United States: In Departure From Obama Administration, DOE To Grant Only Partial Student Debt Relief For Corinthian Alumni

In early March, the Department of Education, led by Secretary Elizabeth Dee DeVos, began informing some former students at campuses once owned by the now-defunct Corinthian Colleges, Inc. that it will forgive only fifty percent or less of their federal student loans. In fact, DeVos had announced her intent to adopt such a plan, a decided departure from the approach taken by the Obama Administration's DOE in its final years, in December 2017. While "[n]o fraud is acceptable, and students deserve relief if the school they attended acted dishonestly," DeVos then argued that taxpayers should nonetheless not be "forced to shoulder massive costs that may be unjustified." Seemingly, as Corinthian alums' recent letters suggest, the DOE has now reduced this sentiment to a formula. No official policy and definite method, however, has yet been publicly released by the DOE.

Corinthian's Representative Rise

Founded in February 1995, Corinthian was a large for-profit post-secondary education company whose subsidiaries offered career-oriented diploma and degree programs in health care, business, criminal justice, transportation technology and maintenance, construction trades, and information technology. Originally, Corinthian's five founders, alumni of National Education Centers, Inc. ("NECI"), itself a for-profit operator of vocational schools based in Irvine, California, planned to acquire fundamentally sound but underperforming (relative to their seeming potential) schools. Following this plan, this quintet's new company purchased sixteen colleges from NECI in 1995 and eighteen from Phillips Colleges, Inc. in 1996. In that year, it also legally took the name Corinthian, under which it would henceforth operate. From 1997 through 2010, Corinthian grew via such acquisitions and organically from the opening of new branch campuses; the remodeling, expanding or relocating of existing campuses; and the adoption of new curricula by existing colleges. At its height, Corinthian owned ninety-one campuses that operated under such brand names as WyoTech, Heald College, and Everest College.

Corinthian was no outlier in the post-secondary education market. From 2005 to 2010, enrollment in the for-profit college sector doubled to more than two million students. The vast majority of these institutions' revenue came – and much of it (90%) still does – from students overly reliant on federal and private loans and relatively sparse grants. As the Brookings Institute concluded in January 2018, based on DOE data released in October 2017, over half (52%) of student loan borrowers who attended a for-profit college in 2003 defaulted on their student loans after twelve years, compared with 26% of borrowers at two-year community colleges. Troublingly, nearly three-fourths (72%) of the programs offered at for-profit colleges produce graduates who earn less than high school dropouts.

Corinthian's Swift Fall

Corinthian's legal woes began at the state level. In July 2007, California's Attorney General threatened to file suit against Corinthian, and a settlement resulted. In 2008, a purported class action suit was filed against Corinthian and a wholly-owned subsidiary in Santa Clara Superior Court on behalf of graduates of the medical assistant vocational programs run by Bryman College, which had become Everest College in April 2007. The lawsuit alleged that Bryman made untrue or misleading statements to students related to employment success in order to induce them to enroll and stay enrolled in their medical training program. In October 2013, California's A.G., future Senator Kamala D. Harris, finally sued the beleaguered company.

Federal attention inevitably followed. On October 17, 2007, DOE investigators seized records at Florida campuses of for-profit colleges, including Corinthian's former National School of Technology in Fort Lauderdale and Florida Career College (a division of Anthem Education Group) in Lauderdale Lakes and Pembroke Pines. In June 2013, Corinthian disclosed that it was under investigation by the Securities and Exchange Commission. Another investigation, this one by the Consumer Financial Protection Bureau, commenced in November 2013 and culminated in the filing of a federal lawsuit in September 2014.

Subject to this flurry of enforcement actions, Corinthian executed a controlled shutdown of twelve of its U.S. schools and a sale of eighty-five other schools pursuant to a deal with the DOE struck on July 3, 2014. In February 2015, Corinthian finalized a sale of most of its locations to Zenith Education Group. In April 2015, the DOE finally fined Corinthian in the amount of $30 million, having found twelve Corinthian campuses to have misled students and loan agencies about its graduates' actual prospects for post-school employment. Within two weeks, Corinthian and twenty-four of its subsidiaries filed a Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. Upon filing, Corinthian closed its remaining thirty locations across the country, including two satellite campuses. The hits, however, kept coming. In November 2015, the DOE, in conjunction with California's A.G., published additional findings of misrepresentation at twenty Everest and WyoTech campuses in California and Florida.

Obama Administration's Loan Forgiveness Program for Corinthian Graduates

As part of this crackdown, the Obama Administration forgave tens of thousands of loans, totaling more than $550 million, held by students purportedly deceived by Corinthian. Eligibility for such relief was afforded to those who had attended a Corinthian school that closed on April 27, 2015, or attended a Corinthian school that engaged in fraud or other actions that violated applicable state law, regardless of whether that school closed. In other words, the Obama Administration steadily but consistently wiped away all debts traceable to any loan taken out by Corinthian's enraged alumni. For now, these folks would enjoy "a clear path to loan forgiveness" thanks to the results of an investigation done in conjunction with multiple state attorneys that showed the company misrepresented job placement rates to enrolled and prospective students.

"When Americans invest their time, money and effort to gain new skills, they have a right to expect they'll get an education that leads to a better life for them and their families. Corinthian was more worried about profits than about students' lives," John B. King Jr., DOE Secretary under Obama, explained in defense of this generous approach. "Through these important partnerships with states' attorneys general, we are pleased to offer relief to Corinthian students who were defrauded. And we will continue to take action to protect students and taxpayers from unscrupulous companies trying to profit off of students who simply want to better their lives."

This move came only two days after a San Francisco judge ordered Corinthian to pay restitution of $820 million for students and civil penalties of more than $350 million for its illegal advertising practices.

DeVos' Proposal for Partial Relief

The DOE's new formula apparently determines the propriety of relief for any Corinthian student by comparing the average earnings of students enrolled in that defunct entity's program to the average earnings of students who graduated from similar programs at other schools. Seemingly, this program aims to provide students whose earnings are at 50% or more of their peers who attended a gainful employment passing program with only proportionally tiered relief so as to compensate for the difference and make them whole. The DOE has yet to provide data on how many students have received partial relief announcements based on its new formulation.

Troutman Sanders LLP will continue to monitor developments in this area.

The Troutman Sanders' Consumer Financial Services Law Monitor blog offers timely updates regarding the financial services industry to inform you of recent changes in the law, upcoming regulatory deadlines and significant judicial opinions that may impact your business. To view the blog, click here

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Authors
Timothy St. George
Stephen Piepgrass
Alan D. Wingfield
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