Can a student loan be discharged? It’s a common question among those saddled with student loan bills, especially with so many college graduates still struggling to find high-paying jobs. The short answer is “yes,” but it’s not a simple or easy process to undertake. In fact, a study by Jason Luilano suggested that in 2007 there may have been as many as 69,000 borrowers eligible for student loan debt relief, but fewer than 300 actually attempted to have their loans discharged. One reason fewer borrowers may try to have their debt erased is the urban myth that it’s impossible to achieve. Recent studies, however, suggest that up to 40 percent of those who attempted relief through bankruptcy actually succeeded. Another obstacle may be the perceived time and money involved. Last year, there were reports that it took one borrower 10 years to have his loans partially discharged, but this is not the norm.
In general, borrowers who are trying to have a federal or private student loan discharged through bankruptcy must meet the following three conditions, sometimes referred to as the Brunner test.
Borrower is unable to maintain a minimal standard of living, if forced to repay the debt.
Borrower can provide evidence that the hardship will continue for the majority of the loan repayment period.
Borrower has made a good-faith effort to replay the student loan(s) before filing for bankruptcy.
Although it may be easier to obtain a federal loan to help pay for college, it may actually easier to have a private loan discharged through bankruptcy. Why? Many borrowers have taken advantage of a stipulation that requires loans be for an eligible education institution, under 26 USC 221(d)(1) and (2). Loans for schools that do not meet this condition are included in traditional bankruptcy proceedings and may be dischargeable because the debt is not considered a qualified education loan under 11 USC 523(a)(8)(B). Private student loan borrowers may also find relief by filing for Chapter 13 bankruptcy, which may help them reorganize their debt. Under this type of filing, a new monthly payment will be set by the court and creditors cannot take collection actions against borrowers while they are paying the court-determined amounts.
Of course, many students assume that bankruptcy is their only recourse. Although this is true for private student loans, those with federal student loans have additional methods to discharge their debt. Here are some of the other ways borrowers may have their federal student loans discharged.
Disability or Death
Borrowers who suffer from a total and permanent disability (TPD) may have their federal student loans completely discharged. There are three ways borrowers can provide proof of a TPD:
Submit documentation from the U.S. Department of Veterans Affairs verifying inability to work due to a service-related disability (veterans only).
Submit a Social Security Administration (SSA) notice of award for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits showing a review will not be scheduled for a minimum of five to seven years.
Submit certification of total and permanent disability from a physician.
In the case of a borrower’s death, all federal loans will be discharged. Parent PLUS Loans will also be discharged if the student on whose behalf the loans were obtained dies. A family member or representative must provide a certified copy of the death certificate to the school or loan servicer.
Borrowers may be eligible for a 100 percent discharge of their federal student loans if their school closes while they are enrolled or if they were unable to complete their program due to the school’s closure. Those who are able to transfer their credits or complete their degree/certificate programs at another school are ineligible. Borrowers may also receive a full discharge if their school closes within 120 days after they withdraw. Unfortunately, students who completed a program at a school that closes, but did not receive a diploma or certificate, will not be eligible to have their loans discharged.
When a borrower has withdrawn from school, but the institution did not refund the money owed to the U.S. Department of Education or lender, the borrower may be entitled to have the amount of the unpaid refund discharged.
Federal student loan borrowers may also have their student loans discharged through various loan forgiveness programs. Those who enter the teaching profession or work in public service fields may have a portion of their eligible, outstanding federal student loan balances paid off. Borrowers should contact their loan servicers for more information regarding loan forgiveness programs or help with other repayment options.