Many people ask me: is there a way to have my student loan discharged? In most situations, it’s very difficult if not impossible to have a student loan discharged. But, below are 7 options for Federal Loan Discharge.
7 OPTIONS TO HAVE YOUR FEDERAL STUDENT LOAN DISCHARGED OR CANCELLED
Read what follows carefully: if you meet any of these conditions, you can apply to have the government cancel the remainder of your federal student loans. If you submit an application to have your student loan discharged, you must keep paying your loan until the right agency approves your application.
Also, note that canceled loans may still count as taxable income. Even though you won’t have to pay back your student loans, you might have to pay taxes on the discharged balance (see my article on income tax on cancelled debt here).
1. YOUR SCHOOL CLOSED
If your school closed while you were enrolled or shortly after you withdraw, you could qualify for student loan discharge.
You must have been enrolled during or within 120 days of the school closing. If you withdraw more than 120 days after it closes, you won’t be eligible for student loan discharge.
If the agency approves your application, it will cancel 100 percent of your Direct Loans, Federal Family Education Loans (FFEL), or Perkins Loans.
2. FILING BANKRUPTCY
Bankruptcy courts rarely discharge student loans through bankruptcy. But in extreme cases of “undue hardship,” filing a bankruptcy will wipe out some or all of your student debt. There’s no hard and fast rule for what constitutes undue hardship, but there are a few general guidelines:
- You’ve made good faith efforts to pay back the loan.
- If you had to pay back the loan, you couldn’t sustain a minimal standard of living.
- Your financial hardship is going to continue for the foreseeable future.
3. YOU ARE TOTALLY AND PERMANENTLY DISABLED
If you’re facing a long-term disability that leaves you unable to work, you may qualify for Total and Permanent Disability Discharge (TPD). There are three ways you can qualify for TPD:
- You’re a veteran with a service-related disability who can no longer work. You must submit documents from the U.S. Department of Veterans Affairs.
- You receive Social Security Disability Insurance or Supplemental Security Income benefits. You must submit supporting documentation and have a disability review scheduled within the next five to seven years.
- Your physician determines that you have a total and permanent disability that has lasted for at least 60 months and will last for at least another 60.
Whatever documentation you provide, it must show you’re unable to engage in gainful employment. As a result, you can’t pay back your student loans.
4. THERE WAS A FALSE CERTIFICATION OR UNAUTHORIZED PAYMENT
This student loan discharge option applies primarily to Direct Loan or FFEL Program loans. It’s offered to victims of identity theft or false certification. There are a few different ways to qualify:
- Your school falsely certified you as eligible to receive loans even though you didn’t meet the requirements.
- Your school signed your name on an application or promissory note without you knowing about it.
- Someone took out a loan in your name (identity theft).
- You trained for an occupation at school that you can’t engage in due to a physical or mental condition, your age, a criminal record, or another qualifying reason.
5. SCHOLL DID NOT PAY REFUND
If you have Direct Loans and FFEL Program loans and your school didn’t pay a refund it owed to the U.S. Department of Education or a lender, the government may give you a partial discharge in the amount your school didn’t pay.
Qualifying for this refund may require a bit of detective work on your part. Contact your school to learn about its refund policies for federal aid, and ask your loan servicer for additional information.
6. SCHOOL DEFRAUEDED YOU
Some schools, such as the for-profit chain Corinthian Colleges, have used illegal or deceptive tactics to convince students to take out loans and attend.
If you can prove a school defrauded you, you won’t have to pay back your student loans. You must prove the misleading conduct directly related to your loans or education. Documents like transcripts, enrollment agreements, emails with school officials, promotional materials, and course catalogs may all be useful in supporting your claim.
The government may put your loans into forbearance or stop collections while your application is pending when you apply for this student loan discharge option.
7. STUDENT DEATH
If the borrower dies, the family may be eligible to have a Federal student loan discharged. In this event, a family member or representative must send a death certificate or other documentation to the loan servicer. All federal student loans are discharged. Parent PLUS loans are also canceled if the borrower or the student passes away.
POSSIBLE INCOME TAXES ON DISCHARGED OR CANCELLED STUDENT LOANS
If you have your student loan discharged, it could save you thousands of dollars in debt and interest, but you may have to pay income tax on the amount of the student loan discharged or cancelled.
When the government discharges your loans, the canceled balance might be treated as taxable income by the IRS. There are exceptions to this such as insolvency. It is best to check with your tax specialist to see if you owe any income tax.
The amount of tax owed may still be significantly less than what you’d pay in student loan debt.
OTHER STUDENT LOAN FORGIVENESS AND ASSISTANCE OPTIONS
As you can see there are a number of options to have your student loan discharged, but, it’s still rare. It is more likely that you can take advantage of a student loan forgiveness and repayment assistance programs.
Look into forgiveness programs such as Public Service Loan Forgiveness and Teacher Loan Forgiveness. In exchange for several years of service, you could get the remainder of your loan balance forgiven.
States and universities also offer loan repayment assistance programs, which are typically based on occupation. They often benefit people who work in critical shortage or high-needs areas. Browse student loan repayment assistance programs by state or occupation to see if any apply to you.
Also, look into income-driven repayment plans if you’re struggling to keep up with student loan payments. These income-based plans extend your repayment plans and lower your monthly payments. But be careful, adding years to your plan means you’ll pay more interest in the long run. But it could be the solution you need to avoid defaulting on your student loans.
KEEP PAYING YOUR LOANS UNTIL YOU’RE APPROVED
Remember that any application for student loan discharge or cancellation will take some time. You’ll need to track down and provide documentation to support your claim.
You’ll also have to wait for the associated agency to review your application and approve it. In the meantime, keep paying your student loans. If you pause payments and the government denies your application, you’ll have to deal with the fallout of ballooning interest.
Although these discharge programs are useful for some, there’s no guarantee you’ll qualify. Look into all avenues for managing your student loans. That way, you can take control of your debt and find the solution that works for you.
