College Closings and Financial Aid: What to Know

When students graduate or drop out of college, they typically begin repaying the student loans they borrowed to finance their education. But sudden college closings, like ITT Technical Institute's closing in 2016, leave thousands of students in the lurch, uncertain about the future of their loans.

What happens to student loans after a school closing isn't just a concern for former ITT Tech students. The list of closed colleges is becoming a lengthy one, including for-profits like Argosy University and Corinthian Colleges. Small private nonprofit colleges continue to struggle – like Hampshire College in Massachusetts, which considered merging with another school to avoid closing – and larger public colleges like the University of Wisconsin system are consolidating.

"We're seeing more school closures, not fewer," says Adam S. Minsky, an attorney specializing in student loan debt. And when a college closes for business, it leaves students with more than just wasted time and unopened textbooks. They may also have thousands of dollars in student loans, borrowed to attend an institution that no longer exists.

Here's what to know about the impact of college closings on financial aid, particularly repayment of student loans.

Closed School Discharge

Borrowers of federal student loans who were enrolled or were on an approved leave of absence when their school closed, or whose college closed within 120 days after they withdrew, may be eligible for a closed school discharge, which means they are no longer required to make payments on their loans.

Such was the case for former students of ITT Tech, who collectively received $95.1 million in student loan relief after the institution closed.

"Whenever there is a closure, this is the first question: Could they be eligible for a closed school discharge?" says Beth Stein, senior adviser at the nonprofit Institute for College Access & Success.

But not every student at a closed college can successfully apply for this kind of loan cancellation. Those who finish their program with a partner school, called a teach-out, and transfer credits elsewhere to complete their degree, as well as those who completed all the coursework for the program before the school closed will remain responsible for paying back their student loans.

Students who do meet the eligibility requirements for a closed school discharge, having attended a school that closed on or after Nov. 1, 2013, and who have not enrolled at another school that participates in the federal financial aid programs within three years of the date of the school's closure, are currently given an automatic closed school discharge.

However, changes to the rule are set to take effect soon. In 2019, Education Secretary Betsy DeVos issued a new rule that extends the window for closed school discharge from 120 days to 180 days of the college's closure date, but also removes automatic debt cancellation for eligible borrowers who had not re-enrolled in another institution within three years.

These changes will have an impact on students whose schools close after July 1, barring congressional action.

To get the ball rolling on a closed school discharge, borrowers can contact their loan servicer and fill out an application with any related documents or details about the school's closure.

Students who meet the eligibility requirements for a closed school discharge will automatically receive it within three years of the date the school closed, but successful applicants can have their qualified federal loans discharged sooner. Those who receive a closed school discharge will also receive a refund for payments already made and have any black marks related to those loans removed from their credit reports.

Borrower Defense to Repayment Rule

The Department of Education also offers another form of loan forgiveness created for student loan borrowers in cases where a school was involved in misleading, fraudulent or otherwise illegal conduct. In some cases of sudden school closure, students may apply to have their loans forgiven through what's called the borrower defense to repayment rule.

However, the Department of Education's new 2019 rule will also have an impact on borrower defense, cutting the time borrowers have in half from when they discover they were defrauded to when they can apply for forgiveness – from six years to three – along with other more strenuous requirements.

"From our perspective, the provisions of that rule will make it effectively impossible for defrauded borrowers to get the debt relief they are entitled to under the Higher Education Act," says Kyle Southern, director of higher education policy and advocacy at the Young Invincibles, a national organization focused on issues affecting young people. He says, for example, the new rule "puts up a much higher standard of evidence that there was direct financial harm and real malevolent intent to harm (students)."

Private Student Loans

Securing assistance after a college closes isn't a certainty, especially in the case of students who took out private student loans. Borrowers with nonfederal loans should contact the private lender to learn more about their options.

"Private loans unfortunately are just tougher. There is no equivalent discharge program for private loans," Minsky says. Instead, relief may be possible on a case by case basis, depending on the lender.

If a loan discharge through a lender is off the table, a state tuition recovery fund or bond program may help students with private loan debt or those who paid out-of-pocket for their education recoup some of the funds. Students can contact their state's consumer agency for more details.

Future Financial Aid

A college closing can also mean that a student's access to financial aid may take a hit. Low-income students who were awarded federal Pell Grants, financial aid of up to $6,345 in 2020-2021, may have limited eligibility left.

The Pell Grant has a lifetime limit equal to six years of funding. Some periods of eligibility may be restored to students who could not complete their program due to a college closure.

There are also limits on the maximum period of time that a student can receive federal direct subsidized loans. Loans that were not discharged under the closed school discharge policy will continue to count toward the individual's federal loan limits.

Future College Closings

Students can investigate whether the school they're attending, or considering attending, is on the cusp of closure. Information-seekers can look at the Department of Education's list of schools under scrutiny, called heightened cash monitoring.

From this, prospective and current students can learn more about an individual school's compliance issues, which may be a red flag for future closures.

Just don't ignore the warning signs of a faltering school, Minsky says. If there are rumors that your school is in trouble, "don't stick your head in the sand," he says.

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