Last summer, Corinthian Colleges closed its doors amid government scrutiny of for-profit colleges.
The school - which had been the recipient of some $1.5 billion in annual federal aid funding - was variously accused of employing deceptive marketing practices, falsifying job placement records, and lying about graduation rates.
As we noted when the doors were shut, for-profit students won’t have a particularly easy time transferring their credits (meaning they would have to start over at another school if they wanted to complete their degrees). That means that when a government mandated closure leaves them out in the cold, they’ll likely seek to take advantage of their 'right' to have their debt discharged.
Sure enough, the government quickly found itself scrambling to respond after Secretary of Education Arne Duncan received a group request from 78,000 former Corinthian students requesting loan forgiveness in late May. Essentially, the law says students can have their debt expunged in the event they’ve been defrauded. In cases like Corinthian, where the government itself has effectively accused the school of fraud, it’s difficult to deny students’ claims.
We immediately suggested that in the wake of the Corinthian affair, many more of the nation’s heavily indebted students and former students would seek to have their loans forgiven as well. Here’s what we said in May:
The real question now is whether continued pressure on for-profit colleges will result in further closures and more petitions from hundreds of thousands of students with tens of billions of loans they now know can be legally discharged. Note that we have not used the term "canceled", because as we like to remind readers, liabilities are never "canceled", they are simply written off by the person for whom they are an asset.
Fast forward nine months and sure enough, “thousands” of students are “flooding the government” with appeals to have their student loans discharged on the grounds they were the victims of fraud.
"In the past six months, more than 7,500 borrowers owing $164 million have applied to have their student debt expunged under an obscure federal law that had been applied only in three instances before last year," WSJ wrote on Wednesday. "The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as by lying about their graduates’ earnings." Here's more:
The U.S. Education Department has already agreed to cancel nearly $28 million of that debt for 1,300 former students of Corinthian Colleges—the for-profit chain that liquidated in bankruptcy last year. The department has indicated that many more will likely get forgiveness.
The sudden surge in claims has flummoxed the Education Department, which says the 1994 forgiveness program is overly vague. The law doesn’t specify, for example, what proof is needed to demonstrate a school committed fraud.
And that's a problem. Because the law is short on specifics, US taxpayers are theoretically on the hook for every student who feels aggrieved at not being able to secure gainful employment in a field related to what they studied in college. "The program could prove to be one of the few lifelines for hundreds of thousands of Americans buried in student debt after attending disreputable schools that failed to land them a decent job," WSJ continues.
Of course "disreputable schools" aren't to blame for every jobless graduate.
As we've shown on countless occasions using countless metrics, the "robust" US labor market is anything but, and has been reduced to a kind bartender creation machine. That deplorable state of affairs is the result of America's rapid transformation from a middle class utopia buoyed by breadwinner jobs in sectors like manufacturing to a kind of modern day fuedal system wherein the peasantry slaves away in the service sector so the robber barons can enjoy conveniences like $6 lattes. "Andrew Kelly of the American Enterprise Institute, a conservative think tank, said there is a danger that the program will become overly broad, encompassing not just instances of outright fraud, but also cases in which borrowers simply regret taking out the debt because they can’t find a job, through no fault of the colleges," WSJ adds, underscoring our point.
Because the government didn't take the time to spell out what counts as "fraud," taxpayers may effectively end up subsidizing the "strong" US jobs market by bailing out every student who can't find gainful employment in an economy which, if you believe the BLS, is adding nearly 300,000 positions a month.
Imagine the shock when the US public suddenly realizes that bailing out jobless students isn't compatible with the "robust" labor market rhetoric. Here's a bit more from The Journal:
The surge in applications reflects the growing savvy of student activists, who discovered the law last year after it had largely sat dormant for two decades. Education Department officials say the agency failed to draft rules after the law was passed in the early 1990s and lacked the urgency to do so because it had only received five applications—three of them granted—before last year.
The clamoring for forgiveness represents the fallout of a college-enrollment boom—driven by a surge in students attending for-profit colleges—that caused student debt to nearly triple in the past decade to $1.2 trillion, New York Federal Reserve figures show. Seven million Americans have defaulted, government data show.
So far, almost all of the borrowers applying for forgiveness under the 1994 program attended for-profit schools.
Three-quarters went to Corinthian-owned institutions, while hundreds of others attended the Art Institutes, owned by Education ManagementCorp.; and ITT Technical Institutes, owned by ITT Educational Services Inc. All three have been the subject of federal investigations into illegal recruiting tactics in recent years.
“I feel robbed of my life,” wrote one student who said she owes $114,000 in federal student debt—most of it in her mother’s name—for her time at a branch of the Art Institutes chain of for-profit schools. “Even after paying my student loans on time and in full every month for over seven years, I’ve barely made a dent.”
Syd Andrade’s story is emblematic. He said in an interview that during his high-school senior year, he received a call from an Art Institutes recruiter promising “great facilities, great teachers, use of industry-standard software” for a game-art design program.
Mr. Andrade, who graduated from the company’s Tampa, Fla., location, said the classes used outdated software and were taught by an instructor who knew less than the students. “Most of the time spent in her classes were us teaching her,” he said. “It was a group effort of everyone trying to learn together.”
So while the phenomenon is for now confined to the shady for-profit arena, don't kid yourself into thinking that there aren't student activist groups at large state schools pondering how they can take advantage of the law as well. In short, it's just a matter of time before the "thousands" of appeals flooding the Department of Education turn into tens and hundreds of thousands as recent graduates suddenly discover the harsh realities of America's waiter and bartender economy.
At the end of the day, there's $1.2 trillion in student debt that needs paying down and students simply aren't finding the type of jobs they need to service their liabilities. That means you, dear taxpayer, will shoulder the burden of wiping the slate clean for millions of disgruntled students who were literally sold a lie not only about the quality of the education they would receive, but about the well being of the American dream itself.
On that note, we close with a quote from the abovementioned Syd Andrade:
“They promised us to get jobs in the field, and most of us ended up at Office Depot,” he said.