Closed School and Borrower Defense: Paths to Discharge

Overview

Closed school discharge and borrower defense to repayment are two distinct federal protections for borrowers harmed by institutional failure or fraud. Both are administered by the U.S. Department of Education (Federal Student Aid) and can result in full or partial cancellation of eligible federal student loans and, in some cases, a refund of payments made after certain dates (U.S. Dept. of Education).

These programs are not automatic for most borrowers — you must submit an application and supporting evidence. Processing times vary and may take months. The standards, documentation needed, and the exact relief available differ between the two programs, so it’s important to treat them separately when preparing an application.

(Author note: In my 15 years advising clients on student loan relief, clear documentation and early engagement with your loan servicer materially improve outcomes.)

Sources: U.S. Department of Education, Federal Student Aid — Closed School Discharge and Borrower Defense to Repayment (studentaid.gov).

Who is eligible?

Closed school discharge

• Eligible borrowers generally include those enrolled when a school closed or who withdrew within a short period before a school closed and could not complete the program because of that closure. Most federal student loans — including Direct Loans, some Federal Family Education Loan (FFEL) program loans, and Perkins loans — may qualify. (U.S. Dept. of Education)
• If you transferred and completed the program at another eligible institution, discharge may not apply.

Borrower defense to repayment

• Borrower defense applies when a school’s misconduct — such as deliberate misrepresentation of job placement rates, accreditation, program transferability, costs, or licensure prospects — caused the borrower’s financial harm. The federal standard focuses on whether the school’s actions or omissions were a substantial factor in the borrower’s decision to enroll or take out loans. (U.S. Dept. of Education)
• Note: Borrower defense relief applies directly to Direct Loan borrowers. If you hold FFEL or Perkins loans, you may need to consolidate into a Direct Consolidation Loan to seek borrower defense relief. Check the Department of Education guidance for specifics.

What loans qualify?

• Closed school discharge: Most federal loans (Direct, FFEL, Perkins) are potentially eligible; private loans are not. If you have FFEL or Perkins loans, the school closure rules still apply, but the process differs — consult Federal Student Aid guidance. (studentaid.gov)
• Borrower defense: Primarily Direct Loans. Borrowers with FFEL or Perkins loans can often become eligible by consolidating those loans into a Direct Consolidation Loan before or during the borrower defense claim process.

How to apply — step-by-step

Closed school discharge

1. Confirm closure and eligibility: Verify the school’s closure date and your enrollment/withdrawal dates. The Department of Education posts information about closed schools and eligibility on studentaid.gov. (U.S. Dept. of Education)
2. Contact your loan servicer: Ask whether your loans qualify and request the closed school discharge application if one is needed. Some discharges are initiated automatically when the Department identifies eligible borrowers, but many require borrower action. Keep a record of all servicer conversations.
3. Complete the application: Provide enrollment records, withdrawal dates, proof of payments, and any additional documentation the servicer requests.
4. Monitor status: Follow up with your servicer and the Department. If approved, loans will be discharged and payments made after a certain date may be refunded.

Borrower defense to repayment

1. Gather evidence: Collect recruitment materials, contracts, emails, screenshots, promotional materials, program handbooks, testimony from classmates, pay stubs showing promised job outcomes didn’t materialize, or other proof of misleading statements or fraud.
2. Submit a claim: File a borrower defense application online at studentaid.gov/borrower-defense (or via the Department’s portal). The application lets you describe the misconduct and upload evidence. (U.S. Dept. of Education)
3. Consider consolidation: If you have non-Direct loans and want borrower defense relief, explore Direct Consolidation so your loans fall under the Department’s jurisdiction for borrower defense.
4. Await decision and appeal: The Department reviews evidence and issues a decision. If denied, you may be able to appeal or pursue administrative review; for complex or high-value claims, consult an attorney or an accredited student loan counselor.

