The Department of Education allows federal student loan borrowers to seek a student loan discharge in certain circumstances. One such scenario involves a discharge related to permanent school cancellation.
If your college or university closes while you’re enrolled you may be wondering if you still have to repay loans you took out to fund your education. Closed school loan discharge can relieve you of the financial responsibility of repaying federal student loans.
There are certain eligibility requirements you need to meet to qualify for a closed school discharge. Understanding the guidelines, along with other options for student loan discharge, can help with managing your student debt.
What Is School Cancellation Loan Discharge?
The Department of Education can discharge up to 100% of federal student loans through the closed school discharge program.
The types of loans eligible for school closure discharge include:
• Federal Direct Loan Program loans (including Subsidized and Unsubsidized loans, consolidation loans, Parent PLUS loans and graduate PLUS loans)
School cancellation discharge of eligible loans is not the same as loan forgiveness. Federal loan forgiveness programs, including the Public Service Loan Forgiveness program (PSLF) and Teacher Loan Forgiveness, have service and repayment requirements. With PSLF, you’re required to work in a public service job and make 120 qualifying payments toward your loans. Teacher Loan Forgiveness requires you to teach in a qualifying school for five consecutive years to be eligible for loan forgiveness.
A closed school loan discharge, on the other hand, imposes no requirements with regard to any minimum number of payments you need to make toward your loans or work service commitments. If you qualify, your obligation to make payments to your loans disappears.
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Who’s Eligible for Closed School Loan Discharge?
Borrowers may qualify for a school cancellation discharged if their school closed and they meet any of these conditions:
• They were enrolled at the time of the closure
• They were on an approved leave of absence when the closure occurred
• The closure occurred within 120 days of their withdrawal from the school and their loans were first disbursed before July 1, 2020
• The closure occurred within 180 days of their withdrawal from the school and the loans were first disbursed after July 1, 2020
Borrowers may not qualify for any discharge of student loans related to a school closure if:
• The student’s withdrawal happened outside the 120-day or 180-day windows allowed, based on the date of their first loan disbursement
• They are continuing education at another school
• They completed all coursework toward their degree before the school closed, even if they haven’t formally received a certificate or diploma
If any one of those things happens to be true then it’s possible a borrower won’t qualify for a closed school loan discharge.
How Does A Closed School Discharge Work?
If the school closes while a student is enrolled, they can apply for a federal student loan discharge. In general, students who meet the eligibility criteria will automatically receive an application from the Department of Education. The application is also available on their website.
Automatic Closed School Loan Discharge
School closure discharge is automatic if the school closed between November 1, 2013 and July 1, 2020 and the borrower hasn’t enrolled in another school within three years of the date of the closure. The Department of Education handles the closure for the borrower, there’s no need to complete the application. However, borrowers who would prefer to fill out the application, are able to do so.
Once your loans are discharged, the borrower is no longer responsible for paying anything toward them. But while an application for closed school discharge is under review it is important to continue making payments toward the loans as usual if they’re already in repayment. This can help avoid late payments.
Any discharged loans are removed from a borrower’s credit reports once the discharge is complete. That includes your entire payment history as well as negative items such as late payments.
Other Options for Discharging Student Loans
If you aren’t eligible to have your loans discharged because of school cancellation, there are some other scenarios that may allow it.
For example, you could apply for a discharge of your loans if you become totally and permanently disabled. The disability discharge option is available to eligible borrowers who owe:
• Federal Direct loans
• FFEL program loans
• Federal Perkins loans
It’s also open to TEACH Grant program recipients. In order to be eligible for a student loan disability discharge, you must be able to provide proof of your disability through a physician, the Social Security Administration, or the Department of Veterans Affairs. You’ll need to complete a separate application for this type of discharge and once approved, you’re subject to a three-year monitoring period to certify that you lack sufficient income to pay your loans.
Discharge in Death
Student loans can also be discharged due to the death of the borrower. That includes loans taken out by a student as well as Parent PLUS loans. In the case of Parent PLUS loans, discharge is an option if the parent who took out the loans passes away. To qualify for a death discharge of student loans, proof of death (i.e. a death certificate) must be submitted to the Department of Education.
In Rare Cases: Declaring Bankruptcy
Though it is rare, bankruptcy may be another option for discharging federal student loans, though it can be difficult to achieve. In order to have student loans discharged through bankruptcy, the borrower must be able to prove through an adversary proceeding that having to repay their loans would cause a sustained undue financial hardship for both themselves and their family.
Filing a bankruptcy case could result in all of the loans being discharged, some of them being discharged or none of them being discharged. Declaring bankruptcy adversely affects a person’s credit score and is generally a last resort. Always consult with a qualified and trusted financial advisor, accountant, or attorney before considering bankruptcy.
Other Options for Managing Student Loans
Federal student loan borrowers who are ineligible for other forms of discharge or student loan forgiveness may want to consider alternative options such as income-driven repayment options or student loan refinancing instead.
Income-driven repayment plans are offered to borrowers with federal student loans and consider a borrower’s discretionary income when determining their loan terms and payments. This can help make monthly payments more manageable but may make borrowing the loan more expensive over the life of the loan by extending the loan term.
Student loan refinancing may allow qualifying borrowers to secure a more competitive interest rate or loan terms. Though, keep in mind, refinancing any federal student loans will eliminate them from federal plans and protections, including income-driven repayment plans and closed school loan discharge.
Does School Closure Discharge Apply to Private Student Loans?
Federal closed school discharge applies to federal student loans only. Borrowers with private student loans wouldn’t be able to apply for a discharge through the Department of Education should their school close.
It may be possible to contact your private student loan servicer to see if any type of discharge option is available. Your lender may be able to offer a solution for handling private student loans if your school closed while you were enrolled and you have no plans to re-enroll elsewhere.
Closed school loan discharge can help erase federal student loan debt, in the event a qualifying borrower’s school has closed. But if your school remains open or you have private student loans, you may need to consider other possibilities for keeping up with your payments.
Refinancing student loans could help borrowers secure a lower interest rate. Know that refinancing a federal student loan into a private loan eliminates it from federal student loan borrower protections, like income-driven repayment plans, deferment, and loan forgiveness options. So it may not be the best option for everyone.
If you’re considering student loan refinancing, take the time to look around for the best loan rates and repayment terms for you. SoFi, for example, offers competitive student loan refinancing rates with no hidden fees. Weighing student loan refinancing alongside other options can help make your loans more manageable.
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