If a college turns about to be a total fraud, do students still have to pay for it? One might think that if a college is a diploma mill the students might be forgiven for foolishly taking out loans to go to the school. Well not if their loans were with KeyBank. According to a recent piece by Stephen Burd on the New America Foundation’s website:

On Super Bowl Sunday in 2008, Silver State Helicopters, an unlicensed and unaccredited Nevada-based flight school chain, shut down without warning, leaving its 2,500 students in the lurch. …Most have succeeded in getting their debt discharged or at least reduced. Under threat of legal action, lenders such as Citibank and Student Loan Xpress have backed down and agreed to forgive much of the debt these students took out to attend this fly-by-night school.

But one lender has refused to budge. KeyBank continues to fight… to force Silver State students to pay back every single penny they borrowed.

As a result, angry former Silver State students are suing the bank for colluding to defraud the students. KeyBank, apparently, was Silver State’s preferred private student loan provider.

This was despite the fact that Silver State Helicopters, while theoretically a school for training helicopter pilots, actually didn’t have the material or instructors students needed to obtain pilot licenses. Obtaining a pilot license was, after all, the only reason to go to the school. According to Burd’s article,

KeyBank officials deny any wrongdoing, saying that they had little involvement with the school except to provide financing to their students. Therefore, they say, they can’t be held responsible for mismanagement at the schools with which they work.

Maybe I’m being naive but one would think that the very first thing a bank would do when deciding whether or not to become a school’s preferred lender would be to establish the school’s legitimacy. How else would students pay back the loans? Key Bank, an institution that apparently has special relationships with a number of unlicensed trade schools, appears to be unconcerned with this little detail.

Check out the Burd article for information about how this works legally. [Image via]

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Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer