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1.11.2 Loan Cancellation

Regardless of whether the client is in default, loan cancellation is the first option to consider. Cancellation provides the most complete remedy for student loan borrowers. Advocates should always review all of the various cancellation remedies for all clients. Clients may be eligible for more than one type of cancellation, but they can recover only once. Cancellation options are discussed in detail in Chapter 10, infra.

Before reviewing cancellation options, it is important to know what type of loan the client has. Cancellation and other rights vary depending on the type of loan. After considering these issues, advocates should determine whether the client is eligible for loan cancellation. The following are the main cancellation programs:

I. School-Related.

  • 1. Closed school. The closed-school cancellation is available for borrowers unable to complete a program due to a school closure and applies to FFELs, federal Direct loans, and Perkins loans (including NDSLs) received at least in part on or after January 1, 1986.327
  • 2. False certification. Borrowers are entitled to a loan cancellation if they received at least part of an FFEL or Direct loan after January 1, 1986, and if their eligibility to borrow was falsely certified by the school.328 The cancellation does not apply to Perkins loans, but students should be able to raise the school’s misconduct as a defense to loan repayment because the school is the original lender.329
  • The Department recognizes four bases for a false-certification discharge:
  • A. The school falsifies a non-high-school graduate’s ability to benefit from the program.330 As of July 1, 2012, however, most students without high school diplomas or equivalencies are no longer eligible for federal aid unless they are enrolled in an eligible Career Pathway program.331
  • B. The school enrolls a student unable to meet minimum state employment requirements for the job for which the student is being trained;332
  • C. The school forges or alters the student loan note or check endorsements;333 or
  • D. The borrower is a victim of identity theft.334
  • 3. Unpaid refund. Provides for discharge based on the school’s failure to make an owed refund to the student.335 State tuition recovery funds should also be considered.336
  • 4. Defense to repayment. Existing regulations and new guidance from the Department of Education allow borrowers who either have Direct loans or are willing and able to consolidate other federal student loans into Direct consolidation loans to submit borrower defense applications seeking full or partial discharges based on their school’s misconduct. The Department has also established a more streamlined application form and process through which certain former Corinthian Colleges students covered by Department findings of school misconduct may apply for relief. At the time of this update, the Department has delayed new rules that would govern the borrower defense process and has scheduled a new rulemaking on the subject to begin in November 2017.337

II. Disability cancellation. The borrower’s permanent and total disability is grounds for a student loan discharge.338

III. Death. The borrower’s death is a defense to collection actions on Stafford, SLS, Perkins, and Federal Direct loans.339 The deaths of both parents (assuming both parents are obligated) or the death of the student discharges PLUS loans.340

IV. Public service and other job-related cancellations. These cancellations are tied to the borrower’s profession and generally require a minimum number of years of full-time employment in various fields.341 There are special provisions in some loan programs for military service members as well.342

V. Cancellation for repayment. Borrowers may also be able to cancel loan balances after twenty or twenty-five years of repayment through an income-driven repayment plan.343

Obtaining a statutory loan cancellation can take a long time. In the meantime, advocates should request administrative forbearances to stop the collection efforts pending a decision.344 If the client wants to go back to school before a decision on the cancellation is made, advocates should consider reviewing the repayment, loan rehabilitation, and consolidation options discussed in Chapter 7, infra, and summarized below. However, the Department advises against consolidating while a discharge is pending in certain cases, as discussed in detail in Chapter 10, infra. In addition, advocates and borrowers should be aware of possible tax consequences associated with some of the statutory discharges.345

VI. Bankruptcy. Some student loans may be discharged in bankruptcy.346

Footnotes

  • 327 {271} See §§ 10.2, 10.3, infra.

  • 328 {272} See § 10.4, infra.

  • 329 {273} See § 13.8.3, infra.

  • 330 {274} See § 10.4.2, infra.

  • 331 {275} See § 1.6.1, supra.

  • 332 {276} See § 10.4.3, infra.

  • 333 {277} See § 10.4.4, infra.

  • 334 {278} See § 10.4.5, infra.

  • 335 {279} See § 10.5, infra.

  • 336 {280} See § 13.5.2, infra.

  • 337 See § 13.8, infra.

  • 338 {281} See § 10.7, infra.

    For a PLUS loan on which both parents are obligated, the disability of only one parent does not discharge the loan. See § 10.7.2, infra.

  • 339 {282} See § 10.8, infra.

  • 340 {283} See § 10.8, infra.

    Assuming the parents are co-borrowers, the death of only one of the two obligated parents does not discharge a PLUS loan.

  • 341 {284} See §§ 10.9–10.12, infra.

  • 342 See §§ 10.9, 10.12, infra.

  • 343 {285} See § 3.3, infra.

  • 344 {286} See § 4.4, infra.

  • 345 {287} See § 10.14, infra.

  • 346 {288} See Ch. 11, infra.