Comparing Student Loan Discharge & Loan Forgiveness

The terms “student loan forgiveness” and “student loan discharge” are used interchangeably for a good reason: They both mean you are no longer responsible for what is left of your student loan debt.

More than 44 million Americans wish that were the case for them.

That’s how many people still owe part of the $1.5 trillion of student loan debt on the books in 2018. According to the Consumer Financial Protection Bureau, more than 5-million individuals have defaulted on their student loans or are behind in their payments, but for some, there may be a way out.

There are legitimate ways to get your student loans forgiven or discharged, but you need to know the definition and conditions of both to see if you qualify.

Student loan forgiveness applies when a borrower chooses to perform a service for the community, which the lender (usually the government) believes is worthy of loan forgiveness. It must be a full-time job and the borrower must make 120 on-time payments before qualifying for loan forgiveness. Teaching, military service, police, firefighters and social work are some examples of jobs that qualify.

Discharge applies to catastrophic situations, including death, total and permanent disability, the closing of a school, bankruptcy, disaster situations (such as the surviving spouses of people killed in the 9/11 terrorist attack), fraud or severe physical and mental impairments.

Here are the things forgiveness and discharge have in common:

Whether you are seeking forgiveness or a discharge, it’s necessary to apply and there’s no guarantee of acceptance. It’s important to keep good records of the time worked in order to prove your eligibility.

Also worth noting: If you are granted forgiveness or discharge of your student loan debt, the canceled amount could be deemed income. Check with the IRS to see if it is subject to federal taxes.

How to Get a Student Loan Discharge

There are multiple ways to get the remainder of your student loan discharged. If you meet any of the following seven conditions, the government will cancel the loan. Be sure to keep up your payments until the right agency approves your application and triggers the loan cancellation.

  1. Your School Has Closed — Federal student loans go to students at accredited colleges and universities. But what if your school closes while you’re enrolled? If that happens — or you withdraw within 120 days of the school closing — you could qualify for a student loan cancellation. You must track down your academic and financial records, which could be found through the state licensing agency for the school.
  2. Bankruptcy — If it causes “undue hardship,’’ it could lead to the discharge of your student loan. What constitutes undue hardship?
    1. If you’ve made good faith efforts to pay back the loan.
    2. If you couldn’t sustain a minimal standard of living by paying back the loan.
    3. If your financial hardship will continue for the foreseeable future.

Student loan debt is rarely settled through bankruptcy, which can be a long and expensive process. You might consider income-based repayment if the hassle isn’t worth the outcome.

  1. Total and Permanent Disability — How do you qualify?
    1. If 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, which state that you are unable to work and, thus, unable to repay your student loans.
    2. If you receive Social Security Disability Insurance or Supplemental Security Income benefits. You must submit supporting documents and have a disability review scheduled within five to seven years.
    3. If your physician said you have a total and permanent disability that has lasted for at least 60 months and will last for at least another 60 months.
  1. False Certification or Unauthorized Payment — This is offered to victims of identity theft or false certification. It applies mostly to Direct Loan or FFEL Program loans.

How do you qualify?

  • If your school falsely certified you as eligible to receive loans, even though you didn’t meet the requirements.
  • If your school signed your name on an application or promissory note without your knowledge.
  • If someone took out a loan in your name.
  • If something suspicious happened with your student loans, an action that could be considered false certification, unauthorized payment or identity theft.
  1. Unpaid Refund — This could happen if your school didn’t pay a refund it owed to the U.S. Department of Education or a lender. And if this is the case, you likely would receive a partial discharge in the amount your school didn’t pay.
  2. Borrower Defense — This occurs if your school violated state laws. In the past, some schools have been convicted of using illegal or deceptive tactics to convince students to take out loans and attend. If you can prove the school is guilty of fraud, you won’t have to pay back the student loan.

You will need documents such as transcripts, enrollment agreements, emails with school officials, promotional materials and course catalogs.

When you pursue this angle, the government will put your loans into forbearance or stop collections. And if your application is approved, you’re off the hook for the loan. If it’s denied? You must pay back the loans and the interest accrued while in forbearance.

  1. Death — If the borrower dies, a family member or representative must send a death certificate or other documentation to the loan servicer for immediate discharge. In this case, Parent PLUS loans also are canceled.

Student Loan Debt Forgiveness Program

When President Barack Obama signed the Health Care and Education Reconciliation Act of 2010, that reform became known as the “Obama Student Loan Forgiveness’’ plan. The Direct Loan Program (FDLP) received expanded funding and gave more borrowers access to loan repayment options.

Here’s how Obama changed federal student loan forgiveness:

  • The federal government no longer gave subsidies to private lending institutions for federally backed loans. In 2014, borrowers of new loans qualified to make payments based on 10% of their discretionary income.
  • New borrowers became eligible for student loan forgiveness after 20 years (instead of 25) on qualifying payments.
  • Increased funding was provided for poor and minority students.
  • Additionally, the borrower can consolidate all their federal student loans into one new loan. There’s also a choice between five different repayment plans, giving the borrower the chance to find the most affordable option.

