Student Loan Discharge and Forgiveness Options
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By Christy Rakoczy

March 16, 2021

Student loans are one of the most difficult types of loans to get out of paying. While creditors for other loans are often willing to negotiate, and bankruptcy may be available as a last resort for dealing with debt you can’t pay, it’s rare to be absolved of the responsibility of paying back student loan debt.

That’s not to say there are no circumstances where student debt can’t be wiped away. In fact, there are eight situations where lenders may discharge your student loans.

You can find out about these options here, including some details on what you might have to do to qualify for each one.

1. Bankruptcy Discharge

Under current bankruptcy laws, it’s not easy to have your student loan debt eliminated. In most circumstances, you cannot discharge student loans in bankruptcy. To qualify for a bankruptcy discharge, you have to prove that repaying your loans would create an undue hardship.

Different courts use different tests to evaluate whether repayment is an undue hardship, but many use a version of the Brunner test. There are a few parts to the test, including:

  • Did you make a good faith effort to pay your loans?
  • Will you be able to maintain a reasonable quality of life if you continue making payments?
  • Are repayment difficulties are likely to persist for a long time?

The Department of Education is most likely to grant a discharge to individuals with a permanent disability or older people who have been struggling for a long period of time. But, your success depends on the court you land in as well as how extreme your financial troubles are. 

Student Loan bankruptcy discharge laws are prone to change. Make sure to check for any new student loan bankruptcy legislation that could affect your application. 

2. Closed School Discharge

If you took out student loans to attend a school that closed, you may be able to get Federal Direct Loans, Federal Parent Plus Loans, Federal Family Education Loans (FFEL), and Perkins Loans discharged. 

You’ll have to prove you were enrolled in the school or on an approved leave of absence within 120 days of the school closure. For loans issued after July 1, 2020, you have 180 days. You may also qualify for extension under certain circumstances.

You’ll also have to show that you weren’t simultaneously completing an educational program at a comparable school. 

If you completed all of your coursework before your school closed, you do not qualify for a discharge.

If you meet the eligibility requirements, you can apply for discharge. Under old rules, some closed school discharges were automatic, but now borrowers must apply for closed school discharges. If you’re not sure which laws apply in your case, it’s best to contact your loan servicer. 

3. Disability Discharge

Disability discharge applies to Direct Loans, FFEL Loans, and Perkins Loans. It is available to people with a total and permanent disability that has lasted for at least 60 months and will verifiably last for at least another 60 months. This requirement still applies to people who’ve already qualified for Social Security Disability Benefits and to veterans with service-related disabilities whose medical issues prevent working.

To apply, you’ll need to submit documentation from the VA, the Social Security Administration, or your doctor. You’ll also need to complete a TPD discharge application and submit it through Nelnet — which administers disability discharges for the Department of Education.




4. Student Loan Discharge for 9/11 Victims

Spouses and parents of 9/11 victims are eligible for a discharge of federal loans they endorsed for any 9/11 victims. Eligible loans include Stafford Loans, Parent or Graduate PLUS Loans, Perkins Loans, and Loans consolidated prior to 9/11/2001. 

Victims include those who died or became permanently disabled in the attack, which includes safety and rescue personnel who were hurt or killed in its aftermath. You’ll need to notify your lender and provide documentation to apply for the discharge. 

5. False Certification Discharge

You can qualify for discharge of Direct Loans or FFEL Loans for false certification if you meet any of these requirements:

  • Your college falsely certified that you were eligible for a student loan based on your ability to benefit from the education it offers, even though you didn’t meet the ability-to-benefit requirements at the time you applied for the loan.
  • The college falsely certified your eligibility for student loans despite the fact that your status at the time you took out the student loan would prevent you from legally working in the field you were being trained for.
  • A college signed your promissory note or loan application without your authorization and the lender didn’t disburse the money to you nor applied to charges you owed the school.
  • Your college signed for an electronic funds transfer or endorsed your loan check without your knowledge and you didn’t receive the money nor was it applied to the debt you owed the school.

