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Discharging Student Loans related to ITT Technical Institute's Closing

ITT Technical Institute Student LoansIn early September, ITT Educational Services announced that it was immediately closing all 136 of its ITT Technical Institute branches nationwide. This included 9 in Southern California. As of late August ITT had stopped accepting new applications, but had assured existing students that they could finish their academic programs. Their shutdown a few days later left more than 40,000 students in the lurch, as well as 8,000 employees. The new academic quarter was to have started on Monday, September 12.

On September 16, ITT filed a Chapter 7 liquidation bankruptcy in Indianapolis, near its headquarters.

The 9 ITT Tech facilities in Southern California included 3 in Los Angeles County—Sylmar, Torrance, and San Dimas, Corona in Riverside County, Oxnard in Ventura County, in San Bernardino and Orange, as well as 2 in San Diego County—National City and Vista.

WHAT CAUSED THIS TO HAPPEN?

ITT blamed federal regulators for forcing its hand. According its announcement, 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."

The reality is that ITT has been in serious trouble for the last several years.

In February 2014 it was sued by the Consumer Financial Protection Bureau for predatory student lending—pressuring and tricking students into applying for high-cost private student loans that ITT knew the majority of students would default on.

Later in 2014 ITT failed to deliver on time to the U.S. Department of Education financial documents showing its ability to meet its financial obligations. ITT relied on federal student loans for a large majority of its income. Because its students and U.S. taxpayers were at risk, ITT was required to demonstrate its financial stability, which the Department of Education said it failed to do. In order to continue providing federal student loans, ITT entered into a 3-year probation program.

In 2015, the U.S. Securities and Exchange Commission charged ITT and the company's two top executives with fraud. It said ITT hid from its auditor and from investors the poor performance and looming financial impact of two private student loan programs the company guaranteed.

In April 2016 the private organization that oversees ITT's accreditation informed it that some of its schools were in danger of losing their accreditation. Unaccredited schools cannot provide federal student loans to its students. The formal letter from the Accrediting Council for Independent Colleges and Schools (ACICS) called "into question ITT's administrative capacity, organizational integrity, financial viability and ability to serve students in a manner that complies with ACICS standards." In response to this, in June 2014 the Department of Education imposed additional financial requirements on ITT.

After ACICS held a hearing in early August for ITT to respond to its concerns, it informed ITT that it was "not in compliance" with a list of accreditation requirements, and was "unlikely to become in compliance."

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 imposed a set of new financial conditions on ITT, and gave it until September 6 to respond. On September 6, ITT announced it was closing.

IF I'M AN ITT TECH STUDENT WHAT CAN I DO ABOUT MY STUDENT LOANS?

Getting out of owing student loans is usually quite difficult. You may be able to discharge a debt if:

  • you become permanently and totally disabled
  • you enter certain professions such as teaching or the military under certain conditions
  • you file bankruptcy and qualify under the tough "undue hardship" provision.

But these options help a limited number of people and can be difficult to qualify for.

There is another potentially much easier way to discharge federal student loans that very much applies to the ITT situation: the closed school 100% discharge of your student loan(s).

HOW DO I QUALIFY FOR A CLOSED SCHOOL DISCHARGE?

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

But you have to meet some conditions to qualify for this closed school discharge of student loans. You must have either been still enrolled at ITT when it closed on September 6, or had withdrawn from the school within 120 days before that date.

The Department of Education 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 I can tell the Department of Education has not extended this 120-day period. It's saying that the cut-off date for withdrawing before the closure is May 6, 2016.

ARE THERE OTHER CONDITIONS OR EXCEPTIONS?

Yes. If you are able to and do transfer academic credits earned at ITT to another school you may lose your ability to discharge the student loans related to those academic credits.

But according to ITT's own "Student FAQ" about its closure it states: "It is unlikely that any credits earned at the school will be transferable to or accepted by any institution."

As the U.S. Secretary of Education stated on the same day that ITT announced its closing:

It is important to note that transferring your credits may limit your ability to have your federal loans discharged. Closed school discharge may be an option if you enroll in a different program that does not accept your ITT credits.

So if you enroll in a new school and are not able to receive any credit for your ITT classes, you are eligible for a closed school discharge. Or if you enroll in a new school for a completely different program of study (NOT a "comparable program of study"), the federal ITT student loans can be discharged (assuming you meet the other conditions).

As the Secretary of Education concluded, the options of closed school discharge vs. completing at a different school "have pros and cons, depending on your unique circumstances, so it is important that you consider your specific situation carefully."

DOES THIS DISCHARGE APPLY TO ALL ITT STUDENT LOANS?

The closed school discharge applies only to FEDERAL student loans. It does not apply to private and other non-federal loans. There may be other remedies with non-federal loans.

This discharge also only applies to CERTAIN federal loans:

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

Related to this it's interesting to see the sources of ITT's income. In its official corporate Annual Report to Securities and Exchange Commission for 2015, ITT reported the percentage of its income that it received from various sources. It received about 93% of all its "cash receipts" from governmental sources! Included were 56% from federal direct loans, 23% from federal grants, and 14% from state and veterans benefits. Another 2% were from private educational loan sources, while only 4% were from students' "employment, personal savings and family contributions."

WHAT DOES DISCHARGE OF FEDERAL LOANS MEAN?

If you receive a closed school discharge, you have no further obligations on that student loan whatsoever—principal, interest, collection charges—it's all forgiven.

If you have already paid anything on any of the applicable loans, you get paid back whatever you've paid, whether your payment was made voluntarily or involuntarily such as by wage garnishment or tax refund intercept.

If you were in default on a discharged student loan (which has other consequences beyond that loan), you are no longer considered in default. So you become eligible again for new grants and student loans.

The discharge of the loan is favorably reported to credit reporting agencies "so as to delete all adverse credit history assigned to the loan." 34 Code of Federal Regulations Section 682.402(d)(2)(i-iv).

Parents who were liable on Plus loans, and other co-signers ("endorsers") also have no further obligation to pay discharged loans. 34 Code of Federal Regulations Section 682.402(d)(1)(i-ii).

Also, unlike certain other write-offs of debts, you do not report the amount of your closed school discharge as income on your federal tax return.

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