Disability Discharge of Federal Student Loans

The borrower’s permanent and total disability is grounds for a student loan discharge. Borrowers with FFELs, Direct Loans, and Perkins loans are eligible for this discharge.[1] This includes consolidation loans.

The definition of disability changed as of July 1, 2010. The new definition is less restrictive and is more favorable for borrowers because it allows discharges to be granted to borrowers who are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, can be expected to last for a continuous period of 60 months, or has lasted for a continuous period of 60 months.[2]

The borrower applies directly to the loan holder for a disability discharge. If the borrower has different loan holders, the borrower should submit a separate application to each loan holder.

In order to help ensure a more efficient application process, borrowers should follow these guidelines from the Department:

  1. Be sure to sign the application. A photocopy must contain an original signature.
  2. Separate applications must be submitted to each loan holder. Copies may be submitted. However, each copy must have an original borrower signature. Original physician signatures are not required on each copy.
  3. The application must be signed by a doctor of medicine or osteopathy who is licenses to practice in the United States.
  4. The doctor must complete the application.
  5. Doctors should not use medical abbreviations or insurance codes on the application.
  6. The doctor must provide more than a diagnosis. The doctor must also identify the medical condition and clearly and fully explain how the condition prevents the borrower from working and earning money.

The lender may continue collection activity until it receives the certification of disability.  The borrower may request an administrative forbearance to stop collection activity during the review period.

It is important for borrowers to realize that the Department of Education has a very high rate of denials due to “medical review failures.” However, the denial is not tied to an actual medical review. Instead, this is a generic denial category that can mean anything from a missing license number to the physician forgetting to check a box on the application form. The Department of Education often sends a follow-up letter to physicians that require a relatively prompt response and failure of the physician to timely respond may lead to a medical review failure. Borrower should not assume that a denial based on a medical review failure is tied to an actual medical review.

The Department of Education has set up a Disability Discharge Loan Servicing Center. The center can be contacted by phone at 1-888-869-4169, by email at disability_discharge@acs-inc.com, or by regular mail at U.S. Department of Education Disability Discharge Loan Servicing Center, P.O. Box 5200, Greenville, TX 75403-5200. Hearing impaired individuals with access to TDD can call 1-888-636-6401.

If borrower obtains a discharge, the balance of the loan is discharged.[3]

Dunne Law Offices, P.C.
1500 John F. Kennedy Boulevard, Suite 200
Philadelphia, PA 19102
(215) 854-6342 (Office)
http://www.thephiladelphiabankruptcyattorney.com


[1] 20 U.S.C. § 1087(a); 34 C.F.R.  §§ 674.61 (Perkins Loan), 682.402(c) (FFEL), 685.213 (Direct Loan).

[2] 34 C.F.R. § 682.200

[3] 34 C.F.R. § 682.402(c)(3)(ii).

Other Profession-Related Loan Cancellation Programs

The Department of Education administers a loan-forgiveness program for certain child care providers with FFELs or Direct Loans.[1] Under this program, borrowers who have received an associate’s or bachelor’s degree in early childhood education or child care and who are providing full-time child care services that serve certain low-income communities are eligible for forgiveness of up to 100% of their total eligible loans. Only loans made after October 7, 1998, qualify.  In January 2004, the Department of Education published the application for this cancellation program.[2]

The 2008 HEA reauthorization law created a number of new job-related cancellation programs, including loan forgiveness for service in areas of national need and limited loan repayment for civil legal assistance attorneys. Under the civil repayment program, attorneys may be awarded up to $6,000 in repayment assistance in 2010 and may be prioritized to receive assistance in future years if Congress continues to fund the program.[3]


[1] See 67 Fed. Reg. 55385 (Aug. 29, 2002).

[2] U.S. Dep’t of Educ., Dear Colleague Letter GEN-04-01 (Jan. 2004). The form is available on the Department of Education’s website at http://www.ed.gov

[3] For requirements and application procedures, see 75 Fed. Reg. 38999 (July 7, 2010).

