Closed-school discharge is the cancellation of a Direct Loan borrower’s obligation to repay loans taken out to attend a school that closed while the student was enrolled or within a defined period after withdrawal.
How it works
The Department identifies closed schools and notifies potentially eligible borrowers. The borrower submits an application or, in some automatic-discharge periods, receives the discharge without an application. The Department verifies enrollment dates and that the program was not completed elsewhere. Approved balances are discharged and prior payments may be refunded. Credit-reporting agencies are notified.
Example: an online student is enrolled when the institution closes permanently. The student does not transfer the credits. Six months later the student applies for and receives a closed-school discharge of the $12,000 Direct Loan balance associated with that enrollment.
How it differs
Borrower defense requires evidence of misconduct and can apply even if the school remains open. Teach-out allows the student to finish the program, usually eliminating eligibility for closed-school discharge. Ordinary loan forgiveness programs (PSLF, income-driven) have different qualifying conditions.
Common errors
Transferring credits to finish the same program and thereby losing discharge eligibility. Assuming automatic discharge without checking whether an application is required for the relevant closure. Expecting discharge of private loans (they are not covered).
References
- 1. Federal Student Aid closed-school dischargeEligibility and process
- 2. 34 CFR 685.214Regulatory criteria
Closed-school discharge is the cancellation of a Direct Loan borrower’s obligation to repay loans taken out to attend a school that closed while the student was enrolled or within a defined period after withdrawal.