Tens of thousands of disabled veterans and hundreds of thousands of people living with severe disabilities are now eligible for new student loan protections starting this year.
Due to a recent change in federal law, borrowers whose student loans are forgiven on or after Jan. 1, 2018, due to “death or total and permanent disability” no longer have to pay federal income taxes on those forgiven loans.
Now, when the Department of Education or a private lender forgives a student loan due to a borrower’s death or disability, the amount of forgiven debt no longer counts as income and does not cause a borrower’s federal taxes to go up. Prior to this change some borrowers with disabilities faced financial distress driven by a tax bill because they qualified for debt relief. A Catch-22.
Additionally, some private student lenders also offer disability discharge options for borrowers with disabilities. Lenders that offer these programs may use guidelines that differ from the Department of Education to determine eligibility, so borrowers should contact their private student loan servicer to find out more information.
In 2016, the Department of Education worked with the Social Security Administration to proactively who were eligible for the TPD discharges of their federal student loans. They found 387,000 borrowers with disabilities, who collectively owed over $7.7 billion in federal student loans. Roughly half of those borrowers were in default on their student loans.
The Department of Education sent these borrowers letters alerting them to their eligibility for discharge while also warning them about the potential tax consequences. Now, the borrowers with disabilities that are stilled burdened by student debt can receive loan forgiveness without incurring any tax penalties.
Additionally, there are likely to be tens of thousands of severely disabled veterans who don’t yet know that they qualify for federal student loan forgiveness. According to the VA, more than 800,000 severely disabled veterans are unemployable due to a service-connected disability.
While we don’t know how many of these veterans have student loans, even just a small percentage could mean there are tens of thousands of disabled veterans with billions of dollars in forgivable federal student loans hanging over their heads. The Departments of Education and Veterans Affairs recently put into place some of the who qualify for federal student loan forgiveness.
Are you a servicemember or a veteran with questions about credit cards, auto loans, or debt collection? We also provide help for servicemembers, veterans, and military families at every stage of their military career and beyond. See our guides for navigating financial challenges.
Seth Frotman is the CFPB’s Student Loan Ombudsman. To learn more about our work for students and young consumers, visit consumerfinance.gov/students.
Patrick Campbell is the CFPB’s Deputy Assistant Director for the Office for Servicemembers Affairs. To learn more about our work for servicemembers, visit consumerfinance.gov/servicemembers.
This article by was distributed by the Personal Finance Syndication Network.