The Trump administration is implementing a new system that may make it easier for some disabled veterans to erase their student loan debt.
The Department of Education announced last month that it’s working with the Department of Veteran Affairs to identify veterans with service-related disabilities who borrowed federal student loans.
These borrowers will be notified via mail of their potential eligibility and receive an application for a Total and Permanent Disability Discharge, known as TPD discharge. Filling out and submitting the application is the next step borrowers with severe physical impairments can take to erase their student loans.
Under the current law, the Education Department can’t discharge these loans automatically because these borrowers need to provide documentation of their disability. But experts say the new program provides essential outreach to many disabled veterans who may be unaware that they could be released from their legal obligation of repaying their student debt.
The Education Department will now match borrowers on the National Student Loan Data System who have federal student loans or aid through the Teacher Education Assistance for College and Higher Education, or TEACH Grant Program, to the VA’s database.
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According to the Consumer Financial Protection Bureau, there are likely tens of thousands of severely disabled veterans who don’t know they qualify.
“Simplifying the loan forgiveness process and proactively identifying veterans with federal student loans who may be eligible for a discharge is a small but critical way we can show our gratitude for veterans’ service,” said Education Secretary Betsy DeVos in an April statement.
For disabled veterans who borrowed federal student loans, here are few things to know about discharging student debt.
There’s no longer a federal tax penalty for student loans forgiven due to a permanent disability. Prior to the recent federal tax code overhaul in December, forgiven debt from a TPD discharge counted as taxable income. Student loan experts say this caused undue hardship, since many disabled veterans faced a larger tax bill because they qualified for debt relief. For instance, there was a highly publicized account last year of a disabled veteran who owed more than a $60,000 tax bill on a $223,000 debt discharge.
Borrowers whose student loans are forgiven after Dec. 31, 2017, due to death or total and permanent disability no longer have to pay federal income taxes on forgiven loans.
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Mark Kantrowitz, a college admissions and financial aid expert, adds that the tax-free benefit is likely also to apply at the state level. “To the extent that state income taxes base income on the federal definition, this will also exclude such discharges from income at the state level. Of course, borrowers should check with a tax preparer to be sure,” he says.
Veterans identified as eligible for a TPD discharge don’t have to submit supporting documentation. Veterans who have been contacted about their TPD discharge based on information provided by either the Social Security Administration or the VA don’t have to provide supporting documentation showing that they’re totally and permanently disabled, according to DisabilityDischarge.com, a website serviced by Nelnet Inc. on behalf of the Department of Education. These veterans qualify for TPD discharge because of a service-connected disability that is 100 percent disabling, or they’re totally disabled based on an individual unemployability rating.
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The DisabilityDischarge.com website instructs: “If we contacted you regarding TPD discharge based on information we received from the VA, you do not need to submit documentation with your application.”
Applicants can begin the process online. While the Department of Education will be sending identified veterans information about TPD discharge and application via mail, qualified borrowers can still begin the process online before being notified — although they may have to submit supporting documentation on their disability, experts say.
“For federal loans, you can complete and submit the application for Total and Permanent Disability Discharge right away or on your own through DisabilityDischarge.com,” says Andrew Josuweit, CEO of Student Loan Hero, a company that combines tools with financial education on student loans. “If you’re disabled and have private loans, I’d recommend you contact your loan servicer and explain your situation. Some private lenders, but not all, offer student loan discharge in the case of disability.”
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What Veterans Need to Know About Student Loan Discharges originally appeared on usnews.com
