Who’s Looking Out for the Students?

Last week at the Brookings Institution, Consumer Financial Protection Bureau (“CFPB”) Director Richard Cordray described his greatest challenge as CFPB director as coordinating his agency’s response with those of other agencies whose responsibilities overlap with the CFPB. Although he didn’t mention the U.S. Department of Education (the “ED”) by name, perhaps he was thinking of them when he spoke, given the two agencies’ widely divergent responses to the ongoing Corinthian Colleges debacle. For those who aren’t aware, both agencies recently accused Corinthian Colleges of misleading students about their job prospects at graduation. But the agencies appeared to part ways on the appropriate response. 

On first blush, the two agencies’ responses were not too different. The CFPB decided to sue Corinthian colleges for luring “students into taking out private student loans by touting ‘bogus’ job prospects.”  For its part, the ED sent a “toughly worded, 17-page letter” to Corinthian Colleges, claiming that the school was misrepresenting job placement statistics. This letter might have presaged a similarly aggressive response by the ED to Corinthian Colleges' alleged duplicity. But it was not. Instead, each agency's next steps were very different. While the CFPB continued to prosecute its lawsuit, the ED worked with Corinthian Colleges to find a buyer and prevent its campuses from shutting down. Why didn't the ED join the lawsuits or pending investigations by “nearly half of the country’s state attorneys general, the Department of Justice, Securities and Exchange Commission, and the Consumer Financial Protection Bureau”?

The deal that the ED has apparently blessed may save the ED approximately $600 million, but it seems to do so at the expense of the students the ED serves. Ordinarily, when an institution of higher education closes, its students can avail themselves of the “closed school discharge,” which enables students to discharge 100% of certain federal student loans if they meet certain criteria.  But the ED has apparently approved a deal struck between Corinthian Colleges and the Education Credit Management Corporation (“ECMC”), pursuant to which many students will not be able to avail themselves of the closed school discharge.  Moreover, the terms of the sale to ECMC provide for various payments to the ED, including $12 million at closing and a $17.5 “earnout” to be paid over the next seven years. In short, the ED is preventing some students from discharging debts that many think they were fraudulently induced to take out, and will receive a direct financial benefit from an entity that appears to benefit from this decision. As a result, some consumer advocates have claimed that the ED is hopelessly conflicted.

How the ED can claim that it’s protecting students when it’s depriving some them of the choice of whether to continue their studies or discharge many of their federal, student loan obligations, especially when the ED is collecting a fee in the process?

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