Student Loan Discharge
If your student loan is anything like that of the average US graduate, you could have racked up a massive $37,000 in debt.
It’s not surprising that many students are desperately looking for ways they can have it canceled, discharged, or forgiven.
Watching all that debt suddenly disappear can seem like a dream, but there are a few genuine reasons for a student loan to be discharged.
While they don’t apply to everyone, it’s always worth a go, right?
Federal Student Loan Discharge Conditions
Student loan discharge takes place when a loan servicer cancels the debt of a borrower.
This only happens under seven different conditions, where it’s deemed that the borrower should not or cannot make the payments.
However, don’t assume that just because you meet one of these criteria, your loan will automatically be discharged, and you can stop making your payment.
Although sometimes the process is automatic, you’ll normally need to apply for approval first.
1. Closed School Discharge
You could be eligible for closed school discharge if the college you attended closes when either you’re still studying there or shortly after you graduate. Generally, the cutoff point is 120 days, but this is set to extend to 180 days in July 2020.
To be eligible, you need to have taken out a federal student loan – either a direct loan, a Federal Family Education Loan (FFEL), or a Federal Perkins loan.
If you have a private student loan or consolidated loan, it’s unlikely you’ll be able to apply for a closed school discharge, but you can still contact your lender to see whether there’s any possibility of this happening.
Another important point is that you’ll disqualify yourself for the discharge if your school closes and you transfer your credits to a different school – this shows that the closing of the school didn’t hamper your educational success.
2. Total and Permanent Disability Discharge
Total and Permanent Disability Discharge (TPD) is for those with a level of physical or mental disability that prevents them from engaging in “substantial gainful activity.” Therefore, your disability should render you unable to participate in work, and therefore eligible to have your loan discharged since you cannot repay it.
The discharge program is for those with direct loans, FFEL loans, or Federal Perkins Loans.
Because of the implications, taking out a TPD discharge means you won’t be able to return to school and receive more student loans without resuming repayments on your current loans since returning to education suggests you’re also capable of working and repaying. However, once you’ve made it past the mandatory three-year period after discharge without returning or working, you can return.
Another quirk of TPD discharge is that, before January 2018, the loan discharge was viewed as income for tax purposes. However, this has since changed, and all loans discharged between January 2018 and December 2025 aren’t considered income for tax purposes.
There’s a dedicated website to learn more about the disability discharge process.
3. Discharge Due to Death
If anything is a good reason to stop paying your student loan debt, it’s dying. It’s traumatic enough for your family to experience a loved one dying without inheriting your debt and having to make the payments for you.
If a borrower dies and has a direct loan, FFEL loan, Perkins loan, or if their parent has a PLUS loan, they are eligible for a discharge due to death.
4. Bankruptcy Discharge
Contrary to popular opinion, declaring bankruptcy isn’t an automatic guarantee that your student loan will be discharged. You’ll need to take the case to bankruptcy court, and the court must rule that repayment would cause “undue hardship” on you and your dependents.
To get your student loan discharged, you must have either Chapter 7 or Chapter 13 bankruptcy, the two main types of bankruptcy that affect consumers. Chapter 7 bankruptcy involves selling all nonexempt property back to your creditors and will wipe out your debts within months. Only low-income individuals can qualify.
Under Chapter 13 bankruptcy, you can keep your property and establish a repayment plan with your creditors, but must be able to afford the payments. If you seem able to make your repayments in part but not in their current form, you should apply for a Chapter 13 bankruptcy.
Since a large part of getting your loan discharged due to bankruptcy relies on “undue hardship,” you’ll need to prove this is true. You could do this by showing you’d be unable to maintain a minimal standard of living while making your payments, that you’ve tried hard to make the payments, or that the position you’re in is likely to continue for a significant amount of time. However, there are no strict criteria for you to meet – the above are just helpful measures.
Discharge in bankruptcy is available for direct loans, FEEL program loans, and Perkins loans.
5. Borrower Defense to Repayment
A slightly more unusual type of student loan discharge is the borrower defense to repayment, which is applicable for the special case where a school either fails to provide the educational services expected or violated the law relating to the loan provision itself.
It can be complex and difficult to figure out if borrower defense to repayment applies to your case. The failure of the institution must be directly related to the loan provision or the educational services the loan provided – it isn’t applicable to wider failures of the school, like your failure to secure the career you wanted.
Unlike most other types of discharge, it’s available only for direct loans. However, if you have an FFEL loan or Perkins loan, you could still apply for borrower defense to repayment by consolidating into a direct loan.
6. False Certification Discharge
Somewhat similarly to borrower defense to repayment, false certification discharge is issued if a school was wrong when deciding you were eligible for a loan. This is generally given to victims of fraud, especially identity fraud, but is sometimes given to those who feel they should never have been given a loan in the first place.
