The federal government filed suit Tuesday against embattled Santa Ana-based Corinthian Colleges, alleging many of the same predatory practices contained in a state filing (pdf) nearly a year ago, but with at least one new wrinkle.  

The for-profit parent company of Everest Institute, Everest College, WyoTech and Heald brands, with a couple dozen campuses in California, was accused of deceptively marketing $568 million in private loans to students who defaulted on 60% of them over three years. The lawsuit asks that the loans be wiped out.

Corinthian, like most for-profit schools, relies overwhelmingly on its low-income students taking out loans to pay for tuition. They help them find government loans, but the law requires that at least 10% of the money received by a school not come from federal financial aid provided under Title IV of the Higher Education Act of 1965.

When students still couldn’t make tuition, which is often, Corinthian arranged for private Genesis loans that it told students were provided by an independent third party.

The U.S. Consumer Financial Protection Bureau, in its lawsuit, says that wasn’t true. Not only did Corinthian participate in the loan program, they ran it hard. Students were pressed to start paying back loans while still in school and cut off from classes and computers if they didn’t pay.

Corinthian said in a press release that it pursued student payments while they were still in school to “help them develop the discipline and practice of repaying their federal and other loan obligations.”

The lawsuit proffered another theory. Although the payoff for Corinthian was low because of defaults, it continued to pursue the loans because, “Every Genesis loan dollar that Corinthian induced its students to borrow, in effect, allowed Corinthian to receive up to an additional nine dollars in Title IV aid.”

Corinthian told investors they expected loan defaults of at least 50% and referred internally to students having poor or no credit history and “minimal to nonexistent understanding of basic financial concepts.”

Corinthian sold all of the Genesis loan notes it owned―170,000 loans worth $505 million―to a third party on August 20 for $19 million.

The feds asked the court to order the rescission of all Genesis and Education Plus loans originated since July 21, 2011. They want Corinthian to “disgorge all ill-gotten profits” and pay damages and restitution to consumers it harmed. The Bureau asked the court to declare that Corinthian “engaged in deceptive conduct,” like wildly inflating its job-placement statistics, and tell it to stop doing that.

Corinthian is reeling. It reached a deal with the U.S. Department of Education in July to sell most of its 120-plus schools and close about a dozen.

Corinthian is the most visible target of a crackdown on for-pay colleges, which were skewered in a report (pdf) by U.S. Senator Tom Harkin (D-Iowa) in 2012. Thirty operations were ripped for their high drop-out rates, questionable programs and targeting of non-traditional students, including veterans, who piled up loads of debt and had nothing to show for it.   

–Ken Broder

To Learn More:

Corinthian Student Private Loans Could Be Wiped Clear in Federal Lawsuit (by Katy Murphy, San Jose Mercury News)

U.S. Consumer Bureau Sues Corinthian, Alleging Predatory Lending (by Chris Kirkham, Los Angeles Times)

Beleaguered For-Profit Corinthian Colleges Agrees to Get Out of the Business (by Ken Broder, AllGov California)

Consumer Financial Protection Bureau v. Corinthian Colleges Inc. (U.S. District Court for Northern District of Illinois) (pdf)