Many students facing a school closure do not know what their legal rights and options are upon the closing. One of the options upon a school closure is to seek to have the federal student loans forgiven by the U.S. Department of Education. However, the option does not come without a price. Most Recently, students at Dade Medical College in South Florida experienced first hand such event, when they were told the for-profit school would close its doors for good by the end of the day on Friday, October 30, 2015. If your school has closed, you may be eligible to have your federal student loans completely cancelled or forgiven, but only under certain circumstances.
What is the Criteria for a Federal Loan Forgiveness?
You are only eligible to discharge your federal student loans if the location or campus that you were attending closed, and your request is made on or after January 1, 1986. If you were taking distance education classes, such as online classes, you are only eligible for discharge if the main campus of your school closed.
If the above criteria is met, you may qualify for the forgiveness of your federal student loans only if:
(A) Your school closes while you are enrolled, and you do not complete your program because of the closure; or
(B) Your school closes within 120 days after you had withdrawn from the school.
You should note that if you were on an approved leave of absence, you are considered to have been enrolled at the school for purposes of getting the loan forgiven.
You are generally not eligible to discharge your federal student loans if your school closes and you withdraw more than 120 days before the school closes. In those circumstances, you may, however, still be eligible if you can show exceptional circumstances to allow an extension beyond 120 days.
For example, you may get the extension if you can show that (1) the closed school’s loss of accreditation; (2) the closed school’s discontinuation of the majority of its academic programs; (3) action by the State to revoke the closed school’s license to operate or award academic credentials in the State; or (4) a finding by a State or Federal government agency that the closed school violated State or Federal law.
You may not be eligible for a loan forgiveness if you are completing a comparable educational program at another school through a teach-out agreement with the school; by transferring academic credits or hours earned at the closed school to another school; or by any other comparable means to have credits recognized by another institution.
You should also note that you may not be eligible if you have completed all the coursework for the program you had studied, even if you have not received a diploma or certificate.
What happens if my loan is forgiven?
If you qualify for a complete discharge of your loan, you
are no longer obligated to make loan payments. Depending on the type of loan discharge program for which you may be eligible, the U.S. Department of Education may be required to refund to you some or all of the payments you made on the loan.
In addition, any adverse credit record related to a default might be deleted, and no tax refund offset or wage garnishment will take place to collect on the discharged loan. If the loan was in default, the discharge may erase the default status. If you have no other defaulted loans, you regain eligibility for federal student aid.
In some cases, your school might be required to refund a portion of your loan to the U.S. Department of Education (for example, you withdrew from school within a timeframe that required a refund of loan funds). If your school fails to make that refund, that portion of your loan should be canceled, but you will be responsible for paying any remaining amount.
The application process and final discharge or non-discharge determination by the U.S. Department of Education takes approximately 2 to 3 months.
What happens if my loan discharge application is denied?
In most instances, the final decision on whether to discharge the loan cannot be appealed. The two exceptions are false certification and forged signature discharges. If you receive these types of discharges, you may ask the U.S. Department of Education to review the denial.
If your loan discharge is denied, you remain responsible for repaying the loan.
What to Do?
You would have to walk away entirely from your accumulated credits to have your federal student loans forgiven. If you are early in your program when the school closes, you may want to apply to have your federal student loans forgiven. However, if you are in the middle or near the end of your program, you may want to transfer to another school - but you must be aware that if you opt to transfer to another school, you would not qualify to get your federal loans forgiven. There is no such thing as a partial loan forgiveness under the federal program.
In addition, students should note that the forgiveness of a debt may create a taxable event. The forgiveness of a student loan would generally have to be included as gross income for tax purposes. Limited exceptions exists for this general rule, including insolvency at the time of the discharge.
Students facing a school closure should consult with an attorney to guide them through their legal rights and options, including whether the application for student loans forgiveness makes sense in his or her particular case.
SARDI LAW can assist clients with making the right decision. Each case is different, and the information provided here is not intended to create an attorney-client relationship. The hiring of a lawyer is an important decision that should not be based solely upon any single source of information, including advertising. You may ask us to send you additional information about us, and we urge you to review other sources of information about Sardi Law, PLLC.