Globe University and Minnesota School of Business are closing: We need federal legislation to manage college shutdowns

Globe University and Minnesota School of Business (MSB) began closing their campuses last month. The two for-profit institutions once operated in three states--Minnesota, South Dakota, and Wisconsin; but a series of regulatory and court actions brought them down.

In September, a Minnesota court ruled that Globe and MSB committed fraud by inducing students to enroll in their criminal justice programs.  Not long after, the Department of Education cut them off from federal student-aid funding. No for-profit college can survive a month without federal student-loan revenue, so DOE's action amounted to a death sentence for both institutions.

The demise of Globe and MSB follow in a train of college shutdowns over the past couple of years. The casualty lists includes Corinthian Colleges and ITT, two for-profits that declared bankruptcy. St. Catharine College and Dowling College also shut their doors, along with Virginia Intermont College.

DOE has more than 500 colleges on its "heightened cash monitoring" watch list, and many of these schools will shut down within the next three or four years. In a 2015 report, Moody's Investment Services predicted colleges would close at the rate of 15 per year commencing this year.

Now is the time for Congress to pass legislation to protect colleges' former students when the institution they attended shuts down. At a minimum, Congress should do the following:

I. Congress should pass legislation requiring every defunct college to deposit all student records in a central federal depository.

First student records at failed colleges must be preserved. Former students will need access to their official transcripts for decades after their alma mater closes, but how will they get those transcripts 25 years after the institution they attended shut its doors?

Currently, some closing colleges are voluntarily making arrangements to preserve student records. Dowling College, for example, which filed for bankruptcy in 2016, sent its student records to nearby Long Island University.

But not all closing colleges will act as responsibly as Dowling. In particular, colleges that are accused of defrauding their students have no incentive to preserve student records because those records might be used against them in legal proceedings.

Congress needs to adopt legislation that requires every college that receives federal funds to send all student records, including transcripts, to a federal records depository in the event of a closure. And colleges should be required to digitize their student records according to a standardized protocol so that the process of transferring records after a college closes can be done quickly and efficiently.

II. Non-operating colleges should forgive any loans owed to them by former students.

Most nonpublic colleges depend on federal student aid money for the bulk of their revenues, but some also lend money directly to their students.  For example, Globe and MSB loaned money to their students at interest rates as high as 18 percent. According to a Minnesota court decision, the two institutions  loaned money to approximately 6,000 students between 2009 and 2016.

Globe and MSB will be defunct in a matter of weeks, but the loans they made to students are debts they may try to collect. Federal law should require every college that loans money to students to forgive those loans if the college closes. As a matter of simple justice, a college that shuts down shouldn't be chasing after students who owe it money.

III. Congress should ease the path to bankruptcy relief for students who attended for-profit colleges.

Finally, Congress needs to streamline the loan-forgiveness process for students who attend for-profit colleges and received no economic benefit from the experience. It is particularly unjust for students to be on the hook for student loans taken out to attend a for-profit college that closed after being found guilty of fraud.

Under DOE regulations, students can apply to have their student loans discharged if they can make one of two showings: 1) they were induced to enroll based on fraud, or 2) they took out loans to attend a college that closed while they were enrolled or within 120 days of being enrolled.

Unfortunately, the administrative process for resolving discharge applications is slow and entirely inadequate to deal with the potential volume of claims. After all, Corinthian Colleges and ITT, which are both in bankruptcy, have around a half million former students between them.

Currently, the Bankruptcy Code bars debtors from discharging student loans in bankruptcy unless they can show that paying back their loans would create an "undue hardship."  Most bankruptcy courts have interpreted the undue hardship standard harshly, making it incredibly difficult for most college borrowers to clear their student loans through the bankruptcy process.

Congress should pass legislation that eliminates the undue hardship standard for all people who took out loans to attend a for-profit college and wound up broke.  The five-year default rate for a recent cohort of students who attended for-profit colleges is 47 percent--a clear indication that a lot of people got no benefit from attending a for-profit institution.

Conclusion: The Nation faces a swelling tide of college closures and needs an orderly process for shutting down higher education institutions.

