The Obama administration has embarked on a new initiative to offer student loan forgiveness to disabled people. They’re planning to discharge nearly $8 billion of student loan debt, affecting 400,000 people.
A New Push For Student Loan Forgiveness
Student loans are notoriously difficult to get out of. If you default, the federal government can garnish your wages or levy your bank accounts as payment – and they don’t even have to sue you first like other creditors do. If you’re struggling with other kinds of debts, you can file a bankruptcy and have them discharged. Not so with student loans – they’re generally not dischargeable in bankruptcy.
You can, however, have your student loans discharged by the government if you’re severely disabled and can show that it’s unlikely you’ll ever be able to work and pay them off. The process used to be complicated, but as of four years ago the government altered the process to make it simpler. You can now use your Social Security Disability designation to apply for a discharge, since you’ve already proven your disability to qualify for benefits through that program. Unfortunately, not many people have taken advantage of the new process – not many people even know they’re eligible for a discharge.
Now, the Department of Education is going a step further. It’s working with the Social Security Administration to find people who get disability benefits, have student loans, and fall under the category of “Medical Improvement Not Expected.” So far, they’ve identified almost 400,000 eligible candidates. Half of those candidates are in default on their student loans, which means this initiative is happening just in time – otherwise the government could withhold their tax returns or their disability benefits as payment.
The people identified by the Department of Education and the Social Security Administration will receive letters explaining the steps they need to take to get a discharge.
Applying For A Discharge On Your Own
If you have student loans and are permanently disabled but don’t get one of those letters, you still have other options. You can apply to the government for a Total and Permanent Disability (TPD) Discharge on your own. “Total and permanent disability” means that you’re injured or ill to such a degree that you can’t engage in any “substantial gainful activity.” In other words, you’re too sick or injured to be able to work enough to pay off any meaningful amount of your loans.
To qualify for a TPD discharge, you can submit one of three different types of documentation. If you’re a veteran and your disability is related to your service, you can show documentation that the VA has determined that you’re unemployable. If you’re getting disability benefits, you can show your Notice of Award. However, qualifying for disability is different from qualifying for a TPD discharge – your SSD paperwork will need to show that you can’t engage in substantial gainful activity. If you’re not a veteran or receiving disability benefits, you’ll need a doctor to certify that you’re unable to do any substantial work due to a disability that is expected to end in death, that has lasted for a continuous period of at least 60 months, or is expected to last at least 60 months.
But Wait – There’s A Catch
With a TPD discharge, you’re student loans are forgiven. No more debt, right? Actually, that’s not quite the end of the story. The government treats forgiven debts the same as income for tax purposes. In other words, having $10,000 of loans forgiven is the same as earning $10,000 in the eyes of the IRS. If you have a large loan forgiven, you may be facing tens of thousands of dollars’ worth of tax bills. One family had $150,000 in student loans forgiven through a TPD discharge, only to receive a tax bill for $59,000!
If you get a tax bill that you can’t cover, you should contact the IRS right away to ask about your options. If you can show that your entire income is taken up by your living expenses, they’ll mark your tax debt as uncollectible and stop trying to collect until your financial situation changes. You may also be able to set up a payment plan to spread the debt out over several years instead of paying all at once.
Alternatives To Student Loan Forgiveness For Disabled People
Getting rid of your student loan debt only to land in a pile of tax debt is not ideal. The tax debt will be significantly smaller than your student loan debt, but it may still be beyond your reach. As an alternative, you may want to consider skipping the TPD discharge and instead signing up for income-based repayment. If you’re struggling to make ends meet, you’re likely to qualify for a payment of $0 per month. After 30 years of $0 payments, your loans will be discharged – that’s true whether you’re disabled or not. You’ll face the same tax problem when that happens, but you’ve pushed it back for 30 years.
The Bottom Line
Student loans are never easy, even with the new push to make student loan forgiveness for disabled people easier. If you’re struggling to manage your loans, remember that you have options. The government offers a variety of repayment plans that can significantly lower your monthly bill and also offers loan forgiveness for working as a teacher or in public service (just don’t forget that pesky tax bill).
And if you are disabled, you can start the process of applying for a TPD discharge online. The organization that manages the process is called Nelnet, and you can reach them by phone at 888-303-7818 or by email at firstname.lastname@example.org.