For many years, student loan borrowers who were totally and permanently disabled—veterans and other borrowers alike—could apply to the U.S. Department of Education for a discharge of their federal student loans. The loan forgiveness process for disabled veterans was well-described on the Federal Student Aid website, but wasn’t widely publicized. As a result, eligible veterans often didn’t take advantage of this option.
Last year, the Education Department initiated a program to identify which veterans were eligible for loan forgiveness. The Department then began sending customized letters, explaining the forgiveness program and including an application for disabled veterans to get their loans discharged. But veterans still had to fill out extensive paperwork. Some veterans’ advocates claimed that this process was too burdensome for many severely disabled former servicemembers.
To address this issue, on August 21, 2019, President Trump signed an executive order directing Education Secretary Betsy DeVos to discharge disabled veterans’ student loan debts automatically. Under the new process, before automatically canceling the debt, the Department of Education will identify veterans who’re eligible for loan forgiveness and give them 60 days to opt out.
Veterans could potentially choose to decline debt relief either because of potential tax liability in some states, or because receiving loan forgiveness could make it harder to get future student loans. In his speech on August 21, President Trump called on the states to waive all applicable state taxes on discharged loans. (Under the 2017 federal tax law, any discharged amount due to a total and permanent disability is excluded from a person's taxable income for federal purposes—at least through December 31, 2025. Some states, though, might consider forgiven student loan debt as taxable income, even if the federal government does not. To learn more about the how federal tax law affects student loans, see How the Republican Tax Plan Affects Students, Education, and College Loans. 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.)
Effective date: August 21, 2019