In the past, the student loan discharge process for disabled veterans generally involved filling out paperwork and submitting supporting documentation to the U.S. Department of Education. Veterans’ advocates often claimed that this process was too onerous for many severely disabled former servicemembers. To eliminate the burdensome application procedures, on August 21, 2019, President Trump signed an executive order streamlining the process for getting a discharge. Now, totally and permanently disabled veterans will automatically get a discharge of their federal student loans—unless they opt-out of the process.
Nearly all federal student loans—including all FFEL loans, Perkins loans, and Direct loans—are eligible for a disability discharge. A total and permanent disability discharge also relieves a borrower from having to complete a TEACH Grant service obligation.
Under the new process that President Trump announced on August 21, 2019, the Department of Education will identify veterans who’re eligible for a loan discharge and give them 60 days to opt-out of the process. Those who don't decline will get a discharge of their federal student loans.
As of November 22, 2019, however, only around 3,300 veterans had received automatic forgiveness on their student loans. The delay was because the Office of Management and Budget (OMB) had to approve new rules from the Department of Education. The OMB has now sanctioned the changes, and the Department of Education plans to start automatic loan forgiveness for many more—around 24,000—veterans.
Before January 1, 2018, if a borrower received a disability discharge for a federal student loan, the forgiven amount usually counted as taxable income under federal tax laws. Thanks to changes in the law, though, if you qualify for a disability discharge in the years 2018 to 2025, you won’t have to pay federal income tax on the discharged amount. Some states, however, might consider forgiven student loan debt as taxable income—even if the federal government does not. So, depending on your state’s laws, you might decide to turn down a discharge of your federal loans because of a potential tax liability. (To get advice about whether you might have tax liability after getting a student loan discharge, talk to a tax lawyer or other tax professional.)
You might also choose to pass on getting a discharge if you want to get student loans in the future because the process could be more difficult. If you have questions about how a discharge might affect your chances of receiving more student loans, check out the Federal Student Aid website. You might also consider talking to a debt settlement or consumer protection lawyer who has experience dealing with student loans.