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Student Loan Discharge | Do I qualify?

female university student using tablet computer listening musicA loan that a person takes when he is studying is called a student loan.

The kind of student loan that the person takes will have a direct bearing on that person’s life long after he leaves his school.

A loan entails a serious commitment to repay. Any default in the repayment of the loan can adversely affect his credit rating.

That is why it is highly recommended that the loan is well deliberated upon.

The borrower must read the fine prints properly and must be well aware of the various repayment options that are available to him. Once he is out of the college he must start to repay his loan.

Having said all that, a loan can still be forgiven, cancelled and discharged. What this means is that the borrower can be absolved from repaying his loan. There are certain special circumstances only which can absolve the borrower from this financial commitment. Discharge may be defined as the releasing of the borrower of the loan from his obligation of repayment.

Here’s a look into the circumstances that can entitle the borrower to claim a discharge:

  1. Closed school discharge
  2. Total and permanent disability discharge
  3. Death discharge
  4. Discharge in case of bankruptcy
  5. False certificate of student eligibility to the course / unauthorized payment discharge
  6. Unpaid refund discharge
  7. Teacher loan forgiveness
  8. Public service loan forgiveness
  9. Perkins loan cancellation and discharge
  10. Borrower defense discharge

4 female-student-studying-in-the-libraryTotal and Permanent Disability Discharge (TPD Discharge):

A total and permanent disability f the borrower can entitle him to a discharge of his student loan. The loans included are direct federal loan, the Federal Family Education Loan (FFEL) and federal Perkins Loan. The borrower must provide complete information regarding his permanent disability to the Education Department of the Government of the United States.

The department will evaluate the furnished information and determine whether the disability is a total and permanent one. The department is the authority which will determine whether the person with the disability qualifies for the loan discharge or not.

The borrower may show his disability in the following ways:

  1. If the borrower is a Veteran then he has to furnish certification from the Department of Veterans’ Affairs to prove that he is disable to serve in the capacity that he is trained for.
  2. If the borrower is a recipient of any insurance due to his disability then he may submit the relevant documents.
  3. The documents have to state that due to his disability he is being awarded the Social Security Disability Insurance and/or Supplementary Security Income.
  4. He may also furnish the date on which the insurance agency has conducted the test for his disability.
  5. The next date for disability recheck could be five to seven years away from his most recent check.
  6. The borrower can submit a certification from a doctor to the effect that he is totally and permanently disabled and that he is unable to work for gain or engage is service because of his disability.
  7. The borrower has to additionally prove that the disability may result in his death.
  8. The onus of proving that the disability has lasted for the past 60 years and/or will last for subsequent 60 years is also on him.

FAQ’s regarding discharge due to TPD.

What kind of doctor can certify total and permanent disability?

A physician who is a doctor of medicine (M.D.) or a doctor of osteopathy (D.O.) and fully licensed to practice medicine in the United States can certify for total and permanent disability.

Is the proof that there is receipt of social security benefit enough for claiming TPD?

Not necessarily. The fact does not necessarily mean that the borrower is eligible for a discharge. The final authority is the department of education which will decide the matter after due perusal of all the relevant documents.

Death discharge:

With the borrower’s death, his loan gets discharged. If the loan preferred is a federal Parent PLUS loan, then the loan will be discharged when the parent passes away or with the student’s unfortunate death.

The family member of the deceased must produce a copy of his death certificate duly signed by the necessary authority. The certificate of death must be furnished at the school office of the borrower where he was studying. The loan service officer may also require a copy to file for a discharge of the loan.

4 student-lifeDischarge due to bankruptcy of the borrower:

This discharge of loan is a deliberate process where the borrower will file an insolvency suit in the relevant court. The borrower has to prove beyond any reasonable doubt to the bankruptcy court that repayment of the student loan will cause him undue hardship. This will be particularly important if the borrower files a Chapter 7 or Chapter 13 Bankruptcy of the US Civil Code read along with the United States Bankruptcy Legislation.

The creditors should challenge the premise that the repayment of the loan will put him in a tight corner. The court however uses a three point test to determine if the borrower is indeed eligible for this discharge or not.

  1. The first test is to determine if the borrower will indeed be put to extreme “undue hardship” if he pays his loan. And also to determine if it will be difficult for him to maintain a minimum and decent standard of living if he pays the loan.
  2. The second test that the courts will use to determine is whether there is any evidence that the person has indeed passed through undue hardships in the person while he was repaying his loans.
  3. The final test by the court is to determine whether the borrower has made full effort to pay back the loan in good faith and before filing of the bankruptcy suit. Minimum time duration of five years is a good time to show the repayment of loan done in good faith.

The court has to make sure that there is some locus to think that the borrower is not in a position to repay his loan and therefore discharge is warranted.

