For the most part, you have to pay your federal student loans for an extended period of time before the loan balance is forgiven. And in most cases, even if the loan balance is forgiven, you will have to pay taxes of the forgiven debt.
However, there are some instances where your federal loan can be administratively discharged. One such instance is when the school closes. Nowadays, on a fairly regular basis, we hear reports of “for profit” school going out of business. In 2013, the DOE reported that of 128 schools that had closed in the prior 5 years, 82 were “for profit schools”.
So, how do you qualify for a closed school discharge? First, it has to be a federal loan. That means a Direct Loan, a FFEL (Federal Family Education Loan) or a Perkins loan. This includes a Parent Plus Loan. Second, the loan proceeds were disbursed after January 1, 1986. Third, the student was enrolled or on an official leave of absence on the date of closure, or had withdrawn not more than 120 days prior to the date of closure. Fourth, you have to file an application for discharge of the loan.
Sounds pretty straightforward, but the closed school discharge, like everything with federal student loans, has its own regulations and internal rules. So, if you do not follow the rules you may find that you do not get the discharge.
Moreover, there are some pitfalls. First, if you already graduated, then you cannot get the closed school discharge. I have heard from more than one student that the school from which they graduated had closed, and they should be reimbursed on payments because the education that they received was a useless waste of money. That may lead to different issues, but it will not get you a closed school discharge.
Second, if the school has numerous branches, the discharge only applies if the branch that you attend is closed. If you are taking all your courses online, then the closed school discharge applies if the main campus closes.
Third, if you transfer your credits to another school, and continue with your program at the new school, you are not eligible for the discharge. This also applies to what is referred to as “teach out agreements”. With teach out agreements, the closing school works out a deal with another school or with a non-closing branch of the school to accept the student into its program. However, a school cannot force a student to accept a teach out agreement if the courses are being taught at a location different from where the student was enrolled.
If you received a closed school discharge, you do not have to repay the loan, any accrued interest or any collection or administrative fees associated therewith. Moreover, the student borrower is entitled to reimbursement for any payments made on the loan. And, if you qualify for the closed school discharge, the amount discharged is not subject to tax.