In some circumstances, you can get rid of your student loans altogether through loan cancellation (also called student loan discharge). In order to cancel your loans, you must meet one of the conditions that allow you to do so. In this article we discuss three of those methods -- cancellation due to school closure, false certification, and unpaid refund.
To learn about other options for dealing with student loans, see Student Loans: Cancellation, Deferment, and Forbearance.
To learn about other ways to cancel loans, see Canceling Student Loans: Teaching, Volunteer Work, or Public Service and Canceling Student Loans: Permanent Disability and Death.
What Happens If Your Student Loans Are Cancelled?
If you qualify for cancellation of your student loans (also known as discharge), you may be able to:
- completely wipe out the loan balance
- get reimbursed for any payments you have made or that have been taken from you through tax intercepts or wage garnishments, or
- eliminate some or all future student loan payments.
In addition, certain types of discharges treat the loan as if you never owed it (for example, closed school and false certification discharges) and wipe out all negative references in your credit report. If only a portion of your debt is wiped out due to the school’s failure to pay a required refund on your loan, your credit report must state that a portion of the loan was discharged.
Grounds for Cancelling Your Student Loan
The below ways to cancel your loan -- school closure, false certification, and unpaid refunds—are most likely to apply to students who attended private, for-profit schools. These schools typically offer vocational courses, degrees, or online courses.
This article refers to various types of student loans (for example, FFEL, Direct, Perkins, etc). If you don't know what type of loan you have, see Types of Federal Student Loans.
Cancellation of Student Loans Due to School Closure
Many former students were lulled into taking out student loans to attend a school with glowing descriptions of future careers and high salaries, only to have the school deteriorate or close before they could finish the program. You can cancel a FFEL, Direct, or Perkins loan (including an NDSL loan) if you received any of the loan proceeds after January 1, 1986, as well as the portion of a consolidation loan used to pay off any of these loans if you were unable to complete the program because the school closed:
- before you began attending classes
- while you were enrolled and attending classes (and you were not able to complete your studies)
- within 90 days after you withdrew from the school, or
- more than 90 days after you withdrew, and the Department of Education determined there were extenuating circumstances to justify an extension of the 90-day period.
Did Your School Close? The Department of Education has a list of closed schools. Go to its general financial aid website at http://studentaid.ed.gov, click on “Repayment Information,” scroll down and click on “Loan Cancellation (Discharge).” That page describes the different types of discharges available, including “closed school,” and how to apply for a discharge.
In most circumstances, your school must be on the list in order to qualify for a closed school cancellation. The list may not be entirely accurate. If you have information that can show a school closed earlier than the date indicated in the list, you should provide it.
Student Loan Cancellation Due to False Certification
If the school did not make sure that you were qualified to attend the program, you may be able to cancel your loans based on “false certification.” This program applies to FFEL or Direct loans if you received any of the loan proceeds after January 1, 1986, as well as the portion of a consolidation loan used to pay off one of these loans. (If you had a Perkins loan, you may have other grounds to have the loan canceled, but will need to contact an attorney familiar with the intricacies of student loan law for help.)
To find a student loan law expert in near you, visit Nolo's Lawyer Directory.
Typically, the grounds for false certification are any of the following:
- You did not have a high school diploma or GED at the time of admission, and the school did not properly test your ability to benefit from the program (for example, the school did not properly time its entrance exam, did not properly score it, did not use an exam relevant to the course, did not use an approved exam, or improperly assisted you to pass the exam).
- At the time of enrollment, you could not meet the licensing requirements for employment in the field for which you were to receive training because of physical or mental condition, age, criminal record, or other reason the Department of Education accepts (for example, you had a felony record and enrolled in a security guard course, but your state doesn’t permit prior felons to work as security guards).
- The school forged your signature on the loan papers or checks, unless the loan proceeds paid for charges you owed to the school.
- You are a victim of the crime of identity theft (shown by a verdict or judgment).
Canceling Student Loans Because of Unpaid Refunds
This program allows you to cancel all or a portion of a loan if the school failed to pay you a refund that it owed you because you never attended the school or withdrew from the school and were owed a refund for the time left in the program. Loans must be GSL, Stafford, SLS, PLUS loans, or Direct loans, or the portion of a consolidation loan used to pay off one of these loans and must have been made after January 1, 1986. (If you had a Perkins loan, you may have other grounds to have the loan canceled, but will need to contact an attorney familiar with the intricacies of student loan law for help.) In addition, some states have funds to reimburse students who didn’t get refunds due them.
Applying for Student Loan Cancellation
To discharge or cancel a student loan—or to determine whether you qualify to do so—call the holder of your loan or the Department of Education’s FSA Collection Office at 800-621-3115.(Here's how to find the holder of your student loan.) Be aware that your loan holder may not inform you of all the options available to you. For this reason, it pays to first learn about your options.
For more information on loan cancellation (discharge), go to www.studentaid.ed.gov, and under “Repaying Your Loans,” click on “Repayment Information,” then scroll down and click on “Loan Cancellation (Discharge)” for school-related discharges. For forms, go directly to www.ed.gov/offices/OSFAP/DCS/forms.html.
For a comprehensive guide to dealing with financial difficulties, read Margaret Reiter's Solve Your Money Troubles: Debt, Credit & Bankruptcy (Nolo).