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The recent closures of multiple large, private for-profit institutions of higher education (IHEs), such as those owned by Corinthian Colleges, Inc. (e.g., Heald College) and ITT Educational Services (e.g., ITT Technical Institutes) have brought into focus the extent to which a student's postsecondary education may be disrupted by a school closure. The closures of these IHEs also highlighted the numerous issues students may face when their institutions close and the difficult decisions they may be required to make
Appendixes
Summary
When an institution of higher education (IHE) closes, a student's postsecondary education may be disrupted. Students enrolled at closing IHEs may face numerous issues and may be required to make difficult decisions in the wake of a closure. Two key issues students may face when their IHE closesIHEs close relate to their academic plans and their personal finances.
The academic issues faced by students when their schools close include whether they will continue to pursue their postsecondary education, and if so, where and how they might do so. Students deciding to continue their postsecondary education have several options. They may participate in a teach-out offered by the closing institution or by another institution. A teach-out is a plan that provides students with the opportunity to complete their program of study after a school has closed. In conjunction with or in lieu of participating in a teach-out, students's closure. Students may also be able to transfer the credits they previously earned at the closed IHE to another IHE. If a student is able to transfer some or all of theirthe previously earned credits, he or she would not be required to repeat the classes those credits represent at the new institution; if a student is unable to transfer all or some of his or her previously earned credits, the student may be required to repeat the classes those credits represent at the new IHE. Decisions regarding the acceptance of credit transfers are within the discretion of the accepting IHE.
The financial issues faced by students when their schools close include whether they are responsible for repaying any loans borrowed to attend a closed school and how they might finance any additional postsecondary education they pursue. In general, a closed school loan discharge is available to a borrower of federal student loans made under Title IV of the Higher Education Act of 1965 (HEA)(P.L. 89-329, as amended), if the student was enrolled at the IHE when it closed or if the student withdrew from the IHE within 120 days prior to its closure. In additionAdditionally, the student must have been unable to complete his or her program of study at the closed school or a comparable program at another IHE, either through a teach-out agreement or by transferring any credits to another IHE. Borrowers ineligible for a closed school discharge may be eligible to have their Federal Direct Loan and Federal Family Education Loan programable to have eligible Title IV federal student loans discharged by successfully asserting as a borrower defense to repayment (BDR) certain acts or omissions of an IHE, if the cause of action directly relates to the loan or educational services for which the loan was provided. Whether a borrower may have discharged all or part of any private education loans borrowed to attend the closed IHE discharged dependsmay depend on the loan's terms and conditions.
Some students may also face issues regarding how they might finance future postsecondary educational pursuits. If a borrower receives a closed school discharge or has a successful BDR claim, his or her eligibility for future Direct Subsidized Loans is unlikely to be affected. Moreover,the discharged loan will not count against the borrower's Subsidized Loan usage period, which typically limits certain borrowers' receipt of Direct Subsidized Loans for a period equal to 150% of the published length of his or her academic program, and a borrower's statutory annual and aggregate borrowing limits on Direct Subsidized and Direct Unsubsidized Loans are unlikely to be affected. Students who receive a Pell Grant for enrollment at a school that closed may have an equivalent amount of Pell eligibility restored. Likewise, if the student used GI Bill educational benefits from the Department of Veterans Affairs for attendance at a closed school, those benefits can be restored.
Students may be reimbursed for payments on charges levied by closed IHEs that are not covered by other sources from a State Tuition Recovery Fund (STRF). The availability of and student eligibility for such funds vary by state, and not all states operate STRFs. Finally, the receipt of any of the above-mentioned benefits may have federal and state income tax implications, including the potential creation of a federal income tax liability for borrowers who have certain loans discharged.
In award year (AY) 2015-2016, approximatelyacademic year (AY) 2017-2018, 6,700 institutions of higher education (IHEs), enrolling over 27 million postsecondary education students, in AY2016-2017,1 participated in the federal student aid programs authorized under Title IV of the Higher Education Act of 1965 (HEA; P.L. 89-329, as amended).12 These IHEs ranged in sector, size, and educational programs offered. They comprised all sectors (i.e., public, private nonprofit, and private for-profitproprietary), with some IHEs enrolling as few as one studentthree students and others enrolling over 236190,000 in a single year.3 Offered educational programs varied from certificate programs in career and technical fields to doctoral and professional degree programs.
Most of these IHEs operate from year-to- to year with few severe financial or operational concerns; however, each year, a few do face such concerns, which may cause them to cease or significantly curtail operations. The recent closure of multiple large, proprietary (or private, for-profit) IHEs has brought into focus the extent to which a postsecondary student's education may be disrupted by a school closure.24 However, even in instances of a small IHE's closure, student concerns remain the same. Concerns include the following, among others: Can they continue their postsecondary education at another school? How will they finance future postsecondary educational pursuits? Are they liable for repaying loans they may have borrowed to pursue a postsecondary credential that they were unable to obtain because of an IHE's closure?
This report provides an explanation of the options a postsecondary student may pursue in the event the IHE he or she attends closes, any financial relief that may be available to such students, and other practical implications for students following a school's closure. First, this report describes the academic options available to such students, such as participating in a teach-out or transferring to a new IHE. Next, it discusses issues related to financing a postsecondary education, including the extent to which borrowers may have any loans borrowed to finance educational expenses discharged due to a school closure and whether future financial assistance, including federal student loans, Pell Grants, and GI educational benefits, may be available to students should they decide to continue their postsecondary education at another IHE. This report then describes additional relief that may be available to students who attended IHEs that closed, such as the potential to have tuition paid reimbursed through a state tuition recovery fund. Finally, this report describes some potential income tax implications for students when their IHE has closed, including the extent to which they may incur a federal income tax liability for loans discharged and whether higher education tax credits remain available to them in future years.
In the event of a school closure, currently enrolled students must consider their academic options, including whether they will continue pursuing their postsecondary education, and if so, where. Two options that may be available to students include teach-outs and credit transfer.
To participate in the Title IV federal student aid programs, an IHE must, among other requirements, agree to submit a teach-out plan to its accrediting agency, if it intends to close a location that provides 100% of at least one educational program offered by the IHE or if it intends to otherwise cease operations.35 As part of a teach-out plan, an IHE may enter into a teach-out agreement with another IHE to provide the closing IHE's students with an educational program of similar content.
A teach-out plan is an institution's "written plan that provides for the equitable treatment of students if [the IHE] ceases to operate before all students have completed their program of study."46 Accrediting agencies establish the criteria IHEs must meet when submitting a teach-out plan; thus, there are no standard components of a teach-out plan. Typically, however, in a teach-out plan, an IHE may be required to include provisions for students to complete their credentialsprograms of study within a reasonable amount of time, a communication plan to affected parties (e.g., faculty and students) informing them of the impending closure, and information on how students may access their institutional records.5 Teach-out plans are typically used when an IHE is not closing immediately and is able to teach-out its own students prior to its closure.
As part of a teach-out plan, an IHE may enter into a teach-out agreement with another IHE, under which7
Teach-Out Agreements
As part of a teach-out plan, an IHE may enter into a teach-out agreement with another IHE. A teach-out agreement is an agreement between the closing IHE and another IHE that provides the closing IHE's students with a reasonable opportunity to complete their programs of study at the new IHE. Teach-out agreements are used when an IHE ceases operations before all of its enrolled students are able to complete their programs of study.8 Under a teach-out agreement, the new IHE must
9In addition, teach-out agreements may establish the cost of attendance for students being taught out.7
Teach-out agreements are typically used when an IHE is closing immediately and is unable to continue providing instruction to its students to allow them to complete their course of study before the school's closure. 10
When implemented, teach-out agreements may take a variety of forms. For instance, a teach-out agreement may provide that the teach-out institution will provide the faculty and student supports necessary to deliver the closing IHE's educational programs at the closing IHE's facilities for the remainder of the academic year in which the closing IHE ceases operations,8 while in.11 In other instances, a teach-out agreement may provide educational programs to the closing IHE's students at the teach-out IHE's facilities.
In some instances, a student may be unable to complete his or her educational program during the duration of the teach-out plan or agreement (e.g., the teach-out plan would occur over the course of a single academic year, but the student must complete at least two more academic years before earning a degree). In these instances, students would need to make arrangements to transfer to another IHE to receive their credentials.
In the event an IHE closes without a teach-out plan or agreement in place, the IHE's accrediting agency must work with ED and appropriate state agencies to assist students in finding opportunities to complete their postsecondary education.9
In lieu of or in conjunction with a teach-out, students of closed IHEs may be able to continue their postsecondary education by transferring some or all of the credits earned at the closed IHE to another IHE. In general, credit transfer is the process of one institution (the accepting institution) measuring a student's prior learning (typically via coursework) at another institution (the sending institution) and comparing that prior learning against educational offerings at the accepting institution. The accepting institution determines whether a student's prior learning meets its standards and whether the prior learning is applicable to its educational programs. If it determines the prior learning meets its standards, the accepting institutions gives credit toward its educational programs for the prior learning, such that a student transferring credits need not repeat all or part of a program's curriculum. Transfer-of-credit policies are determined by individual IHEs.
To smooth the credit transfer process, some IHEs have entered into articulation agreements. Articulation agreements are agreements between two or more IHEs demonstrating that a student's prior learning from a sending IHE meets the accepting IHE's standards. Typically, they guarantee acceptance of at least some credits earned at the sending institution by the accepting institution.
The HEA does not require Title IV participating IHEs to maintain transfer-of-credit policies nor does it specify requirements for transfer-of-credit policies for IHEs that do have them. The HEA does, however, require that Title IV participating IHEs make publicly available any transfer-of-credit policies they may have in place.1013 In disclosing transfer-of-credit policies, accepting IHEs must include information on the criteria the institution uses in evaluating credit transfers, and all institutions that are parties to articulation agreements must disclose a list of IHEs with which it has articulation agreements.