In short, the school in some way committed fraud to convince you to borrow money or borrowed money in your name without your permission.

If you meet any of the above requirements, you can submit an online application with the Department of Education.

6. Identity Theft Discharge

Identity theft discharge is similar to false certification discharge. You’ll have to show you were a victim and someone took out a student loan in your name that you didn’t benefit from. 

You’ll likely have to provide documentation, such as a police report or documents from related court proceedings, to convince the lender to discharge your loan.

7. Unpaid Refund Discharge

If you withdraw from a college, the academic institution may be required to return some amount of your loans directly to the lender. If the institution failed to do so, you may be eligible for an unpaid refund discharge.

Before applying for discharge, you’ll need to contact the college to try to resolve the issue. If the school is closed or won’t help you, you can submit a form to your student loan servicer with documentation showing you withdrew from school.

8. Borrower Defense Discharge

A borrower defense discharge is an unusual situation that applies when the school you attended misled you or engaged in other types of illegal misconduct to attract students. This applies to colleges, universities, and other career schools.

If you can prove that the school defrauded you somehow, you may be able to get the full amount of your loan forgiven by the federal government. This rule came about in 2015 after a for-profit school, Corinthian College, closed after borrowers accused it of fraud.

If you’re considering applying for a borrower defense discharge, you should keep the eligibility requirements in mind.

First, only federal Direct Loans are eligible. The government will not forgive your private student loans. You also need to have taken the loans to pay for the school accused of fraud. If you transferred to another institution, the government will not forgive your loans if you previously attended a fraudulent school.

Second, you must prove that the school knowingly committed fraud (that violated state or federal law) related to its educational services. 

For example: lying about its accreditation, costs, or your employment prospects after graduating. 

Claims unrelated to education, such as creating an unsafe environment or personal injury, don’t qualify.

While your claim is pending, your loans will enter forbearance, meaning you won’t have to make payments, but interest will still accrue. If your claim is denied, you’ll be responsible for paying the loan again, plus the interest that accrued.

Forgiveness vs. Discharge

Student loan discharge isn’t the only way to get rid of some of your federal student loans. There are also ways to get the government to forgive your student loan debt.

Student loan discharge and forgiveness are very similar. Both will eliminate your loan balance, but there are a few distinctions between them.

Where student loan discharge usually occurs based on the borrower being unable to repay the debt, or having taken on the debt due to fraud, student loan forgiveness occurs based on the borrower’s occupation.

Students seeking loan forgiveness or discharge both have to submit applications for forgiveness or discharge. The government may approve or deny the application based on the student’s situation and eligibility.

The IRS generally treats cancelled debt as taxable income to the borrower. However, the American Rescue Plan Act of 2021 includes a provision that makes all student loan forgiveness tax-free.

A good way to differentiate between the two is that student loan forgiveness is something that borrowers can work toward while student loan discharge is something that borrowers usually become eligible for based on the actions of others.

Student Loan Forgiveness Options

There are many different student loan forgiveness options, each applying in different situations.

Public Service Loan Forgiveness (PSLF)

One of the best-known forms of loan forgiveness is Public Service Loan Forgiveness.

PSLF forgives the remaining balance on a student’s Direct Loans from the federal government. To qualify, a borrower needs to work for a qualifying organization, such as a local, state, or federal government, or a non-profit organization, and make 120 monthly payments on their balance. After 10 years of timely payments, the borrower can apply for loan forgiveness.

PSLF Programs

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Members of the military can also qualify for PSLF after they make 120 monthly payments toward their student debt. They can also qualify for other student loan benefits, including a cap on interest rates and deferments while on active duty.

In some situations, the Department of Defense may elect to pay some or all of a service member’s student loans. This isn’t quite loan forgiveness, but has a similar effect. Eligibility requirements vary based on the branch you serve in and the circumstances, so it’s worth checking with your Military Personnel Officer to see if this is an option.

