Do you qualify for the new student loan forgiveness program?
The federal government has offered student loan forgiveness programs for decades, especially for veterans and individuals who are disabled. However, until recently, these programs have not been easy for borrowers to take advantage of.
This April, the U.S. Department of Education announced a plan to streamline this program. The new program is part of President Obama's "Student Aid Bill of Rights" plan. This plan will forgive around $7.7 billion in federal student loans held by around 387,000 permanently disabled Americans.
In reality, there's not much that's changing with this program. It fits into the Higher Education Act, which already allows for loan forgiveness for borrowers who are totally and permanently disabled. But the big change is that the Department of Education will now be proactively finding borrowers who are eligible for this relief, making it easier for these borrowers to take advantage of the program.
The Department of Education started identifying and reaching out to borrowers on April 18, 2016. They'll be sending a customized letter explaining the steps a borrower needs to follow to complete the discharge process.
Typically, borrowers need to submit documentation demonstrating that they are totally and permanently disabled and, thus, eligible for the forgiveness program. However, borrowers who are identified through this program will not need to submit this documentation. They'll follow a few simple steps to apply for forgiveness after they receive the letter explaining the program.
The notification for this program is set to be sent out over the 120-day period after April 18, 2016. Anyone who doesn't respond to the letter will get a second letter notifying them of this information.
Are you eligible?
It's not hard to know if you qualify for a total and permanent disability (TBD) discharge. There are three ways to qualify:
Veterans can submit documentation from the U.S. Department of Veterans Affairs (VA) showing that the VA has determined you are unemployable because of a service-related disability.
If you're currently receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), you can submit the Social Security Administration's notice of award for your benefits that states that your next disability review will take place in five to seven years from the date of your most recent determination.
You can also submit a certification from a doctor that you're totally and permanently disabled and unable to engage in gainful activity due to a mental or physical impairment that
- Can be expected to result in death,
- Has lasted for at least 60 months, or
- Can be expected to last for at least 60 months.
If you can meet one of these requirements, you may be eligible for forgiveness of the following loan types:
- William D. Ford Federal Direct Loan (Direct Loan)
- Federal Family Education Loan (FFEL)
- Federal Perkins Loan
If you received a Teacher Education Assistance for College and Higher Education (TEACH) Grant, you may also be eligible to have your service obligation discharged. These loans are all federal student loans. Private student loans do not qualify, although you may be able to refinance private loans to a lower interest rate.
What about taxes?
If you receive a letter from the Department of Education about your eligibility for the TPD program, you'll also get notifications of the tax implications of this discharge. The discharge will likely result in a tax bill at the end of the year, since the government can count the discharged student loan amount as income.
While President Obama is working to exclude TPD and other loan forgiveness programs from taxable income, this hasn't happened yet. So be sure to ask when you apply for this process what the tax implications will be in your particular situation.