For many borrowers, the idea of student loan forgiveness is
too good to be true. And that’s because it often is.
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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.
