Student Loans that are forgiven, canceled, or discharged are different from deferment or forbearance discussed in previous parts of this blog series. Forgiveness, cancellation, and discharge of your loan means that you no longer have to pay back your student loan debt. Below, In this part of our student loan blog series, Tran Bankruptcy Law will discuss the circumstances in which your loan can be forgiven, canceled or discharged.
When you can receive forgiveness, cancellation or discharge of Federal Student Loans
When a student takes out a loan for college, finance companies expect students pay the loan even if the student does not complete their education, can’t find a job, or is unhappy with the education. However, in a few circumstances, the loans can be forgiven, canceled, or discharged. It is important to remember, that before a discharge is approved you must continue to make payments on your loan. Below is a list of these circumstances.
Total and Permanent Disability (TPD) Discharge
If you have a total and permanent disability, you may be able to receive a discharge from paying a William D. Ford Federal Direct Loan (Direct Loan) Program loan, Federal Family Education Loan (FFEL), Program loan, and/or Federal Perkins Loan (Perkins Loan) Program loan, or complete a TEACH Grant service obligation. However, you must provide documentation to the U.S. Department of education showing that you are totally and permanently disabled. The Department will evaluate the information and determine if you qualify for the TPD discharge.
To show that you are permanently and totally disabled you can do the following:
- Veterans can submit documentation from the U.S. Department of Veterans Affairs (VA) detailing that you are unemployable due to a service related disability.
- If you are receiving income from Social Security, you can submit a notice from the Social Security Administration stating that your next disability review will be within 5 to 7 years from the current disability determination.
You can submit certification from a physician that you are totally and permanently disabled because your physical or mental impairments:
- May result in death,
- Last for a continuous period of not less than 60 months, or
- May last for a continuous period of not less than 60 months.
If you, the borrower, die, then you will receive a discharge of your federal student loans once someone presents your death certificate to the loan company.
Discharge in Bankruptcy
If you file Chapter 7 or Chapter 13 bankruptcy, you may have your loan discharged in bankruptcy only if the bankruptcy court finds that repayment would impose undue hardship on you and your dependents. The court uses this three-part test to determine hardship:
If you will not be able to maintain a minimal standard of living because you have to repay the loan.
There is evidence that this hardship will continue for a significant portion of the loan repayment period.
You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).
Your loan will not be discharged if you are unable to satisfy any one of the three requirements. If your loan is discharged, you will not have to repay any portion of your loan, and all collection activity will stop. You also will regain eligibility for federal student aid if you had previously lost it.
Closed School Discharge
You may be eligible for discharge of your Direct Loans and FFEL Program loans under either of these circumstances:
- Your school closes while you’re attending, and you do not complete your program because of the closure.
- You can receive a discharge for any federal student loan you obtain to pay your cost of attendance at that school.
- If you were on a leave of absence, you are considered to have been enrolled at the school.
- Your school closes within 90 days after you withdraw.
However, you are not eligible for discharge of your Direct Loans or FFEL Program loans if your school closes and any of the following is true:
- You withdraw more than 90 days before the school closes.
- You are completing a comparable educational program at another school. If you complete such a program at another school after receiving a discharge, you might have to pay back the amount of the discharge.
- You have completed all the coursework for the program, but you have not received a diploma or certificate.
False Certification of Student Eligibility or Unauthorized Payment Discharge
You may be eligible for a discharge of your Direct Loan or FFEL Program loan in these circumstances:
- Your school falsely certified your eligibility to receive the loan based on your ability to benefit from its training, and you did not meet the ability to benefit student eligibility requirements.
- The school signed your name on the application or promissory note without your authorization or the school endorsed your loan check or signed your authorization for electronic funds transfer without your knowledge, unless the proceeds of the loan were delivered to you or applied to charges owed by you to the school.
- Your loan was falsely certified because you were a victim of identity theft.
- The school certified your eligibility, but because of a physical or mental condition, age, criminal record, or other reason you are disqualified from employment in the occupation in which you were being trained.
Unpaid Refund Discharge
You may be eligible for a discharge of your Direct Loan or FFEL Program loan if you withdrew from school, but the school didn’t pay a refund that it owed to the U.S. Department of Education or to the lender, as appropriate. Check with the school to see how refund policies apply to federal aid at the school.
You can only receive a discharge of the unpaid refund. You may qualify for this partial discharge whether or not the school is open. Contact your loan servicer for more information.
Teacher Loan Forgiveness
If you are a teacher and also a new borrower (i.e., you did not have an outstanding balance on a Direct Loan or FFEL Program loan on Oct. 1, 1998, or on the date you obtained a Direct Loan or FFEL Program loan after Oct. 1, 1998) and have been teaching full-time in a low-income elementary or secondary school or educational service agency for five consecutive years, you may be able to have as much as $17,500 of your subsidized or unsubsidized loans forgiven. You cannot include your PLUS loans. For more information, go to Teacher Loan Forgiveness. If you have a Federal Perkins Loan, see Perkins Loan Cancellation for teacher cancellation in that loan program.
Public Service Loan Forgiveness
If you are employed in certain public service jobs and have made 120 payments on your Direct Loans (after Oct. 1, 2007), the remaining balance that you owe may be forgiven. Only payments made under certain repayment plans may be counted toward the required 120 payments. You must not be in default on the loans that are forgiven. For more information, go to Public Service Loan Forgiveness.
Perkins Loan Cancellation and Discharge
The following Federal Perkins Loan Program cancellations apply to individuals who perform certain types of public service or have certain occupations.
For each complete year of service, a percentage of the loan may be canceled. The total percentage of the loan that can be canceled depends on the type of service performed. Depending on the type of loan you have, and when that loan was taken out, you may be eligible to cancel part of or your entire loan if you have served as one of the following:
Volunteer in the Peace Corps or ACTION program (including VISTA)
Member of the U.S. armed forces (serving in area of hostilities)
Nurse or medical technician
Law enforcement or corrections officer
Head Start worker
Child or family services worker
Professional provider of early intervention services
There is no standard application form for Perkins Loan cancellations. Contact the school that you were attending when you received the loan.
Receive forgiveness, cancellation or discharge of Parent PLUS Loans
You must repay your parent PLUS loan even if the student does not complete his or her education or can’t find a job related to the program of study, or if you or the student is unhappy with the education. However, you might receive a discharge if the child for whom you borrowed dies, or if you die or become totally and permanently disabled.
Additionally, the PLUS Loan can be fully or partially discharged under the following circumstances:
- The school closed before the student completed the program.
- The school forged the signature on your promissory note or falsely certified that you were eligible for aid.
- The loan was falsely certified through identity theft.
- The student withdrew from school but the school did not pay a refund that it owed. Check with the school to see how refund policies apply to federal aid at the school.
- If you receive a discharge of the loan in bankruptcy. This is not an automatic process—you must prove to the bankruptcy court that repaying the loan would cause undue hardship.
After a Discharge Approval
If you qualify for a complete discharge of your loan, you will have no obligation to make loan payments. Depending on the type of loan discharge program for which you may be eligible, the U.S. Department of Education may have to refund some or all of your previous payments. In addition, creditors might delete any adverse credit record due to the default. Additionally, no tax refund offset or wage garnishment will take place after discharge. If the loan was in default, the discharge may erase the default status. If you have no other defaulted loans, you regain eligibility for federal student aid.
In addition to managing your student loan debt, you should also consider reading our blog series on credit debt. Together, you can manage all of your debts into something more manageable.