Teacher loan forgiveness

Another forgiveness program related to post-graduation employment is the Teacher Loan Forgiveness program. Teachers qualify for $17,500 of debt debt forgiveness after teaching for five consecutive years in a low-income school.

Income-driven repayment (IDR) plans

For borrowers whose loan balances exceed their annual income , the government offers four different income-driven repayment plans. These plans adjust your monthly payment on your student debt based on your income. These plans have students pay between 10% and 20% of the monthly discretionary income.

Borrowers who make between 240 and 300 monthly payments toward their debt can generally apply for forgiveness.

State and local programs

In addition to national loan forgiveness programs, there are state-based and local student loan forgiveness programs. Usually, these programs involve working in a specific industry in an area that needs professionals.

For example, medical professionals who agree to work for two years in a qualifying Native American or Native Alaskan community can receive up to $40,000 to use toward paying their student debt.

If you work in an in-demand field like healthcare, looking for these types of programs is worth the effort.

Tax Implications of Student Loan Discharge and Forgiveness

Loan discharge and forgiveness can be a great deal. Student debt can follow borrowers for years, draining their monthly budget and making it harder to get other loans. The government forgiving or discharging a chunk of your debt can feel like a weight coming off your shoulders.

Thanks to recent legislation, the IRS doesn’t count discharge and forgiveness as taxable income, including:

  • Public Service Loan Forgiveness
  • Teacher Loan Forgiveness
  • National Health Service Corps Loan Repayment Program
  • Closed school discharges
  • False certification discharges
  • Unpaid refund discharges
  • Income-driven repayment

How Much Does Student Loan Discharge Save?

You can save a lot of money with student loan discharge or forgiveness, especially if you have a large amount of debt under an income-driven repayment plan.

In 2020, the average student who graduated with student debt had a balance of $37,584. Undergraduate student loan interest rates are currently 2.75%.

Under a standard repayment plan, a student will repay their balance in 10 years. A student with $37,584 in debt at an interest rate of 2.75%, will pay $354.30 per month for a total of $42,516.48 over 10 years.

Borrowers who qualify for discharge on their entire loan balance don’t have to pay the principal or interest. In this case, the student will save $42,516.48. 

A student with a larger balance, or who is following a repayment plan with a term longer than 10 years, will save more by qualifying for loan forgiveness or discharge.

Under the Revised Pay As You Earn (REPAYE) plan, borrowers pay 10% of their discretionary income (the amount over 150% of the poverty line) each month. 

For example, in 2020, the poverty level for a single person in the continental US is $12,760 per year, meaning borrowers pay 10% of the amount they make over $19,140 per year/$1,595 per month.

If a graduate has an annual income of $40,000, that means that they have to pay 10% of $20,860 ($40,000-$19.140) or $2,086 per year, which comes to $173.86 per month.

Let’s look at an example of approximately how much a borrower could save. If the borrower has an average loan balance of $37,584, it will take them roughly 299 payments of $173.86 to pay off their debt. 299 payments of $173.86 is a total of $51,984.14, which includes $14,367 in interest.

Hypothetical example

The borrower can qualify for income-driven repayment after making 240 payments and after 20 years has elapsed. 240 payments of $173.86 is $41,726.40. The income-driven repayment plan saves the borrower from paying 59 payments of $173.86 or $10,257.74.

Ultimately, the borrower potentially saves $10,257.74 by qualifying for forgiveness with an IDR plan. These savings come in addition to the lower required payment, which gives the borrower more flexibility in their monthly budget.

The growth of student loan debt

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Conclusion

Student loan discharge and forgiveness can quickly eliminate your student debt. While discharge can be difficult to qualify for and requires specific circumstances, there are other student loan forgiveness options you can apply for.

Even for someone with average debt, the savings are worth working for. If you have a large amount of student debt, discharge or forgiveness can potentially save you tens of thousands of dollars.

If you have private student loans and you don’t qualify for forgiveness or programs, you may want to consider refinancing.


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