Has your school closed down, or is it due for closure? If so, you may have several questions about closed school discharge, especially if you took out student loans to attend the closed institution.
Having your school close suddenly and not knowing what the future holds can be unsettling. For example, are you still responsible for repaying your student loans after school closes? This may be one of your major concerns.
The short answer is that it depends. However, we know how frustrating it can be, so we’ve put together this beginner’s guide.
We’ll tackle closed school discharge in more detail.
Keep on reading!
What Is Closed School Discharge?
If your school closes, you may be eligible to have your federal student loans forgiven. And the student loan discharge offered by the Federal Student Aid program ensures it becomes possible.
The program is available to enrolled students and those who have just dropped out.
Your student loan debt will be eliminated once the loan is discharged. It’s possible to have your entire student loans discharged through the closed school discharge program.
However, this program does have some eligibility requirements. So, in the event of a school closure, you’ll need to understand how to get your student loans discharged.
How To Utilize Closed School Discharge?
You may be able to get a closed school discharge if your school shuts down while you’re still a student or soon after you withdraw.
More specifically, you must have been a student within the last 120 days before the school closed. You’ll be unable to get your loan discharged if you drop out more than 120 days after the school closes.
Finding your financial and academic records could be difficult if you find yourself in this situation. Due to the institution’s closure, you may want to inquire about your school with your state’s higher education licensing agency.
As you go through the application process for a loan, be sure to maintain communication with the loan servicer. If your application is accepted, the government will forgive the entirety of your FFELs, Direct Loans, or Perkins Loans.
How Do You Know If Your Student Loan Is Forgiven?
Your loan servicer will notify you when you get a student loan discharge after applying. Furthermore, there will be further information on how the discharge was applied to your loan balance.
However, keep in mind the following. You’ll no longer have to make those payments if you’re granted a discharge for the entire loan balance. However, those who are only granted a partial discharge are still obligated to pay the difference.
Depending on the discharge, you may qualify for a refund of some or all of your previous loan payments.
Getting a student loan discharge releases you from making any further payments on it.
In addition, credit reporting agencies will be notified of the discharge. And they will take care of reimbursing any damages to your credit score that were caused by this loan.
What Happens If Your Discharge Is Approved?
There will be no need to make any further payments on a loan that has been discharged in its entirety. However, the remaining balance remains due if only a portion of your loan is eligible for a closed school discharge.
Certain types of loan discharge may return all or part of the payments you’ve already made. Others may remove negative information about delinquency or default from your credit report.
The discharge may remove the default from the debt. Also, you would be able to apply for federal student aid again if this was your only defaulted loan.
What Happens If Your Closed School Discharge Is Denied?
If your closed school discharge request is not approved, you’ll still have to pay it back. The decision to grant or deny a loan discharge is often final and not subject to further review.
You should contact your loan servicer to discuss repayment alternatives if you have a direct loan or a loan under the FFEL program. Also, check out the repayment options available to you.
If your loan is in default, find out how you can start making payments and avoid further default.
Contact your loan servicer if you think your application was declined in error.
Two Exceptions If Your Closed School Discharge Was Declined
There are two notable exceptions to having your loans discharged: Forged Signature and False Certification. You have the right to request a review of such dismissals by the U.S. Education Department if you get one.
If any of the following apply to you, you may be able to get out of paying back your FFEL or direct loans:
- Your school falsely certified your eligibility for a loan based on the benefit you’ll get from its training. And you didn’t meet the eligibility requirements.
- The school may have signed your name without your permission on the promissory note or loan application. Or they endorsed your loan check or signed your authorization for an electronic funds transfer. However, if the loan profits were handed to you or used for costs owed by you to the school, you’ll not be eligible.
- Your institution has given you a certificate of eligibility. But you can’t work in the field you were trained in due to a mental or physical disability, criminal record, or advanced age.
- Identity theft led to a fake certification of your student loan.
How Can I Get Rid Of Student Loan Debt Through Discharge?
