Borrowers of school loans who are thinking that bankruptcy may be their only option will need to think again. Section 528(a)(8) of the Federal Bankruptcy Code states that federal student loans are exempted from discharge during bankruptcy. There may be some provisions for discharge after the debt is 5 years old. Those considering this path need to consult a bankruptcy attorney or their state's legal services office. Also, there is also no statute of limitations on defaulted student loans.
Federal Student Loans May Be Cancelled
The good news is that there are options. The Department of Education gives several conditions that can cause a federally guaranteed student loan to be cancelled.
School Closure – If the school closes either while the student is attending or within 90 days after the student withdraws.
Students and parents should be aware that there is no clause in the loan application or promissory note that guarantees job placement. Whatever claims a trade school may make, the promissory note stands regardless of whether or not that school gives any employment assistance whatsoever. Any complaints against the school must be handled separately.
False Certification
- If the school admits a student “on the basis of [the student’s] ability to benefit” and the student doesn’t meet the requirements to truly be able to benefit from the training. (DOE, 2009)
- If the school signs the student’s name on the loan application or promissory note without authorization.
- If the student has a physical, mental, or legal status or condition at the time of enrollment that would legally bar him/her from employment in that field of study.
- If the borrower is a victim of identity theft.
Total and Permanent Disability – A physician’s certification must be provided and certain other criteria met.
Death – If the borrower dies the debt is discharged and does not carry on to the estate. As of 1992, if a parent takes out a PLUS loan for a student and that student dies, the PLUS loan is then discharged. Proof of death must be provided, generally in the form of a death certificate.
Some Loans Cancelled in Return for Vital Service
Certain other types of loans may be cancelled for specific services:
- Volunteer in the Peace Corps or an ACTION program (including VISTA)
- Teacher
- Member of the U.S. Armed Forces (serving in an area of hostilities)
- Nurse or medical technician
- Law enforcement or corrections officer
- Head Start worker
- Child or family services worker
- Professional provider of early intervention services
If problems arise that are not so dire as to warrant cancellation of the debt, there are other possibilities such as to defer or consolidate federal student loans. But if the unimaginable happens, it is good to know that options are available.
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