How to Discharge Your Student Loans: Comprehensive Guide

Student loans are no joke.

If you’ve read through our previous articles about the history of student loans and repayment plans for federal student loans, you know that Americans are facing $1.3 trillion in student loan debt. 

A 2015 Breitbart article pointed out that 27 percent of loans in repayment were in default, which means those loans are more than 90 days late.

With so many students unable or unwilling to pay back their loans, the idea of discharge comes into the conversation. “Discharging student loans” is a technical way of saying getting rid of your loans.

Students have several different options for this. Some require that you make payments on your loan for at least 20 years. Other plans will discharge your loans if you work in certain fields, while still other rules allow you to get rid of your loans through bankruptcy.

But here’s the catch – some of these methods are a lot easier than others. And if you get overwhelmed by your payments – whether right out of college or 10 years after graduation – you don’t have much wiggle room when it comes to bankruptcy.

Many of the solutions are long-term solutions which take a lot of time. Magic bullets are few when it comes to student loan debt.

We’re going to take some time to work through each of the options you have for discharging your loans. Then, we’ll talk about ways you can reduce your debt before you even get to college. 

Discharging Your Student Loan Through Income-Driven Repayment Plans

The federal government offers students with federal loans a series of repayment plans that calculate monthly payments based on how much money you earn. Those payments are anywhere from 0 to 20 percent of your discretionary income, which equals your income minus 150 percent of the poverty guideline for your state (check out our guide to repayment plans for more details).

There are four plans in this repayment category, and each plan includes a loan discharge at the end of your repayment. Here’s the exact wording of the discharge rules:

“Under all four plans, any remaining loan balance is forgiven if your federal student loans aren't fully repaid at the end of the repayment period.”

Sounds great, doesn’t it? You make your payments for 20 or 25 years (depending on your repayment plan) and, at the end of it all, whatever balance remains is forgiven. There’s got to be a catch, right?

To figure out what that catch is, we talked with Betsy Mayotte of American Student Assistance. Betsy is the ASA’s director of regulatory compliance, which means she’s an expert in the rules and regulations surrounding federal student loans.

In fact, she was part of the team of experts who helped craft some of the income-driven repayment plans. Betsy told us that she and her colleagues crafted the most recent repayment plans with the assumption that most students would pay back their loans before the end of their repayment term.

“The models we kicked around indicated most people would pay off their loans before they got to loan forgiveness,” she said. “The point is, the borrower will pay off their loans as agreed.”

So, in that sense, the discharge (forgiveness) of loans wasn’t anticipated to come into play that often.

“But, there are these lifejackets in the form of income-driven plans with forgiveness options at the end of repayment,” Betsy said. “However, it may be that few borrowers actually get forgiveness because they end up paying off their loans.”

Why Will Only a Few Borrowers Get Loan Forgiveness? 

To get an understanding of why only a few borrowers would be able to take advantage of loan forgiveness at the end of their income-driven repayment plan, we researched average loan debt and average income for graduates from 10 major degree categories. 

Most Students Borrow $50,000 or Less

2014 New York Federal Reserve study analyzed the distribution of debt among borrowers in the fourth quarter of the 2011-2012 fiscal year. Here’s how the numbers looked:

  • 39.9 percent of students had up to $10,000 in student loans
  • 29.8 percent of students had between $10,000 and $25,000 in student loans
  • 17.7 percent of students had between $25,000 and $50,000 in student loans
  • 12.7 percent of students had between $50,000 and more than $200,000 in student loans.

In reality, nearly 9 out of 10 students will graduate with less than $50,000 in debt, which means many graduates will be able to pay off their loans and won’t get loan forgiveness. Why? To answer that question, we have to look at the average salary of the college graduate.

Many Grads Will Earn $50K Per Year

According to a 2015 TIME article from finance contributor Susie Poppick, grads from 10 broad degree categories were predicted to earn an average of $50,556 per year in 2016.

Your payments, according to the formulas for the income-based repayment plan, will never be higher than about $250 per month if your income doesn’t change. If you make a $250 monthly payment for the life of your loan (20 years), you’ll end up paying about $60,000.

Many Grads Will Earn More Than Enough to Pay Off the Average Amount of Loan Debt

As we’ve mentioned before, 2015 grads borrowed an average of $35,000 in student loans. With interest, that totals about $52,000. If you’re making the $50,000 we mentioned above, you’ll pay that loan off before your 20 years are up – exactly how Betsy Mayotte and her colleagues predicted you would. That’s why she said that the income-driven plans were created assuming that most loans would be paid off.

