Total and Permanent Disability Discharge
If one becomes totally and permanently disabled, they can have their Direct Federal Student Loan, Federal Family Education Loan (FFEL), or Federal Perkins Loan forgiven from repayment, or service obligation forgiven for a Teacher Education Assistance for College and Higher Education Grant (TEACH). For simplicity all are referred to here as Federal Student Loan, but everything applies to any form of these Federal programs.
In order to quality, the borrower must show they are totally and permanently disabled. There are three ways this can be established.
If the borrower is a veteran they can provide a VA Disability Determination showing they have a service related total disability or they are totally disabled based on an individual unemployment rating.
If the borrower is eligible for Social Security Disability Insurance or Supplemental Security Income, the borrower can provide a copy of the SSA Award Notice or the Benefits Planning Query if it shows the next scheduled disability review is at least 5 years from the date of the last disability determination.
Qualification and also be established by having a treating doctor certify on the application for Total and Permanent Disability Discharge that the borrower is unable to obtain gainful employment due to a physical or mental impairment that can be expected to result in death, has lasted for at least 60 months continuously, or can be expected to last at least 60 months continuously.
To apply for forgiveness of their Federal Student Loan though Total and Permanent Disability Discharge, the borrower or someone on authorized by the borrower to act on their behalf must complete and submit an application along with the documentation to establish the total and permanent disability of the borrower as described above to the U.S. Department of Education.
Collection on the borrower’s student loan debt can be suspended during the application process. Upon contacting the U.S. Department of Education that the borrower wishes to apply for relief under Total and Permanent Disability Discharge and confirmation of the borrower’s identity and existence of a currently outstanding Federal Student Loan, collection will be suspended for up to 120 days so the borrower or the borrower’s representative can complete the application and obtain the required documentation to establish the permanent disability of the borrower and submit them to the U.S. Department of Education.
After the application and supporting documentation has been properly submitted, payments on the loan will be suspended while a determination is being made regarding the discharge of the debt. This means no payments will have to be main on the loan and the loan will not go into default due to nonpayment during the evaluation of the application.
If the loan in already in default and subject to wage garnishment the garnishment will continue during the process. However, if the Total and Permanent Disability Discharge is approved, the wage garnishment will be lifted.
Relief can be granted and the borrower’s Federal Student Loan is forgiven under Total and Permanent Disability Discharge subject to a monitoring period of 3 years if the borrower’s qualification is based on SSA Award or certification by a treating doctor. If during this monitoring period the borrower no longer meets the requirements to receive loan forgiveness under Total and Permanent Disability Discharge the loan and repayment requirement will be reinstated.
A Parent who has taken out a PLUS loan to help pay for their child’s education can also apply if the parent rather than the child who the loan was for, becomes total and permanently disabled. The student child’s disability is not applicable with regard to forgiveness of a PLUS loan as the parent rather than the student is considered the borrower.
The amount of the loan forgiven under Total and Permanent Disability Discharge may be subject to taxes as income up to 25% of the balance of the loan. This would be included in the tax year that forgiveness is received. For those who are disabled, this tax liability could be severely detrimental. In some situations, it may be of greater financial advantage for a borrower to retain the debt longer under an Income Driven Repayment Plan instead of having the debt forgiven immediately under Total and Permanent Disability Discharge. While there would still be a large tax liability at the end of the repayment period, it would put off such liability from immediate upon the Total and Permanent Disability Discharge forgiveness to 20 to 25 years in the future depending on the particular Income Driven Repayment Program plan.
34 CFR §685.213
Federal Student Aid, U.S. Department of Education, If you’re totally and permanently disabled, you may quality for a discharge of your federal student loans and/or Teacher Education Assistance for College and Higher Education (TEACH) Grant service obligation (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/disability-discharge#show-disability)
Federal Student Aid, U.S. Department of Education, Total and Permanent Disability (TPD) Discharge (https://disabilitydischarge.com/default)
Federal Student Aid, U.S. Department of Education, In certain situations, you can have your federal student loan forgiven, canceled, or discharged (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation)
Anderson, Tom, Student loan forgiveness can come with a tax bomb, CNBC, September 11, 2016 (https://www.cnbc.com/2016/09/09/student-loan-forgiveness-can-come-with-a-tax-bomb.html)