In limited circumstances, borrowers may be able to completely cancel their
federal student loans. Borrowers that receive loan cancellations are also eligible
for reimbursement for previous payments (including tax refunds seized by the
IRS and payments made by the borrower) and cleaning up of credit report problems
due to student loan defaults.
These critical rights are summarized below.
A. Closed School Discharge (34 C.F.R. §682.402(d)-FFEL
loans)
Applies only to loans received at least in part on or after January 1, 1986.
Students must have been enrolled at the time of school closure or they withdrew,
the withdrawal had to have occurred within 90 days of closure. The Department
of Education maintains a list of official closure dates, available at: http://wdcrobcolp01.ed.gov/CFAPPS/FSA/closedschool/searchpage.cfm
B. False Certification Discharge (34 C.F.R. §682.402(e)-FFEL
loans)
Applies only to FFEL or Direct loans received at least in part on or after January
1, 1986. Perkins loans are not eligible.
To qualify, student must show that their eligibility to borrow was falsely
certified by the school. In most cases, students with high school diplomas or
G.E.D.s at the time of admission are not qualified. There are exceptions to
the high school diploma requirement: A student may qualify if s/he was unable
to meet minimum state employment requirements for the job for which the student
was being trained, or if the school forged or altered the loan note or check
endorsements.
C. Unpaid Refund Discharge (34 C.F.R. §682.402(l)
A new discharge was passed as part of the 1998 Higher Education Act allowing
students to discharge loan liability for loans obtained after January 1, 1986
to the extent of the amount of a refund that a school owed the student and failed
to pay. Perkins loans are not eligible, but borrowers can already raise an unpaid
refund as a defense in Perkins collection actions.
D. Disability Discharge (34 C.F.R. §682.402(c)
Borrowers can discharge loans if they can document a permanent and total disability.
Pre-existing conditions qualify only if there has been deterioration.
Forms for all of these discharges are available on-line at:
Particularly for false certification and unpaid refund discharges, borrowers
often need to submit evidence of school fraud. NCLC has information in its files
on a limited number of schools. For more information, see NCLC’s publication,
Student Loan Law,
or contact Deanne Loonin at dloonin@nclc.org.
Currently the only ground for discharging a student loan in bankruptcy is if
the student can show that repayment will “impose an undue hardship on
the debtor and debtor’s dependents.” For cases filed after October
7, 1998, there is no longer a discharge for loans more than seven years old.
For more information about discharging student loans in bankruptcy, see NCLC’s
publications Student Loan
Law and Consumer
Bankruptcy Law and Practice.
State Discharges
State tuition recovery funds (STRFs) can be a valuable source of relief for
defrauded students where a school is insolvent and where the student cannot
obtain a federal discharge. The majority of states have either a STRF or a bond
program to reimburse defrauded students.
