42 USC 254o - Breach of scholarship contract or loan repayment contract

U.S Code last checked for updates: Dec 08, 2025

§ 254o.

Breach of scholarship contract or loan repayment contract

(a)

Failure to maintain academic standing; dismissal from institution; voluntary termination; liability; failure to accept payment

(1)

An individual who has entered into a written contract with the Secretary under section 254l of this title and who—

(A)

fails to maintain an acceptable level of academic standing in the educational institution in which he is enrolled (such level determined by the educational institution under regulations of the Secretary);

(B)

is dismissed from such educational institution for disciplinary reasons; or

(C)

voluntarily terminates the training in such an educational institution for which he is provided a scholarship under such contract, before the completion of such training,

in lieu of any service obligation arising under such contract, shall be liable to the United States for the amount which has been paid to him, or on his behalf, under the contract.

(2)

An individual who has entered into a written contract with the Secretary under section 254l–1 of this title and who—

(A)

in the case of an individual who is enrolled in the final year of a course of study, fails to maintain an acceptable level of academic standing in the educational institution in which such individual is enrolled (such level determined by the educational institution under regulations of the Secretary) or voluntarily terminates such enrollment or is dismissed from such educational institution before completion of such course of study; or

(B)

in the case of an individual who is enrolled in a graduate training program, fails to complete such training program and does not receive a waiver from the Secretary under section 254l–1(b)(1)(B)(ii) of this title,

in lieu of any service obligation arising under such contract shall be liable to the United States for the amount that has been paid on behalf of the individual under the contract.

(b)

Failure to commence or complete service obligations; formula to determine liability; payment to United States; recovery of delinquent damages; disclosure to credit reporting agencies

(1)

(A)

Except as provided in paragraph (2), if an individual breaches his written contract by failing (for any reason not specified in subsection (a) or section 254p(d) of this title) to begin such individual’s service obligation under section 254l of this title in accordance with section 254m or 254n of this title, to complete such service obligation, or to complete a required residency as specified in section 254l(f)(1)(B)(iv) of this title, the United States shall be entitled to recover from the individual an amount determined in accordance with the formula

 t−s

A= 3ϕ A——B

in which “A” is the amount the United States is entitled to recover, “ϕ” is the sum of the amounts paid under this subpart to or on behalf of the individual and the interest on such amounts which would be payable if at the time the amounts were paid they were loans bearing interest at the maximum legal prevailing rate, as determined by the Treasurer of the United States; “t” is the total number of months in the individual’s period of obligated service; and “s” is the number of months of such period served by him in accordance with section 254m of this title or a written agreement under section 254n of this title.

(B)

(i)

Any amount of damages that the United States is entitled to recover under this subsection or under subsection (c) shall, within the 1-year period beginning on the date of the breach of the written contract (or such longer period beginning on such date as specified by the Secretary), be paid to the United States. Amounts not paid within such period shall be subject to collection through deductions in Medicare payments pursuant to section 1395ccc of this title.

(ii)

If damages described in clause (i) are delinquent for 3 months, the Secretary shall, for the purpose of recovering such damages—

(I)

utilize collection agencies contracted with by the Administrator of the General Services Administration; or

(II)

enter into contracts for the recovery of such damages with collection agencies selected by the Secretary.

(iii)

Each contract for recovering damages pursuant to this subsection shall provide that the contractor will, not less than once each 6 months, submit to the Secretary a status report on the success of the contractor in collecting such damages. Section 3718 of title 31 shall apply to any such contract to the extent not inconsistent with this subsection.

(iv)

To the extent not otherwise prohibited by law, the Secretary shall disclose to all appropriate credit reporting agencies information relating to damages of more than $100 that are entitled to be recovered by the United States under this subsection and that are delinquent by more than 60 days or such longer period as is determined by the Secretary.

