I hear that some Corinthian students will be getting their federal student loans cancelled. I graduated from a private, non-profit college two years ago with a Bachelor’s degree in Theater, but haven’t been able to get a job. Can I get my student loans discharged, too?
Corinthian Colleges Inc., a chain of for-profit colleges, filed for bankruptcy on May 4, 2015, and closed its 28 remaining campuses, affecting about 16,000 students. Other former Corinthian students, who were not affected by the closure, have asked the U.S. Department of Education to forgive their federal education loans, arguing that they were harmed by misrepresentations concerning Corinthian’s graduation rates and job placement rates.
Closed School Discharge
A student who was enrolled in a college within 120 days of the school’s closure may be eligible for a closed school discharge if the student is unable to complete his or her degree or certificate program at another college, per the Higher Education Act of 1965 at 20 USC 1087(c)(1). Historically, only about 6% of eligible borrowers take advantage of the closed school discharge, since most prefer to finish their education at another school.
The U.S. Department of Education has the authority to extend the 120-day threshold under exceptional circumstances. Exceptional circumstances can include a finding by a federal or state agency that the school violated federal or state law per the regulations at 34 CFR 682.402(d) and 34 CFR 685.214(c)(1)(i)(B).
Depending on the state, students who are ineligible for a closed school discharge might qualify for compensation from a state tuition recovery program. They may also be able to file a claim in the bankruptcy proceedings against Corinthian Colleges Inc. as an unsecured creditor, but are unlikely to recover much money under such a claim, given the long list of creditors.
Borrower Defenses to Repayment
The Higher Education Act of 1965 provides for borrower defenses to repayment of federal education loans in 20 USC 1087e(h) based on acts or omissions of an institution of higher education. The regulations at 34 CFR 685.206(c) clarify that the act or omission must be one that “would give rise to a cause of action against the school under applicable State law.”
The U.S. Department of Education previously issued sub-regulatory guidance that the borrower does not need to be in default to assert a defense to repayment. The borrower also does not need to sue the school, but the borrower does need to prove the elements required to establish such a claim. It is unclear whether the borrower must have a private right of action under the applicable state law, but the act or omission must relate specifically to the borrower’s loans or the educational services paid for by the borrower’s loans. Given that the facts surrounding each borrower’s loans may differ, the U.S. Department of Education may need to review each borrower’s circumstances on a case-by-case basis.
The following language is excerpted from the Master Promissory Note (MPN) for federal education loans. It demonstrates that borrower dissatisfaction with the quality of education and borrower unemployment or underemployment are not sufficient grounds to assert a defense against repayment.
In some cases, you may assert, as a defense against collection of your loan, that the school did something wrong or failed to do something that it should have done. You can make such a defense against repayment only if the school's act or omission directly relates to your loan or to the educational services that the loan was intended to pay for, and if what the school did or did not do would give rise to a legal cause of action against the school under applicable state law. If you believe that you have a defense against repayment of your loan, contact your servicer.
We do not guarantee the quality of the academic programs provided by schools that participate in federal student financial aid programs. You must repay your loan even if you do not complete your education, are unable to obtain employment in your field of study, or are dissatisfied with, or do not receive, the education you paid for with the loan.
The borrower defenses, which were enacted as part of the Higher Education Amendments of 1992, were originally intended to be temporary, in connection with the launch of the Federal Direct Loan program. Congress was concerned that the Federal Direct Loan program implicitly eliminated an important protection against fraud by allowing the college to both authorize and disburse federal education loans. This is in contrast with the Federal Family Education Loan (FFEL) program, where there was an explicit separation of functions between the loan maker (the lender) and the loan certifier (the school).
The U.S. Department of Education subsequently issued regulations at 34 CFR 668.16(c)(2) which required separation of duties within the school so that no single office would have authority for both awarding and disbursing student aid funds. Congress also subsequently enacted additional statutory requirements concerning false certification, such as the unpaid refund discharge in 1998 and the identity theft discharge in 2006, but did not repeal the borrower defenses.
Broad Authority to Cancel Debt
In addition to the closed school discharges and the borrower defenses against repayment, the U.S. Department of Education also has broad legal authority under 20 USC 1082(a)(6) and 34 CFR 30.70(h) to cancel any federal education loan for any reason.