One thing is certain: colleges are closing at an accelerating rate; and the Nation need an orderly process to minimize the harm to defunct colleges' former students. Student records must be safeguarded, student debt to failed institutions should be wiped out, and Congress needs to amend the Bankruptcy Code to allow former for-profit college students to obtain bankruptcy relief.

Photo credit: Wisconsin Public Radio

References

Christopher Magan. Globe U. and Minnesota School of Business to start closing campuses. Twin Cities Pioneer Press, December 21, 2016.

Rick Seltzer. Virginia Intermont's campus sale begs question of how colleges close accounts. Inside Higher Ed, January 5, 2017.

State of Minnesota v. Minnesota School of Business, 885 N.W.2d 512 (Minn. Ct. App. 2016).

Alia Wong. Farewell to America's Small Colleges, Atlantic, October 2, 2015.

Department of Education's fumbling efforts to aid students defrauded by Corinthian Colleges: No relief for the Walking Dead

David Goldman wrote a  highly informative article for Bloomberg yesterday about the Department of Education's fumbling efforts to process Borrower Defense claims filed by people who claim they were defrauded by Corinthian Colleges. I am grateful to Steve Rhode for calling my attention to Goldman's article.

Essentially, here's the story. Corinthian Colleges filed for bankruptcy last year under a cloud of fraud allegations. In fact, the the State of California got a $1.1 billion judgment against Corinthian for its wrongdoing in that state. At the time it filed bankruptcy, Corinthian had 335,000 former students.

DOE has an administrative process whereby it will forgive the student loans taken out by students who were defrauded by for-profit institutions. So far, 82,000 former Corinthian students have filed those claims.  But DOE's process for reviewing those claims is slow. Goldman reported that so far only about 15,000 students have gotten debt relief through the Borrower Defense process.

DOE won't grant blanket forgiveness to all of Corinthian's former students, arguing that not all of them were defrauded.  But in fact, a high percentage were defrauded. As Goldman reported, "Department officials concluded that Corinthian engaged in 'widesperead placement rate fraud' for almost 800 programs at nearly every one of its more than 100 U.S. campuses."

 David Vladek, a former director of the Federal Trade Commission's consumer protection division, said this about Corinthian's former students: "These kids by and large have been scammed, and the Department of Education in some sense is continuing the harm by making them jump through hoops to get the relief to which they are entitled."

But it gets worse. Not only is DOE not processing loan-forgiveness claims quickly, it is actually employing debt collectors to hound Corinthian's former students, even though most of these students are entitled to have their loans forgiven.  Although DOE states on its web site that it will stop all loan collection efforts on Corinthian borrowers, that statement is not true.

Indeed, DOE's debt collection activities are a hell of a lot more efficient than their loan forgiveness process. As Maggie Robb, a consumer-rights attorney, observed, " When the Department of Education wants to collect money, it doesn't stop."

Goldman's story focused solely on Corinthian Colleges' former students, but there are hundreds of thousands of people who took out loans to attend for-profit colleges who have been scammed. I know one woman with a documented claim for fraud against DeVry University who filed a Borrower Defense claim with DOE last August and still hasn't gotten a response from DOE.

In short, people who have been defrauded by the for-profit college industry are the real life representations of the Walking Dead. Fraud victims have debt hanging over their heads, which DOE has not discharged; and if they default on their loans they are subject to abusive debt collection tactics, wage garnishment, income-tax offsets, and ruined credit. Many are continuing to make loan payments on debt they don't really owe; and most did not get fair value for their for-profit college experiences.

In DOE's defense, the Department is simply overwhelmed by the implosion of the for-profit college industry. It does not have the resources to process claims by Corinthian students or to even notify those students that they may be entitled to debt relief. ITT's closure and bankruptcy will bring a deluge of new claims, and other for-profits are sure to follow over the next few months. (Globe University and Charlotte School of Law, for example, have been accused of misrepresentation and many of their students will be filing Borrower Defense claims.)

There is really only one sensible solution: DOE should allow all people who borrowed money to attend for-profit colleges and who are insolvent to file for bankruptcy relief in the federal bankruptcy courts. Whether or not a a particular student debtor can prove fraud should be irrelevant. If they took out loans to attend a for-profit college, the odds are better than even that they were scammed or did not get fair value for their money.

