What Is Student Loan Forgiveness?
At the very root level, student loan forgiveness is simply the process of being told that you can stop paying back the loans without any penalty. Whether you have made payments already or not, the rest of the loan is discharged, and you owe nothing. This is not the same as bankruptcy, in that loan forgiveness does not have an impact on your credit score. You just don't have to repay what you owe.
Now, student loans are only forgiven in certain situations, so you must know what these are to determine both if you are eligible to request it and what legal steps you have to take to put in the request. Some of the more common reasons why a debt will be discharged include:
- If the school itself is forced to close.
- If you are disabled in a way that is “total and permanent.”
- If you did public service with groups like the Peace Corps or the United States military.
- And more.
Loan Forgiveness After Death
If you pass away after taking out federal loans, they are automatically going to be forgiven. You do not have to worry about this debt being passed on to your family members. The gray area is when you have Parent PLUS loans, which are signed by both you and a parent. While these loans are sometimes forgiven after the death of either the student or the parent, this is not always done.
Another thing to note about parent PLUS loans is that the IRS may still want the tax from the loan, even if the loan is forgiven. They are not going to seek taxes on a standard loan, so the family does not have to worry about paying if the borrower has passed away with typical federal loans. For the parent PLUS variety, there is no guarantee that the IRS will try to get the taxes, anyway, but it does have that option, and this has been done before.
Loan Forgiveness in Bankruptcy
This is another tricky area. In many cases, asking for your loans to be forgiven when you file for bankruptcy will not get you anywhere. As a rule of thumb, bankruptcy does not apply to student loans, and they remain even if the rest of your bankruptcy proceeding goes as planned.
However, you can ask the bankruptcy court, in a separate suit known as an adversary proceeding, to consider forgiving the student debt as well. You have to show that the situation that you have found yourself in is abnormal and that your loans are putting too much stress on you and your family due to these unforeseen circumstances.
For example, the court may want to know what your standard of living is while you are paying the loans. If you are not financially able to provide a minimum standard of living for your children, the bankruptcy may be allowed to apply to student loans. This is done so that loans do not make it impossible for parents to offer food, clothing, and the like to their children.
However, if you can pay them off, but you simply want a higher standard of living, with more items that the court considers to be frivolous, you may be denied. Each case is reviewed on an individual basis, so this is not an automatic way to wipe out the loans, but it is an option that you need to be aware of.
Your Path to Loan Forgiveness
As you can see, there are many different ways for you to approach student loan forgiveness, whether you base it around actions that you take -- serving in the Peace Corps -– or circumstances that may be out of your control -– like the loss of a job that leads to bankruptcy. No matter your situation, be sure that you know what options you have so that you can take the proper legal steps.
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- The Difference Between Secured Debt and Unsecured Debt
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- What Is Fraudulent Conveyance and How Can I Avoid it?
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- What Happens to Student Loans in Bankruptcy Cases?
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- What Is Bankruptcy?
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