Closed School Discharge Reform: A Roadmap
By Preston Cooper
Because of declining college enrollments and the coming end of federal COVID-19 aid, we can expect to see a wave of school closures over the coming years, concentrated among nonprofit and for-profit private colleges.
Students may receive a “closed school discharge” of their federal loans when a school fails, but current policies make it difficult for students to finish their degrees or transfer credits to another institution.
A quarter million students have had their education interrupted by a school closure since 2010, while the federal government has granted over $2 billion in closed school discharges.
An elegant solution to both these problems is a requirement that colleges insure against closed school discharges, protecting taxpayers and creating an incentive for schools to ensure students can complete their education after a closure.
When an institution of postsecondary education closes, its students may be eligible for a discharge of their federal loans if they are unable to complete their education. While closed school discharges represent an important safety net for student borrowers, they have cost taxpayers over $2 billion during the past decade. The 2016 closure of ITT Technical Institute, a chain of proprietary schools, led to over $1 billion in closed school discharges alone. Though students are ineligible for discharges if they complete their education at the closing school or elsewhere, the precipitous nature of many school closures means that successful program completion is an uncommon outcome.
Higher education enrollment is currently on a downward trajectory. School closures— and the associated loan discharges—are likely to continue and even accelerate as pandemic-era stimulus funding runs out and enrollment continues to decline. In theory, the Department of Education (ED) assesses the financial health of private schools participating in Title IV programs and requests financial protection (surety) from institutions in danger of closure. But in practice, ED has failed to foresee most school closures, meaning most closed school discharges go uncompensated.
Precipitous school closures hurt students most of all. The collapse of ITT Tech and other institutions left tens of thousands of students without a school, often in the middle of the semester. Plans were not in place to allow students to complete their educations elsewhere; most lost months or years of their lives with nothing to show for it. Even though these students received discharges of their federal loans, their goal when they began higher education was a degree or certificate, not a loan discharge. Rather than aiming to maximize the number of closed school discharges, policymakers should aim to maximize the number of students at closed schools who can complete their education.
This report proposes a requirement for private institutions that depend on federal Title IV funding to purchase insurance to compensate taxpayers in the event of a closed school discharge. Though the immediate benefit of such a policy is taxpayer protection, the larger benefit is to encourage institutions to act in ways that benefit students.
Insurance companies would be free to vary premiums based on the risk of a closed school discharge, granting lower premiums to institutions that take action to make closures less likely. Schools would be rewarded for prudent financial management and for arranging viable teach-out plans that will allow students to complete their programs in the event of a closure.
The report includes a detailed roadmap for policymakers to use in implementing a discharge insurance requirement, including proposals for coverage requirements, enforcement provisions, a phase-in, and oversight. The report also examines some of the criticisms of an insurance requirement and suggests additional policy responses to address them. It proposes that a discharge insurance requirement form a piece of a broader, incentives-based accountability agenda to improve the way institutions of postsecondary education serve students, taxpayers, and society.
Preston Cooper is a research fellow at the Foundation for Research on Equal Opportunity, where his work focuses on higher education. He is the author of the report “Is College Worth It? A Comprehensive Return on Investment Analysis,” which produced estimates of the financial value of nearly 30,000 bachelor’s degrees. He is a regular contributor to Forbes and has published in the Wall Street Journal, the Washington Post, and National Review. He is based in Washington, DC. For questions or comments, he can be reached at firstname.lastname@example.org.