December 20, 2017 / 10:01 PM / in 2 months

U.S. cancels student loan debts for 12,900 college fraud victims

WASHINGTON (Reuters) - The U.S. Education Department on Wednesday canceled the student-loan debts of 12,900 people defrauded by defunct Corinthian Colleges, but its announcement that it will give varying amounts of debt relief in the future set off fierce criticism.

For-profit higher education provider Corinthian collapsed in 2015 amid government investigations into how many of its graduates found gainful employment.

An internal review released this month showed the Education Department had stopped discharging loans of former attendees of Corinthian and other failed for-profit schools once President Donald Trump took office.

The department added it also had denied 8,600 requests for relief from Corinthian loans. It gave no reason for the denials and no value for the canceled debt.

Future loan discharges will follow a tiered system based on income, the department also said on Wednesday.

Borrowers earning less than 50 percent of their peers will receive full relief, and those earning more will receive partial relief. Borrowers will also receive credit for interest that accrues on their loans if the time to decide whether they qualify for forgiveness takes longer than a year.

“There is nothing fair about denying students the full relief they are entitled to when they are cheated,” said Senator Patty Murray, a senior Democrat lawmaker on the Education Committee, adding that thousands of borrowers would be “stuck paying back loans on worthless or non-existent degrees.”

The department said in the announcement that a tiered system would help victims more than “an ‘all or nothing’ approach.”

By law, borrowers defrauded by for-profit schools can have their loans erased, but since Trump’s Jan. 20 inauguration the department had not approved any of the 25,991 requests for relief it had received, its inspector general said in a report released this month.

Last week, four states sued the department and Education Secretary Betsy DeVos, saying they were breaking the law and demanding speedy relief for borrowers.

California Attorney General Xavier Becerra said his state would press on with its lawsuit despite Wednesday’s announcement, taking issue with the different levels of relief.

“Under federal law, Secretary DeVos is required to provide full – not partial – relief to Corinthian students,” he said in a statement.

Massachusetts, Illinois and New York have also sued.

Advocates for the borrowers say students cannot repay the often-large debts because the schools did not give them adequate work training or diplomas. They also say struggling borrowers need to know soon if they will not receive relief so that they do not face debt collection and other penalties.

Reporting by Lisa Lambert; Editing by Peter Cooney and Rosalba O'Brien

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