What is Student Loan Discharge and Cancellation?

Are you looking to get rid of student loans that you've had since forever? If yes, then read this article on Federal student loan discharge and cancellation and get detailed info on its eligibility, requirements, policy, application and more.

Updated by Sharan Kumar on 10th October 2019

Are you looking to stop paying your student loans altogether? It is possible as you may be qualified for federal student loan forgiveness, cancellation, or discharge which means that under certain special circumstances, the federal government may forgive part, or the whole of your student loans as well as potentially cancel or discharge all of your loans.

Forgiveness, cancellation, and discharge essentially are the same thing, but they apply to different situations and circumstances.

For example, if you do not have to pay your student loans due to your job or schooling, this is typically called forgiveness or discharge. On the other hand, if you are not able enough or can't afford to repay your loans due to permanent disability or the closure of a school where you received your investments, this typically leads to student loan discharge.

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Table of Contents


Student loan forgiveness, cancellation, and discharge

The terms forgiveness, cancellation, and discharge basically mean the same thing, but they’re used in different ways.

If you’re no longer required to make payments on your loans because of your job, this is usually called forgiveness or cancellation.

If you’re no longer required to make payments on your loans because of other circumstances, such as a total and permanent disability or because of the closure of the school in which you received your loans, this is generally called discharge.


When federal student loans can be forgiven, canceled, or discharged?

You must compulsorily repay your loans even if you do not complete your education, could not manage to find a job related to your program of study, or are unhappy with the education you have paid for with your loan.

You also cannot claim that you have no responsibility to repay your loan because you were a minor (under the age of 18) when you signed your promissory note or received the loan.

However, certain circumstances can lead to your loans being forgiven, canceled, or discharged.

Loan Cancellation or Discharge 

In many cases, the above terms 'loan cancellation' and 'loan discharge' can be used interchangeably.

Different types of loans require specific qualifications in order to qualify for the same.

Cancellations of Perkins Loans are available under specific circumstances, including serving in certain professions or performing certain types of public service.

Perkins Loan Cancellations are usually made on a percentage basis of the loan obtained; for every year of service, a percentage of the loan can be eligible for cancellation.

With a few exceptions, Perkins Loans can have up to 100% of the loan removed if one or more of the following qualifications are met.

  • Your school prematurely closed before you could complete your program of study

  • You are a volunteer in the Peace Corps or VISTA

  • You are a serving as a member of the U.S. armed forces deployed in an area of hostilities

  • You are employed full time as any of the following - a firefighter, law enforcement officer, corrections officer, public defender, nurse, medical technician, or teacher

  • You are a working as a staff member at a child or family services agency, early intervention services agency, or Head Start program

  • You have declared bankruptcy (in rare cases)

  • You suffered permanent disability or passed away

Contact your school or loan servicer to figure out how to apply for Perkins Loans Cancellation.

For the discharge of Direct Loans and FFEL Program Loans, you will be required to meet at least one of the following qualifications.

  • Your school prematurely closed before you could complete your program of study.

  • You have declared bankruptcy (in rare cases).

  • Your identity was stolen to receive federal student loans.

  • Your school had falsely certified your eligibility to receive the loan or signed your loan check without your knowledge.

  • You withdrew from school, but the school did not pay the refund, it owed to the loan servicer.

  • Your school misled you or deceived you with false information (also known as borrower defense to repayment).

  • You suffered permanent disability or passed away.

If you fulfill at least one of the above requirements, contact your loan servicer for more information on how to apply for loan discharge.


Discharge

Under certain circumstances, a federal student loan borrower may be relieved from further repayment obligations by getting their federal student loans discharged.

Discharge provisions are made available under both the Direct Loan and FFEL programs.

Loan discharge differs from forgiveness

While both involve the cancellation of debt, forgiveness is generally provided in exchange for service in a particular profession (especially a high-need area) or for giving back to the community in other ways which are much needed.

Loan discharge usually occurs in situations where the borrower is unable to repay the debt (e.g., death, disability, and bankruptcy) or rejects the debt due to causes (e.g., fraud, identity theft, false certification, or unpaid refund).

Main types of student loan discharge 

  • Death Discharge

  • Total and Permanent Disability Discharge

  • Bankruptcy Discharge

  • Closed School Discharge

  • False Certification Discharge - Student Eligibility / Ability to Benefit, Unauthorized Signature, Unauthorized Payments, Identity Theft, Disqualifying Status

  • Unpaid Refund Discharge

  • Discharge for the Spouses and Parents of 9/11 Victims and Public Servants

  • Discharge for Federal Perkins Loans

  • Discharge due to death

1 - Death Discharge 

In case a person dies, their federal loans will be discharged at once after a death certificate is submitted to their loan servicer.

The Parent PLUS loans which will be used to pay for schooling will be discharged if the parent who holds the loan or the student passes away.

2 - Total and Permanent Disability Discharge

If you cannot work due to being completely and permanently disabled, physically or mentally, you may be qualified to have your remaining student loan debt canceled.

  • To be eligible, you’ll be required to provide documentation proving your disability.

