U.S. Is Collecting Student Loans It Promised to Forgive

December 19, 2016 at 08:46 AM

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The U.S. Department of Education has two quite different roles in the lives of indebted former students. The same bureaucracy that must safeguard taxpayer dollars by collecting $1.1 trillion in loans also oversees the nation's largest-ever effort to forgive student debt.

These dual roles have culminated in a strange situation. The Obama administration has repeatedly promised that borrowers eligible to have their student loans cancelled would be reimbursed for "every penny." But for months, the Education Department has been actively working to collect on federal student debt owed by tens of thousands of former students at Corinthian Colleges Inc., which filed for bankruptcy in 2015 under a cloud of fraud investigations.

It is clear that government officials, working under their own guidelines, have reason to believe at least some of these same debts should be forgiven. When companies have similarly hounded borrowers to repay debt without disclosing that borrowers do not owe it, they have been charged by federal and state regulators with violating the law.

"There's no clear-cut reason why there shouldn't be automatic loan forgiveness for people who otherwise would have a legal claim for deceptive conduct against this now-bankrupt company," David Vladeck, a former director of the FTC's consumer protection division, said of Corinthian students. "These kids by and large have been scammed, and the Department of Education in some sense is continuing that harm by making them jump through hoops to get the relief to which they are entitled."

The Education Department is effectively disregarding records it obtained earlier this year—a development not previously reported—that identify former Corinthian students eligible for debt relief under the administration's criteria. Instead of halting collections, however, the department has outsourced the work of informing these borrowers to budget-strapped state attorneys general.

This account of the government's inconsistent actions toward distressed borrowers is based on records and interviews with more than two dozen borrowers, former federal regulators, current state prosecutors, public interest attorneys, and others working on student loan issues.

The government stands to gain from muscular collection tactics. Not all former Corinthian students are eligible to have their debt cancelled. But eliminating the debt of those who are could cost the federal government nearly $4 billion, according to Education Department estimates. That's enough money to fund one year of Pell Grants for more than 600,000 students.

Eligible borrowers may have their debts erased because the Education Department determined that Corinthian defrauded them into taking out federal loans by advertising false job placement rates for its many career programs. Department officials concluded that Corinthian engaged in "widespread placement rate fraud" for almost 800 programs at nearly every one of its more than 100 U.S. campuses. Prior to its collapse, Corinthian consistently denied any wrongdoing.

"The department is not collecting on loans from borrowers that it knows are eligible" for fraud-based debt cancellations, said Kelly Leon, an Education Department spokeswoman. Leon said the department had corrected errors after identifying them and that education officials believe "nobody should be in collections for a loan that is eligible to be discharged." The department worked with state prosecutors because they have resources the department doesn't have, Leon said. She declined to answer numerous questions submitted in writing or provide further comment addressing Bloomberg News's findings.

Corinthian, once among the largest for-profit chains in the country with such schools as Everest, WyoTech, and Heald, faced a flood of government investigations and lawsuits alleging systemic fraud before filing for bankruptcy. In the aftermath, the federal government declared that as many as 335,000 former students could erase their loans by checking a box and signing their names on a simple form, under penalty of perjury. Doing so, the former students were told, would void their debt and prompt a refund on past payments.

But things turned out to be far more complicated for defrauded borrowers.

Even though the Obama administration presumes Corinthian misled these borrowers, as many as 80,000 of them are in default and battling draconian collection efforts—wage garnishments, the seizure of tax refunds and federal benefits—on behalf of the Education and Treasury departments. Others are paying off debt they aren't aware they don't owe.

The Obama administration's moves underscore a basic fact about the officials who run the federal student loan program: Their job is to maximize collections, not assist borrowers. In fact, the same person—James W. Runcie, chief operating officer of the department's student aid unit—directly oversees both collection and forgiveness. Runcie declined to comment.

"These kids by and large have been scammed, and the Department of Education in some sense is continuing that harm by making them jump through hoops to get the relief to which they are entitled."

Christopher Suarez was unemployed when he enrolled at a Corinthian school in 2011. Recruiters promised he'd make a minimum of $30 an hour following graduation from a car repair program, he said, and showed him data on how the previous year's graduating class had fared in the workforce. But after he graduated, interviewers told him the best he could hope for was a retail job at Pep Boys or AutoZone making $9 an hour.

