WILMINGTON, Del., June 30 (Reuters) - The U.S. government and former students of Corinthian Colleges, which closed in April, need to promote the government's loan relief program before asking for a stay on all student debt collections, a U.S. Bankruptcy judge said on Tuesday.
Judge Kevin Carey in Wilmington, Delaware, declined to rule on a request by an official committee of Corinthian students to halt all loan repayments amid allegations the company misrepresented itself to prospective students.
Corinthian Colleges Inc became the largest failure in for-profit higher education when it abruptly closed 28 schools in April and left 16,000 students without classes. Corinthian has been the target of lawsuits and government investigations alleging it defrauded students and acted as a predatory lender.
The company filed for bankruptcy last month and soon after the U.S. Department of Education announced a plan under which tens of thousands of former Corinthian students could seek relief from their federal student loans.
A lawyer for the U.S. government told Carey on Tuesday that while 40,000 Corinthian students are in default on their federal loans, less than 5,000 had applied for the government's debt relief. The attorney, Lloyd Randolph, said the government intended to grant relief to 768 former Corinthian students.
The official student committee wanted Carey to stay efforts to collect on loans for 350,000 of the school's former students, stretching back five years, which the parties acknowledged would be unprecedented. The committee's lawyer, Scott Gautier reasoned that the company acted fraudulently, and therefore the student loan debt is an obligation of Corinthian.
The move was opposed by the government, which argued its debt relief program was enough.
"I'm not yet convinced that notice has been sufficient or broad enough to put people in a position to ask for it," said Carey of the debt relief.
Carey asked the parties to return on July 9 and in the meantime see if they could find a better way of reaching former Corinthian students and alerting them to the government's debt-relief program.
The company operated the Heald College, Everest and WyoTech schools and offered degrees in healthcare and trades. In 2014, it sold 56 campuses to Education Credit Management Corp.
Corinthian has little in the way of assets to repay its creditors. Mark Collins, a lawyer for Corinthian, told Carey on Tuesday that any money for unsecured creditors will depend on the outcome of litigation, including against former insiders. (Reporting by Tom Hals in Wilmington, Delaware; Editing by Lisa Shumaker)