Total and Permanent Disability Discharge and Student Loan Forgiveness

Danika McClure

There are certain situations in life where your students loans are eligible for student loan forgiveness, cancellation, or discharge. This means that in approved circumstances, you are no longer required to repay portions, or in some cases, the entirety of your loan.

These reasons can range from teacher loan forgiveness programs, to bankruptcy, to public service loan forgiveness. But students who have become disabled, in specific circumstances, may also be entitled to to student loan forgiveness.

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Total and Permanent Disability Discharge

A total and permanent disability (TPD) discharge relieves students who have become disabled and meet specific criteria with documentation from having to pay back loans for the following:

  • William D. Ford Federal Direct Loan (Direct Loan) Program loan
  • Federal Family Education Loan (FFEL) Program loan
  • Federal Perkins Loan (Perkins Loan) Program loan
  • Teacher Education Assistance for College and Higher Education (TEACH) Grant service obligations

In order to qualify however, you must submit proof to the Department of Education, who will determine if you meet their criteria.

What Qualifies Individuals for Student Loan Disability Discharge?

Following regulatory changes made to the TPD discharge process made in 2012, there are three ways that students can prove that they are totally and permanently disabled.

  • First, if you’re a veteran, you can submit documentation from the U.S. Department of Veterans Affairs if they have determined that you are unemployable due to a disability connected with your time and service in the military.
  • Second, if you are receiving Social Security Disability Insurance or are a beneficiary of Supplemental Security Income, you can submit this information to the Department of Education for review.
  • Third, you can submit certification from a physician that states that you are totally and permanently disabled. In order for this option to be feasible, your physician must certify that you are unable to engage in a physical or mental impairment that ultimately results in death, has lasted for or is expected to last for a continuous period (60 months).

The application process requires different documentation depending on which of the three options you believe are applicable to you.

Veterans Affairs Determination

If you believe you qualify for loan forgiveness due to documentation from the VA, you will need to take the following actions:

  • Complete sections 1-3 of your TBD discharge application
  • Return the application along with a copy of the complete documentation to the US Department of Education

Social Security Administration Determination

If you are currently receiving SSDI or SSI benefits, you will be eligible to receive a TPD discharge if you have documentation that indicates that your next scheduled disability review will be within 5-7 years of your most recent SSA disability determination.

If you are unaware of how to obtain this information, it’s best to contact your local SSA office or to call (800) 772-1213 and request what is called a Benefits Planning Query. This will inform you of when your next scheduled review is set to occur.

As with the Veterans Affair Determination, you will need to complete the following steps:

  • Complete sections 1-3 of your TPD discharge application
  • Return the application along with a complete copy of your SSA notice of award, or a copy of your Benefits Planning Query to the US Department of Education

Physician Certification

If you believe you may qualify for TPD due to a physical or mental disability, you will have to provide the following information:

  • Complete sections 1-3 of the TPD discharge application
  • Have a physician who is a licensed physician in either medicine or osteopathy complete section 4 of the application
  • Return the application to the US Department of Education within 90 days of the date that your physician made those materials available to you

Are Disability Discharge Student Loans Taxable?

Under previous laws, those who applied and were approved for disability discharge were responsible for a new bill, as their discharged loan amount was now considered taxable income.

“Your lender will issue you a 1099-C form indicating the amount of your discharge,” writes Ashley Norwood of US News. “This amount is considered income for tax purposes, and you can estimate a tax bill of 25 to 30 percent of the forgiven amount.”

This essentially meant that if you had a $50,000 student loan balance discharged, for example, you might expect to owe $12,500 in taxes for your discharged loans. In order to remove these charges, you would have to apply for an insolvency exclusion which essentially means that your debts exceed the value of your assets at the time of the loan discharge. Completing this process also didn’t necessarily mean that the full amount of your taxes would be eliminated.

New legislation, enacted January 1, 2018, however, has changed this process. Known as the Tax Cuts and Jobs Act, this legislation offers significant tax savings for those who are forced to default on their student loan debt due to disability.

“Federal student loans can be discharged if the borrower dies or becomes totally and permanently disabled,” writes legal expert Adam S. Minsky. “For years, these discharges were taxable events – meaning that the cancelled loan balance could be treated as income for the borrower. However, the recently-passed tax bill eliminated the taxable nature of these student loan discharges – meaning they are now tax-free events as of January 1, 2018.”

Student Loan Disability Discharge on Your Credit Report

It’s hard to say how this new legislation will factor into terms that affect credit reports in years to come. Previous experience, however, indicates that you will need to contact your creditors to see what options are available to you.

“The first and most important step is to contact your lenders and ask them what their policies are and whether you qualify to have your debts forgiven,” wrote the team at Experian before this new legislation passed. “Any agreement would be between you and your creditors. You will likely have to prove permanent disability, which may involve providing copies of documentation from your employer and physician.If your creditors do agree to that you meet the terms of the contracts and absolve the debt, the creditors will make the necessary changes to its records, and subsequently have the information removed or updated in your credit report.”

If you’re worried about how this process might affect your credit score, it’s best to contact your loan provider.

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