Counseling indebted students after their school closes
Recent high-profile school closures, like that of ITT-Tech, have left thousands of students across the country confused about their legal options.1 Closer to home, the Minnesota Attorney General has obtained an order that might lead local schools like the Minnesota School of Business and Globe University to close certain campuses or have their authorization revoked.2 Most attorneys are all too familiar with paying student loans, but few have experience in helping clients who are encumbered by debt left after a school has closed. This brief update, while certainly not all-encompassing, should provide readers with a starting point to advise those saddled with debt from a closed school.
Closed school discharge option for federal loans 3
For those with federal student loans, the closed school discharge is the widest reaching remedy. The Higher Education Act HEA) requires the Secretary of the Department of Education to discharge certain specific loans in the event that a student was unable to complete an educational program due to a school’s closure.4 Without delving into the depths of the alphabet soup that is the current federal student loan regimen, students are eligible to receive a closed school discharge of their Federal Family Education Loans (FFEL); Federal Direct Loans; and Federal Perkins Loans.5 Additionally, Federal Parent Plus loans may also be discharged due to school closure if the student on whose behalf the loan was taken qualifies.6
For purposes of a closed school discharge, “school” means the school’s main campus or any branch of the main campus.7 Distance and online programs are considered part of the main campus of the school, so a student enrolled in an online or distance program is only eligible for a discharge if the main campus closes, and not simply when the online or distance program is discontinued.8 The official “closure date” is defined as the specific date when the school ceased to provide education in all programs, as determined by the Secretary.9 This means that a student is not eligible for a discharge when the school terminates a specific program before a student can complete it, but only when the school has stopped all programs. On the other hand, a student may receive a discharge even if they are issued a diploma or certificate by a closed school, provided they did not actually complete the program.10 Students are also eligible for a closed school discharge if they withdrew from a school not more than 120 days before the school’s closure date.11
“Teach-out” option: Impact on federal loans
Students may be prevented from discharging their loans if they transfer any credits to a different institution under a “teach-out” agreement.12 “Teach-out” is defined as a written agreement that provides for the equitable treatment of students and a reasonable opportunity for students to complete their program of study if an institution, or an institutional location that provides 100 percent of at least one program offered, ceases to operate before all enrolled students have completed their program of study.13 Students will not be prevented from discharging their loans if they do not complete the program, so commencing a “teach-out,” but failing to complete it, should still allow a student to discharge debt from the closed school. Additionally, it is important to note that in question 13 on the application for discharge, the Department asks if a student completed or is in the process of completing “the same or comparable program of study at another school.” This requirement that the program be the same or comparable does not appear in the regulations.
Applying for a discharge
For students who wish to explore their specific discharge options, it is advisable to know which loans they have. The best place to start for federal loans is the National Student Loan Data System (NSLDS). The NSLDS is the central database for federal student aid from the Department of Education. The database can be accessed online at www.nslds.ed.gov. Through the NSLDS database, borrowers can view and download data on loan and grant amounts, outstanding balances, loan status and disbursements.14 To access their NSLDS students will need their FSA ID, which replaced the previous PIN system in May 2015.15 It is important to note that the Department of Education has expressly stated that the FSA ID should only be created and used by the owner of the FSA ID, and that it was prohibited for third parties to use another’s FSA ID even with express permission.16
Many students should also be actively informed by the Department of Education or the holder of the loan that they have a right to a discharge, because the Department of Education and holder are required to identify eligible students (and parent cosigners) after the Department has determined that a school has closed and send them a notice, along with an application, and cease collection efforts for 60 days after the mailing.17 Students who fail to submit their application, or never receive one due to error or because they could not be located, can obtain a copy from the Department’s website at https://ifap.ed.gov/. The application should be submitted to the loan servicer or directly to the Department, depending on who holds and actually services the loan.
What happens when the loans are discharged?
Once a student receives a discharge, they are no longer obliged to repay the loan or any costs or charges associated with it.18 Additionally, the student should be reimbursed for all amounts paid to date on the loan, whether voluntary or involuntary, such as garnishments or tax intercepts.19 The student should no longer be regarded as in default on the loan, and is immediately eligible for new federal loans and grants.20
The discharge must also be reported to any credit reporting agencies that had previously received reports of the loan, so as to delete all adverse credit history assigned to the loan.21 Due to how expansive these remedies are, students who delayed submitting an application, or could not be located by the holder of the loan at the time of school closing, should not have long lasting harm as a result of the delay.
Limited options for private loans; FTC holder rule
For those students who are saddled with private student loans, statutory discharge is not an option, and students do not have any statutory options based on school closure. However, all hope is not lost. Private borrowers may still turn to The FTC’s rule, Preservation of Consumers’ Claims and Defenses, commonly known as the “FTC holder rule” which would allow the student to pursue the same claims against the holder of the loan that the student might have had against school.22 These claims could then include claims based on the school’s early and untimely closure. The FTC holder rule has broad applicability to sellers of goods or services to consumers; therefore it can cover for-profit schools.23 In fact, the FTC’s Statement of Basis and Purpose for the holder rule explicitly states that the rule applies to vocational training.24 There are many potential complications that can arise with these claims, chief among them being, the schools failure to include the notice; however anyone wishing to consider representation of a client who has private loans should explore this potentially powerful option.
