If the school where you took out federal student loans has shut down, a closed school discharge can wipe out your remaining federal loan balance and refund what you have already paid. You qualify if you were still enrolled when the school closed, or if you withdrew no more than 180 calendar days before the closure date.1eCFR. 34 CFR 685.214 – Closed School Discharge Private student loans do not come with the same statutory right, but there are separate tools for challenging those debts.
Who Qualifies
Federal regulations set two eligibility scenarios for Direct Loans. You need to have been enrolled at the time the school closed, or to have withdrawn within the 180-day window before the closure date. The Department of Education can extend that window when exceptional circumstances justify it, but the default cutoff is firm.1eCFR. 34 CFR 685.214 – Closed School Discharge
A common misconception trips up borrowers here. Transferring your credits to a different school does not disqualify you. You lose eligibility only if you finished your program at another branch or location of the same school, or through a formal teach-out agreement arranged by the school’s accrediting agency. Enrolling on your own at a completely different institution does not count against you.1eCFR. 34 CFR 685.214 – Closed School Discharge
Teach-Out Agreements and Automatic Discharge
When a school closes, its accrediting agency sometimes arranges for another institution to finish teaching current students through a teach-out agreement. Accepting a teach-out does not permanently lock you out. If you accept it but don’t complete the program, you remain eligible for an automatic discharge one year after your last date of attendance. Borrowers who decline the teach-out become eligible for automatic discharge one year after the school’s closure date.
The automatic route requires no application from you. The Department of Education initiates it when its records support eligibility. Filing an application yourself is faster, though, and avoids the full year of waiting.1eCFR. 34 CFR 685.214 – Closed School Discharge
What an Approved Discharge Gives You
An approved discharge cancels your entire remaining federal loan balance for the closed school, including accrued interest and any collection costs. This is a full cancellation, not a partial reduction.
You are also entitled to a refund of amounts you already paid on the loan, whether voluntarily or through wage garnishment or other enforced collection. The Department reports the discharge to every credit bureau where the loan appeared and deletes the adverse credit history tied to the debt. If the loan had gone into default, that default is erased and your eligibility for future federal financial aid is fully restored.1eCFR. 34 CFR 685.214 – Closed School Discharge
How to Apply
Pull together records that prove when you were enrolled: your official transcripts or enrollment history, your enrollment agreement, and billing statements from your last term. Confirm the school’s official closure date, since that date anchors the 180-day calculation. The Department of Education publishes a list of closed schools with official closure dates.
The form you need is the Closed School Loan Discharge Application, available through the Department of Education’s website or your loan servicer. You sign it under penalty of perjury, so accuracy matters: deliberate misrepresentation can bring federal fraud penalties, including fines and imprisonment.
Submit the completed application and your supporting documents to your loan servicer. If you mail paper copies, use certified mail with a return receipt. Once the servicer receives a complete application, the Department must suspend all collection activity on the affected loans while the claim is under review.1eCFR. 34 CFR 685.214 – Closed School Discharge The review takes several months. If approved, you receive formal notice of the cancellation, and any eligible refunds follow.
If Your Application Is Denied
A closed school discharge denial is final. The Department has no formal appeal process for this category, and you are responsible for resuming payments.
Timing is the most common reason for denial. If you withdrew more than 180 days before the closure, you fall outside the eligibility window unless the Department grants an exceptional-circumstances extension. If your withdrawal was directly tied to the school’s impending collapse, document that connection as thoroughly as possible before reapplying or looking elsewhere.
A denial does not end your options. Several other routes may be worth pursuing:
- Contact your state’s higher education licensing agency to see whether a tuition recovery fund or performance bond can cover your losses.
- If the school filed for bankruptcy, file a claim as a creditor in that proceeding.
- If the school engaged in fraud or misrepresentation, look into borrower defense to repayment, which has its own application and review process.
- Consult an attorney experienced in student loan or consumer protection law to evaluate claims you might pursue in court.
Private Student Loans
Private student loans carry no statutory right to closed school discharge. What you can do depends on the contract you signed, the lender’s relationship with the school, and your willingness to push back. Some private lenders offer voluntary hardship or closure-related relief, but these programs are discretionary and vary widely.
The FTC Holder Rule
The strongest legal tool here is the FTC’s Holder Rule. It preserves your right to raise the same legal claims against the current holder of your loan that you could have raised against the school. If the lender had a referral relationship or business affiliation with the school, and the school failed to deliver the education you paid for, you can use that failure as a defense against repayment or as the basis for affirmative claims.2Federal Trade Commission. 16 CFR Part 433 – Trade Regulation Rule Concerning Preservation of Consumers Claims and Defenses
The Holder Rule does not guarantee discharge. It gives you leverage. Lenders facing a valid Holder Rule claim often prefer to negotiate rather than litigate, and settlements that reduce the total debt by a significant percentage are common. The strength of your claim depends on how directly the lender was tied to the school. A lender that ran a preferred lending program through the school’s financial aid office is more exposed than one you found on your own.
State Consumer Protection Laws
Every state has consumer protection statutes that prohibit unfair or deceptive practices by financial institutions. If the closure involved fraud or misrepresentation, and the private lender was involved in or benefited from that conduct, state law can provide another avenue for challenging the debt. The specifics vary by jurisdiction, and you will likely need an attorney to evaluate your facts. Some states allow a prevailing consumer to recover attorney’s fees, which makes representation easier to find.
State Tuition Recovery Funds
Many states maintain tuition recovery funds, pooled money funded by schools operating in the state, that reimburse students when a school closes or commits fraud. These funds can cover out-of-pocket costs and expenses paid with private loans, filling gaps the federal discharge does not reach. Coverage, eligibility, and deadlines vary widely from state to state. Some funds are limited to certain school types or capped in amount, and filing deadlines range from as short as 60 days to as long as three years after closure.
Contact your state’s higher education licensing agency promptly. In some states these funds are first-come, first-served, and the deadlines are unforgiving. Even if you are pursuing a federal closed school discharge, a state tuition recovery fund can reimburse costs the federal process will not, such as books, supplies, or the portion of tuition you paid out of pocket.
Taxes on the Discharged Amount
The tax picture changed in 2026. The American Rescue Plan Act temporarily excluded forgiven student loan amounts from taxable income, but that provision covered only discharges through December 31, 2025. Loan forgiveness processed in 2026 or later generally counts as cancellation-of-debt income, and you can expect a Form 1099-C for the forgiven amount.3Taxpayer Advocate Service. What to Know About Student Loan Forgiveness and Your Taxes
Federal law permanently excludes some types of student loan forgiveness from income, including Public Service Loan Forgiveness and discharges for death or total and permanent disability. Closed school discharges are not specifically listed among those permanent exclusions.4Office of the Law Revision Counsel. 26 U.S. Code 108 – Income From Discharge of Indebtedness IRS Publication 970 does provide a broader exclusion for canceled student loans made, insured, or guaranteed by the federal government, provided the cancellation was not in exchange for services performed for the lender. A closed school discharge of a federal Direct Loan may fall within that framework, but the guidance is not as explicit as borrowers would like.5Internal Revenue Service. Publication 970, Tax Benefits for Education
If you do owe tax on a discharged amount and cannot pay, there is a safety valve. Borrowers who were insolvent at the time of discharge, meaning total debts exceeded the fair market value of total assets, can exclude some or all of the forgiven amount from income by filing IRS Form 982. Many students affected by school closures are already financially stretched, so insolvency is worth investigating before you accept a large tax bill as unavoidable.