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Student Loan Bankruptcy Servicer Seeks Its Own Special Bankruptcy Exemption

The proposed sale between troubled Corinthian Colleges and the Education Credit Management Corporation (ECMC), a student loan debt collection agency, is full of sad ironies. Here’s a company that makes its money by collecting on defaulted student loans buying most of a college chain that produces about 20,000 defaulters a year. Meanwhile, the Education Department is getting Corinthian to only forgive as much student loan debt as a bunch of Occupy Wall Street folks already did on their own this year.

Now we have another twist—a company whose special role involves fighting student loan borrowers tooth and nail from discharging their loans in bankruptcy is asking Congress for special treatment in Chapter 11.

According to multiple sources, ECMC is asking Congress to make a special change to the rules that govern a college’s eligibility for federal student aid once it declares bankruptcy. Under current law, a bankrupt college is no longer considered to be an institution of higher education, a change that immediately triggers its loss of federal student aid. While we do not know exactly why ECMC is pursuing this exemption for Corinthian, it presumably would help the sale still go through if Corinthian cannot stay solvent until the deal closes. It also might stop creditors from going after Corinthian and further insulate ECMC from the troubled for-profit college chain.

Denying bankrupt colleges access to federal student aid makes a lot of sense. An institution in this situation is extremely fragile financially, increasing the risk that further aid dollars could get wasted or that students will take on debt at a campus that is likely closing. In fact, a fair case can be made that these financial viability considerations are the only real form of accountability in higher education, since monetary problems, not educational issues, are almost always the cause of colleges losing accreditation and closing.

Keeping bankrupt colleges out of the student aid programs is particularly important in the case of non-public providers. That’s because access to federal aid is an extremely valuable asset—some estimate that it’s worth as much as $10 million. Allowing investors and owners to run a college into the financial ground and then unload its federal aid eligibility just provides an additional way to make money and increase the value of a sale. Needless to say that’s a change that benefits investors and debt holders while significantly upping the risk for students.

If ECMC succeeds in getting the law changed, Corinthian and its brands would be only the second college to secure this special exemption. The other was the Allegheny Health, Education and Research Foundation, which also owned the Medical College of Pennsylvania and Hahnemann University. It went bankrupt in the late 1990s and had a special provision added to the Higher Education Act that allowed it to stay in the federal aid programs. But in that instance the college was one part of a $1.3 billion failure that affected statewide healthcare in Pennsylvania.

Corinthian, by contrast, had a market capitalization of about $20 million when it failed and about half of the students at the campuses being sold are attending online and spread throughout the country.

Seeing ECMC pursue such a special loophole is particularly rich because it has a contract with the Department of Education to handle some federal student loans when they are in bankruptcy proceedings. As detailed earlier this year by The New York Times,ECMC has been known to aggressively pursue borrowers to the point that it has been accused of wasting legal resources and abusing the bankruptcy process.  For example, the company has allegedly chased down borrowers over loans even though documentation showed they had already been paid off. And in one case, it claimed that a couple splitting $12 worth of food at McDonald’s was eating out too much.

ECMC has carried the same message in response to these charges—the law is the law and it must be followed. In fact, the company defended its practices to Inside Higher Ed just last week, saying “Our role is not to determine social policy on student loan repayment, but to present the law fairly and consistently."

I guess concerns about consistency and fairness under the law only applies to borrowers, not the company hounding them for money.