Non-Bankruptcy Student Loan Discharge Law

Federal Law establishes a number of options available to the advocate that may assist borrowers in discharging their student loans. The Higher Education Act (HEA) establishes six way to discharge a student loan obligation:

The school closed while the student was still enrolled;
The school falsely certified the student's eligibility;
The school failed to pay a refund owed to a student;
The borrower is permanently and totally disabled;
The borrower dies; and
The borrower files for bankruptcy protection (not covered in this outline).

Description of the Various Student Loan Programs

Depending on the loan program involved, the advocate might be dealing with the school, a guaranty agency, or with the Department of Education.

A guaranty agency is a state or private non-profit agency who administers the loan programs. Upon default, they pay off the lender, and in turn, the Department of Education reinsures the guaranty agency. The guaranty agency will pursue collection, but at some point the Department of Education can take over collection. It is likely that the advocate will see private collection agencies involved as well, but any application for a discharge should eliminate them from the process.

Where a guaranty agency is involved, they will make the initial determination as to whether the discharge application should be granted. In essence, they are acting as the agent for the Department of Education.

The current types of relevant loans include the following:

FFEL (Federal Family Education Loans) - loans made by private lenders but guaranteed by a guaranty agency and ultimately by the federal government through the Department of Education. Includes subsidized and unsubsidized Stafford Loans (formerly known as Guaranteed Student Loans or GSLs); Supplemental Loans for Students (SLSs); and parental PLUS loans;

Federal Direct Loans (Direct Loans) - loans directly from the federal government to the student, without private lender or guaranty agency involvement. The loan is originated by the school (who received an origination fee);

Subsidized Stafford Loans - can be Direct or FFEL loans and are based upon a students financial need. The student is not charged interest before repayment begins or during an authorized deferment period;

Unsubsidized Stafford Loans - can be Direct or FFEL loans and are not based upon financial need. Interest begins from the date the funds are disbursed. A student can have both a subsidized and unsubsidized Stafford loan at the same time;

Perkins Loans (formerly National Direct Student Loans) - made by the school to students with exceptional financial need, and administered by the school. Upon default, the school can pursue collection. The school can refer or assign the loan to the federal government for collection. These loans are not part of the FFEL program;

PLUS Loans - loans to the parents of a dependent student, and can be either a Direct loan or a FFEL loan;

Older loans - it is possible that the borrower will come to the advocate with an older loan, particularly since regulations now allow for the taking of other federal benefits (with certain limitations) to help pay off defaulted student loans. The advocate will have to look to the specific regulations relating to those loans. See NCLC, Student Loan Law (2001) for a description of these older loans and a guide for locating the appropriate regulations.

CLOSED SCHOOL DISCHARGE

Applies to: FFEL; federal Direct Loans; and Perkins Loans (including NDSLs) received at least in part after January 1, 1986.

General provisions

The HEA requires the Secretary of Education to discharge a specified loan if the borrower was unable to complete the program due to the school's closure. 20 USC 1087(c)(1).

If only one branch of a school closes, the loan is discharged only if the branch the borrower attended is closed.

The closed school discharge applies to any school at which the student obtained a qualified loan, whether or not the school (or branch) was in fact an eligible school under the program.

The closure date is defined as the date when the school (or branch) ceases offering all programs at the particular branch, and not when it stops offering the particular program in which the student is enrolled.

A borrower is entitled to a discharge if the school closed while the borrower was enrolled or if the borrower withdrew within 90 days before the school's closure. The Department of Education can expand the time frame beyond the 90 days under exceptional circumstances. For example, where a school stops offering a particular course of study and then 4 months later the entire school closes, an advocate should request that the Department of Education extend the 90 period to bring the borrower within the closed school discharge regulations.

NOTE: A student is still enrolled even if on approved leave. As of July, 2003, students are entitled to multiple leaves of absence (at the schools discretion after the student makes a written request for the leave) so long as the total days of leave do not exceed 180 in a 12 month period. A student who cannot return from leave because the school closed is entitled to a closed school discharge. However, a student who does not return to a opened school after the leave ends could not apply for a closed school discharge if the school thereafter closes. The start of leave in that case would be considered the date of withdrawal from the school.

