Hundreds of colleges close each year. Do their students still have to pay their loans?
Story at a glance
Hundreds of post-secondary institutions close every year, leaving thousands of students from both for-profit and non-profit schools without a clear track to finishing their degrees.
Sometimes when a college abruptly closes the U.S. Department of Education will automatically forgive student loans.
But at other times borrowers will have to be more proactive to get their loans forgiven or reduced.
Hundreds of post-secondary institutions close every year, leaving many of their students with questions over what to do about their student loans.
Many of these students go on to continue their degrees by taking part in teach-out plans that enable them to finish their studies elsewhere or by transferring to other schools. But for others, a school closure can completely disrupt their education, leaving them without a degree and with thousands of dollars in loans to pay off.
Americans who complete their degrees uninterrupted already struggle to pay off their student loans. And student loan borrowers who did not earn a degree are three times more likely to default on their loans than those who do, according to the Council on Foreign Relations.
Following school closures, some students can get their loans entirely cancelled — but others may have to work to get partial reductions, or be left holding a bill for an education that came to an abrupt end.
Full forgiveness of some federal loans
In some cases, the Department of Education offers students full loan forgiveness through what’s known as a closed school discharge.
Students with federal loans qualify for a full discharge of this kind if they were enrolled in their school or on an approved leave of absence when it closed, or if it shuttered between 120 and 180 days after they withdrew, according to the Department of Education website.
Students who completed their degree before their college closed are not eligible, according to the department, and neither are those who withdrew more than 180 days before the closure, unless they can demonstrate “an exceptional circumstance.”
Participation in a teach-out agreement, a type of contract between schools that allows students to finish their program of study at another college, also impacts students’ eligibility for loan forgiveness.
Students retain the right to refuse any teach-out agreement or transfer option suggested by their closing school, the Department of Education notes.
But those who are finishing their studies or have completed them through such an agreement can’t receive a closed school discharge.
Other students who are ineligible for such a discharge are those who have completed or graduated from a program of study at a different branch or location of their closing school.
Beyond the closed school discharge, the department offers another potential route to loan forgiveness for students who feel like their school misled them about its education program before it closed: A Borrower Defense Loan Discharge.
The Biden administration issued a rule this year that would have made it easier for students to have their federal loans forgiven if their college abruptly closed or if they were misled about the quality of their education.
But on Aug. 7, a federal appeals court blocked the rule, meaning that applications for the loan relief are still being considered under the previous parameters.
“The U.S. Department of Education will not process any closed school discharge applications under the 2023 rules unless and until the effective date is reinstated,” the agency said on its website.
The Biden administration has also released other new regulations that would better help protect student-loan borrowers. The new rules, which would go into effect on July 1, 2024, require a college or universities showing warning signs to have “clearer, more comparable” information on financial aid, including better information on which scholarships and loans have to be repaid, according to a press release.
The new rules also require schools that show warning signs of closing to come up with teach-out plans or agreements and limit the addition of new programs and locations, the release states.
Limited pathways to private loan relief
Private loans are not eligible for such forgiveness through the Department of Education, since it does not oversee them, according to a department spokesperson.
But some private loan providers say they will work with borrowers attending schools that abruptly close.
Sallie Mae, one of the largest student loan providers in the country, works with borrowers attending for-profit schools who find themselves in such a situation.
“In the event a for-profit school closes abruptly and does not give an enrolled student the opportunity for a teach-out program or the opportunity to transfer to another institution, we work directly with the student to seek relief which could include discharge of their loan obligation,” Richard Castellano, a spokesperson for Sallie Mae, said in an email to The Hill.
But in general, there are far fewer protections in place for students with student loans.
“Private student loans unfortunately usually don’t have the same level of safety nets that federal loans have,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that offers free student loan advice.
Students should see if their state has a tuition recovery fund, Mayotte recommended. She noted there are about 20 states with tuition recovery funds including Wisconsin, Florida and Virginia.
Most students with private loans are left on the hook for those debts if their school closes, however, according to Joshua Cohen, a Vermont-based attorney who specializes in student loan cases.
Some lawyers representing students with private loans have tried to use the “holder in due course” clause to make the lender liable for the school’s issues, he noted.
But that strategy is “still developing,” said Cohen. “It is usually used as a defense if someone is sued. It isn’t a proactive tool.”
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