Students who attended a closed IHE may decide to continue their postsecondary education at another IHE and may wish to transfer credits earned at the closed IHE to the new IHE. This may be done in conjunction with or separate from a teach-out.11 Typically, students must initiate the credit-transfer process by expressing interest in transferring credit to another IHE.14 The IHE would then inform the student of next steps the student must take to enroll. Because IHEs set their own credit transfer criteria, credit transfer may not be guaranteed.1215 Thus, some students may have all or a large proportion of their previously earned credits transferred to an accepting IHE and may experience little to no disruption or delay in their postsecondary educational pursuits, while others may have few or no credits transferred to an accepting IHE and may experience significant disruptions and delays in their postsecondary education. In addition, a student may incur greater financial obligations (e.g., student loans) if he or she must repeat coursework because credit from the closed school did not transfer.
Finally, students who successfully transfer some or all of their previously earned credits would be required to meet the accepting IHE's satisfactory academic progress (SAP) policies to maintain eligibility to receive Title IV funds at the accepting IHE.1316 IHEs may establish their own SAP policies, but these policies must meet minimum federal standards, which must establish a minimum grade point average (or equivalent) and a maximum time frame in which students must complete their education program (pace of completion).1417 Only transfer credits that count toward a student's educational program at the accepting IHE are included in the accepting IHE's calculation of SAP.1518 Thus, if a student is unable to transfer any credits from a closed IHE to another IHE, the student's previously earned credits will not count toward the accepting IHE's SAP calculation and would not have the potential to affect the student's aid eligibility with respect to SAP at the new IHE. However, should some or all of a student's previously earned credits from a closed IHE transfer to another IHE, depending on the accepting IHE's specific SAP policy, a student's Title IV eligibility may be affected such that he or she may not be meeting the IHE's SAP policies and thus may be ineligible for Title IV aid at the accepting IHE.16
Along with considering academic options in the event of a school closure, students may also need to consider the financial options available to them, as they may have received financial assistance to help finance their education at the closed school and may need to seek financial assistance should they decide to continue pursuing a postsecondary education. Considerations for students who borrowed moneyfunds (or parents who borrowed funds on behalf of a student) to finance their education at a closed school include whether they are responsible for repaying any loans borrowed to attend the school. Considerations for students who wish to continue their education at another IHE include the extent to which their eligibility for various forms of financial aid (e.g., Direct Loans, Pell Grants, GI Bill Educational Benefits) may be affected by their previous use of those benefits at the closed school.
In some instances, individuals who borrowed funds to finance postsecondary education expenses may be provided some relief from being required to repay their loans, depending on the type of loan they seek to have discharged and specific borrower circumstances.
Students who attended a school that closed (or the parents of students who attend a school that closed) may have borrowed federal student loans to help finance their postsecondary education at the closed school. For HEA Title IV federal student loans (i.e., loans made under the Direct Loan [DL], Federal Family Education Loan [FFEL], and Perkins Loan programs), borrowers may be provided some relief from being required to repay their federal student loans through a closed school loan discharge.
In addition, borrowers who are ineligible for a closed school loan discharge may, in certain circumstances, seek debt relief on their Title IV student loans by asserting a borrower defense to repayment (BDR) for certain acts or omissions of an IHE, if the cause of action directly relates to the loan or educational services for which the loan was provided. The availability of a BDR claim may be closely related to a school's closure, as oftentimes, a BDR claim is predicated on misleading representations of an IHE relating to the educational services provided, and in recent years allegations of misrepresentation have played a part in the ultimate closure of some IHEs.20Previously, regulatory provisions addressed closed school discharge standards and procedures. They also addressed BDR standards and procedures, but in a somewhat limited manner. On November 1, 2016, ED promulgated new regulations (hereinafter, "the 2016 regulations") intended to create a more robust set of standards and streamlined procedures for assessing BDR claims and to make some changes to the closed school discharge procedures.21 These regulations were scheduled to take effect on July 1, 2017, but prior to the effective date, ED issued a Final Rule establishing July 1, 2019, as the new effective date for the regulations.22 Following a series of lawsuits, however, a court vacated the delay of the 2016 regulations.23 The 2016 regulations went into effect October 16, 2018, and ED is currently working to fully implement the 2016 regulations.24 On July 31, 2018, ED issued a new Notice of Proposed Rulemaking to revise the BDR standards.25 A Final Rule has not yet been issued, and it appears that the potential new BDR regulations would not go into effect until at least July 2020.26
The following section of the report describes the closed school discharge and BDR regulations, as in effect on October 16, 2018.27
Students who attended a school that closed (or their parents) may be eligible to have the full balance of the outstanding HEA Title IV loans they borrowed to attend the IHE discharged. In general, borrowers of Title IV loans may be eligible to have the full balance of their outstanding HEA Title IV loans discharged (including any accrued interest and collection costs) if they, or the student on whose behalf a parent borrowed in the case of Parent PLUS Loans, are unable to complete the program in which they enrolled due to the closure of the school.1728 Borrowers who have their loans discharged due to a school closure are also eligible to be reimbursed for any amounts previously paid or collected on those loans, and if any adverse credit history was associated with the loan (e.g., default), the loan discharge will be reported to credit bureaus so that they may delete the adverseadverse credit history associated with the loan.1829
Closed School Loan Discharge Eligibility
Typically, to be eligible for loan discharge due to school closure, a student must have been enrolled in an IHE when it closed or must have withdrawn from the IHE within 120 days prior to its closure.1930 In addition, the student must have been unable to complete his or her program of study at the closed school or in a similar20comparable31 program at another IHE, either through a teach-out agreement or by transferring any credits to another IHE.2132
If the closing school offers the option for students to complete their education through a teach-out agreement with another IHE, a student may refuse the option, and the borrower may still qualify for loan discharge. However, ifin general, a borrower may not qualify for a closed school discharge in the following scenario: a student refuses the teach-out, later enrolls at another IHE in a program similarcomparable to the one in which he or she had been enrolled, receives transfertransfer credit for work completed at the closed school, and completes the program at the new IHE, then the borrower may not qualify for closed school discharge.
Alternatively, if a student transferredtransfers credits to a new school but completedcompletes an entirely different program of study at the new school, then the borrower is eligible for loan discharge, as the program at the new school is entirely different than the one for which the loans were intended at the previous school, regardless of the fact that some credits from the closed IHE may have transferred to the new IHE.22regardless of the fact that some credits from the closed IHE may have transferred to the new IHE. This is because the program at the new school is entirely different than the one for which the loans were intended at the previous school.34
Finally, to obtain discharge a borrower must cooperate with ED in any judicial or administrative proceeding brought by ED to recover amounts discharged from the school.2335 If a borrower fails to cooperate with ED, the loan discharge may be revoked.2436
Closed School Loan Discharge Procedures
Borrowers seekingmay have their loans discharged in one of two ways: (1) by applying for a closed school loan discharge or (2) by having their loans automatically discharged by the Secretary of Education (the Secretary).
Borrowers applying for a closed school discharge must fill out the closed school loan discharge application and return it to their loan servicer.2537 Generally, while a borrower's loan discharge application is being considered, the borrower's loan is placed in forbearance until a discharge decision is made.2638 Under forbearance, a borrower is able to temporarily stop making payments or reduce theirthe monthly payments on theirhis or her federal student loans for up to 12 months. During this time, interest continues to accrue on both subsidized and unsubsidized loans. In addition, collections on an eligible defaulted loan cease, although a borrower may continue to make payments on the loan.
Borrowers may initiate the closed school loan discharge process on their own;39 however, the Secretary of Education (the Secretary), or the guaranty agency for purposes of FFEL program loans,40 is required to identify all borrowers who may be eligible for a closed school discharge upon a school's closure and mail to each borrower a discharge application and an explanation of qualifications and procedures for obtaining a discharge, if the borrower's address is known.2741 After the Secretary sends notice to a borrower, the Secretary ceases collections on any defaulted loans and places any other loans in forbearancesuspends any effort to collect a borrower's defaulted loans. The borrower then has 60 days in which to submit a closed school discharge application. If the borrower fails to submit such an application within the 60-day time frame, the Secretary continues collections on defaulted loans and any other loans are taken out of forbearanceresumes collections42 and again provides the borrower with another discharge application and an explanation of qualifications and procedures for obtaining a discharge. Should a borrower not submit a closed school discharge application within the 60-day time frame, he or she may still submit a closed school discharge application at any time for consideration.
The Secretary is also authorized to discharge a loan without an application from the borrower if the Secretary determines that, based on information in the Secretary's possession, the borrower qualifies for the discharge.28
Alternatively, a borrower's loans will be automatically discharged by the Secretary, if with respect to schools that closed on or after November 1, 2013, the Secretary determines that the borrower did not subsequently reenroll in any Title IV eligible institution within three years after the school closed. A borrower's loans also may be automatically discharged if the Secretary determines the borrower qualifies for the discharge based on information within ED's possession.44 Relief Provided If a borrower receives a closed school discharge, the full balance of the outstanding Title IV loan borrowed to attend the IHE is discharged and the borrower is qualified to be reimbursed for any amounts previously paid or collected on those loans. In addition, for loans that were considered in default, ED is to consider such loans not in default following discharge, and the borrower is to regain eligibility to receive additional Title IV assistance.45 Finally, ED is to update reports to consumer reporting agencies so that they may delete any adverse credit history associated with the loan.46Borrowers who attended a closed school but who are ineligible for a closed school loan discharge may, in certain circumstances, seek debt relief on their FFEL or DL program loans by asserting as a borrower defense to repayment (BDR), certain "acts or omissions of an institution of higher education."29 An IHE's acts or omissions must "give rise to a cause of action against the school under applicable State law," and the cause of action must directly relate43
Borrower Defense to Repayment
Even if borrowers who attended a closed school are ineligible for a closed school loan discharge, they may, in certain circumstances, seek debt relief on their Title IV student loans by asserting a borrower defense to repayment (BDR) certain acts or omissions of an IHE, if the cause of action directly relates to the loan or educational services for which the loan was provided. to the loan or educational services for which the loan was provided.30 There are no BDR provisions for Perkins Loans. The availability of a BDR claim may be closely related to a school's closure, as oftentimes, a BDR claim is predicated on misleading representations of an IHE relating to the educational services provided, and in recent years, allegations of misrepresentation have played a part in the ultimate closure of some IHEs.31
If a borrower's BDR is successful, ED will47 Whether a borrower may seek this type of relief depends on the type of Title IV loan borrowed. The standard under which a BDR may be reviewed also depends on the type of Title IV loan borrowed and when the loan was disbursed. Newly promulgated BDR procedures apply to many, but not all, BDR claims and vary depending on the type of Title IV loan.