The Department of Education determines the closure date, and it maintains a Cumulative List of Closed Schools. The list is updated continuously, and it can be viewed at http://wdcrobcolp01.ed.gov/CFAPPS/FSA/closedschool/searchpage.cfm. Advocates should not necessarily rely on the list if evidence exists that the school closed on a different date. The List is not error free, and the Department of Education will receive requests to change the listed closure date. Evidence can consist of newspaper articles, affidavits from other students, state regulators, or school employees about the closing date. A request to change the date should be sent to the Department of Education's Closed School Section. The Department alone determines any change to the closure date.

Borrowers would be entitled to the discharge if they did not complete the course of study even if the school gave them a certificate or a diploma, but borrowers would not be entitled to the discharge if they did complete the course of study but they did not receive a diploma or certificate.

Where a student transfers credits to another school, they are barred from receiving a closed school discharge related to the first school's closure, since by definition the student is continuing in the enrolled course of study (albeit at a different school). See 20 USC 1087(c)(1).

Relief Available With A Closed School Discharge

The borrower (and any other obligor) is no longer obligated to repay the loan or any charges or costs associated with the loan (in other words, the principal, interest charges, collection costs, and all other charges are forgiven). Also, any amounts the borrower paid are to be reimbursed to the borrower, even if the payments were made involuntarily (e.g. through garnishments or tax intercepts). The borrower is no longer in default and is eligible immediately for new loans and grants.

FFEL discharge requires the holder to report the discharge to all credit reporting agencies to which the holder previously reported the loan "so as to delete all adverse credit history assigned to the loan." 34 CFR 682.402(d)(2)(iv). Discharged Direct Loans only have to be reported as discharged.

Applying for the Closed School Discharge

If the loan is held by a guarantee agency, then the borrower needs to apply to the guarantee agency. If the Department of Education is holding the loan, the borrower must apply to the Department of Education. The application can be found on their website. Often, Department of Ed held loans are handled by a collection agency. The application is sent to the collection agency. Once the application for discharge is received, the collection agency must turn over the entire file to the Department for processing.

Collection agencies may be reluctant to do this since they could lose commission. Advocates need to be vigilant in making sure that collection agencies turn over the file. Also, check to see if the collection agency makes false statements to the borrower in an effort to prevent him or her from filing for the discharge. If they do make false statements, then the advocate should consider claims against the collection agency under the Fair Debt Collection Practices Act (FDCPA).

Requirements of a Written Application

The following is all the information the borrower is required to produce:

Whether the borrower has made a claim with a third party (such as state tuition recovery program or a surety through the school), and the amount of such a claim;
That the borrower received the loan proceeds after January 1, 1986;
That the borrower did not complete the program because of the school's closure, or was on an approved leave, or withdrew within 90 days before the closure;
That the borrower did not complete the program by transferring credits to another school or through a "teach-out" at another school;
That the borrower agrees to submit any additional information requested that is reasonably available; and
That the borrower agrees to cooperate with the Department of Education in any action to recover money relating to the loan from third parties.

Oral Applications

The Department or the guarantee agency is authorized to grant a discharge, where it has enough information in its possession, without a written application.

A discharge without a written application can occur if: (1) the borrower received a discharge of a different type of loan for the same program of study or; (2) based on information in the Department's (or guarantee agency's) possession they determine that a discharge is warranted. For example, if on student is granted a discharge, the Department could grant all other qualifying students a discharge even though those other students have not filed applications. In advocating for a particular borrower, one could ask the Department of Education to apply the discharge to all qualifying borrowers rather than having each file an unique written application.

Time Limits

There is no time limit on a borrowers right to apply for a closed school discharge. The process for determining whether the borrower is entitled to a discharge could be lengthy, and the advocate should request a forbearance during this period. A forbearance would stop collection activities until a decision is made.

FALSE CERTIFICATION DISCHARGE

Applies to: FFEL and Direct Loans received at least in part after January 1, 1986.