CHRIS WYSOKINSKI is an attorney in the Consumer Rights Practice Group at Nichols Kaster, PLLP where he represents consumers in class actions across the country. During law school, Chris was student director of the Consumer Protection Clinic at the University of Minnesota Law School.
1 Anya Kamenetz, All Things Considered: Large, For-Profit ITT Tech Is Shutting Down All Of Its Campuses, NPR (Sept. 6, 2016, 1:36 PM ET), http://www.npr.org/sections/thetwo-way/2016/09/06/492819673/large-for-profit-itt-technical-institutes-will-close-its-doors.
2 Mark Brunswick, Globe U and Minn. School of Business Must Close, State Says After Fraud Ruling, StarTribune (9/9/2016), http://www.startribune.com/judge-globe-u-and-minnesota-school-of-business-committed-fraud-in-criminal-justice-programs/392801791/ ;
see also Commissioner Pogemiller Statement on Globe University and Minnesota School of Business, Minn. Off. of Higher Educ. (9/12/2016), https://www.ohe.state.mn.us/mPg.cfm?pageID=2211.
3 The Department issued new final regulations on 10/28/2016 that address a wide range of issues related to school misconduct and school closure. Most of the regulations are set to go into effect on July 1, 2017 and would allow the Secretary to grant an automatic closed school discharge to a student who has not begun a new program within the three year period. Students wishing to receive quicker relief could still apply using the outlined methods in the article. The regulations are available at https://www.gpo.gov/fdsys/pkg/FR-2016-11-01/pdf/2016-25448.pdf.
4 20 U.S.C. §1087(c)(1).
5 34 C.F.R. §§682.402(d) (FFEL), 685.214 (Direct Loan), 674.33(g) (Perkins Loan).
6 34 C.F.R. §§682.402(d)(1)(i) (FFEL), 685.214(a)(1) (Direct Loan).
7 34 C.F.R. §§682.402(d)(1)(ii)(c) (FFEL), 685.214(a)(2)(ii) (Direct Loan), 674.33(g)(1)(ii)(B) (Perkins Loan).
8 78 Fed. Reg. 45,618, 45,627–628 (July 29, 2013).
9 34 C.F.R. §§682.402(d)(1)(ii)(A) (FFEL), 685.214(a)(2)(i) (Direct Loan), 674.33(g)(1)(ii)(A) (Perkins Loan). The list of all closed schools with official “closure dates” is updated monthly and can be accessed at https://www2.ed.gov/offices/OSFAP/PEPS/closedschools.html.
10 See U.S. Dep’t of Educ., Dear Colleague Letter 94-L-166/94-G-256 (Sept. 1994).
1134 C.F.R. §§682.402(d)(1)(i) (FFEL), 685.214(c)(1)(i)(B) (Direct Loan), 674.33(g)(4)(i)(B) (Perkins Loan).
12 34 C.F.R. §§682.402(d)(3)(ii)(c) (FFEL), 685.214(c) (Direct Loan), 674.33(g)(4)(i)(C) (Perkins Loan).
13 34 C.F.R. §602.3; for there to be a valid teach-out agreement, the institutions may be required to submit a “teach-out” plan to accrediting agencies.
14 Pamela Eliadis, Electronic Announcement: Implementation of MyStudentData Download Button on NSLDS, U.S. Dep’t of Educ. (9/24/2012), https://www.ifap.ed.gov/eannouncements/092412ImplementofMyStudentDataDownloadButtononNSLDS.html.
15 Brenda Wensil & Pamela Eliadis, Electronic Announcement: FSA ID/PIN Replacement—FSA ID Must Only Be Created by FSA ID Owner, U.S. Dep’t of Educ. (7/17/2015), https://ifap.ed.gov/eannouncements/071715FSAIDnPINReplacementCreatedByFSAIDOwner.html.
17 34 C.F.R. §§682.402(d)(8) (FFEL), 685.214(f) (Direct Loan), 674.33(g)(8) (Perkins Loan).
18 34 C.F.R. §§682.402(d)(2)(i) (FFEL), 685.214(b)(1) (Direct Loan), 674.33(g)(2)(i) (Perkins Loan).
19 34 C.F.R. §§682.402(d)(2)(ii) (FFEL), 685.214(b)(2) (Direct Loan), 674.33(g)(2)(ii) (Perkins Loan).
20 34 C.F.R. §§682.402(d)(2)(iii) (FFEL), 685.214(b)(3) (Direct Loan), 674.33(g)(2)(iii) (Perkins Loan).
21 34 C.F.R. §§674.33(g)(2) (Perkins Loan), 682.402(d)(2)(iv) (FFEL), 685.214(b)(4)(Direct Loan).
22 16 C.F.R. §433.
23 16 C.F.R. §433(1)(j).
24 40 Fed. Reg. 53,524 (11/18/1974).