Student Loan Forgiveness & Cancellation
Student loan debt is the second largest consumer obligation after home loans. Under the right circumstances, you can have your student loan canceled, or you can receive monetary payments to apply to your loan balance in exchange for working for certain organizations or in specific fields in underserved areas.
To determine eligibility for cancellation of your student loan or for payments to reduce your balance, you need to know the type of student loan or loans you have. Some nonfederal student loan programs allow you to cancel or reduce your loan obligation, and you can see if your employer offers a loan cancellation or reduction program — especially if you work in the public sector. Because the federal government backs nine out of 10 student loans, it's likely you have a federal loan. If you have a federal loan, find out what type. Knowing the type will help identify cancellation or repayment options.
Is Your Loan Federal or Private?
Unsure if your loan is federal or private? Search the National Student Loan Data System, which includes information about existing federal loans. Your loan is federal if you find it in the database. Your loan is private if it's not.
Federal Student Loan Programs
Federal loans fall into three buckets:
- William D. Ford Federal Direct Loan Program (Direct Loan)
- Federal Family Education Loan Program (FFEL)
With Direct Loans, the federal government acts as the lender. Various types of Direct Loans are available, including a subsidized loan, in which the interest charged is subsidized (paid by the government) based on need while the student is in school. Most Direct Loans have a 10-year repayment period. Direct Loans comprise four types:
- Direct Subsidized
- Direct Unsubsidized
- Direct PLUS
- Direct Consolidation
Federal Family Education Loans (FFELs) are no longer available, but many borrowers have not yet finished or begun repaying their FFELs. For everyone else, FFELs have been consolidated under the Direct Loans umbrella. One FFEL type, the Stafford Loan, is a subsidized loan, in which the federal government pays loan interest while the student is in school. FFEL loans include:
- Stafford Loans
- Unsubsidized Stafford Loans
- Federal PLUS Loans
- Federal Consolidation Loans
Federal Loan Forgiveness and Cancellation
You must repay your federal loans. In some situations, however, your loan may qualify for forgiveness if you experience a change in personal circumstances or your school failed to follow lending or administration procedures. A student's or borrower's death cancels a federal student loan obligation. The federal government allows discharge or reduction of the amount of your student loan under the following six conditions.
See the MoneyGeek Student Loan Forgiveness & Cancellation at a Glance page for a summary of federal loan forgiveness and cancellation programs.
Total and Permanent Disability (TPD)
If you suffer from a mental or physical impairment, you may discharge your student loan if you can show your impairment is a total and permanent disability (TPD). A TPD completely relieves you from repaying a Direct Loan or FFEL. A TPD generally means that you have an illness, condition or injury that prevents you from working in an occupation for which you are suited. To have your loan canceled, you must provide proof of your TPD to the U.S. Department of Education (ED).
You can prove your TPD with one of these documents:
- Physician's certification of your TPD, such that your medically determinable physical and mental impairment prevents you from engaging in any substantial gainful activity, and your TPD is expected to result in death, or has lasted or can be expected to last for a continuous period of at least five years
- U.S. Department of Veterans Affairs' (VA) documentation confirming its determination that you are unemployable due to a service-connected disability
- Social Security Administration's (SSA) notice of award for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits confirming your next scheduled disability review is five to seven years after your most recent SSA disability determination date
What if your college or university permanently shuts its doors? The upside is that enrolled or recently enrolled students may use the closure to cancel their federal student loans. If your school is unfortunate enough to fall on a slowly growing closure list, you may be able to cancel 100 percent of your loan obligation.
