Student Loan Debtors with Severe Disabilities

According to an article in Forbes, there are more than 44 million student loan borrowers in the U.S. who collectively owe about $1.3 trillion in student loans. For some of these borrowers, Public Service Loan Forgiveness (PSLF) may allow them to have their federal student loan debt forgiven after 10 years without having to pay federal income taxes on the amount of debt that is ultimately forgiven. For most other borrowers, eligibility for forgiveness comes after either 20 or 25 years of qualifying payments, depending on the type of repayment plan the borrowers pay under. Yet those borrowers will be responsible for federal income tax on the amount of debt that is forgiven. For some student debtors, that amount is too much to bear. Indeed, some debtors have considered filing for consumer bankruptcy due to the tax debt owed on forgiven student loans.
A recent article from the Consumer Financial Protection Bureau (CFPB) reports that thousands of debtors with severe disabilities will not have to pay federal income taxes on forgiven student loans.
Death or Total Permanent Disability and Student Loan Debt
A recent change in federal law will affect “tens of thousands of disabled veterans and hundreds of thousands of people living with severe disabilities.” To be more precise, those individuals with student loan debt who are seeking to have their loans forgiven as of January 1, 2018 or afterward may be eligible to avoid paying federal income taxes on the forgiven debt. In order to be eligible, the borrower must either have suffered fatal injuries or be living with “total and permanent disability.” The change in the law applies to both private student loan debt and federal student loans.
Who may qualify? The article lists the following:
  • Veterans who are classified as “unemployable due to a service-connected disability” by the Department of Veterans Affairs (VA);
  • Borrowers who currently receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits; and/or
  • Borrowers who have been certified as “totally and permanently disabled” by a physician.
These are the guidelines from the U.S. Department of Education for federal student loans. Private student lenders also offer options for disabled debtors, and anyone with a total and permanent disability should contact the lender to learn more about options for discharge.
How Many Student Loan Borrowers May be Eligible?
In total, the Department Education estimates that about 387,000 student loan borrowers have disabilities, and together they owe more than $7.7 billion in federal student debt alone. Approximately 50% of those borrowers—or about 194,000 debtors—are currently in default on their loans. That number does not include severely disabled veterans who also may be eligible. The VA reports that “more than 800,000 severely disabled veterans are unemployable due to a service-connected disability.” Of course, not all of those veterans have student loans.
What does it mean to pay federal income taxes on forgiven debt? In short, forgiven student loan debt—except for PSLF and now for borrowers with total and permanent disabilities—is treated as taxable income. As such, if a borrower has $50,000 forgiven, she would owe federal income tax on that $50,000. As you can imagine, that amount of debt often is substantial—and perhaps impossible to pay—for a student loan borrower.
Contact an Oak Park Consumer Protection Lawyer
If you have questions about student loan debt and bankruptcy, you should get in touch with an Oak Park consumer protection attorney to discuss your situation. Contact the Emerson Law Firm to learn more about how we can help.
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