If Your College Closes for Good, What Happens to Your Debt?

Only a handful of colleges have closed permanently due to economic instability caused by the COVID-19 pandemic. It’s likely that most schools will weather the storm, college experts say. But some schools are more vulnerable than others.

“It’s not like thousands of schools will go under,” says Sandy Baum, a nonresident senior fellow at The Urban Institute. “Some schools would have gone under anyway, and now more will.”

If your school does close and you’re stuck with debt and no degree, you have two options:

• Transfer credits and attend college elsewhere.

• Get your student debt discharged.

You can’t do both. Here’s how to tell if your school could shutter and what to do if it does.

Why some colleges could close

Colleges around the country are facing financial strain due to the pandemic. In the fall semester, hundreds of schools have gone fully or partially remote in an effort to curb the spread of COVID-19 among students (and faculty) crammed into close quarters.

Students are still paying full price for tuition at most places, but there are far fewer dollars going toward housing, facilities fees and even parking.

The schools most at risk for a closure are dependent on room and board revenues, says Baum. She likens financial conditions at colleges to a household facing a job loss.

“Households that don’t have savings and households that were living on the edge anyway are most at risk, and that will be true of colleges as well,” says Baum. She says schools are incurring extra expenses to go remote, and some won’t be able to bear the weight.

The schools that announced permanent closures prior to the fall semester were all small private liberal arts schools already facing financial difficulty. That includes schools like Holy Family College in Manitowoc, Wisconsin; MacMurray College in Jacksonville, Illinois; and Urbana University in Urbana, Ohio.

The first coronavirus relief bill pumped $12.5 billion into colleges last spring, which may have “stanched the bleeding and prevented colleges from closing,” according to Amy Laitinen, director for higher education at New America, a nonpartisan think tank.

Another cash infusion could help colleges stay afloat, but there’s no guarantee as coronavirus relief talks continue to stall in Congress.

You can use your credits at another school

If your college is going to close, you’ll likely know it’s coming — at least if you attend a nonprofit school. In recent years students have shown up to closed doors at for-profit schools, such as ITT Tech in 2016 and Education Corporation of America in 2018.

“The harm to students is so much greater because they close their doors in the middle of the semester, and a lot of those credits won’t transfer and there isn’t good record retention,” says Laitinen.

When most schools close, they enter into a teach-out agreement for their students with one or a few nearby colleges. A teach-out means you can complete your degree at another institution that has agreed to enroll you and accept your credits.

Holy Family College, for example, entered into 15 teach-out agreements, and most of those colleges are in Wisconsin.

By entering into a teach-out program, you keep the credits you earned, but you won’t be eligible for closed school discharge, which forgives your student loans.

If you plan to complete your degree, access your academic transcript before your school closes so you can transfer credits. The federal student aid website offers more information on specific school closures.

You can apply for closed school loan discharge

If your school closes, you’re eligible to have your loans discharged only in these scenarios:

• You were enrolled or on an approved leave of absence when the school closed.

• The closure happened within 120 days after you withdrew without completing all of your coursework.

That means your loans won’t be forgiven if you are continuing coursework elsewhere by transferring or through a teach-out. But there are some cases where you might want to take the discharge anyway to relieve your debt burden.

“In the case where a student is going to a shady for-profit college where your credits won’t transfer and you didn’t get much of an education, you may be better off taking the discharge,” Laitinen says. “But if you can transfer your credits and finish out your degree, the returns for a degree are great.”

You can apply for a closed school discharge, tax-free, by contacting your federal student loan servicer.

Your loans will be automatically discharged within three years if you qualify. But there’s no reason to hold off on applying since repayments on your loans will start within that three-year window.

Approximately 31,400 borrowers were eligible for an automatic closed school discharge, and about 30,000 borrowers received those discharges between Nov. 1, 2013, and Dec. 31, 2019, according to Federal Student Aid data. There’s no data available on approval for borrowers who manually applied for discharge.

You can pursue borrower defense to repayment

If you already graduated with a degree and your school closes, you won’t be eligible for a loan discharge. But if you can prove your college defrauded you in some way, you could apply for forgiveness through borrower defense to repayment.

“You shouldn’t just assume that if your school closes they’ll forgive your loans,” says Baum. “The question is: Can you show you were really financially harmed by it?”

Borrower defense to repayment is much harder to get than a closed school discharge. According to February 2020 data from the Education Department, only 16% of the 300,000 applications submitted had been approved since the program’s inception, and 217,000 are still pending.