Choosing the right school is difficult when you finally decide to continue your education after high school. You have plenty of options on which you can build your future academic life and professional career. However, it is generally advised to stay away from for-profit schools, as explained in a Forbes article about “20.000 More Reasons to Never Go to a For-profit School”. You might have issues later while dealing with Closed School Discharge, so it would be best for you to avoid those schools. Several for-profit schools could not meet their business goals and failed the investors and thousands of students dependent on them. Le Cordon Bleu College of Culinary Arts, Argosy University, Vatterott College, Brown Mackie College, and many others closed in recent years, and their students faced major consequences.
Besides not completing the education for a degree, it was revealed that many schools offered credits that could not be transferred to new educational institutions after they closed. Moreover, people who graduated and got their degrees before were left with worthless papers because other parties- schools and companies- do not recognize their educational achievements. Even worse, a huge portion of these students and graduates owe student loan debt, and they cannot meet the obligations.
If you are one of the thousands of such students, you have a way out of the debt challenges – Closed School Discharge. This guide will explain the details of the discharge and what you should expect from it. Besides, it will present some alternatives if you do not qualify for this student aid program.
Why For-Profit Schools Close?
As the name suggests, for-profit schools have profitability goals, and their only aim is not to educate people. Unfortunately, their relations with the shareholders, as well as the government, have long been complicated.
Many schools, to meet their profitability targets, engaged in fraudulent activities. Their recruiters utilized unethical and illegal practices to attract students and convince them to enroll. For example, the officials lied about true education costs, job replacement rates, and the quality of education. Sure, these activities led to numerous lawsuits against for-profit schools. Besides, during the Obama administration, the schools were pressured to prove their worth of education. The ones that failed to operate ethically lost their accreditations and access to federal aid. As a result, campuses keep closing nationwide.
It should be mentioned that public schools also close. However, the reason to focus on for-profit schools is that 95.5% of schools closed between 2013-2018 were for-profit institutions, according to the Forbes article.
What are the Options if the School Closes?
School closure is not the end of the world, but it still brings undesirable consequences. If you know that the school is closed, you have a few options. First, you can continue your education in another school by transferring your credits to a comparable program. Yet, there exist several pre-conditions for this option.
Your credits should be transferable and recognizable by other schools. Till now, many students have revealed that their credits are not even worth transferring. In such cases, you can start your educational life again in another school – from 0. Another option is stopping progress for education. Each option has its drawbacks and benefits. If you have student loans, your Closed School Discharge eligibility will depend on what you decide on.
If you choose the first option and transfer your credits to a comparable program, you will lose your eligibility for discharge. In other words, continuing education in another school by transferring credits for a similar degree will not eliminate your debt obligations.
If you choose a different program to start your education again, you will get a loan discharge for school closure. In such a case, your program should not be comparable or similar to the existing program. Lastly, if you do not continue your education, you will eliminate the student loan debt.
Closed School Discharge Program Details
The federal government provides several opportunities to borrowers to eliminate their student debt. Some of these programs help students facing unfair treatment, while others reward the graduates for their services. Discharge programs are available to students due to special circumstances, such as bankruptcy, school closure, death, total or permanent disability, etc.
If your school closes while you are still studying, or within 120 days after you withdraw, you can get rid of the debt accumulated for the education. This program- Closed School Discharge- eliminates 100% of your direct student loan, FFEL loan, and Perkins loan. However, you need to meet the eligibility conditions. When your school closes, you need to be:
- still enrolled or studying
- in 120 (or 180) days period after you withdraw
- In approved leave
The condition for the withdrawal period depends on when you got the loan. If your loan was disbursed after July 2020, the allowable period is 180 days. For borrowers whose loans were disbursed before this period, 120 days is allowed after the withdrawal to qualify for Closed School Discharge.
As mentioned before, if you decide to continue your education in a new school in a comparable program, you will not receive the discharge benefit. The new program can be accessed through a teach-out by transferring credits, hours, or comparable means. Additionally, if you already completed coursework but did not receive a diploma, you will not qualify for discharge.
How is the Comparability of the Program Determined?
Students who transfer the credits to a comparable program do not receive loan forgiveness, while others who apply for a non-comparable program enjoy the Closed School Discharge. Hence, it is necessary to understand the difference the comparability brings.
The Education Department decides whether the new program is comparable by considering several elements. They compare the academic and professional nature of both programs, check the similarity in the course list, as well as the final decision of a state-approving agency on the comparability.
Some educational institutions would not accept the credits and require their testing or interview process for enrollment. In such cases, you will lose your eligibility for the Closed School Discharge benefit.
The Discharge Process
Closed School Discharge application and the overall process are straightforward. When you meet all the eligibility conditions, you will automatically be qualified for discharge. The Secretary will send the qualifying borrowers an application form which should be provided to the loan servicers. In case you do not hear about the loan discharge for school closure, you can contact your loan servicer and ask about the process.
