If a college closes while a student is enrolled or soon after the student withdraws, and the student is unable to complete the educational program at another college, the student and parent may be entitled to a discharge of their federal student loans that were borrowed to pay for the closed school.

Warning Signs that a College May Close

When a college is placed on Heightened Cash Monitoring (HCM) by the U.S. Department of Education, it may be a sign that the college is at risk of closing. Several large for-profit colleges, including Corinthian Colleges, ITT Tech, American Career Institute and Education Corporation of America, were placed on heightened cash monitoring and subsequently shut down. It is ironic that a regulation intended to safeguard taxpayer funds may have precipitated the closure of these colleges. Not every college placed on heightened cash monitoring will close, but such colleges are at greater risk of closure.

Requirements for a Closed School Discharge

To qualify for a closed school discharge, the college must have closed while the student was still enrolled or within 180 days (previously 120 days) of the student’s withdrawal. In some cases, the U.S. Department of Education may extend the 180-day period, as it did with the closure of Corinthian Colleges.

If the college closed while the student was on an approved leave of absence, the student is treated as though they were still enrolled in the college when the college closed.

The student must be unable to complete the program in which they were enrolled due to the school closure.

Eligible Loans for a Closed School Discharge

Eligible loans include federal education loans, such as the Federal Stafford Loan, Federal Perkins Loan and Federal PLUS Loans, made in 1986 or a later year. Both FFEL program loans and Direct Loans qualify.

This includes Federal Parent PLUS loans borrowed by a parent on behalf of a dependent undergraduate student to pay for the student’s college education.

Federal consolidation loans may be eligible, to the extent that they repaid loans that were eligible for a closed school discharge.

Unable to Complete Program

To qualify for a closed school discharge, the student must be unable to finish their program at another college or through a teach-out program.

The student’s application for a closed school discharge will be denied

  • If the student transferred their credits to another college and
  • The student completed the same or a comparable program at another college

If the transferred credits did not count toward the same or a comparable program at another college, the student may be eligible for a closed school discharge. For example, if the student completed a different program at another college, they may be eligible for a closed school discharge. Similarly, if the student didn’t transfer any credits, they may be eligible for a closed school discharge even if they enroll at the same program at another college.

Note that competency testing may be the equivalent of allowing credits to transfer, even if the college does not accept any of the credits from the closed school. Thus, if the other college uses competency testing to allow the student to place out of taking some classes in the same or comparable program, the student will be ineligible for a closed school discharge.

Borrowers should consider the number of credits that will transfer. If very few credits will count toward completion of the same or a comparable program at the new college, they may be better off applying for a closed school discharge instead.

The U.S. Department of Education has not defined what it means by comparable program, but it has issued guidance concerning factors that it considered when determining whether a program is comparable. In particular, the U.S. Department of Education considers whether the program has similar course requirements, accepts transfer credits from the closed school’s program, and has a similar academic or professional nature.

How to Apply for a Closed School Discharge

To apply for a closed school discharge, first check whether the college is on the U.S. Department of Education’s searchable list of closed schools. The U.S. Department of Education has also published an announcement that lists colleges that closed within the last few years. If the student withdrew, confirm that the student withdrew within 120 days of the school closure date on this list.

Then, send the closed school discharge form to the loan servicer. The student and parent must each send this form to each servicer that services their federal student loans. Call the servicer to confirm the address to which the form should be sent. Mail the form with proof of delivery, such as delivery confirmation or certified mail, return receipt requested. Keep a copy of the form for your records. You may need to send proof of your enrollment dates with the form.

If the borrower is challenging the school closure date, they should provide some evidence of the school closure date, such as a dated letter, email message or newspaper report.

The borrower must agree to transfer the borrower’s right of recovery against the college, its affiliates and principals to the U.S. Department of Education. The borrower must also agree to cooperate with the U.S. Department of Education in any enforcement actions against the institution. The U.S. Department of Education may choose to pursue or settle these claims against the institution.

If the borrower’s discharge application is approved, the borrower will receive a refund of the amounts paid and the loans will be cancelled. If the loans were in default, the default will be removed from the borrower’s credit history, along with any other negative events, and the student will regain eligibility for federal student aid. In particular, the U.S. Department of Education will also restore the student’s eligibility for the Federal Pell Grants and Federal Work-Study that were received to attend the closed school.

If the borrower’s discharge application is denied, the borrower can choose to file an appeal in federal court.

Alternatives to a Closed School Discharge

If a borrower does not qualify for a closed school discharge, they may be eligible for a discharge under the defense to repayment rules.

Several states have tuition recovery funds and performance bonds to compensate students when a college closes. Look for information on the web site of the state attorney general, in the bureau of consumer protection, or the web site of the state board of higher education. Also, Google the name of the state and relevant keywords, such as

  • State Tuition Recovery Fund
  • Student Assurance Fund
  • Student Indemnification Account
  • Student Protection Fund
  • Student Tuition Recovery Fund
  • Tuition Guarantee Fund
  • Tuition Guaranteed Trust Fund
  • Tuition Reimbursement Account
  • Tuition Surety Bond
  • Tuition Trust Account

These states have such tuition recovery funds.

 

Additional Information

The closed school discharge is authorized by the Higher Education Act of 1965 in 20 USC 1087(c) and in the regulations at 34 CFR 685.214.