At least 20 colleges closed in 2024, a number that could increase in the coming years because of proposed cuts to Pell Grants and loans, and the untested risk-sharing plan in the reconciliation legislation currently under consideration. The risk of abrupt school closure has increased given cuts to the Department of Education’s staff and reduced oversight of schools’ finances. And with the loss of personnel, the Department is less equipped than in the past to offer information and transfer assistance to students when their school closes.
Students experience wide-ranging disruption and harm during a closure, especially when it happens with little warning. In many college closures, students are in the middle of their degree programs, and experience significant hurdles transferring credits or re-enrolling at another school to complete their program. Studies show that the challenges caused by abrupt closures result in a much lower likelihood of students completing their degree. Worst of all, college closures can leave students scrambling to repay loans taken out for programs they can no longer complete and without the benefit of increased salary related to a completed degree.
Current Regulations Help Students When Their School Closes
Currently, federal law empowers the Department of Education to grant federal student loan discharges to students who:
- were enrolled when their school closed,
- were on an approved leave of absence when their school closed, or
- withdrew from the school within a certain period of time of their school’s closure.
Closed school discharge provides an important pathway to debt relief for students who were unable to complete their programs because of school closure. However, Congress is currently proposing to limit the availability of the closed school loan discharges by rescinding the most recent regulations related to that program. Those regulations, enacted under the Biden Administration, made it possible for students to have their loans automatically cancelled if their school closed and they did not continue their program elsewhere. The new bill aims to reinstate the first Trump Administration’s regulations that eliminate the possibility of automatic discharge and limit the number of students who can apply for discharge when their school closes.
States Must Act Now to Strengthen Student Protections Against Closures
In light of the changes at the Department of Education and potential for drastic upheaval in federal laws, states should act now to protect their students from the harm of college closures. Some examples of legislation that should be considered are:
- A requirement that schools provide refunds to students when a program closes or the school entirely ceases operation, unless the school arranges for students to complete their program elsewhere.
- A prohibition on schools that close from collecting on debts that students owe to the school and from selling student debts to third-party debt collectors who would collect upon those debts.In 2020, Maryland enacted a law prohibiting the collection and sale of debts that students owe to any school that closes without an approved teach-out arrangement. Md. Code Ann. Education Article §11-211. The law was passed in response to the closure of Brightwood College, which sold the debt owed to it by former students to a company that started collecting those debts. The Maryland Attorney General obtained a settlement with the debt buyer related to alleged violations of Maryland debt collection laws. Without this law, it is challenging and likely impossible for that to happen for each school that closes.
- A robust tuition recovery fund that schools pay into on a regular basis. If a school closes and fails to refund all student payments and outstanding loans, the fund would be available to provide relief for student debts and refunds for money paid.
- Schools with risky financial situations or low financial composite scores could be required to post a significant bond with the state before enrolling more students, in addition to paying into the tuition recovery fund. This would serve as a backstop to protect the states’ students and the tuition recovery fund if a closure occurs and should not be relied upon as the only source of protections for students if a school closes.
- A clear requirement for schools to provide states with electronic access to all students’ transcripts in advance of a closure. This allows states to ensure that students have access to critical records needed to transfer to another school or prove that they obtained a degree from a closed school. Fees for maintaining electronic records should be paid by the schools enrolling students in the state.
- A prohibition on individuals that operated, led, or owned a school that abruptly closed taking on similar roles at other schools that enroll students living in the state. This ensures that executives, board members, and owners of a school that collapsed in a way that harmed students cannot participate in the operation of another school that enrolls the state’s students. Leaders of schools that close in a responsible way (by, for example, providing refunds, transcripts, and discharge of institutional debts) could be exempted.
States should consider potential policies now, before school closures occur. After schools close, it is often too late to obtain financial protection or protect student records. Enacting laws or expanding the applicability of existing authorities will serve to prevent some of the worst outcomes that will impact students if the federal government removes or curtails protections.