If a borrower's BDR is successful, ED is to determine the amount of debt relief to which the borrower is entitled, which can include relief from repaying all or part of the outstanding loan balances and any balance and reimbursement for previous amounts paid toward or collected on the loan. Additionally, if an adverse credit history was associated with the loan (e.g., default), the loan discharge willis to be reported to credit bureaus so that itthey may delete the adverse credit history associated with the loan.32
Applicable Borrower Defense to Repayment Standards
The HEA specifies that Direct Loan borrowers may assert as a defense to repayment certain "acts or omissions of an institution of higher education."49 Although this statutory language is specific to Direct Loans, implementing regulations have expanded the instances in which a borrower of a non-Direct Loan may assert a BDR claim. Thus, loans that are potentially eligible for discharge under a BDR claim include Direct Loan program loans and Federal Family Education Loan program loans and Perkins Loans program loans, if they are first consolidated into a Direct Consolidation Loan.50
In addition, even if a FFEL program loan is not consolidated into a Direct Consolidation Loan, FFEL program regulations specify instances in which a FFEL program loan may not be legally enforceable, such that a borrower need not repay it. ED has stated that the claims a borrower could bring as a defense against repayment under the FFEL program are the same as the pre-July 1, 2017, standards (discussed later in this report) that could be brought under the DL program.51 Perkins Loan program loans that are not consolidated into Direct Consolidation Loans may not assert a BDR claim.
In general, two separate BDR standards may be applied to eligible student loans under the Direct Loan program regulations. For eligible loans made prior to July 1, 2017, a borrower may assert as a defense to repayment an IHE's acts or omissions that "wouldBDR Eligibility
For DL program loans, ED has determined in regulations that institutional acts and omissions for which a Direct Loan borrower may assert a BDR are those that would "give rise to a cause of action against the school under applicable State law."33 Additionally, a cause of action must directly relate to the loan or educational services for which the loan was provided; thus, availability of a BDR claim is dependent on the laws of the applicable state.34 For FFEL program loans, borrowers must satisfy the DL program BDR standards and must also prove additional components, such as showing that the FFEL lender offered payment or other benefits to the IHE for referring borrowers to the specific FFEL lender.35
Although FFEL program BDR standards differ from DL program BDR standards, and BDR is unavailable for Perkins Loans, ED has determined that for borrowers who have consolidated FFEL or Perkins Loans into a Direct Consolidation Loan, the underlying FFEL and Perkins Loans will be evaluated under the same BDR standards as a Direct Loan.36 In addition, ED has determined that borrowers may prospectively consolidate their outstanding FFELs and Perkins Loans into a Direct Consolidation Loan for purposes of pursuing potential BDR discharge of the Direct Consolidation Loan.
In addition to being eligible to have loans discharged after a successful BDR claim, a borrower may also be eligible to have all or part of amounts previously paid on his or her loan reimbursed by ED. Payments on Direct Loans generally may be reimbursable by ED; however, some payments on ED-held FFEL program loans37 may not be reimbursable. Specifically, payments previously made to a private holder of an FFEL program loan prior to being transferred to ED may not be reimbursed; rather, borrowers would need to pursue reimbursement directly from the previous private FFEL holder. The same holds true for FFEL program loans that were consolidated into a Direct Consolidation Loan. Any payments previously made on an FFEL program loan to a private holder cannot be reimbursed by ED, although a borrower could pursue reimbursement of those payments made from the previous private holder. Finally, no amounts of Perkins Loans paid prior to consolidation may be reimbursed, as Perkins Loans in and of themselves are ineligible for a BDR discharge.38
BDR Procedures
Current regulations are silent regarding the process a borrower must follow to assert a BDR claim; however, ED has developed procedures through which borrowers may seek relief. Processes, policies, and guidance related to BDR procedures are subject to change or adjustment; the descriptions herein are accurate as of the date of this report.
ED recently developed a universal BDR application for borrowers of DL program loans to pursue a BDR claim.39 As of February 1, 2017, the universal application is the only BDR application accepted by ED.40
Using the universal application, borrowers of DL program loans must submit a variety of information to ED, which include but are not limited to
Once ED receives the borrower's information and while the claim is evaluated, all ED-held federal student loans (i.e., Direct Loans and some Perkins Loans and FFEL program loans) are placed into forbearance41 and collections cease on eligible defaulted loans for up to 12 months, unless otherwise specified by the borrower. Borrowers are not required to provide additional documentation to have their loans placed in forbearance or to have collections cease. ED-contracted student loan servicers, which are responsible for many of the day-to-day administrative tasks associated with the federal student loan programs, will contact borrowers informing them that their loans have been placed in forbearance or that collections have stopped. The forbearance or stopped collections affects all of a borrower's ED-held student loans, including those loans ineligible for a BDR claim.42
While an individual's loan is in forbearance, ED reviews the BDR claim, makes a determination as to whether the borrower is eligible for discharge and reimbursement for amounts previously paid on the loan, and determines the precise amount of relief for which a borrower is eligible. Regulations are silent regarding how ED is to calculate appropriate amounts of relief for a borrower.43
Individuals who wish to consolidate their ED-held FFEL or Perkins Loan program loans into a DL Consolidation loan to pursue a BDR claim may also submit the universal application to ED. Once the application is received, the borrower's loans will be placed into forbearance and collections on eligible defaulted loans will cease, unless otherwise specified by the borrower. ED will then review the application to determine whether it would approve the borrower's BDR claim if the borrower consolidated his or her loans. Should ED pre-approve such an application, a borrower would then only need to consolidate her or her loans into a DL Consolidation loan to have the loans discharged.44
For those FFEL program loans not held by ED, BDR claims procedures may vary by lender. Borrowers of such loans must contact their lender for information on the BDR process. In general, private sector holders of FFEL program loans are not required to grant a forbearance or to cease collections they evaluate a BDR claim; however, loan holders are required to place a loan in forbearance or to cease collections if a borrower has submitted the universal application to ED to determine whether his or her loans would be eligible for discharge under a BDR claim if the loans were consolidated into a Direct Consolidation Loan.
BDR Negotiated Rulemaking
On November 1, 2016, ED promulgated new regulations intended to create a more robust set of standards and streamlined procedures for assessing BDR claims.45 These regulations were scheduled to become effective on July 1, 2017; however, prior to the effective date, ED announced it would delay the implementation of these regulations until July 1, 2019.46 ED is currently undertaking a new negotiated rulemaking process to revise the BDR standards.47 It is unclear how the BDR standards may be revised in the negotiated rulemaking process.
TEACH Grant recipients whose TEACH Grants have converted into a Direct Loan for failure to complete TEACH Grant service requirements may seek relief under either a closed school discharge or a successful BDR. Program regulations specify that for individuals who do not complete the program's teaching service requirements, the TEACH Grant converts into a DL and the individual "is eligible for all of the benefits of the Direct Loan Program."48 Thus, so long as an individual meets all applicable closed school discharge or BDR criteria, they may be provided relief from repaying a TEACH Grant that has converted into a DL.49
In some instances, students who attended a closed school may have borrowed private education loans to help finance their postsecondary education at the closed school. Private education loans are nonfederal loans made to a student to help finance the cost of their postsecondary education. Unlike federal student loans, which have statutorily prescribed terms and conditions that are typically uniform in nature, private education loan terms and conditions are primarily governed by market conditions that may vary greatly, depending on a variety of factors such as the lender, the borrower's creditworthiness, and the market.50 Thus, the extent to which a private education loan borrower may be provided relief from the requirement to repay their loans will largely depend on the individual private education loan's terms and conditions.51
Pell Grant recipients who attended an IHE that closed may have some portion of their Pell eligibility restored. All Pell Grant recipients are subject to a cumulative lifetime eligibility cap on Pell Grant aid equal to 12 full-time semesters (or the equivalent). The HEA exempts from a student's lifetime eligibility cap the period of attendance at an IHE at which a student was unable to complete a course of study because the IHE closed.53 ED uses its information technology systems to adjust Pell eligibility for those students who attended a closed school and were not reported as having "graduated" from that school.54 Following an adjustment, ED notifies students of the adjustment.
GI Bill entitlement may be restored following a school closure. However, a school closure may result in some GI Bill participants receiving an overpayment of benefits that they would become responsible for repaying.
Prior to 2015, GI Bill entitlement was not restored for benefits received at an educational institution that later closed.
