Can You Cancel a Student Loan? Here’s How

Student loan cancellation is a topic many borrowers seek to understand, yet it is not a straightforward process. Rather than a simple elimination of debt, it involves specific programs with stringent conditions. These options differ considerably depending on whether a borrower holds federal student loans or private student loans.

Defining Student Loan Cancellation

The terms “forgiveness,” “cancellation,” and “discharge” are often used interchangeably when discussing student loan relief, but they carry distinct meanings. Loan forgiveness typically refers to situations where debt is eliminated due to specific service or employment, such as public service, or after a long period of payments under certain repayment plans. Loan discharge involves the elimination of debt due to specific events or conditions, such as death, total and permanent disability, or school closure. While both result in the borrower no longer being obligated to repay, the underlying reasons and potential tax consequences can vary.

A crucial distinction lies in the type of loan held, as options for federal student loans are far more extensive than those for private student loans. Federal loans, backed by the U.S. government, offer various forgiveness and discharge programs. In contrast, private student loans, issued by banks or other private lenders, have very limited cancellation options. These loans rarely offer forgiveness and are typically only discharged in specific, rare cases like bankruptcy, which requires demonstrating “undue hardship,” or sometimes upon death, depending on the lender’s policy.

Federal Loan Forgiveness Programs

Federal student loan borrowers have several pathways to forgiveness, each with specific requirements tied to employment or repayment history.

Public Service Loan Forgiveness (PSLF)

The Public Service Loan Forgiveness (PSLF) program offers forgiveness for the remaining balance on Direct Loans after a borrower makes 120 qualifying monthly payments. To qualify, borrowers must be employed full-time by a U.S. federal, state, local, or tribal government organization, or a qualifying non-profit organization, including 501(c)(3) organizations. Payments must be made under a qualifying repayment plan, typically an Income-Driven Repayment (IDR) plan, while working for a qualifying employer. Borrowers should submit the PSLF form annually or when changing employers to track their progress.

Income-Driven Repayment (IDR) Forgiveness

Income-Driven Repayment (IDR) plans provide another path to forgiveness. Any remaining loan balance may be forgiven after 20 or 25 years of payments. The specific timeframe depends on the plan and the type of federal loans held. Payments under these plans are calculated based on a borrower’s income and family size, potentially resulting in lower monthly payments.

Teacher Loan Forgiveness

Teacher Loan Forgiveness is available for full-time teachers who work for five complete and consecutive academic years in a low-income elementary school, secondary school, or educational service agency. Eligible teachers may receive up to $17,500 in forgiveness on their Direct Subsidized and Unsubsidized Loans and Subsidized and Unsubsidized Federal Stafford Loans. The specific forgiveness amount depends on the subject taught, with higher amounts for highly qualified mathematics, science, or special education teachers.

Borrower Defense to Repayment

Borrower Defense to Repayment allows for the discharge of federal student loans if a borrower was defrauded by their school or if the school engaged in misconduct. This can include misrepresentations about job placement rates, educational services, or the ability to transfer credits. Only federal Direct Loans qualify for this program; other federal loan types must be consolidated into a Direct Loan to be eligible.

Federal Loan Discharge Options

Beyond forgiveness programs, federal student loans can also be discharged under specific, often severe, circumstances. These discharge options eliminate the debt without requiring continued payments or specific employment.

Total and Permanent Disability (TPD) Discharge

Total and Permanent Disability (TPD) Discharge is available for borrowers who are unable to engage in any substantial gainful activity due to a medically determinable physical or mental impairment. There are generally three pathways to qualify:
A determination by the Department of Veterans Affairs (VA) that a veteran is 100% disabled or unemployable due to a service-connected condition.
Receipt of Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits with a next scheduled disability review within five to seven years or more.
A physician’s certification that the impairment has lasted or is expected to last for a continuous period of at least 60 months, or is expected to result in death.

School Closure Discharge

A School Closure Discharge may be granted if a borrower’s school closed while they were enrolled, on an approved leave of absence, or within a specific timeframe after withdrawing. Generally, this timeframe is within 180 days of the school’s closure. The borrower must not have completed their program or transferred their credits to another school through a “teach-out” plan.

Death Discharge

Federal student loans are also eligible for a Death Discharge. If a borrower dies, their federal student loans, including Direct Loans, FFEL Program loans, and Perkins Loans, will be discharged. For Parent PLUS Loans, the debt is discharged if either the parent borrower or the student on whose behalf the loan was taken out passes away. To initiate this process, a family member or representative must submit proof of death, such as a death certificate, to the loan servicer.

Bankruptcy Discharge

Discharging student loans through Bankruptcy is an option, though it is extremely rare and difficult to obtain. A borrower must demonstrate to the bankruptcy court that repaying the student loan would cause “undue hardship” to them and their dependents. This requires filing a separate action, known as an “adversary proceeding,” within the bankruptcy case. Courts typically evaluate factors such as:
Whether the borrower can maintain a minimal standard of living.
If the hardship will persist for a significant portion of the repayment period.
If the borrower has made good faith efforts to repay the loan prior to bankruptcy.

The Application Process for Cancellation

Navigating the application process for federal student loan cancellation requires careful attention to detail and adherence to specific procedures. Borrowers should identify the appropriate program based on eligibility criteria. Gathering all necessary supporting documentation is essential for a complete application.

Required documents vary by program but typically include proof of employment for forgiveness, medical documentation for disability discharge, or official records related to school closure or misconduct. Application forms and detailed instructions are usually available on the U.S. Department of Education’s Federal Student Aid (FSA) website, StudentAid.gov, or through a borrower’s loan servicer.

Applications can often be submitted through online portals, by mail, or by fax. After submission, borrowers should expect a confirmation of receipt. Processing times vary, and additional information may be requested. It is advisable to continue making scheduled loan payments during the review unless explicitly informed that payments are paused.

Post-Cancellation Tax Implications

While student loan cancellation provides significant financial relief, borrowers must consider potential tax implications. Generally, the Internal Revenue Service (IRS) may consider forgiven or discharged debt as taxable income, meaning it could be subject to federal income tax in the year cancellation occurs.

However, certain exceptions exempt specific types of student loan cancellation from federal income tax. For instance, amounts forgiven under the Public Service Loan Forgiveness (PSLF) program are not considered taxable income. Similarly, student loan discharges due to Total and Permanent Disability (TPD) are exempt from federal taxation through the end of 2025, a provision established by the American Rescue Plan Act of 2021. This temporary exemption also applies to most other types of federal student loan forgiveness through December 31, 2025.

While federal tax implications may be clear, state tax laws can differ. Some states may still treat the forgiven amount as taxable income, even if it is exempt at the federal level. Borrowers who receive student loan cancellation are encouraged to consult with a qualified tax professional to understand their individual federal and state tax obligations.