For many borrowers, the idea of student loan forgiveness is too good to be true. And that’s because it often is.
Borrowers need to be on high alert for debt-relief companies that make repayment promises they can’t keep – like being able to get rid of your loans for you. Just pay a fee, and they’ll qualify you for the “Obama Loan Forgiveness Program.”
Unfortunately, that program doesn’t exist. However, the president did outline steps in his Student Aid Bill of Rights to make it easier for borrowers to understand how to manage their loans or when they may be eligible for discharge – and one of them was implemented just last week.
Proactive Help for Disabled Borrowers
On April 18, the U.S. Department of Education sent a letter to approximately 387,000 federal student loan borrowers letting them know they may be eligible for what’s known as the total and permanent disability discharge. The department estimates approximately 179,000 of these borrowers are in default, and that’s an important point for this population.
Defaulted loans come with serious consequences, including the potential loss of certain government payments. This can have a dramatic effect on those with disabilities, especially if it causes them to have a portion of their Social Security disability payments seized.
This new initiative aims to help these borrowers keep those benefits and inform them of the discharge they’re entitled to. “Americans with disabilities have a right to student loan relief,” said U.S. Education Undersecretary Ted Mitchell in a release. “And we need to make it easier, not harder, for them to receive the benefits they are due.”
To fulfill that desire to make things easier, the department has taken certain steps to change the process.
To find eligible borrowers, the department worked with the Social Security Administration. They identified borrowers who not only receive Social Security disability payments – which alone does not qualify someone for this discharge – and who also have the designation “Medical Improvement Not Expected.”
Because the department certified these borrowers’ disability status with the Social Security Administration, they get to bypass the documentation typically needed to prove their eligibility. Instead, they simply sign and return their application to receive this discharge – that’s it.
If a borrower does not send a completed application after 120 days, the department will reach out to them again to let them know they qualify. This is an important step since borrowers often ignore their student loan-related communications, especially if they’re in default.
Borrowers who are approved for discharge will be monitored for three years, when they may be required to submit income or other documentation to verify they remain eligible for the discharge status. It’s important that these borrowers or their representatives respond to each one of these notices, or run the risk of having the loans reinstated.
The government will continue to identify eligible borrowers on a quarterly basis. So, if you or a family member suffers from a disability, pay extra attention to any communications from the department. You can also visit DisabilityDischarge.com to learn more about a total disability discharge.
Potential Drawbacks
While getting rid of Educational loans can be a great relief for many borrowers, it may not make sense in every situation. That’s because when a loan is discharged, the department reports any balance of more than $600 to the IRS.
That amount may be considered taxable income, depending on the borrower’s situation, which means you may simply replace a student loan bill with a tax bill. Before applying for this discharge, you may want to consult a tax professional to understand how it will affect your financial situation.
Even with this consideration, this is another recent instance of the department looking out for borrowers. That’s something all borrowers should be happy about, even if they don’t qualify for loan forgiveness or discharge.
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