Personal Finance Sep 11, 2014 10:10 AM EDT

Column: What to do when your college shuts down


The collapse of Corinthian Colleges Inc. and the abrupt shutdown of several other for-profit campuses this year have left tens of thousands of students wondering about the future of their education - and their debt.

For many students, starting over after a shut-down may be the best option, because it means they would be eligible to have their federal student loans "discharged," or erased, from that institution, said Robyn Smith, an attorney with the National Consumer Law Center. But they could not transfer any credits.

However, if the student continues with another college - called a "teach out" deal - the loan discharge option would evaporate, said Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau.

Student loans also typically cannot be discharged if the college is sold, even if the new institution discontinues the student's program.

Some students may try to finish their educations at other for-profit schools, especially if they're close to graduation or they've used up most of their available grant aid. Grant programs such as Pell Grants and GI benefits have lifetime limits, and aid spent on aborted educations reduces the amount left for starting over, Smith said.

"This is a complex situation," Smith said, and the information students receive from the colleges often "is not that helpful" in clarifying their options or rights.

High student loan default rates have drawn attention to the for-profit college industry, which enrolls 13 percent of college students but accounts for 46 percent of defaults, according to the U.S. Department of Education. Consumer advocates have long questioned the industry's business practices, saying students are often saddled with huge debts and few prospects of finding jobs.

A U.S. Government Accountability Office undercover probe in 2010 found that four of the 15 colleges it investigated encouraged students to commit fraud with financial aid applications and that all 15 made "deceptive or otherwise questionable statements" to its applicants.

Corinthian, which operates the Heald, WyoTech and Everest chains, has been the target of several state and federal investigations. In June, the federal Department of Education temporarily shut off the company's access to federal financial aid, saying Corinthian failed to produce documents that were part of an investigation of whether the school inflated job placement and graduation rates.

The 21-day restriction was enough to send Corinthian into a tailspin, since the vast majority of its revenue comes from federal student loans and grants. In July the company agreed to sell or shutter most of its 107 campuses.

Corinthian is one of the largest for-profit college companies, with more than 70,000 students and 12,000 employees.

Other for-profit schools that have run aground this year include Anthem Education, which had 41 campuses before filing for bankruptcy in August; BioHealth College Inc, which filed for bankruptcy in July and which owns colleges in four California cities; and Career Colleges of America, which shut down its three California campuses in January.

Many states have student tuition recovery funds that may help reimburse those who prepaid tuition at closed schools, although Smith questions whether the funds have enough money to handle the expected deluge of student requests. The Student Loan Borrower Assistance site, which is run by Smith's National Consumer Law Center, has a list of the funds by state.

The Department of Education encourages students to contact the companies servicing their student loans to find out how to get a discharge.

Similar relief typically isn't available for private student loans. Some lenders offer partial discharges when schools close, "but that's rare," Smith said. Students should contact their lenders to see what options, if any, are available to them, Chopra said.

"And they should file a complaint with the CFPB if they're not getting a clear answer," Chopra said. "We may be able to help them get a resolution."

Some students at Corinthian schools have complained that administrators have left them in the dark about what's happening to their campuses or offered misleading assurances that they didn't have to worry about the changes.

If students don't understand their rights and options, they may accept teach-outs or other deals that preclude them from erasing what may turn out to be unpayable debt, Smith said.

Students of failed or troubled colleges also may be targeted by other for-profit institutions eager to scoop up new customers, regardless of whether their programs can help the students find jobs.

Smith encourages students at troubled schools to research their options, including studying at a local non-profit community college, which usually offers similar vocational training at a lower cost.

Community colleges may not be as flexible with scheduling as for-profit schools and it may take somewhat longer to get a certificate or degree, Smith said.

"But they're much cheaper and you'll get better training," she said.

(The author is a Reuters columnist. The opinions expressed are her own.)

(Follow us @ReutersMoney or here Editing by Beth Pinsker and Dan Grebler)

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