Canceling Student Loans To Get Rid Of Student Loans
In some situations, you can get rid of your student loans altogether, which is referred to as student loan “forgiveness,” “cancellation,” or “discharge.” You must meet very specific criteria. Sometimes, you can cancel part of the loan, but not the entire loan.
What’s the Difference Between Loan Forgiveness, Cancellation, and Discharge?
If your federal student loans are forgiven, canceled, or discharged, you don’t have to pay them. People often use the terms “loan forgiveness,” “loan cancellation,” and “loan discharge” interchangeably, but the federal government uses these descriptions in specific ways.
“Forgiveness” or “cancellation” refers to situations when borrowers don’t have to make loan payments because of their occupation. A “discharge” happens when the borrower doesn’t have to make payments due to other circumstances, like a total and permanent disability or school closure.
The circumstances in which you might be able to cancel your student loan include:
Discharging Your Student Loan
If your student loan is discharged, it likely means youre no longer required to make payments on your loan because of specific circumstances. The U.S. Department of Education may choose to discharge your loan because of things like a permanent disability, a school closure, or other circumstances considered to constitute an undue hardship.
Here are common reasons why your federal student loans may be discharged:
What Is Student Loan Forgiveness
Student loan forgiveness means you are no longer required to make payments on the loans you used to pay for college. Its an incentive program for those who took out more money than they can afford to repay.
Piling up student debt isnt exactly a sin. If it were, 45 million people should head to the nearest confession booth. They have a combined $1.7 trillion in sins, er, debt.
It cant be confessed away, but it can be forgiven. Sort of.
Forgiveness means all or part of your student loan is wiped away. Poof! But the federal government doesnt just wave a magic wand over everyones debt. You must qualify for forgiveness, and depending on which type of forgiveness you are pursuing, that can be a challenge. To qualify for PSLF, for example, you must have 10 years of steady, on-time payments.
Private student loan forgiveness is even more difficult. The only way that happens is if you sustain total and permanent disability, or you die.
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No Credit History No Problem
Student loans are different. Your child doesnt have to have an 850 credit score to get a federal student loan. In fact, your student doesnt even have to have a credit history to get a Direct Subsidized or Unsubsidized student loan. He or she must meet eligibility criteria.
Now, if you, the parent, would like to get a Direct PLUS loan, you will need to undergo a credit check. A Parent PLUS loan, for parents of undergraduate students, falls under the Direct PLUS loan category.
Its also important to know that most private lenders require you to have a credit score of at least 670 or higher.
Apply Every Raise And Tax Refund Toward Paying Off Your Student Loans
What do most people do when they get a raise? They blow through it like its nothing. And then they wonder why it felt like they didnt get a raise.
As you keep growing in your career and getting promotions as you go, put your extra income toward paying off those student loans. Dont move to a bigger house. Dont buy a new car. Dont buy any designer threads. And dont upgrade your smartphone. You were living without that extra money before, and you can keep living without it a little while longer. Now is not the time to upgrade your lifestyle. You can do that later when you dont have a payment in the world! Use your income boost to make major progress in your fight against student loan debt.
The same goes for your tax refund. How many people do you know who take that free money and burn it all on new furniture, clothes or a 55-inch flat-screen TV? One extra deposit into the bank account, and suddenly a little voice in your head yells, Treat yourself!
Heres a not-so-fun fact: Your tax refund isnt free money from the government. Theyre just giving you back your own money because you paid them too much. They were just holding onto your money all year long with zero percent interest earned! If you really want to treat yourself, take that refund and put it directly toward paying off a big chunk of your student loans!
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The Corinthian Colleges Student Loan Forgiveness Program
Corinthian Colleges was the first huge for-profit chain to shut down, closing in 2016 and stopping operations across all its campuses, including all Everest, Heald and WyoTech locations.
This was a huge shot across the bow of the student loans industry, as it was the first time that any of the truly huge schools had taken a big financial hit, and it opened the door for many other schools to follow, including ITT Tech and Westwood, who both just recently ceased their own operations.
You can qualify for forgiveness on your Corinthian loans in two ways: first, by pushing for a Borrowers Defense Against Repayment Discharge, if you can prove that the school defrauded you in some way , and second, through a Closed School Loan Discharge, which will work perfectly if you were still a student at the time the school closed.
To find out how to take advantage of these excellent opportunities, please visit my page on the Corinthian Colleges Student Loan Forgiveness Program.
Private Student Loan Bankruptcy Discharges
While many people think its impossible to get rid of private student loans via bankruptcy proceedings, Im happy to report that this couldnt be further from the truth!
Private student loan debt definitely can be discharged via bankruptcy it just takes a lot of work, and some really specific financials.
To get rid of your loans in bankruptcy, youll have to prove to a court, or the Judge, that the loans are so large and so oppressive that theyre literally making it difficult for you to afford food,, shelter and clothing.