This year, Suarez received letters from a government contractor threatening to garnish his wages to pay back some $25,000 in defaulted student loans despite submitting the government's required paperwork for debt relief in August with the help of a public interest attorney. Unable to land a job repairing cars, the 42-year-old from Antioch, Calif., makes about $25,000 annually as an office assistant at a hospital. "Oh, God, they're going to take my car, garnish my paycheck, or come into my house and take stuff that I own," Suarez said of his fears of the government's contracted debt collectors.

The first wage garnishment order came a few weeks after Suarez petitioned the Education Department to cancel his debt. He appealed the decision by submitting his debt-relief application, to no avail. "You have provided no evidence or documentation to support the objection(s) you raised," read the Oct. 6 letter from the department's loan contractor. This letter arrived even though both Suarez and his attorney say he meets the qualifications for debt cancellation.

Tens of thousands of former Corinthian students are similarly eligible to have their federal loans wiped—and many of them remain unaware.

Debtors such as Suarez aren't told on their monthly bills that they're eligible to have their loans erased. While the Education Department has sent a few letters and e-mails to some 335,000 former Corinthian students telling them they could be eligible for debt relief, advocates say that's hardly the most effective way to get the message out. "Consumers are much more likely to open mail containing their bills rather than some random letter," notes Joel C. Winston, a former senior official at the Federal Trade Commission.

When Suarez received one such letter from the feds, he thought it was a hoax. He once had been taken in by a television ad promising debt relief, forking over $500 before he realized it was a scam. "I can't see a reason why they just wouldn't put something on the bill saying, 'Hey, if you feel you've been defrauded, check this box,'" Winston said.

In fact, the feds have taken similar steps in previous cases. In 2014, the FTC required T-Mobile to notify consumers of their right to refunds on different color paper than their bills. Robert Kaye, an Education Department official supervising its debt-relief initiative, was a senior official in the FTC's consumer protection division at the time. When asked during a conference call on Oct. 18 why the department wasn't doing more to help borrowers, Kaye cited budgetary implications beyond his control, said Luke Herrine, a member of the activist group Debt Collective who was on the call. Kaye declined to comment.

"When the Department of Education wants to collect the money, it doesn't stop," said Maggie Robb, a staff attorney at the Empire Justice Center in Rochester, N.Y., who has represented former Corinthian students. "It figures out a way. Why don't they do that in trying to help these students get their loans discharged?"

Even when borrowers do apply for relief, they face the prospect of what appear to be baseless rejections. Education Department employees have erroneously told some borrowers there's no federal right to debt cancellations. (The department issued an apology.) Some borrowers say they never hear anything at all. "To this day I have heard nothing," said Ann Bowers, 56, of Paris, Tenn. Bowers, a former Corinthian student who served on a government advisory committee grappling with student debt, applied for debt relief herself nine months ago.

Even when the government has tried to notify borrowers, it hasn't been consistent about the requirements for eligibility. In June, the department quietly revised the list of programs marred by fraudulent employment claims first published on its website three months earlier. The changes affected more than 100 programs.

Federal student debtors have had the right since 1995 to void their loans if their school engaged in fraudulent behavior, but few borrowers applied for loan cancellations over the following two decades. The Education Department buried the right in loan contracts and does not appear to have advertised it to students.

Despite the small number of debtors attempting to utilize the provision prior to last year, internal department e-mails from 1998, reviewed by Bloomberg News, show officials fretting about the "increasing number" of claims asserted by the borrowers. In one e-mail, Ronald B. Sann, an attorney still at the Education Department, recommended to colleagues that they develop a system for addressing these claims. His suggestion was ignored. Sann declined to comment.

Corinthian's bankruptcy strained the department's ability to process requests for debt cancellation. Efforts to prop up the struggling chain generated a backlash by former students who went on a debt strike. Federal officials, who announced plans last year to create the kind of system Sann suggested nearly two decades earlier, have been overwhelmed by some 82,000 claims from allegedly defrauded former college students.

The Obama administration's moves underscore a basic fact about the officials who run the federal student loan program: Their job is to maximize collections, not assist borrowers.

By and large, students who took out federal loans to pay for Corinthian classes couldn't afford them.

