On Tuesday, the U.S. Department of Education announced new steps to ensure that student loan borrowers with disabilities receive the loan forgiveness they’re eligible for. As a start, education officials will send out letters to these borrowers next week to inform them about their options.
Back in 2012, the Obama administration moved to make it easier for totally and permanently disabled borrowers to apply to have their student loans discharged through Social Security. But many borrowers aren’t aware they can apply to discharge their loans.
Now, the department will reach out to eligible disabled borrowers to ensure they know about the Total and Permanent Disability (TPD) loan discharge, which was made available through the Higher Education Act. There are 387,000 borrowers with a qualifying disability status who will receive letters from the department to let them know they are eligible. The total loan balance of these borrowers is near $7.7 billion and about 179,000 have defaulted on their loans, according to data released by the department.
“Under the new process, we will notify potentially eligible borrowers about the benefit and guide them through steps needed to discharge their loans, helping thousands of borrowers,” stated U.S. Education Under Secretary Ted Mitchell in a press release. Mitchell referenced a woman with breast cancer who received a loan discharge seven years after her first application.
These changes came after criticism of the way the department handled loan forgiveness for totally and permanently disabled borrowers. A 2011 investigation by ProPublica and The Center for Public Integrity found that the system for discharging loans as an eligible disabled borrower was so “complex” and “byzantine” that many borrowers simply gave up. Through a public records request, ProPublica and The Center for Public Integrity obtained an unpublished 2009 internal report by the federal student-aid ombudsman that showed there was “no formal appeals process” and “no written medical standards for determining disability,” among other problems. The report suggested the department contract out the decisions to SSA or other agencies.
Borrowers with total and permanent disabilities are also plagued by current tax law. Even if they get their debt forgiven, it’s usually taxed, sending disabled borrowers burdensome tax bills — and even though the tax debt is usually a small fraction of the initial student loan debt, this policy effectively makes them trade debt for debt, the New York Times reported in 2014. Although borrowers may be able to reduce their tax burden by providing they are insolvent, it’s a very complicated process, and they may not be able to get rid of the tax debt completely.
The department addresses this issue in its announcement by pointing out that the President Obama’s 2017 budget proposal aims to ensure these discharges aren’t taxable income. In the meantime, the department does have some guidance for paying the tax bill on its website and suggests a couple options.
For example, former loan holders can apply to set up a monthly payment plan through a Form 9465 or can attempt to convince the IRS to allow them to accept an amount as an “offer in compromise.” If basic living expenses take over a substantial part of someone’s monthly income, they can also try to get the IRS to stop collection. Former borrowers can also opt for income-based repayment so that if they are unemployed and have a minimal adjusted gross income on tax returns, they don’t pay anything, at least for 30 years.
The administration has taken other recent steps to assist disabled borrowers. The Student Aid Bill of Rights announced by the president last year pushes the Social Security Administration and the Education Department to work in tandem by ensuring those receiving disability insurance who are eligible for a discharge of their loans don’t have their disability payments garnished. The Treasury Offset Program collects delinquent debts that are owed to federal agencies and the state and thus offsets other federal benefits borrowers receive.