Cancel Your Debt With These Student Loan Discharge Programs
Hundreds of thousands of borrowers have taken advantage of getting their loans discharged through federal programs, for reasons like total and permanent disability (TPD), school closure or bankruptcy. But not everyone qualifies for discharge programs—even though there are almost a dozen of them available at the federal level.
Here’s how to tell the difference between forgiveness and discharge as well as what you need to be eligible.
What is a student loan discharge?
A student loan discharge occurs when you are no longer legally required to make payments on your student loans due to extenuating circumstances through no fault of your own. For example, if you have a permanent disability and can’t work, you likely won’t be able to earn wages to make student loan payments.
However, discharge is different from student loan forgiveness or cancellation. Both of these are usually reserved for those who have worked in a specific industry or field for a specific period of time. Those eligible for public service loan forgiveness, for example, need to make at least 10 years of qualifying payments before qualifying.
9 Federal Student Loan Discharge Options
When it comes to private student loans, it is up to each lender whether or not they offer a discharge option. But if you have federal student loans, here are nine discharge programs to consider:
1. Total and permanent disability
Are you in the US? You can qualify for total and permanent disability by providing documentation from the Department of Veterans Affairs, the Social Security Administration, or a physician that proves you have a total and permanent disability.
The only TPD loan servicer is NelNet. Eligible loans and programs include:
- Direct Loan
- Federal Family Education Loan (FFEL) Program Loans
- Federal Perkins Loan
- Teacher Education Assistance for College and Higher Education (TEACH) grant service obligations
2. Borrower protection for repayment
If you were misled by your school or found that the school violated state law, you may be eligible for repayment of your loan through borrower protection.
You have to prove that you were misled by the school or that the school violated the law—causing you financial loss. Only direct loans are eligible for this type of discharge. There is also a possibility that only a portion of your loan will be discharged and you will still be liable for the rest.
3. False certificate
If your school has incorrectly certified your eligibility for a loan, you may be able to have your Direct or FFEL loan discharged. There are three ways you can qualify:
Ability to Benefit: For students who have not graduated or received a GED before entering school, the institution will likely administer an “ability to benefit” test. If there is a problem with how the exam was administered or they fail to take the exam, the loan may be waived. However, this may not be as common, because as of 2012, students without a high school diploma or GED are not eligible for federal financial aid.
Disqualifying status: If you meet the requirements to receive a loan but are not eligible to work in your state for the job the organization was preparing you for, you may qualify for ineligible status. For example, you cannot meet the state’s requirements for employment in your occupation because of your age, physical or mental condition, criminal record, or other reasons.
Unauthorized signature or payment: If your school signs your name on a loan application or promissory note without your consent, you may be eligible for false certification disqualification. You are also eligible if the school endorsed your loan check or authorized a fund transfer without your knowledge. You may also be eligible if the loan is not applied to the charges you have paid to the institution or given to you.
4. Unpaid Refunds
If you received a loan and withdrew from the school before using it, your school can put you or your loan servicer on the hook for returning those funds. If the school has not reimbursed your loan servicer, you may be eligible to discharge a portion of that loan.
5. School closure
You are eligible for discharge if the institution closes while you were enrolled or shortly after you graduate. Direct Loans, FFEL Loans and Perkins Loans are all eligible.
If a person or company forges your signature on a student loan document, you may be eligible for a discharge. If you are eligible, you will see the full balance discharged.
7. Death of Borrower
If you die, your federal loan will also be discharged. Proof of death by a family member or other representative is required.
Parent Plus Loan is waived if either the parent who has taken the loan on behalf of the student or the student who is the beneficiary of the loan. Direct Loans, FFEL Loans and Perkins Loans are eligible.
Student loan discharges due to bankruptcy are not common—but they are possible. During your bankruptcy filing, you’ll need to show that repaying your student loans will cause an undue hardship to qualify. You have to take a separate action called counter action. Your student loan lender and other creditors may be present at your hearing.
Your loan may be partially or fully discharged depending on the court order. There is also a possibility that you will be required to repay your loan but with improved terms such as a lower interest rate.
9. Perkins Loan Discharge
New Perkins loans are no longer issued as of 2017. But if you still have Perkins loans from years ago, you can discharge them through bankruptcy, school closure, death, or total and permanent disability.
Depending on your circumstances, you may be eligible to have some or all of your Perkins Loan discharged.
How to Apply for Student Loan Discharge
Only the federal government and authorized student loan servicers can handle the discharge of federal loans. Although each discharge program has its own requirements, you can still follow these steps to apply:
- Complete the application. There are more than a dozen different types of waivers, cancellations, and discharge options. Find the program you think you qualify for and complete the application. If you are unsure of what you are eligible for, you can contact your servicer.
- Provide documentation. Each program has specific requirements for discharge, so be prepared to show more than one type of document to prove your eligibility.
- Keep up with your payments if necessary. Some programs require you to continue making student loan payments while your application is under review. Others will pause your payment for a few days during the application process to allow you to submit your application and provide your proof.
- Wait for approval. Even if your application is approved, you may still be responsible for a portion of your loan. If your loan is fully discharged, you are no longer obligated to make payments. If your application was rejected, you will continue or resume the payments you previously made.
- Review any tax implications. Different discharge programs have different tax implications. Generally, discharge loans and other canceled debts are considered taxable. But every case is different. For those who qualify for a total and permanent disability discharge from 2018 to 2025, the amount discharged will not be considered taxable income.
Student Loan Discharge
An additional way to achieve student loan forgiveness is called a discharge. It is usually awarded by a judge and can apply to both federal and private student loans. Discharge is granted in very rare circumstances.
Circumstances for Student Loan Discharge
- Permanent disability or death
- A victim of identity theft
- Unauthorized co-signing of loans by the school without your knowledge
- False certificate of student eligibility
- Unpaid refunds, which occur when you withdraw from school and don’t return the required loan funds to your loan servicer
- School closed when you were enrolled
Discharging student loans through bankruptcy is extremely rare. It’s not technically impossible, but it’s very difficult to demonstrate undue hardship. Read more about the differences between a waiver and a discharge.
Student Loan Forgiveness Options
The qualifying standards for student loan forgiveness eliminate many of the 45 million borrowers, but there are other avenues to pursue that can make paying off your debt a little less challenging.
The most obvious way to get a federal loan is to sign up for one of the income-based programs. These programs adjust your monthly payment based on your income, so if you’re not making much, you don’t have to pay more.
Historically low interest rates in 2020 made it a prime time for borrowers to check whether refinancing their student loans makes sense. Some borrowers were able to get rates at 3% APR and that reduced their monthly payments to manageable levels. Be aware, however, that if you refinance federal student loans, you’ll lose many of the options federal programs offer.
If your cash crunch is temporary, you can ask for your loan to be deferred or put into forbearance. This gives you time to reorganize financially so you can meet monthly payment obligations.