Loan cancellation is possible only in very limited circumstances. Although loan cancellation is a limited option, it is the most complete way to deal with student loan debt. This means that it’s a good idea to review the various cancellation programs to see if you qualify. This section discusses ways to cancel or discharge loans outside of bankruptcy. In rare cases, it is also possible to discharge student loans through bankruptcy.
Loan cancellation (also called “discharge”) is the most complete way to deal with a student loan. Although limited, cancellations for federal loans are required by law. In some cases, you can cancel a loan due to serious problems with the school you attended. This is not a general cancellation simply because you didn’t like your school. You must meet the specific criteria of the school-related discharge. Other cancellations are available if you work for a certain period of time in a public service job. This includes military service members. Another category is for borrowers with serious disabilities or after a borrower dies so that the debt is not passed on to the borrower’s estate. You cannot get these cancellations automatically. You must apply for loan cancellation using the government forms.
Private loans are another story. Unless the private lender made a promise about a cancellation program, private lenders MAY cancel loans, but they usually don’t have to. It certainly can’t hurt to ask your private lender about loan cancellation programs.
As you review the various cancellation options, keep in mind that you may get a tax bill if your loan is cancelled. Some of the government cancellation programs result in taxable income and some do not. You should consider discussing this with a tax professional.