For the last week, we’ve been telling you about the ongoing negotiations between the U.S. Dept. of Education and Corinthian Colleges, the operators of the for-profit Everest University, WyoTech, and Heald College chains, that would sell off some of the schools and wind-down the others. Some people have asked why the government doesn’t just let Corinthian collapse. Part of the reason is that it would leave some 72,000 students in the lurch, but a big motivating factor is that the government could end waving bye-bye to more than $1 billion in student loan debt.

What a lot people don’t know — because it doesn’t happen very often — is that one of the few ways the government will discharge 100% of someone’s student loan debt is if their school completely shuts down and the student doesn’t continue her education elsewhere.

And it’s not just currently enrolled students that could get out of their loan obligation. If you withdraw from a school and it closes within 120 days, you may also qualify for a discharge. Additionally, those who are on an official leave of absence from the school when it closes may have a way out of their federal student loans.

Note that we’re only talking about federal Direct Loans, Federal Family Education Loan (FFEL) Program loans (which include Stafford and PLUS loans), or Perkins Loans.

Corinthian students take out some $1.2 billion a year in these federal loans. It’s impossible to predict how many of the current students would choose to continue their education elsewhere and how many would opt just to say “Thanks for the discharge” and move on with their lives without finishing school.

Even those students who want to continue on elsewhere could face some bureaucratic hurdles if Corinthian simply ceases to operate.

“The school’s failure would unnecessarily harm students because they would have no access to academic records, assistance with transition or transfer, or any other services that a school in teach-out can provide,” the company wrote in a recent court filing.

While Corinthian claims the government would be on the hook for the full $1.2 billion it would have to discharge, the exact number is in doubt. While certainly not every one of Corinthian’s 72,000 students would choose to give up on college, you also have to factor in that a large number of students that would be eligible for discharge have been enrolled for multiple years, so there is a lot of money at stake here.

There is the additional question of whether or not Corinthian students should be compelled to continue their education just because some other school snaps up Corinthian-operated campuses. Similarly at the campuses that will be wound down through teach-out programs, should those students have to accept this degraded educational experience just because Corinthian made a deal with the government?

In their letter to Secretary of Education Arne Duncan, a group of U.S. Senators want the Dept. of Education to clarify whether “students at closing campuses have the option to refuse a planned teach-out and instead seek Closed School Discharge?”

If you’re a current Everest, WyoTech or Heald student, we still want to hear from you. Shoot us an e-mail at cci@consumerist.com.

Controlled Crash? [Inside Higher Ed]

If your school closes while you’re enrolled or soon after you withdraw, you may be eligible for discharge of your federal student loan. [StudentAid.gov]

It’s Hard to Shut Down a Poorly Performing For-Profit College [BusinessWeek]

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