In the past, the student loan discharge process for borrowers with total and permanent disabilities generally involved filling out paperwork and submitting supporting documentation to the U.S. Department of Education. But on August 19, 2021, the Department of Education announced that many totally and permanently disabled student loan borrowers will now get automatic discharges of their federal student loans unless they opt-out of the process.
Under this policy change, around 323,000 borrowers will receive over $5.8 billion in student loan discharges.
Nearly all federal student loans, including FFEL loans, Perkins loans, and Direct loans, are eligible for a total and permanent disability (TPD) discharge. A TPD discharge also relieves a borrower from having to complete a TEACH Grant service obligation.
Borrowers will be identified through an existing data match with the Social Security Administration (SSA) and then will get automatic TPD discharges, beginning with the September quarterly match with SSA. This new policy removes the requirement that these borrowers fill out an application before receiving student loan relief. (If you aren't receiving Social Security Disability or Supplemental Security Income benefits, you can still apply for a discharge with a physician's certification.)
Borrowers will get notice of discharge approvals in the weeks following the match, and the Education Department says that all discharges will likely happen by the end of the year. Borrowers will get the chance to opt-out of the discharge process. But those who don't decline will get a discharge of their federal student loans.
Before January 1, 2018, if a borrower received a disability discharge for a federal student loan, the forgiven amount was usually counted as taxable income under federal tax laws. Thanks to changes in the tax law, though, if you qualify for a disability discharge from 2018 to 2025, you won't have to pay federal income tax on the discharged amount. Also, the American Rescue Plan Act exempts student debt forgiveness from federal taxation until January 1, 2026, and covers Direct Loans, FFELs, and private student loans.
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, consult with your state's tax office or 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.
Under current regulations, a borrower who receives a TPD discharge through the SSA match or the physician's certification process is subject to a three-year monitoring period. During this period, a borrower could have their discharged loans reinstated if the borrower's earnings are above a certain threshold or they don't respond to a request for earnings information.
The Department of Education has announced plans to pursue the elimination of this monitoring period and that it will indefinitely extend its policy of not asking borrowers to provide information on their earnings, which was implemented as a result of the coronavirus (COVID-19) pandemic.
Effective date: August 19, 2021