Additionally, keep in mind that the automatic Closed School Loan Discharge application happens when three years pass after the school is closed and you do not enroll in another school. However, you do not need to wait for three years. Instead, if you meet eligibility, contact your loan servicer directly.
When you apply for the discharge, continue making your payments as usual till you get a notice that your loan is discharged.
The eligibility criteria for Closed School Discharge can be confusing. Hence, here is a simple description:
- Did not complete the program but have diploma/certificate- qualified
- Completed the program but no diploma- not qualified
- Transferred to a comparable program- not qualified
- Transferred to a completely different program- qualified
The Benefit of the Discharge
Besides the simple Closed School Discharge application process, it brings many benefits. You will get rid of 100% of your student debt if you do not continue studying in a comparable program. It means you do not need to worry about your loan payments anymore.
Even better, the borrower will receive the reimbursement for the payments made voluntarily or through a forced payment collection process. The Education Department will also require the credit rating agencies to delete any record for the loan, together with any adverse history related to it. Therefore, your credit performance can improve.
I have Private Student Loans. What Should I Do?
Unfortunately, the Closed School Discharge program only covers the Direct, FFEL, and Perkins loans. If you have private loans, you cannot qualify for this program. Instead, you need to contact your loan servicer and ask for your options. The private lender will rarely grant a discharge due to school closure.
However, they might provide some favors such as reduced monthly payments, a temporary non-collection period known as student loan forbearance. However, to establish realistic expectations, you have to know that the lenders mostly do not grant any favors as the government or any other party does not require them.
What Are Other Options Available to Borrowers?
The Closed School Discharge program is straightforward. There aren’t many requirements to meet the eligibility conditions. However, if you are ineligible, you do not have many opportunities to improve the conditions and become eligible. Instead, you need to find other programs that can grant debt forgiveness.
In this section, we will present you Borrowers’ Defense to Repayment and Student Loan Refinancing. Sure, the government provides many other opportunities like Public Service Loan Forgiveness, Teacher Loan Forgiveness, Disability Discharge, etc. However, the two programs that we are going to present mostly fit the conditions of borrowers ineligible for Closed School Discharge.
1. Borrowers’ Defense to Repayment
Borrowers’ Defense to Repayment program allows borrowers who the school misled to eliminate the debt. Some schools misinform students to convince them to enroll. For example, they lie about low job replacement rates or mislead students about the true costs of student loans. In such cases, borrowers decide to enroll based on false grounds.
Hence, the government allows the borrowers to get rid of the debt if they can prove the fraudulent activity. Keep in mind that only educational-related matters can be cases for Borrowers’ Defense rule. Personal conflicts, such as harassment, will not make you qualified for this program.
Closed School Discharge and Borrowers’ Defense Rule
There is a reason behind why this article involves the Borrowers’ Defense rule—many closed for-profit schools engaged in fraudulent activities that subsequently led to the closure. Even before the closure, some lawsuits were raised against the school by students due to low quality of education, misleading advertising, etc. Therefore, there is a high chance that students of closed schools also face unfair treatment by the school, which can make them eligible for the Borrowers’ Defense rule.
Besides, to prove the case, borrowers need to utilize different ways. One of these ways is showing proof that such misleading activities also happened in the past. Hence, prior lawsuits strengthen the claims of borrowers for Borrowers’ Defense to Repayment. In short, if for any reason you do not qualify for Closed School Discharge, you can be highly likely to qualify for the Borrowers’ Defense rule.
Eligibility Requirements for BDR
Borrowers’ Defense rule involves Direct federal loans. Different from Closed School Discharge, you cannot get rid of your FFEL or Perkins loans through this program. Luckily, the qualification for the program is simple.
All you need to do is prove that the school misled you. In other words, you need to indicate that you would not choose this school if the officials provided correct information. Therefore, borrowers should clearly explain what happened and why they believe the school engaged in misleading activity in the application. In contrast to pretty straightforward Closed School Discharge applications, the Borrowers’ Defense to Repayment requires detailed, properly structured applications. Besides the arguments, the borrowers should submit supporting documents, such as email communications, brochures with false ads, contracts, curriculum, etc., that back the claims.
The loan discharge for the closed school program grants totals forgiveness for student debt borrowers. However, Borrowers’ Defense rules work differently. There have been long discussions on the effectiveness of this program. The previous Education Secretary Betsy DeVos believed that the program was “free money” for debtors. Hence, during recent years, the ED delayed the review or rejected loan discharge.
Besides, she changed the discharge percentage calculation, which compares the applicant’s earnings with the earnings of a graduate of a similar program. Yet, in many cases, the discharge percentages were low, and even cases with 0% discharge happened although the applicant got approval.
