As of 2022, there are over 43 million federal student loan borrowers. While many will likely end up paying off their loans in full, others might qualify to have their loans discharged, canceled or forgiven.
While these terms are often used interchangeably, each of them refers to a different process when it comes to removing the borrower’s repayment obligation.
Here’s what student loan discharge, cancellation and forgiveness mean for federal student loans and how you might qualify.
Student Loan Discharge vs. Cancellation vs. Forgiveness
Because federal student loan discharge, cancellation and forgiveness work differently, it’s important to do your research to see which programs you might be eligible for. Here’s a basic overview of how they work:
What Is Student Loan Discharge?
Student loan discharge is when you’re no longer required to make federal student loan payments due to extenuating circumstances beyond your control. For example, if you become permanently and totally disabled, it will likely be difficult for you to make an income and pay your student loans—which is why those in this situation can qualify to have their federal loans discharged.
Other scenarios that can make you eligible for student loan discharge include:
- Closed-school discharge: Your school closed while you were enrolled or shortly after you graduated.
- Perkins loan discharge: You have a Perkins loan and experience certain circumstances, such as bankruptcy, school closure or a military service-connected disability. You could also qualify if your spouse was a victim of the events of 9/11.
- Total and permanent disability discharge: You become totally and permanently disabled. You must provide documentation from the Department of Veterans Affairs, Social Security Administration or a physician.
- Discharge due to death: The primary borrower or student who benefitted from a parent PLUS loan dies.
- Discharge in bankruptcy: You file for bankruptcy and prove to the court that paying your loans would cause an undue hardship. Note that receiving a full discharge due to bankruptcy is rare. Those with undue hardships are more often given the option to pay off a portion of their loan or repay it with different terms, such as a lower interest rate.
- Borrower defense to repayment: Your school violated certain state laws, misled you or engaged in other misconduct related to your loan or education.
- False certification discharge: Your school falsely certified that you were eligible to receive a federal loan—for example, you didn’t meet the ability-to-benefit requirements, you didn’t meet employment criteria or your school signed your name on the loan application or promissory note without your permission.
- Unpaid refund discharge: You withdrew from school, and the school failed to return the required federal funds to the loan servicer.
- Forgery discharge: You’re the victim of identity theft, and the perpetrator fraudulently took out federal loans if your name.
Is Student Loan Discharge Taxable?
In most cases, no—you won’t have to pay taxes on federal loans that are discharged. However, keep in mind that there are some exceptions.
For example, if you had your loans discharged due to a permanent and total disability before Jan. 1, 2018, you might be liable to pay income taxes on the discharged amount. But loans discharged for this reason after January 1, 2018, through December 31, 2025, will not be taxed.
How to Apply for Student Loan Discharge
If you think you qualify for student loan discharge, you can apply for the specific program through the Department of Education. In some cases, this might require working with a certain servicer—for example, applications for total and permanent disability discharge must be submitted to Nelnet.
Generally, you don’t have to make payments on your loans while your application is being reviewed. You can check with your servicer to see if payments are required or for additional help with the application process.
What Is Student Loan Cancellation?
Student loan cancellation occurs when you’re no longer required to make payments on your federal student loans because of your job.
For example, if you have a Perkins loan, you could have up to 100% of it canceled if you work in a qualifying eligible government or nonprofit field for five to seven years, depending on your profession.
Professions potentially eligible for Perkins loan cancellation include:
- Attorneys (public defenders)
- Corrections officers
- Providers of early intervention services for people with disabilities
- Employees of public or private nonprofit child- or family-service agencies
- Faculty members at tribal colleges or universities
- Firefighters
- Law enforcement officers
- Librarians
- Medical technicians
- Nurses
- Speech pathologists
- Teachers (including staff members in the education components of Head Start programs and prekindergarten or childcare programs)
- U.S. military members
- Volunteers for AmeriCorps Volunteers In Service to America (VISTA) or the Peace Corps
Is Student Loan Cancellation Taxable?
This depends on how your federal loans are canceled. For example, if you’re eligible for Perkins loan cancellation, you won’t have to worry about taxes on the canceled amount.
How to Apply for Student Loan Cancellation
If you qualify for cancellation, you’ll generally be able to apply through your loan servicer. For Perkins loan cancellation, you must apply through the school that gave you the Perkins loan or through the school’s Perkins loan servicer.
What Is Student Loan Forgiveness?
Similar to cancellation, student loan forgiveness is when you’re no longer required to make payments on your federal loans, typically because of your employment in an eligible government or nonprofit organization.
There are three main federal student loan forgiveness programs available.
- Public Service Loan Forgiveness (PSLF): If you work for a government or nonprofit organization, you could be eligible to have your federal loans forgiven after making 120 qualifying payments under an income-driven repayment (IDR) plan.
- Teacher Loan Forgiveness: To qualify for this program, you must be a highly-qualified teacher and teach for five complete, consecutive academic years in a low-income school or educational service agency. You can have $5,000 or $17,500 of your federal loans forgiven, depending on the subject you teach.
- Income-driven repayment: Unlike PSLF and Teacher Loan Forgiveness, IDR doesn’t require borrowers to work in certain fields. Instead, you simply need to sign up for one of the four IDR plans, which will base your payments on your income and household size. You can then have any remaining balance forgiven after 20 or 25 years, depending on the plan you choose.
Is Student Loan Forgiveness Taxable?
This depends on the program. PSLF and Teacher Loan Forgiveness are both tax-free, while forgiveness under an IDR plan could be subject to taxes.
How to Apply for Student Loan Forgiveness
You can use the PSLF Help Tool to see if you’re eligible and on track for PSLF as well as to fill out an application. If you’re ready to apply, you can then send that form to the Missouri Higher Education Loan Authority (MOHELA) for processing.
For Teacher Loan Forgiveness or IDR, you can apply through your current servicer.
Related: Student Loan Forgiveness Calculator
