Federal student loans can be cancelled in certain circumstances. 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 must apply for loan cancellation using the government forms. There is an important exception to this rule for certain borrowers eligible for closed school automatic discharges.
Below is the chart of discharges according to the Department:
|Type of Forgiveness, Cancellation, or Discharge||Direct Loans||Federal Family Education Loan (FFEL) Program Loans||Perkins Loans|
|Public Service Loan Forgiveness||X||X*||X*|
|Teacher Loan Forgiveness||X||X|
|Perkins Loan Cancellation (includes Teacher Cancellation)||X|
|Total and Permanent Disability Discharge||X||X||X|
|Bankruptcy Discharge (in rare cases)||X||X||X|
|Closed School Discharge||X||X||X|
|False Certification of Student Eligibility or Unauthorized Signature/Unauthorized Payment Discharge||X||X|
|Unpaid Refund Discharge||X||X|
*FFEL program loans may become eligible for Public Service Loan Forgiveness if they are consolidated into the Direct Loan Program.
You may also raise defenses to repayment, also known as borrower defenses.
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.
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.