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Why the federal government is forgiving millions of dollars of student loans, explained

Students outside Everest College in City of Industry, California, a Corinthian campus that closed suddenly this spring.
Students outside Everest College in City of Industry, California, a Corinthian campus that closed suddenly this spring.
Al Seib/Los Angeles Times via Getty Images
Libby Nelson is Vox's policy editor, leading coverage of how government action and inaction shape American life. Libby has more than a decade of policy journalism experience, including at Inside Higher Ed and Politico. She joined Vox in 2014.
  1. Some students from the for-profit Corinthian Colleges chain, which sold most of its campuses and went bankrupt last year, won't have to repay their student loans, the Education Department announced today.
  2. Corinthian students will be able to get their loans discharged if they went to campuses that closed and they're not able to transfer their credits. They also might not have to repay their loans if they feel that they were victims of fraud.
  3. The loan forgiveness could cost hundreds of millions of dollars, depending on how many students take advantage of it. The Education Department estimates that 150,000 students are eligible.
  4. Forgiving this many loans is an unprecedented step for the Education Department. But officials suggest it might not be the last time this happens, and that the process might end up applying to students from other colleges as well.

Corinthian Colleges was a major for-profit college chain until its collapse last year

Corinthian Colleges was seen as one of the worst for-profit college chains before it went out of business last year. About half of its students dropped out, and 20 percent of students defaulted on federal loans in the first years of paying them back. The Consumer Financial Protection Bureau sued the college for predatory lending.

But students don't usually just get a break on their loans because they went to a terrible college. Corinthian is a special case: the Education Department found that it lied to students at some of its campuses about what they could expect in the job market. And an obscure phrase in federal student loan law means that as a result, students who think they were defrauded might not have to pay their loans back.

Corinthian Colleges operated campuses under three brand names — Heald College, Everest College (sometimes Everest University or Everest Institute), and WyoTech. At its peak, it enrolled more than 112,000 students nationwide.

But enrollments fell dramatically in recent years, in part because the economy was improving. Corinthian was under pressure from proposed Education Department regulations to crack down on for-profit colleges and vocational programs whose students couldn't repay their loan debt, and it was under investigation from state attorneys general, the Securities and Exchange Commission, and the CFPB.

Corinthian sold just over half of its 107 campuses to ECMC, a student loan debt collector that established a nonprofit education branch, and shut down the rest, including abruptly closing its final 28 campuses this spring.

Why some students won't have to pay back their loans

As Corinthian Colleges collapsed, a group of activists started arguing that Corinthian students shouldn't have to repay their loans. They based their arguments on an obscure provision of federal law that says students don't have to repay their debts if their college violated state laws, and borrowers can even be reimbursed for student loan payments they've already made.

Just five people have successfully discharged their loans that way since 1995 — but the Education Department now says more than 100,000 students are eligible to use it. In April, the federal government fined Corinthian $30 million, saying Heald College had lied about the proportion of its students that got jobs after graduation. Students who made their college decisions based on those misleading rates can have their loans forgiven. The department estimates that about 40,000 Heald College students are eligible, and together they have up to $600 million in outstanding debt.

They're also opening up claims to students from Everest and WyoTech, Corinthian's two other brands. Borrowers will have to submit paperwork saying how they think their college violated state law, how they were hurt by the misconduct, and how it affected their decision-making. Once they apply, their loans will go into forbearance — meaning they won't need to make payments, although interest will continue to pile up — and the Education Department will appoint a "special master" to determine who gets debt forgiveness and who doesn't.

In all, the Education Department could end up forgiving hundreds of millions of dollars of debt. It's not clear how many students will file the paperwork and jump through the hoops to get their balance forgiven.
But in the past five years, Corinthian College students have borrowed
$3.5 billion in federal loans.

Students at campuses that closed will also be able to get out of paying back their loans. If they don't transfer their credits to complete their education in a similar program elsewhere — such as moving from a criminal justice program at Everest College to one at a community college — they don't have to pay their loans back. That's a longstanding, and slightly more common, provision of federal law.

How the Corinthian mess exposed a hole in the student loan system

The Education Department thinks the problem is bigger than Corinthian — and that forgiveness eventually could be too. The special master is also tasked with creating a broader system that can help students from other colleges who believe they shouldn't have to pay back their loans because their colleges violated state law.

Education Secretary Arne Duncan said in a call with reporters Monday afternoon that Corinthian might not be "the last domino to fall." The Education Department's goal is to create a "durable" process — suggesting that relief for Corinthian students might eventually be available to students from other colleges as well.

"You can’t do some sort of debt forgiveness and pretend that students who went to similar schools that also engaged in questionable behavior are not going to start coming forward too," Ben Miller, senior director for postsecondary education at the Center for American Progress, said in April.

Already, more than 1,400 students have submitted claims saying Corinthian defrauded them and so they shouldn't have to repay their loans.

The federal government has ways to punish colleges and programs if their graduates struggle to repay their student loan debt, or if high numbers go into default. But while that can prevent future students from suffering the same fate, the system doesn't do much for the students who graduated and found themselves unable to meet their financial obligations.

Forgiving students for loans at Corinthian Colleges is a step toward changing that. At the same time, limiting loan forgiveness to students whose colleges violated the law is a way to offer some debt relief without saying that every college graduate should get a refund if their education disappointed them.

But the Education Department is likely to keep wrangling with this question. Accusations of fraud around job placement aren't limited to for-profit colleges. In recent years, law school graduates have sued their schools for misrepresenting job placement rates. And job placement rates, in general, aren't the most reliable statistic.

"The way we do a lot of collection of job placement statistics and reporting of those statistics is really not particularly rigorous or centralized," said Andrew Kelly, director of the Center on Higher Education Reform at the American Enterprise Institute, said in April. "For me, it just raises much broader questions about this bizarre system we’ve set up, where a lot of what we expect colleges to report on how they’re doing is actually self-reported and not always collected with any rigor."

How loan forgiveness at Corinthian could build momentum for further reforms

If the Education Department ends up forgiving hundreds of millions of dollars in debt, it could provide momentum for a bipartisan idea on Capitol Hill: colleges should have some skin in the game on their students' loans.

Corinthian is a special case; the company filed for bankruptcy in May, and it's not even clear if the Education Department will collect its $30 million fine. But in general, lawmakers from both parties agree that colleges should have some kind of financial stake in whether their students repay their debt. That means colleges could end up owing the federal government money if their students fail to repay their loans.

That money could be used to make grants to help colleges improve. Or some of it could be held back for a victims' fund in case other colleges go out of business and, like Corinthian, leave thousands of students eligible for loan forgiveness. That exists at the state level: some states require colleges to pay a percentage of tuition revenue into a fund that can be used to reimburse students.

"There’s nothing in the statute today that provides for victims’ relief of the nature that really is necessary," said David Bergeron, vice president for postsecondary education at the Center for American Progress, in an April interview.

If that idea gets momentum, Corinthian is likely to be a prime example of why the system needs to change.