Jacquelyn Martin/AP Photo
Vice President Kamala Harris announces the cancellation of all federal student loans borrowed by students to attend Corinthian Colleges, June 2, 2022, at the Department of Education in Washington.
Last week’s announcement that the Education Department would automatically cancel all $5.8 billion in student loans from the defunct, predatory for-profit chain Corinthian Colleges gives a measure of (belated) restitution to over half a million fraud victims. But debtors at other for-profit schools with similar business models have reasonably asked why they haven’t gotten the same treatment.
Department officials have vowed to assess whether other colleges acted so fraudulently toward students that they, too, meet the standard for blanket cancellation. “We will continue to ensure that all Americans with federal student loans get the protection they deserve,” a senior administration official said on a press call last week. But the best way to do that, rather than engaging in convoluted analyses that last years, is to prevent loans to for-profit diploma mills from ever being made.
The Education Department has that authority, according to an 11-page memo that activists from the Debt Collective delivered to Rich Cordray, chief operating officer of the Office of Federal Student Aid (FSA), last July. The memo, which has not previously been reported on, outlines a variety of ways that FSA could shut down the for-profit college industry on its own.
Key to the strategy is the fact that for-profits derive nearly all of their revenue from federally issued student loans. The industry “siphons public money to private investors via the federal student lending system,” the memo states. Cutting off that spigot of federal loans would make it impossible for for-profits to finance their operations. FSA could do this through regulations that have not been enforced much, the Debt Collective argued in its memo. Additional congressional approval would not be needed.
The Education Department has not yet responded to a request for comment.
“Schools like Corinthian College would not have been able to scam their students without the full cooperation of the Department of Education,” Thomas Gokey, co-founder of the Debt Collective, told the Prospect. “When we are asking the Department to cut off federal funding to for-profit schools, we are not asking them to interfere with a business, we are simply asking them to stop being partners in crime.”
DECADES OF OBSERVABLE EVIDENCE indicates that other for-profit colleges engage in the same behavior as Corinthian. They target Blacks and Hispanics, poor people, single mothers, first-generation students, and veterans (due to a quirk of federal student loan policy that makes GI Bill benefits a prized source of revenue). They promise a ladder into the middle class, using bogus job placement rates as evidence. They charge exorbitant prices relative to comparable study at community colleges, masking it through aggressive use of loans. The curriculum is typically substandard, constrained by demands to maximize profits. And the degrees received at the end of instruction have been shown to either not help or actively harm career prospects, leaving borrowers saddled with mountains of debt.
This pattern goes back to the 1940s, when the Veterans Administration investigated hastily assembled colleges put in place to capture benefits of GIs returning from World War II. The ensuing 80 years have followed a persistent pendulum swing between tighter rules and corporate innovation, with the same types of abuses cropping up every decade or so, despite new regulations, government reports, media exposés, congressional hearings, and legislative action.
Over the past decade, federal agencies have been busy investigating and penalizing for-profits that violate the law. In 2015, the Justice Department settled for $95.5 million with the parent company of the Art Institutes, Argosy University, South University, and Brown Mackie College, over illegal and deceptive recruiting. In 2016, the Education Department denied recertification for the student loan program to ITT Technical Schools and the Marinello Schools of Beauty, over similar issues. Both sets of campuses would eventually close. And the same year, DeVry University settled with the Federal Trade Commission for $100 million over misleading advertising.
Yet dozens of for-profit colleges, including DeVry and Art Institute campuses, remain active, accepting students with federal loans. That’s despite the fact that the Education Department has affirmatively canceled debts from borrowers at these schools who successfully argued they were defrauded, either on an individual or, in the case of Marinello Schools of Beauty and Corinthian, a blanket basis.
No for-profit executive has ever seen the inside of a jail cell or even suffered much financial loss for this conduct. (Jack Massimino, the CEO of Corinthian, paid just $80,000 to resolve a Securities and Exchange Commission civil case; from 2011 to 2013, he was paid nearly $10 million.) Meanwhile, even nonstudents are harmed by the continued existence of for-profit colleges, because federal dollars derived from their tax payments continue to pour into the sector, despite the near-guarantee that much of it will have to be rebated later to defrauded students.
Defenders of exploitative industries like payday loans often claim—rather dubiously—that their products, while imperfect, are necessary for low-income households with nowhere else to turn. But with for-profit colleges, student degrees after graduation have been proven to be virtually worthless. The idea that diploma mills are distasteful but vital doesn’t hold.
The Debt Collective’s memo shows how this fraudulent cycle can simply be ended, through the determined application of laws on the books.
