Special Master Joe Smith Delivers Progress Report on Borrower Defense Process

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Special Master Joe Smith Delivers Progress Report on Borrower Defense Process

Under Secretary Ted Mitchell accepts recommendation to grant nearly $28 Million in relief to former Heald Students
December 3, 2015

As part of the Obama Administration's commitment to provide former Corinthian students the debt relief they are entitled to with minimal burden, today, Special Master Joe Smith has delivered his second borrower defense (BD) progress report to U.S. Department of Education Under Secretary of Education Ted Mitchell.

In June, Under Secretary Mitchell appointed Smith, an advocate for consumers and taxpayers, as a Special Master to the Department to help create a BD process that is fair and efficient to students and borrowers. In his first report, Smith discussed the legal and regulatory basis for the Department's approach to BD and the sequence of events leading to his appointment and his process going forward to evaluate borrower defense claims.

"Today we are announcing loan forgiveness for more than 1,000 former Corinthian students, students who were victimized by Corinthian's fraudulent practices. We will continue to provide forgiveness to every student who has been similarly mistreated," said Under Secretary Ted Mitchell. "Allowing this situation to repeat itself at other institutions would be unfair to students and taxpayers. We look forward to working with Congress, States and accreditors to improve accountability and transparency in the career college industry. I commend Joe Smith and his team for their diligence in resolving these claims."

The second report documents substantial progress on a number of student debt-relief goals. In particular, this report addresses:

  • The Department's progress in granting BD and closed school relief to eligible student loan borrowers
  • Details on the population of BD and closed school claims under review
  • The standards under which BD relief has been granted and the steps being taken to develop additional rules under which further relief may be granted

This report also discusses the issues that Smith and his team continue to examine. In particular, Smith describes his plans to develop rules for resolving borrower defense claims still under review and to pursue additional engagement with state attorneys general to expedite relief to students.

Last month, the Department of Education and California Attorney General Kamala Harris announced findings from an investigation of Wyotech and Everest programs in California. The Department has referred those findings to Smith to inform the debt relief process for former Corinthian students.

Smith and the BD team hired by the Department continue to review BD claims. In addition, the Department plans to hire additional staff to help analyze current and future claims.

Next Steps for Borrowers

Under Secretary Ted Mitchell accepted Smith's recommendation to grant approximately $27,832,370 in relief to 1,312 former Heald students who have filed BD claims. Beginning tomorrow, the Department will notify this initial set of borrowers that their claims have been approved.

Within 120 days from now, borrowers will receive confirmation that their loans have been discharged. Credit reporting agencies will also be contacted to update borrowers' credit history to reflect discharged loans. Borrowers will receive updated disclosures from their loan servicers detailing their up-to-date loan balance and payment schedules, to the extent they have remaining loans with that servicer unrelated to their BD claim or not eligible for discharge.

Borrowers seeking debt relief should who have not submitted claims should visit www.studentaid.gov/Corinthian for more information.

Tax Implications of Discharge

In conjunction with today's announcement, the Department of Treasury also issued guidance providing that Corinthian students whose loans are discharged based on BD will not be required to report discharged amounts for federal income tax purposes.

"The students whose loans are being forgiven were victims of fraud by Corinthian and failed to receive the education that they were promised and that they deserved," Treasury Deputy Secretary Sarah Bloom Raskin said. "Today's action provides needed relief to these borrowers and eliminates potential uncertainty regarding any related federal income tax obligation."

Students whose discharged loans fall within the scope of the Revenue Procedure not need to file additional forms or include additional information on their federal income tax returns. In addition, this Revenue Procedure reiterates that under existing law, all borrowers whose federal student loans are discharged under the closed school discharge process do not have to recognize income and do not have to report the discharge on their federal income tax returns.

Protecting Students from Abusive Career Colleges

Despite the lack of support from some in Congress, the Department has taken unprecedented steps to protect students and provide them with opportunities for a high-quality, affordable education that prepares them for their careers, including:

  • creating Gainful Employment rules to protect students and taxpayers and to ensure students receive an education that leads to good job prospects
  • strengthening oversight and compliance of the career college industry through an inter-agency task force
  • announcing a negotiated rulemaking committee to improve the current borrower defense regulation, starting in January 2016
  • protecting military service members, veterans, and their families from predatory actions by for-profit colleges by proposing to strengthen the 90/10 rule
  • announcing executive actions and legislative proposals to strengthen its oversight of schools and accreditors.