Total and Permanent Disability Discharge is available to borrowers of federal student loans who are disabled and therefore unable to participate in gainful activity—employment—due to a substantial physical or mental impairment. This type of discharge provides borrowers with relief on their student loans by forgiving the debt entirely.
However, you must be able to prove to the Department of Education (DoE) that you are, in fact, permanently disabled and unable to work. It is important to learn the steps necessary to prove your permanent impairment.
Proving Permanent Disability
A few different options are available to prove that you are permanently disabled and therefore eligible for federal student loan forgiveness.
You can submit your documents from SSDI or SSA to the DoE, and they will review your case on an individual basis. The notice must not only state that you are permanently disabled, but that your next review will take place within the next five to seven years. Unfortunately, if your next review is set to take place in less than five years, you will be ineligible.
Your physician can submit a certified form stating that you have a permanent disability. They need to state exactly what your disability is, how long its expected to last, and whether he or she believes you are unable to work due to your impairment.
In addition, if you are a veteran and your disability was service-related, the Veterans Affairs office can provide additional documentation to make a better case for you.
Your disability must have already lasted or be expected to last at least 60 months. If it is expected to ultimately result in death, such as a terminal illness, this will also allow you to receive the disability discharge.
The first step in the process is gathering the documentation that will be used to prove your permanent disability.
Once you apply, the DoE will contact your lenders and stop all collection activity on your federal student loans until they have reviewed your case and made their decision. The DoE will closely examine your application before giving you a response. A determination is made within three to five months. It could be slightly less or more, depending on the amount of files they have to work through at the time.
If you are approved, the DoE will soon be in touch with your lenders. They will provide instructions that your loans are being discharged. Any money paid to you since your disability began significantly impacting your life will be returned to you as well.
If you are denied, the DoE will instruct your lenders to continue collecting your loans. They will also send you a letter explaining why you have been denied.
Stipulations to Keep in Mind Should Your Loans Be Discharged
When applying for a disability discharge, you must take several factors into account.
You cannot apply for student loans without first obtaining a letter from your physician that you are now able to engage in substantial gainful employment. You also need to fill out a statement of acknowledgement stating that you understand that your new student loans cannot be discharged again based on any illness you had before you took out the new loans. Any new disabling condition means that you can reapply for disability discharge.
Your discharged loan balance can be reported to the IRS as taxable income during the year they have been discharged, if the amount is greater than $600.
In our experience helping permanently disabled people, we have found that many prefer not to discharge their student loans, due to the tax bills they receive.
A better option for many permanently disabled borrowers is to enter into the William D. Ford Direct Loan program. When a borrower consolidates their loans into this program, they are able to choose an income-based repayment (IBR) plan that can be much more beneficial.
Firstly, the IBR program will give you a monthly payment based on your income and not on your loan size. For those who are disabled and therefore not able to work, this is typically a payment of $0.00 per month. Rather than discharging this loan and receiving the resulting tax bill, the monthly payment will be $0.00 for 25 years, assuming that you will be disabled for that entire time.
Both the Direct Loan and IBR programs offer loan forgiveness after this term is up. If you are certain that you will be disabled for 25 years or more, entering into this program may be the best choice for you, since it will provide forgiveness on your student loans but delay your tax bill for a significant number of years.
The IBR program, however, recalculates your payment annually. This means that if you start working and begin earning a significant income, your new monthly payment will be based on your income. You are also required to annually reapply for the IBR program and submit your income documents, or self-certify that you are not working and don’t have any taxable income to claim.
If you know that you are permanently disabled and you can obtain the necessary documentation to prove it, please remember that there are options available to you to help with your federal student loans. If you believe you are prepared to apply, give us a call to learn more or to get started. We can assist you with the process.