(2)

If an individual is released under section 254n 1

 See References in Text note below.

of this title from a service obligation under section 234 1 of this title (as in effect on September 30, 1977) and if the individual does not meet the service obligation incurred under section 254n 1 of this title, subsection (f) of such section 234 1 of this title shall apply to such individual in lieu of paragraph (1) of this subsection.

(3)

The Secretary may terminate a contract with an individual under section 254l of this title if, not later than 30 days before the end of the school year to which the contract pertains, the individual—

(A)

submits a written request for such termination; and

(B)

repays all amounts paid to, or on behalf of, the individual under section 254l(g) of this title.

(c)

Failure to commence or complete service obligations for other reasons; determination of liability; payment to United States; waiver of recovery for extreme hardship or good cause shown

(1)

If (for any reason not specified in subsection (a) or section 254p(d) of this title) an individual breaches the written contract of the individual under section 254l–1 of this title by failing either to begin such individual’s service obligation in accordance with section 254m or 254n of this title or to complete such service obligation, the United States shall be entitled to recover from the individual an amount equal to the sum of—

(A)

the total of the amounts paid by the United States under section 254l–1(g) of this title on behalf of the individual for any period of obligated service not served;

(B)

an amount equal to the product of the number of months of obligated service that were not completed by the individual, multiplied by $7,500; and

(C)

the interest on the amounts described in subparagraphs (A) and (B), at the maximum legal prevailing rate, as determined by the Treasurer of the United States, from the date of the breach;

except that the amount the United States is entitled to recover under this paragraph shall not be less than $31,000.

(2)

The Secretary may terminate a contract with an individual under section 254l–1 of this title if, not later than 45 days before the end of the fiscal year in which the contract was entered into, the individual—

(A)

submits a written request for such termination; and

(B)

repays all amounts paid on behalf of the individual under section 254l–1(g) of this title.

(3)

Damages that the United States is entitled to recover shall be paid in accordance with subsection (b)(1)(B).

(d)

Cancellation of obligation upon death of individual; waiver or suspension of obligation for impossibility, hardship, or unconscionability; release of debt by discharge in bankruptcy, time limitations

(1)

Any obligation of an individual under the Scholarship Program (or a contract thereunder) or the Loan Repayment Program (or a contract thereunder) for service or payment of damages shall be canceled upon the death of the individual.

(2)

The Secretary shall by regulation provide for the partial or total waiver or suspension of any obligation of service or payment by an individual under the Scholarship Program (or a contract thereunder) or the Loan Repayment Program (or a contract thereunder) whenever compliance by the individual is impossible or would involve extreme hardship to the individual and if enforcement of such obligation with respect to any individual would be unconscionable.

(3)

(A)

Any obligation of an individual under the Scholarship Program (or a contract thereunder) or the Loan Repayment Program (or a contract thereunder) for payment of damages may be released by a discharge in bankruptcy under title 11 only if such discharge is granted after the expiration of the 7-year period beginning on the first date that payment of such damages is required, and only if the bankruptcy court finds that nondischarge of the obligation would be unconscionable.

(B)

(i)

Subparagraph (A) shall apply to any financial obligation of an individual under the provision of law specified in clause (ii) to the same extent and in the same manner as such subparagraph applies to any obligation of an individual under the Scholarship or Loan Repayment Program (or contract thereunder) for payment of damages.

(ii)

The provision of law referred to in clause (i) is subsection (f) of section 234 ¹ of this title, as in effect prior to the repeal of such section by section 408(b)(1) of Public Law 94–484.

(e)

Inapplicability of Federal and State statute of limitations on actions for collection

(f)

Effective date

(July 1, 1944, ch. 373, title III, § 338E, formerly title VII, § 754, as added Pub. L. 94–484, title IV, § 408(b)(1), Oct. 12, 1976, 90 Stat. 2286; amended Pub. L. 95–83, title III, § 307(g), Aug. 1, 1977, 91 Stat. 391; renumbered § 338D and amended Pub. L. 97–35, title XXVII, § 2709(a), (e)(1)–(4)(A), Aug. 13, 1981,

cite as: 42 USC 254o