Closed School Discharge
Under forgiveness for a closed school, a borrower can receive a discharge of their entire student loan if they were enrolled in the school when it closed, on an approved leave of absence from the school when it closed, or if the school closed within 120 days of withdrawing from the school.
Forgiveness is not available if (i) the borrower was able to attend a comparable educational program completed at another school through a teach-out, (ii) transferring of academic credits or hours earned at the closed school to the same of similar program at a different school, or (iii) completed the comparable educational program by similar means. This is due to benefit having been received from the time at the closed school equivalent to if the entire program had been completed at the second school so that the value and purpose of the loan was realized.
However, a borrower is not made ineligible if credits or hours from the closed school are transferred to another school for a different educational program. Additionally, if a borrower completes the same or similar educational program at another school, but does not transfer credits or hours from the close school, and is not through a Teach-Out agreement, the borrower is likewise not made ineligible. Further, if the closed school issued a Certificate or Diploma even though the educational program was not completed, receiving the Certificate or Diploma does not make the borrower ineligible for loan forgiveness under Closed School Discharge.
For those who meet the requirements for Closed School Discharge on or after November 1, 2013 and did not enroll at another school participating in the Federal Student Aid Program within three years of the school’s closure an automatic Closed School Discharge is granted. This automatic process is initiated by the U.S. Department of Education themselves without application by the borrower. The borrower’s loan servicer will notify the borrower if this happens.
For borrowers that attended Corinthian Colleges of Everest, WyoTech, or Heald that closed on April 27, 2015 and were attending at the time of these closures or withdrew after June 20, 2014 the borrower can apply for Closed School Discharge or transfer to another school that has a comparable program. These options are independent of any ongoing lawsuits regarding the schools closures or any fraud or misrepresentation by the schools and any such lawsuits would not affect or delay a borrower’s application under Closed School Discharge.
If desired, a borrower can apply for forgiveness under Closed School Discharge without waiting for the automatic process. This can be desirable to avoid repayment obligation during the three years for the automatic process to take effect.
If forgiveness is granted under Close School Discharge, the debt that was incurred for partially attending the educational program is cancelled. In addition, any payments made on the loan will be reimbursed to the borrower to restore the borrower to the same financial position they would have been had they not attended the closed school. Further, the any negative entries from the loan on the borrower’s credit history will be deleted. However, after applying for forgiveness under Close School Discharge, the borrower must continue to make payments as required on the loan. Failing to do so will cause the loan to go into default and collections even after an application has been submitted for forgiveness under Closed School Discharge.
A list of closed schools for which borrowers are eligible for Close School Discharge is provided by the U.S. Department of Education.
The amount of the loan forgiven under Closed School Discharge may be subject to taxes as income up to 25% of the balance forgiven amount. This would be included in the tax year that forgiveness is received. This can be surprising and some may even consider this penalizing a borrower for something which they had no control over. However, that is the current tax law at this time and applies uniformly to all forgiven loan debt.
34 CFR §685.214
Federal Student Aid, U.S. Department of Education, If your school closes while you’re enrolled or soon after you withdraw, you may be eligible for discharge of your federal student loan (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/closed-school)
Federal Student Aid, U.S. Department of Education, In certain situations, you can have your federal student loan forgiven, canceled, or discharged (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation)
Federal Student Aid, U.S. Department of Education, Has Your School Closed? Here’s What to Do. (https://studentaid.ed.gov/sa/about/announcements/closed-school)
Federal Student Aid, U.S. Department of Education, Information about Debt Relief for Corinthian College Students. (https://studentaid.ed.gov/sa/about/announcements/corinthian#loan-forgiveness)
Anderson, Tom, Student loan forgiveness can come with a tax bomb, CNBC, September 11, 2016 (https://www.cnbc.com/2016/09/09/student-loan-forgiveness-can-come-with-a-tax-bomb.html)