Evidence checklist — what to collect

• Enrollment agreements, promissory notes, and loan disclosures
• Promotional materials (brochures, webpages, recorded calls) claiming job placement or salary outcomes
• Email or text communications with admissions or financial aid staff
• Transcripts, attendance records, and withdrawal forms
• Proof of payments (bank statements, payment receipts)
• Classmate statements or group evidence showing widespread misconduct
• Documentation of licensing outcomes if the program guaranteed licensure but students failed to sit for or pass exams

A well-organized, time-stamped evidence file is easier for reviewers to evaluate.

Typical timelines and outcomes

• Processing times vary widely: some closed school discharges can be processed in a few months; borrower defense claims — especially complex ones — can take many months or longer because of evidence review and legal considerations. Expect variability; keep records and follow up regularly.
• Outcomes may include full discharge, partial discharge, or denial. When approved, refunds of recent payments and cancellation of remaining principal and interest are possible.

Impact on credit, taxes, and other federal benefits

• Credit reporting: A discharge does not erase the loan from your credit history, but it should be reported as “paid/closed” or “discharged” rather than delinquent if you were current or the loan is discharged. If your loan was in default, the Department often rescinds default status for discharged loans — confirm with your servicer and credit bureaus.
• Taxes: Recent federal legislation and guidance have affected tax treatment of forgiven student loan amounts; however tax law can change. Consult the IRS or a tax professional for current tax treatment of any discharged loan amounts. (IRS; U.S. Dept. of Education)
• Program eligibility: A discharge is not the same as a record expungement — some licensing boards or credentialing bodies may require separate action. Additionally, canceled loans generally will not count toward Public Service Loan Forgiveness (PSLF) because the debt itself is removed.

Common mistakes and pitfalls

• Missing deadlines or failing to apply: Some borrowers assume relief is automatic. That’s not always true.
• Weak documentation: Vague allegations without documentary support are harder to prove.
• Consolidating too early: Consolidating FFEL/Perkins into a Direct Consolidation Loan can be required to pursue borrower defense — but consolidation can also change loan terms or restart the clock on certain borrower benefits. Review consequences before consolidating.
• Relying on non-authoritative advice: Use Department of Education resources, CFPB guides, or qualified legal counsel.

Professional tips

• Start collecting documents now, even if you plan to submit a claim later.
• Keep a contemporaneous timeline of events showing admissions, payments, program marketing, and communications.
• Talk to an accredited student loan counselor or an attorney with experience in borrower defense claims for complex cases. Many consumer protection attorneys handle borrower defense matters on contingency.
• If your school closed, contact the state attorney general’s consumer protection office; they sometimes have parallel investigations that strengthen borrower defenses.

Legal and appeal options

Borrower defense claims can be litigated or appealed in administrative settings. If denied, a borrower may have options such as administrative review, submitting additional evidence, or, in some cases, litigation. Because law and Department practices evolve, consult counsel experienced in student loan law for high-value or complex claims.

Related resources on FinHelp.io

• Learn more about who qualifies for federal loan forgiveness in our guide: Student Loan Forgiveness Eligibility: Practical Steps to Apply.
• If you’re weighing short-term relief options while a claim is pending, see: Deferment vs Forbearance for Student Loans: Pros, Cons and Tax Effects.

Final notes and professional disclaimer

This article explains the programs generally and provides practical steps to prepare an application. It is educational and does not constitute legal or tax advice. The U.S. Department of Education’s Federal Student Aid pages are the authoritative resources for applications and up-to-date policy: https://studentaid.gov/manage-loans/forgiveness-cancellation/closed-school-discharge and https://studentaid.gov/manage-loans/forgiveness-cancellation/borrower-defense-to-repayment. For personalized advice, consult a qualified attorney, tax professional, or accredited student loan counselor.

Sources

• U.S. Department of Education, Federal Student Aid — Closed School Discharge and Borrower Defense to Repayment (studentaid.gov)
• Consumer Financial Protection Bureau and state attorney general resources on borrower protections

(Author: Senior Financial Content Editor & AI Optimization Agent, FinHelp.io)