What Are The Differences Between Forgiveness, Cancellation, and Loan Discharge?

Forgiveness, cancellation, and loan discharge are all options for ensuring that you no longer are required to pay back some or all of the outstanding debt amount.

Although these terms mean the same thing, each is used in a different situation. For instance, if you’ve lost your job and don’t need to make any further payments on an outstanding student loan, then this may be categorized as loan forgiveness or loan cancellation. On the other hand, it’s categorized as a loan discharge if you don’t need to make any payments on the loan due to other circumstances such as a permanent disability.

Types Of Loan Forgiveness

There are two types of loan forgiveness programs. You can apply for the option that fits your situation best depending on the type of job and other eligibility criteria. Listed below is a detailed overview of both types.

Public Service Loan Forgiveness

This program is available for Direct loans. If you’re working for a government or a non-profit agency, you’ll be entitled to seek loan forgiveness through the PSLF scheme. Under the program, the balance on your Direct Loan will be forgiven after you have made 120 eligible monthly payments on an eligible repayment plan while working full-time with a qualified employer.

Teacher Loan Forgiveness

This program is available for Direct and FFEL loans. If you teach full-time at a low-income primary school, high school, or social support agency for five full and consecutive academic years, you may be eligible to apply for forgiveness of up to $17,500 on your Direct Loan or FFEL loans. The program has the broadest eligibility criteria among federal forgiveness programs. 

Types Of Loan Discharges

In certain situations, the terms "loan cancelation" and "loan discharge" can be used interchangeably. However, eligibility criteria vary based on the type of loan. Listed below are the common types of loan discharges.

Perkins Loan Cancellation And Discharge

This option is available to borrowers who have had eligible employment or volunteer service for a specified length of time. You can qualify for the cancellation of the full amount of your loan if you’ve served full-time in a not-for-profit or public school catering to low-income communities. 

Other qualifications for cancellation include working as a special education teacher or teaching in a field of education approved by the Department of Education.

Closed School Discharge

This option is possible if you were attending a school that closed when you were still enrolled, or if you withdrew 120 days before the school was closed. The Department of Education extended the time limit to 180 days under the revised regulations implemented in September 2019. 

Direct loans, FFEL, Perkins, and PLUS loans are eligible for this option as well.  Parent PLUS loans are eligible for dismissal if the school is closed before their child completes the course.

Total And Permanent Disability Discharge

This option is available for Direct Loans, FFEL programs, and Perkins loans. To apply for a total and permanent disability (TPD) discharge, you’ll need to fill in the application form and send it to Telnet alongside the required documents. 

You can get proof from the US Department of Veterans Affairs, the Social Security Administration, or an approved physician. If approved, the dismissed amount won’t be considered for taxation by the IRS.

Discharge Due to Death

You’ll need to submit the required proof of death alongside the application to get a dismissal on the loan. Acceptable records include an original death certificate, a certified copy of the death certificate, or a clear photocopy of one of those records.

Borrower Defense To Repayment

Borrower defense to repayment, commonly known as borrower defense, is available to borrowers of federal student loans who used to attend a school that misled them or engaged them in activities that involved violations of certain laws. 

To apply for federal student loan forgiveness based on the protection of the borrower, complete an electronic application form. It’s useful to provide additional documentation as part of your application by submitting additional documents.

False Certification Discharge

Borrowers of Direct loans and FFEL programs are eligible to apply for this if the school has falsely certified their eligibility for the loan. When you meet the legal requirements for dismissal, the remaining balance on the loan will be forgiven and all contributions made to the loan will be refunded. 

Unpaid Refund Discharge

If you withdraw from school right after receiving a Direct or FFEL loan, the school must return some or all of the loan amount to the service provider. If the school didn’t do so, you’ll be eligible for a release on the amount that your school failed to return to the lender. However, under Federal law, if you’ve completed 60% of your loan term, you won’t be eligible for refunds.

Bottom Line

There are various ways to obtain forgiveness, cancellation, or a total discharge on a pending federal student loan. To take full advantage of these options ensure that you evaluate your situation, check the eligibility criteria, gather the required documentation, and file your application.