By loan type and disbursement date BDR Standard Applied Loan Type & Disbursement Date Pre-July 1, 2017 Post-July 1, 2017 DL Program Subsidized and Unsubsidized Loans Disbursed pre-July 1, 2017 ✓ Disbursed on or post-July 1, 2017 ✓ ✓ DL Program Consolidation Loans Underlying DL Program Subsidized & Unsubsidized Loans Underlying loan disbursed pre-July 1, 2017 ✓ Underlying loan disbursed on or post-July 1, 2017 ✓ Direct Consolidation Loan disbursed pre-July 1, 2017 ✓ Direct Consolidation Loan disbursed on or post-July 1, 2017 ✓ Source: CRS analysis of Department of Education, "Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program," 81 Federal Register 75926, November 1, 2016, and 34 C.F.R. §682.209(g). BDR Procedures Regulations establish two separate processes through which a BDR claim may be asserted on a borrower's DL program loans: an individual claim process and a group claim process.57 This section of the report describes the 2016 regulations' BDR procedures for DL program loans (including Direct Consolidation Loans that repaid eligible non-DL program loans for which a borrower asserts a BDR claim) under which BDR claims may be more likely to be asserted, as DL program borrowers account for approximately 80% of all borrowers with outstanding Title IV loans.58 The procedures described herein would not apply to ED-owned FFEL program loans or to FFEL programs loans held by private and state-based entities that are not consolidated into Direct Consolidation Loans.59 For such ED-owned FFEL program loans, ED would review and adjudicate any BDR claims.60 For such FFEL program loans not owned by ED, BDR claims procedures may vary by loan holder.61 To assert a BDR claim as an individual,62 a borrower must submit a BDR application,63 which among other items requires the borrower to provide evidence that supports his or her BDR claim. Upon receipt of the application and while the BDR claim is evaluated, ED places any nondefaulted Direct Loans into forbearance64 and ceases collections on defaulted loans.65 If a borrower with a FFEL program loan files a BDR claim with ED, ED notifies the lender or loan holder, as appropriate.66 The lender places the loan in forbearance in yearly increments,67 and the loan holder ceases collection on any defaulted loans while a borrower's BDR claim is being evaluated.68 If ED determines that the borrower would be eligible for relief if he or she consolidated the FFEL program loan into a Direct Consolidation Loan, the borrower would then be able to consolidate the loan into a Direct Consolidation Loan69 and receive BDR relief.70 If ED determines that the borrower would not qualify for BDR, then the loan is removed from forbearance or collections resume, as appropriate.71 To determine whether an individual qualifies for BDR relief, the Secretary designates an ED official to review the borrower's application and resolves the claim through a fact-finding process. As part of that process, ED notifies the IHE against which the BDR claim is asserted and reviews any evidence submitted by the borrower and other relevant information, such as ED records and any submissions from the IHE. After the fact-finding process, the ED official issues a written decision on the claim. If the claim is approved in full or in part, ED notifies the borrower of the relief provided. If the claim is denied in full or in part, ED notifies the borrower of the reason for the denial, along with other relevant information.72 The decision made by the ED official is "final as to the merits of the claim and any relief that may be granted on the claim."73 However, if the borrower's claim is denied in full or in part, the borrower may request that ED reconsider his or her claim upon the identification of new evidence. In addition, ED may reopen a BDR application at any time to consider evidence that was not considered in the previous decision. Regulations also establish a group process for BDR claims.74 Under these procedures, upon consideration of factors such as a common set of facts and claims or fiscal impact, the Secretary may initiate a process to determine whether a group of borrowers has a BDR claim. ED may identify members for a group BDR claim by either consolidating applications filed by individuals in the above-described process that have common facts and claims or by determining that there are common facts and claims that apply to borrowers who have not filed individual applications. Loans of borrowers who have filed individual claims that are consolidated into a group BDR claim remain in forbearance or suspended collections as described above, and loans of identified group members who have not filed individual claims are placed in forbearance or suspended collections as described above. ED notifies identified group members of the group proceeding and informs them that they may opt out of the group proceeding.75 ED also notifies the school against which the group BDR claim is asserted. For the fact-finding portion of a group BDR claim, one set of procedures applies to a BDR claim relating to loans made to attend a school that has closed76 and from which there is no financial protection or other entity that ED may recover losses from associated with the BDR claims.77 Another set of fact-finding procedures applies to BDR claims relating to loans made to attend a school that has closed and for which there are financial protections or other entities from which ED may recover losses associated with BDR claims, or that is open. If the claim relates to loans made to attend a school that has closed and for which there is no financial protections or entities against ED may recover, a hearing official considers any evidence and arguments presented by ED on behalf of the group,78 along with any additional information such as ED records or responses from the school that the ED official considers necessary. After the fact-finding process, the ED official issues a written decision on the claim. As with the individual claims process, if the group claim is approved in full or in part, ED notifies the borrowers of the relief provided. If the claim is denied in full or in part, ED notifies the borrowers of the reason for the denial, along with other relevant information. The decision made by the ED official is "final as to the merits of the group borrower defense and any relief that may be granted on the group claim."79 However, if relief for the group has been denied in full or in part, an individual borrower may file a claim for individual relief as previously described. In addition, ED may reopen a BDR application at any time to consider evidence that was not considered in the previous decision.80 Group BDR procedures for a claim that relates to loans made to attend a closed school for which there are financial protections or entities from which ED may recover losses or to loans made to attend an open school are substantially similar to those procedures for group BDR claims for closed schools without financial protections described above.81 However, in addition to the above-described procedures, the IHE against which the claim is brought is given the opportunity to present evidence and arguments during the fact-finding process. In addition, the school or the ED official who presented the group's BDR claims may appeal the decision of the hearing official within 30 days after the decision is issued and received by the school and the ED official. Should an appeal be made, the hearing official's decision does not take effect pending the appeal. The Secretary issues a final decision on the appealed claim. If relief for the group has been denied in full or in part, and after a final decision has been made (either following an appeal by the school or the ED official or after 30 days from the hearing official's decision have passed), an individual borrower may file a claim for individual relief as previously described. Additionally, ED may reopen a BDR application at any time to consider evidence that was not considered in the previous decision. Finally, to obtain relief a borrower must cooperate with ED in the relevant individual or group BDR proceeding. If a borrower fails to cooperate with ED, the relief may be revoked.82 Relief Provided Regulations specify the relief that may be afforded to a borrower who, as an individual or as part of a group, successfully asserts a BDR.83 This section of the report focuses on BDR relief available to borrowers with DL program loans, including Direct Consolidation Loans that repaid eligible non-DL program loans. However, it should be noted that borrowers of FFEL program loans that have not been consolidated into Direct Consolidation Loans are eligible to have all or part of their loan discharged, and may be eligible to be reimbursed for payments previously paid toward or collected on the loans if certain conditions are met.84 Borrowers of Perkins Loans are ineligible for BDR relief unless they first consolidate their loans into a Direct Consolidation Loan. For Direct Loans, if a borrower defense is approved, ED (either the ED official in an individual BDR claim or the hearing official in the group BDR claim) determines the appropriate amount of relief to award the borrower. Relief provided can include a discharge of all or part of the loan amounts owed to ED on the loan at issue. A borrower may also be eligible to have all or part of amounts previously paid toward or collected on his or her loan reimbursed by ED. Payments made or collections on Direct Loans, including Direct Consolidation Loans that repaid eligible non-DL program loans, are reimbursable by ED if the borrower asserted the BDR claim within the applicable statute of limitations85 and the payments were made directly to ED.86 Reimbursements are to equal the amount by which the payments or collections on the loans (or portion of the loan in the case of Direct Consolidation Loans to which a BDR claim applied to some, but not all, of the underlying loans) exceed the amount of the loan that was not discharged.87 To calculate the amount of relief to be provided, ED takes into account a variety of factors, depending on the basis on which the BDR claim was brought. In addition to monetary relief, other relief, as appropriate, may be provided to a borrower. Such relief may include, but is not limited to, determining that the borrower is not in default on his or her loan and is eligible to receive additional Title IV assistance and updating reports to consumer reporting agencies so that they may delete any adverse credit history associated with the loan.91 TEACH Grant recipients whose TEACH Grants have converted into a Direct Loan for failure to complete TEACH Grant service requirements may seek relief under either a closed school discharge or a successful BDR. Program regulations specify that for individuals who do not complete the program's teaching service requirements, the TEACH Grant converts into a DL and the individual "is eligible for all of the benefits of the Direct Loan Program."92 Thus, so long as an individual meets all applicable closed school discharge or BDR criteria, they may be provided relief from repaying a TEACH Grant that has converted into a DL.93 In some instances, students who attended a closed school may have borrowed private education loans to help finance their postsecondary education at the closed school. Private education loans are nonfederal loans made to a student to help finance the cost of their postsecondary education. Unlike federal student loans, which have statutorily prescribed terms and conditions that are typically uniform in nature, private education loan terms and conditions are primarily governed by market conditions that may vary greatly, depending on a variety of factors such as the lender, the borrower's creditworthiness, and the market.94 Thus, the extent to which a private education loan borrower may be provided relief from the requirement to repay their loans may largely depend on the individual private education loan's terms and conditions.95 Pell Grant recipients who attended an IHE that closed may have some portion of their Pell eligibility restored. All Pell Grant recipients are subject to a cumulative lifetime eligibility cap on Pell Grant aid equal to 12 full-time semesters (or the equivalent). The HEA exempts from a student's lifetime eligibility cap the period of attendance at an IHE at which a student was unable to complete a course of study because the IHE closed.97 ED uses its information technology systems to adjust Pell eligibility for those students who attended a closed school and were not reported as having "graduated" from that school.98 Following an adjustment, ED notifies students of the adjustment. GI Bill entitlement may be restored following a school closure. However, a school closure may result in some GI Bill participants receiving an overpayment of benefits that they would become responsible for repaying. Prior to 2015, GI Bill entitlement was not restored for benefits received at an educational institution that later closed.The Harry W. Colmery Veterans Educational Assistance Act of 2017 (P.L. 115-48) restoresgive rise to a cause of action against the school under applicable State law," and the IHE's acts or omissions must relate to the making of the loan for enrollment at the IHE or the provision of educational services for which the loan was provided52 (hereinafter, "pre-July 1, 2017, standard"). For eligible loans made on or after July 1, 2017, a borrower may assert as a defense to repayment one of the following, as it relates to the making of a borrower's loan for enrollment at the IHE or the provision of the educational services for which the loan was made (hereinafter, "post-July 1, 2017, standard"):53
As indicated above, the BDR standard applied in a borrower's case may depend to a large extent on the date on which a borrower's loans were disbursed. However, other considerations that relate to the type of federal student loan made also play a role in determining which BDR standard may apply in a borrower's case. In general, for DL program loans not paid off through a Direct Consolidation Loan, the BDR standard used would depend on the date on which a borrower's loans were disbursed. For FFEL program loans not paid off through a Direct Consolidation Loan, the pre-July 1, 2017, standard would apply. For DL program loans paid off through a Direct Consolidation Loan, the BDR standard used would depend on the date on which the underlying Direct Loan was disbursed. For eligible non-DL program loans paid off through a Direct Consolidation Loan, the BDR standard used would depend on the date on which the Direct Consolidation Loan was made.56 Direct Consolidation Loans comprising underlying loans disbursed both before and after July 1, 2017, would necessarily have been disbursed after July 1, 2017. Thus, in this scenario, the post-July 1, 2017, standard would apply to any eligible non-DL program loans paid off through the Direct Consolidation Loan and either the pre- or post-July 1, 2017, standard would apply to any Direct Loans paid off through the Direct Consolidation Loan, depending on the date the underlying Direct Loan was disbursed. Table 1 depicts the BDR standard that would be applied in a BDR proceeding based on type of federal student loan at issue and the date on which the loan was disbursed.
