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Student Loan Discharge

ALERT: PSLF Time-Limited Waiver Opportunity

On Oct. 6, 2021, the U.S. Department of Education (ED) announced a time-limited waiver opportunity to its PSLF program rules. Under the time- limited waiver opportunity, borrowers could receive credit for past payments which would not have been previously classified as qualifying payments or instances in which payments were not made, specifically, servicemembers who were advised to put their loans in a deferment or forbearance status and did not make payments while on active duty.  The months the borrower spent on active duty can be counted toward the PSLF.

Borrowers will need to submit a PSLF form—the single application used for a review of employment certification, payment counts, and processing of forgiveness—on or before October 31, 2022 to have previously ineligible payments counted.

The time- limited waiver essentially waives all requirements except the employment requirement. If you have Federal Family Education Loans (FFEL) or Perkins loans, you will still be required to consolidate your loan with a Direct Consolidation Loan by Oct. 31, 2022. However, any payments made on your federal student loans, under any repayment plan (partial, full, or late), on any FFEL, Perkins, or Direct Loan, will count towards your 120 qualifying payments.

Under the new time-limited waiver, you need to have been employed or are currently employed by an eligible employer (government, 501(c)(3) not-for-profit, or other not-for-profit organization which qualifies), and working full-time. You can still qualify for the full-time requirement if you are working multiple part-time jobs (that totals at least 30 hours per week) with eligible employers. For more information on which employers meet PSLF Program requirements visit the PSLF Help Tool.

Unlike student loan forgiveness, where in many cases specific employment experience and on-time consecutive payments help you qualify, federal student loans may be discharged if you experience certain unfortunate situations beyond your control.

This type of loan cancellation is determined by very specific circumstances and usually include total and permanent disability or a school closing.  In some cases, you can claim “borrower defense”. This is for people who were the victim of fraud or illegal misconduct from the school attended.

Federal Student Loan Discharge Options

Total and Permanent Disability (TPD) Discharge

TPD discharge available to federal student loan borrowers (Direct Loans, FFELP Loans, Perkins Loans, and TEACH Grant Service Obligation) borrowers who become totally and permanently disabled. Most borrowers will need to submit an application to show that you meet the requirements for TPD discharge. The documentation will not be sent to your student loan servicer, it will actually be sent to Nelnet, the federal student loan servicer who helps the U.S. Department of Education with TPD claims.

Essentially you need to demonstrate that your totally and permanently disabled by providing veteran’s affairs (VA) documentation, social security administration (SSA) Documentation, or a physician certification. If you are providing a physician certification, they must certify that you are unable to engage in substantial gainful activity due to a physical or mental impairment that is either: expected to result in death; has lasted for a continuous period of 60 months, or; can be expected to last for a continuous period of at least 60 months.

The U.S. Department of Education along with the VA and SSA will identify potentially eligible borrowers. That means, the U.S. Department of Education may determine you qualify for discharge based on your status with the VA and SSA, and you will receive a letter notifying you of your eligibility for discharge.

For more information and find the necessary forms, it’s best to review

Closed School

A Closed School Discharge is available for all federal student loans, including Direct Loans, FFEL Loans, and Perkins loans. Sometimes school’s close leaving you in a challenging situation. If your school closed  while you were enrolled, were on an approved leave of absence when your school closed, or your school closed within 120 days after you withdrew (if your loans were first disbursed before July 1, 2020), or your school closed within 180 after you withdrew (if your loans were first disbursed on or after July 1, 2020), you could be eligible for a Closed School Discharge.

There are a few reasons why you may not be eligible for this discharge, even if you meet the above criteria.

  • You withdrew more than 120 days before you school closed, if your loans were first disbursed before July 1, 2020 (exceptional circumstances are considered)
  • You withdrew more than 180 days before your school closed, if your loans were first disbursed on or after July 1, 2020 (exceptional circumstance are considered)
  • You are completing a comparable program through a teach-out
  • Note: you are not required to opt for the teach-out options presented to you
  • You are completing a comparable program* by transferring academic credits or hours earned at the closed school to another school
  • Note: if you are not transferring your credits or hours earned from the closed school, you are likely still eligible for a closed school discharge
  • You are completing a comparable program* by any other comparable means
  • You completed your program before the school closed, even if you didn’t receive your diploma or certificate

*Comparable program is key to determine if you are still eligible or ineligible for discharge if you transferred your credits. If you transferred your credits to a similar program, you probably aren’t eligible for discharge. However, if you transferred your credit to a completely different program, you may still be eligible for a closed school discharge. It’s best you contact your servicer to explain your situation.

