A major for-profit private school has declared bankruptcy and ceased operations, leaving thousands of students with significant debt and no degrees. The closure has also raised questions about the nature of student loans and personal bankruptcy.
In the wake of a $30 million fine from the Department of Education for inflating graduate hiring statistics, Corinthian Colleges announced that its 28 campuses would close. Collectively, about 16,000 former students owe an estimated $480 million in student loans.
To call attention to their predicaments, and in protest of the school’s illegal activity, a number of these students are staging a “debt strike” and are refusing to make loan payments. Several key Democrats are sympathetic to their case: Senators Barbara Boxer of California and Patty Murray of Washington sent a letter to the Department of Education requesting “additional support” for the displaced students.
Corinthian Colleges also owned Everest University and Heald College campuses, as well as WyoTech College in Laramie.
Student Loans and Bankruptcy
Student loan discharge is a thorny issue because of the difficulty in categorizing these debts.
On the one hand, student loans are an investment. If a person borrows money that is related to the Small Business Administration and that enterprise subsequently fails, the borrower still must repay the funds. Discharge opponents argue that student loans have a similar risk, and if the investment in tuition does not pay off, for whatever reason, the students should still repay their loans.
But the difference is that the SBA only loans money to qualified borrowers who have some wherewithal to repay the funds even if the business fails. Moreover, the SBA will not approve a loan to someone with no business experience or a poor business plan. Student loans, on the other hand, are available to almost anyone who is attending any postsecondary institution.
There is a second issue, related to the loan guarantees issued by the federal government. Theoretically, depending on the nature of each loan agreement, the government could be forced to pay out billions of dollars to private banks whose borrowers defaulted, and Uncle Sam can ill afford this bill in the current budgetary climate.
Nonetheless, student loans are more akin to credit cards than any other type of debt, and they should be dischargeable in a consumer bankruptcy, at least in some circumstances.
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