Thousands Apply to U.S. to Forgive Their Student Loans, Saying Schools Defrauded Them

Borrowers owing $164 million have stepped forward in the past 6 months, citing a previously obscure federal law

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Syd Andrade, a 27-year-old aspiring video-game designer living in Austin, Texas, owes $30,000 in federal student loans. Mr. Andrade is among the thousands of Americans petitioning the Education Department to forgive their loans, arguing that their schools deceived them with false promises. (Tamir Kalifa/WSJ)

Americans are flooding the government with appeals to have their student loans forgiven on the grounds that schools deceived them with false promises of a well-paying career—part of a growing protest against years of surging college costs.

In the past six months, more than 7,500 borrowers owing $164 million have applied to have their student debt expunged under an obscure federal law that had been applied only in three instances before last year. The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as by lying about their graduates’ earnings.

The U.S. Education Department has already agreed to cancel nearly $28 million of that debt for 1,300 former students of Corinthian Colleges—the for-profit chain that liquidated in bankruptcy last year. The department has indicated that many more will likely get forgiveness.

The program could prove to be one of the few lifelines for hundreds of thousands of Americans buried in student debt after attending disreputable schools that failed to land them a decent job. Federal law prohibits student debt from being discharged in bankruptcy, except in rare circumstances, and the Supreme Court last week declined to hear a case that could have expanded bankruptcy options.

The sudden surge in claims has flummoxed the Education Department, which says the 1994 forgiveness program is overly vague. The law doesn’t specify, for example, what proof is needed to demonstrate a school committed fraud. Last week, the department a began monthslong negotiation with representatives of students, schools and lenders to set clear rules, including when the department can go after institutions to claw back tuition money funded by student loans.

Education Department officials say they are still trying to grasp the potential bill that will be footed by taxpayers. They say the cost of forgiveness could ultimately be in the billions of dollars.

“We just don’t know” the potential scope, said Ted Mitchell, the Education Department’s undersecretary. “This is new territory for us.”

Mr. Mitchell added that borrowers are entitled to forgiveness—as well as potential reimbursement of repaid loans—if they have been defrauded, regardless of the taxpayer cost. “The law is clear about giving students redress when they’ve been defrauded,” he said.

Andrew Kelly of the American Enterprise Institute, a conservative think tank, said there is a danger that the program will become overly broad, encompassing not just instances of outright fraud, but also cases in which borrowers simply regret taking out the debt because they can’t find a job, through no fault of the colleges.

“It gets much more difficult when students say, ‘Well, I was told this would improve my job prospects.… I don’t have a job, and I’m mad about it, and I think I’m defrauded,’” Mr. Kelly said.

The surge in applications reflects the growing savvy of student activists, who discovered the law last year after it had largely sat dormant for two decades. Education Department officials say the agency failed to draft rules after the law was passed in the early 1990s and lacked the urgency to do so because it had only received five applications—three of them granted—before last year.

The clamoring for forgiveness represents the fallout of a college-enrollment boom—driven by a surge in students attending for-profit colleges—that caused student debt to nearly triple in the past decade to $1.2 trillion, New York Federal Reserve figures show. Seven million Americans have defaulted, government data show.

So far, almost all of the borrowers applying for forgiveness under the 1994 program attended for-profit schools. Three-quarters went to Corinthian-owned institutions, while hundreds of others attended the Art Institutes, owned by Education Management Corp.; and ITT Technical Institutes, owned by ITT Educational Services Inc. All three have been the subject of federal investigations into illegal recruiting tactics in recent years.

An Art Institutes spokesman declined to comment. Corinthian Colleges was liquidated in bankruptcy last year; the company denied allegations of illegal recruiting tactics.

ITT said it wants “to assist students with a legitimate grievance.” But it added that it believes the company has been unfairly targeted by the Obama administration in what it characterized as a broad campaign against for-profit colleges.

In letters to the Education Department, borrowers speak of frayed lives after taking on huge debts to attend schools that they say provided inept instructors and failed to land them the industry jobs they promised.

“I feel robbed of my life,” wrote one student who said she owes $114,000 in federal student debt—most of it in her mother’s name—for her time at a branch of the Art Institutes chain of for-profit schools. “Even after paying my student loans on time and in full every month for over seven years, I’ve barely made a dent.”

Syd Andrade’s story is emblematic. He said in an interview that during his high-school senior year, he received a call from an Art Institutes recruiter promising “great facilities, great teachers, use of industry-standard software” for a game-art design program.

Mr. Andrade, who graduated from the company’s Tampa, Fla., location, said the classes used outdated software and were taught by an instructor who knew less than the students. “Most of the time spent in her classes were us teaching her,” he said. “It was a group effort of everyone trying to learn together.”

The school had also promised to help him land an industry job, he said. But when he graduated in 2011, the school placed him in an $8-an-hour job working behind the counter at a local Office Depot. He said they did the same for his girlfriend, another graduate of the school.

Mr. Andrade and his girlfriend moved to Austin, Texas, where he now makes $44,000 a year working in technical support for a major media company, outside his desired field. “They promised us to get jobs in the field, and most of us ended up at Office Depot,” he said.

The Art Institutes spokesman, Bob Greenlee, declined to comment.

The case of Mr. Andrade, who is trying to document the school’s actions, points to tough decisions facing the Education Department. Many students say recruiters verbally made misleading promises and cited fraudulent job-placement data, but the students often lack documentation to prove it. Moreover, consumer-protection laws vary by state, and a recruiting practice might be legal in one state but illegal in another. The Education Department has hired a special master to sort through existing claims as it drafts permanent rules.

Luke Herrine, an organizer with the student-activist group Debt Collective, said the number of borrowers defrauded by colleges, most of them in the for-profit sector, is likely in the millions. His group is pushing for the Education Department to cancel loans for entire classes of students instead of individually. “An individualized process is likely to underprovide relief,” he said, pointing out that many borrowers might not realize they are entitled to loan forgiveness.

Write to Josh Mitchell at

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