The big news in the education world is that Corinthian Colleges, a publicly traded company that owns three for-profit colleges, is in deep financial trouble. On June 19, 2014, the Department of Education believed that Corinthian was “falsifying job placement data used in marketing claims to prospective students, and [allegedly] altered grades and attendance.” As a result, the department placed a hold on Corinthian’s access to federal student loan dollars. The result was a prompt liquidity crisis for Corinthian, which averted bankruptcy when the department agreed to release $16 million in immediate payments. Nevertheless, it plans on shuttering some of its institutions and selling their assets. Corinthian’s schools enroll 72,000 students in 107 campuses, and it rakes in an astonishing $1.4 billion in federal loan and grant dollars.
If any students are left in the lurch, they have a non-bankruptcy option available to them that student debtors in other situations do not: the “closed school discharge.” As its name suggests, the federal government will cancel loans made to student loan debtors if their schools shuts their doors, but students must meet a certain set of circumstances.
- Debtors must be enrolled at the school, which generously includes approved leaves of absences, and they must not complete their program because of the closure.
- Alternatively, students who withdraw within 120 days of the school closure are also eligible. This requirement was recently changed from just 90 days.
The department also clarifies exceptions to the closed school discharge:
- Students who withdraw more than 120 days before the closure are ineligible.
- Students who have completed all the school’s required coursework, even if they haven’t received a diploma or certificate, cannot receive a discharge. They may transfer their credits to another institution and graduate from there.
- Finally, the discharge isn’t unconditional. Students who complete their coursework at a different institution will be required to repay any amount that was discharged.
Obviously—and this is important—the closed school discharge only applies to federal loans. Students who borrow from private lenders are unlikely to have any such options.
Another important point: The closed school discharge is not automatic. Students who believe they are eligible will have to contact their loan servicers to begin the discharge application process. Finally, debtors should certainly continue making any payments on outstanding student loans. Delinquency will hamper the discharge application.
More information can be found on the Department of Education’s Web site.
It’s possible that Corinthian’s school closures are the first of many as Americans cast a wary eye toward for-profit higher educators. If you are unlucky enough to suffer a school closure before your studies are completed, there are still alternatives. For example, federal student loans are also eligible for income-sensitive repayment plans, like Pay-As-You-Earn (PAYE). Otherwise, a chapter 7 bankruptcy can allow you to discharge other debts to free up income for your student loans.
For answers to more questions about student loans in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy lawyer Bruce Weiner for a free initial consultation.
