If My College Closes, What Happens to My Loans?

When a college abruptly closes, students face uncertainty regarding their academic progress, student loans, and financial aid. This article guides students through the processes related to their student loans and other academic considerations when their college ceases operations.

Understanding Federal Loan Discharge

Students may be eligible for a full discharge of their federal student loans if their school closes while they are enrolled or shortly after their withdrawal. Eligibility for this closed school loan discharge requires the student was enrolled at the time of closure, on an approved leave of absence, or withdrew within 180 days before the school closed. Students are not eligible for discharge if they completed their program, graduated, transferred all credits to a comparable program, or completed a teach-out agreement at another institution.

The U.S. Department of Education may automatically discharge eligible federal loans approximately one year after the school’s official closure date, but students can apply sooner. To prepare, students should gather documents such as their enrollment agreement, loan documents, and receipts for tuition or loan payments. If approved, the discharged loan amount is not considered taxable income for federal tax purposes, though state tax implications may vary.

Students can apply for a closed school loan discharge by contacting their federal loan servicer or by downloading a PDF from the Federal Student Aid website. The completed application and supporting documentation should be sent directly to the loan servicer. While the application is under review, students should continue making scheduled loan payments, as any payments made on a discharged loan will be refunded. Processing typically takes 6 to 8 weeks.

Managing Federal Loans Without Discharge

For students who do not qualify for a closed school loan discharge or choose to continue their education, other options exist for managing federal student loans. If a student transfers credits from the closed school to a new institution and enrolls in a comparable program, they become ineligible for a discharge. Their existing federal loan obligations remain, and they must ensure their financial aid is properly transferred to the new school. Federal financial aid, including loans and grants, does not automatically transfer; students must update their Free Application for Federal Student Aid (FAFSA) to include the new school’s information.

Transferring to a new institution can impact a student’s federal loan limits and future aid eligibility, especially if the new school reclassifies their academic standing due to non-transferable credits. When a student is no longer enrolled, their federal student loans enter repayment after a grace period. Students facing repayment challenges due to their school’s closure can explore flexibility options such as forbearance or deferment, which temporarily pause loan payments.

Students should proactively contact their federal loan servicer to discuss their specific circumstances. Servicers can provide detailed information on available repayment plans, deferment, or forbearance options applicable due to the school closure. Maintaining open communication with the loan servicer helps ensure students understand their responsibilities and avoid potential default.

Addressing Private Student Loans

Private student loans function differently from federal loans and do not offer the same protections or discharge options in the event of a school closure. Unlike federal loans, private loans are agreements between the borrower and a private lender, not backed by the federal government. Consequently, there is no universal closed school discharge program for private student loans.

Any relief options for private loans are at the sole discretion of the individual lender. Students with private loans from a closed institution should contact their private loan lender or servicer immediately to inquire about potential limited relief options. Some lenders may offer temporary forbearance, revised payment plans, or in rare circumstances, a settlement.

When contacting a private lender, students should have their loan agreements and payment history readily available. While private loan forgiveness is uncommon, some state-specific programs or tuition recovery funds may offer assistance to students with private loans affected by a school closure. Understanding the terms of the original loan agreement is crucial for determining potential avenues for relief.

Accessing Academic Records and Other Financial Aid

Beyond student loans, securing academic records and understanding the status of other financial aid are important considerations when a college closes. Academic transcripts are vital for transferring credits to a new institution or for future employment and educational pursuits. When a school closes, its academic records are transferred to a state education department, a designated partner institution, or a third-party records custodian. Schools are legally required to make arrangements for students to access their academic records indefinitely.

Students should contact the higher education agency in the state where their closed institution was located to inquire about obtaining their transcripts. This agency can direct them to the location where records are stored and explain the procedure for requesting official copies.

Regarding other federal financial aid, such as Pell Grants, students unable to complete their program due to a school closure may have their Pell Grant eligibility restored. This restoration often occurs automatically, but students can confirm their updated eligibility through their Federal Student Aid account. For state grants or potential tuition refunds, students should reach out to their state’s postsecondary education agency or relevant consumer protection offices. Some states maintain tuition recovery funds designed to compensate students affected by a school’s closure.