What Is Closed School Discharge?

Imagine you took out a federal student loan for further education and the school you chose to enroll in closes before you could complete the course.  Ever wondered what happens to the loan in this case? Many colleges have shut down for good between semesters. Hence, the Department of Education has offered a way for students to get rid of the debt in such cases. 

A closed school discharge is a service or facility provided to students who have attended a school that closed while they were enrolled, or if the student withdrew at least 120 days before the school closed. The time has been extended to 180 days in September 2019. In such cases, students are entitled to 100% discharge of their federal student loans. 

However, note that only federal loans received on or after January 1, 1986, are eligible for closed school discharges. Keep reading to learn more about the application process and other related details of this option.

Application For Student Loan Discharge 

Your federal student loans don’t get dismissed automatically, even if your school closes. You’ll have to apply to get the loans discharged. Here’s how to apply:

• Look for the school closure loan discharge application form and fill it out. Send the same to the lender or loan servicer. There’s no particular deadline for the submission of such an application, but you still need to work on it as soon as possible
• Cross-check with the loan provider regarding the application process for getting the loan discharged 
• Make sure you continue making the payments towards the loan until the application gets approved or disapproved for discharge 
• When the application gets approved, you won’t be held liable to make any further payments 
• If the application for the discharge gets disapproved, you legally have to make payments as mentioned in the promissory note 

When the application process for student loan discharge gets denied, search for the mistake that led to disapproval. Then, contact the lender to dispute it. 

Will I Have To Pay Back My Student Loan?

Wondering in which situations you might not qualify for the closed school discharge facility? The first reason for the disqualification of the eligibility criteria is holding a private student loan. If you learn about the closure of the school, get in touch with the lender as soon as possible to work on possible student loan discharge options. 

The students are also provided with a teach-out option so they can finish their incomplete coursework from the original program and obtain the diploma certificate from another school. If you accept this option, you’ll be liable to keep making the repayment on the student loan as per the agreement. In case you refuse to select the teach-out option, you won’t have to make any further payments towards the federal student loans. 

Stay In The Know Regarding Your Closed School Discharge Options

The first thing you need to understand is that if your school is shutting down its doors, there’s no need to panic. In most cases, your student loan will be eligible for a closed school discharge. However, to get approved, it’s extremely important to fill out a request to contact the loan provider regarding the application process.

You should analyze the closed school loan discharge, on a case by case basis, to figure out the option that suits you best. Depending on your plans, it might even make sense to forgo the loan discharge and continue your course by transferring to another school. For instance, let’s say you took out a loan of $200,000 to enroll in the university of your choice. If the school closes, you can either get a discharge or choose the teach-out option. 

With the degree earned, you can expect to make at least $80,000 a year. Without a degree, you may still earn around $50,000. In this scenario, a portion of $80,000 as loan repayment is a better option than earning $50,000 per year.

Bottom Line

By accepting a student loan forgiveness for school closure, you’ll have no further responsibility to repay the loan. You’ll be reimbursed for payments made voluntarily or by forced collection. The discharge will be submitted to the credit bureaus to delete any adverse credit history marked on your account.  Ultimately, make sure you consider the teach-out option before choosing to opt for loan discharge.