Total and Permanent Disability Discharge is available to federal student loan borrowers who are disabled an unable to engage in any substantial gainful activity (employment) because of a physical or mental impairment. The discharge would provide you with relief on your student loans by removing the debt completely that is under your name. You must be able to prove to the Department of Education (DoE) that you are in fact permanently disabled.
Proving Permanent Disability
You have a few options to prove that you are permanent disabled and eligible to have your federal student loans discharged
- If you have received a notice of award for SSDI or SSA you can submit this to the DoE to review. The notice must state that you are permanently disabled, as well as having your next review between 5-7 years. If your next review is less than 5 years, you will not qualify for disability discharge.
- Your physician can submit a certified form stating that you are totally and permanently disabled. The physician would need to state what is your disability, how long its expected to last, and whether he or she believes you are unable to engage in gainful activity due to your disability.
- If you are a veteran, the Veterans Affairs office can provide documentation to you that you are unemployable due to a service related injury.
Your disability must have lasted, or is expected to last at least 60 months, or is expected to result in death.
How The Process Works
First, you will need to gather the documentation that will be used to prove your permanent disability. Once you apply, the DoE will contact your lenders and stop all collection activity on your federal student loans until a determination has been made for your file. The DoE will then review your application and give you a determination which typically takes 3-5 months or so depending on the volume of files received.
- If Approved – Your lenders will be contacted by the DoE with instructions that your loans are being discharged, and also to return any money paid by you on your student loans from when your disability began.
- If Denied – The DoE will instruct your lenders to continue collection activity for your loans, as well as send you a letter on why your loan discharge was denied.
Stipulations If Your Loans Are Discharged
There are a few items that need to be carefully considered when applying for disability discharge.
- You cannot apply for student loans unless you obtain a letter from a physician that you are now able to engage in gainful activity, as well as signing a statement acknolowledging that your new student loans cannot be discharged again based on any illness you had prior to takeing out the new loans. Any new condition that renders you disabled would allow you to reapply for disability discharge.
Discharged Loans are No Longer Considered Taxable Income
In the past, many people with permanent disabilities preferred not to discharge their student loans due to the large tax bill they would receive. Under old tax law, discharged loans were reported to the IRS as taxable income. This presented a large financial burden to those seeking forgiveness. Under the new tax reform bill, discharged federal student loans are no longer seen as taxable income starting January 1st, 2018.
Many borrowers who could not afford the tax bill come April entered into the William D. Ford Direct Loan program instead. They would choose an income-based repayment plan that would lower monthly loan payments to as little as $0. After 25 years, loans would be forgiven, but they would still have to pay the tax bill–it would just be delayed.
The Trump Administration’s new tax law makes student loan discharge due to death or permanent disability a no-brainer for anyone who qualifies. Discharged federal loans are no longer viewed as taxable income. Approval for loan discharge now means 100% forgives of eligible loans without any financial consequences like a massive tax bill due in April.
Keep in mind that Trump’s new law is not retroactive. Borrowers who have already paid taxes on their discharged student loans will not get their money back. Only loans discharged between January 1, 2018 and December 31, 2025 are covered under this plan. The law expires in 2025, but Congress can renew it if desired.
Any qualified borrower who opted not to pursue TPD discharge in the past should reconsider it. Now that the heavy tax burden is out of the picture, there are very few downsides to discharging your loans. If you want to apply or learn more about eligibility requirements, visit the Federal Student Aid’s website about disability discharge.
We have found that many people who are permanently disabled prefer not to discharge the loans due to the tax bill they will receive, and instead enter into the William D. Ford Direct Loan program. When you consolidate your loans into this program, you are able to choose an income based repayment(IBR) plan that can benefit you in these ways:
- The IBR program will give you a monthly payment based on your income and not loan size. For those who are disabled and not working, this can typically be a payment of $0.00 per month. So rather than discharging the loan and receiving a tax bill, you receive a $0.00 payment for 25 years assuming you will not being working during these years.
- The Direct Loan and IBR program offer loan forgiveness after the 25 year term. So entering into this will also provide forgiveness on your student loans, but will delay the tax bill for many years.
The issues to consider is that the IBR program recalculates your payment annually. This means if you start working and have a considerable income, you will have a monthly payment to make that will be based on your income. You would also be required on an annual basis to reapply for the IBR program and submit your income documents, or self certify that you are not working and have no taxable income.
So if your are permanently disabled, know that you have options to help with your federal student loans. If you are ready to apply and need assistance you can work with your loan servicer for free, or you can hire a private company that can help you with the process. If you’d like to hire a private company call us at 1-844-311-1699.