MEMORANDUM

Date: February 3, 2016

To: U.S. Department of Education 

From: Eileen Connor and Noah Zinner

Issue: Closed School and Unpaid Refund Discharge Regulatory Proposals 

The memo describes four proposals:

(1) Closed School Discharge Applications for Students: Amend the Direct Loan and FFEL 

regulations to require the Department to send discharge applications and information to 

closed school borrowers at least twice: (a) immediately after a school closes, as currently 

required by the regulations, and (b) with the first monthly repayment statement, which is 

not currently required.

(2) Information for Students at Schools that Are Completing Programs Before Closing: For 

schools that plan on closing but intend to allow students to complete all their programs 

prior to closure, amend the Direct Loan and FFEL regulations to require that schools 

disclose to students: (a) the expected date of closure, and (b) information about their right 

to a discharge if they withdraw within 120 days of school closure. If the actual closure 

date is later than the expected and disclosed date, the regulations should be amended to 

extend the 120-day look back period by the number of days between the expected and 

actual date of closure. 

(3) Information for Students When Teach-Outs Are Offered After Closure: Amend the 

FFEL and Direct Loan regulations to provide that whenever a school campus closes and a 

teach-out is offered at a different campus or school, the closing school must provide to 

students a closed school discharge application and a disclosure that the student may opt 

out of the teach-out and seek a discharge. 

(4) Department Review of Closed School and Unpaid Refund Discharge Denials: Amend the 

FFEL Loan regulations to provide for Department review of guaranty agency denials of 

closed school and unpaid refund discharge applications.

Proposal No. (1): Amend the Direct Loan and FFEL regulations to require the Department 

to provide closed school discharge applications and information to potentially eligible 

borrowers with their first monthly repayment statement after their school has closed. 

Legal services organizations have a constant influx of clients whose schools closed five to 

thirty years ago and who had no idea that they are eligible for a discharge. The Department 

has acknowledged that in the past it has received small percentages of closed school loan 

discharge applications from borrowers who qualify for discharges. Undersecretary Mitchell 

stated that the percentage of eligible borrowers who have sought closed school discharges 
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February 3, 2016

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has been around 6%.1 Our experience suggests that this does not reflect lack of demand, but 

rather lack of outreach and information about available relief. 

Currently, after a school closes and the Department confirms the date of the school’s closure, 

the Department is required to mail discharge applications to borrowers who appear to have 

been enrolled at the time of the school’s closure or to have withdrawn not more the 120 days 

prior to closure.2 This often happens one to three months after the school has closed when 

the borrower may not be focused on his or her student loan repayment burden because he or 

she is in the grace period.

The Department could improve borrowers’ awareness of their right to a closed school 

discharge by sending closed school discharge applications and information a second time, 

when the borrower enters repayment and receives his or her first monthly statement. If the 

information is included with the first monthly statement, borrowers are more likely to 

respond because they are obligated to start making payments. Given that the Department 

would have already identified all potentially eligible borrowers, a second mailing should not 

be overly burdensome for the Department or servicers. 

Proposal No. (2): For schools that plan on closing but intend to allow all students to 

complete their programs prior to closure, amend the Direct Loan and FFEL regulations to 

require schools to disclose to students the expected date of closure and information about 

their right to a discharge if they withdraw within 120 days of school closure. If the actual 

closure date is later than the expected and disclosed date, the regulations should be 

amended to extend the 120-day look back period by the number of days between the 

expected and actual date of closure. 

When schools announce that they are closing but plan on allowing all their students to first 

complete their programs, the schools currently have no obligation to inform their students 

about the expected date of closure or of their loan discharge rights. As a result, students who 

experience a deterioration in the level of instruction are hesitant to withdraw and in many 

cases do not know they have the right to withdraw. If they are aware of this right, they do 

not know when they can withdraw and be eligible for a closed school discharge. 

To provide borrowers in this difficult situation with more choice about how to proceed with 

their higher education, the regulations should be amended to require that the school provide 

written disclosures to students. The regulation should state that whenever a school notifies 

the Department that it intends to close but to stay open long enough for students to complete 

their programs, it must provide a written notice, in a form approved by the Department, to 

students about the expected date of closure and their right to a discharge if they withdraw 

within 120 days prior to closure. 

