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Court Ruling Could Push Debt Forgiveness For Cheated Students

The owner of the disgraced Everest University chain has been ordered to pay $530 million to former students. They'll likely never see a dime, but the ruling is important.

Posted on October 29, 2015, at 4:35 p.m. ET

Photograph by Molly Hensley-Clancy for BuzzFeed News

Despite a judge's $530 million ruling Tuesday against the operator of the disgraced Everest University chain of for-profit colleges, tens of thousands defrauded students are unlikely to ever see a dime from the bankrupt company, whose meager assets were handed over to lenders long ago.

But the ruling against Corinthian Colleges may still have important implications for former Everest students: advocates say it should provide a basis for the Department of Education to forgive Corinthian students' federal loans. The lawsuit against Corinthian was filed by the Consumer Financial Protection Bureau last year.

The judgement is the first of its kind. Throughout its storied collapse, the giant for-profit college maintained it had "never been given due process to refute the unsubstantiated allegations" of fraud against students. That was essentially true: Corinthian faced an onslaught of investigations and lawsuits by state attorneys general, a probe by the SEC, and a finding of fraud by the Education Department earlier this year. One was settled without an admission of guilt; others are ongoing.

But until Tuesday, after the bankrupt Corinthian ceased to defend itself in the CFPB's lawsuit, there had never been a ruling in a court of law against the for-profit college.

"This is the first ironclad, definitive judicial finding that this operation was formally engaged in fraud," said Barmak Nassirian, a policy analyst American Association of State Colleges and Universities and a longtime critic of the for-profit college industry.

The judgement could help those trying to make the case that Corinthian's students were misled into taking out loans, and are therefore eligible to have the debt forgiven. Former Corinthian students and activists are using a previously unknown student loan protection clause, called "defense to repayment," to argue that the federal government is obligated to forgive the loans of former Corinthian students. According to that clause, students "may assert, as a defense against collection of your loans, that the school did something wrong.”

The Education Department has mostly remained vague about how it plans to determine whether Corinthian "did something wrong," enabling the government to forgive loans. But officials told reporters this summer that one of two conditions would provide sufficient evidence of misconduct: the department's own findings against a school, or a "final judgment" against a college in a court of law.

β€œThe Department of Education should use this ruling to provide comprehensive debt relief to Corinthian students," said Maura Dundon, senior policy council for the Center for Responsible Lending. "It is now beyond clear that they were deceived into taking out their loans and deserve a fresh start.”

Denise Horn, an Education Department spokesperson, said: β€œThe Department’s Special Master is reviewing all borrower defense claims and will consider this ruling in that process.”

The department used its own findings from an investigation against Heald Colleges, a smaller school owned by Corinthian, as a basis to offer blanket forgiveness to all former students of that chain. But the federal government has not had any findings against Everest Colleges and Universities, which was by far the company's largest chain.

Tuesday's ruling "should signal the eligibility for loan forgiveness of every one of the students who borrowed," said Nassirian.

Debt forgiveness based on Tuesday's ruling is complicated by the fact that the Consumer Financial Protection Bureau's lawsuit technically pertains only to a relatively small portion of private student loans issued by Corinthian β€” the only loans over which the CFPB holds jurisdiction.

The judge found that Corinthian had deceived students into taking out those private loans using misleading information and falsified job-placement rates. The CFPB says that more than 60% of Corinthian students defaulted on those private loans within three years.

The rulings do not pertain to the billions of dollars in federally-backed loans that make up the bulk of the debt owed by former Corinthian students β€” the loans that former students and advocates are fighting to have forgiven.

Advocates said that when it comes to the Education Department's rulings, the distinction between fraud relating to private and federal loans should be meaningless. "If they were lying to people about private loans," Nassirian said, "they were lying about federal loans."