Who Pays For the Pending Bankruptcy of Corinthian For-Profit Colleges: Students and Taxpayers!

Dear Commons Community,

The New York Times has an article analyzing the Corinthian Colleges debacle and pending bankruptcy. Here is an excerpt:

“In the years before the mortgage crisis, financial regulators often looked the other way as banks and other lenders pursued reckless activities that cost investors, taxpayers and borrowers billions of dollars. When trouble hit, these regulators had to scramble to fix the mess that their inertia had helped create.

This same dismal pattern is now playing out in the for-profit education arena.

For years, federal and state regulators have done little as dubious operators of for-profit colleges and trade schools have pocketed tuitions funded by taxpayer-backed loans. Many students left these colleges with questionable educations and onerous debt loads that cannot be erased in bankruptcy.

Regulators have finally woken up to this ugly reality. And, once again, taxpayers and borrowers will pay the price of regulatory failures.

Last week, after years of being on the financial precipice and facing accusations of improper recruiting practices by authorities in several states, Corinthian Colleges, a for-profit education company with 74,000 students in more than 100 locations around the country, began to wind down its operations. In an agreement with the federal Department of Education, Corinthian said it would halt admissions and try to sell 85 of its campuses.

At another 12 Corinthian campuses, students can continue their studies until they graduate. Certain students who choose to stop attending classes will receive refunds, the company said.

Even as the company’s fortunes faded in recent years, Corinthian’s five top executives piled up real money: Over the last three years, they’ve shared $12.5 million in salaries and cash bonuses.

But taxpayers and Corinthian students — a vast majority of whom have borrowed to finance their educations — will be the biggest losers. When Corinthian eventually vanishes, its graduates will be left holding degrees from a defunct institution. This will make it even tougher for them to get jobs, resulting in higher default rates on their federal student loans.

What kind of losses might the taxpayers incur? Let’s do some arithmetic: Corinthian students received approximately $1 billion a year in federal financial aid. So if default rates on the last two years of aid were to rise by 20 percent, that would generate $400 million in losses.

“Many of the students who have already graduated will default on their loans and will be followed by the federal government for the rest of their lives,” said Robyn Smith, of counsel to the National Consumer Law Center and author of a recent report on how states can improve oversight of for-profit schools. “If the regulators had been better at doing their jobs, this could have been avoided.”

The article provides further details and is definitely worth the read. The bottom line is that Corinthian ripped off students and taxpayers while the United States Department of Education, state departments of education, and other regulators did practically nothing until it was too late.



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