For most borrowers, federal student loans don’t go away until you pay them off. But in rare cases, the government will discharge the remaining balance of your student loans.
In fact, there are seven options for student loan discharge (not counting the many student loan forgiveness programs for public service).
Whether you’re interested in bankruptcy discharge or disability discharge of federal student loans, here’s how you can qualify.
7 options for federal student loan discharge
If you meet any of these conditions, the government will cancel the remainder of your federal student loans. You’ll have to apply for student loan discharge and keep paying your loan until the right agency approves your application.
However, 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.
1. Closed school discharge
Federal student loans are for students at accredited colleges and universities. But if your school closes while you’re enrolled or shortly after you withdraw, you could qualify for student loan discharge.
More specifically, 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 you find yourself in this situation, you’ll have the challenge of tracking down your academic and financial records. Because the college is defunct, try contacting the state licensing agency for your school.
Keep in touch with your loan servicer throughout the application process. If the agency approves your application, it will cancel 100 percent of your Direct Loans, Federal Family Education Loans (FFEL), or Perkins Loans. It’s worth noting, however, that the Perkins Loan Program expired on Sept. 30.
2. Discharge in bankruptcy
Unlike other types of debt, the courts rarely discharge student loans through bankruptcy. But in extreme cases of “undue hardship,” declaring 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.
If you’re considering filing for bankruptcy discharge, you must decide whether your situation falls under Chapter 7 or Chapter 13 bankruptcy. Chapter 7 filers have virtually no income to pay back any of their debts; Chapter 13 filers might be able to repay at least part of their debt if their loans were restructured to make them more manageable.
Since student debt is not typically included under bankruptcy filing, you may need to enlist a student loan lawyer. This legal process can be long and expensive, so you must consider whether filing for bankruptcy discharge is worth the battle. Consider all your options, including income-based repayment, before choosing student loan discharge through bankruptcy.
3. Discharge for total and permanent disability
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.
To apply for disability discharge, contact the loan servicer Nelnet. Nelnet will provide you with the information you need for your application and it will tell your loan servicers to pause collection for 120 days while it makes a determination on your case.
4. Discharge for 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.
If something suspicious happened with your student loans, you could qualify for this discharge option. Contact your loan servicer for more on how to prove false certification, unauthorized payment, or identity theft.
5. Student loan discharge for unpaid refund
Like the false certification discharge, unpaid refund discharge applies to Direct Loans and FFEL Program loans. It would come into play if your school didn’t pay a refund it owed to the U.S. Department of Education or a lender. In this case, the government will 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. Borrower defense discharge
Another way to qualify for student loan discharge is if your college violated state laws. 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.
Unless you request otherwise, the government will put your loans into forbearance or stop collections when you apply for a borrower defense discharge. If it approves your application, you won’t have to pay the loans back. But if it denies it, you’ll have to pay back the loans and the interest they accrued while in forbearance.
7. Student loan discharge due to death
Federal student loans are also discharged if the borrower dies. 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.
Taxes on discharged student loans
Student loan discharge could save you thousands of dollars in debt and interest, but it doesn’t always reduce your student loan bill to zero.
When the government discharges your loans, the canceled balance might be treated as taxable income, as with Total and Permanent Disability Discharge. You might have to pay a certain percentage of your remaining balance in taxes.
This tax bill may be significantly less than what you’d pay in student loan debt. So prepare yourself for one last expense before you can say goodbye once and for all to your federal student loans.
Other student loan forgiveness and assistance options
While there are a number of options for student loan discharge, it’s still relatively rare for most borrowers. More common are student loan forgiveness and repayment assistance programs.
The government offers 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.
Finally, you could also qualify for 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.
Adding years to your plan means you’ll pay more in 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.