Student Loans and the Unpaid Refund Discharge

When you leave school early, the school should refund your tuition for the portion of the academic period you didn't attend. This was a very important discharge in the time of the coronavirus pandemic when many left school early in the academic period. This refund of loan funds goes to your student loan lender. This will reduce your loan balance and your monthly payments. 

Sometimes, the unused portion of your student loan doesn't get refunded. That's what's called an unpaid refund. To reduce your student loan by the amount of this (so far unpaid) refund, you can apply for an "unpaid refund discharge.” 

It's important to understand that loan discharge means the same thing as loan cancellation. That is, your loan is eliminated for any reason. Loan forgiveness has a slightly different meaning. Loan forgiveness programs usually involve some public service work performed by the student loan borrower that entitles the borrower to loan forgiveness.  

The Types of Loans That Meet the Eligibility Requirements for Unpaid Refund Discharge

This discharge is available for the Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan Program. The primary difference between the FFEL Program and Direct Loans is private lenders make FFEL loans that are guaranteed by the federal government while the U.S. Department of Education makes Direct Loans. 

The FFEL Program, which stopped making new loans in 2010, had 4 types of loans:

• Stafford Loans,

• Unsubsidized Stafford Loans, 

• PLUS Loans, and

• Federal Consolidation Loans.

Under the Direct Loans Program, the loan types available are:

• Direct Loans,

• Direct Unsubsidized Loans,

• Direct PLUS Loans (including Parent PLUS Loans and Graduate PLUS Loans), and

• Direct Consolidation Loans

Besides the FFEL Program and the Direct Loans Program, there’s a third federal student loan program called Perkins Loans. The unpaid refund loan discharge is not available for Perkins Loans. But, you, the borrower, can raise an unpaid refund claim as a defense if you're sued for default on your Perkins Loan. Unpaid refund could also be the basis of a lawsuit you file against your school.

It's complicated to determine the amount of your unpaid refund discharge when you have a Federal Consolidation Loan. Some of the loans wrapped into the consolidation could be eligible for the unpaid refund while others might not. The unpaid refund discharge would only be for the part allocable to loans that were eligible before consolidation. 

So, there would be some untangling of the consolidation loan to make the calculation on how much unpaid refund discharge is available. You may be able to get sufficient information to untangle your consolidation loan by logging into the studentaid.gov website. 

Private Student Loans

There's no federal right to the unpaid refund discharge for private student loans. Yet, your enrollment agreement with the school may give you a refund right. The state's law may require a refund. These contractual and state law rights are useful to defend against collections for private loans for higher education that should have been refunded by the school. In some cases, you may use unpaid refund as the basis for a lawsuit against the school and/or the lender.

Steps to Get the Unpaid Refund Discharge

To be entitled to an unpaid refund discharge from your federal loan, you must have attended the school for less than 60% of the loan period. Also, the funds for the loan must have been received on or after January 1, 1986. If your school is now closed, you should apply for the school closure discharge before trying the unpaid refund discharge since that could eliminate the entire loan balance, not just the portion that wasn’t refunded. 

Calculation of the Discharge Portion

Determine the last date of attendance at the school during the period. Determine the loan period. The loan period is an academic year or portion of an academic year that a loan was made for. Loans for a semester or quarter are examples of loans for a “portion of an academic year.”  

This example shows the calculation for the refund due. A student has no other grants or student loans. In this example, a loan is taken out for the fall semester of 2015 in the amount of $5,000.00. The first day of the semester was August 23, 2015, and the last day was December 15, 2015. The last day the student attended class was October 15, 2015. 

The semester (loan period) has a total of 114 days. The student left class 61 days into the semester. Dividing 61 by 114 we see that the student only attended for 54% of the semester. Since 54% is less than 60%, the student is due a refund. But, since the tuition was paid with a loan, the refund goes to the student loan lender. 

Since 54% is less than 60%, theoretically, the student would be due a refund of a portion of the loan. The problem for the student is their contractual relationship with the school. Part of that contract is the school’s withdrawal policy. If the student doesn’t follow the school’s procedures and deadlines they may not be eligible for the refund. For example, the school may have a deadline for withdrawal with a partial refund of 50% through the semester. In this case, since the student didn’t meet the school guidelines, the student isn’t due an unpaid refund discharge. 

