The Department of Education and VA will now coordinate to eliminate all paperwork required for disabled Veterans to qualify student loan forgiveness.
On Thursday, President Trump announced that he has directed the Department of Education to implement new rules that will make it easier for Veterans to qualify for student loan forgiveness due to a Total and Permanent Disability (TPD). In fact, under the new system, all Veterans who qualify for TPD status through the U.S. Department of Veterans Affairs (VA) will automatically have their student loan balances discharged.
How is this different from current student loan forgiveness rules?
Under current rules, Veterans and civilians who qualify for student loan forgiveness due to a Total and Permanent Disability must file paperwork with their federal student loan servicers in order to have those balances discharged. Veteran advocacy groups have rightly complained that the procedure is too cumbersome for Veterans who suffered a severe disability during their service.
Currently, the White House estimates that there are 50,000 disabled Veterans in the country that are eligible for permanent disability student loan forgiveness. However, only roughly 22,000 Veterans have applied for TPD student loan forgiveness.
Under the new rules, all Veterans who receive TPD status from the VA would automatically be identified by the DoED for student loan forgiveness. The DoED would send them a letter letting them know they are eligible for forgiveness unless they decide to opt-out. If they don’t opt-out within 60 days, all federal student loan balances would be forgiven.
What about taxes on the cancelled debt?
Under CFPB regulations established in 2018, borrowers who qualify for permanent disability student loan forgiveness are automatically exempt from paying federal income taxes on the discharged debt. This exemption would still apply to Veterans who qualify for discharge automatically.
The White House is encouraging states to follow suit and grant automatic tax exemptions to Veterans who qualify for TPD discharge. This would wholly eliminate any need for disabled Veterans to file paperwork related to any part of their student loan forgiveness.
Permanent disability student loan forgiveness for civilians
Veterans are not the only Americans who can qualify for TPD student loan forgiveness. Civilians can also qualify for TPD status in one of two ways:
- If you qualify to receive Social Security Disability Insurance (SSDI) or Supplemental Security (SSI) benefits through the Social Security Administration, then you may qualify for TPD student loan forgiveness.
- If a qualified medical professional certifies that you are totally and permanently disable, you may also file for TPD discharge with your loan servicers.
The new rules would not make qualification for civilians automatic. A disabled civilian
would still need to file paperwork proving their TPD status to be granted loan forgiveness.
Federal income taxes on discharged debt
In January 2018, the CFPB changed federal policy to provide additional protections for tens of thousands of disabled student loan borrowers. Under these rules, debt discharged through permanent disability student loan forgiveness automatically qualifies for exemption from federal income taxes.
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 o
bligation. 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 these rules affect discharge for permanent disability student loan forgiveness
Under the 2018 CFPB rules, qualifying for federal tax exemption is automatic for anyone granted TPD forgiveness. Permanently disabled borrowers aren’t required to jump through hoops to have their loans forgiven cost-free.
The tax exemption doesn’t just affect federal student loans either. These rules also apply to private student loan debt, too. Many private lenders, including Wells Fargo and Discover, also allow for TPD student loan forgiveness. If your lender grants you forgiveness for a total and permanent disability, then the federal tax exemption applies automatically to the discharged balance.
What disabilities qualify for student loan forgiveness?
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 DoED 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.”