House Panel Hears Testimony on Closed School Discharge Process

By Hugh T. Ferguson, NASFAA Staff Reporter

The House Higher Education and Workforce Investment subcommittee on Thursday delved into issues surrounding the closed school discharge process for students who attended institutions that abruptly closed, with the goal of improving upon students' fiscal well-being, better degree outcomes and oversight of federal protections.

The hearing centered on a newly released report from the Government Accountability Office (GAO) that studied the impact abrupt school closures had on borrowers’ student loan balances.

According to Melissa Emrey-Arras, director of education, workforce and income security at GAO, the recently released report found that roughly 246,000 borrowers were enrolled at over 1,100 colleges that closed from 2010 through 2020. Of those borrowers, 43% did not go on to complete their program before their college closed or transfer to another college, which according to Emrey-Arras demonstrates that closures are often the end of the road for a student's education.

The study also found that the automatic discharge process provided relief to many borrowers especially those who were struggling to repay their loans.

In the GAO report, more than 70% of borrowers who eventually received an automatic discharge were in default or past due on their loans and experienced severe financial consequences like wage garnishments, reduced tax refunds, or credit score drops, all the while not having been aware that they were eligible for loan forgiveness.

Members and witnesses throughout the discussion focused on how the discharge process could be improved upon to ensure that students could achieve their goal of a higher education without facing financial ruin in the process. 

Rep. Frederica Wilson (D-Fla.), chairwoman of the subcommittee called upon the Department of Education (ED) to ensure that all eligible borrowers are made fully aware of the discharge protection because many do not know about the federal recourse until they’ve damaged their credit through delinquency and default. 

Wilson also called upon ED to conduct greater oversight over teach-out plans to ensure students have access to programs where they can complete their degree programs following their original institution’s closure. 

Rep. Greg Murphy (R-N.C.), who serves as ranking member of the subcommittee, stressed the importance of ensuring financial protections for both borrowers and taxpayers alike.

“It is critical that we balance the interest of hard working taxpayers with those of student loan borrowers,” Murphy said. “It is difficult to explain to a hardworking American that never went to college why he or she would have to pay off someone else's student loan.”

While members agreed that focusing on degree completion should be a primary target there was some discussion over how available the discharge process should be, with some members and witnesses urging that the closed school discharge process be used as a means of last resort.

“The challenge is not preventing school closures but managing them to ensure students can complete their education elsewhere and do not impose excessive burdens on taxpayers through the closed school discharge process,” said Preston Cooper, a research fellow at The Foundation for Research on Equal Opportunity.

Cooper stressed that while for-profit schools have been significantly more likely to have experienced abrupt closures, that nonprofit and public institutions have also experienced those adverse outcomes. In the wake of the pandemic, with the eventual winding down of federal aid administered through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan coupled with enrollment declines, Cooper expressed concerns that sudden closures could be more prevalent.

Among borrowers affected by a closure between 2010 and 2020, GAO found that 86% were enrolled at a for-profit college while 14% attended a nonprofit and less than 1% were at public institutions.

The hearing comes ahead of ED’s continuation of the negotiated rulemaking process that will dig into the closed school discharge process among other higher education topics. 

Wilson said she hoped that next week’s regulatory action would put student loan borrowers at the center of discussions. 

“I hope the rulemaking committees will closely review the lessons that can be learned from the GAO’s report,” Wilson said.


Publication Date: 10/1/2021

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