Student loans can be quite a burden on any borrower. Discharge of that student loan debt can be very difficult. However, if you have served since you took out certain kinds of subsidized or direct student loans for college or graduate school, you may qualify for a discharge or partial or full forgiveness of your loans. You may also qualify for a discharge if you have become disabled since you attended school.
We will discuss options for discharge or forgiveness for:
- Federal Family Education Loan Program
- Subsidized and Unsubsidized Stafford Loans
- PLUS Loans for Parents
- Federal Direct Loans
- Federal Perkins Loans
Note: These rules apply only to the loans listed above. If you have a private student loan or state loan, these rules do not apply. Not sure whether your loan is a federal loan? Consider these following rules to determine what type of loan you have:
- If your interest rate is above 8.5%, you may have a private loan rather than a federal loan.
- Check the Department of Education’s National Student Loan Data System. Only federal loans are listed in the system.
- Still don't know? Ask your student loan servicer.
How do I request a discharge for total and permanent disability?
All three of the Federal student loan programs allow you to discharge your federal student loans in the case of “total and permanent disability.” Total and permanent disability means that your impairment can cause death or has lasted for 5 years and can be expected to last for at least an additional five years.
The federal loan servicers recognize the disability determination made by the VA. If you already have service-connected disabilities and you have a total rating of 100%, you qualify for a loan discharge under the above federal programs. You also would qualify if you are not rated 100% but have a TDIU (Total Disability and Individual Unemployability) determination by the VA.
If you have a 100% service-connected or TDIU determination, to apply for discharge submit the following to your loan servicer:
- Cover Letter: Stating your application for discharge due to total and permanent disability
- Discharge Application: Total and Permanent Disability
Note: If you have a VA Ratings Decision Letter, you do not need a physician to fill out section four. Write instead: “Not Applicable: See VA Rating’s Decision Letter."
- VA Ratings Decision Letter stating 100% disability or TDIU
- Do not send your application to the same address listed on correspondence from your loan servicer. Call your servicer and ask for the address for "Total and Permanent Disability Applications."
- Some loan services have two addresses: 1) the address provided by the loan servicer when you request a Discharge Application and they send the form to you; and 2) the address provided if you print the form online yourself (linked above). It is not clear that one provides a faster response.
- If you have multiple loan servicers, submit applications for discharge to each servicer.
- When you don’t have a 100% service-connected or TDIU decision, a physician must fill out section four of the application for discharge.
What does the discharge based on 100% or TDIU do?
Once you have been approved for student loan discharge based on 100% service connected or TDIU, your loans will be discharged so you will no longer owe the debt. In addition to not owing the balance on your debt, consumer reporting agencies will be notified.
You will also be refunded any payments that you made after the date you received your 100% service-connected or TDIU determination. Note: This repayment only applies to veterans with the 100% service-connected or TDIU rating. If you are approved for total disability discharge but not based on a 100% service connection or TDIU, you will have a different post-discharge process.
What happens if I get a discharge from a non-100% or TDIU application?
Once you have been approved for total and permanent disability, but your disability is not related to a 100% service-connected rating or TDIU, you automatically enter into a three year monitoring period. This monitoring period is handled by the loan servicer Nelnet for the U.S. Department of Education. During this monitoring period:
- You cannot receive income from employment more than the poverty line for a family of two.
Note: This income limit does not change if your family is larger than two. For 2012, this means no more than $15,130.00 a year, $1260.83/month, $586.43/bi-weekly or $293.21/weekly (in most states - higher in Alaska and Hawaii).
- You cannot receive a new loan under the FFEL, Perkins Loan or Direct Loan Program or a new TEACH Grant.
During this monitoring period you are also responsible for:
- Securing any loan payments made after the loan had been discharged
- Notifying the Department of Education loan servicer of any change in address or phone number
- Providing documentation of annual earnings from employment when requested.
Federal Taxes, the IRS and your Loan Discharge
When a debt is discharged based on TPD, the amount that is discharged counts as income in the year it was approved. You will receive a IRS Form 1099-C after your loan is discharged. It is your responsibility to file your 1099-C with your federal tax return for the year your loan was discharged.
Am I responsible for filing the 1099-C at the beginning or the end of the “post-discharge monitoring period”?
Use this chart to determine when you have to file the 1099-C with your tax return.
Date the Application for Discharge was submitted:
When you have to file your federal tax return:
Before July 1, 2010
File a return at the end of the 3 year monitoring period.
After July 1, 2010
File a return in the year your loan discharge is approved (prior to the 3 year monitoring period).
This is general tax information . You should seek competent tax help to help you file your return. Find free tax help in your area.