False certification of student eligibility:

The student loan may be discharged if the school that the borrower attended had falsely certified the students’ eligibility to receive the loan only to benefit from the loan. The borrower has to prove that he did not meet the eligibility criteria of the course at all.

The discharge can also be claimed in the circumstance that the school had signed the application and the promissory note without any authorization from him. This can only be possible if:

  • an electronic transfer was made directly into the school’s account by the loan servicing company or
  • the check that you’ve furnished with your application had forged signature of yours which allowed them to deposit the check and secure a credit into their account.
  • If the pro note/check is handed over duly signed by the borrower and if the cash is personally handed over to them, then cannot claim this defense for the discharge of his loan.

The discharge can be claimed if the borrower has been a victim of identity theft wherein his details have been stolen and an application is made as if on his behalf and a loan has been sanctioned in his name. This is a lawful defense and in most cases, the courts discharge the loans almost immediately.

Another defense for claiming discharge for loan is that the school had certified the borrower as eligible and the loan was sanctioned but due to subsequent circumstances the borrower is not qualified for employment in the field that he is trained. The subsequent conditions will mean and include any physical affliction, a mental condition, and age, any crime that the borrower committed.

He may have also served a prison sentence. This is an inclusive clause and it can include any defense that the court may deem fit for the discharge of the loan.

Unpaid refund discharge:

The borrower can claim discharge of the loan if he withdrew from the school but the school evaded payment of refund to the Education Department in the US.

Perkins loan cancellation and discharge:

Every society has a need for professionals and volunteers who can chip in with their time and energy to help the needy and the disadvantaged. In the US, if the borrower of a student loan can claim a discharge for his loan if he performs certain types of public services and classified type of economic activities,

For every completed year of service, a certain percentage of his loan amount will be discharged. The total percentage of dischargeable loan depends again on the kind of the activity that he performs. The classifies activities are

  • Volunteer in Peace Corps or ACTION program (VISTA like programs)
  • Serving as a teacher.
  • As a member of the united stated armed forces and stationed in hostile regions
  • Nurse and medical technician
  • Law enforcement officer or correctional officer
  • Head start workers
  • Child and family welfare service worker
  • A professional who works in the area of providing early intervention service.

There is no formal procedure for applying for a discharge of the loans under the Perkins Loan Cancellation Program of the US. The borrower must contact the school where he studies for further information on it and also to determine if he is entitles to any discharge.

School closure discharge:

If the school where the student is doing his course closes down or files for bankruptcy, then the borrower has a right to claim for a discharge. However due to any reasons if the discharge is denied to the student then he must contact the state licensing agency and ask for tuition recovery fund or a performance bond that will cover the damages caused due to the closure of the school.

If the school has filed for insolvency then the student must also file a claim in the bankruptcy procedure in the court as a party. The borrower may consult an attorney who is specialized in this type of case work in order to get a rightful discharge.

The procedure for filing for a discharge:

Like all government procedures, getting a discharge for your student loan will also warrants a lot of documentation.

  • If the borrower thinks that he may be entitled to a discharge of his loan, he must immediately get in touch with his loan service officer.
  • If the loan servicer is satisfied that the borrower can claim a discharge, he will on his behalf apply to the Department of Education.
  • Till the time the borrower hears from the authority that his discharge has been approved, he must continuously make his monthly payments in order to not make any default.
  • In case the loan discharge is approved, the borrower will no longer be obligated to make any loan payment after that date.
  • In some cases, the US department of Education may also refund some of the monthly payments made by him.
  • Any credit rating that had taken a beating will be relaxed and there will be no tax liability on the refunded amount.
  • If any loan had been in the default status then that status will be cleared and subsequently the borrower will be eligible for federal student aid.
  • In any case that the discharge is not approved, the borrower shall be liable to pay the remaining loan amount.
  • The department of Education is the only one authority for determining the eligibility for a discharge and therefore no further appeal can lie.
  • Except in case of false educational certification and forged signature claim, the ED may be asked to review the same.

Discharge of the private student loans – challenges

Prior to 2005, private loans were easier to get discharged on the defense of ‘bankruptcy’. But after the government lobbied to bring about amendments to the bankruptcy law it has become difficult to get a private loan discharged. In order to prove bankruptcy, the onus lies on the borrower to prove that repayment is causing him ‘undue hardships’.

The term is very vague and the judgment varies according to the facts and circumstances of each case. The court applies the Brunner test where it determines if the person will go through hardships if he repays. The court has to be satisfied that the bankruptcy will continue for the entire period of repayment of loan and that the borrower has made an effort to pay bonafide towards the loan at least for a period of five years.

Statistics show that a discharge on federal loan is relatively easier to get than a discharge on a private student loan. A discharge on the basis of bankruptcy is not automatic; the borrower has to file a petition for it in the relevant Civil Court.

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