Your College Is Closing. Don't Sign the Teach-Out Until You've Priced the Loan Discharge It Can Cost You.

If your college just announced it’s closing, the teach-out offer in your inbox has a cost nobody prints on it. Take it and keep going, and you lose your shot at having the federal loans for that program wiped.

That’s the rule again as of last year. The government’s own application form hasn’t caught up.

What changed

A closed school discharge cancels federal student loans you borrowed to attend a school that shut down before you could finish. It covers past payments, too: the regulation says a discharge qualifies you for reimbursement of what you already paid.

In 2022 the Biden administration loosened the rules. Students who accepted a teach-out, an arrangement where you finish your program at the closing school or a partner school, could still get a discharge if they didn’t complete it. Borrowers could also get an automatic discharge one year after closure.

Then Congress hit undo. Section 85002 of the One Big Beautiful Bill Act, signed July 4, 2025, suspends those 2022 rules for loans first made before July 1, 2035. The Education Department told schools the 2020 rules apply “as if the regulations were never amended.”

Here’s what they don’t tell you. FSA’s school-closure application, good through December 31, 2026, still tells you you’re eligible “If you accepted, but did not complete, a teach-out agreement.” It still mentions an automatic discharge “one year after the date of the school’s closure.” That’s the 2022 rulebook.

What the 2020 rules actually say

To qualify, you must certify you have “not accepted the opportunity to complete, or is not continuing in,” your program through a teach-out. You must not have finished through a teach-out or by transferring credits. You must have been enrolled at closing or have left no more than 180 days before.

The automatic three-year discharge covers only schools that closed before July 1, 2020. For a 2026 closure, the department “may” discharge without an application. May isn’t will.

And waiting for the government to find you has a record. When GAO studied closures from 2010 through 2020, more than 70% of borrowers who eventually got the automatic discharge were already in default or past due.

The real decision

This is your call, but make it with a number. If you’ve borrowed $20,000 toward a degree you can’t finish at a school that’s closing, the teach-out isn’t free. It costs whatever you’d owe plus whatever the new school charges, in exchange for credits that move with you. Starting over clean might be cheaper. It might not.

Plenty of students should take the teach-out. Hampshire College, closing at the end of December 2026, built its own path to finish degrees, and anyone who can graduate on it probably should. The mistake is signing before you’ve compared.

Do this

Pull your federal loan balance at studentaid.gov before you answer any teach-out letter. Put it next to what the teach-out school will charge you to finish.

If you choose the discharge, decline the teach-out in writing, keep a copy, and file the school-closure application yourself. Don’t wait for an automatic discharge that may never come.

Watch Massachusetts. Its higher ed board plans to make private colleges publicly post by December 31 whether they’re at risk of imminent closure. For the rest of your repayment options, start at our education hub. Just don’t refinance federal loans into a private one while a discharge is on the table, because a private loan can’t be discharged this way. Our best-of picks can wait until this is settled.

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