You may be eligible to cancel your student loan obligation if you:
- Withdraw from school and within 120 days your college or university closes
- Enroll at a school that closes and as a result, you do not complete your program (an approved leave of absence still means you are enrolled) You aren't eligible if:
- You fully completed coursework for the institution's program even though you never received a diploma or certificate
- You are completing a comparable program at another school
School's False Certification of Ability to Benefit
If it turns out your school falsely certified your eligibility for your federal student loan and you produce sufficient proof of it, you may be able to cancel your loan obligation if your loan is a Direct Loan or FFEL. This type of false certification often comes into play if you did not have a high school diploma or general equivalency diploma (GED). The school you attended through your student loan gave you an exam to ensure that you could benefit from its program; and in giving you the exam, the school did not properly ensure your ability to benefit from the school's program.
Here are a few examples of a school's false certification of your ability to benefit:
- Gave you an exam that was not an approved ED test
- Gave you an exam allowing more time than the prescribed time
- Gave you an exam and allowed you to discuss test answers with other students You must adequately prove your school falsely certified your ability to benefit. Providing as much supporting documentation to go along with your application to the ED is critical, so research on your part is highly beneficial.
Consider looking into multiple resources to add to your supporting documentation. State and federal agencies may have reports about problems with your school's ability-to-benefit exams. Consider these resources:
Unauthorized Signature or Unauthorized Payment
If you never received the proceeds of your student loan, you may be able to cancel your federal Direct Loan or FFEL obligation in cases involving forgery of your signature on student loan documents. The person who forged your signature must be someone affiliated with the school.
You can apply to cancel your student loan obligation on this basis at any time. However, in supporting your case and filling out the application, you must submit four samples of your signature, not including the signature on your application. At least two of your sample signatures must have been written within one year of the student loan forgery date. You may find appropriate sample signatures to satisfy this requirement on canceled checks or tax returns with proven dates.
If you successfully prove the school forged your signature, you can cancel the remaining loan balance, plus any related costs and charges. You may also receive reimbursement of loan payments already made.
False Certification (Disqualifying Status)
Another way you may be able to cancel your student loan obligation is that if at the time of your enrollment you would have failed to meet the state's requirements for employment — such as a minimum age, minimum education level, lack of physical or mental condition — in the occupation for which you were being trained.
For example, someone with a felony offense on record who enrolled in a security prison guard program would be eligible for a discharge based on this type of false certification if the applicable state prohibits anyone with a criminal record from working as a security guard. Or, if someone who dropped out of school in 10th grade attended a plumbing technology program in a state that requires plumbers to have a high school diploma or GED, then that individual is eligible for a discharge.
Any loan cancellation under this condition applies to federal Direct Loan and FFEL loans only. If you successfully prove the school falsified your disqualifying status, you may cancel the remaining loan balance, plus any related costs and charges, and also receive reimbursement for loan payments already made.
Despite receiving a student loan, the school you attended may not have worked out for you. If you dropped out of the school's program early, you may be entitled to a refund because your school is legally obligated to return the money to the lender and refund the loan balance to you. If it failed to refund your entitled amount under federal law, you may be eligible for an unpaid refund cancellation. It doesn't matter if your school has closed down.
If you've completed at least 60 percent of the loan period, however, you aren't entitled to a refund. If you never attended classes or only attended the school for a brief period, you should be able to obtain a cancellation of your entire student loan obligation, provided you and the school tried to first resolve the issue within 120 days of submitting your refund application to the ED.
The amount by which your loan obligation is reduced depends on the refund amount you failed to receive. You may reduce the balance of your loan obligation by the entitled refund amount, plus interest and other related charges. You remain obligated for the remaining balance after the refund application.
Time Spent at School
Amount of Borrower's Refund
Amount Borrower Still Owes
30% of one semester
70% of student loan paid for one semester, plus interest/fees on that 70%
30% of student loan paid for one semester, plus interest/fees on that 30%
40% of one semester
60% of student loan paid for one semester, plus interest/fees on that 60%
40% of student loan paid for one semester, plus interest/fees on that 40%
To calculate your refund, you need information about:
- The tuition
- The school's refund formula
- The percentage of the course or term you completed
Look for the information in the school's catalog or enrollment agreement. If you have trouble finding it, inquire with state licensing agencies to see whether they have the information. The school's refund formula often mirrors a state policy. But if your school does not have its refund formula available, you can use the ED's substitute formula.