Unsure if this applies to you? There are three categories:
- False certification of your ability to benefit from a loan
- Unable to meet legal requirements for the employment your program was for
- Unauthorized signature on application or loan money not given
You can be issued a false certification discharge if you have a direct loan or an FFEL loan.
7. Unpaid Refund Discharge
If you withdraw from a program you’ve received a loan for, you’re eligible for at least a partial refund.
So, if a school fails to return this money to you, you’re eligible for a discharge.
Unpaid refund discharge is available for anyone with a direct loan or an FFEL loan.
However, the Department of Education recommends anyone who thinks they might be eligible to resolve the issue with the school before applying for a discharge.
How Can I Apply For a Student Loan Discharge?
Although the outcome of each type of student loan discharge is the same, they all have very different application processes.
You’ll also find that some categories completely remove your student debt, whereas others only cancel a percentage of it.
1. Closed School Discharge Application
To apply for closed school discharge, you need to apply by contacting your loan servicer. You’ll need to fill in a form and submit your academic and financial aid records along with the application to ensure you can be approved. It can be tricky to obtain your academic transcript once your school has closed, but you can contact your local state licensing agency instead.
While the loan servicer processes your application, you must continue to make your payments, but you’ll receive a refund for this later if your application is approved.
If your application is denied and you believe it was a mistake, you can request a review from the Department, and even appeal to federal court.
The Department of Education has also recently created an automatic student loan discharge, which is initiated by them. You’ll receive an email if they decide you’re eligible. However, this can be a longer process – the loan will only be discharged automatically after three years – so you can also apply for a manual discharge if you’d prefer.
2. Total and Permanent Disability Discharge Application
You can apply for TPD discharge by sending an application to Nelnet, which assists the Department of Education with this type of discharge. First, contact Nelnet to tell them you’re sending your application, and they will pause payments on your student loans for 120 days while you apply.
If your disability means you cannot complete the application yourself, an Applicant Representative may apply for you, but an Applicant Representative Designation form must be filled in first.
You must provide proof that you have a disability and that it meets the requirements. This evidence should come from a trusted source: either the US Department of Veterans Affairs, the Social Security Administration, or a physician.
Documentation from the Veterans Affairs department is suitable for those who have a disability connected to their service that is 100% disabling, or for those who are disabled based on their individual employability rating.
Meanwhile, if you’re eligible for Social Security Administration, you can provide a copy of the notice of your award or a Benefits Planning Query. Alternatively, a doctor of medicine or doctor of osteopathy can certify you have a mental or physical disability that is expected to last 60 months or more, has lasted for at least 60 months already, or is expected to result in your death.
If you apply using proof from either the Social Security Administration or a physician, you’ll have to undergo a post-discharge monitoring period lasting three years. If you stop meeting the criteria during this period or you start earning more than the poverty guideline amount, you’ll have to continue paying the loans afterward.
3. Discharge Due to Death Application
To apply for discharge due to death, a representative of the borrower that died must send proof of your death to your loan servicer.
This could be either the original copy of a death certificate, a certified copy of the death certificate, or an accurate and complete photocopy of the certificate.
4. Bankruptcy Application
To take your case to the bankruptcy court and begin the process of applying for loan discharge, you’ll first need to declare Chapter 7 or 13 bankruptcy. You’ll then need a lawyer to present you in your court case, which is notoriously expensive.
If your application is accepted, your loan could either be fully or partially discharged. A partial discharge could mean that you’re given a lower interest rate, or the loan is reduced. On the other hand, a full discharge means all debt collections will cease immediately.
If the court decides not to discharge your loan, you’ll have to contact your loan servicer and organize an alternative plan instead.
5. Borrower Defense to Repayment Application
You must submit an online application to the Department of Education to apply for borrower defense to repayment. The process includes a digital signature and documents such as proving your enrollment at a school, promotional materials, or a course catalog from the school making certain claims, and emails with school staff. The information you’ll need varies depending on the reason you’re making the claim.
As the Department of Education reviews your application, you can opt for them to pause your debt payments.
If you went to a Corinthian College (Everest, Heald, or WyoTech) between July 1, 2010, and September 30, 2014, then you must make a specific type of application. These colleges were infamous for using illegal and dishonest promotions to persuade students to attend, and many are now applying for discharges. You can find more information here.
Making a successful application will mean that the Department of Education uses the income of you and your classmates to figure out how much loan relief you’re eligible for. If the earnings of those on your program are significantly below those of others studying a similar program at another school, you’ll receive a high loan discharge amount. The amount will always be above 10% of the total loan.
