid in dollars, have no dollar denominated assets and deal with financial institutions that have nothing to do with dollars–would that theory still be practically enforceable? I’m thinking of the new Russia/China axis and the push for dedolarization.

        3. tongorad

          I lived overseas and every year I got the tax exemption. I believe it’s now around 90K – in other words, if you make over 90K/year, you pay tax in the US. That seems fair.

          1. guest

            That $90k exclusion only covers earned income. Interest, dividends, rental income, capital gains, pension withdrawals — all of these are unearned and so not covered by the $90k exclusion. Also, one might also reasonably ask why, if you live full time outside the US, you should pay the US anything in tax, no matter how much you earn.

            The expense and complication of complying with both US tax laws and the tax laws of your home nation have become overwhelming. US citizens living abroad long-term are taking the rational decision to massively simplify. In some cases they literally have no choice but to renounce US citizenship, because FATCA has induced a lot of non-US banks to simply stop handling US citizen customers entirely, even those who may be dual and live in that bank’s country. Try to live these days without a bank account. Others must renounce to protect their non-US citizen spouse and family from IRS intrusion and possible penalties.

            For what it’s worth I am part of the ‘brain drain’ being posited here. A non-US citizen who lived in the US for more than a decade but took a direct decision to leave the US, drop the green card, and return to my country of birth purely because of the execrable ‘exit tax’. The cumulative tax the US has now missed out on because of my decision now hugely outweighs anything that it tried (and failed) to extract with the ‘exit tax’. Moreover, I know personally of several folk who elected not to move to the US for work after finding out about how US tax policy could devastate their finances.

  2. Blurtman

    “The charges against it include presenting false job placement data to prospective students in its marketing..”

    Many respectable schools are guilty of this type of misrepresentation. No one audits the data.

  3. JS

    Sorry, but does anyone else read “ED” in this article and think of something other than what’s intended?

  4. Jackiebass

    Obama has made many bad appointments to his cabinet but Arnie Duncan gets the distinction of being the worst of them. He should have been fired long ago because he is incompetent. Why would you appoint a failure to such an important position? John King is another example. He was run out of nY because of his incompetence and guess what. He was appointed to a high position in the Obama education department. Two examples of the Peter Principal at work.

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