Table 1. Borrower Defense to Repayment Standard Used in a BDR Proceeding
FFEL Program Subsidized, Unsubsidized, and Consolidation Loansa
Disbursement date inapplicableb
Underlying Eligible Non-DL Program Loansc
Teacher Education Assistance for College and Higher Education Grants (TEACH Grants)
,56 and the restoration of entitlement goes into effect November 14, 2017..100
In addition to restoring such entitlement, P.L. 115-48 permits the VA to continue paying a Post-9/11 GI Bill housing allowance through the end of the academic term following such closure but no longer than 120 days. Entitlement is not charged for the interim housing allowance. The extension of benefits following such closure is only applicable to the Post-9/11 GI Bill. Eligibility for interim housing allowance payments begins August 16, 2017, and they are payable effective August 1, 2018.57
Finally, P.L. 115-48 requires that the Department of Veterans Affairs (VA) notify affected individuals of imminent and actual school closures and notify them how such closure will affect their GI Bill entitlement.
GI Bill participants must apply for benefit restoration and the housing allowance extension.Under general GI Bill regulations, if there are mitigating circumstances, a GI Bill participant who withdraws from all courses may remain eligible for benefits for the portion of the course completed. However, if there are no mitigating circumstances, the individual may be required to repay all benefits received for pursuit of the course. Mitigating circumstances are circumstances beyond the individual's control that prevent the individual from continuously pursuing a program of education. A school closing is considered to be a mitigating circumstance.58
Some GI Bill benefits, such as advance payments and the Post-9/11 GI Bill tuition and fees payment, Yellow Ribbon payment, and books and supplies stipend, may be paid as a lump sum before or at the beginning of an academic term. An overpayment may occur for a prorated portion of those upfront payments if an individual is unable to complete the academic term without mitigating circumstances.59
Under Post-9/11 GI Bill regulations, the VA may determine the ending date of educational assistance based on the facts found if an eligible individual's educational assistance must be discontinued for any reason not described in regulations.60104 A school that permanently closes may qualify as a reason not described in regulations.61
For students who wish to continue their education at another IHE, another financial consideration related to an IHE's closure is the extent to which the students' eligibility for various financial aid sources may be affected by their previous use of those benefits at the closed institution. In addition to the duration of eligibility limits generally placed on Pell Grants and GI educational benefits discussed in the previous section, other federal student aid eligibility criteria that could affect future receipt of additional Title IV student loans include borrowing limits and eligibility limitations for receipt of Direct Subsidized Loans.
Generally, annual and aggregate borrowing limits apply to Title IV student loans. Annual loan limits prescribe the maximum principal amount that may be borrowed in an academic year, and aggregate limits apply to the total amount of outstanding Title IV loans that borrowers may accrue.62106 Borrowing limits for DL and Perkins Loan program loans63107 vary by borrower academic standing (e.g., grade or credential level), and in the case of DL program loans, by loan type (e.g., Subsidized or Unsubsidized Direct Loan), and dependency status.64108 For borrowers who receive a closed school discharge or whose loans have been discharged under a successful BDR claim, any discharged loans do not count against their annual and aggregate loan limits.65109
In general, for borrowers of Direct Subsidized Loans, the federal government pays the interest that accrues on the loan while the borrower is enrolled in school on at least a half-time basis, during a six-month grace period thereafter, and during periods of authorized deferment. Individuals who are new borrowers on or after July 1, 2013, may only receive Direct Subsidized Loans for a period of time equal to 150% of the published length of the borrower's academic program (e.g., a borrower enrolled in a four-year degree program may receive six years' worth of Direct Subsidized Loans).66110 However, for borrowers who receive a closed school loan discharge or who successfully assert a BDR claim, the discharged loan will not count against the borrower's Subsidized Loan usage period.67
In addition to available debt relief, some states operate state tuition recovery funds (STRFs), which may reimburse students for charges paid to closed IHEs that are not covered by other sources. For example, a student may have his or her Direct Loan discharged due to school closure, and an STRF may provide relief to cover expenses such as cash payments made directly to a closed IHE for tuition payments or to provide relief on private student loans borrowed to attend an IHE. The availability of and eligibility for such funds vary by state; not all states operate STRFs.68
Borrowers whose student loans are discharged due to school closure will be subject to federal and state income taxes on the discharged loans unless they qualify for an exception. Students who received funds from an STRF might similarly be subject to tax on any funds received, although the tax treatment of such funds is unclear. Additionally, there could be tax consequences for individuals who had previously claimed certain federal education tax benefits. This section examines the potential federal and state tax consequences that may arise for these borrowers and students.
Under the Internal Revenue Code (IRC), borrowers whose debt is forgiven must generally include the amount of the canceled debt in income when determining their federal income tax liability.70114 In other words, they are subject to tax on the amount of the discharged loan. There are, however, various exceptions to this rule under which a borrower may exclude from income all or part of the forgiven debt.71
The HEA contains several exceptions providing for certain student loan discharges. These exceptions apply to borrowers of FFELs, Direct Loans, and Perkins Loans who borrowed such loans to attend any IHE and whose loans are discharged due to school closure.72116 Under the HEA exceptions, these borrowers will not be subject to federal income taxes on the discharged amounts so long as the student borrowers (or students on whose behalf a parent borrowed) meet the general criteria regarding the discharge of debt tied to closed schools described earlier in this report.73
The HEA does not address the tax treatment of (1) federal student loans discharged due to a successful borrower defense to repayment or (2) private education loans that are discharged under anymost circumstances.118 As such, in these cases, the borrowers will be taxed on the amount of the discharged loan unless they qualify for an exception found outside of the HEA. Federal tax law provides several exceptions that may be relevant to borrowers whose loans are discharged. For example, IRC Section 108 excludes forgiven debt if the taxpayer is insolvent.74119 Thus, borrowers whose liabilities exceed the fair market value of their assets immediately prior to discharge will not be taxed on the discharged student loan.75120 Another example of an exception that might be relevant is the disputed debt doctrine. Under this doctrine, a discharged loan is not considered income for federal tax purposes if the loan was based on fraud or misrepresentation by the lender.76121 Guidance issued by the Internal Revenue Service (IRS) in 2015 and 2017 illustrates how the doctrine might be applied in the student loan context. The 2015 guidance provides that former students of Corinthian Colleges, Inc. (CCI) whose federal student loans are discharged under a defense against repayment claim will not be taxed on the discharged amounts because many would likely qualify under the disputed debt doctrine due to the school's fraudulent behavior.77
In order to exclude a discharged loan from income, borrowers must determine that they qualify for an exception based on their individual circumstances and be able to show that the determination is correct if the IRS contests it. If the IRS disagrees and assesses tax based on the amount of the discharged loan, the taxpayer may challenge the assessment in federal court.78
Students who receive funds from STRFs might also face federal tax consequences, although the tax treatment is less clear. As a general rule, any amount received by a taxpayer is includible in gross income, and potentially subject to taxation, unless specifically excluded by law.79126 It is not clear how this principle applies in the context of STRF payments, as there do not appear to be court decisions or IRS guidance addressing the issue. There are several theories under which students could arguably exclude the payments from income, depending on their circumstances and the specifics of the state's plan. For example, the payment might be treated as a nontaxable reimbursement of tuition, scholarship, or state benefit.80127 If the payment is excluded from the student's income, the student may be required to account for previously claimed federal education tax benefits, as discussed below.
Along with the potential taxation of discharged student loans and amounts received from STRFs, a school's closure or the discharge of a borrower's student loan may have consequences related to higher education tax benefits. While there are a variety of federal tax benefits that help offset some of the costs of a higher education, four are relevant for purposes of this report for reasons discussed below.81128 These four benefits include the following:
134Tuition and fees paid with the proceeds of a loan can count toward claiming these tax benefits, but any aid that is tax-free, such as a Pell Grant, must generally reduce the amount of expenses against which the benefits may be claimed.88135 As a general rule, either the parent or the student who pays the qualifying education expenses will claim the tax benefit, depending on whether the student is the parent's dependent for tax purposes.89136 Taxpayers can generally only claim one tax benefit per student annually.90137
Students who continue to pursue higher education after a school closure are eligible for these education tax benefits, pursuant to the requirements applicable to all taxpayers. However, in some instances, a taxpayer who claims the AOTC may be ineligible for the credit in future years due to statutory restrictions on the period of education for which students may claim the credit. Specifically, the AOTC can only be claimed for expenses incurred during the first four years of a postsecondary education, irrespective of whether those first four years lead to a postsecondary credential.91138 Therefore, for example, it appears that if a student attended a school for three years and that school closed, the maximum remaining time the student could claim the AOTC is one additional year. There is seemingly no IRS guidance or case law addressing how this requirement is applied in the context of students whose schools have closed, including students who may have to pay back previously claimed credits (discussed below).
The other three benefits contain no limits on the period of education in which students may claim them.