  • Once your loans are discharged, the government may monitor your finances and disability for up to a period of three years.

  • If you don’t meet the requirements during the monitoring period, your loans can be reinstated.

3 - Public Service Loan Forgiveness

If you receive a job at a government or NPO, the Public Service Loan Forgiveness (PSLF) Program may forgive the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time.

  • Basically, if you work for 5 years under a necessary field with a low income for 5 continuous years the government will forgive the rest of your federal loan if you apply and qualify for the same. 

  • Starting in April 2018, veterans who may be qualified for the program will receive a letter from the Department of Education and/or the Department of Veterans Affairs explaining their eligibility which will also be including a copy of the application.

4 - Student loan Discharge programs

  • Closed school discharge

  • You may qualify for loan discharge if your school prematurely closes. At the time of closure, you must have been enrolled or have been relieved within 120 days, without receiving a degree.

  • If you think you qualify, contact your loan servicer to begin the application process.

  • You’ll be required to continue making payments on your loan while your application is being processed.

  • If your application is approved, you will no longer have to make loan payments and you may be refunded some or all of the previous payments you made on the loan.

5 - Borrower Defense to Repayment Discharge

Borrowers defrauded by their colleges may be qualified for debt relief. You’ll be needed to file a borrower defense to repayment claim with the U.S. Department of Education.

If you qualify, you can have your loans automatically discharged, at the discretion of the Education Department, if your school was involved in clear and widespread fraud or misrepresentation that has affected a broad group of borrowers.

6 - Unpaid Refund Discharge

If a borrower was entitled in the initial documentation during procurement of the loan to a refund of a federal student loan because the student did not attend the school, withdrew from the school or was terminated by the school, and the school had failed to return the loan funds to the lender, the borrower can be eligible for an unpaid refund discharge.

  • The loan should have been borrowed on or after January 1, 1986.

  • Discharge for the Spouses and Parents of 9/11 Victims and Public Servants.

  • Spouses and the parents of all the individuals who died or ended up totally and permanently disabled due to injuries suffered on September 11, 2001, terrorist attacks may be eligible for a discharge of 100 percent of the remaining balance on federal student loans which was borrowed or endorsed on behalf of the individual.

  • The amounts that were previously paid are not eligible for a refund.

  • This also includes the portion of a federal consolidation loan that was used to repay such a loan.

  • Federal student loans are not eligible for discharge solely because the borrower feels that the school has provided an inferior quality education or because the student was not able to get a job after graduation.

  • Whether a student loan is capable of being subject to statutes of limitation, the defense of infancy and the defense of laches depends on whether the loan is a federal student loan or a private student loan.

  • Since Federal student loans are not subject to these defenses; private student loans are. Statutes of limitation for private student loans also vary from state to state.


Cancellation

Although loan cancellation is a very limited option, it is the most complete way to deal with student loan debt.  

This means that it’s a good idea to go through the various cancellation programs to see if you qualify.  

This section discusses the various ways to cancel or discharge loans outside of bankruptcy.

In rare cases though, it is possible to discharge student loans through bankruptcy.

There are two types of student loans that are applicable for cancellation -

  • Federal student loans

  • Private student loans


Student loan cancellation programs

Here are the various cancellation programs available to you:

Perkins loan cancellation

Borrowers with federal Perkins loans may be able to have 100% of their loans canceled if they work in a public service job for over five years.

In many cases, approved borrowers will see a percentage of their loans being discharged incrementally for each year worked.

The Perkins loan teacher benefit is made available for teachers who work full time in a low-income public school or for those who teach qualifying subjects, such as Special Education, Math, Science or a Foreign Language.

Although limited, cancellations for federal loans are generally required by the law.

Private student loan cancellation and dischargesource - pexels.com

Private student loans have a completely different story.  

Unless the private lender has made a promise about a cancellation program, private lenders may cancel loans, but they usually do not have to.  

It certainly won't hurt to ask your private lender about the eligibility for any loan cancellation programs.

As you review the various cancellation options, just keep in mind that you may get a tax bill if your loan is canceled.  

Some of these government cancellation programs will result in taxable income whereas some do not.  

You might consider discussing this with a tax professional.

Student loan settlement in general -

  • The settlement is not always as easy for student loans.  

  • But it is definitely worth considering a settlement, especially if you have a quite large lump sum to offer.  

  • It can be quite difficult, however, to negotiate this type of deal.  

  • The government has some specific guidelines for the settlement of federal student loans.

  • Private loan settlement is generally left to the discretion of the private lender. 


What type of loan do I have?

Get started by finding out what kind of loan you currently have as the process and circumstances for cancellation and settlement for the different loans are varied.

Mainly Federal and Private student loans differ in certain aspects as explained below.


Cancellation of federal student loans

Federal student loans can be canceled in specific circumstances. In some cases, you can cancel a loan due to some serious problems with the school you attended/are still attending.  

This is not as simple as a general cancellation simply because you didn’t like your school. You are required to meet the specific criteria of the school-related discharge.

Other cancellations are available if you work for a certain period of time in some public service job.  