So Who Would Actually Benefit From IDR Loan Forgiveness?

Not everyone will have an $0 balance at the end of their repayment period, and it’s these people who will benefit from the loan forgiveness included in income-driven plans.

Once your overall loan debt eclipses $40,000, and assuming you’re making $50,000 a year, you’re going to have a balance left over when the interest is added on. With interest:

  • $45,000 in loans becomes about $67,000 ($7,000 remaining after 20 years)
  • $50,000 in loans becomes almost $75,000 ($15,000 remaining)
  • $55,000 in loans becomes more than $82,000 ($22,000 remaining)

Basically, if you’re $45K in debt, or more, you’ll have the opportunity for loan forgiveness. Unfortunately, though, only a small percentage of students have that much debt, bringing us to the bittersweet conclusion that income-driven loan forgiveness isn’t a legitimate option for most borrowers.

Discharging Your Student Loan Through Public Service

The federal government also offers loan forgiveness for students who work full-time for certain employers, while the borrower makes 120 payments on any one of the four income-driven repayment plans. This option is called the Public Service Loan Forgiveness program.

This option, however, comes with a very specific set of requirements for jobs that qualify as “public service”: 

  • Any federal, state, local or tribal government
  • Tax exempt, non-profit 501(c)(3) organizations
  • Not-for-profit organizations that aren’t tax exempt and provide one of the following services:
    • Emergency management
    • Military service
    • Public safety
    • Law enforcement
    • Public interest law services
    • Early childhood education
    • Public service for individuals with disability
    • Public health

There are several other types of employment that are eligible under the non-tax exempt nonprofits; click here to get the full list. 

Remember that “full-time” actually means at least 30 hours per week. You can do those hours at one job, or you can work two different jobs that add up to at least to 30 hours a week.

Important note: The federal student aid department says that any hours spent “on religious instruction, worship services, or any form of proselytizing” may not be counted toward your weekly full-time hours.

Let’s pause here for a second before we move to the final form of discharge, bankruptcy. In terms of mathematical chances for loan discharge, public service loan forgiveness is your best bet. As you’ll soon find out, loan discharges are few and far between in bankruptcy proceedings. 

Discharging Your Student Loan Through Bankruptcy

We got a very good sense of how likely you are to get rid of your loans through bankruptcy when we talked with Ben Heston, a bankruptcy lawyer at Heston & Heston, Attorneys at Law in Riverside, California. 

Ben has handled multiple bankruptcy cases of individuals or couples with student loan debt. His advice: “Most of my clients have student loan debt and I tell them, ‘I’m sorry, but you’re going to have to stick with your loans.”

In fact, he said he researched 10 years’ worth of Riverside County bankruptcy cases in which student loans were involved. Out of the hundreds of cases he read through, not one single client was able to get their loans discharged through bankruptcy.

Why? It’s all based on the “Brunner Test”, Ben said.

The Brunner Test goes back to a 1987 court case where the United States Court of Appeals, Second Circuit, ruled that anyone wanting student loans discharged through bankruptcy had to meet three criteria.

“It has three prongs,” Ben said. “First, you have to show you can’t pay your loans and maintain a minimal standard of living. The second prong is that these conditions are likely to persist the entire repayment period, and the third prong is that you’ve made a good faith effort to repay the loans.”

As you can see, passing this three-prong test isn’t easy. With the income-driven repayment plans in the mix, having payments that bury you below a minimal standard living. And if, for some reason, they do, you have to prove that those conditions will continue for the entire length of your repayment period.

We like how Ben put it when he said, “If you’re homeless, you have to show you’ll be homeless for the next 25 years, basically.”

Another thing to remember: over the past five decades, the rules for bankruptcy and discharges have actually gotten stricter, not easier.

“There’s just no leeway at all,” Ben said.

» See Also: Common Student Loan Scams and How to Avoid Them

Getting Ahead Before You Get Behind: Scholarships and Credits

Thinking about how slim your chances are for discharging your loans can be a little depressing. Unless you work for an employer who qualifies you for Public Service Loan Forgiveness, you’re in a tough spot.

That leads us to think about our collective student loan experience – which can be summarized with one word… “$1.3 billion” – and what we can do for the next generation of students.