If your application for a refund is granted, you may have other rights. Your loan holder must help clean up your credit history. You may also have additional rights under your enrollment agreement or applicable state law. Some laws require your school to refund cash you've already paid if you withdrew before completing your program. Also, some laws or enrollment agreements dictate that the school refund your federal or private loans.
Expert Interview: Q&A With Andy Josuweit
What is your philosophy and approach to student loan forgiveness?
I focus on providing individuals with access to information and really simplifying the situation. Although it may be tempting to go into a federal program that would pause or lower your payments, I believe these programs are really not looking out for your best interest. Individuals need smart, financial advice. They need to build up their emergency sources. The best way to repay a student loan is to try to pay it off as aggressively as possible.
Are there any loan forgiveness or repayment programs that you find better than others?
I do think the public service loan forgiveness program [which offers loan forgiveness after 10 years] is attainable. It can be a smart option for a lot of folks, such as doctors, firefighters or state troopers. A whole slew of careers that typically have higher debt load than average would benefit. If you have $30,000 in student loan debt, most likely you'll reap no savings because you would be able to repay over 10 years. However, if you have $100,000 in debt, chances are you wouldn't be able to repay over a 10-year period.
What do you think about repayment programs?
A lot of income-based repayment programs and other repayment programs are great tools for borrowers in bad financial situations. But I really view them as bandages because they are not solving the root problems. A lot of lawyers and doctors have the option to go into a deferment period. I did for three years and accrued almost $30,000 in interest. These are gimmicks offered by the Department of Education. I understand they are tools to help borrowers from defaulting. But philosophically, you should be focused on getting out of debt by increasing your income or focusing on budgeting, not falling prey to a lot of these federal programs.
What are some examples of student loan forgiveness reform that would be truly helpful to consumers?
Student loan forgiveness programs are really affecting a small niche of student loan borrowers — those with the highest debt load, like lawyers or health practitioners in the public sector. Instead, structuring contributions to pay off student loan debt similar to the tax benefits of a 401(k) retirement account would be helpful. You could allow borrowers to contribute up to a certain threshold and provide the same tax-free benefits you find in retirement accounts. Someone right out of school with $50,000 in student loans shouldn't be contributing to a 401(k), but should be paying off debt first. You could also allow employers to match contributions, similar to 401(k) retirement accounts. Look also at the tax treatment of mortgages, which allows you to deduct up to $1 million from income. With student loans, if you make over $60,000 per year, you only get to deduct up to $2,400 a year. My suggestion would be to raise the amount of deductible interest, to a level similar to mortgages. I don't see why there's a difference. Student loans in the United States should be viewed as economic development, as creating infrastructure and competitive advantage for the country. It shouldn't be a for-profit vehicle; it should be a break-even or loss vehicle. Yet, loan holders [can make] over $50 billion on student loan programs. I don't think we should be operating student loan programs that way.
Any other potential for reforming student loan forgiveness?
Another piece of legislation that's a no-brainer is student loan refinancing. We should be providing incentives for borrowers graduating from college to make their payments and maintain good credit scores so they can refinance their student loans. They should be able to refinance their student loans to lower interest rates, especially given the interest-rate environment. We're seeing a lot of private lenders entering the refinance market. But the federal government has yet to provide student loan refinances.
Career-Based Loan Forgiveness and Cancellation
If you are a recent graduate or in the planning stages of financing your education, depending on the profession you've chosen — perhaps as a teacher, attorney or health professional — you might be able to take advantage of a career-specific loan forgiveness program. The goal of many of these programs is to entice more individuals to dedicate their careers to certain professions, often to work in underserved areas or specific locations with higher need.
Because these programs set out formal career requirements, you must plan your career choices early. Many programs address federal student loans.
See the MoneyGeek.com Student Loan Forgiveness & Cancellation at a Glance page for or a summary of career-based loan forgiveness and cancellation programs.
