Student Loan Discharge, Cancellation & Refund Guide 2026: Borrower Defense, PSLF, TPD, Closed School & New RAP Plan

On April 1, 2026, the U.S. Department of Education sent mass discharge notices to approximately 170,000 federal student loan borrowers. These borrowers did not apply for forgiveness through a special program or win a lottery. Their loans were discharged automatically because the Department missed a court-ordered deadline to individually review their borrower defense claims.

This is not an isolated event. The federal student loan system is undergoing the most significant restructuring in decades. The SAVE plan was vacated by a federal court on March 10, 2026. Two new repayment plans — the Repayment Assistance Plan (RAP) and Tiered Standard Plan — launch July 1, 2026. Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE) close to new borrowers the same day and disappear entirely by July 2028. Parent PLUS loans are being eliminated for new borrowers.

If you have federal student loans, this guide explains every path to discharge, cancellation, or refund available in 2026, how the repayment landscape is changing, and what you need to do before July 1.

The 2026 Student Loan Landscape: What Changed

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, fundamentally restructured federal student loan repayment. Here is what is different:

Path 1: Borrower Defense to Repayment

Borrower defense is the process of having your federal student loans discharged because your school engaged in fraud, misrepresentation, or other misconduct. It is the most powerful discharge tool available, and 2026 has seen massive developments.

What Qualifies for Borrower Defense

Under the 2023 Borrower Defense Regulation, there are six grounds for discharge:

1. Substantial misrepresentation — The school lied about job placement rates, graduate salaries, program costs, transferability of credits, or other material facts.
2. Substantial omission of fact — The school failed to disclose important information that would have affected your decision to enroll.
3. Aggressive and deceptive recruitment — The school used high-pressure tactics, made false promises, or targeted vulnerable populations.
4. Breach of contract — The school failed to deliver the educational services it promised in its enrollment agreement.
5. Secretarial determination — The Department of Education determined that the school's conduct was so problematic that all former students qualify for relief.
6. Prior secretarial action — The Department revoked the school's ability to participate in federal student aid programs.

The Sweet v. McMahon Settlement

The largest borrower defense development in 2026 involves Sweet v. McMahon (originally Sweet v. DeVos, then Sweet v. Cardona). Key facts:

• In November 2022, the Department of Education agreed to a $6 billion settlement covering borrowers who attended schools identified as having engaged in misconduct.
• The settlement created three groups: automatic relief, decision groups (1–5), and post-class applicants.
• Post-class applicants — approximately 207,000 borrowers who filed borrower defense applications between June 23 and November 15, 2022 — were entitled to automatic full discharge if the Department failed to process their claims by January 28, 2026.
• The Department missed the deadline, asked for an 18-month extension twice, and the judge denied both requests.
• On April 1, 2026, discharge notices went out to approximately 170,000 borrowers at Exhibit C schools (151 institutions the Department identified as having engaged in misconduct).
• These borrowers received full loan discharge, refunds of amounts paid, and deletion of associated credit tradelines.

How to Apply for Borrower Defense

1. Go to studentaid.gov/borrower-defense and create an account.
2. Fill out the application, identifying your school and the specific misconduct.
3. Upload supporting documentation: transcripts, enrollment agreements, promotional materials, emails with admissions staff, and any evidence of false claims made by the school.
4. Alternatively, download the PDF application and email it to BorrowerDefense@ed.gov or mail it to U.S. Department of Education, 4255 W Hwy 90, Monticello, KY 42633.

Processing time: The Department has up to three years to evaluate your application. Track your status at StudentAid.gov or call 855-279-6207.

Tax impact: Borrower defense discharges are not taxable income according to the IRS.

Path 2: Public Service Loan Forgiveness (PSLF)

PSLF remains available and unchanged by the OBBBA for now. If you work in public service (government, nonprofit, education, healthcare) and make 120 qualifying monthly payments, your remaining balance is forgiven.

Key PSLF Rules in 2026

• Eligible employers: Federal, state, or local government; 501(c)(3) nonprofits; tribal colleges; AmeriCorps or Peace Corps.
• Eligible loans: Direct Loans only. FFEL Program loans must be consolidated into a Direct Consolidation Loan first.
• Qualifying payments: 120 payments under a qualifying repayment plan while working full-time for a qualifying employer. Payments do not need to be consecutive.
• PSLF and RAP: Borrowers enrolled in RAP after July 1, 2026 can still count those payments toward PSLF.
• Best strategy: If you are on SAVE, switch to IBR before July 1 to keep payments as low as possible while earning PSLF credit.