To get an idea of how we can curb the federal student loan problem, we talked with Kristina Ellis, author of “How to Graduate Debt Free; The Best Strategies to Pay for College”. 

She helps high school seniors find ways to cut down on their student loan debt before they even fill out a single college application.

Her keys: choosing the right school, applying for scholarships and completing college credits while in high school.

“A lot of students think they have to go to one school in order to be successful,” Kristina said. “But there are other schools you can go to that will help you be successful.”

Kristina told us about a friend who wanted to get into the Massachusetts Institute of Technology. The friend got in but didn’t receive any aid. Rather than taking out student loans to in order to attend MIT, she decided on another university.

“She graduated with high honors and went on to work at Google, her dream job,” Kristina told us. “There are students from MIT and Stanford and the University of Tennessee and a private liberal arts schools in Idaho who are in the halls of Wall Street and Google and other places. The most prestigious school doesn’t equal the best life.”

As for scholarships, Kristina says one thing makes you successful: hard work.

“A lot of students hit scholarship-application time and they apply and they’re not super-strategic about it,” she said. “A scholarship is not a lottery ticket where you scratch it off with no real effort and hope luck will come your way.”

Put in around 50 hours of work into finding scholarships available to you, research which schools provide the greatest amount of scholarships and which awards you’re most likely to receive.

“It’s absolutely worth it. If you walk away from high school with $50,000 or $100,000 in scholarships and it took you about 50 hours to get it, that’s a high batting average,” Kristina said. “And just think about how long that would take to pay back if those were loans.”

And Kristina’s final bit of advice is to search for AP courses, dual-enrollment opportunities and KLEP exams to help you earn college credits while you’re in high school.

“If you can get a lot of that done in high school, the credit hours will be much cheaper then than while you are in college,” Kristina said.

But, she pointed out, don’t get frustrated if you don’t perfectly execute your scholarship and college-credit plans. Putting too much pressure on yourself can be detrimental.

“You have to realize you don’t have to get everything perfect,” she said. “It’s not the end of the road if you don’t’ have everything figured out as you’re walking across the stage during graduation.”

A Final Review of Federal Student Loan Discharge Options

There is a lot of talk about loan forgiveness programs and discharge options for your federal student loans, but the truth is, your options are limited.

Loan forgiveness at the end of an income-driven repayment plan offers hope to just over one out of 10 borrowers, while the Public Service Loan Forgiveness Program provides a way out only through 501(c)(3) organizations. Bankruptcy is definitely the most difficult way to discharge your student loans, with very few people being able to pass the Brunner Test.

Because the options for loan discharge are very limited, our suggestion is to work hard in high school to get scholarships and college credits. Putting in the effort before you get to college can greatly reduce your debt and set you up for a lot of financial freedom when you graduate with your degree.

But let’s say you’re in the middle of a degree program and you need immediate ways to offset the cost of your education. 

Kristina Ellis said you’ve got two main options: co-ops and part-time work.

Co-ops are like internships, but differ in two huge ways: they’re longer and they pay more.

“Co-ops are longer and more intensive than internships. You’re working full-time, but you’re technically enrolled,” she said. “Internships are great, but co-op students get paid a lot more to do it for the six months they’re working at the company.”

Students who participate in co-ops tend to graduate with tons of experience and less debt than others.

Kristina is also an advocate of working part-time while you’re in school.

“The 10-15 hours a week range tends to be the sweet spot,” she said. “It might have to do with that extra discipline in work gives you more focus in studies. It’s definitely better than going out and partying all weekend.”

While working in school or getting into a co-op seems really stressful, Kristina said, it’s important to remember that you have to find some equilibrium in your schedule.

“At the end of the day, it’s about balance,” Kristina said. “Don’t stress yourself out so much that you don’t graduate. It’s about finding what’s working and what’s not.”

The bottom line is this: the options for discharging your loans are limited, so it’s better to put in the work to reduce costs before or during college, not after.

But if you find yourself in a position where discharge isn’t an option, take a moment to read our guide to refinancing your student loans. We’ll help you see the pros and cons of refinancing, as well as tips for finding reputable refi companies.

J.R. Duren

J.R. Duren is a personal finance reporter who examines credit cards, credit scores, and various bank products. J.R. is a three-time winner at the Florida Press Club’s Excellence in Journalism contest. He is a member of the Society of Professional Journalists and his insight has been featured on Investopedia, GOBankingRates, H&R Block and Huffington Post.

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