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Education Department Wants To "Claw Back" Loan Dollars From Disgraced Colleges

As more for-profit college students seek to have their federal student loans cancelled, the government is looking for ways to keep taxpayers off the hook.

Posted on August 19, 2015, at 4:08 p.m. ET

U.S. Secretary of Education Arne Duncan
Larry Downing / Reuters

U.S. Secretary of Education Arne Duncan

The Education Department said Wednesday that it would move to enact regulations that allow the government to "claw back" money from colleges that defraud students, and potentially penalize schools whose students had loans discharged because of fraud.

The for-profit giant Corinthian Colleges was shuttered earlier this year in the wake of allegations that it had misled tens of thousands students. Since then, the Education Department has been pressured by lawmakers and activists to craft a process through which defrauded students at Corinthian and other schools can apply to have their student loans discharged.

The Department said today that it was looking to codify that "borrower's defense" process in federal regulations, establishing procedures and requirements for students to meet.

The regulations would also seek to ensure that taxpayers were not on the hook in the future for colleges' bad actions. Taxpayers are largely footing the bill for student loan discharges at Corinthian, which raked in billions of dollars of federal loan money but is now bankrupt, without assets to compensate the approximately 10,000 current and former students who have applied for some form of loan relief from the government.

"We are going to look at where we have the legal rights, in statues, to claw back any successful borrower's defense claims from institutions," Mitchell said. "This will make it clear to us and clear to institutions how they will be on the hook, should they defraud students."

In a press call Wednesday, Education Department undersecretary Ted Mitchell was vague on exactly how those regulations might work, saying it would wait to formulate them with the help of public hearings and a rulemaking committee.

In launching her own higher education plan last week, Hillary Clinton said she supported "institutional risk-sharing," an idea that has been floated by several other prominent Democrats. It would force schools whose students were defaulting on their loans in high numbers to pay fines into a pot used to compensate students.

The for-profit college industry — which has been backed by several key Republican presidential candidates, including Marco Rubio — is likely to stand in strong opposition to any attempts to further regulate the industry. The department said it was hoping to enact the rules by November 2016 — a time frame that might allow a Republican administration to later dismantle them.

The department has at times struggled with regulating for-profit colleges in the face of industry pressure. It took four years to push through "gainful employment regulations," which penalize for-profit colleges where students have high ratios of debt to earnings, after a lawsuit by an industry lobbying group led to the dismantling the original rules, forcing the government back to the drawing board.


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