Students who were scammed by for-profit colleges are the Walking Dead.

Note: All quotations come from Mr. Goldman's article.

References

David Goldman. The U.S. Government Is Collecting Student Loans It Promised to Forgive, Bloomberg News, December 19, 2016.

Pam Hunt, debt striker, begs Obama to forgive all student loan debt of former Corinthian Colleges students: Let's hope the President responds

When Barack Obama steps down from the presidency next month, he will leave a huge mess behind for the next president to clean up. 43 million Americans hold student loans, and almost half of them can't pay them back.

Most desperate among the victims are the hapless souls who attended for-profit colleges. Many were enticed to enroll by high-pressure and even fraudulent recruiting tactics. Most paid far too much for their educational experiences, and few obtained jobs that paid well enough to justify their educational investments.

Under pressure from state and federal regulators, some for-profit colleges are closing and filing for bankruptcy. Corinthian Colleges, with 350,000 former students, filed for bankruptcy last year. ITT Tech filed for bankruptcy a few months ago, and Dade Medical College filed a bankruptcy-type action in Florida after it closed under allegations of corruption. Global University lost all federal funding earlier this month and will likely close.

Unfortunately, most of the students who attended these ne'er-do-well colleges are still liable on their student loans.  The federal government has processes in place for students to obtain loan forgiveness if they can show they were enticed to take out loans through fraud. But the process is slow. In late September, Senator Elizabeth Warren wrote the Department of Education a letter, specifically complaining about the Department's failure to provide speedy relief for Corinthian students.

Earlier this week, Pam Hunt, a former Corinthian Student, appealed directly to President Obama to forgive the student-loan debt of all Corinthian students. "We're appealing to you this one last time," Hunt said. "Please forgive these debts before you leave office."

President Obama should head Hunt's plea, but he probably won't. Secretary of Education John King raised two objections to Hunt's proposal. First, King said, it is not clear that fraud occurred on every Corinthian campus. Second, he said that Corinthian students should testify individually that they were victims of fraud.

King is ignoring the fact that the for-profit college industry is riddled with corruption and fraud, and has victimized millions. DOE doesn't have the resources to deal with these victims on a case-by-case basis, and many for-profit students aren't sophisticated enough to file administrative actions anyway. After all, more than half of the people in income-driven repayment plans are not certifying their income on an annual basis, which is a requirement for remaining in these plans.  Few Corinthian students have applied for loan forgiveness under DOE guidelines, even though almost all are probably entitled to relief.

Hunt is right. DOE should forgive all student loans taken out by Corinthian students. And it should forgive all student debt taken out by ITT Tech students, Global University students, and students who attended Dade Medical College.

After all,whether DOE forgives these loans or not, most of these loans won't be paid back. It is in the national interest to give all victims of the for-profit college industry a fresh start.

Pam Hunt: "Please forgive these debts before you leave office."

References

Andrew Kreighbaum. New Call for Debt Relief Before Obama Leaves. Inside Higher Ed, December 6, 2016.

Tamar Lewin, "Government to Forgive Student Loans at Corinthian Colleges," New York Times, June 8, 2015.

US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016.

Michael Vasquez. Dade Medical College sets in motion plan to sell assets. Miami Herald, November 18, 205.

 

ITT Tech files for bankruptcy, leaving more than 35,000 students in the lurch. 23 Democrat Senators ask the Department of Education to give ITT students special assistance

ITT Educational Services, a for-profit corporation operating more than 130 vocational and technical training schools, filed for bankruptcy earlier this month. The Department of Education shut off student aid money to ITT in late August, and the corporation quickly collapsed.

ITT's bankruptcy left  about 35,000 students in the lurch.  Most of them took out federal student loans to pay ITT's extraordinarily high tuition, and none of them will be able to complete their studies. DOE Secretary John King sent a message to these students telling them they had just two options: transfer their credits to other institutions or file for loan forgiveness under DOE's "closed school"forgiveness regulations.

