Your college is closing, now what?

Monday, July 28, 2014

If you have federal student loans and are currently enrolled in or recently left a college or university that has shut its doors, you may be able to discharge (cancel) your loans. For private student loan borrowers, discharge isn't an option, but in some cases, you may be able to bring a legal defense against paying back private student loans taken to attend a school that has closed.

Here is what you need to know:

1. When a school closes, the institution may give students the option of a "teach-out," an arrangement to complete your program and receive your degree or certificate at another campus, program or school. There is no obligation to accept the offer of a teach-out—students instead can apply for a closed school discharge of their federal loans or apply for state tuition recovery funds, meaning they are no longer obligated to pay back their loans. The U.S. Department of Education (ED) is required to notify borrowers eligible for loan discharge within 90 days of school closure. If you accept a teach-out or transfer even a few credits to a school other than the teach-out school, you will not qualify for a closed school discharge.
   
   If your school is bought by a new owner, you do not have a right to a closed school discharge. Students can receive a partial refund of federal financial aid if they (1) voluntarily withdraw (in writing, using the required procedures) and (2) have not completed more than 60% of the term they paid for. If a student withdraws, he or she will receive a prorated refund for that term. Submit withdrawal requests in writing and keep copies to submit with refund applications.
    
2. If you withdrew from a school and it subsequently closed, you qualify for a closed school discharge as long as the date of withdrawal was within 90-120 days of the closure (90 days if your school closure discharge application was received before July 1, 2014 and 120 days for applications received on or after July 1). Students also are eligible for a closed school discharge if they were on approved leave when the school closed.
    
3. If you are considering a withdrawal based on a deterioration of the program, document any problems you witness, such as teachers not showing up, the school building being open shorter hours or closed on some days, failure to fix broken equipment, failure to provide promised equipment and books, etc. If students can show problems with the school prior to the 90- or 120-day look-back period, the time frame could be extended under “exceptional circumstances.”
    
4. Students with private loans facilitated by the closed school may be able to (1) qualify for partial or full payment of private loans from a state tuition recovery fund if available under the laws of their state; (2) obtain a partial or complete discharge from the loan holder (it's rare, but private lenders may grant partial discharges); or (3) assert the closure as a defense to repayment based on state law, such as breach of contract or other violations.
    
5. In order for distance education (online) students to receive a closed school discharge, the school must have closed its main campuses and ended all educational programs. If an education company with various school affiliates sells any of its schools that offer online programs and some or many of those programs are discontinued, those students will not be entitled to a closed school discharge.
   
   Students with private (non-federal) loans who were enrolled in online programs and who live in states where the school has no physical presence likely will not qualify for reimbursement from state tuition recovery funds. Online students with private loans for closed schools can bring a legal defense against repayment. Students who borrowed from a private lender to pay for an online program should contact the Consumer Financial Protection Bureau (CFPB) to better understand their options.

For more information on actions to take if your school closes, please visit the CFPB's "frequently asked questions about school closings" page.

To find out if you might be eligible for a discharge because your school has closed, check the “Closed School Monthly Reports” from the Department of Education. These are the official lists that guaranty agencies may use to discharge loans for students who meet the eligibility requirements.

Students with questions or complaints should contact the Department of Education or the CFPB:

U.S. Department of Education
Email: [email protected]
Phone: 877-557-2575

Consumer Financial Protection Bureau
Phone: 855-411-2372
Click here to submit a complaint online.