Remember that your federal student loans won’t be forgiven even if your institution closes. Instead, you must apply for a closed school loan discharge program to get your loans forgiven.
To begin, complete the closed school loan discharge application and submit it to your loan servicer. Next, consult with your loan servicer to learn how to submit a discharge application.
You can start the closed school loan discharge application process at any time. But it’s best to submit it as quickly as possible.
Keep Making Your Monthly Payments
You must keep making payments until you hear back about whether or not you’ll be granted a closed school discharge. If your request to cancel your student loans is granted, you’ll no longer be responsible for making payments on them.
However, if your request is denied, you’re still legally obligated to make payments as outlined in your promissory note. If you were declined but believe there was an error, contact your loan servicer to discuss the situation.
If your school has closed, check the Education Department’s closed school discharge list to see if your school is listed there. You can also find your state’s education service agency’s contact information and determine your next educational steps.
Automatic Closed School Loan Discharge Program
You may be eligible for an automatic school loan discharge if you satisfy the eligibility requirements explained above. And if you’ve not enrolled in a similar educational program within three years of the closure.
Students who attended a closed school between November 1, 2013, and July 1, 2020, are eligible for a closed school loan discharge program.
The U.S. Education Department will inform your loan servicer, which should subsequently inform you if you’re qualified for an automatic discharge.
Is Closed School Discharge Taxable?
Income tax must be paid on any forgiven student loans under certain conditions. However, the federal student aid office states that a closed school loan discharge is not considered taxable income.
When filing your federal tax return, you don’t need to include the amount by which your federal student loans were discharged if your school closed. Or if your loan servicer canceled your student loans.
Do You Have To Pay Back A Student Loan If The School Is Closed?
Yes. You’ll have to repay your student loans if your institution shuts down unless you do one of three things:
- Apply for a closed school discharge
- Complete your education using the transfer or teach-out plan
- Seek other student loan forgiveness options
- State tuition recovery funds
Teach-Out Or Transfer If Your School Closes
You can continue with the education you’ve already started by transferring to another school. But, first, check how many of your current credits the new institution will accept to avoid wasting time.
It may be that credits earned at an institution since closed won’t transfer or will transfer with restrictions.
If your school is going to shut down before you graduate, they are responsible for giving you access to your transcript. That will help you send it to other schools.
Check the school-specific details on the Education Department’s closed school site if you’re unsure how to get your transcripts.
Your School May Offer A Teach-Out Plan
If your school is closing, it may also provide a teach-out plan for its students. This plan can allow you to finish your education at a different school that has agreed to accept you.
The College Scorecard can help you evaluate the quality of education a new school offers, so make sure to look into it.
Other Student Loan Forgiveness Options
You can be eligible for other federal loan forgiveness if you don’t qualify for a closed school discharge. Let’s take some forgiveness programs you can qualify for:
Income-Driven Repayment Plans
With these IDR plans, your monthly cost may be as low as zero dollars, depending on your income. Your plan can be adjusted as your income rises. Loan balances are eligible for forgiveness after 20 or 25 years.
Public Service Loan Forgiveness (PSLF)
The PSLF is a very appealing option. If you work for an eligible company, your outstanding loan balance may be forgiven entirely and tax-free after ten years (120 qualifying monthly payments).
However, you’ll need to hold a job with a public or government agency to qualify. The good news is that an IDR plan is available, making loan forgiveness possible even if your monthly income is less than your loan payment.
State Tuition Recovery Funds
You may qualify for a refund through the State Tuition Recovery Fund program if a closed school discharge doesn’t work for you.
Contact the Postsecondary Education Agency in your state to see if you qualify for this program. This agency is in charge of higher education in your state. They are also responsible for:
- making the laws,
- checking compliance, and
- implementing regulations.
Simply type your state and the education agency into Google to get the right contact. Checking with this office could save you thousands of dollars. It only takes a few minutes of your time to discover if you qualify for state funding.
You can find helpful resources on the websites of state agencies, including
- the attorney general’s office,
- the state board of higher education, and
- the bureau of consumer protection.
