Closed School Discharge

If the school you're attending closes, are you, the borrower, still liable for the student loans you used to attend that school? The short answer is "yes." It's never that simple though. This article will look at the many considerations and actions to take should your school close, whether you will receive the automatic discharge, how the 2020 changes will affect closed school discharges, and the procedure to receive loan forgiveness. 

Since 2010, as many as 40% of the for-profit college campuses in America have closed. Some of the more infamous school closures include Corinthian Colleges, Brightwood College, ITT Technical Institute, Argosy University, and Trump University. Many of these schools closed after being accused of making misrepresentations to the students. If you have a Borrower Defense to Repayment application pending when the school closes, it's a good idea to convert it to a closed school loan discharge application.

Eligibility for the Closed School Discharge

All federal student loans are eligible for the closed school discharge. This isn't the case for private student loans. The federal loans include all loans through the Federal Direct Loans Program (Direct Loans, PLUS Loans, and Consolidation Loans), all loans through the Federal Family Education Loan (FFEL) Program, and the Federal Perkins Loans Program.

As the borrower, you may be eligible for the closed school discharge if you received a loan to attend a school that closed. For loans received before July 1, 2020, if you withdrew from a school whose closure date is within 120 days, you're eligible. For loans received on or after July 1, 2020, if you withdrew from a school that closed within 180 days, you're eligible. 

You're eligible for a closed school discharge if you were a student or you were on an approved leave of absence at the time of the school's closure. If you, the borrower, fail to meet these eligibility requirements, you may still be eligible for loan forgiveness. But, you'll need to show that your failure to meet the requirements was due to exceptional circumstances.

Your school doesn't have to close for you to get the closed school discharge if the branch or campus you attend closes. The Art Institutes is a school that's still open but has closed many of its campuses. If you attend an online school, the physical headquarters of your school must have closed for you to be eligible for the closed school discharge.

What if You Transfer to Another School

As a general rule, you can get the closed school discharge if you can't benefit from the education you received at the closed school. For example, if you transfer to a different school, but don't transfer any credits from the old school, you should still be eligible for the closed school discharge. You might still be eligible for a closed school discharge even when you transfer your credits. This can happen if you enter a completely different field of study at the new school so that your credits from the closed school don't benefit you.

Comparable Education Program

You're not eligible for the closed school discharge if you're completing a comparable education program through a "teach-out," or by transferring credits from the closed school to another school, or if you completed the coursework before the school closed. If you complete your coursework before the school closes, you're ineligible even when you don't receive your diploma or certificate. A teach-out plan is when another school allows the students of the closed school to complete their course of study.

An important question is, "What is a comparable educational program?" When ITT Tech closed, the U.S. Department of Education issued a FAQ. The answer to question 15 of this FAQ explains what “comparable” means. The Department of Education states that it considers many factors in determining if the new school has a comparable program to that of the closed school. In the words of the Department, these factors include:

• the academic or professional nature of the two programs;

• the similarity in course requirements;

• the treatment of transfer credits by the institution accepting the credits (for example: as general education credits or electives, or as credits toward completion of the core program); and

• the disposition of a state approving agency or accrediting agency on the comparability of the programs.

The Department of Education goes on to say that if the new school does an evaluation of competency through testing or interviews that exempts you, the borrower, from taking core credits for their comparable program, you're ineligible for a closed school loan discharge.

The Automatic Discharge

If you meet the eligibility requirements for closed school loan discharge for a school that closed between November 1, 2013, and July 1, 2020, you may get the automatic discharge. To get the automatic discharge, you must not have enrolled at another school that participates in the federal student aid program within three years of the date your school closed. 

With the automatic discharge, you don't have to do anything. Your lender will notify you that your loan has been discharged. You don't have to wait three years for the automatic discharge. You can notify your loan servicer that you want to apply for the discharge sooner.

With the federal government's new regulations that went into effect on July 1, 2020, the automatic discharge was removed. The New York Legal Assistance Group (NYLAG) sued to stop these new regulations from going into effect. They filed NYLAG v Devos on February 19, 2020. The case is currently pending. 

Applying for the Discharge

To apply for the closed school discharge, contact your loan servicer. You should receive a discharge application like this form from the loan servicer . While the application is pending, you should continue to make your loan payments. If your closed school discharge is approved, you no longer have to pay on the loan. You will receive a reimbursement for payments you did make on the student loan repayment plan. Any reference to the loan will be removed from your credit history. 

If your closed school discharge is denied, you could ask the Department of Education to review the denial. 34 CFR § 685.214 requires the Department of Education to send you written notice of a denial of your application and the reasons for the denial of your application. 

If you disagree with the Department’s rationale for denial, it's time to contact an experienced student loan attorney. You can find a list of student loan attorneys in your area in this database on the National Association of Consumer Advocates' (NACA) website. If you have difficulty affording an attorney, you can find options for free legal aid at this directory provided by the American Bar Association.

Conclusion

If your school closes causing you to get no benefit from the education for which you received financial aid, you shouldn’t have to repay the loans. This is the general rule when it comes to federal student loan debt. Yet you still may have a few hoops to jump through to be granted a closed school discharge. It may be easy to forget about student loans while they’re in forbearance due to COVID-19 relief. Yet, the very fact that our nation’s economy is struggling means more colleges will close. You need to act to get rid of loans related to closed schools, else you’ll have to restart paying at some point.