Did Your College Close? You May Be Able to Cancel Student Loans
June 18, 2013

Colleges and universities don’t close often, but when they do, it can be disastrous for its students. If you attended a school that closed, there may be one ray of hope. If you were using federal loans to finance your education at the closed institution, your loans may be eligible for discharge! Here’s what you need to know about school closure student loans discharge:

Closed School Loan Discharge

If your school closed while you were enrolled making it impossible for you to complete your program, your lender may discharge your loans. Also, if you withdrew and the school closed within 90 days of your withdrawal or if you were on an approved leave of absence from school when it closed, your federal student loans could be eligible for cancellation.

Caveats: If you transfer your credits to another school and finished your program there, your loans will not be eligible for cancellation. If you completed all required course work for your degree or certificate prior to the school closing even if you weren’t given the degree or certificate, you’re not discharge eligible.

Warnings: If you have your loans discharged under this loophole but then later complete your degree at another institution, you may be required to pay back those loans.

How to Apply: If this is your situation and you prefer to apply for loan discharge rather than opting to complete your degree at another institution, here’s the form you’ll need to ask your lender for discharge.

Results of Closed School Loan Discharge

Refunded Payments: If you qualify for this discharge, you could have your entire loan balance forgiven. Additionally, if you’ve already made some loan payments or had garnishments or tax refunds withheld related to these student loans, you may be able to have these refunded back to you.

Credit Report Adjustment: If your loans are completely discharged under this program, any negative references should be removed from your credit report. If only a portion of the debt is forgiven, your credit report should be adjusted to reflect this status.

Tax Impact: It’s also important to note that a closed school loan discharge is taxable! What does that mean? In the year the loan debt is discharged, you’ll get a 1099-C for that amount. For instance, if you had $20,000 in loans forgiven, your taxable income for that year will climb by that amount which can cost you thousands of dollars in additional taxes.

Eligibility for Closed School Loan Discharge

Private student loans are not eligible for closed school discharge. Only loans disbursed after January 1, 1986 are eligible. FFEL, Direct, PLUS and Perkins loans are all eligible for closed school discharge – as are any consolidations of these types of loans.

If you think or suspect (or need to verify) that your school has closed, contact the representative for your state from the US Department of Education’s closed school unit. If your school closure is not on this official government list, you may have trouble getting a closed school discharge. Other circumstances that may make you eligible for a student loan discharge include disability (for instance if you were permanently disabled from a car accident) and false certification. We’ll talk about these in detail in upcoming blogs!

In order to make your request for the closed school discharge, you’ll need to complete the form (linked above) and send it to your lender. If you’re not sure who your lender(s) is, a great way to get this information is to sign up for the free student loan tool at Tuition.io. You’ll be able to view all of your loans, see the balances, pay off dates, repayment plans and contact your lenders!

Also enjoy these other blogs on student loans:

Proposed Michigan Law Would Help Pay Off Your Student Loans!

Project on Student Debt: How TICAS Is Fighting for Students and Families

Bankruptcy and Student Loans: Clearing Up Arbitrary Outcomes for Better Results

Hope for Student Loan Debtors in Recent Bankruptcy Ruling