If you are disabled and have a federal student loan, the Dept. of Education may cancel the balance of your loan.
According to the Dept of Education, to begin the application process, the borrower must complete Section 1 of the Discharge Application: Total and Permanent Disability (PDF) and sign and date the application in Section 3. The borrower will then need to have his or her physician complete Section 4 of the application. The borrower should make sure that the physician completes this section of the application thoroughly.
To learn more about how to work through the TPD process, see the Dept. of Education's Total and Permanent Disability: For Borrowers Web page.
Federal Student Loan Settlement
Let us assume for a moment that you do not qualify for a TPD discharge. In my observation, the Dept. of Education rarely settles federal student loans for less than the amount owed. They do this because the loans were issued at an already low interest rate and student loans are not dischargeable in bankruptcy. The government may also garnish wages and taxes without going through the court system. It may be possible to payback less than what was owed if a disability or extreme financial hardship occurred.
The Dept. of Education can compromise FFEL or Perkins Loans of any amount, and suspend or terminate collection of these loans. It can be difficult, however to negotiate a “good” deal. The Dept. of Education has not given much guidance on what it is likely to accept. The Department has Standardized Compromise and Write-Off Procedures for use by guaranty agencies. These are for negotiated agreements between borrowers and guaranty agencies to accept less than full payment as full liquidation of the entire debt.
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