Closed School Discharge

A closed school discharge is the cancellation of a federal student loan on the ground that the borrower, or the student a parent borrowed for, did not complete the program of study because the school closed. The rule for Direct Loans is 34 CFR 685.214, with parallel provisions at 34 CFR 674.33(g) for Perkins Loans and 34 CFR 682.402(d) for the older FFEL program. Two definitions in the rule do a lot of quiet work: a school's closure date is the date it "ceases to provide educational instruction in all programs", and "school" means the main campus or any location or branch of it, whether or not that location is itself considered eligible. A branch closing can therefore qualify a student even though the institution's name is still on a building somewhere else.

What the discharge is worth is set out in paragraph (b). It relieves the borrower of any past or present obligation to repay the loan and any accrued charges or collection costs; it qualifies the borrower for reimbursement of amounts paid voluntarily or through enforced collection; a borrower who had defaulted is no longer treated as in default and becomes eligible for federal student aid again; and the Department reports the discharge to the credit bureaus it previously reported to "so as to delete all adverse credit history assigned to the loan".

The rule in force is not the rule published as current, and the difference is exactly the number people quote. Section 85002 of Public Law 119-21, enacted in July 2025, provides that for loans that first originate before July 1, 2035, the closed school provisions "as added or amended" by the Department's November 1, 2022 final rule shall not be in effect, and that those portions of the Code of Federal Regulations "shall be in effect as if the amendments made by such final regulations had not been made". Since every loan outstanding today originated before 2035, the suspension is universal in practice. The 2022 rule had replaced the two look-back periods with a single 180-day window for everyone, added a general automatic discharge one year after a closure, and broadened the definitions of closure date and program. All of that is switched off, and the federal regulations website still displays it.

So the first question is the date the loan was first disbursed. For loans first disbursed before July 1, 2020, the borrower applies by written request and sworn statement, made under penalty of perjury but not requiring notarization, and must state that the loan proceeds were received on or after January 1, 1986, and that the student either was enrolled when the school closed or "withdrew from the school not more than 120 days before the school closed". For loans first disbursed on or after July 1, 2020, the borrower submits a completed application and the window is "not more than 180 calendar days before the date that the school closed". A borrower with loans from both periods can be inside one window and outside the other on the same set of facts.

Both windows can be extended, and the grounds are written down. The Secretary may extend the period where exceptional circumstances related to the closing justify it. For the earlier cohort the rule names the school's loss of accreditation, discontinuation of the majority of its academic programs, state revocation of its license to operate or award credentials, and a finding by a state or federal agency that the school violated the law. For the later cohort the list is longer and includes two situations peculiar to how modern closures are managed: a teach-out of the student's program that exceeds the 180-day look-back period, and a teach-out school that fails to perform the material terms of the plan, so that the student does not have a reasonable opportunity to finish. These are examples rather than a closed list, which matters for anyone whose withdrawal fell just outside the window for a reason connected to the closure.

Finishing the program is the disqualifier, and a teach-out is the usual way it happens. A borrower must state that they did not complete the program through a teach-out at another school or by transferring credits or hours earned at the closed school. For the later cohort the rule goes further and requires certification that the borrower has not accepted, and is not continuing in, a teach-out plan run by the school or a teach-out agreement at another school approved by the accrediting agency and, where applicable, the state authorizing agency. That is the real decision point for a student when a school announces its closure. Accepting a teach-out place is often the sensible educational choice, and it generally forecloses the discharge; declining it preserves the claim but leaves the credits unfinished. The rule does not pretend otherwise, and nothing about the choice is reversible after the fact.

Two routes end in a discharge nobody applied for, and they are not the same route. Paragraph (c)(3) provides that where the Department determines from information already in its possession that a borrower qualifies, it may discharge the loan without an application, and that for schools which closed on or after November 1, 2013 and before July 1, 2020 it will do so where the borrower did not subsequently re-enroll at any title IV-eligible institution within three years of the closure date. The first is discretionary and the second is mandatory, which is why some borrowers from that period received a discharge years afterwards with no correspondence beforehand.

Where the Department writes to a borrower, a 60-day clock starts. After confirming a closure date the Department identifies borrowers who appear to have been enrolled on that date or to have withdrawn inside the look-back period, mails a discharge application with an explanation, and promptly suspends collection. If the borrower does not return the application within 60 days, collection resumes; the suspended period is covered by forbearance of principal and interest, and the Department may capitalize the interest that accrued and went unpaid during it. So ignoring the envelope has a price: the discharge is not withdrawn, but the balance can be larger when payments restart. Where the Department cannot find a borrower it is directed to try, by consulting the closed school's representatives, its licensing agency, its accreditor and other appropriate parties.

The Department confirms the closure date, identifies affected borrowers, mails each of them an application and suspends collection. The borrower returns the sworn statement or application within 60 days, certifying the enrollment or withdrawal date, that the program was not completed through a teach-out or by transferring credits, and whether any third party such as a performance bond holder or a state tuition recovery program has already paid anything. The Department decides and notifies the borrower in writing either way. Where it approves, the balance and accrued charges go, amounts already paid come back, any default status is removed, and the adverse credit history is deleted.

A hypothetical, to show why the look-back period cannot be stated as one number. Ana withdrew on 5 March and her school ceased instruction on 2 August of the same year, a gap of 150 days (26 remaining days in March, plus 30, 31, 30 and 31 for April through July, plus 2 in August).

For a loan first disbursed on or after July 1, 2020, the window is 180 calendar days, so 150 days sits comfortably inside it. For a loan first disbursed before July 1, 2020, the window is 120 days, so the same withdrawal falls outside it by 30 days, and Ana would have to rely on the Secretary extending the period for an exceptional circumstance connected to the closure. One student, one withdrawal date, two answers.

Suppose her post-2020 loan is discharged. She had been paying $130 a month for 18 months since leaving. Those payments are reimbursable, so 18 × $130 = $2,340 comes back to her, on top of the canceled balance. The figures are invented; the rule that the discharge reaches amounts already paid, whether paid voluntarily or collected, is not.

Pros

• It cancels the balance and the accrued charges and collection costs, and returns amounts already paid.
• It removes default status and restores eligibility for federal student aid.
• The Department must ask the credit bureaus to delete the adverse history it previously reported on the loan.
• Some borrowers never have to apply. For schools that closed between November 2013 and June 2020, the discharge is mandatory where the borrower did not re-enroll anywhere within three years.
• The definition of "school" reaches a branch or additional location, so a student at a closed campus is not disqualified because the parent institution survives.
• Both look-back windows can be extended, and the listed grounds are the ones that usually accompany a closure.

Cons

• There is no single look-back number, and the figure published as current federal regulation is the suspended one, so a borrower researching this can easily reach the wrong answer.
• Completing the program through a teach-out or by transferring the credits disqualifies the claim, which turns the teach-out offer into a decision with financial consequences the offer letter is unlikely to spell out.
• The 120-day window for older loans is short relative to how long a failing school can take to close.
• Ignoring the Department's mailed application for 60 days restarts collection, and interest accrued during the suspension can be capitalized.
• The discretionary automatic discharge depends on information the Department already holds, so a borrower whose records are incomplete may still need to apply.
• It reaches federal loans. A private loan taken out for the same program is governed by that lender's contract.