Federal judge orders DeVos to cancel loans for students defrauded by for-profit colleges

Advocates for students joined Massachusetts Attorney General Maura Healey in celebration on June 26 after a federal court in Boston ordered U.S. Education Secretary Betsy DeVos to cancel the loans of 7,200 people in the commonwealth who were defrauded by Corinthian Colleges, a for-profit education company that closed its U.S. campuses in 2015.

"Thousands of Massachusetts students cheated by Corinthian have finally had their day in court, and they have won," Healey said in a statement. "This landmark victory for students will cancel the federal loans for thousands of defrauded borrowers, mostly black and Latinx students, targeted by a predatory for-profit school and abandoned by Secretary DeVos and the Trump administration."

U.S. District Court Judge Leo T. Sorokin's ruling (pdf) in Vara v. DeVos came nearly two years after he ordered the U.S. Education Department to stop collecting on the loans because they were covered by a borrower defense application filed by Healey.

Despite the ruling, DeVos refused to stop billing and harassing students.

“This ruling is a clear and powerful statement of the rights of student borrowers, and a resounding rejection of the Department of Education's ongoing and across-the-board refusal to recognize these rights and cancel fraudulent student loans,” Healey said.

Fraudulent practices

At its peak, Corinthian Colleges Inc., which provided primarily vocational training, operated 105 schools in 25 U.S. states, along with 17 in Canada, according to its website. The company, which began in 1995, had a troubled legal history from the beginning. The Los Angeles Times described the colleges as a collection of "castoff" schools that were taken over by Wall Street investors in 1999.

Plagued with legal investigations for fraudulent practices, the company began closing locations, first in Canada. In 2015, it ceased all operations, stranding over 16,000 students and employees.

Corinthian Colleges and 24 of its subsidiaries subsequently filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware.

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“Our clients, and all 7,200 Massachusetts students who were cheated by Corinthian ... have been waiting nearly five years for the Department of Education to acknowledge their right to loan cancellation," said Toby Merrill, director of the Project on Predatory Student Lending at Harvard Law School. The project assisted Healey in developing the successful case.

"We thank Attorney General Healey for her long-term commitment to fighting for these borrowers, and look forward to the day when five-year, three-lawsuit battles to cancel obviously fraudulent debts are not necessary."

Sen. Elizabeth Warren, D-Massachusetts, a longtime critic of the current education secretary, tweeted that the ruling "is a huge victory against DeVos and a victory for all student borrowers."

Sorokin ruled that:

• The Education Department can't escape its obligations under the law by simply writing off the loans of people who happen to sue;
• Contrary to ED's assertions, a federal court may review ED's actions and inactions with respect to borrower defense;
• ED must act in a consistent and rational manner and must explain its actions;
• "Overwhelming" evidence shows that ED has, in the past, repeatedly exercised its discretion to cancel federal student loans in response to an application, supported by evidence, from an attorney general;
• "Overwhelming" and "uncontradicted" evidence establishes that the plaintiffs and their classmates are entitled to cancel their loans because of Corinthian's flagrant and widespread misconduct; and
• So that students are no longer caught in "a game of ping-pong," the court instructed the agency to take action within 60 days consistent with the court's order granting relief to all borrowers.

The win in Boston came as House Democrats failed on June 26 to override Donald Trump's veto of a bipartisan resolution to invalidate strict new rules by DeVos on student loan forgiveness, which are set to take effect July 1. The lower chamber's 238-173 vote fell short of the two-thirds majority needed to overturn the veto.

In a statement responding to the unsuccessful override effort, Ben Miller, vice president for post-secondary education at the Center for American Progress, said that "Secretary Betsy DeVos has repeatedly put the interests of exploitative schools before students, and today almost the whole House minority showed its willingness to side with her."

"From the start, this administration has sat on its hands while tens of thousands more borrowers lawfully seek relief," he added. "And it has denied significant relief to students inarguably ripped off by predatory actors such as Corinthian Colleges through innumerate formulas that do things such as deny full relief to borrowers for not having negative earnings."

Louis Weisberg contributed to this story.