Teacher Loan Forgiveness Programs
Full-time teachers who have taught at least five consecutive academic years, may be eligible for student loan forgiveness of as much as $17,500 through the Teacher Loan Forgiveness Program. The program requires that you teach in certain elementary or secondary schools or educational service agencies serving low-income families, with at least five years of teaching experience under your belt. It restricts the types of federal loans eligible for forgiveness to specific Direct Loans (excludes Direct PLUS and Direct Consolidation loans) and FFELs (excludes Federal PLUS and Federal Consolidation loans). Loan forgiveness amounts vary depending on the circumstances, but to receive the maximum $17,500 amount, you must be a highly qualified full-time math, science or special education teacher and meet certain other requirements.
Some conditions disqualify you from eligibility. For example, you are not eligible if:
- You had an outstanding balance on a Direct Loan or FFEL as of Oct. 1, 1998
- You had an outstanding balance on the date you obtained a Direct Loan or FFEL after Oct. 1, 1998
- You are in default on a subsidized or unsubsidized loan and you have not made satisfactory repayment arrangements (not eligible for loan forgiveness for the defaulted loan)
Sidebar: Make sure to look up whether the school where you teach qualifies as a low-income school. Any elementary or secondary school operated by the Bureau of Indian Education or operated on an Indian reservation by an Indian tribal group under contract with the bureau meets the low-income school requirement.
Many other teacher loan forgiveness programs are available, and eligibility depends on various factors, such as the state or district where you teach, and the grade level and subject you teach. You can identify suitable programs using the American Federation of Teachers' online database.
Medical Professional Loan Forgiveness
If you are a health or medical professional or student, your student loan might be eligible for cancellation in a number of loan repayment programs. In exchange for serving in certain locations, usually a designated site that is underserved, the organization supplies funds to apply to your loan balance. Here's a brief rundown of organizations and available programs.
National Health Services Corps (NHSC) Programs
The National Health Service Corps offers several programs to health field professionals and students. Amounts you receive to repay your student loan are income-tax free. The details of three programs are below.
NHSC Students to Service Loan Repayment Program
If you are a qualifying medical student, you may apply up to $120,000 in your final year of schooling to your student loan. To receive the repayment amount, you must commit to serve a minimum period at a specified location.
The three primary requirements are that you work:
- As a medical doctor or doctor of osteopathy student who commits to providing primary healthcare
- For three years (full time) or six years (part time)
- At an NHSC-approved site with a Health Professional Shortage Area (HPSA) score of 14 or higher
The program applies to loans extended by federal, state or local governments, as well as commercial loans obtained for your reasonable educational and living expenses. Some loans do not qualify, such as Parent PLUS loans.
NHSC State Loan Repayment Programs
Health professionals — such as physicians, nurses, dentists, psychologists, therapists and pharmacists — may be eligible for state-operated loan repayment programs through the NHSC. Repayment amounts vary among state programs, and you'll need to confirm that your state offers one, as not all do.
The three requirements are that you work:
- As a primary care provider who commits to working in a role that corresponds with your training
- For a minimum of two years (full time) or four years (half time)
- At an HPSA located in the state operating the repayment program
NHSC Loan Repayment Program
Under the NHSC Loan Repayment Program, primary care medical, dental or health clinicians may receive a maximum of $50,000 to repay student loans in exchange for serving in approved underserved U.S. locations. The amount you receive is given to you at the beginning of your service and depends on your service location.
The two requirements are that you work:
- As a primary care provider who commits to working
- For a specified period (half or full time) depending on the location of your service
The period and location determine the amount you receive.
You'll find detailed eligibility requirements at the National Health Service Corps.