 1 Paul Fain, Best of a Bad Situation?, www.InsideHigherEd.com (Dec. 9, 2014). 2 34 C.F.R. § 685.614(f).
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Informing students in a failing school of their rights to closed school discharge and allowing 

them to exercise these rights demand that students rely on an expected date of closure when 

deciding whether or not to withdraw. Therefore, if the actual closure date is later than the 

expected date disclosed in the written notice, the regulations should provide that the 120-day 

look back period is extended by the number of days between the expected and actual date of 

closure. 

Proposal No (3): Amend the FFEL and Direct Loan regulations to provide that whenever a 

school campus closes and a teach-out is offered at a different campus or school, the closing 

school must provide to students a closed school discharge application and a disclosure that 

the student may opt out of the teach-out and seek a discharge. 

In some cases, after a school closes the students are offered a teach-out either at a different 

campus or at a different school. In most cases, students are not aware that they may choose 

to not participate in a teach-out and instead seek a closed school discharge. 

For example, after Corinthian campuses closed in Florida, students were told that they could 

complete their programs at other Corinthian campuses. Some students had difficulty getting 

to these other campuses, but were not aware they had the option of seeking a discharge 

instead. 

This problem could be addressed by amending the FFEL and Direct Loan regulations to 

require closing schools to provide students with a discharge application, along with a 

disclosure about their right to seek a discharge instead of participating in a teach-out. The 

regulations should require that this information be provided when students are first offered a 

teach-out. 

Proposal No (4): Amend the FFEL Loan regulations to provide for Department review of 

guaranty agency denials of unpaid refund and closed school discharge applications.

FFEL borrowers whose loans are held by guaranty agencies should have the same right to 

challenge an erroneous unpaid refund or closed school discharge decision as Direct Loan and 

FFEL Loan borrowers whose loans are held by the Department. Current FFEL Loan 

regulations do not provide borrowers with any right to seek review of guaranty agency 

denials of closed school discharges.3 In addition, although current FFEL Loan regulations 

provide borrowers with a right to seek review of guaranty agency denials of unpaid refund 

discharges, they may only seek review from the guaranty agency itself. Borrowers currently 

have no right to seek review from the Department.4 

 3 34 C.F.R. § 682.402(d).

4 34 C.F.R. § 682.402(l)(4)(vii).
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Even when FFEL borrowers are able to get administrative review, unlike Direct Loan 

borrowers, their right to seek further review in court is not clear. The Administrative 

Procedure Act (APA) does not provide for judicial review of decisions by private, nongovernmental entities such as guaranty agencies. Nor is there any explicit right to judicial 

review of guaranty agency decisions in the Higher Education Act. 

As a result, FFEL borrowers whose loans are held by guaranty agencies have no way to 

challenge an erroneous unpaid refund or closed school discharge decision from a guaranty 

agency. Only Direct Loan and FFEL Loan borrowers whose loans are held by the 

Department may seek judicial review of administrative unpaid refund or closed school 

discharge denials. This is arbitrary and a denial of borrower due process.

The Department can rectify this by amending the FFEL regulations to provide borrowers 

with a right to seek review from the Department of guaranty agency decisions on unpaid 

refund and closed school discharges. Then, a borrower may seek reversal of an erroneous 

guaranty agency decision by the Department or, if the Department affirms a decision, the 

borrower may seek judicial review under the APA.

This proposal aligns with the Department’s position on other types of guaranty agency 

decisions. The regulations currently allow borrowers to seek the Department’s review of 

guaranty agency false certification discharge denials.5

 In addition, the Department has 

acknowledged due process issues for borrowers who cannot seek judicial review of guaranty 

agency administrative wage garnishment decisions.6

 5 34 C.F.R. § 668.402(e)(11).

6 See U.S. Dep’t of Educ. Memorandum of Points and Authorities Supporting Motion to Dismiss, Hutchins v. U.S. 

Dep’t of Educ., CV-F-02-6256-OWW-DLB (E.D. Cal. filed Apr. 25, 2003) (Dep’t acknowledged due process 

problems and supported implying a private right of action under HEA for judicial review of guaranty agency 

administrative wage garnishment decisions); 78 Fed. Reg. 45,618, 45,645 (July 29, 2013) (Dep’t stated that guaranty 

agency wage garnishment decisions are subject to judicial review when it amended the FFEL regulations to require a 

summary record of the garnishment hearing process).