Dunne Law Offices, P.C.
1500 John F. Kennedy Boulevard, Suite 200
Philadelphia, PA 19102
(215) 854-6342 (Office)
http://www.thephiladelphiabankruptcyattorney.com

Perkins Loan Forgiveness Program

The Perkins Loan Forgiveness Program was the first to provide for cancellation of loans for teachers in low-income school districts.

A 2005 Second Circuit decision broadened the Perkins Loan Forgiveness Program to include numerous occupations related to teaching, public interest law and social work. Since the Second Circuit decision, the Department of Education has clarified its position in a “Dear Colleague letter” explaining that the program has indeed expanded to include numerous occupations that are considered socially desirable professions.

A short list of covered occupations include:

  • Full-time nurses or medical technicians;
  • Full-time law enforcement or correction officers;
  • Full-time staff members in the education component of Head Start;
  • Military service;
  • VISTA or Peace Corps volunteers;
  • Full-time fire fighters in local, state, or federal fire departments;
  • Full-time speech pathologists with master’s degrees working in certain elementary or secondary schools;
  • Certain librarians working in certain schools;
  • Full-time attorneys employed in public or community defender organizations.
Borrowers must perform uninterrupted service for a specific length of time to qualify for a Perkins loan discharge. However, the Department of Education has waived the continuous service requirement for borrowers who are members of the military reserves or who are regular active duty members of the Armed Forces.
It is important to note that borrowers lose access to Perkins Loan Forgiveness Program if they consolidate their loans with “Direct Loans.”

Check the following website for more information:

De La Mota v. U.S. Dep’t of Educ., 412 F. 3d 71 (2d Cir. 2005)

U.S. Dep’t of Educ., Child or Family Service Loan Cancellation Benefit in the Federal Perkins Loan Program, Dear Colleague Letter GEN-05-15 (Oct. 19, 2005); 34 C.F.R. § 674.56(b).

Dunne Law Offices, P.C.
1500 John F. Kennedy Boulevard, Suite 200
Philadelphia, PA 19102
(215) 854-6342 (Office)
http://www.thephiladelphiabankruptcyattorney.com

Teacher Loan Forgiveness Program

Teachers who are full time and work five (5) consecutive years in certain schools that serve low income families are eligible to erase $5,000.00 of their federal student loans.

Math or Science teachers in eligible secondary schools and special education teachers in eligible elementary or secondary schools are allowed to erase up to $17,500.00 of their student loans in return for five (5) consecutive years of employment in certain schools that serve low income families.

The Teacher Loan Forgiveness Program under the FFEL Program and the Direct Loan Program apply only to borrowers with no outstanding loan balances as of October 1, 1998, or later.

FFEL and Direct Loan borrowers are not eligible for the Teacher Loan Forgiveness Program if their loans are in default status. If a borrower is in default status, it is imperative that they get out of default status by taking advantage of the Income Based Repayment (IBR) Program in order to establish their eligibility to participate in the loan forgiveness program.

It is important to note that teachers can take advantage of multiple loan forgiveness programs simultaneously. For example, teachers can apply for the Teacher Loan Forgiveness Program and the Public Service Forgiveness Program at the same time.

Check the following website for more information:

http://ibrinfo.org/

http://studentaid.ed.gov/students/attachments/siteresources/LoanForgivenessv4.pdf

http://studentaid.ed.gov/students/attachments/siteresources/PSLF_QAs_final_02%2012%2010.pdf

Dunne Law Offices, P.C.
1500 John F. Kennedy Boulevard, Suite 200
Philadelphia, PA 19102
(215) 854-6342 (Office)
http://www.thephiladelphiabankruptcyattorney.com

Loan Forgiveness Program

This program is available to all borrowers who work in public service jobs for ten (10) years and participate in a eligible repayment plan (IBR or ICR). The remaining balance of the student loan (principal and interest) is forgiven after ten years of public service is completed.

The program applies only to Direct Loans which encompasses Stafford, Plus, and Consolidation loans. Some borrowers may find it advantageous to consolidate their direct loans with their non-direct federal government loans in order to take advantage of this benefit.

