Taxpayers on the hook for Corinthian Colleges student loan bailout

Taxpayers will be on the hook for a massive student loan bailout the federal government is offering students left stranded after the beleaguered for-profit Corinthian Colleges chain abruptly closed its doors in April. The debt-relief plan could cost taxpayers as much as $3.6 billion.

Students who attended schools closed due to the federal investigation of Corinthian and its ultimate bankruptcy already had access to federal debt relief. Those who attended the numerous Corinthian campuses that were sold, rather than closed, did not. The new plan expands debt relief to include those students.

“We will make this process as easy as possible for them, including by considering claims in groups wherever possible, and hold institutions accountable,” Education Secretary Arne Duncan said in a statement.

But while federal lawmakers may agree the students are victims, there is not universal backing for the billion-dollar bailout.

“Students have been hurt, but the department is establishing a precedent that puts taxpayers on the hook for what a college may have done,” said Sen. Lamar Alexander, chair of the Senate Education Committee.

One of the problems is an inherent conflict of interest: The Education Department both provides loans and regulates colleges.

“If your car is a lemon, you don’t sue the bank that made the auto loan, you sue the car company,” Alexander said.

But even with the attractive offer of a government bailout, some students will opt out of the process because in order to receive debt forgiveness, they must give up their Corinthian credits.

Dianne Torres, 24, of Whittier, Calif., is one former student debating the value of the government cash. She has struggled to find a job since completing a medical assistant program at Everest College shortly before the school closed this spring. But she’s not sure she wants to apply to the debt relief program because that would require her to give up her diploma.

“I dedicated 10 months of my life doing it because I wanted to get a better job for my kids,” she said. “So it’s really hard for me to go here, then have to give the diploma back.”

Even though the Education Department has no way of knowing how many people will apply for the program, the amount of debt relief could still be staggering. Officials estimate some 40,000 borrowers at Heald College alone took on more than $540 million in loans that potentially qualify for debt relief. The final amount could climb significantly once all Corinthian Schools are accounted for.

A federal court ruled this week in favor of tough new regulations aimed at career training programs, a mainstay of the for-profit college industry. The ruling demands schools show evidence their graduates’ loan payments will be less than 20 percent of their projected income.

Programs that don’t pass the new “gainful employment” standards risk losing access to federal money.

The Associated Press contributed to this report.