Tuition Recovery Funds Covers Different Tuition Payments
In most cases, costs not covered by other means can be recouped through a tuition recovery fund. For instance, if your school closed, you might receive compensation for federal loan amounts from the closed school discharge fund.
But the state tuition recovery funds may cover expenses like private student loans. Each state has guidelines for how much of this fund is available and what is required. So you should also check that out.
What Student Loans Are Eligible For A Closed School Discharge?
Federal student loans such as PLUS, direct, Perkins, or FFEL qualify for a loan discharge. You can get a 100% discharge on all these student loans.
Can You Get Private Loans Closed School Discharge?
Only federal loans are eligible for a loan discharge. Unfortunately, loan discharge isn’t possible for private student loans. In addition, private loan lenders aren’t obligated to cancel borrowers’ debt, although they may provide flexible repayment plans.
Contact your private loan servicer to discuss your options if your school has closed since you took out loans. For example, refinancing or debt consolidation could help reduce your regular payment amount.
Get in touch with your school and your lender if it looks like you might have to withdraw from school before you graduate. You may be eligible for financial aid from your state’s tuition recovery fund.
Other Options If Closed School Discharge Doesn’t Work
Even though a loan discharge process is simple, you may not get approved. But that shouldn’t stop you from getting your student loans canceled. Fortunately, there are other options you can try out if you don’t get a discharge.
We’ll go through some of them in this section.
Borrower’s Defense To Repayment
Students deceived by their institution might have their loans forgiven through the Borrowers’ Defense to Repayment program. To enroll more students, some schools give them false information.
For example, some institutions mislead the public by lying about the actual cost of student loans or the difficulty of finding a job replacement. So borrowers enroll in such institutions on false claims.
For this reason, the government will forgive your debt if you provide evidence of fraudulent activities. Remember that the Borrowers’ Defense rule only applies to issues that pertain to a student’s education.
Problems on a personal level, such as harassment, don’t qualify you for this program.
Student Loan Refinancing
If you have federal student loans, you can access the borrower’s defense to repayment and closed school discharge. However, repaying private student loans is extremely difficult, and forgiveness options are nearly non-existent.
In case of death or permanent disability, only a few lenders will discharge the debt. If not, it’ll be challenging to gain the lender’s favor to discharge your loans. This is where student loan refinancing comes in.
If you have private student loans, you should look into refinancing them to a reduced interest rate. That will help you pay off your debt. Also, it’ll reduce your interest costs during the life of the loan and your principal repayment amount.
Refinancing your loans to a lower student loan interest rate while maintaining the same monthly payment is a great strategy. This could shorten the duration of your loan and save you hundreds or even thousands of dollars.
Total And Permanent Disability Discharge (TPD)
Total and Permanent Disability Discharge is an option if a long-term disability prevents you from working. You can be eligible for TPD in one of three ways:
- You’re a veteran, and because of an injury sustained in the service of your country, you are now disabled and unable to hold gainful employment. Include any paperwork you have received from the Department of Veterans Affairs when applying.
- An accredited physician has determined that you have had a TPD for at least 60 months. And the TPD will last for another 60 months.
- You’ve qualified for financial support from either Supplemental Security Income or Social Security because of a disability. A disability evaluation must be scheduled and necessary paperwork submitted within five to seven years.
Whatever proof you present must establish that you can’t work, period. And your inability to repay your college loans is a direct outcome.
Make an appointment with your loan servicer to discuss a possible disability discharge. Your loan servicer will give you all the data you need to complete your application. And it’ll inform the loan servicers to stop collecting for 120 days while it decides your case.
Unpaid Refunds Loan Discharge
FFEL programs and Direct loans are eligible for unpaid return discharge. If your university fails to pay a refund, it owes your lender or the U.S. government; this provision would apply.
If your school can’t cover the entire cost of your education, you may be eligible for a refund from the federal government.
