Should loans be discharged if a college closes?

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Students whose colleges close abruptly can often get their student loans discharged. But a federal rule change makes it harder for some students to get this relief. My colleague Sarah Butrymowicz explains that situation this week. I’ll be back next week. -Delece

By Sarah Butrymowicz

Malboro College and Holy Family College had a lot in common. Both were small liberal arts colleges that made the difficult decision to shut down their campuses this summer. Both institutions pledged to work with their students to help them transfer to complete their educations. But for any students who don’t do so, there is one crucial difference between them.

Malboro students would have their federal student loans automatically discharged after three years. Holy Family students would need to apply for such relief – which means they’d need to know the option exists in the first place.

Malboro shuttered its campus, in Vermont, at the end of June, creating an institute at Emerson College in Massachusetts. Holy Family, in Wisconsin, closed at the end of August. And in between, on July 1, a new federal rule went into effect.

Closed school loan discharge has long been an option for students who would otherwise remain on the financial hook for a college education they were unable to finish through no fault of their own. In 2016, the Obama administration put provisions in place to make the discharges automatic after three years if the student did not transfer to a comparable program. But the Trump administration quickly undid those changes and reverted back to the old process, where students must apply.

Now, experts fear the financial stress that coronavirus has wrought will tip more colleges over the brink into closure – and students may be caught in a case of regulatory whiplash.

“The elimination of the automatic closed-school discharge came in the worst way and in the worst time,” said Yan Cao, a fellow at The Century Foundation, a left-leaning think tank. “We’re living through a clear reshuffling of the deck when it comes to higher education.”

The Department of Education argued, in its final rule, that borrowers should make the decision as to whether they wanted their loans discharged or wanted to keep their credits to enable them to transfer at a later point. Eliminating the automatic discharge was also helpful to taxpayers, the department wrote, because automatic discharges “increase the cost to the taxpayer, including for borrowers who are not seeking relief, because default provisions typically capture a much larger population than opt-in provisions.”

What little data exists does suggest that many students who would be eligible for closed-school discharge never apply for it or transfer. The department has estimated that nearly half of borrowers who attended schools that shuttered between 2008 and 2011 did not receive a discharge or transfer to a new school, according to Cao.

The education department is supposed to notify all affected students of their options. Sometimes loan servicers also supply the information. But a student might miss the initial notice from the government and not hear anything from a loan servicer.

Robyn Smith, a senior attorney at the Legal Aid Foundation of Los Angeles, has clients who went to schools that shuttered decades ago and were unaware that they could get their loans wiped away. “Usually when a school closes, it’s massive chaos right off the bat, and students don’t know their rights,” she said. “There are probably thousands and thousands of people who have closed-school discharge rights and don’t know it.”

Historically, college closures, particularly precipitous ones, have been at for-profit schools, including large chains like ITT Technical Institutes and Corinthian, which have left tens of thousands of students scrambling. For-profits tend to enroll more low-income students and students of color than other institutions, meaning their closures can have a disproportionate impact on those groups.

“In many ways, students who qualify for closed-school discharge are the most disadvantaged of the disadvantaged,” Cao said.

And even if students apply for discharge and get relief from paying off their loans, they can’t get back the time they put in.

“So many of our clients are so demoralized” when their schools close, Smith said. “It really is awful.”

How can higher education do a better job of making sure students aren’t harmed financially if a school suddenly closes? Should the federal government offer automatic loan forgiveness options? Email or tweet me your thoughts.

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Should loans be discharged if a college closes?

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