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Loan Forgiveness For Bad-Faith, Not Bad-Bargain Schools

Under the new guidelines for student loan forgiveness, the little advertising mailers that your college sent you could wind up being just as important as your income — if they induced you to enroll under false pretenses.

On Monday, Secretary of Education Arne Duncan announced that his department would develop a new review process to forgive the federal loans of any student who was defrauded by his or her alma mater. The first students affected were those who attended Corinthian Colleges, a for-profit company that filed for bankruptcy last month. Tens of thousands of Corinthian students will have their federal loans forgiven.

Students were already protected from debt if their school simply collapsed. A student who is enrolled in a college at any time in the 120 days before its closure is eligible for debt relief. The new guidance takes aim at so-called Potemkin schools, which deceived their students when they signed them up.

The new expansion of loan forgiveness is rooted in a provision of the 1965 U.S. Higher Education Act, which gives the Department of Education the power to determine what omissions by a school constitute a “defense against repayment.”

According to a 2012 investigation by the Senate Committee on Health, Education, Labor and Pensions, that might make a lot of students of for-profit schools eligible to discharge their debts. When the Senate committee examined 30 major for-profit education companies, it found that a large share of the schools’ sales divisions had a “boiler-room atmosphere.” In the rush to recruit, the committee’s report said, many of the companies “used tactics that misled prospective students with regard to the cost of the program, the availability and obligations of Federal aid, the time to complete the program, the completion rates of other students, the job placement rate of other students, the transferability of the credit, or the reputation and accreditation of the school.”

The committee’s report makes clear why these schools may have been tempted to lie about their retention rates and job prospects: The true numbers are awful. More than half (54 percent) of students who enrolled in a for-profit program run by one of these 30 companies in 2008-09 wound up withdrawing without a degree. Even students who finished their degrees fared poorly. According to a 2012 report from the Department of Education’s National Center for Education Statistics, students who received a bachelor’s degree from a for-profit school in 2007-08 were about twice as likely to be unemployed as students who got their bachelor’s degree from a public or private nonprofit school (12 percent of for-profit graduates were unemployed, compared with 6 percent of public-school graduates and 7 percent of graduates of private nonprofit schools).

Not all those students are eligible for loan forgiveness, though, even under the new guidelines. It’s not enough for a school to have been a bad bargain; the school must have lied. Corinthian didn’t just have terrible employment rates for its graduates, it actively mischaracterized the jobs its students got and created phony, two-day jobs to inflate the school’s employment numbers.

Based on Corinthian’s record, it’s not just students at for-profit schools who have reason to hope the Department of Education’s new program will discharge their debts. A number of law schools have drawn criticism for using Corinthian-like tactics to goose their post-graduation employment numbers. U.S. News and World Report collects data on “graduates known to be employed nine months after graduation” from law schools. Georgetown Law is one of several schools that has hired some of its unemployed graduates back for temp jobs during this critical window, allegedly so these students won’t be counted against the school.

Every act of statistical legerdemain, even from a reputable school, is now a piece of evidence that may make graduates eligible for federal debt relief. It’s up to the Department of Education to sift through the advertisements from schools at every level and draw the line between spin and fraud.

Leah Libresco is a former news writer for FiveThirtyEight.

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