Path 3: Total and Permanent Disability (TPD) Discharge

If you are totally and permanently disabled, you can have your federal student loans discharged. There are three ways to qualify:

1. Veterans Affairs (VA) determination — If the VA has rated you as unemployable due to a service-connected disability.
2. Social Security Administration (SSA) notice — If you receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) with a next continuing disability review scheduled in 5–7 years.
3. Physician certification — A doctor certifies that you are unable to engage in substantial gainful activity due to a physical or mental impairment that has lasted or is expected to last at least 60 months or result in death.

How to apply: Apply online at disabilitydischarge.com or call 1-888-303-7818.

Monitoring period: After discharge, the Department monitors your earnings for three years. If your income exceeds the federal poverty guideline for a family of two or you take out new federal student loans, the discharge can be revoked.

Tax impact: Starting January 1, 2026, TPD discharges are generally considered taxable income at the federal level. The American Rescue Plan Act's tax exemption for student loan discharges expired on December 31, 2025. Check with a tax advisor about your specific situation — some borrowers may qualify for the IRS insolvency exclusion (Form 982).

Path 4: Closed School Discharge

If your school closed while you were enrolled or within 180 days of your withdrawal, you may qualify for a closed school discharge.

Eligibility Requirements

• You were enrolled when the school closed.
• You were on an approved leave of absence when the school closed.
• You withdrew within 180 days before the school closed.
• You did not complete your program through a teach-out agreement or by transferring credits to another school.

What You Get

• Full discharge of your Direct Loans, FFEL Program loans, and Perkins Loans used at the closed school.
• Refund of amounts you already paid on those loans.
• Credit report correction — the discharged loans are removed from your credit history.

How to Apply

Contact your loan servicer and request a closed school discharge application. The Department of Education also automatically discharges loans for borrowers who meet the criteria and have not enrolled at another school within three years of the closure.

Path 5: Other Discharge Programs

False Certification Discharge

If your school falsely certified your eligibility for federal student loans — for example, by forging your high school diploma, enrolling you in a program you were not qualified for, or certifying loans using identity theft — you qualify for a full discharge.

Unpaid Refund Discharge

If you withdrew from school and the school failed to return your federal loan funds to the Department of Education as required, you can have the unreturned amount discharged.

Teacher Loan Forgiveness

Teachers who work full-time for five consecutive years in a low-income school or educational service agency may be eligible for forgiveness of up to $17,500 on Direct Subsidized and Unsubsidized Loans.

Perkins Loan Cancellation

Perkins Loan borrowers may have their loans cancelled for service in specific professions, including teaching, nursing, law enforcement, military service, and Peace Corps or AmeriCorps VISTA service. Cancellation rates are typically 15% per year of qualifying service, reaching 100% after 7 years.

The New RAP Plan: What You Need to Know

The Repayment Assistance Plan (RAP) is the only income-driven repayment option for new borrowers after July 1, 2026. Here is how it works:

RAP Payment Calculation

Under RAP, your monthly payment is calculated as a percentage of your adjusted gross income:

• Income below $10,000: $10 per month minimum
• Low income (1% of AGI): Payments start at 1% and scale up to 10% as income increases
• The payment is reduced by $50 per dependent
• Unpaid interest is waived to prevent negative amortization — your balance will not grow

Why RAP Is Controversial

The Institute for College Access and Success (TICAS) has warned that RAP will make it harder for borrowers to keep up with payments compared to SAVE:

• Higher payments than SAVE for most borrowers because the percentage tiers are higher.
• 30-year forgiveness timeline compared to 20–25 years under previous IDR plans.
• Unpredictable payment spikes when income crosses arbitrary thresholds — even a small cost-of-living raise could push you into a higher payment tier.
• Nearly 10% of federal loan balances are already 90+ days delinquent according to the Federal Reserve Bank of New York's Q4 2025 report.

Tax Implications: When Forgiven Loans Create Tax Bills

This is the most overlooked aspect of student loan discharge, and it changed dramatically in 2026.

