Borrowers who qualify for discharge due to total and permanent disability will now enjoy even more financial relief.
Tens of thousands of disabled student loan borrowers are now eligible for additional protections. The CFPB made the announcement on the policy change that took effect on January 1 of this year. Now, loans discharged through permanent disability student loan forgiveness automatically qualify for complete exemption from federal income taxes.
Federal income taxes on discharged debt
In normal circumstances, when you discharge debt, the IRS expects you to pay taxes on the discharged balance. They essentially treat a forgiven debt as income, because it’s money you borrowed that you won’t repay. As a result, if you settle a $5,000 for $3,000, then you would be responsible for paying taxes on the $2,000 difference.
For most discharged debts, you can apply for an exemption from the federal income tax obligation. You must simply prove that you were facing a period of financial hardship when you discharged the debt. People with permanent disabilities were good candidates to qualify for this exemption. However, you still had to go through the process of applying and approval was not guaranteed.
How the new rules affect discharge for permanent disability student loan forgiveness
The new rules from the CFPB affect any loans balances forgiven due to death or permanent disability. Borrowers who become totally and permanently disabled (TPD) have always qualified for loan forgiveness. However, the federal income tax exemption was not built-in. So, you would have to write a letter and wait to see if the IRS approved your eligibility for the exemption.
Now, that process is automatic. Permanently disabled borrowers aren’t required to jump through hoops to have their loans forgiven cost-free. Even better, this doesn’t just affect federal student loans. These new rules also apply to private student loan debt, too.
How many borrowers will this affect?
In 2016, the Department of Education conducted a study with the Social Security Administration. They found that 387,000 students would qualify for TPD loan forgiveness. Those borrowers collectively owe about $7.7 billion in student loans. So, that’s a lot of relief for people who really need it.
You may qualify for TPD if:
- The Department of Veterans Affairs (VA) rules that you are unemployable due to a service-connected disability
- You received Social Security Disability Insurance or Supplemental Security Income (SSI) benefits
- You’ve been diagnosed by a licensed physician as “totally and permanently disabled.”
If you were a student loan borrower at the time the DOE conducted the study, you should have received a letter explaining your eligibility. However, if you became permanently disabled after that study, you might not be aware of the program. This is especially important for Veterans, since the VA recently released an assessment that over 800,000 Veterans qualify as “unemployable due to a service-connected disability.”