Student loans are a serious financial burden for many Americans, but what happens when you become disabled and cannot work? How will you make your loan payments? Is defaulting on your loans inevitable? I found myself in this situation and had a conversation that ended up changing my situation dramatically. I feel I have to share my experience, and open up a discussion so others can share their stories about disability and student loans, both good and bad. In doing so, I hope we can help relieve some of the financial burden and stress that comes from finding yourself in this predicament.
Prior to becoming completely disabled, I was working part-time and going to college to complete a bachelor’s degree. (I had already completed an Associate Degree many years prior.) As my health became progressively worse, I had to drop out of school and only worked part-time. I had applied for forbearance of my loans a few times, then President Obama announced changes to federal student loan repayments which included an income contingent repayment option. I immediately applied for this and was told my payments would be $0. According to their metric, I did not make enough to afford any payments on my student loans. Interest would continue to accumulate, however, as it had for many years. By December of 2015, the total of all my loans, including interest, going back to 1988 was close to $80,000.
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If you have an income contingent repayment (ICR) plan for federal student loans, you have to provide your loan servicer a copy of, or allow them to access, your federal income tax return every year in order to maintain your repayment status. Last year, I had to call my loan servicer because I felt I may have been too close to the deadline for submitting my documentation and wanted to be sure they would receive it in time. During my conversation with their customer service representative, I explained that I was disabled and waiting for a hearing date for SSDI, so I didn’t have a tax return or W-2’s for 2014. The representative then asked me if I was aware that there was a federal program that could allow me to have my student loans discharged in full if I was totally and permanently disabled, and was I interested in learning more about it. I had no idea such a thing existed, and told her I absolutely wanted to know more about this. She transferred me to a representative in their Total and Permanent Disability Discharge (TPD) division when we were done resolving my ICR issue.
I applied for a discharge based on my disability and was approved in December. The complete discharge of my federal student loans is in process at this time. There are upsides and downsides to this, and it may not be an option for everyone; however, I don’t believe this program is well known based on my experience and the recent stories I have read about SSDI payments being garnished for federal student loans. That should never, ever, happen. I hope this information can help eliminate that burden as well as repayment, endless accumulating interest, and default for anyone eligible for this program. Again, I welcome any input based on others experiences; however, if you looked into TPD or applied and were rejected before July 1, 2013, please read on. Significant changes were made to the program which took effect on that date in response to complaints that the system was too difficult to navigate, and even people on SSI or SSDI were being rejected without a stated reason.
How to find out if you are eligible
The Total and Permanent Disability Discharge program applies only to the following federal loans; William D. Ford Federal Direct Loan (Direct Loan) Program, Federal Family Education Loan (FFEL) Program, and/or Federal Perkins Loan (Perkins Loan) Program. It also applies to TEACH Grant service obligations, which provides a “grant” of $4,000.00 a year while in college in exchange for teaching in a high need field for four years at an elementary school, secondary school, or educational service agency that serves students from low-income families. If the TEACH service obligation is not completed within eight years of college graduation, the grants are converted to Unsubsidized Student Loans with interest and are required to be repaid. The TPD website disabilitydischarge.com lists the following qualifiers and documentation to submit in order to prove your disability for their purposes:
1 – If you are a veteran, you can submit documentation from the U.S. Department of Veterans Affairs (VA) showing that the VA has determined that you are unemployable due to a service-connected disability;
2 – If you are receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits, you can submit a Social Security Administration (SSA) notice of award for SSDI or SSI benefits stating that your next scheduled disability review will be within 5 to 7 years from the date of your most recent SSA disability determination; or
3 – You can submit certification from a physician that you are totally and permanently disabled. Your physician must certify that you are unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that:
- Can be expected to result in death;
- Has lasted for a continuous period of not less than 60 months; or
- Can be expected to last for a continuous period of not less than 60 months.
I want to stress that you can use certification from your physician as proof of disability, as I did, and be approved. Betsy Mayotte, of The Student Loan Ranger, at U.S. News and World Report gives a good explanation of how the process works once your application is received, but I will give a quick overview. From the TPD website you can call or apply online. This connects you with Nelnet, the only student loan servicer contracted to administer the program for The Department of Education. When you begin the application process, Nelnet contacts your loan holders and requests that they put a 120 day hold on your loans to give you time to complete the application. You must submit the completed application with documentation within 120 days or risk being returned to repayment status, and any interest that has accumulated during that period will be added to your loan balances. Once the application is received by Nelnet, your loans remain on hold while the application is reviewed. A decision is usually made within 60 days. I received my initial approval notification by email with a formal follow up letter sent by mail.
It is important to know that all approved discharges, with the exception of those granted using VA documentation, are subject to a three year monitoring period. This monitoring period has specific guidelines that must be met. If they are not, you will be sent back to repayment status and interest that would have accrued on your loans from the date of discharge will be added to your loan balances. They seem fairly reasonable to me, and a detailed explanation of the requirements are available under the FAQ's at the TPD website. It is very important to respond to any requests for documentation from Nelnet or the DOE during the monitoring period. If you do not respond, that can also send you back into repayment status.
How a disability discharge affects your credit rating
How a disability discharge affects your credit rating depends on how it was being reported to credit bureaus prior to the discharge. Gerri Detweiler at Credit.com received this question from a reader and did some investigation. In her article, she shares the responses she received from credit reporting firm Experian, The Consumer Data Industry Association, and Nelnet. It is worth reading, but generally they state if the loans are in good standing at the time of discharge, they should be reported as paid in full as agreed. If the loans have late payments, are in default, or in collections status at the time of discharge, they should be reported as a paid in full collection account. If incorrectly reported, you will need to contact the loan servicer who reported to the credit bureau and request a correction as well as contacting the credit bureaus to file a request for correction. It may be a fight to get this done correctly based on my past experience with requesting correction to credit reports.
