A few weeks ago, the Student Loan Ranger shared some information
about a discharge available to federal loan borrowers whose school closes
before the student can complete their credential. While it's nice that the
federal student loan programs have a bit of a safety net for those situations,
having your school close suddenly is not ideal, to say the least.
This got us thinking about some other safety nets that the
federal loan programs offer that are good to know about, but you hope you never
have to use. Here are a few to get started.
• Unpaid Refund Discharge: If a student withdraws before
completing 60 percent of the academic period for which their federal loan was
for, the school is required to return or cancel the appropriate portion of the
loan. If they do not, a borrower can apply for what's called an unpaid refund
discharge to have that portion of the loan forgiven.
Keep in mind that in most cases, a student must go through
the school's posted withdrawal process to be considered officially withdrawn,
and therefore eligible for the loan refund. Also, a school's tuition refund
policy may not be the same as the federal loan refund policy. So even if the
school returns funds to the loan holder, you may still end up owing that money
to the school.
• Death Discharge: Unlike some private loans, federal
student loans are discharged upon the death of the borrower, or in the case of
Parent PLUS loans, the student for whom the loan was taken. To receive this
discharge, the family must submit an original or certified copy of the death
certificate to all federal loan holders. For Perkins loans, the death
certificate must be sent to the school.
Any payments made on the loans since the date of death will
be refunded.
Some private lenders also offer discharge upon the death of
the borrower, so it's worth asking about. Keep in mind, however, that if a
co-signer is involved, the death of the borrower or the co-signer can
complicate things.
• Ability to Benefit Discharge: Another discharge the we
hope you never need to use – is called the ability to benefit discharge. In
this situation, the federal loan borrower states that they have a condition,
which could be physical or not, that prevents that student from practicing in
the field for which their credential prepared them.
This condition has to have existed when the student borrowed
the federal loans, and the school had to have been aware that the condition
existed. Examples of this would be a student who was legally blind obtaining
loans to attend truck-driving school or someone with a criminal history that
would prevent him or her from working with children taking loans to obtain a
credential in child care or teaching.
Less specific degrees and certificates, such as accounting
or business, would be difficult to apply this discharge to, as there are
multiple career options available to those who pursue them.
If you do need to explore these discharges further, contact
your Education loan
holder or check out their website for further instructions and applications.
Note that in many cases, you will continue to be due for payment until a
completed application is received and you'll need to send an application to
every loan holder.
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