If your college closes before you finish your program, what happens to your student loans depends on who you borrowed from. Federal student loans can be wiped out entirely through a program called Closed School Discharge, which cancels the balance, refunds payments you already made, and clears related marks from your credit report. Private student loans usually stay on the books, because your obligation is set by the contract you signed with the lender, not by federal rules.
What Closed School Discharge Does for Federal Loans
Closed School Discharge is a U.S. Department of Education program that eliminates your obligation to repay federal loans you took out to attend a school that shut down. It covers Direct Loans (including Direct PLUS Loans borrowed by parents), Federal Family Education Loans, and Federal Perkins Loans. Your loan servicer handles the paperwork; the Department makes the final decision.
When a discharge is approved, three things happen. The remaining balance on those loans drops to zero. Any payments you already made are refunded, including money collected through wage garnishment or tax refund offsets. And the loan, along with any delinquency history tied to it, is removed from your credit report. The loan is treated as though it never existed.
Parents who borrowed PLUS loans qualify on the same terms. What matters is that the student could not complete the program because the school closed. The parent does not need to have attended the school.
Who Qualifies
The core rule is that you could not finish your program because the school closed. You qualify if you were actively enrolled when the school shut down, or on an approved leave of absence at the time.
You can also qualify if you withdrew shortly before the closure. Under current rules effective July 1, 2023, the withdrawal window is 180 calendar days before the school’s official closure date, and the Department can extend that window in exceptional circumstances. Before July 2023, the window was 120 days, so the applicable timeframe depends on when your school actually closed.
A few situations disqualify you:
- You graduated before the school closed. You got what you paid for.
- You completed your program through a formal teach-out at another institution.
- You transferred credits from the closed school and finished a substantially similar program elsewhere.
The teach-out rule catches people off guard. If you accepted a teach-out offer but then dropped out of the receiving school before finishing, you may still be eligible. The disqualification only applies if you actually completed the program.
Automatic Discharge or Apply Now?
If your school closed on or after July 1, 2023, the Department of Education will generally grant an automatic discharge one year after the school’s official closure date, as long as you meet the eligibility rules and did not complete your program elsewhere. You do not need to file anything for the automatic version.
You do not have to wait, though. You can apply as soon as the Department confirms the school’s official closure date, and approved applications are processed without the one-year delay. If your loans are stressing your budget or you are actively in repayment, applying is worth the effort.
During the waiting period or while your application is under review, your loans sit in forbearance. No payments are required and no collections activity happens. Any payments you voluntarily make during this window are refunded if the discharge is approved.
How to Apply
The form is called the “Loan Discharge Application: School Closure.” You can download it from StudentAid.gov or request it from your federal loan servicer. If you are not sure who your servicer is, log into your account at StudentAid.gov to find out.
The form asks for your identifying information, the school’s name and closure date, your enrollment or withdrawal dates, and a statement that you did not complete your program through a teach-out or transfer. You sign under penalty of perjury, so accuracy matters. Send the completed form to your servicer, which reviews it and forwards it to the Department for a final decision. Review can take several months. Your servicer should confirm receipt, and your loans move into forbearance in the meantime.
What You Get Back After Approval
Beyond the balance being zeroed and past payments refunded, approval also restores your Pell Grant lifetime eligibility. Every student has a capped number of Pell Grant semesters available across their lifetime. When your school closes and you receive a discharge, the semesters you used at that school are added back to your balance. The adjustment happens through the Department’s systems after the closure is finalized; you do not apply separately.
That restoration matters if you plan to re-enroll. Without it, you might find yourself closer to the lifetime cap than you should be, and lose out on grant money for your next program.
Will You Owe Taxes on the Discharged Amount?
The American Rescue Plan Act temporarily made all student loan discharges tax-free from 2021 through the end of 2025. That broad exclusion expired on January 1, 2026, which has caused some confusion.
Closed School discharges appear to remain excluded from taxable income even after the ARP sunset. The IRS issued guidance in Revenue Procedure 2020-11 giving safe-harbor treatment to borrowers whose loans were discharged through the Closed School or Borrower Defense programs, and these Department of Education processes are among the exclusions that survived the change. That is different from income-driven repayment forgiveness, which may now be taxable for borrowers reaching their forgiveness date after January 1, 2026.
Tax rules shift, and the distinction between programs matters. If you receive a 1099-C after your discharge, talk to a tax professional before assuming you owe anything.
Private Student Loans Are a Different Story
No federal program cancels private student loans when a school closes. Your obligation to a private lender is governed by the contract you signed, and most private loan agreements say nothing about school closures. You have fewer options, but not necessarily zero.
Call Your Lender
Start by contacting your private lender and explaining what happened. Some lenders have offered temporary forbearance or modified repayment after high-profile closures, particularly when the closure draws media attention. These are discretionary, not legal entitlements, but asking costs nothing.
The FTC Holder Rule
A less familiar option involves the FTC’s Preservation of Claims and Defenses Rule, often called the Holder Rule. When a lender has a business relationship with the school, such as the school referring students to that lender or the two being affiliated, the lender is legally subject to the same claims and defenses you could raise against the school. If your school closed and failed to deliver the education you paid for, the Holder Rule may let you raise that failure as a defense against the lender.
The catch is that the rule applies only when the required notice language appears in your loan contract, or when a qualifying business relationship existed between the school and the lender. A loan you obtained on your own from a bank with no school involvement would not be covered. If you think your school steered you toward a particular lender, have a consumer attorney review your loan documents.
State Tuition Recovery Funds
Some states operate tuition recovery funds that reimburse students for out-of-pocket expenses after a school closure. These can cover costs federal discharge does not reach, including cash payments toward tuition and amounts paid through private loans. Eligibility rules and reimbursement caps vary widely, and many states do not have these funds at all. Check with your state’s higher education agency to see whether one exists where you attended.
If Your School Also Deceived You
Closed School Discharge is not the only federal path to cancellation. If your school engaged in fraud or serious misrepresentation, such as lying about job placement rates, falsifying accreditation status, or using deceptive recruiting, you may also qualify for a Borrower Defense to Repayment discharge. That program applies whether the school is still open or has closed.
The two programs answer different questions. Closed School Discharge turns on whether the school shut down and you could not finish. Borrower Defense turns on the school’s misconduct. Both can apply to the same borrower, and filing for both can make sense, especially if you want to recover damages beyond the loan balance itself. Borrower Defense claims take longer to process, but they are worth filing if you believe your school deceived you.
Veterans Using GI Bill Benefits
Veterans who were using GI Bill benefits at a school that closed can apply to have their entitlement restored. The Harry W. Colmery Veterans Educational Assistance Act of 2017 gave the Department of Veterans Affairs authority to restore benefits for students who could not complete their coursework because of a closure. If you finished the term before the school closed, you likely do not qualify. Restoration is handled separately from the federal loan discharge process, through the VA.
Getting Your Transcripts
Even after your loans are discharged, you will eventually need your academic records, whether to transfer credits, apply to another school, or document your education for an employer. When a school closes, its records are typically transferred to a designated custodian. The Department of Education advises contacting the state licensing agency in the state where the school was located, since that agency usually arranges for record storage after a closure. Different agencies handle records for different types of schools, so you may need to contact both the state’s higher education board and its vocational licensing office.
If the closed school was part of a larger institution still operating, the parent organization usually keeps the records. For standalone schools that shut down entirely, state archives or the state education agency generally take custody. Tracking down transcripts can take time, so start early if you plan to continue your education elsewhere.