On September 15, 23 Democratic Senators sent Secretary King a letter asking DOE to grant ITT's former students special assistance. The letter is slightly incoherent, which is understandable given the fact that 23 politicians had to agree on the text. Nevertheless, the Senators articulated several specific requests for relief.

Extending the eligibility guidelines for total student-debt relief for ITT's former students. First, the Senators want DOE to loosen the eligibility requirements for ITT students who file for total loan forgiveness under DOE's "closed school" relief regulations.  Under current DOE guidelines, ITT's former students can apply for debt relief under DOE's "closed school" procedures if they were enrolled at ITT at the time it closed or withdrew from ITT up to 120 days prior to closure.

The Democrats asked Secretary King to expand the 120-day window to a little more than two years. If King grants this request, any student who withdrew from ITT on or after March 1, 2014 will qualify to have their ITT student loans forgiven under DOE's "closed school" discharge process.

Preservation of ITT's student records. The Senators also asked DOE to preserve all of ITT's documents and records that might be relevant to an ongoing investigation of ITT's  activities or that could be helpful to students seeking to get their loans discharged..

Explore legal authority to automatically discharge ITT students' federal loans.  Finally, the Senators urged DOE to determine its authority to automatically discharge student loans of ITT    students and to consider discharging loans of all students who don't transfer their ITT credits to another institution within three years and who are otherwise eligible for a "closed school" discharge.

All these recommendations are commendable but they are far too timid. After all, as the Senators attested in their letter, DOE shut off ITT's funding based on serious concerns about "ITT Tech's deceptive practices, dubious educational quality, and financial integrity."

As reported in Bloomberg News, the U.S. Securities and Exchange Commission sued ITT for fraud in 2015, and the Consumer Financial Protection Bureau sued the company in in 2014, "accusing it of overstating students' job prospects and potential salaries and then pushing them into high-cost private loans that were likely to default." Both suits are still pending.

ITT has enrolled thousands of students over the years. Many of these students--my guess is most of them--received little or no economic benefit for their ITT tuition dollars.

I'm sure ITT can point to some students who completed their ITT studies and found good paying jobs, but I think for every success story  there is surely one or more students who  got no economic benefit from their ITT studies and wound up heavily in debt.

One thing is certain. The for-profit college industry is imploding, and DOE needs a comprehensive process for assisting students who attended one of the collapsing for-profit schools.  Several years ago, Professor Robert C. Cloud and I proposed a change in the Bankruptcy Code that would allow anyone who accumulated student-loan debt from attending a for-profit college and who is insolvent to receive a bankruptcy discharge of student-loan debt without having to show "undue hardship."

In other words, we argued that student debt acquired to attend a for-profit college should be treated like any other unsecured debt, which would make it readily dischargeable in bankruptcy. In my view, this proposal makes more sense than for DOE to deal with each collapsing for-profit college on an ad hoc basis.

Let's see if our U.S. Senators have the courage to offer broader relief for for-profit college students than the tepid proposals contained in the Democratic Senators' recent letter.


References

Richard Fossey, Robert C. Cloud, R. (2011). From the cone of uncertainty to the dirty side of the storm: A proposal to provide student-loan debtors who attended for-profit colleges with reasonable access to the bankruptcy courts. Education Law Reporter, 272, 1-18.

Secretary of Education John B. King Jr. A Message from the Secretary of Education to ITT Students. Accessible at http://blog.ed.gov/2016/09/message-secretary-education-itt-students/

Letter to the Honorable John King, Secretary of Education, from 23 Democratic Senators, September 15,2016. https://www.insidehighered.com/sites/default/server_files/files/9_15_16%20ITT%20Tech%20ED%20Letter%20(1).pdf

Dawn McCarty and Shahien Nasirpour. ITT Educational Services Files for Bankruptcy After Shutdown. Bloomberg, September 16, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-09-16/itt-educational-services-files-for-bankruptcy-after-shutdown-it6byu6t

Reuters. ITT Educational Services Files for Bankruptcy After Aid Crackdown. International New York Times, September 17, 2016. Accessible at http://www.nytimes.com/2016/09/18/business/itt-educational-services-files-for-bankruptcy-after-aid-crackdown.html?_r=0

The Department of Education shuts down ITT Tech: No lifeboats for ITT's former students

In one of Patrick O'Brian's novels on life in the 19th century British Navy, a British fleet attacks a flotilla of Barbary pirates, who are in armed galleys rowed by Christian slaves. A British ship sails into the galleys at full speed, ramming one galley and cutting it in half.

