For-profit colleges close in droves. What can students do?

It’s an uneasy time for students of for-profit colleges. Mass school closures have dominated the headlines recently, and more uncertainty is on the way: The Department of Education said last week it will no longer recognize the Accrediting Council for Independent Colleges and Schools, the largest accreditor of these colleges.

That’s significant because without accreditation, for-profit colleges can’t receive federal student aid, which is their primary source of revenue. Without that funding, these schools won’t be able to operate.

Fallout from Corinthian, ITT

The Department of Education’s announcement was a response to a recommendation made to it in June by the National Advisory Committee on Institutional Quality and Integrity. The committee ruled that ACICS should no longer be recognized by the federal government, citing a lack of oversight of its institutions, including the now-shuttered Corinthian Colleges and, most recently, ITT Technical Institute, which closed in September and left 40,000 students high and dry nationwide. Both schools’ closures left thousands of students without degrees, burdened by loans and with their educational futures in limbo.

ACICS says it will appeal the department’s latest decision, leaving final say in the hands of Secretary of Education John B. King. Experts say King is likely to announce a final decision by the end of the year, before his term concludes. If the appeal is rejected, colleges accredited by ACICS will have 18 months after the decision is finalized to secure accreditation by another federally recognized agency. Schools that can’t find a new accreditor are likely to close.

A changing landscape

Accreditation recognizes that a college or university upholds the standards of quality necessary for its students to earn credentials in a professional field or be admitted to other recognized institutions.

Increased scrutiny of accreditation agencies and the for-profit sector has altered the landscape for these institutions and their students, according to Kevin Fudge, director of consumer advocacy and ombudsman at American Student Assistance, a nonprofit centered around education finance.

Vocational and trade schools once typified for-profit colleges, until the industry ballooned with the advent of online education. Schools such as University of Phoenix — now a nonprofit — considerably broadened the reach of for-profit schools by attracting nontraditional students. In recent years, for-profit colleges have been chastised for their high price tags and low completion rates, as well as lower-paying jobs and high instances of student loan default among graduates.

ACICS first received federal recognition in 1953 and most recently was the accrediting agency for nearly 250 schools and hundreds of their campuses. It’s unclear which accreditors those schools will turn to now. Schools with sound practices or existing accreditations from other agencies aren’t likely to have a problem maintaining accreditation. But institutions with shakier foundations, such as those already being monitored for their financial and recruiting practices, may have a more difficult time finding an agency to accredit them.

Fudge advises students to carefully weigh their options. “It illustrates the importance for students to be wise consumers,” he says. “If you think your school is one that might be under scrutiny, you can check with the school about its current accreditation status.”

Unfortunately, the federal government is offering no independent means of assessing or obtaining information about a particular school’s status, except for its list of schools under financial scrutiny, known as Heightened Cash Monitoring.

What you can do

Obtain your educational and financial records early so that if your school closes — or is on the brink of shutdown — you’ll have the documents you need to move forward. Graduates will want to obtain copies of their transcripts. Here are your options and the consequences if you have federal loans.

APPLY FOR CLOSED SCHOOL DISCHARGE

Under a closed school loan discharge, all of your federal loans will be dismissed. That amount discharged will not count as taxable income on your federal return. If your school loses accreditation but doesn’t close, this option won’t be available.

If you’re eligible, you can apply with your federal loan servicer only if a school closes while you’re enrolled and haven’t completed your program, or if the school closes within 120 days after you withdraw from a program without a degree. However, you are not eligible if you completed a comparable educational program through a teach-out program elsewhere (more on that below) or have completed all coursework for your intended degree.

SEEK BORROWER DEFENSE TO REPAYMENT

To receive relief under a provision called borrower defense to repayment, you would have to demonstrate, in court, that your school violated laws in its state when it came to educational services or loans. The Department of Education is expected to soon release guidelines about borrower defense, since the right has not been exercised en masse in the past.

Reid Setzer, deputy director of policy and legislative affairs at Young Invincibles, a nonprofit focused on engaging young adults in political issues, pointed to the lack of structure when Corinthian Colleges closed. “When Corinthian went down, there was no playbook,” he says, citing the sheer volume of students eligible for the option. But by the time more closures occur after the start of the 18-month clock, borrower defense regulations may be available.

You can submit a claim for loan forgiveness as well as reimbursement for any payments already made. You can work with an attorney, but it’s not required. After submitting a claim, your loans will be placed into forbearance and collections on any defaulted loans will be suspended. However, interest will continue to accrue.

TRANSFER TO ANOTHER SCHOOL OR TEACH-OUT

While your school is finding a new accreditor, you can continue to access federal aid, but you might want to consider transferring.

“If a school isn’t soluble, you might not want to keep funneling money to them,” Setzer says. “You have a right to get out of those schools and attempt to transfer, which we know can be difficult.”

Transferring can be problematic because credits obtained under a school that is no longer accredited or has closed may not be transferable to another institution.

If your school is on the path to closure, it may offer students a teach-out program in which you finish your coursework at another institution that has agreed to take on students from your school. Be sure to check on the status of a new institute using College Scorecard.

Transferring or enrolling in a teach-out program will render you ineligible for a closed school loan discharge, but you may be able to pursue borrower defense.

Options for private loans, grants, military

Federal loan borrowers may have options in the event of a school closure, but if you have private loans or grant funds for education, or if you paid cash for your tuition, little relief is possible.

Private loan borrowers: While federal loan borrowers may have options, private loan borrowers will still be responsible for repayment. Contact your lender or servicer to see what assistance may be available.

Pell Grant recipients: There’s no way to reimburse students for distributed Pell Grant funds, which means the amount already disbursed will still count toward a student’s six-year maximum eligibility.

GI Bill benefit recipients: The U.S. Department of Veterans Affairs doesn’t have the authority to reset GI Bill benefits for a student when a school closes, even if a student cannot transfer credits. If a school is no longer approved by the VA as an institution where GI Bill benefits may be used, students can’t continue to use those funds at that location. Students can transfer to a new school and continue to receive GI Bill benefits.

State tuition recovery funds

For students who don’t qualify for federal debt assistance, there may be one last resort. If your state offers a tuition recovery fund or student protection fund, you may be able to receive some compensation for lost costs and educational opportunity due to a school closure. Fund availability and qualifications will vary from state to state, so check with your state’s post-secondary or licensing agency.

Once the clock begins ticking for ACICS accredited schools to find a new agency, you’ll have 18 months to make your decision about your educational future. Contact your school to learn more about the status of the process.

Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

This article first appeared in NerdWallet.