Taxpayers may be required to account for previously claimed education tax benefits if they subsequently qualify to exclude discharged student loans or STRF payments. The borrowers who might be affected are those who
In order to prevent these borrowers from getting the double benefit of both (1) a credit or deduction and (2) the exclusion of the discharged loan or STRF payment, such borrowers may be required to pay back the value of the credit or deduction.93140 However, there may be circumstances in which the IRS will not require a taxpayer to account for previously claimed tax benefits. For example, in the 2015its 2015, 2017, and 2018 guidance addressing former students of Corinthian Colleges, Inc.CCI and ACI, the IRS announced that it willwould not require these borrowers to account for previously claimed education tax benefits.94141 The IRS did not explain its reasoning in reaching this determination,95142 and it is not clear the extent to which the agency may provide similar benefits to other borrowers.
A school closure or the discharge of a student loan may also result in state income tax consequences. Most states use the IRC's definition of income as the starting point for computing state income tax liability.96143 As such, to the extent that the borrower must pay federal income tax on the discharged debt or account for previously claimed federal education tax benefits, he or she may be taxed at the state level as well. Similarly, to the extent that the borrower qualifies to exclude the amounts from federal income taxation, such treatment may also apply at the state level. However, while most state tax codes follow the IRC, states are not required to adopt the federal definition of income and, thus, some states may provide for different tax treatment. Furthermore, states with their own education tax benefits or tuition recovery funds may have laws or policies specifically addressing the state tax treatment of the benefits and funds.
The following are abbreviations used throughout this report.
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ACI |
American Career Institutes |
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AOTC |
American Opportunity Tax Credit |
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BDR |
Borrower defense to repayment |
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CCI |
Corinthian Colleges, Inc. |
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DL |
Direct Loan |
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ED |
U.S. Department of Education |
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FFEL |
Federal Family Education Loan |
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HEA |
Higher Education Act |
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IHE |
Institution of higher education |
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IRC |
Internal Revenue Code |
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IRS |
Internal Revenue Service |
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LLC |
Lifetime Learning Credit |
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SAP |
Satisfactory Academic Progress |
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STRF |
State Tuition Recovery Fund |
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TEACH Grant |
Teacher Education Assistance for College and Higher Education Grant |
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VA |
Department of Veterans Affairs |
Author Contact Information
Alexandra HegjiAuthor Contact Information
| 1. |
U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS). |
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20 U.S.C. 1001, et seq. 3.
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U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS). 4.
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For additional information on some of these closures, see CRS Report R44068, Effect of Corinthian Colleges' |
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34 C.F.R. §668.14(b)(31). In addition, IHEs are required to submit teach-out plans to their accreditors when ED initiates an emergency action against or limitation, suspension, or termination of an IHE's participation in an HEA Title IV program; when an IHE's accrediting agency acts to withdraw, terminate, or suspend an IHE's accreditation or preaccreditation; or when the IHE's legal authorization to operate within a state is revoked. |
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HEA §487(f)(2). |
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See, for example, Higher Learning Commission, "Teach-Out Requirements: Provisional Plan and Teach-Out Agreements," https://downloadna11.springcm.com/content/DownloadDocuments.ashx?Selection=Document%2C73d8aaaf-d1fb-df11-bf75-001cc448da6a%3B&aid=5968, accessed |
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9.
34 C.F.R. §602.3. |
34 C.F.R. §602.24(c). |
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See, for example, Higher Learning Commission, "Teach-Out |
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See, for example, Southern New Hampshire University, "Southern New Hampshire University to Lead 'Teach-Out' of all Daniel Webster College Programs," press release, September 13, 2016. |
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34 C.F.R. §602.24(d). |
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HEA §485(h). |
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| 11. |
For example, a student may participate in a teach-out of the closed institution for an academic year but may need to complete an additional academic year to complete his or her credential. The student may transfer credits earned prior to and during the teach-out to another IHE. |
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15.
In some cases, a teach-out agreement may specify that the credits a student earned at the closed institution will transfer to the new IHE. See, for example, Higher Learning Commission, "Teach-Out Requirements: Provisional Plan and Teach-Out Agreements," March 2017, https://downloadna11.springcm.com/content/DownloadDocuments.ashx?Selection=Document%2C73d8aaaf-d1fb-df11-bf75-001cc448da6a%3B&aid=5968, accessed February 5, 2019. |
For information on how often credits transfer, see Sean Anthony Simone, Transferability of Postsecondary Credit Following Student Transfer or Coenrollment: Statistical Analysis Report, National Center for Education Statistics, NCES 2014-163, August 2014. |
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HEA §484(c). |
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34 C.F.R. §668.34. A student's pace of completion is calculated by dividing the total number of credits a student has successfully completed by the number of credits the student has attempted. A student becomes ineligible for Title IV aid when it is mathematically impossible for him or her to complete their course of study within 150% of the length of the program (e.g., six years for a full-time, full-year four-year program) for undergraduate students and within the maximum time frame established by the IHE for graduate students. |
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U.S. Department of Education, |
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In general, it appears that a student's pace of completion is unlikely to be affected by a credit transfer, as typically, only successfully completed courses at the original IHEs may be transferred to an accepting institution. However, successful course completion is defined by individual IHEs. Thus, should an accepting IHE define successful completion as any grade higher than an F (or its equivalent), then a student might be able to transfer credits from a class in which he or she earned, for instance, a D. This D would be included in the accepting IHE's calculation of the student's grade point average for purposes of determining SAP. Such grades may have the effect of bringing the student's GPA below the federally required C minimum, such that he or she may become ineligible for Title IV student aid at the accepting institution. |
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For instance, in 2014 ED placed restrictions to Title IV aid on IHEs owned by Corinthian Colleges, Inc. (CCI) to address concerns relating to a variety of practices, including inconsistencies in job placement rates that had been presented to students. In response to its limited access to federal student aid funds, CCI closed and sold many of its IHEs. CRS Report R44068, Effect of Corinthian Colleges' Closure on Student Financial Aid: Frequently Asked Questions, archived, available to congressional clients upon request. 21.
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Department of Education, "Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program," 81 Federal Register 75926, November 1, 2016. 22.
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Department of Education, "Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program," 83 Federal Register 6458, February 14, 2018. 23.
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Bauer v. DeVos, 332 F. Supp. 3d 186 (D.C. Cir. 2018). See also, Cal. Ass'n of Private Postsecondary Schs. v. DeVos, 2018 U.S. Dist. LEXIS (D.C. Cir. 2018). 24.
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CRS email communication with U.S. Department of Education personnel on October 31, 2018. See also U.S. Department of Education, Electronic Announcement, "Closed School Discharge Changes," December 13, 2018. 25.
|
|
Department of Education, "Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program," 83 Federal Register 37242, July 31, 2018. 26.
|
|
Andrew Kreighbaum, "Missed Deadline Stalls DeVos Agenda," Inside Higher Ed, October 4, 2018. 27.
|
|
81 Federal Register 75926, November 1, 2016. |
HEA §437(c)(1); HEA §455(a)(1); HEA §464(g). In some instances, borrowers who are ineligible to have their federal student loans discharged due to school closure may be able to seek debt relief for their DL and FFEL program loans for a variety of other reasons. For additional information, see CRS Report R40122, Federal Student Loans Made Under the Federal Family Education Loan Program and the William D. Ford Federal Direct Loan Program: Terms and Conditions for Borrowers |
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34 C.F.R. §§674. |
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The Secretary may extend the 120-day period in exceptional circumstances. |
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There is no formal definition of |
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34 C.F.R. §§674. |
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34.
Ibid. |
U.S. Department of Education, Federal Student Aid, "Q&A on Closed School Discharge," https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/closed-school#q-and-a, accessed |
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For instance, the borrower may be required to provide testimony supporting a request for discharge. |
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|
34 C.F.R. §§674.33(g) |
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Ibid. See |
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| 28. |
34 C.F.R. §§674.32(g); 682.402(d); 685.214(c)(2). Final Regulations promulgated in 2016 would have expanded the Secretary's authority to discharge a borrower's loan without an application. The implementation of those regulations has been delayed until July 1, 2019, and ED is currently undergoing a negotiated rulemaking process that may address this issue. See Department of Education, "Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program," 83 Federal Register 6458, February 14, 2018. |
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| 29. |
HEA §455(h). |
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| 30. |
34 C.F.R. §685.206(c). Regulations for the FFEL program provide instances in which an FFEL program loan may be legally unenforceable, such that a borrower need not repay it. While the language of the FFEL program regulations does not specifically identify acts or omissions by an institution as a defense against repayment, ED has stated that the claims a borrower could bring as a defense against repayment under the FFEL program are the same as those that could be brought under the DL program. See U.S. Department of Education, "Notice of Interpretation," 60 Federal Register 37768-37770, July 21, 1995. There are no similar provisions related to borrower defenses for Perkins Loans. |
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| 40.
|
|
This paragraph generally describes the procedures associated with closed school loan discharges as specified in regulations. The descriptions herein are drawn from the regulations specific to the Direct Loan program (34 C.F.R. §685.214), but are generally applicable to the Perkins Loan and FFEL programs as well. However, because parties other than ED may be responsible for administrative functions associated with closed school discharges in the Perkins Loan and FFEL programs, the tasks described in this report may vary somewhat from what Perkins Loan and FFEL program loan holders other than ED may be required to undertake. Closed school discharge procedures specific to the Perkins Loan program and the FFEL program can be found at 34 C.F.R. §674.33 and 34 C.F.R. §682.402, respectively. 41.
|
|
If the borrower's address is unknown, ED attempts to locate the borrower by consulting with a variety of parties, including the closed school, the school's accrediting agency, and the school's licensing agency. 34 C.F.R. §685.214(f)(3). 42.
|
|
Upon resuming collection on a borrower's loans, ED grants forbearance of principal and interest for the period during which the collection activity was suspended and may capitalize any interest accrued but not paid during that time. 34 C.F.R. §685.214(f)(4). 43.
