Feeling burned, for-profit college grads want loans erased

For thousands of Americans with student loans, repaying what they owe may be the least of their problems.

More than 7,500 people have asked the federal government to forgive a total of $164 million in student loans, alleging that their colleges defrauded them. Many of the schools in question were for-profit institutions, including Corinthian Colleges. That educational institution liquidated after declaring bankruptcy last year, and a court found that the college was deceptive in promising certain careers to prospective students.

The Department of Education said it can't estimate how many students will receive debt forgiveness, but the number of people asking for relief could well grow given the tens of thousands of students who attended Corinthian Colleges and other for-profit schools.

The U.S. Higher Education Act of 1965 includes what was a previously little-known clause that allows students who were defrauded by their colleges to request loan forgiveness. Advocacy groups, such as the Debt Collective, which represents students from Corinthian and other for-profit schools, have pointed students to the application, helping to boost the numbers of claims.

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A special master hired by the Education Department to oversee the claims said in a December report that four lawyers have been hired to sort through the claims, which so far have largely came from students who attended Heald and Everest colleges, part of Corinthian, and claim the schools misrepresented job placement rates and other statistics.

"It has also become apparent that additional attorneys will be necessary to swiftly analyze claims," Joseph A. Smith Jr., the special master, wrote in the report. He added that the Education Department had agreed to add more staff to work through the loan forgiveness requests.

For critics of for-profit colleges, the controversy bolsters their argument that not all Americans should be pushed into college degree programs. One former student of a Corinthian program said for-profit colleges target specific types of young people.

"They are first-generation college students, or going through a tough time in their lives," said Jessica King, who received a medical assistant diploma from Everest College in Newport News, Virginia. She added that she fell into the same category. "I was a low-income single parent, and I was promised a job on graduation."

After graduation, she sent out 150 resumes but didn't get a bite. Finally, she asked a doctor for honest feedback and was told that the school had a negative reputation. He offered to hire her as a receptionist, but said he couldn't hire her as a medical assistant. "My heart dropped," she said.

King said that even though she was told she was on a scholarship at the school, she found out after she graduated that the college had taken out $32,000 in student loans in her name. She may be out of luck in getting loan relief. Her claim was denied because the loans are Federal Family Education Loans (FFEL), which aren't held directly by the government.

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The Education Department told CBS MoneyWatch that FFEL loans may be eligible for loan forgiveness, but that there are "additional challenges" compared with direct loans from the U.S. government. For instance, a FFEL borrower needs to show that there was a referral relationship between the school and the borrower, it said.

As for criticism that she and other students who attended for-profit schools should have done their research before enrolling, King said that she was trying to pursue the American dream by bettering herself.

"We're damned if we do and damned if we don't," King said. "You do what you have to do" to pull yourself up by your bootstraps. She added, "It's like saying, 'Move on with your life.' But we didn't do this. I didn't ask to have loans taken out after I graduated. I didn't know my degree was worthless."

King, who is working as a bartender, said she'd like to back to college but isn't able to do so until she sorts out her loans, given that she defaulted since she wasn't aware of the debt. "It's like being victimized again," she said.