Three bases for a false certification discharge exist under federal law:

The school falsifies a non-high school graduate's ability to benefit from the program; or
The school enrolls a student unable to meet minimum state employment requirements for the job for which the student is being trained; or
The school forges or alters the student loan note or check endorsements.

Discharge Based on Ability to Benefit (ATB)

A false certification discharge is authorized if the student was admitted to the school and the school falsified the student's ability to benefit from the program.

The school must test the student's ability to benefit only if the student does not have a high school diploma or its recognized equivalent.

Rules for Admitting ATB students changed in 1987, 1991, and 1996, and therefore, advocates need to be aware of the date of admission to determine which regulations applied. See NCLC, Student Loan Law (2001), Chapter 6.3.2.1, pp 51-52, for a breakdown of the shifting regulations over time. Generally ATB will be determined though a testing process.

Currently, the student must have done at least one of the following:

Obtained a passing score on an independently administered test (34 CFR 668.151); or
Enrolled in and eligible institution that participates in an alternative admissions process. Alternative processes can be set up by the state for some or all of its schools, and they are approved by the Secretary of Education. In gaining approval, the state must provide proof of a certain minimum success rate; or
Met the requirements for valid home schooling as set forth in 34 CFR 668.32(e)(4).

Advocates should argue that failing to administer a valid test where one is required is a clear example of ATB falsification. Advocates should also be aware of what the Department of Education considers ATB falsification. The Department considers other testing errors to be proof of ATB falsification, even if they were committed unintentionally. These are:

A test requiring an independent administrator was not so administered;
The school allowed the student to retake the test sooner than allowed or more frequently than allowed;
The school allowed more time than permitted to take the test, did not use all the required portions of the test, supplied answers to the student, allowed students to discuss the test, or passed a student who did not meet the minimum score; or
After July 1, 1991, the test was not approved by the Department of Education.

Even if an approved ATB test is given, a false certification discharge may still be granted if:

the wrong portion of the test for the student's program is given;
if an audit or OIG investigation demonstrates altered test results;
a school improperly enrolls a student who cannot benefit because of limited English language proficiency. An ATB test can be given in a language other than English in limited circumstances; to wit, where the student is a non-English speaker and not procicient in English, and where the coursework is either entirely in the non-English language or the coursework is in English but there is an English as a Second Language (ESL) component where the student is enrolled in both.

Proof of ATB falsification

Failure to find employment is no longer a requirement to proving ATB falsification. See Jordan v. Secretary of Education, 194 F.3d 169 (D.C. Cir 1999). After the Jordan decision, the Department of Education formalized regulations stating that certifying that employment could not be found was not required for an ATB discharge. 34 CFR 682.402 (e)(3)(ii)(C), as amended on November 1, 2000.

Advocates who have former clients that were denied an ATB discharge based upon employment history may want to resubmit the case for reconsideration. While the Department is ambiguous about making this regulation retroactive, where the denial was based on a failure to find or seek employment, then advocates should push for reconsideration of that denial.

Proof can be obtained from a variety of sources:

Student's own statements (alone, this is not likely enough);
A finding by an oversight entity;
Statements by school officials;
Statements by other students (including statements made in other claims for discharge relief);
Dept of Ed's files on the school (use Freedom of Info. Act request and see online audit reports and investigative reports);
Dept of Ed Inspector General audit reports and investigative reports;
State licensing agency files;
Private accrediting agency files (probably would need a subpoena for these);
School files on the student;
Contact the testing company who prepared the ATB test to see if the test was given, or if the results indicate that the ATB requirements were met.

Advocates should argue that lack of a copy of the ATB test (or at least a description of the test) in the student files is evidence that the test was not given. Since 1991, Department regulations hold the school liable for all funds disbursed if the school is unable to document that the student received a passing score on an approved test.

The Department of Education files should include: the school's application for eligibility with accompanying documents; any program reviews; reviews shared with the Department by guaranty agencies, state agencies or accreditors; and any "Emergency Action" memos relating to the school.

