Student Loan Discharge Vs. Cancellation Vs. Forgiveness – Forbes Advisor

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In 2022, there were over 43 million federal student loan borrowers. While many will likely end up repaying their loans in full, others may be eligible to have their loans discharged, canceled or forgiven.

Although these terms are often used interchangeably, each of them refers to a different process when it comes to removing the borrower’s obligation to repay.

Here’s what student loan release, cancellation, and forgiveness mean for federal student loans and how you might qualify.

Student loan discharge vs cancellation vs forgiveness

Since the discharge, cancellation, and forgiveness of federal student loans work differently, it’s important to do your research to see which programs you might qualify for. Here is a basic overview of how they work:

What is student loan discharge?

Student loan discharge occurs when you are no longer required to make federal student loan payments due to extenuating circumstances beyond your control. For example, if you become permanently and totally disabled, it will likely be difficult for you to earn an income and repay your student loans, which is why people in this situation may be eligible to have their federal loans forgiven.

Other scenarios that may qualify you for student loan discharge include:

  • Closed school outing: Your school closed while you were enrolled or shortly after graduation.
  • Perkins Loan Release: You have a Perkins loan and you are experiencing certain circumstances, such as bankruptcy, school closure, or disability related to military service. You may also be eligible if your spouse was a victim of the events of 9/11.
  • Exit from total and permanent disability: You become totally and permanently disabled. You must provide documentation from the Department of Veterans Affairs, Social Security Administration, or a doctor.
  • Exit due to death: The primary borrower or student who received a parent PLUS loan dies.
  • Release from bankruptcy: You declare bankruptcy and prove to the court that repaying your loans would cause undue hardship. Note that receiving a full discharge due to bankruptcy is rare. Those who experience undue hardship more often have the option of paying off part of their loan or repaying it on different terms, such as a lower interest rate.
  • Defense of the borrower to repayment: Your school has violated certain state laws, misled you, or engaged in other misconduct related to your loan or education.
  • False certification waiver: Your school falsely certified that you were eligible to receive a federal loan – for example, you did not meet eligibility requirements, you did not meet employment criteria, or your school signed your name on the loan application or promissory note without your permission.
  • Unpaid discharge reimbursement: You withdrew from school and the school did not return the required federal funds to the loan officer.
  • False Disclaimer: You are a victim of identity theft and the attacker has fraudulently taken out federal loans in your name.

Is student loan discharge taxable?

In most cases, no, you will not have to pay taxes on federal loans that are discharged. However, keep in mind that there are some exceptions.

For example, if your loans were canceled due to permanent and total disability before January 1, 2018, you may be required to pay taxes on the canceled amount. But loans discharged for this reason after January 1, 2018, until December 31, 2025, will not be taxed.

How to Apply for Student Loan Discharge

If you think you qualify for student loan discharge, you can apply for the specific program through the Department of Education. In some cases, this may require working with a certain repairer – for example, applications for release for total and permanent disability must be submitted to Nelnet.

Generally, you do not have to make any loan payments while your application is being reviewed. You can check with your service agent to see if any payments are required or for additional help with the application process.

What is student loan forgiveness?

Student loan forgiveness occurs when you are no longer required to make payments on your federal student loans due to your job.

For example, if you have a Perkins loan, you could see up to 100% of it forgiven if you work in an eligible government or non-profit field for five to seven years, depending on your profession.

Professions potentially eligible for Perkins loan forgiveness include:

  • Lawyers (public defenders)
  • Correctional officers
  • Disability Early Intervention Service Providers
  • Employees of public or private not-for-profit child or family service organizations
  • Faculty members of tribal colleges or universities
  • Firefighters
  • law enforcement officers
  • Librarians
  • Medical technicians
  • Nurses
  • Speech therapists
  • Teachers (including staff members of the educational components of Head Start programs and pre-kindergarten or child care programs)
  • american military
  • Volunteers for AmeriCorps Volunteers In Service to America (VISTA) or the Peace Corps

Is canceling a student loan taxable?

It depends on how your federal loans are forgiven. For example, if you are eligible for Perkins loan forgiveness, you won’t have to worry about taxes on the canceled amount.

How to Apply for Student Loan Cancellation

If you qualify for cancellation, you will usually be able to apply through your loan servicer. For cancellation of a Perkins loan, you must apply through the school that gave you the Perkins loan or through the school’s Perkins loan department.

What is student loan forgiveness?

Similar to forgiveness, student loan forgiveness occurs when you are no longer required to make payments on your federal loans, usually due to your employment with a government or qualifying nonprofit organization.

There are three main federal student loan forgiveness programs.

  • Civil Service Loan Waiver (PSLF): If you work for a government or nonprofit organization, you may be eligible to have your federal loans forgiven after making 120 qualifying payments under an income-based repayment (IDR) plan.
  • Teacher loan forgiveness: To qualify for this program, you must be a highly qualified teacher and teach five full, consecutive academic years at a low-income school or educational service agency. You can have $5,000 or $17,500 of your federal loans forgiven, depending on the subject you teach.
  • Income-Based Reimbursement: Unlike PSLF and Teacher Loan Forgiveness, IDR does not require borrowers to work in certain areas. Instead, you simply need to enroll in one of four IDR plans, which will base your payments on your income and household size. You can then have any remaining balance canceled after 20 or 25 years, depending on the plan you choose.

Is student loan forgiveness taxable?

It depends on the program. The PSLF and the teacher loan forgiveness are both tax-exempt, while the forgiveness under an IDR plan could be subject to taxes.

How to apply for student loan forgiveness

You can use the PSLF Support Tool to see if you are eligible and on track for PSLF as well as to complete an application. If you are ready to apply, you can then submit this form to the Missouri Higher Education Loan Authority (MOHELA) for processing.

For Teacher Loan Forgiveness or IDR, you can apply through your current service agent.

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