More than 18,000 students who have attended a defunct for-profit college will have a private loan debt of $ 168 million.
The repeal of the loan is part of a proposed contract between the Office of Financial Consumer Protection, Attorney General of 43 states and the District of Columbia, and student CU Connect (or CUSO), a company that has held and managed private loans Students at ITT Tech. The agreement comes when ITT's bankruptcy court approved a settlement between CUSO and ITT's liquidator.
In his complaint, the CFPB outlined a system that induced ITT students to take on high-yield private student loans managed and held by the CUSO, which both the company and the school knew likely were unable to repay them. As part of the deal, CUSO has neither acknowledged nor denied most of the agency's claims.
Richard Bernard, a lawyer from Foley and Lardner representing CUSO, wrote in an e-mail that CUSO is cooperating with the government and "is pleased" that the settlements will benefit ITT students.
The CUSO "acted duly and in good faith in the conclusion and administration of the student loan program," wrote Bernard. "As ITT and its management have been wrong in some way, CUSO and these other parties have been victims of this misconduct and not its side effect."
The CFPB's complaint reflects allegations made by others against private loan programs Defunct profit-making colleges that frequently engage with students to lure them, and federal grants that came to school with them.
The key to the alleged system was to force students who could not afford to pay more for the school than they could with a government grant. In 2008, ITT launched a temporary loan program that helped students close the gap between their student loan coverage and tuition fees, according to the CFPB complaint. The program was essentially an interest-free loan that students had to repay roughly nine months after enrollment at school.
The complaint alleges that ITT staff for grants has driven students through this process and provided them with little or no information about the loan program. In many cases, this meant that the students did not know that they had taken out a loan. According to the court documents, ITT also knew that the students could not repay the loan when due.
In the same year, ITT started building the CUSO Loan Program under the CFPB complaint, and in 2009, ITT grant officials pressured students to refinance their temporary loans with the CUSO loan program. ITT officials told students that if they did not refinance, they would have to repay the loan and pay the next year's class gap or leave school ̵
Students who received temporary credit were prequalified for the CUSO loan program, regardless of their creditworthiness, as court papers claim. Around 79% of the CUSO portfolio consisted of these students, according to the CFPB.
The loans were passed on to students, although both CUSO and ITT knew that many borrowers would not be able to repay them, according to court documents. According to the complaint, for around 46% of borrowers with credit scores below 600, the effective loan rate was 13.75% or 16.25%.
Prior to the start of the loan program, ITT and CUSO models had predicted that 30% of debt would be lost, according to court documents. For borrowers with a credit score below 600, the projected default rate was 58.9%. By 2011, ITT's Adviser on Credit Impairment Forecasts predicted a gross loss ratio of 61%. Despite this estimate, ITT and CUSO continued the loan program, claims the complaint.
The agreement, which still requires final approval from a judge, is the latest development in ITT's Fallout, which filed for bankruptcy in 2016. At that time, the school was the second for-profit college that collapsed in so many years, accused of attracting borrowers with excessive job and graduation rates. More profit-driven college chains have shut down under similar circumstances in recent years.
While students with CUSO loans will certainly appreciate debt relief, many may still be burdened by their federal debt. Under pressure from activists in the aftermath of the collapse of Corinthian Colleges, the first major profit-driven college chain in 2015, the Obama administration has streamlined a process that borrowers could use to cut their debts out of the US student loan if they felt it was necessary they were cheated by their schools.
The Department of Education of Betsy DeVos unsuccessfully tried to rewrite the rule for this process known as Borrower Defense. In the meantime, claims for debt relief, which must be approved by the Authority, have been issued to the Agency.