The American Rescue Plan Expiration

The American Rescue Plan Act excluded federal student loan forgiveness from taxable income — but only for loans forgiven between December 31, 2021 and December 31, 2025. Starting January 1, 2026:

• IDR plan forgiveness is now taxable income. If your remaining balance is forgiven after 20–30 years under IBR, RAP, or another income-driven plan, you will receive a Form 1099-C and must report the forgiven amount as income.
• Borrower defense discharges remain tax-free. The IRS specifically excludes borrower defense discharges from taxable income.
• PSLF remains tax-free. Public Service Loan Forgiveness discharges are not considered taxable income.
• TPD discharges are now taxable starting January 1, 2026, after the ARP tax exemption expired. Check with a tax advisor about the insolvency exclusion.

How Much Could You Owe

If you have $50,000 forgiven through IDR and are in the 22% tax bracket, you could owe approximately $11,000 in taxes on the forgiven amount. For larger balances, the tax bill can be devastating.

How to Prepare

• Increase your tax withholding or make estimated quarterly payments if you expect IDR forgiveness.
• Consider insolvency exclusion — if your total debts exceed your total assets at the time of discharge, you may be able to exclude some or all of the forgiven amount using IRS Form 982.
• Prioritize PSLF or borrower defense over IDR forgiveness when possible, as these paths are tax-free.

Are You Getting an Automatic Refund? What to Check

Some federal student loan borrowers are receiving unexpected refund checks in 2026. These are not part of a new forgiveness program — they reflect corrections to loan records.

Why Refunds Are Happening

Years of shifting rules around the COVID-era payment pause, income-driven repayment plans, and PSLF caused some borrowers to pay more than they ultimately owed. As the Department of Education reviews and updates repayment counts, certain accounts show credit balances.

How to Check

1. Log into StudentAid.gov and check your loan servicer.
2. Call your servicer and ask whether your account has a credit balance.
3. Check your mail — refunds are typically sent as physical checks.
4. Amounts vary widely, from modest sums to several thousand dollars.

Step-by-Step: What to Do Before July 1, 2026

If You Are on the SAVE Plan

1. Do not wait for your servicer to contact you. The 90-day switching window starts July 1, but you can act now.
2. Evaluate IBR first. If you are a legacy borrower (no new loans after July 1, 2026), IBR offers lower payments and faster forgiveness than RAP.
3. Call your servicer and ask to switch to IBR immediately. This avoids the risk of being auto-enrolled in Standard Repayment with much higher payments.
4. If IBR is not available, wait until July 1 to evaluate RAP vs. Tiered Standard.

If You Are on PAYE or ICR

You have until July 1, 2028 to switch. After that date, you will be auto-enrolled in RAP. Consider switching to IBR now if you want lower payments, or wait for RAP if it works better for your situation.

If You Think You Qualify for Borrower Defense

1. Gather documentation: transcripts, enrollment agreements, promotional materials, communications with school staff.
2. Apply at studentaid.gov/borrower-defense.
3. Track your application status online or call 855-279-6207.
4. If you attended one of the 151 Exhibit C schools, check whether you received a discharge notice in April 2026.

If You Work in Public Service

1. Submit your PSLF Employer Certification Form annually at studentaid.gov/pslf.
2. Switch to IBR before July 1 to keep payments low while earning PSLF credit.
3. RAP payments also count toward PSLF — but your payment may be higher under RAP than IBR.

Discharge Option Comparison

Key Takeaways

• If you are on SAVE, act before July 1, 2026. Switch to IBR now to avoid being auto-enrolled in Standard Repayment with higher payments.
• 170,000+ borrowers received automatic discharges in April 2026 through the Sweet v. McMahon settlement. Check your StudentAid.gov account if you filed a borrower defense claim between June and November 2022.
• RAP is the only income-driven option for new borrowers after July 1. It requires higher payments and 30 years to forgiveness, compared to 20–25 years under previous plans.
• Borrower defense discharges are not taxable. PSLF and closed school discharges are also tax-free under current law. TPD discharges became taxable starting January 1, 2026.
• Check for unexpected refunds. Some borrowers are receiving checks due to account corrections from years of shifting repayment rules.
• Parent PLUS loans are eliminated for new borrowers after July 1, 2026.
• PSLF remains the best deal for public servants — 120 payments and the rest is forgiven, regardless of which repayment plan you use.