Discharge Based on Inability to Meet Minimum State Job Requirements

Even if the student has a high school (or equivalent) education, or even if the ATB test was administered properly, a false certification discharge is authorized if, at the time of enrollment, "the student would not meet the requirements for employment (in the student's state of residence) in the occupation for which the training program supported by the loan was intended because of physical or mental condition, or age, or criminal record or other reason accepted by the Secretary." 34 CFR 682.402(e)(13)(iii)(B).

Examples where a discharge may be appropriate:

A student does not have the requisite formal education for the job requirements;

A student with a felony record where the job for which student is training prohibits a felon for gainful employment;

Where the school program itself does not meet state requirements (e.g. where graduation from a certified program is a precondition under state law for employment and the school itself does not have (or is not) a certified program).

Generally, borrowers will need to submit detailed documentation of the status or condition that prevfents them from working in the particular occupation. It is likely the Department of Ed will require a copy of the statute or regulation relating to the minimum job requirements.

Discharge Based on Forgery

Forgery of a student's signature on the loan application, promissory note, loan check endorsement, or electronic funds authorization is grounds for a false certification discharge.

In regards to a forged check, a discharge based on forgery is only available if the proceeds of the check went toward tuition payments which the student was not obligated to pay, such as that portion not owed under a refund formula after the student dropped out. The burden is on the guaranty agency to determine whether the proceeds went to a legitimate student obligation.

Advocates should obtain copies of the loan documents (loan application and promissory note) and copies of all cancelled checks evidencing the debt.

The borrower will have to provide 5 samples of his or her own signature, two of which must have been made within one year of the forged signature.

NOTE: A discharge based on forgery will not be granted if the borrower benefitted from the loan (See 34 CFR 682.402(e)(1)(i)).

Relief available for False Certification Discharge

Same as for the Closed School Discharge.

Applying for a False Certification Discharge

There is no time limit on applying for this discharge.

The application should be directed to the entity holding the note. Applications can be obtained from the Department of Education web site Note that they have three different forms depending on which type of False Certification Discharge the student is seeking. Guaranty agencies will likely use their own forms, and they should be requested directly from the respective agency.

The forms should be completed in their entirety. Official forms are not required, but they are recommended to ensure that all the information needed is supplied. Advocates should watch out for application forms that ask for conditions from the borrower, such as demands that the borrower reaffirm the debt while the application is being processed. The borrower is only required to provide the information listed in the regulations, and there is no obligation for the borrower to reaffirm the debt during the processing of the discharge application.

The regulations require the following information:

Whether the student has made a claim against a third party on the loan (such as from a state tuition recovery fund);
That at least part of the loan was disbursed after January 1, 1986;
That the student agrees, if requested, to provide additional information concerning the student's eligibility for a discharge; and
That the student will cooperate with the Secretary in enumerated enforcement actions and to assign to the Department of Education certain rights the student has to recover from third parties. 34 CFR 682.402(d)(3), (e)(3), and (e)(4).

In addition, for ATB falsification applications, students must state that they had not graduated from high school before being admitted, and that they did not have the ability to benefit from the course of study.

For forgery discharge applications, the student must state that on one of the documents relating to the loan (see above) the student's signature was forged; must provide 5 signature samples (2 within one year of the forgery); and where the forgery was on a check or electronic transfer authorization that the student never received the loan proceeds and those proceeds were never credited to amount owed.

Oral applications are accepted rarely, as with oral applications for closed school discharges, and primarily only where the Department of Education has enough information in its possession to grant the discharge.

REFUND DISCHARGE

The discharge applies to FFEL loans, including subsidized and unsubsidized Stafford loans, Supplemental Loans for Students (SLSs), and PLUS loans (for parents); and to Federal Direct Student Loans.

This is a relatively new discharge option. The regulations became effective as of July 1, 2000.

Eligible borrowers include those who signed up for classes but never attended, as well as those who attended and withdrew or terminated within the time allowed to claim a refund from the school. Students who completed 60 percent or more of the loan period are not entitled to refunds, and therefore, are not entitled to the refund discharge.