Many courts have ruled in favor of the borrower in recent years, letting them discharge $100,000, $200,000 or even more, if they can prove that these loans are threatening their daily lives by saddling them with too much debt.
Its not easy, and its not all that straightforward either, but if youre buried in private debt, not making much money, and have dependents, then you may have a shot at a discharge.
For details, visit my page on Private Student Loan Bankruptcy Discharges.
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The Pay As You Earn Student Loan Forgiveness Program
Part of the Obama Loan Forgiveness Program, Pay As You Earn is one of the best income-based Federal Student Loan Repayment Plans available this year, and its only downside is that its only available to people who took out loans on or after October 1st, 2007.
It works the same way as Obama Loan Forgiveness, in that it sets your monthly student loan payments to an amount based on your annual income , but it offers complete Federal student loan forgiveness benefits after youve made a certain number of payments: 240 payments, or 20 years worth of payments.
Abbreviated PAYE, this is one of the most powerful Federal forgiveness programs on the market, and one that you should definitely look into if your loans were taken out after 2007, because it is the most widely available forgiveness benefit, and one of the easiest to qualify for.
For details on how PAYE forgiveness works, please visit my page about the Pay As You Earn Student Loan Repayment Plan.
Likelihood Of Discharging Student Loans
Why Is It So Difficult To Discharge Student Loans?
In 1976, Congress prohibited federally guaranteed student loans from being discharged in bankruptcy except under conditions of undue hardship. This was in response to largely unfounded fears of too many student debtors looking for an easy way out of their obligations.
This put student loan debt in the same category as financial obligations like child support, alimony and criminal fines.
In 2005, Congress added private student loans to the list of debts that cannot be discharged.
In most bankruptcy cases, consumers dont even attempt to have student loans discharged. Instead, their lawyers focus on other issues such as .
Austin said that less than 1% of bankruptcy filings include student loans, even when there is a compelling case. He cited a situation in which a single mother on a teachers salary and battling cancer didnt bother filing for bankruptcy, despite more than $150,000 in student loan debt.
However, in most cases, the legal hurdles that have to be overcome are so daunting that most lawyers advise their clients not to seek a discharge for student loan debt in their bankruptcy filing. Also, there are now several income-driven repayment plans such as Pay As Your Earn , Repay As You Earn , Income Contingent Repayment and Income Based Repayment that most borrowers should be able to find a program they can afford.
Surprisingly, about 40% of the cases that are filed, actually are successful.
Check With Your Employer
You may already know that some employers offer tuition assistance programs to help their employees pay for school. It can be a good option to avoid student loan debt in the first place. You may already have student loan debt so that option will not help you out.
However, some employers are starting to offer Student Loan Repayment Programs. While each program will vary by company, the general idea is that your company will help pay off your loan.
You can check with your HR rep to see if your company offers a program like that. If you havent started a job yet, then a student loan repayment program is something worth looking for at a potential company. As you are negotiating your salary, you may want to bring this up. It never hurts to ask!
Public Service Loan Forgiveness Program
Congress created the PSLF program in 2007 to encourage people to pursue noble careers that serve mankind and lessen student debt.
To qualify for the Public Service Loan Forgiveness program , you must be a full-time employee in a public service job. You must also make 10 years of on-time monthly payments after consolidating your federal loans in a qualified repayment program.
This option applies solely to Direct Federal Student Loans. Private student loans are not eligible for the PSLF program.
Before we proceed, heres a red flag: Applicants from the class of 2007 theoretically were the first ones eligible for loan forgiveness in 2017 and 99% of applications were rejected. That number has gotten slightly better with 2.4% of applications approved as of September 2020, according to the U.S. Department of Education.
Many borrowers discovered their application was rejected because they had been in an incorrect repayment plan. The Department of Education introduced its PSLF Help Tool in 2018 to try and reduce the number of rejected applications.
The PSLF Help Tool allows you to search for qualifying employers and has a series of question related to the programs requirements that should help steer borrowers through the eligibility process.
If you are deemed ineligible because some or all of your payments were not made under a qualifying plan, you might still be eligible through Temporary Expanded Public Service Loan Forgiveness.
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Can Student Loans Be Discharged By Bankruptcy
Asked by: Kayla Rutherford
Absolutely. Though difficult, it is still possible to have student loans discharged through bankruptcy by meeting the undue hardship requirement. First, the borrower must demonstrate that if forced to repay the student loans, they will be unable to meet a minimal standard of living based on income and bills.
Some Borrowers Will Need To Apply For Student Loan Forgiveness
The Education Department indicates that borrowers who dont have their income information on file will need to complete and submit an application certifying their income. Borrowers who are not sure whether or not the department has current income information should err on the side of submitting the application, according to published guidance.
