When students graduate or drop out of college, they typically begin repaying the loans they borrowed to finance their educations. But when a university or college shuts its doors, like Corinthian Colleges did in April, leaving thousands of students in the lurch, the future of their loans is more complicated.
What happens to student loans after a school closing isn’t just a concern for Corinthian students. Colleges, including other for-profits and smaller regional nonprofits, are struggling. Market analyst group Moody’s Investors Service predicts that institutions of higher education will continue to flounder in 2015. Not long before Corinthian’s demise, Sweet Briar College, a private women’s school, announced that it would close at the end of August .
[Read about whether there will be a massive shuttering of for-profit colleges.]
“We’re seeing more school closures, not fewer,” says Adam S. Minsky, an attorney specializing in student loan debt. And when a college closes for business, it leaves students with more than just wasted time and unopened textbooks. They may also have thousands of dollars in student loans, borrowed to attend an institution that no longer exists.
Here’s what to know about repaying student loans after a college shuts its doors.
[Discover three facts that students should know about for-profit colleges and student debt.]
— Some federal loan holders may score a loan discharge: Federal borrowers who are enrolled during — or withdrew a few months before — a school’s closure may be eligible for reimbursement on government-issued loans, called a closed school discharge.
Not every student at a closed institution can successfully apply for this kind of loan cancellation. Those who finish their program with a partner school, called a teach-out, or transfer credits elsewhere to complete their degree will remain responsible for their loans. In order to qualify, the situation must be that “as a result of closure, you can’t complete your program,” says Minsky. Students who can complete their program, whether at another school or through a teach-out, will maintain responsibility for their loans.
Students can contact their loan servicer to get the ball rolling. And they should file a complaint if their servicer won’t give them a clear answer, says Rohit Chopra, the Consumer Financial Protection Bureau’s student loan ombudsman.
Students who are eligible will need to fill out an application and attach any related documents, such as a written narrative of what happened and a news clipping that says that the school has closed, says Minsky.
Successful applicants will have their qualified federal loans canceled, receive a refund for payments already made and have any black marks related to those loans removed from their credit reports.
— Private borrowers can work with their lenders or tap state funds: But securing assistance isn’t a certainty “given the wide variety of private student loan policies, which are not standardized and are at the whim of the lender,” said Jennifer Wang, policy director of Young Invincibles, which works on issues affecting young people, including higher education, in an email.
[Learn which questions to ask before borrowing a private student loan.]
If a loan discharge through a lender is off the table, a state tuition recovery fund or bond program may help students with private loan debt or those who paid out-of-pocket for their education recoup some of the funds. Students can contact their state’s consumer agency for more details.
— Future aid may take a hit: Students who were awarded Pell Grants, federal aid of up to $5,775 in 2015-2016 for low-income students, may have limited eligibility left.
Pell Grants, which don’t need to be repaid, are only awarded for six years, and applying for a closed school discharge doesn’t reset the clock. “As a result, the lowest income students at Corinthian campuses may not have enough Pell Grant eligibility left to complete a program at another school,” wrote Pauline Abernathy, vice president of the Institute for College Access & Success in a blog post.
Student loans that are discharged shouldn’t count against future borrowing eligibility, says Chopra.
— Students can investigate whether the school they’re attending — or considering attending — is on the cusp of closure: Information-seekers can look at the Department of Education’s list of schools under scrutiny, called heightened cash monitoring, says Chopra, of the CFPB. A place on the list “is not necessarily a red flag to students and taxpayers, but it can serve as a caution light,” wrote Ted Mitchell, undersecretary of education in a blog post.
Still, investigating a college’s chance at closure has its challenges. “Unfortunately, the information that currently exists about this is confusing, and the Department of Education urges students to check with their individual schools,” writes Wang, of Young Invincibles.
Just don’t ignore the warning signs of a faltering school, says Minsky. If there are rumors that your school is in trouble, “don’t stick your head in the sand,” he says.
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
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What to Know About College Closings and Financial Aid originally appeared on usnews.com
