Corinthian Colleges, For-Profit Schools and Tax-Free Loan Forgiveness

Posted on January 2, 2017 at 12:00pm by
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When for-profit schools operated by Corinthian Colleges shut down in 2015, the Department of Education announced instructions for many current and former students to receive tax-free discharges on their federal loans. Students eligible for the following two options do not have to pay taxes on loan forgiveness.

  1. Closed school discharge: Corinthian Colleges and its affiliated campuses shut their doors before many students could finish their degrees. Students enrolled at the time of closing, or who withdrew within 120 days of the closures, may be eligible for the closed school discharge.
  2. Borrower defense to repayment discharge: According to a federal judge, Corinthian Colleges misled students with false job placement rates and other statistics to encourage enrollment. The Education Department’s borrower defense to repayment rule allows victims of college fraud to receive loan forgiveness.

Former students who receive either discharge will not be hit with a large IRS income tax bill.  These options may be available for former students of other for-profit schools. Both loan forgiveness options are not unique to Corinthian Colleges.

However, there are downsides, especially to borrower defense claims, that were only recently brought to light. The current turmoil surrounding borrower defense claims and Corinthian Colleges is too important to not mention.

Are Former Corinthian Colleges Students Not Receiving Loan Forgiveness?

Critics claim there are problems with how the Education Department has handled borrower defense claims for former students of Corinthian Colleges. Some claim the Education Department has prioritized debt collection over informing students of loan forgiveness options. There are also reports of baseless rejections for borrower defense claims.

In fact, attorneys working for the Project on Predatory Student Lending at Harvard Law School have sued the Education Department and the Department of the Treasury for collecting these debts and ignoring evidence of fraud. Senator Elizabeth Warren accused the Education Department of “intentionally collecting on debt that it knows may be eligible for discharge.”

The Education Department claims 15,000 former students of Corinthian Colleges have had their student loans discharged. More than 335,000 may be eligible for tax-free loan forgiveness.

Despite possible shortcomings, former students of Corinthian Colleges and other closed for-profit schools should fill out borrower defense or closed school discharge claims. Two of our blogs can walk you through the process or explain eligibility for the borrower defense discharge and closed school discharge.

Other options for forgiveness may be available. The Kansas City bankruptcy attorneys at The Sader Law Firm can explain what options are available for your situation.