NURSE Corps Loan Repayment Program
If you already work full time as a licensed, registered nurse at a critical shortage facility or as a nurse faculty member at an eligible nursing school, you may be able to pay off 60 percent of your loan balance in two years through the NURSE Corps Loan Repayment Program. You can reduce your original student loan amount by an additional 25 percent by continuing the program for a third year. The program pays off student loans in return for service in designated hospitals and clinics in underserved areas (HPSA). Your student loan must qualify for the program. Examples of qualifying loans include Stafford Loans, Supplemental Loans for Students, and loans obtained to pay for tuition and reasonable educational and living expenses for qualified nursing education. Some loans you cannot pay off through this program include Parent PLUS loans and loans for training in vocational or practical nursing.
Consider carefully before you make a commitment to the program and be certain you can fulfill a two-year commitment because the consequences of not completing your service are serious. You will default on your obligation and become liable to repay all the payments you've received, including interest and amounts withheld for federal taxes. You are also subject to monetary damages specified in your original contract with the NURSE Corps.
NIH Loan Repayment Programs
Research scientists may be able to use one of the eight National Institutes of Health (NIH) Repayment Programs to help pay off student loans. In return for undertaking research that furthers an NIH mission, a researcher can receive $50,000 per year to repay a student loan. To qualify, you must hold a qualifying degree, such as M.D., Ph.D., Pharm.D. or D.O. Your student loan balance must also equal at least 20 percent of your salary at the time of the program award. Your salary amount does not include income you earn outside the duties of your organization, and you can reapply for the program more than once. Researchers who apply to renew participation no longer need to satisfy the 20-percent debt-to-income requirement.
Many types of student loans are eligible for these programs, including federal, state or local loans. However, Parent PLUS loans are not eligible. A few programs are exclusive to NIH employees, and some are also available for non-employees.
Veterinary Medicine Loan Repayment Program
Veterinarians may tap into the Veterinary Medicine Loan Repayment Program to pay off loans taken to pursue veterinary medicine degrees. By serving in a high-priority veterinarian shortage area for at least three years, you receive $25,000 each year to apply to your loan balance. The loan repayments you receive can be applied to the principal and interest due on government and commercial loans you took out to attend a veterinary medicine college. You must have a doctor of veterinary medicine (DVM) degree or the equivalent from an institution accredited by the AVMA Council on Education, and your student loan debt must be at least $15,000. You must also hold the necessary certifications and secure an employment offer or have a practice in a veterinary shortage situation within the time limit set out in the program agreement you sign. Many types of student loans qualify for the program, provided you took out the loan to pay for your veterinarian training at an accredited college of veterinary medicine.
Indian Health Service Loan Repayment Program
The Indian Health Service Loan Repayment Program is available to licensed health professionals — such as dentists, nurse practitioners or physical therapists — who agree to practice in a health facility that serves American Indians and Alaska Native communities. You receive up to $40,000 for a two-year service commitment. You may extend your contract annually after the two years to receive additional payments. Many types of student loans are eligible, including federal, state or local loans.
Lawyer Public Service Loan Forgiveness
If you're a law school graduate, you might consider looking into whether your school offers a loan repayment assistance program for recent graduates who hold public-sector and government positions or work in lower-paying legal fields. Law school public-interest loan repayment assistant programs (LRAPs) are usually law school-specific, with each school setting its own eligibility program requirements — including minimum salary amounts and loan debt amounts — for student loan forgiveness or cancellation. Besides schools, some state bar foundations, federal programs and state governments also offer programs to law school graduates. Currently, about 24 statewide LRAPS exist to help attorneys repay loans. The American Bar Association provides a list of schools that have programs.
Student Loans By The Numbers
Over 80% Undergraduates at four-year schools who receive financial aid throughout the past decade
~ $30,000 Average student loan debt upon completing undergraduate degree.
10.1% Default rate among students who started repaying their loans in 2016.
Source: National Center for Education Statistics, Inside Higher Ed
You can find loan forgiveness programs geared to public-sector employees. One program — the Public Service Loan Forgiveness Program — applies broadly to public-sector employees. Other programs, set up by lenders, are specific to AmeriCorps and Peace Corps workers.
