The Department of Education (ED) often takes months to identify when a college closes and doesn’t always provide borrowers the information they need to obtain a closed school discharge of their federal loans, the Government Accountability Office (GAO) found in a new report.
According to the report — which was requested by Rep. Bobby Scott (D-Va.), chairman of the House Education and Labor Committee — ED is often slow to identify when a college closes. ED identified about half of the college closures from 2010-20 — a total of 546 institutions — in less than one month. However, ED did not identify one-third of college closures until two months or more after the college officially closed, which includes 13% of closures — or 135 institutions — that ED took six months or more to identify..
GAO writes that the delay means that borrowers who attended these colleges were not informed by their loan servicers about the discharge option until months after their college closed. That delay limits students’ ability to make decisions about their educational and financial options after their college closes.
Another key issue for students who face college closures is confusing and incomplete information about their eligibility for a discharge. GAO reviewed template letters that five loan servicers sent to inform borrowers of their potential eligibility for a discharge and found that four of the servicers — who served over half of all borrowers — had information that was incomplete and potentially confusing.
For example, GAO writes that letters from three of the five servicers were missing key information for borrowers, such as descriptions of the eligibility criteria or the discharge benefits. GAO notes that because ED doesn’t provide loan servicers guidance on what to include in these letters, eligible borrowers may not understand the information they are receiving.
Additionally, GAO notes that ED should create more outreach to borrowers after the initial notification about the potential discharge of their federal loans. GAO notes ED doesn’t instruct servicers to include information about discharges in the delinquency and default notices they send to borrowers, and their call centers don’t proactively inform borrowers who call in that they are potentially eligible for a discharge.
GAO lists four recommendations for ED, including that Federal Student Aid (FSA) works to identify college closures in a timely manner, such as by using data to identify and record closures as soon as possible. The second recommendation is for FSA to instruct loan servicers to use more frequent reports from ED on closures so servicers can notify borrowers of their potential eligibility earlier.
GAO also recommends FSA develops guidance for what information loan servicers should include in the notification letters they send to borrowers after an institution’s closure. Finally, FSA should ensure there’s additional outreach to at-risk borrowers who are eligible for a closed school discharge.
In response to the report, FSA’s Chief Operating Officer Richard Cordray wrote ED has already implemented some of GAO’s recommendations and is working on addressing others. He adds that ED is in the middle of the rulemaking process to automatically grant closed school discharges for borrowers who are eligible but haven’t filled out the application.
“When FSA learns of a college closure, it makes every effort to respond to the needs of students,” Cordray wrote. “We recognize that with any process, including this one, there is always room for improvement.”
In a statement released Wednesday, Scott said “abrupt closures of large for-profit college chains have left hundreds of thousands of students with debt they cannot repay and worthless academic credits they cannot use.”
“Unfortunately, the previous Administration abandoned the automatic discharge process put in place by the Obama Administration, adding to the confusion and distress students experience when their schools close,” Scott said. “In addition to restoring the automatic discharge process, the Biden Administration should implement the GAO’s recommendations and further streamline the process for students to ensure they can quickly access the relief to which they are legally entitled.”
Publication Date: 8/12/2022