Recently on our bankruptcy forum a user asked, “I have recently finished college. I have tried to get a job but have been unable to find any work in my field of study. Now the college loan payments are due. What are my options for getting the college loan discharged, cancelled, or forgiven?”
Unfortunately, too many students complete their education only to find that they are unable to find employment related to their studies. They are also surprised to find that the lender does not care whether they are employed, they are happy with their education, or even whether or not they completed their college coursework. The lender has loaned them money, and as with all contracts, they expect to be repaid.
There are specific instances, however, when a federal school loan can be discharged. Let’s review the most common reasons.
When can a college loan be forgiven or discharged?
- Your school closes
Some students may qualify for a 100% discharge of their Federal Family Education Loan Program loan, the Federal Perkins Loan, or a Direct Loan if their school closes while they are enrolled or if it closes within 120 days of their withdrawal. Note, you will not be eligible for a discharge if the school closes after you have received your diploma.
- You become 100% disabled
Some students may qualify to have their federal college loan discharged if they can prove they have become 100% totally disabled. To prove this they will need to provide documentation from the US Department of Veteran affairs, the SSA, or notification from a doctor.
Information provided must include evidence that they are unable to “engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that will last at least 12 continuous months or will likely result in their death.”
- The borrower dies
In some cases, if the borrower has died the federal college loan can be discharged. Evidence of the death must be provided to the school or to the loan servicer. Not all loans will qualify for discharge.
- Filing bankruptcy
Many students mistakenly believe that filing for bankruptcy will always discharge a federal college loan. Although a student loan is an unsecured debt, it is not readily discharged in bankruptcy.
In fact, to receive a discharge, you must prove to the court that repaying the loan will cause you undue hardship. Proving undue hardship includes proving that repayment would not allow you to continue to maintain a minimal standard of living, the hardship will continue throughout the loan repayment period, and you have made a “good faith” attempt to repay the loan prior to filing for Chapter 7 bankruptcy (which could be as long as 5 years).
Filers who cannot prove all three elements of the hardship argument will not have the loan discharged.
- Teacher and Public Service Loan forgiveness programs
Certain teachers who have been teaching full-time in a low-income elementary or secondary school or educational service agency for five consecutive years may qualify for loan forgiveness as well as some students who entered into certain public service jobs and have made up to 120 payments on Direct Loans (after Oct. 1, 2007).
Bottom line for a college loan:
Although most students will have to repay their college loan, there are certain students who may qualify for a college loan discharge.
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