Student Loan Discharge Programs: Do You Qualify?

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.

Thomas Bright is a longstanding Clearpoint blogger and student loan repayment aficionado who hopes that his writing can simplify complex subjects. When he’s not writing, you’ll find him hiking, running or reading philosophy. You can follow him on Twitter.

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6 responses to “Student Loan Discharge Programs: Do You Qualify?”

  • smartypants

    Debts discharged in bankruptcy (including student loans) are not taxable.

    If you receive a 1099-C for a debt that was discharged in bankruptcy, fill out IRS Form 982 and file it with your tax return. Check box 1a, “Discharge of indebtedness in a title 11 case.” (Don’t be confused by the term “title 11” — that’s a reference to the section of the U.S. Code covering bankruptcy, not the type of bankruptcy you filed.) On Line 2, list the amount of debt that was discharged.

    • Thomas Bright

      Thanks for stopping by and commenting. Thanks also for the tax advice 🙂 Will you do mine this year? Ha!

  • OneWhoSeesRightThroughtheWrong

    Under the law, or Brunner v. New York Higher Education Assistance Agency and the related progeny even though the circuits are split on this issue see In Re Long, the Brunner pleading requirements could never be met and the United States Supreme Court refuses to look at it for Instance see In Re Lepre or In Re Traversa. They base their decision to refuse discharge on “future earning capacity”, “future income”, and “good faith effort at repayment” First of all, who can predict the “future”? Second, if your broke how do you make “good faith effort at repayment”? This law is bogus and benefits only one entity, ECMC, regardless of Congress Intentions of Student Loan Discharge Statutes. The Judges reviewing student loan discharge cases are no longer judges anymore but “Fortune Tellers” because the law is based on your future and whether or not you made a payment on the loan. Everyone’s debt is dischargeable in bankruptcy even student loans under Undue Hardship. Congress did not add the pleading requirements of Brunner or Long to the Statute, the judiciary did. Congress says one standard must be met “Undue Hardship” and nothing more. The judges are legislating from the bench allegedly to prevent what ECMC has coined an “abuse” which is the actual discharge of the student loan. This law needs to be overturned and this fascist state must end.

    • Thomas Bright

      Thanks for stopping by and sharing your opinion and legal knowledge. It will certainly be interesting to see what additional protections and legal parameters are put around student loans in the coming years. I’m sure some of this will change radically within our lifetime.

  • Greenstudent

    Good Stuff. This blog is very helpful and informative for students. Thanks For Sharing.

    • Thomas Bright

      Glad it was helpful. Thanks for stopping by and commenting!