Loan Discharge and Forgiveness

  • I received a borrower’s request for a discharge of her loan because her identity was falsely certified in the loan application. She provided me with a copy of a divorce decree in which the court stipulated that her ex-spouse had provided the false information that resulted in the loan. Can I use this information from the court to document the identity theft?
    For a borrower of record to have a federal education loan discharged due to identity theft, federal regulations require a criminal verdict that a loan was falsely certified. See 34 CFR 682.402(e)(3)(v); Federal Register Volume 71, number 211, page 64,388. Other legal determinations such as those from a civil-court action, including a divorce decree, do not meet the federal standard for establishing that a crime of identity theft was committed. 

    In the case you describe, the borrower of record who is asserting that the loan was obtained via identity theft may pursue alternative legal action to obtain the necessary criminal verdict. Or, she may attempt other legal action to have the loan repaid or to at least have her loan holder negate the obligation to repay the loan.

    The loan may not be discharged under the new provisions for loan discharge due to identity theft, however.

    You will need Adobe Acrobat Reader to access the federal regulations from the USA Funds Web site.

  • What are the tax implications of a "forgiven" or "discharged" loan? Would the amount of the forgiven/discharged loan be taxable as income?
    Generally, if a taxpayer is responsible for making loan payments, and the loan is cancelled or forgiven, the taxpayer must include the amount that was forgiven in the taxpayer's gross income for tax purposes. There are some exceptions, however. According to Internal Revenue Service Publication 970"Tax Benefits for Higher Education,” the taxpayer may not have to include the cancelled amount in the taxpayer's taxable income if:

    • The loan was made by a qualified lender.
    • The loan terms permit cancellation of all or part of the loan if the taxpayer works for a certain period of time in certain professions for certain types of employers.

    In addition, beginning in 2004, student-loan-repayment assistance that taxpayers receive from the following programs is tax-free:

    • National Health Services Corps Loan Repayment Program.
    • State programs eligible for funds under the Public Health Service Act.

    To determine if any of these provisions apply to your students, former students or their parents, USA Funds® recommends that you have them consult a qualified tax adviser or the Internal Revenue Service.

  • How do I file for reimbursement when a parent has a consolidation loan made up entirely of underlying PLUS loans for one dependent student, and that student dies?  
    Use the normal death-claim process as described in the Common Manual subsection 13.8.C. Do not file using the partial-loan discharge process, because the entire consolidation loan is being forgiven.

    For more-detailed information about how to file a partial loan discharge or death claim, see the articlein April 22, 2003, USA Funds® Education Access Report.

  • What type of documentation is necessary in order to file a death claim if a borrower is missing as a result of the Sept. 11, 2001, terrorist attacks?
    The U.S. Department of Education has provided guidance in the GEN-01-11 letter regarding the discharge of loans based on "reliable information" that a borrower's (or the dependent student's in the case of a PLUS loan) death was due to the terrorist attacks. Lenders may suspend collection activities without contacting the borrower's family for whatever period is necessary in order to process a death discharge. Guarantors may grant discharge due to death based on exceptional circumstances using reliable documentation other than an original or certified copy of a death certificate. In this scenario, "other reliable documentation" may include, but is not limited to, obituary notices and published listings of the dead provided by a federal, state or local government entity, or by one of the affected airlines.