Taxpayers Could Lose Billions If Students Walk Away From Loans

Interns from around the city gather signs before a protest on the Senate steps to urge the Senate to act on a House passed bill, Smarter Solutions for Students Act, which would prevent student loan interest rates from doubling, in this June 28, 2013 file photo.

Interns from around the city gather signs before a protest on the Senate steps to urge the Senate to act on a House passed bill, Smarter Solutions for Students Act, which would prevent student loan interest rates from doubling, in this June 28, 2013 file photo.

Photographer: Tom Williams/CQ Roll Call via AP Images

Cody Roderiques, a college senior, owes the federal government more than $100,000 for his student loans. He may not have to pay taxpayers back.

That’s because the New England Institute of Art is vanishing around him. On the campus of the for-profit college near Boston, studios were shuttered, teachers lost their jobs and the school announced in May it was closing for good. Under U.S. law, the institution’s death might excuse Roderiques, who will graduate in December, from his loan debt.

As education companies shrink amid government allegations that they misled students about the value of their degrees, tens of thousands of students may be able to walk away from their obligations, a scale of college-loan forgiveness unprecedented in U.S. history. The unwinding may cost taxpayers billions, touching off debate in Washington about fairness and personal responsibility.

“I’m paying back a school that doesn’t exist and that I don’t get any benefit from,” said Roderiques, 22, who is organizing students to ask the federal government for loan forgiveness. If he succeeds, other borrowers “will be right behind me.”

The push for loan cancellations intensified with the May bankruptcy of Corinthian Colleges Inc. and is spreading to other large for-profit colleges, such as Education Management Corp., which owns the chain of Art Institutes that Roderiques attends and whose stock doesn’t trade anymore after losing nearly all its value.

Louisiana Protest

To make their case, dozens of borrowers with loans taken out for those two companies, as well as for ITT Educational Services Inc., are protesting this week outside a gathering of college financial aid officers in New Orleans. Education Management said it helps borrowers understand loan commitments and is offering students at its closing schools a chance to finish their degrees. The companies all deny wrongdoing.

The situation shows how the for-profit college implosion, like the end of the mortgage boom, may haunt the economy and taxpayers for years. Students may be eligible for relief under federal law if they can show schools deceived them into enrolling, as well as when schools shut down and they can’t complete their studies. Before Corinthian’s demise, few students ever applied for relief.

For-profit college borrowers hold about $230 billion in federal loans, a fifth of U.S. higher education debt, according to an estimate by Mark Kantrowitz, publisher of Las Vegas-based Edvisors.com, a financial-aid website. For-profit college students represent about 11 percent of college students and account for almost half of all defaults on U.S. education loans.

‘Unraveling Quickly’

“It’s all unraveling quickly,” said Bradley Safalow, an analyst with PAA Research, an investment advisory firm in Atlanta. “As a taxpayer, I find it all very depressing.”

Education Secretary Arne Duncan said in June that his agency would make it easier for students at Corinthian and other for-profit colleges to apply for loan forgiveness. Many “ended up with huge debts and degrees that meant little to employers,” he said, while vowing the department would also protect taxpayers.

Lindsey Burke, an education policy fellow at the Heritage Foundation, a think tank in Washington, said students should honor their obligations.

“Any student could go to the Education Department and say they were misled, and the taxpayer picks up the tab,” Burke said.

Borrowers for Santa Ana, California-based Corinthian have the best shot at forgiveness. The company, which owned more than 100 schools in the U.S. and Canada, filed for bankruptcy after the Education Department levied a $30 million fine for misleading students about job prospects. If all 350,000 students who enrolled in its schools over the past five years were granted discharges, the bill might reach $3.5 billion, the department said. Corinthian denies wrongdoing.

Mortgage Crisis

In June, the department chose Joseph Smith, who oversaw a settlement with banks and homeowners who lost their homes in foreclosure, as special master in charge of Corinthian’s student debt discharges.

Other for-profit chains are struggling financially amid allegations of deceiving students and are shutting dozens of campuses across the U.S. They include Pittsburgh-based Education Management, which stopped listing on the Nasdaq stock exchange last year to cut expenses, and faces a U.S. Justice Department civil lawsuit over its marketing. Schaumburg, Illinois-based Career Education Corp., is under investigation by 21 states for its reporting of job placement rates.

ITT Educational, the subject of a U.S. Consumer Financial Protection Bureau complaint alleging loan abuses and a lawsuit by the Securities and Exchange Commission over its financial reporting, may also soon have to close schools, according to Safalow. Those three chains currently enroll about 200,000 students combined.

More Cases

While Education Management offers students at closing schools a chance to finish, ITT said its campuses remain open. The company disputes the CFPB and SEC allegations. Career Education didn’t respond to messages about loan discharges.

Borrowers on many closing campuses could successfully argue that their loans should be canceled, too, according to David Bergeron, former chief adviser to Duncan on higher education, now a senior fellow at the Center for American Progress, a Washington think tank.

Two students at Career Education’s Sanford-Brown Institute, which offered training for health-care jobs, are making just such a case, according to Eileen Connor, a senior staff attorney with the New York Legal Assistance Group. The company didn’t respond to questions about the students’ complaints.

“Functionally, the school is closed,” said Connor, who filed requests for discharges for the students, whom she declined to identify. “Support staff and instructors have quit, students can’t complete their internships, and the school won’t exist to provide placement assistance.”

When Roderiques started at New England Institute of Art in 2012, more than 1,000 students occupied two classroom buildings on its campus in Brookline, Massachusetts, sharing space with offices of the renowned Dana-Farber Cancer Institute.

Students Vent

On a recent afternoon, students breaking from classes gathered in an outdoor courtyard, venting about the school’s closing. Roderiques, who works at an Apple store and makes wedding videos, said he’s borrowed enough to buy “a small house” for his degree in video and film production. If he doesn’t get relief, payments will be $1,000 a month.

In May, he started a petition, now signed by 500 students, asking the government for loan forgiveness. Chris Hardman, a spokesman for Education Management, sometimes referred to as EDMC, said the company works with students to understand their loan obligations.

“EDMC and the Art Institutes have ruined the lives of many kids,” Roderiques’s petition reads. “We deserve the opportunities we were promised.”

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