Julio Gonzalez, a 49-year-old in Boston with four children, enrolled in a Corinthian medical assistant program in 2010, he said, after recruiters told him his criminal record wouldn't prevent him from landing a high-paying hospital job. A few months into a nine-month program, the school reversed itself, he said, and warned him that his past would make him unemployable at hospitals. He was fielding daily calls from the Education Department's contracted debt collectors about his roughly $16,500 in defaulted loans until last month, when he complained to the Massachusetts attorney general's office. "They were blowing up my phone," Gonzalez said. "I was getting calls every few minutes. I had to shut it off."

Massachusetts Attorney General Maura Healey called such collection efforts "deeply unfair and unjust" and urged education officials to reform their practices.

Gonzalez also worries about the wage garnishment order his employer, an adult day care center, received in September, four months after he applied for debt relief with the help of state prosecutors. "I have a car payment, rent, insurance," he said. "How am I going to live?"

Although the Education Department states on its website that it will cease collection efforts on Corinthian borrowers' disputed debt, experiences like Gonzalez's are common. There may simply be too much money at stake.

A department analysis from March 2015 disclosed to the New York Legal Assistance Group found that the feds disbursed more than $3.24 billion in loans and accumulated interest to Corinthian students in the previous four and half years. If the loans are cancelled, the federal government won't see a dime of that revenue.

The department has long resisted easing borrowers' path to debt relief. The Education Department insists that borrowers fill out paperwork confirming its suspicions, said Noah Zinner, Suarez's attorney at Housing & Economic Rights Advocates, an Oakland, Calif.-based public interest organization. Similarly, former students of a defunct for-profit beauty school chain had to sue the Education Department in an attempt to force it to send notices to former students informing them that they could have their debts discharged. The case is still pending.

Education Secretary John B. King Jr. has broad legal authority to cancel student debt, a step critics have urged him to take. But his agency has refused to act by claiming, in part, that it doesn't know which career programs allegedly defrauded Corinthian students attended. Before 2014, the federal government's student loan database identified only which schools students attended and when. The department needed former Corinthian students to show which programs they attended in order to obtain debt forgiveness. The department declined to make King available for an interview.

But in interviews with Bloomberg News, prosecutors from California, Illinois, Massachusetts, and Nebraska said the department now has those records. They know this, the prosecutors said, because the Education Department began sharing them with state attorneys general offices in July. For the first time, the records identified the career programs Corinthian students had attended. In Illinois, for example, prosecutors estimate as many as 40 percent of the roughly 17,000 Corinthian debtors in the state attended programs that advertised false career claims. Illinois Attorney General Lisa Madigan said a thorough analysis of Education Department records by her office revealed them to be reliable.

The feds now have a good idea which borrowers were misled by Corinthian's bogus job-placement statistics and might face assertive collection attempts on debt they arguably don't owe. But the Education and Treasury departments still continue to collect on that debt with regular monthly bills, wage garnishment orders, and threats to seize tax credits and Social Security benefits—without accompanying those demands with information on borrowers' right to discharge their debt, Bloomberg News found.

A study by Massachusetts prosecutors revealed that nearly one-quarter of eligible debtors who petitioned the Education Department for debt relief later received notices from department contractors threatening to seize their wages or federal benefits.

It's not even clear whether the federal government is collecting on these debts legally. In October, lawyers at the Project on Predatory Student Lending at Harvard Law School sued the Education and Treasury departments over their efforts to collect on Corinthian-related student debt. They argued that the government ignored its own evidence of fraud and falsely certified the debt was legally collectible. The government has not yet responded to the complaint.

The Education Department has defended itself by pointing to debt cancellation for approximately 15,000 former Corinthian students and ongoing outreach efforts such as a telephone hotline staffed by one of its loan contractors. There's even a $5,000 ad campaign on Facebook meant to reach defrauded students. By contrast, the Massachusetts attorney general's office said in August it has devoted more than 1,200 hours of employee time to aid former Corinthian students.

"We were all taught to trust education," said Bowers, the former Corinthian student. "But trusting the Education Department put me in a bad situation." Earlier this year, she said, she confronted department officials she blames for her plight. "I said, 'I trusted you, and you let us down. You were supposed to be the gatekeeper. You were supposed to protect us. Instead you fed us to the wolves.'"

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