This also includes military service members. Another category is for borrowers with serious disabilities or after a borrower passes away so that the debt is not passed on to the borrower’s estate.  

You must apply for loan cancellation through the government forms. There is an important exception to this rule for a few borrowers eligible for closed school automatic discharges.

The process of cancellation of federal student loans is given here.

  • You may be qualified regardless of whether your loan is current or in default. You are entitled to these cancellations by the law, but you must meet very specific requirements to get to avail of these comprehensive reliefs. 

  • A successful cancellation not only makes sure that the loan obligation goes away, in most cases, the government is also required to give back any payments you have made (whether voluntarily or involuntarily) and also help you by cleaning up your credit. This is definitely the most complete relief you can get.

  • The federal loan cancellations described here are also available outside of the bankruptcy process.

  • You can also cancel your federal loan in the event of declaring bankruptcy. This is a bit of a difficult process, but not impossible.

  • You must be able to prove 'undue hardship' in the bankruptcy court to get a bankruptcy discharge of your federal loans.

  • There may be some sort of tax consequences associated with some of these cancellation programs.  

  • Loan amounts that are canceled through the job related or school-related cancellations should not be considered taxable income.

  • Any other cancellations may be taxable income. However, you may not have to pay taxes.

  • For example, you may be able to claim insolvency status by using the I.R.S. Form 982. It is a good idea to consult a certified tax professional for further information.


Cancellation of Private student loans

Private loans are very difficult to cancel. Private loan cancellations are not required by law and private loan borrowers do not have the same variety of cancellation options as federal student loans. Although limited, cancellations for federal loans are required by law. Private student loan cancellations are another story.

Unless the private lender has made a promise about a cancellation (or discharge) program previously, private lenders may cancel the loans, but they usually are not obligated to do so. You may also consider filing for bankruptcy relief. Bankruptcy is a bit difficult, but not a bad way to cancel private student loans. 

The process of cancellation of private student loans is given below. 

  • You can go ahead and ask your private lender for relief, but these lenders are not required by the law to help you get relief. Some private lenders are now offering discharge due to disability and death. 

  • Sallie Mae, for example, has announced a total and permanent disability program for Smart Option borrowers as well as forgiveness of unpaid balances if a primary borrower passes away.  

  • Wells Fargo announced a similar program in the December of 2010. (The announcement is no longer online but many have reported on it).  

  • Some lenders will automatically allow a private loan discharge if the borrower has managed to obtain a federal disability discharge.  

  • Lenders will also in some cases use the same criteria as used for federal loan discharges.

  • In other cases, the lenders end up using criteria that are completely different than the federal programs.

Read your loan contract in detail to learn about your private loan's particular terms, conditions, benefits, rates, fees, and penalties. Private lenders do have an obligation to honor any promises they make about their terms and benefits.

Some private lenders offer a cancellation program for a certain number of their loan products, but not others. Some will offer to cancel only a part of a loan in certain circumstances.

You may also be eligible for private loan relief due to any recent state and federal enforcement actions. This relief is mainly for students who borrowed loans which are made by for-profit schools, such as Corinthian school Genesis loans. The relief is generally very limited.

Process of the settlement of Private student loans

  • Private student loan settlements are quite difficult to get, but it is possible in some cases. There are no specific laws or regulations which require private lenders to offer settlements. The policies and programs vary considerably from lender to lender.

  • Private lenders will occasionally offer settlements in some cases. However, the lenders generally require a significantly large lump sum to settle debts even from borrowers with low incomes.

  • Most private lenders will usually not even discuss settlement or modification until the loan is in default or written off. At this point, the borrowers’ main point of contact is most often a collection agency. Interestingly, the collection agencies working on behalf of the lenders will most often settle for a smaller amount than the originating lenders.

  • Tax Issues - As it is with some of the federal loan settlements, there can be tax consequences if you get a private student loan settlement.  

  • It is a good idea to consult a good tax professional for more information.

In 2015, the Department of Treasury had issued a ruling that discharges of all the federal student loan debts for Corinthian borrowers will not be considered as taxable income.  In July 2018, the Department of Treasury (I.R.S.) issued a ruling extending the 2015 relief for Corinthian federal student loan borrowers to Corinthian private student loan borrowers also. (There are similar rulings for the students who have attended schools owned by ACI).


Things to do while waiting for the approval of your application

It’s important to note that while you wait to figure out if your request for loan forgiveness, cancellation, or discharge is approved, you must continue making monthly payments on your federal student loans. In some cases, your loan servicer may be able to grant your forbearance until a decision is arrived at regarding your application. 

  • Those performing service or working full time in public service or teaching positions may qualify for deferment during this period.

  • If your request gets approved, you should no longer be required to make payments on your loans.

  • In addition, part or all of the payments you made may be refunded to you based on the circumstances of your cancellation or discharge.

  • Be sure to inquire about loan forgiveness, discharge, or cancellation if you believe that you may qualify.

  • If you are not approved, however, keep in mind that you must continue to repay your loan as originally required and signed to in the promissory note until it is paid in full.

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