The galley slaves are chained to their oars and cry out for help as their galley begins to sink. But the British ship sails on, leaving the slaves to drown. One of the British officers is so upset by the incident that he commits suicide.

Which brings me to the Department of Education's recent decision to cut off federal student-aid funding for all students enrolled on the campuses of ITT Educational Services. ITT had been subjected to a number of state and federal investigations, but DOE's decision to shut off the spigot of federal money was a death sentence for ITT. Within a few days after DOE's action, ITT shut its doors.

If all the allegations against ITT are true, this for-profit institution deserved to be shut down. But what about ITT's 45,000 current students, most of whom took out loans to pay their ITT tuition? What about the thousands of former ITT students who are trying to pay back their student loans? Will DOE offer these poor folks any relief?

Apparently not. DOE Secretary of Education John B. King Jr., issued a letter to ITT students offering them two options, which I quote:

1. If you are currently or were recently enrolled at ITT, you may be eligible to have your federal student loans for your program at ITT discharged. Your federal loan debt will be wiped away and you will have the option of restarting your education somewhere new. . . .
2. If you wish to continue to complete your program at a different school--especially if you are close to graduating--you may be eligible to transfer your credits. It is important to note that transferring your credits may limit your ability to have your federal loans discharged. Closed school discharge may be an option if you enroll in a different program that does not accept your ITT credits.

In short, King gave ITT students two choices: Current ITT students or students who recently withdrew from ITT (within 120 days before ITT closed) can apply to have their loans discharged. Other students can try to transfer their ITT credits to other institutions, which may or may not accept them.

In my view, King's letter is very much like sinking a pirate galley and allowing the poor galley slaves to drown.

Let's face facts. Most of the students who attended for-profit colleges got a substandard educational experience. Many former students claim to be victims of high-pressure recruiting tactics and misrepresentations about the quality of the programs that were offered. Almost half of a recent cohort of for-profit college students defaulted on their loans within 5 years of beginning repayment. All the problems in the for-profit college sector were plainly laid out in Senator Tom Harkin's Senate Committee report that was released several years ago.

The for-profit college sector is collapsing. Corinthian Colleges filed for bankruptcy, University of Phoenix has seen its enrollments drop by half, Stock prices in the for-profit college industry have plummeted.

There is only one fair thing for DOE to do. All students who attended a for-profit college that closed or has been found guilty of widespread fraud or misrepresentation should have their student loans discharged. I repeat--all students. And these discharges should be administered en masse without requiring for-profit students to go through a burdensome administrative process.

This won't happen of course, because releasing  for-profit college students from their student loans would cost the federal government tens of billions of dollars. But again I say, let's face facts. Most of these students were ripped off by the for-profit college industry and most will never pay back their loans anyway.

But Secretary King prefers to behave like the nineteenth century British Navy. DOE is sinking the bad guys but allowing innocent victims to drown, chained down like galley slaves by massive student-loan debt.

References

Patrick Gillespie. University of Phoenix has lost half its students. CNN Money, March 25, 2015. Accessible at http://money.cnn.com/2015/03/25/investing/university-of-phoenix-apollo-earnings-tank/

Secretary of Education John B. King Jr. A Message from the Secretary of Education to ITT Students. Accessible at http://blog.ed.gov/2016/09/message-secretary-education-itt-students/

Brian Stoffel.  Stocks to Watch in For-Profit Colleges. Motley Fool, June 9, 2015. Accessible at http://www.fool.com/investing/general/2015/06/09/stocks-to-watch-in-for-profit-colleges.aspx

United States Department of Education. Increased Oversight of ITT and the Impact on Students.  Accessible at http://blog.ed.gov/2016/08/increased-oversight-of-itt-and-the-impact-on-students/

United States Health, Education, Labor and Pension Committee. For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success. July 2012. Accessible at: http://www.help.senate.gov/imo/media/for_profit_report/PartI.pdf