Student Loans: the next bubble to burst?

Eliminating the Burden of Predatory Student Debt

By Phil Mattera, Dirt Diggers Digest

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The Obama Administration has done the right thing in forgiving the debts of students who attended the schools run by Corinthian Colleges, the for-profit education racket that recently shut down and filed for bankruptcy amid widespread charges of fraud and a $30 million federal fine. Yet the action should have come much sooner and should be much wider in scope.

Over the course of 20 years, Corinthian, once a Wall Street darling, built an empire of some 100 schools offering dubious post-secondary career training programs to hundreds of thousands of students across the country. The company deceived applicants into signing up for expensive degrees of questionable value in landing good jobs, much of which made possible by the availability of what amounted to predatory federal student loans.

There have been questions about Corinthian’s practices for more than a decade. By 2004 the company was being investigated by the U.S. Department of Education and the attorney general of California, where the company was based. A narrowly focused SEC probe went nowhere, but more state cases were launched, along with student-initiated lawsuits.

California finally brought suit against Corinthian in 2013, accusing it of false and predatory advertising, securities fraud and intentional misrepresentations to students. At the same time, however, a federal appeals court ruled that the plaintiffs in the separate student lawsuits had to take their claims to arbitration, a process known for favoring corporations.

In 2014, under pressure from federal and state regulators, Corinthian began selling off its campuses or phasing them out. The company was then sued by the federal Consumer Financial Protection Bureau for illegal predatory lending. This helped bring about an announcement by Zenith Education Group, which had purchased many of Corinthian’s remaining properties, that it would forgive 40 percent of outstanding student loans.

Yet that was not enough. There were growing calls to cancel all the debt of Corinthian students. Some of those students did not wait for officials to act; they launched a debt strike. It was in this context that the Obama Administration’s action finally came, though the strikers are disappointed that the Education Department is not simply discharging the debt outright but is instead setting up a bureaucratic application process.

It may be hard to believe but there was once a movement called Wages for Students, which argued not only that those in school should not have to take on debt but they should in fact get compensated for the time spent being prepared to be more useful for a future employer. 

That view lost out to the ideology of personal responsibility and the mistaken notion that the average person can borrow his or her way to prosperity — a notion was exploited by predatory operators such as Corinthian using the federal government as their enablers and their collection agencies.

It is a positive development that the discussion has shifted from simple debt alleviation to the alternative of debt cancellation, but the process should not stop with Corinthian, which was egregious but not unique. There are plenty of other for-profit educational companies that have saddled students with debt for degrees of questionable value, or in many cases no degree at all.

The federal government did a lousy job addressing the predatory lending in the housing sector that contributed to the financial meltdown and seriously damaged the economic well-being of much of the population. Now it should make up for that failing by doing an aggressive and thorough job of eliminating abusive student debt once and for all.