What Does Student Loan Discharge Mean?

Student loan discharge refers to the complete elimination of a borrower’s obligation to repay a student loan under specific circumstances. This process releases the individual from their financial commitment, meaning no further payments are required. It is a distinct form of debt relief, differing from deferment or forbearance, which only temporarily pause or reduce payment obligations.

Understanding Student Loan Discharge

Student loan discharge means the loan is legally canceled, and the borrower is no longer responsible for any remaining balance. This outcome is not a voluntary choice by the borrower but rather a result triggered by specific life events or institutional failures. While the terms “discharge,” “forgiveness,” and “cancellation” are sometimes used interchangeably in general conversation, they carry specific distinctions. Discharge refers to loan elimination due to defined circumstances, such as a borrower’s death, total and permanent disability, school closure, or false certification. Forgiveness, in contrast, implies a program-based elimination tied to specific employment, like Public Service Loan Forgiveness. Cancellation is a broader term, but discharge specifically highlights the removal of the obligation due to qualifying events.

Common Reasons for Discharge

Total and Permanent Disability (TPD) Discharge

Borrowers may qualify for a Total and Permanent Disability (TPD) discharge if they cannot engage in substantial gainful activity due to a physical or mental impairment. This impairment must be expected to result in death, or last for at least 60 months. Eligibility can be proven through documentation from the U.S. Department of Veterans Affairs (VA) showing a 100% disability rating or unemployability due to a service-connected disability. A Social Security Administration (SSA) notice of award for SSDI or SSI benefits also qualifies. Alternatively, a U.S. physician can provide documentation confirming the disability’s severe and lasting nature.

Death Discharge

Federal student loans are discharged upon the borrower’s death. To initiate this process, a family member or representative must submit proof of death to the loan servicer. This discharge also applies to Parent PLUS loans if either the parent borrower or the student on whose behalf the loan was taken out passes away. The remaining balance of the federal loan is then canceled, and the borrower’s family is not responsible for repayment.

School Closure Discharge

A borrower may be eligible for a school closure discharge if their school closes while they are enrolled, or within a specific timeframe after they withdraw. This generally applies if the school closed while the student was enrolled or within 180 days of their withdrawal, and they did not complete their program at another institution through a “teach-out” agreement. If approved, the entire remaining balance of the federal loan is dismissed, and any payments made on those loans may be refunded.

False Certification Discharge

False certification discharge is available if a school improperly certified a borrower’s eligibility for a loan. This can occur in several scenarios:
Ability to Benefit: The school certified eligibility without the student having a high school diploma or GED, or without demonstrating their ability to benefit.
Unauthorized Signature: A school employee forged the borrower’s signature on loan documents.
Disqualifying Status: The school certified a borrower who had a condition (e.g., impairment, age, criminal record) that legally prevented employment in the trained field.
Identity Theft: Someone else used the borrower’s identity to take out loans the borrower did not receive.
If a false certification discharge is granted, the entire remaining balance of the loan is typically discharged, and any payments made on the loan may be refunded.

Unpaid Refund Discharge

This type of discharge applies when a student withdraws from school, and the institution fails to return unearned federal student aid funds to the lender as required by regulations. If a student withdraws before completing 60% of an enrollment period, the school is generally obligated to return a prorated portion of the federal loan funds. If the school does not make this required refund, the borrower may be eligible for a discharge of the portion of the loan that the school should have returned. The amount discharged only covers the unreturned portion, not necessarily the entire loan.

Bankruptcy Discharge

Discharging student loans through bankruptcy is possible but rare and difficult. A borrower must file an “adversary proceeding” within the bankruptcy case to demonstrate that repaying the loan would cause “undue hardship.” Courts often consider a three-part test for undue hardship:
The borrower cannot maintain a minimal standard of living if forced to repay the loans.
This financial hardship is likely to persist for a significant portion of the repayment period.
The borrower has made a good faith effort to repay the loans before filing for bankruptcy.
If the court determines undue hardship exists, the loan may be fully or partially discharged, or repayment terms modified.

Financial and Tax Implications

When a student loan is discharged, the primary financial benefit is the elimination of the debt obligation. However, there can be important tax implications to consider. Generally, the Internal Revenue Service (IRS) considers discharged debt as taxable income, which could lead to a tax liability for the borrower. This means the amount of the discharged loan might be added to the borrower’s gross income for the year, potentially increasing their tax burden.

There are significant exceptions to this general rule for student loan discharges. For instance, loans discharged due to the death of the borrower or a total and permanent disability are typically not considered taxable income. Additionally, the American Rescue Plan Act of 2021 temporarily made most student loan discharges tax-free at the federal level for discharges occurring between December 31, 2020, and January 1, 2026. This temporary exclusion applies to various types of federal student loan discharges, including those for school closure. Borrowers should consult a tax professional to understand their specific tax situation, especially as this temporary provision nears its end.

A student loan discharge generally affects a borrower’s credit report by showing the loan as paid or closed with a zero balance. This can be positive, as it eliminates the debt and may remove any previous negative marks like delinquency or default from the credit history. While closing an account can sometimes cause a temporary slight dip in a credit score due to changes in credit mix or average account age, the overall impact of eliminating the debt is often beneficial for long-term financial health.

Discharging a student loan typically does not prevent a borrower from receiving future federal student aid. For example, after a Total and Permanent Disability discharge, a borrower can still receive new federal student loans or TEACH Grants. However, they generally need to provide a doctor’s letter stating their ability to engage in substantial gainful activity and acknowledge that the new loan cannot be discharged based on the same prior disability unless it significantly worsens. This ensures that individuals can pursue further education or training if their circumstances change.