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When Your School is Under Federal Scrutiny

September 22, 2015

The U.S. Department of Education is closely monitoring 483 colleges over concerns of financial or federal compliance issues. The Department’s report, released June 1, 2015, includes three public institutions: Northern New Mexico College, Mesalands Community College in Tucumcari, N.M., and Copiah-Lincoln Community College in Mississippi. A complete list of these colleges is here.

Colleges on the Department of Education’s list are subject to “Heightened Cash Monitoring” which provides additional oversight over financial or federal compliance issues. Some schools subject to this oversight are restricted from immediate federal financial aid payouts, which always creates cash flow problems for the institution. This situation is often cited as the reason Corinthian Colleges, a for-profit institution with 72,000 students spread over 100 campuses, closed its doors.

So what happens if your college shuts down?

A current student at a college that closes has choices under the federal law. A School Closure Loan Discharge is available to a student who meets the following criteria:

The school closed while you were enrolled and you could not complete the program of study for which the loan was intended; OR
You were attending school within 120 days of the closure date or on an approved leave of absence when the school closed.

The Department also clarifies exceptions to the closed school discharge:

Students who withdraw more than 120 days before the closure are ineligible.
Students who have completed all the school’s required coursework, even if they haven’t received a diploma or certificate, cannot receive a discharge. They may transfer their credits to another institution and graduate from there.
Finally, the discharge isn’t unconditional. Students who complete their coursework at a different institution will be required to repay any amount that was discharged.

In the case of Corinthian and its on-going bankruptcy case, the Department of Education recently agreed to temporarily stop legal action against as many as 40,000 Corinthian borrowers who defaulted on their loans after the school closed. Attorneys for a student committee have complained that Corinthian lured students by exaggerating graduation rates. The Department reports that nearly 7,000 borrowers have applied for some form of relief, however hundreds of thousands of students took out loans to attend a Corinthian school since 2010.

If your school is in trouble with the Department of Education, it may be prudent to investigate your rights. The federal law offers protections for borrowers, but these protections are often difficult to navigate. The best advice is to seek the counsel of an experienced bankruptcy attorney.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to

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