Federal student loans can be cancelled in certain circumstances. There are limited federal student loan cancellation (also known as discharge or forgiveness) programs for federal student loan borrowers. You may qualify regardless of whether your loan is current or in default. You are entitled to these cancellations by law, but you must meet very specific requirements to get this comprehensive relief. A successful cancellation not only makes the loan obligation go away, but in most cases, the government must also give back any payments you have made (whether voluntarily or involuntarily) and help clean up your credit. This is the most complete relief you can get. Because the relief is so broad, there are very specific conditions you must meet to get these cancellations. It is a good idea to go through the list and see if any apply to your situation. You must fill out an application form if you apply for a cancellation and meet the specific conditions for the specific cancellation program.
The federal loan cancellations described here are available outside of the bankruptcy process. You can also cancel your federal loan in bankruptcy. This is a difficult process, but not impossible. You must prove “undue hardship” in the bankruptcy court to get a bankruptcy discharge of your federal loan.
There may be tax consequences associated with some of these cancellation programs. Loan amounts cancelled through the job-related or school-related cancellations should not be considered taxable income. Other cancellations may be taxable income. However, you may not have to pay taxes. For example, you may be able to claim insolvency status using I.R.S. Form 982. It is a good idea to consult a tax professional for more information.
Note: These are the primary federal cancellations. You should check out the Department of Education web site for information about other cancellations, including a program for certain victims of the September 11 attacks.