Borrowers with non-direct loans should consolidate with direct loans as soon as possible because only payments made through the Direct Loan Program count towards the ten year forgiveness period. Borrowers who have previously consolidated their loans are eligible to reconsolidate their loans (combine direct loans with non-direct loans) to take advantage of this loan forgiveness program.

In order to qualify, borrowers must not be in default and must have made 120 payments on their loans after October 1, 2007. Payments can made through any of the eligible repayment plans (IBR or ICR). Borrowers must be employed in a public service job at the time of the forgiveness.

Jobs with federal, state, local, or tribal government organizations, public child or family service agencies, 501(c)(3) nonprofit organizations or universities should be considered “public service jobs.”

Borrowers who are working for organizations that provide any of the following services should qualify: Law Enforcement, Public Interest, Military service, Public safety, childhood education, public health care occupations, and public education.

It is important to note that the loan forgiveness is based upon the employer’s eligibility, not the type of job. Anyone working full time for a qualifying employer, regardless of his or her job, may qualify. There is no requirement that borrowers must work in the same public service job for the entire ten year period.

Check the following website for more information:

Click to access LoanForgivenessv4.pdf

Click to access PSLF_QAs_final_02%2012%2010.pdf

Student Loans: The Next Debt Bubble:

Total student loan debt in the U.S. is expected to reach $1 trillion this year — more than the nation’s total credit-card debt. The consequences of default are severe. Unlike most debt, student loans are almost impossible to dispose of through bankruptcy. If students fail to repay, their tax refunds can be withheld and wages and Social Security payments can be garnished.

Lawyer turns topless dancer to pay the bills

DISCHARGING STUDENT LOANS IN BANKRUPTCY

Student Loans and Chapter 7 Bankruptcy

Most student loans are obtained from a lending institution and are ultimately guaranteed by the United States Department of Education.  In many situations the loans are guaranteed by a middle entity, usually one of the forty-seven state guarantee agencies.  The Pennsylvania Higher Education Assistance Agency (PHEAA) is such a guarantee agency.  If a student defaults on a student loan, the original lender seeks reimbursement from the guarantee agency.  Once the lender is repaid, the guarantor then holds the promissory note and commences collection action. PHEAA has state statutory authority to commence an administrative action to garnish the borrower’s wages.  There is also federal authority to collect on defaulted loans through income tax refund intercepts. These collection actions often prompt clients to inquire about bankruptcy as a way of preventing or eliminating these collection practices.

As a general rule, a student loan guaranteed by the government or made by a nonprofit institution is not dischargeable under 11 U.S.C. §523(a)(8).  As a result of the 2005 amendments to the Bankruptcy Code, student loans made by private entities for which repayments are tax deductible are also nondischargeable.  Normally, the debtor should attempt to obtain a nonbankruptcy discharge before seeking a bankruptcy hardship discharge.

However, there is an exception to this general rule of student loan nondischargeability for student loans. If the repayment of the loan would create an undue hardship on the debtor and his/her family, the debt may be discharged. This discharge is commonly referred to as an undue hardship discharge.  In order to successfully assert that a debtor is eligible for an undue hardship discharge, it is necessary to satisfy the three-pronged test for determining “undue hardship”  adopted by the Third Circuit in the Court of Appeals decision on November 28, 1995 in its decision In re Faish, 72 F 3d. 298 (3d. Cir. 1995), which adopted a three part test based upon the Second Circuit’s decision in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). Under this test, “undue hardship” requires a three-part showing:

  1. that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the student loans;
  2. that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period for student loans; and
  3. the debtor has made “good faith” efforts to repay the loans (which means that the debtor’s student loan default was caused by circumstances beyond the debtor’s control and not the debtor’s willful negligent conduct).

The debtor has the burden of establishing each element of this test by a preponderance of the evidence. For purposes of clarity, the preponderance of the evidence standard simply means “more probable than not.” The standard is met if the the proposition is more likely to be true than not true. Effectively, the standard is satisfied if there is greater than 50 percent chance that the proposition is true.

Dunne Law Offices, P.C.

(215) 854-6342
1500 JFK Blvd, Two Penn Center, Suite 200
Philadelphia, PA 19102
www.dunnelawoffices.com