The unpaid refund discharge is available because you do not always have to repay the full loan amount if you left school early. If you went to school for less than 60% of the loan repayment period, you should have received a refund for at least some of what you owed on your loan. In these circumstances, schools are supposed to return the money to the lender and make sure that you get a refund on your loan balance.
If you left school early, but you still owe a lot in government loans, it is possible that you should have received a full or partial federal loan refund. If you did not get a refund that you were entitled to, you can apply for an unpaid refund cancellation.
This program allows you to cancel loan liability for federal loans obtained after January 1, 1986 if the school failed to pay a refund required under federal law. You may qualify for this discharge regardless of whether the school is open or closed. This discharge is available to FFEL and Direct Loan borrowers. Perkins loan borrowers can raise the failure to pay a refund as a defense to a collection action.
Consolidation loans are trickier. A consolidation loan usually consists of a number of underlying loans. If any of these underlying loans could be canceled, you can apply for an unpaid refund cancellation for these loans only. If granted, you will receive a credit for the amount of the underlying loans related to the unpaid refund. Find out what type of loans you have underlying your consolidation through NSLDS.
If you never received a refund, you may be eligible to reduce your federal student loan obligation by the amount that should have been refunded plus interest and related charges. If you were owed a refund for less than what you borrowed, you will only get a discharge of a portion of the amount you borrowed and you will still owe the rest. Under federal law, borrowers who completed 60% or more of the loan period are not entitled to refunds. On the other hand, borrowers who never attended classes or who attended for a very short time should be able to get a complete cancellation.
For example, if you stopped attending your school after completing 40% of a semester, your school should have refunded 60% of your the federal loan paid for that semester to the government. If it failed to do so, you may apply for a discharge of 60% of these government loans, plus interest and fees accumulated on that 60%. You will, however, still owe 40% of the loan amount paid for that semester, plus any interest or fees accumulated on the 40%.
The amount of the unpaid refund will be based on information that you or the loan holder has. You need three pieces of information to calculate a refund: the tuition, the school’s refund formula, and the percentage of the course or term that you completed. The school catalog or the written enrollment agreement should have this information. State licensing agencies sometimes have this information as well. If the actual school refund formula is not available, the Department of Education regulations set out a substitute formula.
How to Apply for an Unpaid Refund Discharge
In most cases, you will have to fill out an Unpaid Refund Cancellation Form to apply. (There are limited cases in which the government will accept an oral application). The form is also available on the Department of Education’s web site. You should send by certified mail to your loan holder and get a receipt.
There is no time deadline to apply. If the school is still open, you must prove that you and the loan holder tried to resolve the problem within 120 days from the date that you submitted the application for discharge. This requirement does not apply if the school is closed.
If the cancellation is granted, you will receive a discharge in the amount of the unpaid refund, including any accrued interest and any collection or other charges. If you already paid part of the loan, and the amount still owing is less than the unpaid refund, part of the unpaid refund will be used to fully cancel the loan. The rest should be paid to you. The loan holder must help clean up your credit history. If the discharge is denied, you may first seek review from the Department of Education and then if necessary, appeal to federal court.
OTHER REFUND RIGHTS
You may also have refund rights under your enrollment agreement or state law. Some state laws require your school to refund your federal and private loans, as well as any cash you paid, if you withdrew before you completed your program. Or, the enrollment agreement between you and your school may provide for the refund of federal loans, private loans and cash you paid, depending on when you withdrew.
If you dropped out or withdrew and need help determining whether your school refunded the correct amounts required by law, you should seek legal assistance. You should also check your enrollment agreement or contact your state oversight agency for more information about your rights under state law.