Collections Actions Tied to For-Profit-College Fraud Triggers Suit

WASHINGTON (CN) – Three states brought a federal complaint Thursday against the government for enforcing debt collection against students who were defrauded by a defunct chain of for-profit colleges.

The Dec. 14 complaint filed by the attorneys general for Massachusetts, Illinois and New York alleges that the Department of Education is unlawfully seizing tax returns and garnishing the wages of students who attended Corinthian colleges. The department is also refusing to review loan-forgiveness applications from thousands of students who were victimized by for-profit colleges, according to the complaint.

“Both the underlying student loan promissory notes and department regulations require the department to recognize school violations of state law as a defense to repayment of federal student loans,” the 41-page complaint says. “The department’s failure to do so, and its ongoing collection activity relating to these loans, should be declared unlawful by this court.”

The Department of Education did not return a phone call seeking comment on the lawsuit.

Prosecutors at the Massachusetts Office of the Attorney General and the Illinois and New York Consumer Fraud Bureaus did not return emails seeking comment.

The complaint notes that the Department of Education, while working in conjunction with multiple state attorneys general, discovered fraud at more than 100 Corinthian College campuses. Among other violations of federal law, the schools had been using inflated job placement rates to induce enrollment between 2010 and 2014.

The Massachusetts attorney general submitted a loan-forgiveness claim in 2015 on behalf of more than 7,000 students, along with supporting evidence. The Illinois attorney general followed suit a year later submitting a claim for more than 6,000 students.

Corinthian eventually buckled under the pressure of numerous lawsuits and investigations, collapsing in April 2015. Along the way, the Department of Education had cut off its access to federal aid, and the government slapped the for-profit chain with a $30 million fine. The Consumer Financial Protection Bureau had also brought a $500 million lawsuit against the company for urging students to take out high-cost loans.

Last year, the Department of Education announced it would allow defrauded students to apply for debt relief through an online form. The agency also conducted extensive outreach to affected students, and requested that states undertake their own outreach efforts.

Citing the findings outlined in a report released by the Department of Education inspector general on Tuesday, the lawsuit notes that the Department of Education stopped approving loan-forgiveness claims on Jan. 20, 2017. Since then, the backlog of claims has swelled to more than 95,000, according to the complaint.

“This is especially egregious with respect to Corinthian borrowers in the Designated Fraud Cohorts because the Department has already determined that these borrowers were subject to fraud,” the complaint says.

Insisting that the agency has the infrastructure in place to handle the claims, the complaint notes that it processed more than 31,000 such applications were processed prior to the change in administrations.

The inspector general urged the Office of Federal Student Aid to begin processing the claims again.

Alleging violations of the Administrative Procedure Act, the states seek an order blocking the department from collection activities in cases where significant evidence shows that Corinthian broke state laws or in cases where a student has been determined to have been the victim of fraud.

The states are also asking the court to force the Department of Education to forgive loans for students with a valid defense against repayment.

A related lawsuit was filed in California Thursday.

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