You may need to do some investigating before you can receive this reimbursement. Get in touch with your school’s financial aid office and your student loan servicer for details on how to request a refund of federal money.
Find A Repayment Plan That Works For You
If a closed school discharge doesn’t work for you, check repayment programs that might work for you. You’ll be enrolled in the standard repayment plan when you graduate. It’s an equal payment schedule for 10 years, but it might not work for all borrowers.
Many recent grads think they can’t change their student loan repayment schedule. And that causes them to make high monthly payments for years.
Numerous repayment options are available for people with federal loans. And these plans might make it easier to pay off the loan balance over time.
Consider a Graduated repayment plan if your salary is expected to increase in the years after graduation. This plan requires a smaller initial payment, with subsequent payments increasing in size.
Consider the Extended repayment plan if you’d prefer a smaller monthly payment but are willing to spread out your payments over a longer period.
The federal government will forgive any outstanding federal student debts if the borrower passes away. However, before a loan can be forgiven, a surviving relative must provide the lender with a copy of the death certificate.
Talk to your loan servicer if you think you could be eligible for loan cancellation. You must have all the legal paperwork you need to proceed.
Even if you meet all the requirements, the lender will not grant the discharge until all paperwork is submitted. So remember: you need to have enough saved for taxes.
Consolidate Your Federal Loans
Another good alternative to closed school discharge is consolidating your federal student loans. Consolidating will help you get your finances in order, but it won’t reduce the amount you owe or the monthly payment.
Before your first year of college, you probably took out your first student loan. And then, you sign up yearly and get a new student debt.
If your education costs exceed the amount you can borrow from the federal government, you may have to turn to private lenders for the rest. Unfortunately, you may have to keep track of four or more separate loan repayments.
Another complication is that the amount and date of payment for each loan may differ. One missed payment can have a devastating effect on your credit score and your ability to borrow money in the future.
Consolidating your federal loans can keep all your many loans in check.
Some Employers May Offer Tuition Reimbursement
Many companies provide tuition reimbursement programs to help their employees with the high cost of higher education. That’s one way to get a closed school discharge. In addition, some companies now reimburse their workers for a portion of their student loan debt through loan repayment programs.
If you’re already working, you can maximize your compensation by exploring your company’s tuition reimbursement options to reduce or eliminate your debt.
Many of these programs require upfront payment and subsequent verification of completion by the employer. However, most companies will compensate you financially after you finish the training.
If you have massive loans and are finished with school, there’s still a way. You may be eligible for signing bonuses and other benefits from certain employers. But you need to ask your employer.
Bargain for your first salary after graduation. Then, inquire as to whether or not your prospective company will assist you in paying off your student loans.
You could qualify for a closed school discharge if your school closed down. Also, you could get a 100% discharge on your student loans if you have federal loans. Contact your loan servicer to get the application form.
However, remember that:
- you must have been enrolled at the time of closure,
- be on an official leave of absence, or
- have withdrawn within 120 days of the school closing date to qualify.
If you plan to enroll in a teach-out course or use transferable credits to finish your degree, you won’t be able to choose the above option. However, you can also explore federal loan forgiveness and repayment alternatives.
Where to find the closed school loan discharge application?
Contact your federal student loan servicer and request a closed school loan discharge application. But do that after an official notice of school closure has been listed on the USDE website.
What do you need to know before applying for a closed school loan discharge?
Before applying, you must know the eligibility requirements for a closed school loan discharge. Furthermore, you must meet one of the following conditions:
- The school you were enrolled in closed while you were still a student there.
- You were on an official absence from school when it was closed.
- You dropped out of school within the allowed 120-day student loan grace period after the institution’s closure.
Which universities are available on the closed school discharge list?
There are numerous universities on the closed school discharge list. Some of them are Argosy University, Everest University, Globe University, Coleman University, etc.
When to apply for a closed school loan discharge program?
There is no application deadline for a closed school loan discharge program. You can apply for the closed school discharge program if your institution closes and you qualify. The current processing times for applications are six to eight weeks.