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Guide to Student Loan Closed School Discharge

Guide to Student Loan Closed School Discharge
Jennifer Calonia
Jennifer CaloniaUpdated March 1, 2023
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If you learn your school is permanently closing, you may wonder what happens to your student loan debt. Don’t panic. If you’re saddled with student debt from a school that has shut down, you could have options. One way forward is potentially getting approved for closed school discharge.  According to the Department of Education, one million borrowers have received $13 million in total relief to date, partially due to school closures. Here’s what to know about the federal school closure loan discharge program.

What Happens to Student Loans When a School Closes?

The fate of how much you owe in student loans  after a school closes depends on a few factors, including whether you’ve finished school or you’re still enrolled. Some schools that anticipate a permanent closure make arrangements called “teach-out agreements” with nearby school(s). If you’re still in school, this type of agreement lets you finish a similar program or transfer your credits to the partner school. If you choose this option, or you’ve already completed your program at the closed school, your loans are not eligible for closed school discharge. That means you’re obligated to repay the loans as stated on your loan agreement.However, if you didn’t complete your program and you don’t want to accept the teach-out agreement, you can apply for a closed school loan discharge. If you’re approved, you’ll no longer have to repay the federal student loans that were borrowed to attend the closed school.

What Is Student Loan Closed School Discharge?

Student loan closed school discharge is a way to remove yourself from being legally obligated to pay back federal loans toward a school that’s now closed. The Department of Education won’t hold you accountable for the unpaid debt.Federal student loans that can be discharged due to school closure include Direct Loans, Federal Family Education Loans (FFELs), and Perkins Loans.Additionally, if you started paying student loans before you learned of your school’s closure, any payments you made toward the loan will be reimbursed. 

How Does Closed School Loan Discharge Work?

Closed school loan discharge is available to students who are actively enrolled at a career school or college on the date of closure. If the school closed within 120 days of your withdrawal date, you’re also eligible for student loan discharge. Additionally, if you took a leave of absence that was approved by the school, and the school closed while you were on leave, you’re still considered an enrolled student and eligible for closed school discharge. You need to apply for closed school discharge (see more on the application process below). It takes time for your servicer to review your application, so ask whether they advise you to continue making loan payments while your discharge application is being reviewed.  If your application is approved and you accept the discharge terms, you can stop repayments toward federal loans you borrowed for the now-closed school. Your loans will be marked as discharged on your record, and the discharged amount does not need to be reported on your income tax return.You’ll receive a refund on any payments you’ve made toward the loan. Reimbursements will either be provided voluntarily by the school, or through collections initiated by the Department of Education.The Department of Education will also remove adverse credit history marks like a delinquency or default related to the discharged loan from your personal credit file. Loans that are not included in the discharge program, like those taken out for other schools or different programs, are still your obligation to repay.

Automatic school closure loan discharge

If you meet the loan discharge eligibility criteria for a school closure that took place on November 1, 2013 or later, and you didn’t enroll in a new school that accepts federal student aid within the following three years, you might receive automatic closed school discharge. Your loan servicer will contact you if this situation applies to your federal loans.

Are Private Student Loans Eligible to Receive Closed School Discharge?

Private student loans don’t carry the same protections that federal student loans offer. If you borrowed private student loans for a program at a school that closed, these loans are not eligible for federal discharge.Whether you borrowed only private loans or you took out both private and federal student loans, contact your private student loan lender as soon as you learn of your school’s closure. Since private loans aren’t eligible for federal school closure loan discharge, you’ll need to discuss your options with the lender. If the lender doesn’t offer any kind of discharge or forgiveness program for school closures, you’ll be obligated to repay your loan as stated in your loan agreement. In this case you might want to consider refinancing your student loans if you can qualify for a more favorable interest rate or better terms.

How Can You Get Your Student Loans Discharged During a School Closure?

If your school officially shuts down permanently, there are a few steps to take to initiate a closed school loan discharge.
  • Confirm whether you qualify. Read the criteria to determine if you’re eligible for closed school loan discharge. The Department of Education publishes an ongoing list of closed schools and your options for each institution.
  • Gather your academic transcripts. By law, schools are required to give students the means to access their academic transcripts and records indefinitely. Schools must also notify students about how to get their information. These instructions can also be found through StudentAid.gov under its closed school list. 
  • Submit a closed school loan discharge application. You can either request the application directly from your servicer, or download the PDF application from StudentAid.gov. If you obtain the application online, send the completed form and required documents to your servicer for review. 
And know this: Applying for closed school discharge is free through your federal student loan servicer, and there is no deadline to apply. Watch out for any student loan forgiveness scams that prey on current and former students who’ve attended a recently closed institution. 

The Takeaway

If you borrowed student loans for a program offered by a school that shut its doors, student loan closed school discharge may offer financial relief. The program has requirements you’ll need to meet to successfully have your federal student loans discharged. If you’re not sure if you qualify, speak to your student loan servicer for more guidance. However, if you borrowed private student loans for a school that’s now closed and your current lender doesn’t offer a discharge solution, you may want to explore student loan refinancing. A student loan refinance can help you access a potentially lower interest rate or loan terms that better fit your financial situation. And Lantern can help simplify the process. In our online marketplace, you can easily and quickly get offers from multiple student loan refinance lenders at once to find the best rates and terms for your needs.

Frequently Asked Questions

Can student loans be forgiven if a school closes?
What is a closed school discharge?
How long does a closed school discharge take?
Photo credit: iStock/DaniloAndjus
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About the Author

Jennifer Calonia

Jennifer Calonia

Jennifer Calonia is a Los Angeles-based finance writer who has covered the gamut, including student loans, credit card rewards, consumer loans, and debt. Her work has been featured in outlets like Bankrate, NerdWallet, Business Insider, Yahoo Finance, and U.S. News.
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