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AwardYear: 1998-1999 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Program SectionNumber: 6 SectionTitle: Loan Discharge PageNumbers: 67-70 DEATH AND PERMANENT DISABILITY DISCHARGES ------------------------------------------------ If a FFEL borrower dies or becomes totally and permanently disabled, the borrower's obligation to repay the loan is canceled, and the loan holder is not permitted to collect the loan from an endorser or from the borrower's estate. Certification of total and permanent disability from a qualified physician is required for loan cancellation. A Federal PLUS Loan borrower's debt will be canceled if the student for whom the parent borrowed the PLUS Loan dies. An endorser of a loan canceled because of death or total disability is not obligated to repay the loan. However, if a couple consolidates loans jointly, the death or total disability of one of the borrowers does not relieve the other of the repayment responsibility. If both borrowers have a condition (not necessarily the same one) under which they qualify for loan cancellation, the loan may be canceled. BANKRUPTCY DISCHARGE ----------------------- [[Bankruptcy--Dear Colleague Letter GEN-95-40, dated September 1995]] A borrower may also have his or her loan discharged in bankruptcy. A federal student loan is not dischargeable in bankruptcy unless - the loan has been in repayment for at least 7 years, excluding any periods of deferment or forbearance ("suspended repayment") or - the bankruptcy court has determined that repayment of the loan would cause an undue hardship to the debtor and his or her dependents. OTHER LOAN CANCELLATION PROVISIONS --------------------------------------- [[Closed school discharge]] A borrower's obligation to repay a FFEL received on or after January 1, 1986 will be canceled if the student (the student borrower or the student on whose behalf a parent obtained a PLUS Loan) was unable to complete his or her program of study because the school closed or if the student withdrew from the school not more than 90 days before the school closed. This 90-day period may be extended on a case-by-case basis if an extension is deemed appropriate by the Department. For additional information on this discharge provision, see 34 CFR 682.402(d). [[False certification of ability to benefit--Dear Colleague Letter GEN-95-42, dated September 1995]] A borrower's obligation to repay may be canceled if the school - falsely certified the student's loan eligibility by certifying that he or she had the ability to benefit from its training or - signed the borrower's name without borrower authorization on the loan application, promissory note, loan check, or electronic funds transfer (EFT) authorization. If either of the above conditions occurs, the loan may be discharged under this provision. [[Forgery]] In the case of a borrower requesting a discharge because the school signed his or her name on the loan application or promissory note, the borrower must state that the signature on either of those documents was not his or her own. The borrower also must provide five different signature specimens, two of which must be from no earlier or later than one year before or after the date of the contested signature. (These signature specimens are also required under the condition described in the next paragraph, unauthorized signature for electronic funds transfer.) [[Unauthorized signature]] In the case of a borrower's claiming false certification based on unauthorized signature on a loan check or an EFT authorization, the borrower must certify that he or she did not endorse the loan check or sign the EFT authorization and that he or she did not authorize the school to do so. The borrower must state that he or she did not receive the proceeds of the contested disbursement either through actual delivery of the loan funds or by a credit to the school's account. Interest and collection fees, as well as loan principal, will be discharged if cancellation is granted. The Department will attempt to collect from the school the loan amount discharged, including any refund owed the student. For additional information on false certification, see 34 CFR 682.402(e). A closed school or false certification discharge also relieves any endorser of the obligation to repay the loan. EFFECT ON A BORROWER'S SFA ELIGIBILITY ------------------------------------------- An applicant who applies for SFA funds and who included a defaulted federal student loan that is nondischargeable in his or her bankruptcy schedules will be considered ineligible for further federal student aid until he or she resolves the default. Such a borrower can negotiate a satisfactory repayment arrangement with the holder of the debt. The holder can set the terms of the satisfactory repayment arrangement. If default occurred prior to the borrower's bankruptcy filing and the loan was discharged in the bankruptcy, the applicant is eligible for further SFA funds. Because the borrower is no longer obligated to repay the debt, he or she does not have to establish satisfactory repayment arrangements. The Department no longer requires as a condition for SFA eligibility reaffirmation of a loan that was discharged in bankruptcy or for total and permanent disability. However, a borrower whose loan debt was canceled due to total and permanent disability and who later applies for a FFEL must - provide a physician's certification that the borrower is able to engage in "substantial gainful activity" such as working or attending school, and - sign a statement affirming that the new loan for which the borrower is applying cannot be canceled in the future based on present impairment (unless the borrower's condition substantially deteriorates). If a borrower's defaulted loans are discharged under the false certification or closed-school provisions, the borrower (if otherwise eligible) regains eligibility for SFA funds. In addition, any adverse credit history will be deleted from credit-reporting agencies' records. The period of study the student was unable to complete because of a school's closing will not be counted in calculating the student's eligibility for additional student financial assistance. There are some defaulted loans on which the Department or the appropriate guaranty agency has suspended collection activity after several unsuccessful attempts to collect these loans. If a borrower of such a loan wishes to borrow again under the FFEL Program, he or she must reaffirm the previous loan amount. In addition, the borrower must make satisfactory repayment arrangements on the defaulted debt. Reaffirmation is the legal acknowledgment of the loan. Legally acknowledging the loan may require the borrower to - sign a new promissory note or repayment schedule for the loan or - make a payment on the loan. When loans are reaffirmed, they count toward the borrower's aggregate loan limits. PAYMENTS MADE AFTER DISCHARGE --------------------------------- If a lender receives payments on a borrower's student loan account after the guaranty agency notifies the lender of a discharge (on the basis of total and permanent disability, death, bankruptcy, false certification, or school closing), all of these payments must be returned to the sender. At the same time, the lender must notify the borrower that there is no further loan obligation. REPAYMENT BY THE U.S. DEPARTMENT OF DEFENSE ------------------------------------------------- Currently, if a student borrower decides to serve as an enlisted person in certain specialties in the U.S. Army, the Army Reserves, the Army National Guard, or the Air National Guard, the Department of Defense (as an enlistment incentive) will repay a portion of his or her loan. For more information, a student should contact his or her local Army or Air National Guard recruiting office. This is a recruitment program and does not pertain to an individual's prior service. This program is not an FFEL cancellation provision. Loan repayment under this program is made directly to the lender and is not considered financial aid. Such repayment is considered as student income when loan eligibility is calculated.

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