In certain situation, you can discharge (no obligation to pay) your student loans. These are the following: (1) Death Discharge, (2) Total and Permanent Disability Discharge, (3) Bankruptcy, (4) Closed School, (5) False Certification/Borrower Defense, (6) Unpaid Refund Discharge. There are a few others, but these are the most common. Below you’ll see a bit more details of each.
If the borrower of a Perkins Loans, Direct Subsidized and Unsubsidized Loans, Parent PLUS Loans, Grad PLUS Loans, and Direct Consolidation loans passes away, their liability is discharge. The family just needs to provide a copy of the death certificate to the servicer. This also applies to Parent PLUS Loans. This also applies to other credit card debt.
Total and Permanent Disability Discharge
This applies when a borrower is disabled to the point where they are unable to engage in substantial gainful activity because of a physical or mental impairment that can result from death, or has lasted for at least five years.
I’ve blogged about this before. You can discharge student loans in bankruptcy, but the standard requires a very high showing that paying the debt would “impose an undue hardship on the debtor and the debtor’s dependents”. 11 USC 523(a)(8). It has occurred, but it is very rare.
We’ve all heard about schools closing throughout the news. If your school closes and you did not receive your degree, you may be able to discharge your loans.
False Certification/Borrower Defense
If the school defrauded you, you can discharge the debt. For example: If the school stated you would be able to obtain a job after graduation when in fact you did not qualify.
Unpaid Refund Discharge
If you are entitled to a refund of your loans, but the school failed to refund you, you may be able obtain an unpaid refund discharge. If you withdraw from a school before reaching 60% point of the loan period, you are eligible for a proportional refund (Title IV R2T4). Your discharge will include the refund portion and accrued interest.
With over 44 million Americans with student loans, it’s important to know this information. Let us know if you think you might qualify for any of these.