|
|
34 C.F.R. §685.214(f). 44.
|
|
In the instance of a FFEL program loan, ED may automatically discharge a borrower's FFEL program loan if he or she qualified for and received a closed school discharge of his or her Direct Loan program or Perkins Loan program loans. Similarly, ED may automatically discharge a borrower's Perkins Loan program loan if he or she qualified for and received a closed school loan discharge of his or her Direct Loan program or FFEL program loan and "was unable to receive a discharge on his or her … Perkins Loan because the Secretary of Education lacked statutory authority to discharge the loan." See 34 C.F.R. §§682.402(d)(8), 674.33(g)(3). The Perkins Loan provisions appear to apply largely Perkins Loan program loans made prior to 1998, when ED did not have legal authority to discharge such loans due to a school's closure. The rationale behind the FFEL program loan provisions is not explicitly identified in materials located and reviewed for this report. See 64 Federal Register 41236, July 29, 1999. 45.
|
|
Individuals become ineligible for additional Title IV student aid if they default on a Title IV loan. HEA §484(a)(3). 46.
|
|
34 C.F.R. §§674.33(g)(2), 682.402(d)(2), 685.214(b). |
For instance, in 2014, ED placed restrictions to Title IV aid on IHEs owned by Corinthian Colleges, Inc. (CCI) to address concerns relating to a variety of practices, including inconsistencies in job placement rates that had been presented to students. In response to its limited access to federal student aid funds, CCI closed and sold many of its IHEs. CRS Report R44068, Effect of Corinthian Colleges' Closure on Student Financial Aid: Frequently Asked Questions, |
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|
34 C.F.R. §685. |
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| 33. |
Ibid. Regulations presume that a borrower BDR claim is raised only in response to "any proceeding to collect on a Direct Loan" (e.g., tax refund offset, wage garnishment proceedings). U.S. Department of Education, "Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program; Proposed Rule," 81 Federal Register, 39387, June 16, 2016. |
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| 34. | HEA §455(h). Other non-DL program loans that are potentially eligible for discharge under a BDR claim if they are first consolidated into a Direct Consolidation Loan include Health Professions Student Loans, Loans for Disadvantaged students made under Title VII-A-II of the Public Health Service Act, Health Education Assistance Loans, and Nursing Loans made under part E of the Public Health Service Act. 34 C.F.R. §685.212(k)(2). To assert a successful BDR claim, FFEL borrowers must satisfy the general pre-July 1, 2017, BDR standards and must also prove additional components, such as showing that the FFEL lender offered payment or other benefits to the IHE for referring borrowers to the specific FFEL lender. These standards apply to FFEL program loans held by private sector and state-based entities and those owned by ED. 34 C.F.R. §682.209(g) and U.S. Department of Education, "Notice of Interpretation," 60 Federal Register 37768-37770, July 21, 1995. 34 C.F.R. §685.206(c). 34 C.F.R. §685.222(b)-(d). A substantial misrepresentation is "[a]ny false, erroneous, or misleading statement an [IHE] or one of its representatives…makes directly or indirectly to a student, prospective student or any member of the public, or to an accrediting agency, to a State agency, or to the Secretary" on which "the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person's detriment." An IHE is deemed to have made a substantial misrepresentation when it (or its representatives) makes a "substantial misrepresentation about the nature of its educational programs, its financial charges, or the employability of its graduates." 34 C.F.R. §668.71(b) and (c). |
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|
34 C.F.R. § | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 36. |
Joseph Smith, Fourth Report of the Special Master for Borrower Defense to the Under Secretary, U.S. Department of Education, June 29, 2016, p. 4. |
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| 57.
|
|
Prior to the current regulations going into effect on October 16, 2018, regulations did not specify formal BDR procedures. Therefore, ED had established informal procedures through which borrowers were able to seek BDR relief. Because the current regulations' implementation date was delayed from July 1, 2017, to October 16, 2018, ED has not yet fully implemented the procedures specified in the 2016 regulations. 58.
|
|
Office of Federal Student Aid, Data Center, "Federal Student Aid Portfolio Summary," FY2018 Q4. |
Under the FFEL program, loans were originated and serviced by private sector and state-based lenders and were funded with nonfederal capital. ED guaranteed lenders against loss (e.g., through borrower default or discharge due to death or permanent disability). Although FFEL program loans were last disbursed in 2010, many remain outstanding. In some instances, private or state-based lenders continue to service FFEL program loans. In other instances, ED has purchased FFEL program loans from the lenders and is now the owner of the loans. In these cases, the loans are serviced by ED-contracted student loan servicers. |
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 39. |
|
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| 40. |
Prior to February 1, 2017, ED accepted other forms of applications. For instance, ED had previously established informal procedures for DL and ED-held FFEL programs loans under which borrowers would submit information similar to that in the universal form. |
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|
|
34 C.F.R. §685.222(e). In January 2017, ED promulgated regulations that updated its general hearing procedures for actions to establish liability against an IHE and establishing procedural rules governing recovery proceedings under the 2016 BDR regulations. These procedural requirements are beyond the scope of this report. See Department of Education, "Student Assistance General Provisions," 82 Federal Register 6253, January 19, 2017. 63.
|
|
See U.S. Department of Education, "Application for Borrower Defense to Loan Repayment," OMB No. 1845-0146, Exp. December 31, 2019. This form was approved prior to implementation of the current regulations. |
During forbearance, interest continues to accrue on both subsidized and unsubsidized loans. | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 42. |
U.S. Department of Education, Office of Federal Student Aid, "Forbearance/Stopped Collections Status," https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/borrower-defense#forbearance-stopped-collections-status, accessed February 1, 2018. |
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| 43. |
Prior to December 20, 2017, ED had typically forgiven the entire balance of an individual's eligible loans associated with a BDR claim. On December 20, 2017, ED announced that, going forward, BDR claims of former CCI students, loans would be discharged under a tiered approach. This process will provide "tiers of relief to compensate former Corinthian students based on damages incurred." ED compares eligible BDR applicants' earnings against the earnings of their peers from "passing" gainful employment (GE) programs. Students whose current earnings are less than 50% of their peers from passing GE programs receive full debt relief. Students whose earnings are 50% or greater of their peers from passing GE programs receive proportionally tiered relief to compensate for the difference. For instance, if a student's current earnings are 70% of their peers' from passing GE programs, he or she has 30% of the debt discharged. For additional information, see U.S. Department of Education, "Improved Borrower Defense Discharge Process Will Aid Defrauded Borrowers, Protect Taxpayers," press release, December 20, 2017, https://www.ed.gov/news/press-releases/improved-borrower-defense-discharge-process-will-aid-defrauded-borrowers-protect-taxpayers. |
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| 44. |
81 Federal Register 75961, November 1, 2016. |
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| 45. |
Ibid. at p. 75926. |
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| 46. |
Department of Education, "Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program," 82 Federal Register 49155, October 24, 2017. |
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| 47. |
For additional information, see Department of Education, "Borrower Defense and Financial Responsibility," https://www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefense.html. |
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| 48. |
34 C.F.R. §686.43(b)(2). |
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| 65.
|
|
A borrower may continue making payments under a rehabilitation agreement or other repayment agreement on the defaulted loan. 66.
|
|
The regulations are silent regarding whether lenders of Perkins Loans are required to place Perkins Loans into forbearance or to cease collections on Perkins Loans should a Perkins Loan borrower file a BDR claim with ED. ED has indicated it is not its current practice to request or require Perkins Loan holders or servicers to place borrowers into forbearance or to cease collections on a Perkins Loan for purposes of BDR. CRS email communication with U.S. Department of Education personnel on November 6, 2018. 67.
|
|
A borrower may opt out of forbearance and continue making payments on his or her loan. 34 C.F.R. §682.211(i)(7). 68.
|
|
Regulations specify that upon receipt of a BDR application, ED will notify the borrower of the option to continue making payments under a rehabilitation agreement or other repayment agreement on a defaulted loan. It appears this might apply in the instance in which a borrower of a FFEL program loan first submits a BDR application to ED, prior to loan consolidation. 34 C.F.R. §685.222(e)(2)(ii)(C). 69.
|
|
If borrowers choose to not consolidate their FFEL program loans into a Direct Consolidation Loan, they may still pursue a BDR claim under the FFEL program BDR standards and procedures. 70.
|
|
The loan would remain in forbearance until the loan is consolidated. 34 C.F.R. §682.211(i)(7). 71.
|
|
34 C.F.R. §§682.211(i)(7), 682.410(b)(6)(iii). 72.
|
|
34 C.F.R. §685.222(e). 73.
|
|
34 C.F.R. §685.222(e)(5). 74.
|
|
34 C.F.R. §685.222(f). 75.
|
|
It is unclear how a borrower who has successfully asserted an individual BDR claim may be affected by any subsequent group proceeding. 76.
|
|
This standard would apply regardless of whether the borrower(s) were enrolled at the IHE at the time it closed. 77.
|
|
Financial protections from which ED may recover losses associated with BDR claims include, for example, letters of credit. Other entities from which ED may recover such losses include, for examples, affiliates of a closed IHE. 78.
|
|
The ED official may also present evidence and arguments, as necessary, on behalf of individual group members. 34 C.F.R. §685.222(g)(1). 79.
|
|
34 C.F.R. §685.222(g)(2). 80.
|
|
34 C.F.R. §685.222(g)(4). 81.
|
|
34 C.F.R. §685.222(f). 82.
|
|
34 C.F.R. §685.222(j). 83.
|
|
34 C.F.R. §685.222(i). 84.
|
|
In general, FFEL program loans (both those owned and not owned by ED) may be discharged if a borrower satisfies the general pre-July 1, 2017, BDR standards and proves additional components, such as showing that the FFEL lender offered payment or other benefits to the IHE for referring borrowers to the specific FFEL lender. 34 C.F.R. §682.209(g). Payments made on FFEL program loans may also be reimbursable. To assert a BDR claim, a FFEL program loan borrower who decided not to consolidate his or her loan into a Direct Consolidation Loan can assert a BDR claim against any lender holding the loan, including ED in the instance of ED-owned loans, and may directly pursue reimbursement from the holder. 34 CFR §382.209(g). 85.