The good news is that soon after selecting the new Education Secretary of Biden, Miguel Cardona, actions were taken to change the discharge calculation. The ED announced that the program would grant full discharge to qualifying borrowers. Hence, there is a high chance that more borrowers will qualify for the 100% discharge, as in the case of the Closed School Discharge program. Besides, the applicants can even receive a refund for their prior payments.
Closed School Discharge application could happen automatically three years after the school closes. However, for the Borrowers’ Defense rule, you need to apply through the official platform. The application takes around 30 minutes. You need to first get a verified account with FSA If and then prepare all your supporting documents. Next, the Education Department will review the case and inform you about the decision.
For more information about Borrowers’ Defense to Repayment, you can check the official Student Aid website, read our blogs, or get a free consultation now.
2. Student Loan Refinancing
Both Closed School Discharge and Borrowers’ Defense to Repayment programs are available to federal loan borrowers. As mentioned before, if you have private student loans, there is almost no opportunity to eliminate the debt. Only a few lenders grant a discharge in case of death or total and permanent disability. Otherwise, it is hard to get any favor from the lender in case of financial difficulties or a closed school.
One of the best options for private borrowers is Student Loan Refinancing. This option is available to both private and federal borrowers. However, federal borrowers shouldn’t utilize this program because they will lose all their eligibility for government-provided forgiveness, discharge, or repayment plans. Yet, if you exhausted all options and qualify for none of the federal student aid programs, you can apply for refinancing.
Different from loan discharge for school closure, refinancing does not eliminate the debt. In other words, you will not be free of payments. This program involves getting a new loan to pay out all existing loans. In this way, you will be left with a single loan. Besides simplifying the debt structure, refinancing is most useful when the new loan has better loan terms.
For example, when the market interest rates decrease, you can refinance. As you get a new loan, it will have a lower interest rate, and you will save money in the long term. Additionally, the new loan can have lower monthly payments or provide fixed terms (or variable terms, depending on your preference). In short, with new terms, borrowers are better able to repay their debt.
You might not be satisfied with Student Loan Refinancing when you compare it to Closed School Discharge, eliminating 100% of the debt. However, if you have a private student loan, refinancing is almost the best option available to you.
Refinancing has extensive eligibility requirements because it is provided by private lenders, who are highly concerned about profitability and risk. The general conditions for refinancing involve having a stable income and good credit performance. Usually, a credit score of 600 or more is desirable.
However, it is understandable that students will lack credit performance or a stable income. Hence, it is possible to involve a cosigner in most cases. A cosigner is a third party, like a family member who takes responsibility for non-repayment. In case the borrower fails to meet the obligations, the cosigner would be responsible for paying back the loan. Therefore, it is not surprising that consigners should also meet credit performance and income eligibility conditions.
Besides, keep in mind that the higher the credit performance or income, the lower the interest. In other words, as you get more trusted, the risk of non-repayment decreases, and the interest rate lowers. Therefore, refinancing also benefits when your credit performance improves over time. In such a case, you can refinance to enjoy lower interest for your existing debt.
Bonuses and Pre-qualification
Many private lenders provide bonuses to apply for their refinancing services. Such rewards do not exist for federal programs, like Closed School Discharge, because the government simply does not care much about the profitability of programs.
By referring a friend or signing up, the borrowers can receive bonuses such as a slight decrease in interest. However, keep in mind that if you face a trade-off between a bonus and a lower interest rate, you need to choose the latter because it brings higher benefits in the long term.
Most private lenders provide pre-qualification tools on their platforms.
This tool helps to identify if you are eligible for refinancing and what would be the interest level. Sure, it is not 100% accurate, but it helps form an idea about the qualification. The benefit of this tool is that your credit score will not be affected if you are found to be not qualified. However, if you apply and get rejected, your credit score can decrease.
The Closed School Discharge program ensures that borrowers whose schools are closed are treated fairly. As a result of this program, borrowers can get rid of their student debt completely. However, there exist different eligibility requirements. For example, if you transfer credits to a comparable program to continue education, you will lose your eligibility to the loan discharge for school closure.
This guide elaborated the details of this discharge opportunity. If you found out that you do not qualify, do not worry. There still exist alternative programs which can reduce your debt obligations. For example, the Borrowers’ Defense rule helps eliminate student debt if the school misled you.
However, both Closed School Discharge and Borrowers’ Defense rule benefit federal borrowers. In the case of private student loans, refinancing can be helpful. This option can reduce the interest rates, change loans from variable-rate or fixed (or vice versa), and save you money in the long term. Yet, you need to have a stable income source, a high credit score, or a reliable co-signer. If you cannot decide which option is the best for you and how to maximize your chance, you can contact Student Loans Resolved experts immediately for free.