Public Service Loan Forgiveness
Are you a firefighter, police officer or other public-sector worker? You may be able to discharge your remaining Direct Loan or Direct Consolidation Loan balance through the Public Service Loan Forgiveness (PSLF) Program after you work full time (at least 30 hours per week) and submit at least 120 monthly payments toward your loan balance if you work for a:
- Not-for-profit section 501(c)(3)
- Not-for-profit that provides certain public services
You can combine your hours worked from more than one employer to satisfy the 30-hour time requirement.
In most cases, the program only applies to Direct Loans. Other types of federal loans can be forgiven through the program if included in a Direct Consolidation Loan. Any PSLF payments made before consolidation do not count toward the requirement of 120 monthly payments. The PSLF Program sets strict policies for qualifying monthly payments. With the exception of AmeriCorps or Peace Corps volunteers, who, under the right circumstances, can make a lump-sum payment that counts as 12 qualifying monthly payments, you are generally only allowed to receive credit for one payment each month, even if you make a payment larger than the required amount. As a result, it takes at least 10 years to get a loan forgiven. For this reason, PSLF is more suited to workers who plan to remain in their professions for the long term.
The Segal AmeriCorps Education Award is available to AmeriCorps workers to apply to their student loan balances. The amount of the award varies year to year and depends on the ED's Pell Grant. To be eligible, you must serve a full-time term of national service within a 12-month period. Once you receive the award - totaling around $5,775 - you must use it within seven years. You can earn a maximum of two awards. You may use your award to pay numerous types of student loans, including Direct Loans, Stafford Loans, and Federal Consolidated Loans, as well as loans issued to members by state agencies.
If you are an AmeriCorps VISTA member, you may choose to take a cash stipend at the end of your service instead of the education award. As a VISTA alum, you may also receive up to 15-percent cancellation of your student loan. AmeriCorps limits the number of terms you can serve, which varies depending on the program within AmeriCorps.
The Peace Corps does not administer a loan forgiveness program. But many individual lenders set up programs to assist Peace Corps workers in their student loan repayments. Peace Corps workers may also use the PSLF Program to seek forgiveness for Direct Loan or Direct Consolidation Loans.
Military Service Members
Service members have a number of options to reduce student loan debts. The National Guard has a program designed for members who enlist or re-enlist for a minimum six-year term. The U.S. Armed Forces also provide various forms of repayment assistance or relief to service members, which largely depends on your service status.
If you are enlisted, planning to enlist, or previously enlisted with the National Guard, you may be able to participate in the National Guard's Student Loan Repayment Program (SLRP) to reduce your federal student loan, as long as your loan is listed in the ED's National Student Loan Data System (NSLDS) or it is a federal Parent PLUS loan incurred for individual use. The current maximum amount you can receive through the SLRP is $50,000 annually. To be eligible, you must enlist for a minimum six-year term in a qualifying role.
U.S. Armed Forces
At minimum, you may attempt to postpone repayment of your loan or eliminate interest payment obligations if you are on active duty or are preparing to return to school following active duty. But in some circumstances, you can have your entire loan balance forgiven and canceled.
Following is a list of available loan repayment or forgiveness benefits tied to specific member circumstances.
- Member StatusLoan Benefit
- Active duty (generally)Postponement of payment obligations [military service deferment], Interest rate limited to 6% on federal and private loans [Servicemembers Civil Relief Act interest rate cap], Forgiveness of Direct Loan balances after 120 monthly payments [public service loan forgiveness]
- Active duty during wartime, military operation or national emergencyPostponement of payment obligations [military service deferment], 0% interest rate for Direct Loans for up to 60 months, while serving in hostile area
- Period immediately after active dutyPostponement of payment obligations [deferments after active duty]
- Service-connected disabilityComplete cancellation of federal student loan balances [Veterans Total and Permanent Disability Discharge]
- Income levelLow or zero repayment amount based on member's income level, possibly leading to loan cancellation of remaining balance
- Other special circumstancesThe Department of Defense may repay member's loan balances under special circumstances warranting complete forgiveness
Private Loan Forgiveness and Cancellation
Although numerous student loan forgiveness and repayment programs exist for federal student loans, borrowers of private loans face fewer formalized options and consumer regulatory protections. Lenders of private student loans rarely offer loan forgiveness and cancellation provisions. In extreme cases, even death doesn't discharge a private student loan, depending on the conditions. It's possible for a parent to co-sign a loan and, if the student passes away or becomes permanently disabled, the legal obligation to pay the loan falls on the parent.
