U.S. Is Collecting Student Loans It Promised to Forgive

The U.S. Department of Education has two quite different roles in the lives of indebted former students. The same bureaucracy that must safeguard taxpayer dollars by collecting $1.1 trillion in loans also oversees the nation’s largest-ever effort to forgive student debt.

These dual roles have culminated in a strange situation. The Obama administration has repeatedly promised that borrowers eligible to have their student loans cancelled would be reimbursed for “every penny.” But for months, the Education Department has been actively working to collect on federal student debt owed by tens of thousands of former students at Corinthian Colleges Inc., which filed for bankruptcy in 2015 under a cloud of fraud investigations.

It is clear that government officials, working under their own guidelines, have reason to believe at least some of these same debts should be forgiven. When companies have similarly hounded borrowers to repay debt without disclosing that borrowers do not owe it, they have been charged by federal and state regulators with violating the law.

“There’s no clear-cut reason why there shouldn’t be automatic loan forgiveness for people who otherwise would have a legal claim for deceptive conduct against this now-bankrupt company,” David Vladeck, a former director of the FTC’s consumer protection division, said of Corinthian students. “These kids by and large have been scammed, and the Department of Education in some sense is continuing that harm by making them jump through hoops to get the relief to which they are entitled.”

The Education Department is effectively disregarding records it obtained earlier this year—a development not previously reported—that identify former Corinthian students eligible for debt relief under the administration’s criteria. Instead of halting collections, however, the department has outsourced the work of informing these borrowers to budget-strapped state attorneys general. 

This account of the government’s inconsistent actions toward distressed borrowers is based on records and interviews with more than two dozen borrowers, former federal regulators, current state prosecutors, public interest attorneys, and others working on student loan issues.

The government stands to gain from muscular collection tactics. Not all former Corinthian students are eligible to have their debt cancelled. But eliminating the debt of those who are could cost the federal government nearly $4 billion, according to Education Department estimates. That’s enough money to fund one year of Pell Grants for more than 600,000 students.

Eligible borrowers may have their debts erased because the Education Department determined that Corinthian defrauded them into taking out federal loans by advertising false job placement rates for its many career programs. Department officials concluded that Corinthian engaged in “widespread placement rate fraud” for almost 800 programs at nearly every one of its more than 100 U.S. campuses. Prior to its collapse, Corinthian consistently denied any wrongdoing.

“The department is not collecting on loans from borrowers that it knows are eligible” for fraud-based debt cancellations, said Kelly Leon, an Education Department spokeswoman. Leon said the department had corrected errors after identifying them and that education officials believe “nobody should be in collections for a loan that is eligible to be discharged.” The department worked with state prosecutors because they have resources the department doesn’t have, Leon said. She declined to answer numerous questions submitted in writing or provide further comment addressing Bloomberg News’s findings. 

Corinthian, once among the largest for-profit chains in the country with such schools as Everest, WyoTech, and Heald, faced a flood of government investigations and lawsuits alleging systemic fraud before filing for bankruptcy. In the aftermath, the federal government declared that as many as 335,000 former students could erase their loans by checking a box and signing their names on a simple form, under penalty of perjury. Doing so, the former students were told, would void their debt and prompt a refund on past payments.

But things turned out to be far more complicated for defrauded borrowers.

Even though the Obama administration presumes Corinthian misled these borrowers, as many as 80,000 of them are in default and battling draconian collection efforts—wage garnishments, the seizure of tax refunds and federal benefits—on behalf of the Education and Treasury departments. Others are paying off debt they aren’t aware they don’t owe.

The Obama administration’s moves underscore a basic fact about the officials who run the federal student loan program: Their job is to maximize collections, not assist borrowers. In fact, the same person—James W. Runcie, chief operating officer of the department’s student aid unit—directly oversees both collection and forgiveness. Runcie declined to comment.

“These kids by and large have been scammed, and the Department of Education in some sense is continuing that harm by making them jump through hoops to get the relief to which they are entitled.”

Christopher Suarez was unemployed when he enrolled at a Corinthian school in 2011. Recruiters promised he’d make a minimum of $30 an hour following graduation from a car repair program, he said, and showed him data on how the previous year’s graduating class had fared in the workforce. But after he graduated, interviewers told him the best he could hope for was a retail job at Pep Boys or AutoZone making $9 an hour.

This year, Suarez received letters from a government contractor threatening to garnish his wages to pay back some $25,000 in defaulted student loans despite submitting the government’s required paperwork for debt relief in August with the help of a public interest attorney. Unable to land a job repairing cars, the 42-year-old from Antioch, Calif., makes about $25,000 annually as an office assistant at a hospital. “Oh, God, they’re going to take my car, garnish my paycheck, or come into my house and take stuff that I own,” Suarez said of his fears of the government’s contracted debt collectors.

The first wage garnishment order came a few weeks after Suarez petitioned the Education Department to cancel his debt. He appealed the decision by submitting his debt-relief application, to no avail. “You have provided no evidence or documentation to support the objection(s) you raised,” read the Oct. 6 letter from the department’s loan contractor. This letter arrived even though both Suarez and his attorney say he meets the qualifications for debt cancellation.

Tens of thousands of former Corinthian students are similarly eligible to have their federal loans wiped—and many of them remain unaware.

Debtors such as Suarez aren’t told on their monthly bills that they’re eligible to have their loans erased. While the Education Department has sent a few letters and e-mails to some 335,000 former Corinthian students telling them they could be eligible for debt relief, advocates say that’s hardly the most effective way to get the message out. “Consumers are much more likely to open mail containing their bills rather than some random letter,” notes Joel C. Winston, a former senior official at the Federal Trade Commission.

When Suarez received one such letter from the feds, he thought it was a hoax. He once had been taken in by a television ad promising debt relief, forking over $500 before he realized it was a scam. “I can’t see a reason why they just wouldn’t put something on the bill saying, ‘Hey, if you feel you’ve been defrauded, check this box,’” Winston said.

In fact, the feds have taken similar steps in previous cases. In 2014, the FTC required T-Mobile to notify consumers of their right to refunds on different color paper than their bills. Robert Kaye, an Education Department official supervising its debt-relief initiative, was a senior official in the FTC’s consumer protection division at the time. When asked during a conference call on Oct. 18 why the department wasn’t doing more to help borrowers, Kaye cited budgetary implications beyond his control, said Luke Herrine, a member of the activist group Debt Collective who was on the call. Kaye declined to comment.

“When the Department of Education wants to collect the money, it doesn’t stop,” said Maggie Robb, a staff attorney at the Empire Justice Center in Rochester, N.Y., who has represented former Corinthian students. “It figures out a way. Why don’t they do that in trying to help these students get their loans discharged?”