If the student is still being billed for the full amount of the loan, one of two things happened. Either the school didn't refund the student loan lender or the student loan lender failed to apply the refund to the student's account. Either way, you're entitled to a refund for the unattended part of the semester of as much as 46% (100% less the 54% attended) of the loan balance. Thus, the refund discharge of the loan balance for that semester would be as much as $2,300 (46% times $5,000.00) plus any accumulated interest and fees applicable to the refund amount.  Of course, with this discharge, student loan repayment is reduced.

This is a simplified example that works for loans made before October 7, 2000. After that, Title IV grants and other federal student loans and federal student aid are included in the calculation. The term, "Financial Aid" includes Title IV grants such as Pell Grants, Federal Supplemental Educational Opportunity Grants, and TEACH Grants. 

Preparing to Apply for the Unpaid Refund Discharge

The first step to obtaining an unpaid refund discharge is to try to resolve the issue with the loan holder if the school is open. It's a good idea to document your interaction with the school on this issue. Keep copies of correspondence and certified mail receipts. It's important to keep any letters from the loan holder claiming you have no right to a refund.

With your application for discharge, you should also provide copies, if you still have them, of the following documentation provided by your school:

• The school's catalog

• The school's refund policy

• Tuition bills from the school

• Enrollment contract

• Student account statement

• Registration forms

• Withdrawal forms

• Attendance records

• Any correspondence from the school that contains information about the refund you believe the school owes you

• Any other documentation you have that proves you are entitled to a refund and it has never been received by you or the lender.

Application

To apply for the discharge, you should use the latest unpaid discharge application form. To get this form, go to the Department of Education's forms library. Go to the "discharge and forgiveness tab" then go to the bottom of that set of forms. Here, you will find the unpaid discharge form. 

The title of the form is Loan Discharge Application: Unpaid Refund. The first thing you may notice is the expiration date at the top right is 9/30/2020. This is the only form available at this time. If you try to click a direct link to the form on other parts of the Department’s website, you will come to another unpaid refund discharge with an expiration of 8/31/2017. Until an updated form is posted, the 9/30/2020 form should be sent to your loan holder, by certified mail, return receipt requested. 

It's possible the loan holder will return the form or forward it to your loan servicer. If the loan holder sends the form back to you, send the form to the loan servicer. The loan servicer is the company that sends your bills to you. While your application is pending, the Department of Education will issue a forbearance to prevent collections during this period.

Your Right to Appeal

If you don’t get a favorable result from the loan holder, send the same form to the Department of Education. Along with documentation of your position and the adverse decision of the loan holder. The Department of Education has 120 days to resolve the issue. 

The regulations require you to provide the Department with the following:

1. A statement that you received the proceeds of a loan, in whole or in part, on or after January 1, 1986, to attend a school;

2. You did not attend, withdraw, or were terminated from the school within a timeframe that entitled you to a refund; and

3. You did not receive the benefit of a refund to which you were entitled either from the school or from a third party, such as the holder of a performance bond or a tuition recovery program;

4. You must state whether you have any other applications for discharge pending for this loan; and

5. You must state that you agree to provide the Department, upon request, any other documentation necessary reasonably available to you that demonstrates you meet the qualifications for discharge for an unpaid refund.

If the Department of Education doesn't discharge your unpaid refund and you still believe you're entitled to the discharge, it's time to talk to an attorney. You may have a case that can be brought in federal district court against the Department of Education.

Conclusion

It's a good idea if you left school early during any academic period during the covid pandemic to make sure your unattended time is refunded. If you only received part of the educational services you used the loan to pay for because you left school before substantially completing the academic period, you have a claim for a refund. 

With federal loans through FFEL and Direct Loans, you have an administrative procedure you can initiate to have your unpaid refund discharged. Administrative procedures are much easier and less expensive than court proceedings. It’s a good idea to take advantage of these procedures if you have an unpaid refund since it will reduce your loan payments due to your student loan debt being reduced.