ITT Tech's collapse could help former students wipe out their loans

Students who graduated from or dropped out of ITT Technical Institute could be the biggest winners in the federal government's aggressive actions against the for-profit college.

The Education Department's sanctions on Carmel-based ITT Educational Services Inc. have laid a foundation for past students to take advantage of a little-known rule, called defense to repayment, that can wipe out their loans.

ITT Tech students unsure about next step after school's closure

Federal law gives the Education Department broad discretion to forgive student loans for borrowers who claim they were defrauded or that their college violated state laws. The government on Thursday essentially made the case that ITT has done that, inviting former students to request what could amount to hundreds of millions of dollars in loan forgiveness. The rule applies to all former students with federal loans, but does not cover private loans.

The Education Department is simplifying the claim process for borrowers. The process, which is in a public comment period, should be completed within a few months. In the meantime, the Education Department is encouraging borrowers to email or mail their claims. Instructions are on the Education Department's website.

"There will be a process that should allow students to get their claim before the department without having to have a lawyer, without having to spend a lot of money and time," said David Halperin, a Washington, D.C., attorney who has been critical of the for-profit college industry.

The defense to repayment rule falls under the U.S. Higher Education Act. It has existed for years, but received little attention until recently. Even though the process for submitting claims is being revamped, Halperin urged former ITT students to move quickly.

The ITT Tech shutdown: What we know

"I think students ought to go ahead and go to the Department of Education website and get their complaint in the queue," he said. "They'll be at the head of the line."

ITT offers on-campus and online classes in business, nursing and health sciences, electronics and information technology. It has 137 campuses across 39 states, according to its most recent quarterly earnings filing.

The company has yet to comment on the Education Department's actions aside from a Securities and Exchange Commission filing Friday in which ITT said it "is evaluating these additional sanctions and requirements, as well as all options available to it." Several analysts interviewed by IndyStar said they think ITT will be forced to close, perhaps within weeks.

Current ITT students have straightforward options. ITT has been ordered to begin working with other colleges — likely other for-profit colleges and community colleges — to facilitate transfers for students. Anyone already enrolled in ITT can continue to access federal loans if they want to finish their program. If ITT closes, the Education Department has said it will forgive current students' loans.

ITT's struggles have perhaps hit past students harder. Former students worry that they'll have to continue paying thousands of dollars for a program they never finished or a degree that has been discredited.

Roy McKenzie, 33, said he still owes $20,000 more than two decades after attending ITT for two semesters. McKenzie has built a career in San Francisco, yet said his success came in spite of ITT.

"One of the classes I remember taking was introduction to computers and it was how to click around on your mouse," McKenzie said. "I was pretty proficient. I'm a software developer now, no thanks to my skills learned at ITT."

McKenzie said he recently filed for bankruptcy as the result of debt he incurred in his 20s. While the bankruptcy didn't wipe out his student debt, he said it has given him a fresh start.

"I don't necessarily blame ITT Tech for my mistakes, because I definitely did make some," McKenzie said. "But I do feel like they don't offer what they promise and it's way too expensive for what you get. During the sign-up process, I didn't realize what I was getting into. I was really young and it was a stupid mistake."

Stories such as McKenzie's could persuade the Education Department to discharge federal loans. The Education Department already has forgiven more than $42.3 million in loans from more than 2,000 Corinthian Colleges students who claimed they were defrauded by the since-shuttered for-profit chain. Students at other for-profit colleges, such as Brown Mackie College, which is closing most of its campuses, also likely have a strong case.

Trace Urdan, a Credit Suisse analyst who follows ITT, said the Corinthian Colleges precedent and the government's aggressive actions against ITT could bode well for past ITT students who want to wipe out their federal loans.

"In the case of ITT, there will certainly be people out there who will give that a try and whether the department will be sympathetic to them is not clear," Urdan said. "Critics for the for-profit sector are trying to apply pressure on the department to forgive all of those loans."

While loan forgiveness has obvious benefits for past students, Urdan said discharging loans would shift the burden to taxpayers.

"This has the potential of being very costly because the minute this process starts in a major way, if the department starts granting large numbers of student loan forgiveness, it will bankrupt these institutions and fall back on taxpayers," Urdan said.

The Education Department declined to comment on loan forgiveness for former ITT students, aside from pointing out that it is soliciting claims.

In addition to financial concerns, current and past ITT students fear that their educations are being devalued by ITT's impending collapse. Bobby Smith, a 47-year-old computer engineer, graduated from ITT in 1992, but would rather keep that a secret.

"To be honest, personally, I don't tell people I went there," he said. "I even pulled it off my LinkedIn account because I'd rather people not know I went there. I'm completely embarrassed by it."

It's too late for Smith to file for loan forgiveness. He said he paid off his nearly $30,000 in debt about a decade ago. But the sour memories of ITT remain for him.

"I've never once used anything I ever learned from it all those years," Smith said.

Many other students, past and present, have told similar stories.

More than a dozen states are investigating ITT over its marketing, recruiting and job placement numbers. Before the government announced its sanctions Thursday, ITT already risked losing its accreditation from the Accrediting Council for Independent Colleges and Schools. The SEC and Consumer Financial Protection Bureau also are scrutinizing the company.

While the cost of discharging federal student loans for past ITT students would be painful, it also could help tighten the government's oversight of colleges before allegations mount as high as they did against ITT, said Halperin, the D.C. attorney and a former speech writer for president Bill Clinton.

"It is the fact that we're living in this era of actually using the defense to repayment law that is forcing the department to finally say, 'Should ITT Tech and other schools that have a record of high prices, low quality and predatory recruiting be able to participate in the federal student aid program?'" Halperin said. "I think this is the regulatory process finally making sense and taking action to protect students and taxpayers for the first time in a long time."

Call IndyStar reporter James Briggs at (317) 444-6307. Follow him on Twitter: @JamesEBriggs.