The U.S. Department of Education’s debt collectors may be violating the law by collecting on defaulted federal student loan debt that’s likely invalid yet owed by "vast numbers" of defrauded for-profit college students, Senator Elizabeth Warren (D-Mass.) charged Thursday.
The issue concerns nearly 80,000 Americans in default on loans they collectively took out to attend more than 100 schools from 2010 to 2014 owned by defunct for-profit giant Corinthian Colleges Inc. The schools—which went by the Everest, Heald, and WyoTech brand names and were spread across more than 20 states—allegedly duped students into enrolling in dozens of programs by marketing false job-placement statistics, the Education Department has concluded.
Corinthian filed for bankruptcy last year amid an avalanche of government lawsuits alleging fraud.
Federal student loan borrowers can petition the department to cancel their debt—and get a refund on past payments—if they were defrauded. Borrowers who attended Corinthian programs that published false career data need only check a box and sign their names to a government form to discharge their debts. Then-Education Secretary Arne Duncan said last year that defrauded borrowers would receive “every penny of relief they are entitled to under law.”
The problem, according to Warren, is that the feds are making borrowers apply for debt cancellations, rather than giving it to them outright and not acting aggressively enough to get the word out to them. The Education Department has mailed applications to tens of thousands of potentially eligible borrowers and sent them e-mail reminders, but the department’s debt collectors and loan servicers still send them monthly bills that don’t detail the fact they can erase their loans.
The government’s process has clearly failed distressed borrowers, Warren said. An unknown number of the 79,717 former Corinthian students in default on their loans were likely defrauded, she said, citing data her office received from the Education Department. Yet the department has received just 23,185 debt cancellation applications from Corinthian borrowers. The federal government is seizing tax refunds, Social Security benefits, and earned-income tax credit payments intended for low-income Americans from more than 30,000 former Corinthian students in default on these loans. The Education and Treasury departments are also garnishing wages from more than 4,000 of them, Warren added.
One such borrower, Darnell E. Williams of Dorchester, Mass., sued the Education and Treasury departments on Wednesday for allegedly violating federal law by seizing his federal tax refund of $1,263 to pay off his Corinthian-related debt of nearly $11,000, even though the two federal agencies “possess ample information to conclude that [his] debt is presumptively nonenforceable.” The lawsuit was brought by lawyers at the Project on Predatory Student Lending at Harvard Law School.
The Federal Trade Commission and the Consumer Financial Protection Bureau have sued companies in the past for allegedly violating the law by collecting on debt they knew to be invalid.
In response, Education Undersecretary Ted Mitchell said his agency would conduct further outreach later this fall to inform Corinthian borrowers about their options. He didn’t provide any further details in his prepared statement. Rob Runyan, a Treasury spokesman, didn’t have an immediate comment. Pamela Shepherd, a spokeswoman for the National Council of Higher Education Resources, a Washington-based trade group that represents many Education Department debt collectors, referred questions to the department.
The Education Department tries to stem loan defaults in part by threatening to revoke colleges’ access to federal student loans and grants—lifeblood for most schools in the U.S.—if their former students default at high rates. But over the past two years, the department has spared some colleges from accountability by lowering their loan default rates on account of faulty servicing practices. Dorie Nolt, a department spokeswoman, wouldn’t say whether the feds gave colleges a break this year, too. The borrowers who defaulted on those debts were not granted a similar reprieve.