There is over $150 billion in outstanding debt from private loans, which means plenty of borrowers of need assistance. Some movement by private lenders has shown promise that seeking private student loan forgiveness might become easier. Wells Fargo, the second largest lender of private student loans, began a loan modification program back in 2014 that works to significantly reduce payments through lowered interest rates. Shortly after, Citizens Bank similarly began modifying its student loans.
If you have a private student loan with lenders such as these two, you may more easily obtain loan repayment relief. If not, your best approach might be to attempt to negotiate a settlement with the lender. You may choose to contact the lender and make an upfront request to lower your monthly payment, with an interest-rate reduction or lengthening of your loan term. Lengthening the loan term in the long run, of course, means that you ultimately end up paying more, which isn't a great option.
However, many private lenders staunchly refuse to broach the topic of settlement until the loan goes into default, in which case you may experience the following:
- Default on your student loan by ceasing all loan payments
- Your lender turns its attention to you because the last thing it wants is a nonperforming loan
- Begin talks with your lender, convincing it you've been operating under the tightest of budgets with virtually no discretionary spending (make sure you have proper documentation — such as credit card and bank account statements —to back your assertion)
- Your lender will probably offer short-term relief in the form of lowered interest rate for a few months
- Instead, seek out a settlement that involves complete loan cancellation in exchange for a cash payment from you that is significantly lower than your remaining loan balance
In negotiating with your lender, focus on your inability to pay under the loan's current terms. You want the lender to know the hardship you are experiencing in keeping up with payments. By doing so, you remain focused on convincing the lender that receiving some amount of payment from you is better than leaving you in a position that results in zero payments to them.
One remaining option for federal or private student loan cancellation is filing for bankruptcy. However, this does not represent the best path to student loan cancellation. Bankruptcy courts set a high bar for bankruptcy filers before they will discharge any type of student loan debt. You must show that continuing to shoulder the repayment obligations of your student loans would cause you undue hardship. Courts have interpreted "undue hardship" by applying various tests and requirements.
Historically, most courts have used the Brunner Test to determine whether you have "undue hardship" before they will discharge your student loan obligations.
Under the Brunner Test, you must definitively show these three conditions apply to your situation:
- Inability to maintain a minimal standard of living - your current income and expenses will fail to maintain a minimal standard of living for you and your dependents if you remain obligated to repay your student loans
- Persistence of conditions during repayment period - the circumstances contributing to your inability to maintain a minimal standard of living will probably continue for a significant portion of the loan repayment period
- Good-faith attempt to repay student loan(s) - you've made a sincere effort to stay current on your student loan payment obligations
The Brunner Test seems straightforward enough. Although it is possible to meet with success, the record shows consumers have had an extremely difficult time passing the test and getting student loans — federal or private — canceled in bankruptcy.
Federal and Private Student Loans
Condition for Cancellation or Forgiveness
Repayment poses "undue hardship" to the borrower
Amount Discharged: 100%
Borrower must pass Brunner Test by showing:
- Can't maintain minimal standard of living
- Conditions will persist
- Good-faith attempt to repay
Expert Interview: Q&A With Joshua Cohen
What is the Brunner Test?
