Student Loans: Cancellation, Deferment, and Forbearance

How to defer your student loan payments, or cancel your loans altogether.

If you can't make payments on one or more of your student loans, you may be able to get temporary or permanent relief from making payments.

Learn about your options before you go into default. If you default on your student loans, you will suffer negative consequences. For example:

• Your credit will be damaged.
• Your loan balance will increase dramatically as collection fees are added to the pot.
• In the worst-case scenario, your loan holder will take aggressive action to get the loan money from you, including taking a portion of your paycheck or your tax refund. (For information on how the lender can collect student loans, see Nolo's article What Happens If You Default on Your Student Loans.)

Your Options

If you are unable to make loan payments, some options include:

• postponing payments through deferment or forbearance programs
• eliminating the loan altogether through loan cancellation
• discharging the loan in bankruptcy, or
• considering other, more affordable payment plans or loan consolidation. (For more on this, see Nolo's article Student Loan Repayment Options.)

Deferring Student Loans

A deferment excuses you from making student loan payments for a set period of time because of a specific condition in your life such as returning to school, economic hardship, or unemployment.

Qualifying for deferment. You can defer repayment of a student loan if:

• you meet one of the conditions described below (see "Conditions for Canceling or Deferring Student Loans", below), and
• you are not in default that is, you have made your payments on time, are in the grace period after graduation, or have been granted other deferments or forbearances.

How to get a deferment. Contact the holder of your loan and request the appropriate form based on the reason you think qualifies you for the deferment.

Obtaining a Forbearance

In a forbearance, your loan holder gives you permission to stop making payments for a set period of time. Interest always continues to accrue during a forbearance. Forbearances are granted for up to one year at a time. In some circumstances, a forbearance may be available even if you have defaulted.

Forbearances are easier to obtain than deferments or cancellations, because they are not tied to the type of loans you have or the date you obtained them and they aren't governed by the picayune rules that make cancellations and deferments so hard to come by.

Qualifying for a forbearance. Forbearance on federal loans may be granted for a number of reasons, including:

• poor health
• unforeseen personal problems
• inability to pay within the maximum repayment term (usually 10 years), or
• monthly payments totaling more than 20% of a borrower's monthly income.

How to get a forbearance. To apply for a forbearance, contact the holder of your loan, explain your situation, ask for a forbearance, and fill out the appropriate forms

Discharging Student Loans in Bankruptcy

Very rarely are student loans discharged in bankruptcy. However, it is possible if you can prove that repaying the loan would be a severe hardship for you a very difficult standard to meet. Courts consider several factors in making this determination, including:

• your income and expenses
• how long your financial problems are likely to continue, and
• how hard you've tried to repay your debt.

You must file a separate court action in your bankruptcy proceeding supporting your discharge request. You'll probably need an attorney to help you with the procedure. (For more information about bankruptcy, see Nolo's article Bankruptcy FAQ.)

In certain limited circumstances, you may be able to cancel your student loan meaning that you no longer have to pay it. Doing this is not easy; you'll have to meet specific conditions depending on the type of loan you have. (See "Conditions for Canceling or Deferring Student Loans," below.)

Often, when you cancel your loan, the government will also reimburse you for payments already made, and help clean up your credit record.

In some situations, you won't be able to cancel the entire loan, but you may be able to get rid of a portion of the loan.

To cancel a student loan or to determine if you qualify for cancellation, call your loan holder or the Federal Student Aid office (800-621-3115 or http://www.ed.gov/offices/OSFAP/DCS/index.html). Complete the cancellation application and include any necessary documentation, such as a statement from a physician describing your disability.

Conditions for Canceling or Deferring Student Loans

The circumstances in which you may be able to cancel or defer a student loan are listed below. Read carefully: Some circumstances qualify you for cancellation only, some for both cancellation and deferment, and still others for deferment only.

The Student Loan Borrower Assistance website at www.studentloanborrowerassistance.org discusses each of the below conditions in detail, including which loans qualify, what specific conditions you must meet, and how to apply for the cancellation or deferment.

Death of the borrower. If a former student borrower dies, the executor the person who collects and distributes the property left at death can cancel any federal student loan.

Permanent total disability. You can cancel any federal student loan if you are unable to work because of an injury or illness that is expected to continue indefinitely or result in your death.

Temporary total disability. If you, your spouse, or one of your dependents is temporarily totally disabled, you can defer the payments on most loans obtained before July 1, 1993, for up to three years.

Enrollment in rehabilitation program for the disabled. If you are enrolled in a rehabilitation program for the disabled, you can defer payments on most loans.

Unemployment. You can get a deferment on most loans if you are unemployed but looking for work.

Economic hardship. You can defer payments on federal loans obtained after June 30, 1993 (though Perkins loans can be from any time period) for up to three years if you are suffering an economic hardship.

• You are automatically entitled to this deferment if you receive public assistance, such as welfare or SSI.
• If you don't receive public benefits, qualifying is based on a complex formula that's a mix of your income, the federal minimum wage, the federal poverty level, and your monthly or annual federal student loan payments. You will have to provide documentation of your income, such as pay stubs.

Enrollment in school. If you return to school to study at least half-time, you can almost always defer the payments on your student loans.

Membership in a uniformed service. If you serve in the U.S. Military, the National Oceanic and Atmospheric Corps, or the U.S. Public Health Service, there are several situations in which you may cancel or defer your loans. Check with your supervisor or commanding officer.

Teaching needy populations. Teachers who serve certain needy populations including low-income or disabled students may be able to cancel student loans or defer payments.

Providing other services to needy populations. People who serve needy populations (other than teachers) may be able to cancel student loans.

Performing community service. In many situations, you can partially cancel your student loans or defer your payments in exchange for performing community service. Opportunities range from serving in the Peace Corps to volunteering your time with an organization that assists low-income people in your community.

Working in the health care professions. Health care professionals, including nurses and physicians in their residency, sometimes can cancel their student loans or defer their loan payments.

Working in law enforcement. Full-time law enforcement and corrections officers can cancel some older Perkins loans.

Attended a trade school. If you attended a trade school that closed before you finished the program, or if the school officials falsely certified that you would benefit from the loan, you may be able to cancel 100% of your federal student loan.

Victim of identity theft. If someone forged your signature on a loan application or promissory note, you can cancel the loan.

Withdrew from school but never received a refund. Students who withdraw from a school or enroll and never attend can generally receive a refund for the portion of the course they did not complete (as long as the student completed less than 60% of the course). If you were entitled to, but never received a refund, you may cancel your loan up to the amount of the refund plus fees and interest.

Other discharges. Periodically, Congress adds additional conditions that allow students to cancel or defer loans. For example, Congress recently granted loan discharge to relatives of eligible public servants or eligible victims of the September 11 ^th tragedy.

Getting Help

If you need help with any of these programs, contact the Department of Education's Ombudsman at 877-557-2575, or visit its website at www.fsahelp.ed.gov. This office is available to assist people with student loan problems.

For a comprehensive guide to dealing with financial difficulties, read Robin Leonard's Solve Your Money Troubles: Debt, Credit & Bankruptcy (Nolo).