The Obama Administration just announced that if you were lured to colleges through what it regards as fraudulent recruiting that never delivered on promises, you should be able to walk away from your student loans scot free. First the big banks, then the auto industry. Now, federal bailouts are coming to higher education. What’s next K-12?
In an aggressive move, the Department of Education (DOE) plans to discharge loans if students can prove their school broke state law through false advertising and other means – knowing that they couldn’t or wouldn’t deliver what was promised – and lured them to borrow funding to pay for their education. Under some definitions wouldn’t just about every public and private higher education institution qualify as the maker of misleading promises?
The DOE is starting its bailout with one group of for-profit schools. As much as $3.6 billion in student loans will be forgiven for students who attended colleges under the now defunct for-profit college chain Corinthian Colleges. Federal officials claim that through the chain of schools, 350,000 Americans took out roughly $3.5 billion in loans. A federal complaint was filed last September against Corinthian schools which operate campuses that include Heald, WyoTech, and Everest colleges. If you ever been at home during a weekday, you’ve probably seen their get-off-the-couch-and-get-going commercials which advertise degrees for careers as computer engineers, medical technicians, and more.
As the Daily Caller explains Corinthian has an interesting history:
Corinthian was once one of the biggest players in for-profit colleges, but abruptly fell apart in 2014 amid accusations that it was inflating graduates’ job placement rates and attempting to defraud the federal government. In the course of the investigation, Corinthian lost the right to draw federal student loans, and since those loans provided the vast majority of its revenue, the college swiftly fell into bankruptcy. That left tens of thousands of students out in the cold, while the college itself has become a punching bag for those critical of alleged predatory behaviors by for-profit education companies.
Ordinarily, student loans cannot be discharged in bankruptcy or forgiven without spending at least a decade on a federal repayment plan. Exceptions, however, exist for fraud and for schools that shut down. Previously, only a few thousand students still attending Corinthian when its last campuses closed in April were eligible to have their student loans forgiven. Under the newly-announced plan, any student attending a Corinthian-affiliated school after June 20 of last year will be eligible, ballooning the number of people eligible for forgiveness by tens of thousands.
For-profit colleges are a particular target of traditional academia and non-profit schools. Over the past decade online for-profit schools have driven competition in the higher education space, attracting non-traditional students, working adults, and young adults who might not get into a non-profit institution. Whether for-profit colleges are legitimate or offer a lesser education are debates for another day.
The issue at hand with this bailout is that such large-scale forgiveness of student debt is unprecedented in our history. Education Secretary Arne Duncan acknowledged as much as he noted that no previous administration, Congress, or state had ever done this.
The bailout comes in response to successful grassroots pressure that pushes for full discharge of loans for students they claim they were duped.
While progressives are cheering, conservatives are concerned about the precedent this forgiveness plan will set. The Wall Street Journal explains:
The plan comes after months of demonstrations from former Corinthian students and pressure from some Democratic members of Congress, such as Sen. Elizabeth Warren of Massachusetts. Some of the former students organized a “debt strike”—refusing to make payments on their loans—as they pressured policy makers to forgive their debt.
Critics of the plan said it would spur a flood of false claims from borrowers who simply don’t want to repay. The plan comes as costs linked to the administration’s earlier efforts to reduce student-debt burdens are surging, such as a program to set borrowers’ monthly payments at a small share of their incomes, while also promising to forgive some of the debt after 10 or 20 years of on-time payments.
Sen. Lamar Alexander (R., Tenn.), chairman of the Senate committee on education policy, said the new measure would establish a bad precedent by punishing taxpayers for actions taken by colleges. “If your car is a lemon you don’t sue the bank that made the auto loan; you sue the car company,” he said in a statement. He added that he would seek legislation this year to “address the right way” to help students who were defrauded.
Andrew Kelly, a scholar at the American Enterprise Institute, a conservative think tank, said the administration’s action “opens up a potentially massive liability to taxpayers.”
We can expect two troubling outcomes: a new bureaucratic department to execute this plan and more colleges coming under fire.
Duncan plans to hire a “special master” to figure out the details of this bailout, to set standards determining whether schools gets on the naughty list, and the next set of schools on the chopping block. And of course the “master” will need assistants and additional personnel to handle paperwork. Once they are hired, to stay in business they will keep finding new violators. Therefore, the hit list will continue to grow.
Misleading claims should not be tolerated but they don’t warrant a bailout. It is concerning that the ballooning student loan debt is in part driven by students who take out loans and don’t finish their education or take more time to complete their studies than they should. However, there’s an element of personal responsibility that cannot be overlooked. Just as with a mortgage or car loan, we are expected to pay it off. Students have years until they complete their students to begin repaying on loans. It’s true this job market is cruddy for new grads, but that’s not enough to justify forgiveness of $3.6 billion in one fell swoop.
Discharging that debt and allowing students to walk away sends the message that anyone who didn’t do well after school and feels duped by her school can get off the hook. What about those of us who are faithfully paying our loans even though we didn’t necessarily get the “good” jobs we were told would come out of a college education? It’s not just for-profit colleges that sell a dream, so do non-profit public and private 2nd, 3rd and 4th tier schools which over the next decade face tenuous financial situations. What then?