The Brunner Test came out in 1987 when things were a bit different. Before the test, if you had a private student loan in bankruptcy, you could easily get it discharged. If it was a federal loan, as long as you were in repayment for five to seven years, you could go through bankruptcy and use the get-of-jail-early card with your loan. Now you see what the situation has become with the Brunner Test. To successfully discharge a student loan under the test, you must show "undue hardship" with this three-pronged requirement:
- You can't maintain a minimum standard of living if you have to repay the loan
- There are attenuating circumstances that are likely to persist for the life of the loan that will continue to make your repayment ability difficult
- You have made good-faith efforts to repay the loan
Good-faith efforts don't just mean your attempt to maintain payments. If you attempted to negotiate with your loan holder but were shut down, your attempt counts as a good-faith effort.
How widely used is the Brunner Test?
The Brunner Test is used in every federal circuit court, except for the First Circuit and Eighth Circuit. There has never been a change in the application of the Brunner Test; it's been the same way ever since it was introduced in 1987. The Eighth Circuit refuses to use the Brunner Test. Instead, it uses a totality of the circumstances test, which is a similar standard. The First Circuit never adopted the totality of the circumstances standard, and it has refused to accept the Brunner Test. In Boston [First Circuit], there's a test case in which there's a possibility the bankruptcy court might craft its own definitive undue hardship standard. The court has requested an amicus brief from the National Consumer Law Center. The request is not so much to discuss the merits of the plaintiff's argument but rather a request for suggestions on how to shape an undue hardship test. This should definitely be of interest. I can't tell you the timeline of the case and when we can expect a definitive ruling, but I am optimistic about the case.
Have you seen any other movement in courts' opinions or application of the Brunner Test?
There hasn't been anything concrete. No judge wants to be the first one to come out, go out on a limb and say, "No, I don't want to use this test." But there was one case [of note] in which the dicta—the language from the judge that has no bearing on the decision or case—from the Ninth Circuit which said the Brunner Test is inapplicable, that it is old and draconian and we need something else. However, the judge didn't suggest what that something else could be. I understand this—there's only so much a judge can do. Judges need someone to give them a decision so they can tweak it. They need a good reason to make the change. There's no case law out there that shows what to use instead of the Brunner Test. It will be interesting to see what comes out of Boston and whether any other circuit is going to buy into it. The Boston case can be persuasive at best. There's no precedent, but it might be that [it provides the] one thing that the right judge will come out and say, "I like this. I'm going to run with it." Otherwise, don't expect anything to change until the [presidential] election. And even then, if there's no new Congress, then nothing's going to change.
How do you help clients approach student loan forgiveness in bankruptcy?
Not many of my clients come to me for student loan bankruptcy discharge because they read about the myth that you can't include student loans in bankruptcies. I do everything I can to avoid the discharge issue in bankruptcy, especially for federal student loans. Private student loans are easier to discharge. As much as I want to challenge student loan discharge in bankruptcy, I'm not the client and I have to do what's affordable for my client in the first place, and bankruptcy discharge is not cheap. That's why not a lot of lawyers take student loan bankruptcy discharges in the first place.
You mentioned that private loans are easier to discharge in bankruptcy than federal loans. Why?
With a private loan, you ask the lender for an affordable payment or otherwise you don't pay [because you can't pay]. That's the kind of crazy tactic that could get you a bankruptcy discharge. With a federal loan, you can "fix" the loan [such as changing the terms to a lower interest rate, deferment or longer repayment period] if you default. You can't fix a private loan. The rigidity of private loans actually makes them look good for a discharge in bankruptcy. You pin the creditor against the wall: Work with you or risk a discharge. With a federal loan, simply look at income-based repayment programs. If you're paying $5 a month, how can you argue that that's an undue hardship? So IBR (income-based replacement) has successfully undone the hardship argument. I'm not saying that it's not still a hardship if you survive and get forgiven in 25 years. What about the emotional distress? What if you're middle class and your payment is $300 a month? You may have a better argument. If you live in San Francisco where the cost of living has skyrocketed, you'll never be able to afford your IBR.
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