There is a chance that you receive this discharge automatically, but if you don’t it’s best you contact your student loan servicer. You will likely see an automatic discharge if your school closed on or after Nov. 1, 2013 and before July 1, 2020 and you did not enroll in another school that participated in federal student aid within three years of your school closing.

False Certification Discharge

There are a few ways you could qualify for a False Certification Discharge for your Direct Loans or FFEL Loans, and they all involve your school.

Ability to Benefit False Certification Discharge

Your school certified a loan that you were ineligible to receive because you did not meet the ability-to-benefit eligibility criteria at the time your loan was certified.

Disqualifying Status False Certification Discharge

When your school certified your loan, they did so even though at the time of certification you had a status (physical or mental conditional, criminal record, or other circumstance) that disqualified you from meeting the legal requirements of employment in your state of residence in the occupation the program was preparing you for.

Unauthorized Signature or Unauthorized Payment

Your school signed your loan application or promissory note without your authorization or endorsed a loan check or signed your authorization for an EFT (electronic funds transfer) without your knowledge, and the money wasn’t given to you or applied to the charges you owed the school. This is similar to identity theft but is classified differently because your school was involved.

Death Discharge

Federal student loans (Direct Loans, FFEL Loans, and Perkins Loans) are discharged upon death of the borrower, or death of the student on whose behalf the parent obtained a Parent PLUS loan. In this unfortunate circumstance, it’s best that the family or representative of the deceased contact the loan servicer to submit acceptable documentation, such as an original death certificate, a certified copy of the death certificate, or an accurate and complete photocopy of one of those documentations.

Identify Theft

If you are a victim of identity theft, your student loan borrowing history may be affected. Identity theft isn’t technically a formal discharge option involving just the U.S. Department of Education if you have federal student loans. If you are the victim of identity theft, there are a number of steps you need to take.

  1. Place a fraud alert on your credit report and review your credit reports and dispute accounts you didn’t open through each credit bureau
  2. Freeze your credit
  3. Report the Identity Theft
  4. FTC:
  5. For federal student loans, report to the U.S. Department of Education’s Office of Inspector General: online or call 1-800-MIS-USED (1-800-647-8733)
  6. Contact the school that received the loan funds and let them know that loans were obtained in your name fraudulently
  7. File a Police Report regarding the incident. This may be required by many creditors who had accounts fraudulently opened in your name, including federal student loans.
  8. Work through the process with each company that had an account opened fraudulently opened in your name to close the account, remove you as the liable party, and have the credit lines removed from your credit report. This may take some time. It’s also important to ask businesses that had a fraudulent account in your name to send you a letter explaining that the account was fraudulent, you are not liable for the account, and it was removed from your credit report.

Parents, if your child borrowed a Parent PLUS loan in your name, without your knowledge, the process remains the same. You will likely need to file a police report to have the account removed from your credit, and have the loan removed as your liability to repay the debt. Unless you are able and willing to take on the debt, you are okay with dealing with the credit bureau reporting, and repayment liability, there really isn’t way to have this all removed from your credit.

If you are looking to transfer the debt, if your child is able to qualify (on their own or with a creditworthy cosigner), you may be able to transfer the Parent PLUS loan to the child’s name through a private student loan refinance.

Private Student Loan Discharge Options

Private student loan discharge options will vary between lenders. You want to check your loan terms to see if there are any options available to you. Some private student loan lenders will offer total disability or death discharge, either in their terms or on a case-by-case basis.

If you are unable to repay your student loan obligation, it’s best to contact your lender to discuss your options.

Student Loan Bankruptcy Discharge

While not impossible, it is difficult to discharge your loans through bankruptcy. However, it is possible for a judge to determine that payment of student loan debt will cause an undue financial hardship and discharge the loan.

Student Loan Refinance

If student loan discharge is not going to work out for you, you might want to consider a Direct Consolidation Loan or even student loan refinance.

The Department of Education offers borrowers to option to obtain a Direct Consolidation loan. This loan will combine your federal student loans into one easy to manage loan. The fixed interest rate you pay will be the weighted average of your current rates rounded up to the nearest 1/8th of a percent. This option will allow you to extend the term length of your loan up to 30 years if desired, to reduce the monthly payment. Please keep in mind that the longer you pay on the loan, the more the loan will cost you in interest.

Refinancing your loan or loans will not relieve you of making payments and you will still be responsible to repay the entire amount of the loan, however, you may be able to lower your interest rate or change your terms which could save you money over the life of the loan or lower your payment to make it more manageable.  If you think this might be the best path for you, we encourage you to learn more.

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