|
|
There is no statute of limitation under which a borrower must assert a BDR claim for purposes of having the outstanding balance of his or her loan discharged. However, in certain circumstances, a borrower must assert a BDR claim within specified statutes of limitation for purposes of receiving reimbursement for previous payments made or collected on a loan. The applicable statute of limitation that applies for reimbursement purposes depends on the particular defense (i.e., substantial misrepresentation, breach of contract, or court judgment against an IHE) the borrower asserts. 34 C.F.R. §§685.212(k)(1)(ii), 685.212(k)(2)(iii). 86.
|
|
Thus, payments made on non-DL program loans prior to consolidation are not reimbursable by ED. 87.
|
|
34 C.F.R. §§685.212(k)(1)(ii),685.212(k)(2)(iii). 88.
|
|
34 C.F.R. §685.222(i)(2)(ii). 89.
|
|
34 C.F.R. §685.222(i)(2)(iii). 90.
|
|
ED may consider information derived from a sample of borrowers when determining relief for a group of borrowers. For all borrowers asserting a BDR claim, ED may also rely on conceptual examples of relief provided in the regulations. 34 C.F.R. §685.222(i)(4). See 34 C.F.R. Part 685, Subpart B, Appendix A. 91.
|
|
34 C.F.R. §685.222(i)(7). 92.
|
|
34 C.F.R. §686.43(b)(2). |
TEACH Grant regulations do not provide for a discharge of an individual's duty to meet TEACH Grant service requirements due to a school closure or BDR. However, an individual may request that his or her TEACH Grant be converted into a DL because he or she has decided not to fulfill the service requirements or "for any other reason." 34 C.F.R. §686.43(a). Thus, it appears an individual could request his or her TEACH Grant be converted into a DL and then seek relief from DL repayment under a closed school discharge or a BDR, while also not being required to meet TEACH Grant service requirements. |
|
For additional information on private education loans, see |
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|
In some instances, a private education loan lender or a third-party may agree to provide some debt relief to private education loan borrowers. For instance, a third-party agreed to provide approximately $480 million in debt relief to former Corinthian Colleges students who borrowed private education loans to attend Corinthian Colleges. Consumer Financial Protection Bureau, "Special Bulletin for Current and Former Students Enrolled at Corinthian-Owned Schools," February 3, 2015, http://files.consumerfinance.gov/f/201502_cfpb_bulletin_current-and-former-students-enrolled-at-corinthian-owned-schools.pdf. |
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|
This section of the report was authored by |
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|
HEA §437(c)(3). |
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|
ED began restoring Pell Grant lifetime eligibility in March 2017. Previously, ED had determined it did not have the statutory authority to restore Pell Grant lifetime eligibility limits in the event of a school closure; however, on October 28, 2016, ED determined it does, in fact, have the authority to do so. Department of Education, "U.S. Department of Education Announces Final Regulations to Protect Students and Taxpayers from Predatory Institutions," press release, October 28, 2016, http://www.ed.gov/news/press-releases/us-department-education-announces-final-regulations-protect-students-and-taxpayers-predatory-institutions?utm_name=. |
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|
This section of the report was authored by |
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|
The amount of entitlement restored for closures occurring from January 1, 2015, through August 16, 2017, is based on the entire period of the individual's enrollment in the closed school. The restoration of entitlement went into effect November 14, 2017. |
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|
Eligibility for interim housing allowance payments began August 16, 2017. The interim housing allowance payments were payable effective August 1, 2018. The later effective date gave |
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|
The Department of Veterans Affairs (VA) automatically grants mitigating circumstances for up to six credits the first time a student reduces or terminates and mitigating circumstances must be considered. This automatic grant is called the 6-Credit Hour Exclusion. |
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|
The VA has indicated that students may be subject to debt for the closure of ITT Tech if the students received benefits (books and supplies) for a term they are unable to complete. U.S. Department of Veterans Affairs, "More Information Concerning ITT Tech's Closure," September 13, 2016, available at http://www.benefits.va.gov/gibill/, as of October 14, 2016. |
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|
38 C.F.R. §21.9635(bb). |
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|
The VA has indicated that "no debts will be created against students because of the [Corinthian College] closure" unless the student dropped classes prior to the closure. U.S. Department of Veterans Affairs, "Corinthian College Students—What You Should Know," April 30, 2015, available at http://www.benefits.va.gov/gibill/ as of December 14, 2015. |
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No aggregate limits are placed on PLUS Loans. |
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|
Borrowing limits also applied to FFEL and Perkins Loans; however, the authority to |
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|
For additional information on loan limits, see CRS Report R40122, Federal Student Loans Made Under the Federal Family Education Loan Program and the William D. Ford Federal Direct Loan Program: Terms and Conditions for Borrowers |
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|
HEA §§425(a)(2), 437(c)(3), |
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|
HEA §455(q). |
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|
HEA §437(c)(3) |
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|
For additional information, see National Consumer Law Center, Student Loan Borrower Assistance Project, "State Programs," http://www.studentloanborrowerassistance.org/loan-cancellation/state-programs/, accessed |
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|
This section was written by Margot Crandall-Hollick,
|
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|
26 U.S.C. §61(a)(12); Treas. Reg. §1.61-12. See also United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931) (treating discharged indebtedness as income at a time when the IRC did not yet address its tax treatment). |
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|
See, for example, 26 U.S.C. §108 (allowing taxpayers to exclude canceled debt under certain conditions). |
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|
HEA §§437(c)(4), 464(g)(4), and 455(a)(1). |
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|
HEA §§437(c)(4), 464(g)(4), and 455(a)(1). See also Rev. Proc. 2015-57, 2015-51 I.R.B. 863 (providing that former students of Corinthian Colleges, Inc. |
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|
119.
Private education loans discharged after December 31, 2017, and before January 1, 2026, due to the death or total and permanent disability of the student may be excluded from gross income for purposes of federal income taxation. See 26 U.S.C. §108(f)(5). |
26 U.S.C. §108(a)(1)(B). |
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|
Ibid. §108(a)(3). |
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|
See, for example, Preslar v. Comm'r, 167 F.3d 1323, 1329 (10th Cir. 1999); Zarin v. Comm'r, 916 F.2d 110, 115 (3rd Cir. 1990). |
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|
Rev. Proc. 2015-57, 2015-51 I.R.B. 863. |
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|
|
Rev. Proc. 2017-24, 2017-07 I.R.B. 916. 124.
|
|
Rev. Proc. 2018-39, 2018-34 I.R.B. 319. |
The borrower may file suit in the U.S. Tax Court prior to paying the disputed amount |
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|
Ibid. §61(a). |
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|
See, for example, Comm'r v. Glenshaw Glass Co. 348 U.S. 426, 431 (1955) (interpreting "gross income" to mean "accessions to wealth, clearly realized, and over which the taxpayers have complete dominion") (emphasis added); 26 U.S.C. §117 (excluding qualifying scholarships from income); Rev. Rul. 2003-12, 2003-1 C.B. 283 (discussing the general welfare exclusion, which has been developed by the IRS through a series of administrative rulings and excludes qualifying governmental benefits from income). |
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For a summary of all higher education tax benefits that a student may be eligible for, including benefits for student debt and for saving for higher education, see CRS Report R41967, Higher Education Tax Benefits: Brief Overview and Budgetary Effects |
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26 U.S.C. §221. |
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Ibid §222. The ultimate tax savings from the tuition and fees deduction depends on the taxpayer's marginal tax rate. For example, if the taxpayer's top tax rate is 10%, deducting $4,000 will reduce tax liability by $400; however, if the taxpayer's top tax rate is 25%, the same deduction will reduce tax liability by $1,000. |
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Ibid §25A(c). |
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Ibid. §25A(i). For a detailed overview of the AOTC, see CRS Report R42561, The American Opportunity Tax Credit: Overview, Analysis, and Policy Options |
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26 U.S.C. §25A(i)(3). |
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Ibid. §25A(i)(5). |
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Ibid. §§25A(g)(2), 221(d)(2), 222(c)(2)(B). |
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Ibid. §§25A(g)(3) & (5), 221(c), 222(c)(3); Treas. Reg. §1.25A-5(a). See also Treas. Reg. §1.25A-5(b) (treating expenses paid by a third party, such as grandparents or noncustodial parents, as paid by the student under certain circumstances). |
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See, for example, 26 U.S.C. §§25A(c), 221(e)(1), 222(c)(1) & (2). |
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Ibid. §25A(b)(2)(A) & (C), (i)(2). |
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Note that these tax consequences might also apply to any taxpayers who claimed the Hope Scholarship Credit, which was replaced by the AOTC beginning in 2009. See American Recovery and Reinvestment Act of 2009, P.L. 111-5, §1004, 123 Stat. 115, 313 (2009). The Hope credit is codified at 26 U.S.C. §25A(b). |
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See Hillsboro Nat'l Bank v. Comm'r, 460 U.S. 370, 377-80 (1983) (discussing the origin of the judicially developed tax benefit rule, which prevents taxpayers from receiving double tax benefits on the same income or transaction); 26 U.S.C. §111 (partially codifying the tax benefit rule); Treas. Reg. §1.25A-5(f)(3), (4) (requiring the education tax credits be recaptured if the taxpayer receives a refund of the expenses). |
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Rev. Proc. 2015-57, 2015-51 I.R.B. 863; Rev. Proc. 2017-24, 2017-07 I.R.B. 916; Rev. Proc. 2018-39. 2018-34 I.R.B. 319. |
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Ibid. |
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See Personal Income Tax Quick Answer Charts: Starting Point for Personal Income Tax, State Tax Guide (CCH) ¶700-003 (Nov. 30, 2016) (showing that most states use the federal definition of gross income, adjusted gross income, or taxable income as the basis for computing state individual income tax liability). |