The application for the Biden student loan forgiveness initiative is not yet available, but the Education Department indicates that it will be available before the pause on federal student loan repayments ends on December 31st. As part of the Biden student loan forgiveness initiative, the ongoing pause on student loan payments has been extended to December 31.
The administration is offering borrowers the opportunity to subscribe to a notification system, which will provide notices to borrowers once the application is available. You can .
Make Sure You Qualify Based On Income
President Joe Biden announced last week that most federal student loan borrowers will be eligible for some forgiveness: up to $10,000 if you didn’t receive a Pell Grant, which is a type of aid available to low-income undergraduate students, and up to $20,000 if you did.
The relief will be limited to borrowers who make less than $125,000 per year, or married couples or heads of households earning less than $250,000.
More from Personal Finance:How to figure out if you qualify for student loan forgiveness
Review your recent tax returns to confirm your income fell below those thresholds. The Education Department will be considering people’s so-called adjusted gross income, or AGI, which may be different than your gross salary.
To confirm your AGI for 2020 and 2021, look for line 11 on the front page of your tax return, known as Form 1040.
Loan Forgiveness For Doctors
The healthcare professions, especially physicians, dentists, pharmacists and mental healthcare workers, have several options, both national and local, to receive loan forgiveness.
The requirements and the amount forgiven vary dramatically, depending upon which program you enter. Check out the links to see the amount of loan forgiveness available and requirements for Army doctors Indian Health Services, National Institute of Health, as well as state-by-state programs.
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Consolidate Your Federal Loans
If youre a federal student loan holder with multiple student loans, you can consolidate your federal student loans with a Direct Consolidation Loan at no cost. Combining multiple loans into a single Direct Consolidation Loan wont necessarily give you a lower interest rate your new rate will be a weighted average of all your existing loans. But youll have an easier time keeping track of your student loan debt, particularly if your loans are with different loan servicers.
Note that if youve been making payments under an IDR plan, consolidating your loans into a Direct Consolidation Loan resets your payment clock. Youll typically lose credit for the months youve already been paying on your loans. But because of the pandemic, you wont lose credit for those payments for a limited time.
Private Student Loan Modification Programs
Loan modification programs are like consolidation programs, in that they can change the terms of your loan, saving you money by reducing monthly payments, getting a better interest rate, or doing any number of other things that help reduce your financial burden.
However, loan modification programs have one special difference: theyre available to people who only have a single loan, meaning that more people are likely to qualify for loan mods than will for loan consolidations, since the population of borrowers is much higher.
If youve only got one private student loan, and its destroying your finances, then youll want to see if you can get your loan servicer to agree to make loan modifications.
Things to push for are lower interest rates , longer repayment terms , or anything else that may be able to help ease your financial burden.
Youre going to have to go it alone when it comes to Loan Modifications, as each servicer has their own specific rules for whats possible, so youll need to call whoever youre sending your monthly payments to, and start negotiating with them to see what you can accomplish.
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The Devry Student Loan Forgiveness Program
DeVry is another one of those massive schools that signed up tons of students, charged them ridiculous prices, and maybe didnt do that great a job preparing them to work in the real-world, and theyre paying the price ever since people became aware of Borrowers Defense to Repayment Discharges.
In fact, DeVry has been getting hammered with Borrowers Defense Applications, especially since the FTCs lawsuit made it so obvious that DeVry was vulnerable to fraudulent or misleading advertising claims.
Anyone whos been paying attention to the industry would know by now that theres almost no better target school for a Borrowers Defense Against Repayment Discharge, and if you attended DeVry, then youd better get an application submitted soon, because the line has grown quite long.
To find out how you can use Borrowers Defense against DeVry, please visit my page on the DeVry Student Loan Forgiveness Program.
Federal Student Loan Bankruptcy Discharges
For years, people have thought it impossible to get rid of Federal student loans by filing for bankruptcy, but thats simply no longer true.
Since I started following the student loans industry, Ive noted many cases where people were able to discharge their Federal loans via bankruptcy, though I do have to say that its still one of the hardest ways to get rid of your debt.
Why? Because it requires passing an extraordinary restrictive Test, which forces you to prove that your student loan debt is so debilitating, its literally making it difficult for your to afford paying for essential things, like food, clothing and shelter.
Anyone who makes any reasonable amount of money, or who is young, or who earned a degree in a field that may lead to good employment prospects will be virtually incapable of passing the Bankruptcy discharge tests, so Bankruptcy is really only an option for people who are totally destitute, and buried in debt.
As an example, if youre middle-aged, unemployed, have several dependents, and owe hundreds of thousands in student loans, then you MAY have a chance at qualifying for a bankruptcy discharge, but if youre not all those things, then youll probably want to look elsewhere for forgiveness opportunities.
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