However, if the earnings exceed those of comparative programs, you’re not eligible to receive a discharge – even if the rest of your application was successful.
6. False Certification Discharge Application
Depending on the category under which you’re applying for a false certification discharge, you need to fill in a different application form. Once you have found the right form, you’ll need to submit it along with proof of the claim you’re making.
For example, if you’re saying you’re unable to perform the employment your course was supposed to prepare you for, you might need to provide a physician’s note to prove it.
If the claim is approved, the full loan will be discharged, and all payments you’ve made so far will be refunded.
7. Unpaid Refund Discharge Application
Like most other types of discharge, you apply for an unpaid refund discharge by submitting an online application.
If the school you have an issue with is now closed, you should apply for a closed school discharge instead. But if it’s still open, then you should contact your loan servicer to find out the next steps.
Only the amount that was owed to you in the first place will be returned.
Alternatives to Student Loan Discharge
The requirements needed to apply for student loan discharge are extremely specific – chances are, your circumstances won’t align with the eligibility criteria.
But that doesn’t mean you need to struggle with stifling student debt until your retirement – there are a few other ways to reduce the burden of your student loan.
Student Loan Forgiveness
There are many programs out there for student loan forgiveness, most of which are available in exchange for completing public service. The biggest schemes are Public Service Loan Forgiveness, Teacher Loan Forgiveness, and various options for healthcare professionals.
If you commit to a certain contract (normally between two and ten years) of working in a shortage area in the public sector, the government will cancel a percentage of your debt, or even the entire debt.
For most people, this is the most realistic way to get your student loan debt canceled. However, student loan forgiveness plans are only suitable for people who want to work for a public sector or not-for-profit organizations – the most common professions are teachers, nurses, and doctors.
Repayment Assistance Programs
Alternatively, if you don’t intend to pursue a career in the public sector, you might prefer to go for an income-based repayment plan. While this won’t actually reduce the loan, it will make it more manageable for you by extending the length of your loan and reducing the monthly repayment amount.
Most plans ensure that you only need to pay 10% to 15% of your discretionary monthly income toward your debt, a manageable figure for most people. Some plans even offer forgiveness to those who meet their payments for an extended period – 20 years or more – but don’t manage to pay it off.
However, be aware that these types of plans mean you’ll pay more in the long run. When the term of your contract is increased, it means there’s more time for interest to accrue, which you’ll have to pay off too.
Student Loan Discharge FAQ
How does student loan discharge affect my credit?
A student loan discharge won’t necessarily have a negative impact on your credit. Yet it may do so depending on the type of student loan discharge you apply for and the way you go about it.
Applying for a discharge due to bankruptcy will always result in damage to your credit score. After all, credit scores measure a borrower’s ability to manage debt, and defaulting on a loan proves you’re unable to do this effectively. Chapter 7 bankruptcies affect your credit score for 10 years, and Chapter 13 bankruptcies affect your credit score for 7 years. Some lenders will refuse to lend to anyone who has had a bankruptcy within a certain period, usually one year.
As long as you continue to make your student loan payments until the point at which your loan is discharged, the discharge shouldn’t affect your credit score. It’s therefore essential to wait until your loan servicer tells you that either the need to pay has been paused or that the loan has been discharged.
What is the difference between loan forgiveness and loan discharge?
Many people get confused about the difference between student loan discharge and forgiveness. Loan servicers are willing to cancel loans when it can be proven that the loan should never have been issued in the first place or that the loan is no longer suitable for the borrower. In contrast, organizations (usually the federal or state government) choose to forgive loans of the borrowers that meet their criteria as an incentive for graduates to pursue careers in shortage areas.
Therefore, student loans are generally discharged due to external factors outside of your control, whereas student loan forgiveness is a program you can apply for.
Do I have to pay taxes on discharged student loans?
It depends on the exact scenario and the type of discharge you apply for, but you often have to pay taxes on the balance discharged back to you. This can add up to be quite substantial if you had a large loan balance – however, it’s of course much lower than what you’d pay in your loan payments.
Should You Apply for Your Student Loans To Be Discharged?
If you happen to meet the criteria for one of the categories for student loan discharge, you can consider yourself either extremely lucky or extremely unlucky.
On the one hand, you’ve undergone a terrible experience like identity theft or permanent disability – but on the other hand, you’re eligible to have your student loan canceled without you having to put in much effort.
Don’t hesitate in starting the process – it can be slow to get approved, and you may need to continue to make your repayments in the meantime.
However, don’t be too disappointed if you find you’re not eligible for student loan discharge – most people aren’t.
There are still a few options available to you that can make your debt far more manageable or even cancel it completely.