If your college closes permanently, do you still owe student loans?
By Anna Helhoski
Only a handful of colleges have closed permanently due to economic instability caused by the COVID-19 pandemic. Most schools are likely to weather the storm, university experts say. But some schools are more vulnerable than others.
“It’s not like thousands of schools are going to go under,” says Sandy Baum, nonresident senior fellow at the Urban Institute. “Some schools would have gone bankrupt anyway, and now others will.”
If your school closes and you are in debt and without a diploma, you have two options:
You can’t do both. Here’s how to find out if your school might close and what to do if it does.
Why Some Colleges Might Close
Colleges across the country are facing financial hardship due to the pandemic. During the fall semester, hundreds of schools went fully or partially remote in an effort to curb the spread of Covid-19 among students (and faculty) crammed into cramped quarters.
Students still pay top dollar for tuition in most places, but there’s far less money for housing, settling-in fees, and even parking.
Which schools are most at risk of closing depends on room-and-board revenue, Baum says. She compares financial conditions in college to a household facing 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 for colleges as well,” Baum says. She says schools are incurring additional expense to go remote, and some won’t be able to bear the brunt.
The schools that announced permanent closures ahead of the fall semester were all small private liberal arts schools already struggling financially. This 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 “stopped the bleeding and kept colleges from closing,” according to Amy Laitinen, director of higher education at New America, a nonpartisan think tank.
Another injection of cash could help colleges stay afloat, but there’s no guarantee the coronavirus relief talks will continue to stagnate in Congress.
You can use your credits at another school
If your college is about to close, you’ll probably know it’s coming, at least if you attend a nonprofit school. In recent years, students have shown up behind closed doors at for-profit schools, such as ITT Tech in 2016 and Education Corporation of America in 2018.
“The harm to students is all the greater because they close their doors in the middle of the semester, when a large number of these credits are not transferred and when there is not good file retention” , says Laitinen.
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When most schools close, they make a teaching agreement for their students with one or a few nearby colleges. An education means you can graduate from another institution that has agreed to enroll you and accept your credits.
Holy Family College, for example, has 15 teaching agreements, and most of those colleges are in Wisconsin.
By participating in an education program, you keep the credits you have earned, but you will not be eligible for the closed school exit, which cancels your student loans.
If you plan to graduate, access your transcript before your school closes so you can transfer credits. The federal student aid website offers more information on specific school closures.
You can request the release of a closed school loan
If your school closes, you can only get your loans canceled in these scenarios:
- You were enrolled or on authorized leave when the school closed.
- The closure occurred within 120 days of your withdrawal without completing all of your courses.
This means that your loans will not be canceled if you pursue courses elsewhere by transferring or through teaching. But there are times when you might want to take the discharge anyway to ease your debt burden.
“In the event that a student goes to a sleazy, for-profit college where your credits won’t transfer and you haven’t had much of an education, you might be better off taking the dump,” Laitinen says. “But if you can transfer your credits and complete your degree, the returns from a degree are great.”
You can apply for a tax-free closed school trip by contacting your federal student loans manager.
Your loans will be automatically discharged within three years if you qualify. But there’s no reason to delay the application since your loan repayments will begin within that three-year window.
About 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 data from Federal Student Aid. There is no data available on the approval of borrowers who have manually requested a release.
You can pursue the defense of the borrower until reimbursement
If you have already graduated and your school is closing, you will not be eligible for loan release. But if you can prove that your university defrauded you in some way, you can ask for forgiveness by defense of the borrower to repayment.
“You shouldn’t just assume that if your school closes they’ll forgive you your loans,” says Baum. “The question is: can you show that it really hurt you financially?”
The borrower’s defense against repayment is much more difficult to obtain than a closed school exit. According to February 2020 data from the Ministry of Education, only 16% of the 300,000 applications submitted had been approved since the program’s inception, and 217,000 are still pending.
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Anna Helhoski is a writer at NerdWallet. Email: [email protected] Twitter: @AnnaHelhoski.