A. Determining the Refund Discharge Amount

In general, students who were owed a refund but did not receive it are entitled to reduce there current obligations by the amount that should have been refunded plus interest and related charges.

If the school's refund formula is available and is known, then the refund should be calculated pursuant to that formula.

If the refund formula is not available and is unknown, the regulations set out a formula to determine an eligible formula. See 34 CFR 682.402(1)(3)(ix)(o) for the formula.

Three pieces of information are needed to calculate a refund:

tuition;
the school's refund formula;
the percentage of the course or term completed by the borrower (i.e., the enrollment date and the termination date).

A refund is calculated based on the last date of attendance, regardless of whether or not the school was notified of withdrawal.

B. Relief Available With the Unpaid Refund Discharge

Eligible borrowers will be granted a discharge in the amount of the unpaid discharge including any accrued interest and any collection of other charges relating to the amount of the unpaid refund. If the refund exceeds the amount still owing on the debt, the balance is discharged and the borrower receives cash up to the remaining balance of the refund to the extent the borrower has made payments of that amount on the loan.

The holder of the loan is required to report the fact of the discharge to all credit reporting agencies to which the holder informed of the status of the loan.

C. Applying for the Unpaid Refund Discharge

If the school is open, the borrower and the guarantor must document that they attempted to resolve the issue within 120 days after the borrower submitted a completed application. This requirement does not exist where the school is closed.

In most circumstances, a written application is necessary. Completed applications should be sent to the holder or guaranty agency. Usually the holder will be the guaranty agency, but if the holder is the lender, then lenders are required to provide the guaranty agency with documentation relating to the borrower's qualification for the unpaid refund discharge.

The Department of Ed is require to send applications to potentially eligible borrowers. Once sent, all collection activity must cease for 60 days. If the borrower fails to return the application within 60 days, then collection activity can resume.

After receipt of the application, the holder must cease collection activities within 30 days, discharge the appropriate amount, and inform the borrower of the appropriate amount.

A denial of the discharge triggers a requirement that the holder notify the borrower in writing of the reason for the denial, and that the borrower has a right to request review within 30 days of the borrower's submission of additional documentation. Collection activity must cease during the review period.

TOTAL AND PERMANENT DISABILITY DISCHARGE

require added information from the borrower where the application is incomplete, illegible or not definitive;
reaffirm the M.D. or D.O. certification of disability if it fails to meet the Department's higher than SSA standard for total and permanent disability; and
help those borrowers who do not appear to meet the standard obtain deferments and forbearances.

This discharge is available for FFEL, Direct Loans, and Perkins loans. PLUS loans do not qualify for a disability discharge if only one obligated parent becomes disabled. Also, applicants who receive Perkins, FFEL or Direct loans after the date of disability can be disqualified frm receiving the disability discharge (see 34 CFR 682.402(c)(1)(ii)(B)).

General Requirements for a Disability Discharge

"Total and Permanent Disability" is defined as "the condition of an individual who is unable to work and earn money or attend school because of an injury or illness that is expected to continue indefinitely or result in death." 34 CFR 682.200.

Using Social Security disability standards are not enough. However, advocates should be able to use evidence from a SS disability hearing to help support a position that the disability is total and permanent, so long as there is doctor certification to that effect.

New regulations have been implemented by the Department of Education to stop abuse of this discharge. According to the Department's Inspector General (in a study conducted in 1999), 23 percent of borrowers who received this discharge during the studied time period, worked and earned money after the discharge was granted.

After the borrow applies for a disability discharge, guaranty agencies (or other responsible for making the preliminary discharge determination) are required at a minimum to:

Once the preliminary determination granting a disability discharge is made, the Department will conduct its own evaluation. As such, it is important that the medical documentation supporting the certification of disability has been supplied with the application. If it has not, then the advocate should submit it.

The New "Conditional" Disability Discharge

A new "conditional" discharge will be fully phased in on July 1, 2002. A total and permanent discharge that is granted will not be final for three years from the date of disability.

