With all of the recent changes to federal tax law, it is hard to keep up with everything. However, if you are a borrower, make sure you are keeping track of changes in student loan-related legislation. As of January 1, 2018, a new law took effect that makes discharging student loans more manageable for anyone who is eligible.
Trump Administration New Tax Law for Discharged Student Loans
Trump’s new tax law changes tax brackets, deductibles, and a lot more. More notably, for certain student borrowers, it changes the tax exemption status of discharged student loans. As of January 2018, discharged student loan debt is no longer considered income. Any student loan debt that is discharged due to death or total and permanent disability (TPD) is no longer taxable.
Make note that this is not a retroactive law. Anyone awarded TPD student loan discharge during the 2017 tax year will still have to pay taxes come April 2018. The new law covers eligible loans discharged from January 1, 2018 to December 31, 2025. Only loans discharged during this time are tax exempt. The bill expires in 2025, but Congress can renew it if desired.
Why Does this Change Matter?
If you are not familiar with loan discharge, you may not realize how significant this new law is. Part IV of the Trump administration’s new tax law eliminates the biggest hardship for those seeking out loan discharge–the tax burden. It was a burden so large that it actually stopped eligible individuals from seeking loan discharge. Thankfully, that burden is now gone.
The Previous Tax Burden of Total & Permanent Disability Discharge
Under previous legislation, loans discharged due to death or TPD were viewed as income tax by the IRS. This means that individuals had to pay taxes on this money just as they would with their yearly wages. Plus, the higher income status actually disqualified many from receiving means-based government benefits like Medicaid and SSI–benefits designed in part to help individuals with disabilities who cannot work. If someone with the current average student loan debt of $37k had their student loans discharged, they would end up with a tax bill of anywhere between $3,700 to $14,800 depending on their tax bracket.
In the past, opting not to pursue TPD discharge was the wiser financial decision for many. Paying the required taxes was a bigger burden than making monthly payments. In fact, many individuals eligible for TPD loan discharge would choose an income-driven repayment plan instead. These student loan repayment plans could bring their monthly payment down to as little as $0 with forgiveness after 25 years. Unfortunately, repayment programs are considered taxable income, but they provide more time for borrowers to prepare for the tax bill.
Benefits of the New Tax Law for Total & Permanent Disability Discharge
There are many positive implications of the new tax law for recipients of TPD discharge. Aside from it saving people money, it also helps them hold onto their financial security.
- Their reported income will no longer be artificially inflated by the amount they receive in loan discharge. This means that they remain eligible for programs like Medicaid and SSI. It also means that they do not have to choose between discharging their student debt and their health insurance or monthly living stipend. They can have it all.
- They can hold onto their savings and use the money for things like medical bills and experience some financial security during their time of hardship and limited income.
- They no longer have to prolong loan forgiveness. With the new law, everyone who is eligible can afford to pursue total discharge. They will not need to choose an income-driven repayment plan, which may require monthly payments and/or filing annual paperwork to report their yearly income.
- With the money saved from the new tax bill, individuals have more flexibility to pay off any remaining student loan debt they have from private lenders.
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Can Private Loans be Discharged?
The new tax law applies to both federal and private student loans discharged due to total and permanent disability. The legislation defines a private education loan as a loan that:
- Was not made, insured, or guaranteed under title IV of the Higher Education Act of 1965; and
- Was issued to cover postsecondary educational expenses; and
- Does not include an extension of credit, mortgage transactions, or loans taken out against your property
Unfortunately, the majority of private lenders do not offer loan discharge due to permanent disability. However, if you borrowed from Sallie Mae, Wells Fargo, Discover, or New York Higher Education Services Corp., you may be in luck. Only those four private student loan providers discharge debt in cases of total and permanent disability.
You will need to contact your lender directly for information regarding student loan disability discharge. Their definition of “total and permanent disability” may differ from the federal government’s. Even if your lender is not listed above, they might offer other options like reduced monthly payments.
Is Loan Forgiveness Viewed as Taxable Income?
The new tax law did not affect the tax status of student loan forgiveness programs. The Public Service Loan Forgiveness, Teacher Loan Forgiveness, Law School Loan Repayment, and National Health Service Corps Loan Repayment programs will all remain tax-exempt. After completing the required years of service, enrolled participants will have all eligible loans forgiven (canceled) and will not have to pay any taxes on that money.
Although similar in some ways, loan discharge and loan forgiveness are quite different. Loan discharge only applies to two circumstances: when the borrower dies and when the borrower has a total and permanent disability. Loan forgiveness programs erase eligible federal student debt after a borrower fills a public service job for a set number of years.
Remember that loan cancellation for those enrolled in income-driven repayment plans that are not participating in a program above still have to pay taxes on the amount forgiven. The new law did not address this.
Is Total & Permanent Disability Discharge Right For You?
Without the tax burden, there is no reason not to apply for TPD discharge. If you think you may be eligible for student loan discharge due to total and permanent disability, visit the Federal Student Aid’s website. You do not need a student loan lawyer to apply for this type of discharge. There, you can find out more information and fill out an application. Note that you will need proof and documentation of total and permanent disability. This can be provided by your doctor, the Social Security Administration, or the U.S. Department of Veteran’s Affairs.
Student loans are a hot-button issue for borrowers and politicians. Expect to see more changes under the Trump Administration regarding student loan forgiveness programs and related matters.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
SoFi: Fixed rates from 3.890% APR to 8.074% APR (with AutoPay). Variable rates from 2.550% APR to 7.115% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.550% APR assumes current 1 month LIBOR rate of 2.50% plus 0.04% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.