A scheme designed to evade an important Department of Education rule could soon lead to an estimated 41,000 former Corinthian College students and loan borrowers receiving more than $183 million in student loan relief.
Aequitas Capital Management, a former financial services firm, is charged with acting in concert with Corinthian College to preserve the now-closed for-profit college’s heavy reliance upon federal financial aid. Operated across much of the country, the alleged fraudulent partnership also enabled Corinthian to trap students in unaffordable private student loans.
“Tens of thousands of Corinthian students were harmed by the predatory lending scheme funded by Aequitas, turning dreams of higher education into a nightmare,” said Consumer Financial Protection Bureau (CFPB) Director Richard Cordray. “We will continue to address the illegal lending practices of for-profit colleges and those who enable them.”
An investigation and subsequent charges were coordinated by a state-federal effort that included 13 state attorneys general working with CFPB and representing: California, Colorado, Connecticut, Florida, Illinois, Iowa, Kentucky, Maryland, New York, Oregon, Pennsylvania, Texas and Washington.
Together the governmental officials charged that Aequitas aided Corinthian in a $230 million predatory lending scheme to mask its lack of compliance with a Department of Education rule requiring for-profit colleges to have a minimum 10 percent of its revenues from non-governmental sources. The CFPB alleges that both firms knew the students could not repay the loans and would default. At the time, the default rate ranged from 50 to 70 percent.
The default would not affect Aequitas because Corinthian was committed to buying back all delinquent loans. Aequitas retained only those loans that did not default but charged high interest rates and therefore reduced the chance of any financial risk.
In 2016, the Securities and Exchange Commission also sued Aequitas and three of its top executives. That complaint alleged the firm ran an illegal Ponzi scheme that defrauded 1,500 investors.
“These were sham loans used by for-profit schools and lenders to access federal taxpayer dollars to fund programs that did nothing to help students get ahead,” noted Illinois Attorney General Lisa Madigan. In Illinois, Corinthian owned and operated seven Everest College campuses and approximately 2,800 Illinois students are expected to be eligible for relief.
These private-label loans known as “Genesis” loans had terms that required students to begin repayment as soon as they were enrolled in Corinthian classes. The government investigation also charges that both Aequitas and Corinthian continued to make the loans despite knowing students could not afford them. Aequitas reportedly knew that the loans provided no benefit to Corinthian other than the appearance of eligibility for federal funds.
If the proposed settlement is approved, eligible borrowers will be notified within 90 days following its announcement. Officials estimate that borrowers will average $6,000 to $7,000 in loan relief.
Genesis Loan borrowers who were 270 days or more past due as of March 31, will receive forgiveness on all balances, according to CFPB. All other Genesis Loan borrowers would be forgiven any accrued and unpaid interest, fees and charges that were 30 days or more past due as of March 31; additionally, these borrowers’ remaining principal owed would be cut 55 percent.
Earlier this year, the Center for Responsible Lending (CRL) released a series of research reports on for-profit colleges. Findings revealed that for-profit students have lower graduation rates and carry heavier debt loads than their counterparts at private, non-profit and public schools. The research also uncovered that students of color are disproportionately enrolled in for-profit colleges in Connecticut, Colorado and Maine. Though these states have comparatively few residents of color, students of color were heavily recruited.
“Many for-profit college students are working hard to break into the middle class and build financial security for themselves and often their families,” said Lisa Stifler, CRL’s deputy state policy director. “Our research shows the anguishing outcomes of high debt, no degree and few promising job prospects that fall more heavily on people of color.”
These findings and others underscore the fact that as higher education costs continue to climb, the choice of institution is ever more important. Just as a combination of state and federal resources were needed to bring former Corinthian College students closer to financial justice, it will take continued efforts at both levels of government that are watchful of the quality of education offered.
Recent rollbacks in consumer protections from the federal Department of Education (DOE) do not bode well for student borrowers. For example, the Gainful Employment rule developed under the Obama Administration holds hundreds of career colleges accountable for the education students received. Earlier in August, DOE announced its intention to “reduce the burden on institutions” by extending appeal deadlines involving schools that failed the rule.
Further, instead of objective measures to determine regulatory compliance, appeals will be reviewed on a case-by-case basis. These institutions may also continue to enroll students dependent upon federal financial aid -- even during appeal.
"Unfortunately, Corinthian is not alone in abuses that harm students," added Stifler. "State and federal regulators must continue to crack down on the widespread problems that exist among for-profit schools.”