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Congrats Your Student Loans Have Been Forgiven Because You Are Disabled. Now Pay Up.

By on December 26, 2016

In a move that typifies the illogic of Washington, the Treasury Department, who is responsible for the Internal Revenue Service, has missed a grand opportunity to label student loans forgiven because of a total and permanent disability as being free from a tax liability or penalty.

As it stands now, consumers who have their student loan debt forgiven under the Total and Permanent Disability (TPD) Discharge continue to fax a tax liability for the forgiven debt.

According to HuffPo, “The Obama Administration has repeatedly urged Congress to enact legislative changes to address the possible tax consequences of loan forgiveness faced by these borrowers, as well as others with student loans,” Treasury spokesman Rob Runyan said in a statement. “Congress has not yet enacted these legislative changes. Treasury continues to work with the Department of Education to evaluate possible alternatives that could address the situations faced by these borrowers‎.”

The failure to properly navigate the cloudy waters on tax liability following forgiveness can lead to an audit or even a wage garnishment of Social Security benefits by those who can afford it the least.

“In 2015 alone, the federal government garnished 110,000 seniors’ Social Security benefits to pay off student loans on which they had already defaulted, according to a Government Accountability Office study requested by Warren and Sen. Claire McCaskill (D-Mo.) that came out this week. Some 70,000 Americans over 50 live in poverty as their Social Security benefits are cut to pay off student debts, the report found.”

You can read the full article here.


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About Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

2 Comments

  1. Chris

    December 27, 2016 at 2:55 pm

    Good afternoon and happy holidays:
    I read your article about tax consequences for debtors who have their student loans forgiven/discharged through total and permanent disability.

    I am a total and permanently disabled veteran from Operation Iraqi Freedom. I had a large amount of student loans forgiven after Iraq. I received a 1099 from the Department of Ed with the little box checked that I am liable for the taxes. However, I posed my legal question to AVVO and got some free legal advice. The “escape route” in this situation is be able to prove insolvency at the time the discharge was approved. I did not have a lot of assets, but I did have a lot of liabilities at the time of discharge. I met the insolvency test. Now, when I filed my taxes (HR Block, Turbo Tax) online, the online tax preparation service asked me if debt was discharged, then it asked me if I was insolvent. I typed yes and filled in the monetary values reflecting the extent of my insolvency. I did not end up owing any taxes! Now, I can not guarantee the same result for someone who has more assets than liabilities at the time of discharge due to disability. If you would think you would like to add this to one of your articles, I can certainly prepare a better letter and attach redacted tax documents (1099s, completed insolvency form, etc…).

    Thank you for helping people, who struggle with debt! This is a valuable service you provide!

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