How To Judge Your Qualification for Discharge or Forgiveness of Student Loan?

Savings and incomes are generally not sufficient to pay for one’s education expenses, especially when we talk about higher education from an institution of repute in the US. Hence, to encourage higher studies in the US economy , federal government started offering student loans in 1950s under the National Defence Education Act. The Higher Education Act of 1965 further helped to broaden the scope of student loans. 

Student Loans

A student loan is specifically designed for students to pay for their education expenses and carry substantially lower interest rates and suitable repayment schedules to help students pay them back when they are capable of. Student loans are different from scholarships and grants and are supposed to be paid off. There are mainly two types of student loans, namely, Federal student Loans and private student loans. Federal student loans are funded by the federal government. Interest rates on a federal loan are fixed and in some cases, tax deductible.

Federal student loans  can take two forms- Direct Subsidized loans and Direct Unsubsidized loans with the former offering certain advantages over the latter. Other than government agencies; banks and finance companies also offer student loans. Interest rates on private student loans are generally variable and higher than federal student loans. Unlike federal loans, private student loans are never subsidized and might even require smooth credit history.

Student Loan Forgiveness Programme

A student loan forgiveness programme is designed to help students pay full or a part of their student loan and in exchange require the student to pursue a particular occupation or volunteering service in exchange of paying off the loan completely or in part. In the US, student loan forgiveness programs are also aimed at directing individuals towards sectors of national importance where there is lack of qualified personnel.

The US Department of Education offers forgiveness on federal student loans and once forgiven, the student is not liable to pay his remaining loan balance. Discharge  of a loan means when the borrower is no longer liable to repay one’s loan. In other words, the loan is cancelled and the debt burden is removed. In the US economy, discharge of loan is generally associated with student loan, home loans and mortgages. However, discharge of a loan does not necessarily imply bankruptcy. There can be some other reasons as well for discharge of loan.

There are various forms of student loan forgiveness and discharge loans, such as, Public Service Loan Forgiveness Programme, Teacher Loan Forgiveness Programme, Total and Permanent Disability Discharge, Death Discharge, Perkins Loan Cancellation and Discharge, Discharge in bankruptcy and Unpaid refund discharge.

Forms of Student Loans and the Eligibility criterion

The forms are:

Public Service Loan Forgiveness Programme  : Only loans availed under the William D. Ford Federal Direct Loan are eligible for Public service loan forgiveness programme. In case of Federal Family Education Loan (FFFL) and the Perkins Loan Program, the loan needs to be consolidated into a Direct Consolidation loan in order to be eligible for the Public service loan forgiveness programme.

Employment with a federal, state or local government agency, entity or organisation or a not-for-profit organisation that has been designated as tax exempt by the internal revenue service (IRS) under section 501(c)(3) of the Internal Revenue Code (IRC) qualify for the Public service loan forgiveness programme. While working at any of the aforementioned agencies, once the individual completes his/her 120th qualifying payment, he/she can proceed to submit loan forgiveness application. 

Teacher Loan Forgiveness Programme: An individual is required to teach full-time for five complete and consecutive years in certain elementary and secondary school and educational service agencies that serve low-income groups in order to qualify for Teacher Loan Forgiveness Programme. Also, such forgiveness is applicable for Direct Subsidized and Unsubsidized loan and Subsidized and Unsubsidized Stafford Federal Loans.

Total and Permanent Disability Discharge: An individual with William D. Ford Federal Direct Loan programme loan, Federal Family Education Loan programme loan or Federal Perkins Loan might qualify for Total and permanent disability discharge programme if they are incapable of arranging in any gainful activity because of physical or mental impairment.  

However, they are certain conditions for such impairment, such as the impairment has lasted or can be expected to last for 60 consecutive or is expected to end up in death. It is only after proper evaluation of the information about one’s disability that the US Department of Education discharges the loan. 

Death Discharge: Federal Student Loan can be discharged if the borrower of the loan dies. The loan is discharged on providing a copy of the death certificate to the school or the loan servicer.

Perkins Loan Cancellation and Discharge: The Federal Perkins Loan Cancellation is available to individuals who perform certain types of public services or certain types of occupations such as Volunteer in the Peace Corps or ACTION program (including VISTA), Teacher, Member of the U.S. armed forces (serving in area of hostilities), Nurse or medical technician, Law enforcement or corrections officer, Head Start worker, Child or family services worker and Professional provider of early intervention services.

Discharge in bankruptcy: A borrower with Federal Student Loans is eligible for bankruptcy discharge if he succeeds to prove the bankruptcy court that paying off the loan would mean undue hardships for the individual. Undue hardship is measured in three aspects, i.e., the payer would not be able to maintain a minimal standard of living if forced to repay the loan, the hardship will evidently continue for a significant portion of the loan repayment period and good faith efforts for repayment before filing for bankruptcy should be seen which generally implies that the individual should be in repayment for a minimum of five years. 

Unpaid refund discharge: An individual might be eligible for a discharge of Direct Loan or Federal Family Education Loan programme loan if he/she withdrew from school but the school did not pay a refund that it owed to the U.S. Department of Education or to the lender. The amount of loan that can be discharged, however, is equal to the amount of refund not paid.

Conclusion

By referring to the above mentioned eligibility criterion for forgiveness and discharge of federal student loans, an individual can clearly understand and judge if he/ she can avail any of the programmes. Although, these programmes aim to benefit as many borrowers as possible and also seem to broaden their coverage with each amendment, however, the conditioned imposed on the eligibility serve to ensure that such benefits are only availed by people who are in genuine need or who deserve these. These programmes, among all the praise also attract some criticism for being extensively spendthrift and also for sometimes leaving out people who might be in need of such plans.