I cannot stress this enough; TPD discharges are reported to the IRS as taxable income, but that doesn’t mean you are required to pay taxes on it
The total amount of your discharged federal student loans is reported to the IRS as income on a 1099-C form, and they will want you to pay taxes on them. Do not despair, this does not mean you will have to pay these taxes based on my research. They can be totally or partially forgiven by filling out some IRS forms that are submitted with your income tax return. I have not yet figured out if you can submit the forms by themselves if you do not have taxable income, as is the case with many of us with disabilities. From what I understand, some of the tax preparation software is capable of handling this situation and the paperwork involved; however, I have not been able to determine with certainty which ones. I will do an update post once I find out if TurboTax (what we use) will work and our experience with it, if any. If the complexity of these forms is too difficult or intimidating to complete on your own, ask a friend, family member, or tax professional for help. I found a very helpful website/blog while researching the tax implications of student loan discharges. I am not endorsing him as a CPA because I have no personal experience with him, but he appears to be very knowledgeable and offers free consultations. He has several blog posts with comments and his responses on this subject. The following instructions and further information for how to reduce or eliminate taxes on discharged student loans can be found at his blog, here.
How to Battle a Form 1099-C for a discharged student loan: tax reporting rules for cancelled student loan debt
- The only way to exclude student loan cancellation from taxable income is through the Insolvency exclusion of Form 982, Reduction of Tax Attributes.
- Some student aid is dischargeable for working in under served geographical areas and those Folks usually don’t receive Form 1099-C, Cancellation of Debt.
- If that’s you, and you still receive a Form 1099-C, we can help you straighten that out with IRS.
- Calculate your Insolvency using the IRS Insolvency Worksheet, read more here.
In other words, if you are insolvent when you receive your disability discharge, you will not have to pay income tax on it as long as you file the insolvency paperwork with the IRS. If you have more assets than debt, you would only pay a portion of the taxes due on the discharge unless your assets far outweigh your debt. In another blog post regarding 1099-C student loan discharges on the same site, Mr. Bode advised a commenter to list every single debt you have on the insolvency worksheet, even if it’s something that seems ridiculous like borrowing a few dollars from a friend or relative. As an example, in my instance my partner has been supporting me financially for the past three years. Had I been working, I would have paid for my share of household expenses. This counts as debt.
Another thing you should be aware of is it’s possible that you may not receive a 1099-C from the student loan servicer’s handling your loans in the correct tax year, or in some cases, ever. It is important that you understand that, from a legal perspective, you will be held responsible for any failure to file the proper forms for forgiveness of taxes, or failure to pay the taxes you owe in the correct tax year. If you fail to meet these requirements, it could result in tax penalties and other issues. According to information on Mr. Bode’s blog, if you miss the tax year deadline for filing the paper work requesting tax forgiveness for your discharge, you can still file the paperwork (I assume with an amended tax return, but I am not a tax professional). You need to fill out the insolvency worksheet using your debt/income information from the year your loans were discharged, not information from your current situation.
Garnishment of disability payments: Student Loans and Other Debt
I have seen stories recently about SSDI payments being garnished for federal student loan payments. I don’t know why, but I was surprised this was happening. I did some research to see who can and can’t garnish disability payments and what they can garnish them for. I went to a site I have used for free Social Security disability legal advice in the past, disabilitysecrets.com, and what I found surprised me. Disability Secrets has a list of frequently asked questions and one of them is "Can a Bill Collector Garnish My Social Security Disability or SSI?" The answer is no, and yes. Bill collectors can’t garnish your SSDI payments; however, there are a few exceptions. The federal government can garnish your SSDI benefits for defaulted federal student loans, back taxes, or other money owed to them. If you owe current or back child support payments they can be garnished from your SSDI payments. Your SSDI payments are off limits to any other creditors. SSI payments cannot be garnished for anything. It is illegal to garnish SSDI funds not meeting the exceptions, or SSI funds. To prevent this from happening, a federal law was passed in 2011 requiring banks to determine if Social Security funds are being deposited into accounts before complying with a court ordered garnishment.
I have not found anything stating that you cannot apply for a disability discharge even if you are currently being garnished for defaulted student loans. The TPD website does not state that you must be in good standing on your loans. The information provided by Experian in the credit reporting section above leads me to believe that you can apply and be approved for TPD discharge even if you are in default and the debt sent to collection. As Experian’s representative stated in Gerri Detweiler’s article, if the discharge is approved, in this instance, it would be reported as a paid collection account with previous missed or delinquent payments.
They Don’t Make it easy
It may take some time and effort to get your loans discharged, but it can be done. I was fortunate that I had already consolidated all of my loans and Nelnet was already my student loan servicer, so applying was very easy for me to do. I have to say that Nelnet’s TPD representatives were very helpful. They will assist you in tracking down loans if you have them with multiple servicers, contact them to make them aware that you are applying for discharge, and otherwise help you through the process. Keep the three year monitoring period in mind if you are approved (unless you submitted VA disability certification) and make sure you respond to any documentation requests sent regarding your discharge during that time. Again, if you don’t respond, they can rescind the discharge and send you back into repayment status. The most difficult part of the process appears to be getting the taxes eliminated or lowered by the IRS. Don’t let that scare you. There is help available through tax professionals, and if you can’t afford to pay someone there are options like Volunteer Income Tax Assistance (VITA). You can find a local VITA site by calling toll-free 1-800-906-9887. If anyone has personal experience with a TPD discharge, or has other information they would like to share, please do.