More than 18,000 students who attended a now-defunct for-profit college will have $168 million in private loan debt discharged.
The loan cancellation is part of a proposed deal between the Consumer Financial Protection Bureau, attorneys general of 43 states and the District of Columbia and Student CU Connect (or CUSO), a company that held and managed private loans taken out by students at ITT Tech. The agreement comes as the court overseeing ITT’s bankruptcy approved a settlement between CUSO and ITT’s bankruptcy trustee.
In its complaint, the CFPB outlined a scheme by which ITT students were lured into taking on high-interest private student debt managed and held by CUSO that both the company and the school knew they probably wouldn’t be able to repay. As part of the deal, CUSO neither admitted nor denied most of the agency’s claims.
The complaint mirrors allegations against private loan programs launched by other, now defunct for-profit colleges that often preyed on students in an attempt to lure them and the federal financial aid dollars that came with them to the school.
Key to the alleged scheme was pushing students who couldn’t afford to pay for school beyond what they could get in federal financial aid. In 2008, ITT launched a temporary credit program that students could use to fill the gap between what their student loans covered and the cost of tuition, according to the CFPB’s complaint. The program was essentially a no-interest loan that students were required to repay in a lump sum, roughly nine months after they enrolled in the school.
The complaint alleges that ITT’s financial aid staff rushed students through this process and provided them with little or incorrect information about the credit program. In many cases, that meant students didn’t know they’d taken on a loan, according to the complaint. The court documents allege that ITT also knew that students wouldn’t be able to repay the loan when it came due.
That same year, ITT created CUSO, according to the CFPB complaint, and in 2009, ITT financial aid representatives started pressuring students to refinance their temporary credits into CUSO loans. ITT representatives told the students that if they did not refinance, they would have to repay the credit and pay the next year’s tuition gap or leave the school — which most couldn’t afford to do, according to the court documents.
Students who had received a temporary credit were prequalified for CUSO loans, regardless of their credit history, court documents allege. Roughly 79% of the CUSO portfolio was made up of these students, according to the CFPB.
The loans were pushed on students even though both CUSO and ITT knew many borrowers would be unable to repay them, according to court documents. For the roughly 46% of borrowers with credit scores under 600, the effective interest rate on the loans was 13.75% or 16.25%, according to the complaint.
Before beginning the loan program, models constructed by ITT and CUSO projected that 30% of the debt would default, according to court documents. Among borrowers with a credit score below 600, the projected default rate was 58.9%. By 2011, ITT’s loan default analysis consultant projected a gross default rate of 60%. Despite that estimate, ITT and CUSO continued the loan program, the complaint alleges.
The agreement, which still requires final approval by a judge, is the latest development in the fallout of ITT, which filed for bankruptcy in 2016. At the time, the school was the second for-profit college to collapse in as many years amid allegations of luring borrowers with inflated job placement and graduation rates. More for-profit college chains have shuttered under similar circumstances in the years since.
Though students with CUSO loans will certainly welcome the debt relief, many may still be burdened by their federal student debt. Amid pressure from activists in the wake of the collapse of Corinthian Colleges, the first major for-profit college chain to fall in 2015, the Obama administration streamlined a process borrowers could use to have their federal student loan debt wipe away if they felt they had been scammed by their schools.
Betsy DeVos’s Department of Education attempted unsuccessfully to re-write the rule governing this process, known as borrower defense. Meanwhile claims for debt cancellation, which must be approved by the Department, have languished at the agency.