Economy

$480 Million In For-Profit College Debts Are Actually Worth Less Than $8 Million

CREDIT: AP

Richard Corddray is head of the Consumer Financial Protection Bureau, which on Tuesday announced a deal that significantly reduces what Corinthian Colleges students owe -- and makes it harder to understand why they should owe anything at all.

Students who were bilked into taking abusive high-interest student loans out from a leading for-profit college company will get some significant relief, the Consumer Financial Protection Bureau (CFPB) announced Tuesday. A total of $480 million in debt will ultimately be forgiven under the arrangement and 40 percent of the amount will be forgiven immediately for people who took out private loans from Corinthian Colleges’ so-called “Genesis” program.

Under federal pressure over its recruiting and student lending practices, Corinthian just completed a deal to sell half its campuses to a company called ECMC. ECMC will take a number of steps to convert the schools from Corinthian’s notorious business model to one that the Department of Education hopes will operate more benevolently and provide students with better outcomes. Tuesday’s debt writedown will cost ECMC a little bit of money, but in exchange they will be immune from liability in a nearly $570 million CFPB lawsuit.

The loans being forgiven here come from a particularly shadowy corner of Corinthian’s operation. The CFPB’s suit alleges that Corinthian intentionally inflated its tuition charges to exceed the maximum amounts that federal education loans will cover. When students came up short as a result, Corinthian offered them alternative loans under the Genesis program that were far more expensive and came with far more stringent rules. The agency says the company “lured consumers into predatory loans by lying about their future job prospects, and then used illegal debt collection tactics to strong-arm students at school.”

Students will get help cleaning up their credit reports in addition to the loan forgiveness, and ECMC will ensure that debt collectors do not threaten law suits against borrowers whose debts are being forgiven. But the ongoing CFPB lawsuit still makes it hard to assess the full picture for Genesis borrowers.

In one sense, the arrangement conceals more than it reveals. In August, Corinthian decided to cash out its portfolio of Genesis loans by selling them to a third-party collector. Corinthian said that it got “approximately $19 million” for the loans. According to CFPB’s lawsuit, that sale included “virtually all” of the Genesis loans that Corinthian owned, “totaling approximately 170,000 loans with a face value of $505 million.” Whoever paid $19 million for the right to collect on those loans would have been hoping to turn that investment into half a billion dollars in collections.

Taxpayers and students still know very little about who bought these loans from Corinthian and how that mystery company handled the current and former Corinthian students whose debts are being reduced under the deal announced Tuesday.

But other details from the agreement between ECMC and CFPB drew praise from some watchdogs who have worried about how the new company will operate. The deal stipulates that when ECMC reopens these schools under the new brand name Zenith, it will not use binding arbitration clauses in its enrollment contracts — something Corinthian was notorious for. “What’s important now is that students have a choice,” Public Citizen’s Christine Hines told ThinkProgress. Hines’ organization and others had asked the Department of Education to forbid ECMC from forcing students into arbitration courts that sheltered Corinthian from the normal justice system. Tuesday’s news wasn’t perfect because it still allows ECMC to restrict student class-action suits, she said, but “it’s a major step forward. They’re trying to make this process voluntary, and that part is a win.”

Maura Dundon of the Center for Responsible Lending agreed that the deal’s arbitration provisions are good news for students, but said the government could have gotten more. “The problem is that we’re not sure if it extends to employees as well. Arbitration is also a way to silence employees and whistleblowers,” Dundon said. She praised the debt relief for private Genesis loans, but expressed disappointment that “federal student loan holders who might have claims against Corinthian didn’t get the kid of relief we would’ve hoped.”

Many observers have hoped that the Department of Education (DOE) would use its leverage in the Corinthian-ECMC deal to rescue both current and former students from the loan debts they incurred to attend Corinthian. If the government was sufficiently convinced of Corinthian’s misdeeds to restrict its access to federal funding and force the company to sell off its schools, the thinking goes, then federal officials should also void the financial obligations that customers took on when they did business with the company. DOE officials are not convinced by that argument, however, and there is no plan as yet to let Corinthian students off the hook for their payments back to federal student lenders.

Critics who want all Corinthian-related debts forgiven can point to the murky details of the financial transaction underlying Tuesday’s debt forgiveness announcement. ECMC had to regain control of the Genesis loans in question in order to make the promises featured in Tuesday’s announcement. Corporate filings from Tuesday morning indicate that the company is paying $7.5 million to something called Balboa Student Loan Trust, a recently formed Delaware-based corporation that shares a mailing address with hundreds of others. In exchange, ECMC is getting the 40 percent immediate write-off on those debts. CFPB officials expect the debts will be forgiven in full eventually, and ECMC has promised to restrict the tactics collectors use on the debts in the meantime — two further conditions that depend on ECMC regaining control over the loans. (A spokesperson confirmed that the company had come to an arrangement to reduce the loan principal amounts but could not provide further clarification about Balboa, its relationship to ECMC, or which company now actually owns the loan paperwork in question.)

Until and unless the loans are fully forgiven, these students will still be asked to repay $288 million in Genesis loans. The transaction detailed in the corporate filings suggests that the market value of these loans is now down to $7.5 million, or less than 3 percent of the remaining face value of the loans after Tuesday’s announcement.

In general, the gap between the nominal price that collectors try to charge borrowers and the real price that lenders charge in the third-party debt buying marketplace gives student debt activists a leverage point. Last fall, that cost spread allowed an Occupy Wall Street offshoot called The Debt Collective to cancel about $4 million in student loan debts using just $100,000 in donated funds. The group plans to scale that sort of action up dramatically in the near future, and hopes to adopt even more aggressive tactics such as debtor strikes to force the Department of Education into renegotiating the terms of federal student loans. Private loans like the those involved in Tuesday’s announcement operate under starkly different rules and marketplace dynamics.

If the government is willing to force significant write-offs on Corinthian’s private loans, it stands to reason that the taxpayer-funding lending that went to the company might also be due for some shrinkage. Federal loans don’t get sold at a huge discount in the secondary market because the law is so favorable to collectors of federal education loan debt that they essentially never lose value. ECMC itself has spent decades making sure that education debt is almost impossible to shrug off. Even a loan that has been in default for years can eventually lead to a retiree’s Social Security check being garnished. That weakens activists’ leverage with federal lenders.

With diminished ability to force action, they can only appeal on logical grounds: since the same Corinthian practices also generated lots of federal student loans under the same allegedly deceitful promises about job prospects that lead CFPB to target the Genesis loans, those federal loans should also be treated as illegitimate. It isn’t just the Debt Collective’s rabble-rousers who make that argument, either. Sen. Elizabeth Warren (D-MA) and a dozen other Democrats in the Senate sent a letter asking the DOE to cancel federal loan debts for current and former Corinthian students who are involved in court cases and state investigations into the company’s practices.