How to Get a Closed School Discharge
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- College closures cause major disruptions for enrolled students.
- The closed school discharge program forgives federal loans if your school closes.
- Only certain students are eligible for a closed school discharge.
When a college closes, it leaves many students in a difficult position. In the past five years, over 50 colleges have closed or merged. What does that mean for student loan borrowers?
Students with federal loans may qualify for a closed school discharge. This option can cancel the remaining balance on your student loan. However, only certain students qualify for a closed school discharge.
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What Is a Closed School Discharge?
The federal student aid program offers student loan discharges if your school closes. The program covers current students and those who recently withdrew from the school.
By discharging the loan, you no longer owe money on your student loans. For example, if you borrowed $10,000 in direct loans to attend a school that closes, the federal government will cancel your entire loan balance.
However, the closed school discharge program comes with eligibility requirements. Students affected by a school closure need to understand their loan forgiveness options.
How to Get a Closed School Loan Discharge
How can you get a closed school discharge? This section covers the eligibility requirements and how to receive a closed school discharge.
Closed School Discharge Criteria
Who is eligible for a closed school discharge? Borrowers with direct loans, PLUS loans, and other federal loans qualify if they cannot graduate because their school closed. This option covers currently enrolled students and those on an approved leave of absence.
The discharge policy also covers students who withdrew from a school 120-180 days before it closed.
Students are not eligible for a discharge if they withdraw from the school more than 120-180 days before it closes. Accepting a teach-out agreement also means you are not eligible for a closed school discharge. These agreements allow students to transfer credits to another school to complete a comparable program.
Students who complete all their coursework or graduate are also not eligible for a closed school discharge.
Closed School Discharge Through Your Loan Servicer
You can contact your loan servicer for a closed school discharge application. Visit the Federal Student Aid website to learn who your loan servicer is.
While waiting to complete the loan discharge process, continue paying your loans. Once the loan servicer approves your application, the balance on your federal student loans will be discharged.
However, if the loan servicer denies your application, you must continue repaying your loan. If you believe the lender mistakenly denied your application, you can contact the federal student aid program to ask about appeals.
Automatic Closed School Discharge
Under some circumstances, you may receive a loan discharge for a closed school without submitting an application. If your school closed between Nov. 1, 2013, and July 1, 2020, and you did not enroll at another accredited school within three years, the federal student aid program will process an automatic closed school discharge.
In this case, the Department of Education will initiate your discharge. You will receive notification from your loan servicer about the discharge.
Remember that you can apply for a closed school loan discharge as soon as your school closes rather than waiting three years for an automatic discharge.
What If Your College Closed After You Graduated?
Borrowers struggling with their loan payments have several options. Here are some options if you do not qualify for a closed school discharge.
- Income-Driven Repayment: The federal student aid program offers several repayment options based on your income. This can mean lower payments or even a monthly payment of zero.
- Consolidation: Loan consolidation can lower your monthly payment by giving you 30 years to repay your loan.
- Refinancing: Loan refinancing allows you to take out a new loan to cover the amount owed with a lower interest rate or longer repayment period.
- Public Service Loan Forgiveness: The federal government forgives student loans for borrowers who work for a qualifying public employer for 10 years.
- Deferment: Student loan deferment lets you pause your monthly payments for up to three years.
- Forbearance: Loan forbearance lets you stop making monthly payments on your loan for up to 12 months.
Can You Get a Closed School Discharge for Private Student Loans?
The closed school discharge policy only applies to federal loans. Unfortunately, private student loans do not qualify for a closed school discharge. Lenders aren't required to forgive private student loans, but they might have some ways to make your payments easier.
If you borrowed private loans and your school closed, contact your loan provider to ask about your options. They may offer alternatives such as refinancing or consolidation to lower your monthly payments.
If your school closes before you graduate, contact the school and lender to learn about your options. In some states, a state tuition recovery fund can provide financial assistance.
Frequently Asked Questions About Closed School Discharges
A closed school discharge eliminates your federal student loans if your school closes before you complete your program. Only certain students are eligible for this program. You must have federal loans, and your school must close while you were either enrolled or a recently withdrawn student. If your school closed, contact your loan servicer to learn more about your options or ask for a closed school discharge application.
You can get loan forgiveness if you were a current or recently withdrawn student when the school closed. You cannot accept a teach-out option at another school. And you must have federal student loans. Students who meet the eligibility requirements can contact their loan servicer for a closed school discharge application.
Under some circumstances, forgiven loans count as taxable income. However, a closed school discharge does not count as taxable income, according to the federal student aid office. If your school closes and your loan servicer forgives your federal student loans, you do not need to declare the balance on your federal tax return as income. The same policy applies to loans discharged because of death or disability.
If your school loses accreditation, it can affect your financial aid options. Students at unaccredited schools cannot take out federal loans or receive federal grants like the Pell Grant. After your school loses accreditation, you must still repay your student loans. There is no loan discharge process for schools that lose accreditation. If, however, your school closes, you may qualify for a closed school discharge as a current or recently withdrawn student.