Managing Student Loans: Loan Forgiveness for School Status

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When Your School Closes. Getty Images

Student loans can be cancelled under certain narrow circumstances. These circumstances generally fall into three categories.

  • Those related to the status of the school
  • Those related to death or disability of the borrower
  • Those related to the profession of the borrower

In this article we consider what happens when a school closes or you can otherwise not benefit from the education you paid for.

STATUS OF THE SCHOOL

If a student cannot benefit from the education that his federal loans purchased, the student may be able to seek relief from the burden of having to repay the debt. This may happen under two circumstances, school closure or when the school falsely certifies that the student can benefit from the program of study.

     Closed School Discharge

Although this virtually never happens with public colleges, private colleges have been known to shutter their campuses when their financial obligations become unmanageable. Even more so, private trade or career oriented schools close frequently. (See, for example, Career Colleges of America Officially Closes). For students in those programs, not only do they often lose credit for the courses they have completed, they are left owing substantial student loans for expensive programs that will do them no good.

When a school closes before a student can complete his program, the student may be eligible for discharge or forgiveness of federal loans.

To qualify for a closed school discharge the following criteria must be met:

  1. Your school closes while you're enrolled, and you do not complete your program because of the closure. If you were on an approved leave of absence, you are considered to have been enrolled at the school.
  2. Your school closes within 120 days after you withdraw.

    If you transfer to another school to complete your program of study and are therefore able to benefit from the education you received at the closed school, you will generally not be eligible for discharge of the debt.

    To learn more, visit the Department of Education’s website regarding cancellation, discharge or forgiveness of federal loans.

         False Certification Discharge

    In order to obtain a federal student loan, the school must certify that the student can benefit from the education that she receives there. That eligibility may be demonstrated if the student has a recognized high school diploma or its equivalent, has passed an approved state authorized examination or has successfully completed coursework toward a degree.

    Under certain circumstances a student may make significant progress toward completion of a course of study or even obtain a degree and not be able to enter the profession for which she trained due to physical or mental condition, age or criminal record.

    When the school falsely certifies that the student has acceptable credentials or is able to benefit even thoughs he cannot enter the profession, she may be eligible for forgiveness of her Direct of FFEL loans. False Certification discharge is not available, however, for Perkins loans.

         Missing or forged signature

    If you can show that your signature was forged on your loan application or promissory note or that you never signed your paperwork, you may be able to discharge the loan. This discharge is not available, however, if you received the money or it was credited against your legitimate obligations – in other words, you received a benefit from it.

         Unpaid refund

    If you withdrew from a program before completing it and were due a refund but never received it, you may be able to obtain at least a partial discharge of your obligation depending timing, the school’s refund policy and the type of loan you have. If you attended at least 60% of your program, you are not eligible for a discharge of the debt.

    To learn more about false certifications, signature issues and unpaid refunds, visit the  Department of Education’s website regarding cancellation, discharge or forgiveness of federal loans.

    To learn more about obtaining a discharge with a Chapter 7 or a Chapter 13 bankruptcy filing, visit our article on the subject at MANAGING STUDENT LOANS: BANKRUPTCY DISCHARGE.

    For lots more information on managing your student loans during difficult financial times, see our articles on the following issues:

    General Issues

    What Kind of Loans Do You Have?

    Your Options for Managing Student Loans in a Nutshell

    Glossary of Helpful Student Loan Terms

    When You Can't Make Your Payments

    Delinquency and Default

    Deferment and Forbearance

    Repayment Strategies During Tough Times

    Surviving a Student Loan Default

    Dealing with Student Loan Collectors

    Managing Private Loans

    Loan Forgiveness

    Loan Forgiveness for School Status

    Loan Forgiveness for Disability or Death

    Public Service Loan Forgiveness

    Student Loans in Bankruptcy

    Bankruptcy Discharge

    Discharging Private Loans

    Using Chapter 13 Repayment Plans