We have been talking quite a bit lately about paying back student loans. We’ve given a lot of advice for how people can get ahead on their student loan payments, avoid bad interest terms, and refinance student loans after a credit score boost. Today we want to talk about a much different subject. We want to talk about the options available to people who have been desperately trying to pay off student loan debt but can’t. We are going to look at how these struggling borrowers can qualify for student loan discharge.
What is student loan discharge?
A discharge is the “release of borrowers from their obligation to repay their loans.” Essentially, it is a legal decision that frees a borrower from having to pay back their student loan debt. Similar terms are “student loan debt forgiveness” or “cancellation.”
Types of student loan discharge
According to the Student Aid website, there are nine types of student loan discharge. Each has its own requirements and applies to different types of federal loans:
- Disability discharge
- Death discharge
- Discharge in Bankruptcy
- Closed School Discharge
- False Certification of Student Eligibility or Unauthorized Payment Discharge
- Unpaid Refund Discharge
- Teacher Loan Forgiveness
- Public Service Loan Forgiveness
- Perkins Cancellation and Discharge
As you can see, there are a wide variety of student loan discharge programs. Some serve to protect borrowers from tragic life events, while others are based on occupation. Some also protect consumers from errors or unfair actions taken by the educational institution. For instance, the Closed School Student Loan Discharge allows loans to be discharged for students whose school closed before they graduated. Some of these circumstances are unique, but it might be worth looking into. For more specific information, borrowers should visit StudentAid. It’s also important to remember that different discharge programs apply to different types of federal loans. The three main types of Federal loans are Direct Loans, Federal Family Education Loan (FFEL) Program Loans, and Perkins Loans.
Some people may be struggling with their student loans but still don’t qualify for these discharge programs. In these cases, borrowers should look into student loan repayment programs, which are available to a larger number of people. For help with “sorting it all out,” consider student loan counseling. This service gives you the opportunity to talk with a certified student loan counselor who can help make sense of your options and determine which programs you may qualify for.
Tax Implications of Student Loan Discharge
If you are successful in obtaining a student loan discharge, you may want to breathe a sigh of relief. Before you do, you need to understand the potential tax implications of your discharge. The debt that was forgiven could be charged to you as taxable income. It all comes down to which student loan discharge plan you use.
From our list of programs above, only the Public Service Loan Forgiveness and Teacher Loan Forgiveness programs are exempt from being considered taxable income. The rest of the programs listed will bring some sort of tax implication and you will likely owe a hefty sum, since the forgiven amount will be “taxable income.”
It’s important to understand that policymakers are in constant debate about the future of student loan discharge and repayment programs. It’s likely that the rules will continue to change, and that may include changes to the tax implications of these programs.
Discharge in Bankruptcy: A Closer Look
We should take a closer look at student loan discharge through bankruptcy. It’s a common misconception that “there is no bankruptcy for student loans.” Although this is a popular rumor, it’s not quite true. The truth is that discharging student loans via bankruptcy is incredibly difficult.
To have your student loan debt discharged in this way, you have to tell the bankruptcy court that the repayment would create an “undue hardship.” Then, you need to (at a minimum) meet these three requirements:
- The student loan repayment will make you unable to maintain a minimal standard of living.
- The hardship will continue for a substantial period of time.
- You have made a “good-faith” effort to pay the loan in the past (usually for a minimum of five years).
Having student loan debt discharged in this way is very rare. But, it does happen. Recently, a law-school graduate was successful in having over $50,000 in student loan debt discharged, although this involved a 10 year legal battle.
*Before pursuing this option, it may be wise to consult legal advice.
Is student loan discharge right for you?
Really, student loan discharge is only an option for people who qualify. If you don’t qualify, you are better off looking into some of the repayment programs that can make your student loan repayment more manageable. Like with other student loan topics, this can become confusing, and it may be difficult to determine which programs you qualify for.
That’s where we come in. Student loan counseling gives you the opportunity to talk with a certified student loan counselor about the options available to you. Your counselor can help determine which programs will be a good fit for you and can help you create an action plan to move forward. Call 1-800-675-7601 or click here to get started.