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How to apply for an Unpaid Refund Discharge?

Updated: Jun 2

An Unpaid Refund Discharge is due to you if you left school early after receiving a loan from the William D. Ford Federal Direct Loan (commonly referred to as “Direct Loans”) Program or the Federal Family Education Loan (FFEL) Program and your school failed to return some or all of your loan funds to your loan servicer.

According to Studentaid.gov, The William D Ford federal direct loan program is “a federal student loan program under which eligible students and parents borrow directly from the U.S. Department of Education at participating schools.”

Because you did not complete your studies, you may be eligible for a discharge of the portion of your loan that the school failed to refund based on the percentage of the school year that you attended and did not attend. Perkins loan borrowers can also raise their school’s failure to pay a refund as a defense to a collection action.


The formal regulations guiding this discharge can be found in the Title 34 Education section of the online eCFR federal register at § 685.216 Unpaid refund discharge.



TABLE OF CONTENTS

Purpose of the Unpaid Refund Discharge Program

Unpaid Refund Discharge- Closed school

Unpaid Refund Discharge- Open school

Qualification of the borrower for discharge

How do I apply for an unpaid refund discharge?

Discharge procedures


Purpose of the Unpaid Refund Discharge Program

This program, for federal loans obtained after January 1, 1986, if the school failed to pay a refund required under federal law, is available because you do not always have to repay the full loan amount if you left school early. You should have received a return for at least a portion of what you owed on your loan if you went to school for less than 60% of the repayment period. In these instances, schools are required to return the funds to the lender and ensure that you receive a refund on your loan balance.


For example, if you left after 40 percent of a semester, your school should have repaid the government 60 percent of the federal loan you took out for that semester. If it failed to do so, you may be eligible for a discharge of 60% of those government loans, plus interest and fees accrued on the remaining 40%. However, you will still owe 40% of the loan amount dispersed for that semester, plus any interest or fees accrued on that 40%.


Unpaid Refund Discharge- Closed school


According to the official federal register, the portion of a Direct Loan equal to the refund that should have been made by the school will be discharged if the school has closed. The unpaid refund's interest and other costs are likewise discharged once the proper loan discharge application has been properly submitted.


Unpaid Refund Discharge- Open school

If a school is still open, the part of a Direct Loan equivalent to the return that the institution should have made will be discharged if –

  1. (A) The borrower (or the student for whom a parent borrowed) is not enrolled in the school to whom the repayment is due;

  2. (B) The borrower has been unable to reach an agreement with the institution regarding the unpaid repayment; and

  3. (C) Within 120 days of the borrower submitting a complete application, the Education Department is unable to negotiate the overdue return with the institution. The unpaid refund's interest and other costs are likewise discharged.

*Within 60 days of the Secretary's notification, the school must show that the reimbursement was made by the school or that the school was not obligated to make the refund.


The borrower is also refunded any payments paid in excess of the remaining balance of the loan (including accumulated interest and other charges) owed by the borrower at the time of discharge, if the borrower receives a discharge of a portion of the loan.

The DOE will report the discharged portion of the loan to consumer credit reporting agencies also.


Qualifications of the borrower for discharge.

A borrower must submit a formal application to secure an unpaid refund discharge of a portion of a loan. The borrower must sign a statement testifying to the accuracy of the facts in the application and provide the information needed to compute the amount of the discharge. The statement does not need to be notarized, but it must be signed under penalty of perjury by the borrower.

The borrower must include the following information in the statement:

Declare that the borrower (or the student for whom a parent borrowed)

  1. On or after January 1, 1986, received the entire or partial revenues of a loan to attend school;

  2. Did not attend, withdraw from, or be terminated from the institution within the timeframe required to receive a refund; and

  3. Did not obtain a reimbursement from the school or a third party, such as the holder of a performance bond or a tuition recovery program, to which the borrower was entitled;

  4. Indicate whether the borrower (or student) has filed any additional discharge applications for this loan; and

  5. Inform the borrower (or student) that

  • (A) Agrees to furnish further evidence reasonably available to the borrower to the Secretary upon request that proves the borrower meets the conditions for discharge under this section; and

  • (B) Agrees to cooperate with the Secretary in enforcement efforts and to assign any recovery rights to a third party.


How do I apply for unpaid refund discharge?


If the school you attended is still open, you should try to work out a solution with the school directly prior to filing for an unpaid refund discharge. If the school where you were a student has closed, you should first see if you are eligible for a closed school discharge.

After you have determined that you do not qualify for a closed school discharge, you will need to determine which company currently services your loans:

  1. EdFinancial:

  2. Maximus Federal:

  3. MOHELA:

  4. Trellis Company:

  5. F.H. Cann & Associates:

  6. FedLoan Servicing (PHEAA)

  7. Navient

  8. Nelnet

  9. Great Lakes


If you feel that you are ready to apply for anUnpaid Refund Discharge, you must complete the Loan Discharge Application: Unpaid Refund and send the completed form to your loan servicer.If approved, only the portion of your loan that your school failed to return will be discharged. If the loan was parent PLUS loan funds, the amount of the loan that the school should have returned will be discharged.



Your enrollment agreement or state law may also give you refund rights. If you withdraw before completing your program, some state regulations require your institution to reimburse your federal and private loans, as well as any money you paid. The enrollment agreement between you and your institution may also offer a clause offering a refund of federal loans, private loans, or cash you paid.

Discharge procedures

If the Education Department determines that a school did not make a refund of loan proceeds owed under applicable law and regulations, the borrower will be notified in writing, and an unpaid refund discharge application and explanation of the qualifications and procedures for obtaining a discharge will be sent to the borrower, and all efforts to collect from the borrower on any affected loans will be suspended immediately.


If the borrower does not complete and submit the loan discharge application within 60 days of receiving it from the Education Department, collection for the principal and interest for the time when collection activities were suspended would restart. Any interest earned but not paid within that time period may be capitalized by the Ed Secretary.


If a borrower is not eligible for an unpaid refund discharge, the Education Secretary notifies the borrower in writing of the decision, resumes collection, and grants forbearance of principal and interest for the period during which collection activities was paused. Any interest earned but not paid during that time period may be capitalized by the Secretary.


If you withdrew from school and need assistance assessing whether your institution refunded the correct sums as required by law, you can contact TitanPrep for additional assistance today.

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