The Dodd-Frank Act gives the Consumer Financial Protection Bureau (CFPB) power to go after institutions that engage in unfair, deceptive, and abusive practices against consumers. On September 16, 2014, the CFPB filed a complaint in federal court against Corinthian Colleges for its predatory lending practices. Corinthian Colleges is the parent company of the for-profit colleges Everest, Heald, and WyoTech. The lawsuit against Corinthian and the debt strike brought up two issues related to student loans: the failure of for-profit colleges and the lack of relief for student debt. The CFPB alleged Corinthian lured students into debt with lies about their educational programs, predatory lending, and using illegal debt collection tactics.
First, Corinthian colleges promised good job placements, career options, and career services support. These promises were not met. In order to maintain this illusion, the CFPB alleged that Corinthian colleges created fictitious employers and manipulated the job placement rates. For example, Corinthian counted one-day job placements as a career. These schemes are similar to the misleading employment statistics that gave rise to a series of lawsuits against several law schools back in 2012. Also, Corinthian students received little career services support. For instance, the career services sometimes directed students to job postings from craigslist.
Second, the loans were predatory. A bachelor’s degree from Corinthian colleges cost about $60,000 to $75,000 in 2013, twice that of public colleges. The higher sticker price induced students to take federal loans and private loans from Corinthian. In 2011, Corinthian’s private loans had a 15% interest rate with a 6% origination fee, which was way more than the cost of a federal loan. Corinthian colleges mainly targeted economically disadvantaged students, many of whom were the first in their family to pursue post-secondary education. Their economic background combined with the high fees and interest rates made default highly likely.
Third, Corinthian colleges employed illegal tactics to collect on the loans, even while students were in school. When students failed to pay, Corinthian withheld diplomas and access to academic resources. As CFPB Director Richard Cordray said, “For too many students, Corinthian has turned the American dream of higher education into an ongoing nightmare of debt and despair.”
On top of this, many Corinthian colleges are closing their doors. Students are saddled with large debts and worthless degrees. Last week, 15 former Corinthian students declared a debt strike, refusing to pay their student loans because they have very few options. They do not have money to repay the debt nor can they discharge their debts through bankruptcy. Changing repayment plans is difficult, especially for private student loans because of inadequate loan-servicers services.
Before 1976, all educational loans were dischargeable through bankruptcy. However, political pressure and concern about the strategic student borrower who would game the system changed the regulatory regime. In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that made almost all student loans – federal and private – non-dischargeable. A narrow exception exists for “undue hardship,” but is an extremely high bar to satisfy. So, a student loan will most likely stay with the debtor for life, unless legislators provide some kind of relief such as the federal debt forgiveness programs for certain public interest professions. Recently, the White House proposed an initiative to offer stronger consumer protections for student borrowers and a method for borrowers to voice their complaints against loan servicers. Although the initiative will better protect the rights of borrowers, it still does not address the massive amount of student debt outstanding.
The CFPB estimates that the outstanding student debt exceeds $1.2 trillion in student debt, exceeding the nation’s credit card debt. The growing general consensus is that student debt hinders economic opportunities for low-income and even middle class individuals. The burden of educational loans makes it more difficult for many young people to invest in homes, save for retirement, or increase consumption. Should legislators change the bankruptcy code to offer relief to student borrowers like with other consumer debts? Some people support using the bankruptcy code to provide relief. Some don’t, because relief through bankruptcy arguably may lead to unintended, detrimental consequences for students: tuition increases that may perpetuate more borrowing. It is a difficult empirical question to answer. Changes to the current policy and regulation will occur if there is political will or political pressure on the legislators by constituents, student borrowers or not. At the very least, the lawsuit against Corinthian and the debt strike have added some momentum to the political discussion about this national issue.