Bankrupt college prompts thousands of students to apply for loan forgiveness

by Kelly Ledbetter |

(CNBC.com/SCREEN SHOT)

SANTA ANA, Calif. (Christian Examiner) – After Corinthian Colleges announced its closure Aug. 26, following its declaration of bankruptcy, former students have filed for loan forgiveness with the Department of Education. But the more than 12,000 applications will require time to process and approve, causing the student debtors uncertainty and concern.

Already more than $40,000 of student loan debt has been forgiven, with a stunning $3 billion or more loan relief possible.

Prior to this summer, loan forgiveness applications filed under the "borrower defense" claim, used when students believe they have been victims of fraud, were negligible.

Now, students of the closed or sold Corinthian Colleges and its subsidiaries in California, Arizona, New York, Hawaii, and Oregon have been flooding the Education Department with claims based on school closure and borrower defense.

Currently, 7,815 students whose schools have closed have requested loan forgiveness, while 4,140 have filed as victims of fraud. Thousands more applications are expected.

INVESTIGATED FOR FRAUD

After federal investigation for lying to students about job placement rates, Corinthian Colleges was levied a $30 million fine in April. It had already sold many of its campuses to Zenith Education Group in February.

The for-profit colleges focused on job training and were accused of making false promises to students about their post-graduation job prospects.

It filed for bankruptcy in May, and on August 26, Corinthian Colleges announced that it was effectively shutting down all operations as of August 27.

"Overall, our schools did a good job for the students they served," said chief executive officer of Corinthian Jack Massimino in a press release. "Neither our Board of Directors, our management, our faculty, nor our students believe these schools deserved to be forced to close."

Many of the 16,000 enrolled students did not realize the schools were closed until they arrived on campus on Monday morning.

LOAN FORGIVENESS APPLICATION

In light of the flood of loan relief applications, the Department of Education designated an independent monitor, Joseph A. Smith, to oversee the application review process and ensure compliance with state laws.

Applications related to the ongoing federal investigation might take months to process, Smith said. He is therefore attempting to categorize the applications to speed up review.

"One reason this is taking time is we're trying to be careful about the basis to create classes," Smith told Washington Post.

The government website dedicated to debt relief for Corinthian Colleges students says victims of fraud or other state law violations may be eligible for debt relief regardless of whether the school is open or closed. These students may also request loan forbearance while the claim is under review.

Ordinarily when a debt is forgiven, it is still subject to taxation. But California legislation, proposed by Sen. Janet Nguyen whose district included three Corinthian campuses, might additionally forgive state tax for student debtors defrauded by Corinthian, according to CNN Money.

COLLECTIVE DEBT RELIEF

Some of Corinthian Colleges' liquidated assets were apportioned by a bankruptcy judge to help students pursue loan forgiveness. The new groupings organized by Smith should also help speed the debt relief process.

But some applicants are considering bypassing the wait for individual forgiveness and suing the department for collective debt forgiveness for all Corinthian students.

Scott Gautier, an attorney for the students, said, "Given the fact that the Department of Education and attorneys general have already investigated and identified these deceptive practices, collective relief for students subjected to those practices should be given."

Considering the federal investigation and the circumstances of Corinthian's closure, students should acknowledge the unprecedented situation facing the Education Department as it seeks new methods for assessing claims.

The Education Department is aware of the students' fears. Education undersecretary Ted Mitchell said, "Creating a new system to handle thousands of claims will take a little time ... we know borrowers and taxpayers are counting on us."

Yet students who have been defrauded are anxious about awaiting assurances of loan forgiveness.