Writing Off Student Loans from the Closing of ITT Technical Institute

Wasson and ThornhillStudent Loans

 

On September 6, 2016 the parent company of 136 ITT Technical Institute branches announced that it was closing. It immediately closed all of its classroom and online instructions across the country. It canceled the academic quarter that was to start on the following Monday, September 12, leaving about 45,000 students scrambling.

ITT Tech had two locations in Louisville. One’s on Dixie Highway near I-264, and the other off North Hurstbourne Parkway south of the I-70/I-265 interchange. There were also two locations in Lexington. These Kentucky locations had a total of about 700 students, about 85% of them full-time.

Why Did This Happen?

In its version of the events, ITT closed because the “U.S. Department of Education imposed a series of new requirements and conditions on the ITT Technical Institutes, including imposing conditions on our institutions’ continued participation in the federal student financial aid programs that the Department of Education administers.”

According to the Department of Education, responded to actions taken last spring by the independent entity that accredited ITT, the Accrediting Council for Independent Colleges and Schools (ACICS). In April 2016 ACICS sent ITT a formal letter calling “into question ITT’s administrative capacity, organizational integrity, financial viability and ability to serve students in a manner that complies with ACICS standards.” In early August ACICS held a hearing about these issues. In mid-August it announced that ITT is “not in compliance” and is “unlikely to become in compliance” with ACICS Accreditation Criteria.

This put ITT in violation with its agreement with the Department of Education to “meet the requirements established” by its accreditor. So on August 25, 2016 the Department of Education sent a letter to ITT imposing new conditions for it to continue participating in federal student aid programs.

ITT reacted by deciding to close. After its September 6 announcement to close, on September 16, 2016 ITT filed a Chapter 7 bankruptcy case in Indianapolis and ceased all operations.

Discharging Federal Student Loans

Getting out of owing student loans is generally quite difficult. You may be able to discharge a debt if you become permanently and totally disabled, if you enter certain professions such as teaching or the military under certain conditions, or if you file bankruptcy and qualify under the tough “undue hardship” provision. But again these are limited and often very difficult to qualify for.

But there is another potentially much easier way to discharge federal student loans that very much applies to the ITT situation: the closed-school discharge.

The Closed-School Discharge of Certain Federal Student Loans

The federal Higher Education Act requires the U.S. Department of Education (DOE) to discharge—permanently and completely write off—certain student loans if you as the borrower are unable to complete an educational program because of a school’s closure. (See 20 United States Code Section 1087(c)(1).) This clearly applies to ITT’s closure.

But this discharge of the applicable student loans only works in two circumstances. First, you must have been still enrolled at ITT at its closure. Or, second, you must have withdrawn from the school within 120 days before its closure. The DOE can extend this 120-day period if it “determines that exceptional circumstances related to a school’s closing justify an extension.” (See 34 Code of Federal Regulations Section 682.402(d)(1)(i).) As best as we can tell the DOE has not extended this 120-day period. It’s saying unofficially that the cut-off date for prior withdrawal is no earlier than May 6, 2016.

What ITT Student Loans Are Covered?

This closed-school discharge applies ONLY to federal student loans. There may be other remedies with non-federal loans.

This discharge also only applies to CERTAIN federal loans:

  • Federal Family Education Loan Program loans (“FFELs”)
  • Direct Loan Program loans (“Direct loans”)
  • Perkins Loan Program loans (“Perkins” AND “NDSL loans”)
  • Direct PLUS Loans Programs (“PLUS loans”)

ITT reported the percentage of its income that it received from governmental and other sources in its official corporate Annual Report to Securities and Exchange Commission for 2015. It received 56% of “cash receipts” from federal direct loans, 23% from federal grants, and 14% from state and veterans benefits. That’s a total of about 93% from governmental sources. Another 2% were from private educational loan sources. Only 4% were from “employment, personal savings and family contributions.”

What Relief is Available on These Federal Loans?

If you qualify for a closed-school discharge you no longer have an obligation to repay the loan. Very importantly for loans where someone else is liable, they are ALSO no longer obligated.

You no longer have any obligation to pay any other charges on the loan. So you no longer owe the principal, interest, collection charges—it’s all forgiven.

And if you have paid anything on any of the applicable loans, you get reimbursed whatever you’ve paid. This is true whether you paid voluntarily or involuntarily—such as wage garnishment or tax refund intercept. If you were in default, you are no longer considered in default and become eligible for new grants and student loans. The discharge of the loan is reported to credit reporting agencies “so as to delete all adverse credit history assigned to the loan.” (See 34 Code of Federal Regulations Section 682.402(d)(2)(i-iv).)