Here are the five different repayment plans:

  1. Standard Repayment — The borrower pays a fixed amount each month for the life of the loan. The payment is determined by the borrowed amount, interest rate and term of the loan.
  2. Graduated Repayment — The borrower makes payments lower than the standard repayment plan, but it gradually increases every two years.
  3. Income Contingent Repayment (ICR) — The borrower makes payments based on their income, family size, loan balance and interest rate.
  4. Income-Based Repayment (IBR) — The borrower’s payment is based strictly on their income and family size. The balance of the loan and interest rate are not used in calculating the monthly payment. The borrower is responsible to pay 15% of their discretionary income to their federal student loans.
  5. Pay As You Earn (PAYE) — This usually has the lowest monthly payment and it based on income, but uses 10% of the discretionary income.

Under the William D. Ford Direct Loan program, there are other forgiveness options. Payments made in an IBR, ICR or PAYE repayment count as qualifying payments for those who work in the public sector and would like to apply for public service loan forgiveness, which is different than Obama Student Loan Forgiveness.

Meanwhile, the Trump administration has proposed ending the Public Service Loan Forgiveness program for new borrowers. The Congressional Budget Office has estimated that ending the program would save the government $24-billion over the next decade.

That proposal has not been voted on as of the summer of 2018.

Who Qualifies for Student Loan Forgiveness?

Depending on your career and financial status, there are various ways to qualify for student loan forgiveness eligibility.

Public Service Loan Forgiveness (PSLF) — For full-time employees at a federal, state or local government agency. Organizations with a 501(c)(3) designation qualify, too, but religious-based nonprofits do not. You must make 120 on-time payments toward the loan.

Forgiveness with Income-Based Repayment (IBR) For eligibility, your payments on IBR must be less than what your payment would be under the Standard Repayment Plan. If you have a large debt load compared to your income, it should be easy to qualify. This is a good method for borrowers who work in low-paying fields, but have high-figure debt loads.

Pay as You Earn (PAYE) Your monthly payment is capped at 10% of your discretionary income and after 20 years the remaining balance is eligible for forgiveness. The payments must be less than they would be under the 10-year Standard Repayment Plan.

Revised Pay as You Earn (REPAYE) — Similar to PAYE, but there is no income eligibility. Anyone with eligible loans can apply.

Forgiveness with Income-Contingent Repayment (ICR)You pay either 20% of your discretionary income or what you’d pay on a fixed 12-year plan, whichever is less. Anyone with a federal student loan is eligible.

Federal Perkins Loan Cancellation — A percentage of your student loan is forgiven after every year of service with occupations such as teacher, librarian, speech language pathologist, Head Start professional, firefighter, law enforcement officer, nurse, public defender or service volunteer.

Teacher Loan Forgiveness — Eligible teachers must have worked five years in schools that serve low-income students. Elementary school teachers receive up to $5,000. Secondary school teachers who teach math, science or special education could receive up to $17,500 in loan forgiveness.

Student Loan Forgiveness for Nurses — For those working in an underserved community, the NURSE Corps Loan Repayment Program can have 60% of student loans paid after two year of employment and another 25% after the third year.

Loan Repayment Assistance for Doctors and Other Health Care Professionals — The National Health Service Corps (NHSC) awards up to $50,000 to primary care doctors, dentists or mental/behavioral clinicians who work for two years at an eligible site. The Students to Service Program will provide up to $120,00 if you commit to working as a primary health care provider at an approved site for three years. The National Institutes of Health (NIH) will repay up to $35,000 for health professionals who commit to two years of research at a qualifying nonprofit. Meanwhile, some doctors could receive up to $120,000 (with Army service) or $275,000 (with Navy service) in student loan assistance for medical residents.

Loan Repayment Assistance for Lawyers — Some attorneys can get assistance from their former law schools. Meanwhile, lawyers who work for three years at the Department of Justice can earn up to $60,000 in loan assistance (to qualify, you must have at least $10,000 in federal loans).

Military Student Loan Forgiveness and Assistance — The Army, Navy, Air Force and National Guard each offer loan repayment assistance programs. The Army, for example, pays one-third of your loans every year for three years (up to $65,000 total). The Navy also awards up to $65,000.

How do I Apply for Student Loan Forgiveness?

For most loans, you must submit an online application at StudentLoans.gov. You can also obtain a paper application from your loan servicer. You will need to provide documentation as requested, such as proof of income and a tax return.

To apply for Public Service Loan Forgiveness, fill out and submit the Employment Certification Form each year, or as you change jobs. FedLoan Servicing will review your information and let you know if you qualify. They may ask for more information, like pay stubs, W-2s, or other documentation.

How Do I Apply for Student Loan Discharge?            

If you believe you qualify to have your student loan cancelled completely you should contact your loan servicer. You can also learn more on the Federal Office of Student Aid website. If you have a Perkins Loan, you should contact the school that made the loan or the loan servicer the school has designated.

Where Can I See How Many Payments I Have Made?

When filling out and submitting the Employment Certification Form, FedLoan Servicing will let you know how many qualified payments you have made, and how many payments you will need to make until you qualify for forgiveness.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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