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Student loan borrowers who qualify as totally and permanently disabled may receive an automatic discharge of their federal student loans. As a result, some borrowers will no longer need to send in an application to have their loans discharged.
In August of 2021, the Department of Education changed the rules around loan discharges for individuals with disabilities. Anyone with a disability as recognized by the Social Security Administration, or SSA, will have their loans automatically discharged through a data match. A similar system has been in place since 2019 for those whose disabilities are recognized by the Department of Veterans Affairs, or VA.
If your disability is not on file with the SSA or VA, you will still need to apply for a disability discharge of your student loans.
At the time of the rule change, there were 323,000 borrowers with disabilities who received automatic loan discharges. Future borrowers with total and permanent disabilities on file with either the SSA or VA will automatically qualify, but they can opt out if they prefer to do so.
For those that do receive a loan discharge under the program, there won’t be any federal taxes owed on the forgiven loans, but there may be state taxes to pay.
What is a disability discharge?
Total and permanent disability discharge is a type of student loan forgiveness for borrowers who cannot work due to a physical or mental impairment.
To be granted forgiveness, you have to prove that you’re unable to work (characterized as substantial gainful activity) due to a physical or mental impairment.
Disability discharge rules during COVID
Typically borrowers must provide annual earnings documentation for three years after discharge. If your annual earnings exceed state poverty guidelines for a family of two (regardless of actual family size) your loans can be reinstated.
However, the Department of Education announced on March 29 it would not require borrowers undergoing post-discharge monitoring to submit annual earnings documentation during the COVID-19 emergency. The change is retroactive to March 13, 2020 and ensures borrowers will not have their loans reinstated for failure to provide earnings information — the reason most reinstated discharges occur, according to the education department.
That policy, the Education Department said in August, will be extended indefinitely. The department also aims to completely eliminate the three-year monitoring period currently mandated by law.
What’s needed for total and permanent disability discharge
Depending on your situation, you must supply documentation to support your claim from the U.S. Department of Veterans Affairs, the Social Security Administration or a physician. Here’s what you need from each:
From the U.S. Department of Veterans Affairs: The VA provides documentation to show you’ve received a VA disability determination stemming from your time in service. The process is automatic, but you can opt out. One reason you might opt out is if your state considers the amount discharged as income and the cost outweighs the benefit. Find out from your state tax office.
From the Social Security Administration: Similar to the VA, the Education Department uses a data match with the SSA to identify any federal student loan borrowers with total and permanent disabilities. You can also opt out of this discharge if the costs outweigh the benefits.
From your physician: Your physician must sign your application and provide documentation to back up the claim that your impairment meets at least one of the following requirements:
It’s expected to result in death.
It has lasted continuously for a period of 60 months or greater.
It’s expected to last for a continuous period of 60 months or greater.
Which loans qualify for total and permanent disability discharge?
The following loans can be forgiven under total and permanent disability discharge: federal direct loans, loans through the Federal Family Education Loan Program, Perkins loans and a TEACH Grant that requires a service application.