THE MEMO DETAILS SEVERAL POTENTIAL OPTIONS to shut down for-profit schools. For example, many grants and loans are offered to college students under Title IV of the Higher Education Act of 1965. FSA could commence proceedings against for-profits leading to termination of Title IV support, limitation of that support unless the institution takes corrective action, or suspension of support for up to 60 days. In the past decade, FSA has only used limitation once, against DeVry, and has not terminated or suspended any schools. FSA could even take emergency action to deny funding prior to any proceeding, though schools do get to appeal this.
All Title IV schools receive certification through a program participation agreement. These are usually time-limited for up to six years, and must also be renewed if a school changes ownership. When expiration dates hit, FSA can simply deny recertification; schools cannot appeal this action. This is how the Obama administration successfully ended Title IV funding for several for-profit chains, including Marinello and Charlotte School of Law.
Even before the expiration date, FSA could place all for-profit schools that fail to meet Title IV standards on a provisional program participation agreement (PPPA). Then, at any point, the Education Department could revoke PPPAs if it finds further violations. The revocation takes immediate effect, with the opportunity for the school to appeal. The Debt Collective couldn’t find any examples of revocation in the history of the program, even though the Education Department agreed with its inspector general in 1999 that it should revoke PPPAs when schools are found to be out of compliance.
The Direct Loan program, which has been around since 1965 but which was restructured as the primary student loan program in 2010, is supposed to have even higher standards for participation, but those standards have never actually been written, the memo notes. By writing those rules and paying attention to statutory language, FSA could narrow the list of schools eligible for Direct Loans, which functionally is the entire student loan program today. For example, FSA currently allows schools that have issued late financial statements to obtain Direct Loans, even though the statute plainly reads that schools that are “overdue on program or financial reports or audits” are not eligible.
FSA could also take action to enforce substantive standards that for-profits routinely violate by misrepresentations to students, cash-based incentives to employees for enrollment, flouting civil rights laws, failing to uphold fiduciary duty to students, or closing promised courses. In these cases, FSA could use termination or revocation if the standards are violated, or fine the institutions, including the responsible directors and officers of the company.
The Debt Collective suggests using “secret shoppers” to probe whether standards are being met, as well as more robust investigations into for-profit colleges’ use of contractors, firing of recruiters who don’t hit enrollment numbers, and changes to programs of study that may deny students what they were promised.
Finally, the memo suggests that FSA become more aggressive on financial measures. For example, FSA could establish joint liability, so that any loan discharges or refunds would be paid not only by the school (which often goes bankrupt to avoid this), but by third-party servicers, affiliates, corporate parents, and individual officers. It could use loss prevention tactics, typically through letters of credit with a bank, to secure 100 percent recovery for the government in case of any discharges or fines. It could set high capital requirements so schools can absorb losses. It could hold back the payment of student loan funds to the colleges until substantial performance toward a degree is made or even until a borrower gets employment in their field. And it could publish all warning letters, advisory opinions, interpretations of regulatory standards, and certification decisions, to be transparent about what will be tolerated.
PROPERLY ENFORCING ANY or all of these options, the Debt Collective argues, would be “more than sufficient” to make for-profit colleges financially untenable, “touch[ing] millions of lives and sav[ing] hundreds of billions of dollars.” It would, they say, rightsize what has been an upside-down system, where the Education Department finances the industry, and then compensates students in a piecemeal and often inadequate fashion on the back end after abuses inevitably emerge. “You can and must stop fraud and abuse at the source by cutting off funding to these corrupt corporations,” the memo concludes.
It will take time to get FSA up to the funding and personnel levels necessary to engage in such a strategy, and the investigations needed as ballast for them could take some time as well. That said, the faster FSA begins, the faster it can move forward.
Gokey pointed to the Education Department’s chronic inability to engage in successful widespread borrower relief. The agency has had difficulty in other cancellation cases tracking down proper addresses, informing borrowers about discharges, making sure that no further payments are accepted, and keeping everyone out of collections. “Every single time we have seen a wave of cancellations announced in the past there have been problems,” Gokey said, adding that the Corinthian cancellation is likely to face more challenges, if only because there’s a larger universe of discharges.
Most of the Corinthian discharges should be able to be done automatically, and the current payment pause until the end of August offers some breathing room to execute cancellations. As a safeguard, the Education Department could put all Corinthian loans in administrative forbearance, and pull Corinthian loans out of default, so that there’s no wage or tax refund garnishment. The Prospect asked the Education Department if it would use administrative forbearance; it has yet to respond.
But even then, officials have said it could take months to complete the discharges. In the meantime, borrowers will still suffer with high debt-to-income ratios that restrict access to credit. This is the consequence of failing to prevent fraud, and instead merely reacting to it.
The Debt Collective notes that borrowers it has worked with told them that “they believed such ‘schools’ were legitimate because the Department of Education provided federal student loans for attendance. They trusted the Department of Education, and that trust has been broken.” Shutting down businesses that prey on the public, and fulfilling the department’s stated mission to protect students, would take a significant step toward rebuilding that trust.