The conditional discharge starts running from the date determined to be the date of total and permanent disability. The disability must be certified by a doctor of medicine (M.D.) or a doctor of osteopathy (D.O.).

The disability cannot have existed at the time the loan is made, unless the impairment deteriorates substantially.

Collection activity is suspended during the three year conditional period, and any payments that the borrower paid after the date of total and permanent disability must be returned to the borrower.

Should the borrower satisfy the criteria for discharge throughout the conditional period, then at the end of the 3 year period, the balance of the loan(s) will be discharged.

Criteria Used to Satisfy the Discharge During the Conditional 3 Year Period

Borrowers will satisfy the criteria for a discharge after the 3 year period if their annual earnings do not exceed 100 percent of the poverty line for a family of two and they did not receive an additional student loan during that time (except a FFEL and/or a Direct Consolidation Loan that does not include any loans that are in a conditional discharge status).

The Department of Education will likely look at earnings records obtained from Social Security to determine whether the borrower exceeded the income limits of the conditional discharge.

During the conditional period, the borrower does not make payments on the debt, and the loan is not considered past due or in default. The borrower is required to notify the Department of Education if his or her income exceeds the poverty line.

Should the Department of Education determine that the borrower does not meet the eligibility requirements at any time during the conditional period, then they will resume collection on the debt.

The borrower is not required to pay any interest that accrued on the debt from the initial discharge determination through the end of the conditional period. Should the Department determine that the borrower is no longer disabled during the conditional period, then interest will likely begin to accrue from the date eligibility ended.

Loans that were discharge after July 1, 2001 (but before July 1, 2002), require that the borrower reaffirm the debt if he or she receives a new federally guaranteed or Direct Loan within 3 years from the date the borrower became totally and permanently disabled as certified by a doctor.

Relief Available Based Upon Total and Permanent Disability

Under current regulations, the lender is required to cease collection. Once the discharge has been approved by the guaranty agency, all money received after the date of total and permanent disability must be returned to the borrower. The lender must notify the borrower that there is no obligation to repay a loan that has been discharged.

Under the conditional discharge the relief is essentially the same, except that it is conditional for 3 years from the date of disability.

BORROWER'S DEATH DISCHARGE

Applies to FFEL, Direct Loans, Perkins Loans and PLUS loans.

The borrower's death discharges the obligation. For PLUS loans, either the student's death or the death of both parents (if both are obligated) is sufficient to discharge the debt.

The Department's Inspector General uncovered some evidence of abuse of this discharge, finding that some students or borrowers who received the death discharge were found subsequently to be gainfully employed. The Department of Education now requires an original or certified death certificate for Perkins loan discharges.

Appeal Procedure Upon Denial of Discharge

Most discharge denials are based upon an incomplete application. The advocate should review everything that was submitted together with the appropriate regulations, and, if appropriate, resubmit the fully completed application to the Department of Education.

The initial decision will be an informal agency adjudication, which is governed by the Administrative Procedure Act. The statute holds that the court will set aside the agency decision if it is found to be, "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law." 5 USC 706(2)(A). Moreover, the Department will not have made a record, and the court is entitled to make a "substantial" inquiry. As such, the borrower should be allowed to present any additional relevant evidence (including testimony) to the court.

Any action filed pursuant to the Administrative Procedure Act is filed in federal district court. Although there does not appear to be a statute of limitations for seeking review of a discharge denial, be aware of 28 USC 2401(a), which requires that civil actions against the United States commence within 6 years after the right of action first accrued.

PREPARED BY:
R. Michael Phebus
Legal Aid of the Bluegrass
498 Georgetown Street
P.O. Box 12947
Lexington, KY 40583-2947
(859) 233-4556
mphebus@cklegal.net

This outline is drawn significantly from the National Consumer Law Center, Student Loan Law (2d ed. 2002 and Supp.), the Department of Education website, and the appropriate regulations in the CFR as referenced herein. For additional information and detail regarding the programs referred to in this outline, review the NCLC Student Loan manual and Supplement as well as the Department of Education website.

Reviewed August 2009