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What Happens to Student Loans If Your School Closes

You may be able to get student loans discharged if you borrowed them to attend Argosy University, The Art Institute or a different college that has closed.
March 15, 2019
Loans, Student Loans
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Argosy University and The Art Institute have joined Corinthian Colleges and ITT Technical Institute as recently closed for-profit colleges. A school closure can leave you with no degree and burdened with debt. Here’s what happens to your student loans if your school closes.

You have two main options:

  • Complete your education through a transfer or teach-out plan.
  • Apply for a closed school student loan discharge.

If you get a closed school discharge, you can’t transfer credits you earned at that school — you’ll have to start your education over. That makes a transfer the better choice for most students, if you can find a school you like that accepts your credits.

» MORE: Will your college choice leave you high and dry?

Transfer to another school or teach-out

Transferring to another school lets you continue the educational path you’ve already started. Before you start the transfer process, see how many of your existing credits your new school will accept. Credits obtained at a school that has closed may only be partially transferable — or not transferable at all.

Before you start the transfer process, see how many of your existing credits your new school will accept.

Before your school closes, it must provide you with a way to access your transcript in the future so you can share it with potential transfer schools. If you’re unsure of how to retrieve your academic records, review the school-specific information on the Department of Education’s closed school website.

If your school is on the path to closure, it may also offer what’s known as a teach-out plan. A teach-out plan helps you finish your coursework, typically at another institution that has agreed to take on students from your closed school. Be sure to check out the new institute using the College Scorecard to evaluate the education you’ll receive.

Apply for closed school discharge

Under a closed school loan discharge, all of your federal loans will be dismissed. To be eligible, you must meet one of the following conditions:

  • The school closes while you’re enrolled — or on an approved leave of absence — and you haven’t completed your program.
  • The school closes within 120 days after you withdraw from a program without a degree.

Your loans are not eligible for a closed-school discharge if you complete a comparable educational program through a teach-out plan or transfer credits to a new school. If your new school won’t accept most of your credits, opting for a discharge may make more sense.

Discharged amounts do not count as taxable income on your federal return. You can apply for a closed school discharge with your federal student loan servicer.

If your loans qualify for a closed school discharge, the Department of Education will automatically discharge them three years after your school closes. This option is only for schools that closed on or after Nov. 1, 2013.

Unless you’re unsure about your future education plans, there is little benefit to waiting for this automatic discharge. Repayment on your loans would start during that three-year window. After the discharge, you would be reimbursed for any payments you made, but you could likely find a better use for that money in the meantime.

If you’ve already completed the coursework for your intended degree or graduated, you are not eligible for a closed school discharge

If you feel like the closed school defrauded you, you may be able to receive relief under a provision called borrower defense to repayment. But to do this, you would have to demonstrate, in court, that your school violated laws in its state when it came to educational services or loans. This option is available whether you’ve graduated or not.

» MORE: How to get loan forgiveness through borrower defense to repayment

Options for grants, military, private loans

Legislation changes in 2017 made relief possible for some other types of financial aid in the event of a school closure:

  • Pell Grant recipients: You can receive a maximum of six years’ worth of Pell Grants. If you are unable to complete your education due to a school closure, the Department of Education can restore portions of your Pell Grant eligibility.
  • GI Bill benefit recipients: The U.S. Department of Veterans Affairs has the authority to reset GI Bill benefits for a student when a school closes. You can find more information about restoring these benefits on the VA’s website.

While federal loan borrowers may have options, private loan borrowers will still be responsible for repayment. Contact your lender or servicer to see what assistance may be available.

State tuition recovery funds

For students who don’t qualify for federal debt assistance, there may be one last resort. If your state offers a tuition recovery fund or student protection fund, you may be able to receive some compensation for lost costs and educational opportunity due to a school closure. Fund availability and qualifications will vary from state to state, so check with your state’s post-secondary or licensing agency.

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