The Closure of Institutions of Higher Education: Student Options, Borrower Relief, and Implications

Summary

The recent closures of multiple large, private for-profit institutions of higher education (IHEs), such as those owned by Corinthian Colleges, Inc. (e.g., Heald College) and ITT Educational Services (e.g., ITT Technical Institutes) have brought into focus the extent to which a student’s postsecondary education may be disrupted by a school closure. The closures of these IHEs also highlighted the numerous issues students may face when their institutions close and the difficult decisions they may be required to make in the wake of a closure. Two key issues students may face when their IHE closes relate to their academic plans and their personal finances.

The academic issues faced by students when their schools close include whether they will continue to pursue their postsecondary education, and if so, where and how they might do so. Students deciding to continue their postsecondary education have several options. They may participate in a teach-out offered by the closing institution or by another institution. A teach-out is a plan that provides students with the opportunity to complete their program of study after a school has closed. In conjunction with or in lieu of participating in a teach-out, students may also be able to transfer the credits they previously earned at the closed IHE to another IHE. If a student is able to transfer some or all of their previously earned credits, he or she would not be required to repeat the classes those credits represent at the new institution; if a student is unable to transfer all or some of his or her previously earned credits, the student may be required to repeat the classes those credits represent at the new IHE. Decisions regarding the acceptance of credit transfers are within the discretion of the accepting IHE.

The financial issues faced by students when their schools close include whether they are responsible for repaying any loans borrowed to attend a closed school and how they might finance any additional postsecondary education they pursue. In general, a closed school loan discharge is available to a borrower of federal student loans made under Title IV of the Higher Education Act of 1965 (HEA) if the student was enrolled at the IHE when it closed or if the student withdrew from the IHE within 120 days prior to its closure. In addition, the student must have been unable to complete his or her program of study at the closed school or a comparable program at another IHE, either through a teach-out agreement or by transferring any credits to another IHE. Borrowers ineligible for a closed school discharge may be eligible to have their Federal Direct Loan and Federal Family Education Loan program loans discharged by successfully asserting as a defense to repayment (DTR) certain acts or omissions of an IHE, if the cause of action directly relates to the loan or educational services for which the loan was provided. Whether a borrower may have all or part of any private education loans borrowed to attend the closed IHE discharged depends on the loan’s terms and conditions.

Some students may also face issues regarding how they might finance future postsecondary educational pursuits. If a borrower receives a closed school discharge or has a successful DTR claim, his or her eligibility for future Direct Subsidized Loans and Pell Grants is unlikely to be affected. Moreover, a borrower’s statutory annual and aggregate borrowing limits on Direct Subsidized and Unsubsidized Loans are unlikely to be affected. However, if the borrower used GI Bill educational benefits for attendance at a closed school, those benefits cannot be restored for purposes of attending another institution.

Students may be reimbursed for payments on charges levied by closed IHEs that are not covered by other sources from a State Tuition Recovery Fund (STRF). The availability of and student eligibility for such funds vary by state, and not all states operate STRFs. Finally, the receipt of any of the above-mentioned benefits may have federal and state income tax implications, including the potential creation of a federal income tax liability for borrowers who have certain loans discharged.