U.S. Discharges Student Debt for Disability; Broad $10K Lags

NerdWallet
Borrowers who qualify for the student loan discharge were identified through a data match with the Social Security Administration, and future borrowers will be automatically identified based on information from the SSA or the VA.

Borrowers who qualify for the student loan discharge were identified through a data match with the Social Security Administration, and future borrowers will be automatically identified based on information from the SSA or the VA. Getty Images

The Department of Education announced Aug. 19 that it would automatically discharge federal student loans for 323,000 borrowers who qualify as totally and permanently disabled. Their debt totals $5.8 billion.

Those who qualify for the loan discharge have been identified through a data match with the Social Security Administration. Previously, individuals with federal student loans had to apply for a loan discharge by sending in documentation of their disability from the U.S. Department of Veterans Affairs, the SSA or a physician.

“Today’s action removes a major barrier that prevented far too many borrowers with disabilities from receiving the total and permanent disability discharges they are entitled to under the law,” said Miguel Cardona, the secretary of education, in a press release. “This change reduces red tape with the aim of making processes as simple as possible for borrowers who need support.”

Future borrowers also won’t have to apply for disability discharges; rather, they’ll be automatically identified based on information from the SSA or the VA. The discharges, current and future, won’t be subject to any federal income taxes, but may be subject to some state income taxes.

The Education Department will also no longer require those with disability discharges to provide earnings information after receiving the discharge. In March 2021, the department reinstated loan discharges for 41,000 borrowers who had been approved for a disability discharge but had their loans reinstated after not providing earnings information.

Loan forgiveness for other borrowers

Cardona, asked about broader student loan forgiveness in a call with the media, said that “process is still underway” as the Department of Education continues discussions with the Department of Justice and the White House.

Earlier this year, President Joe Biden asked Cardona and the Education Department to explore whether he could discharge student loan debt by an executive order. Some Democrats have pushed Biden to cancel up to $50,000 of debt per borrower, but the president has said that he is open to discharging only up to $10,000 per borrower.

Although the White House is still waiting on Cardona, House Speaker Nancy Pelosi has suggested that Biden doesn’t have the power to cancel student debt by executive order.

“He can postpone. He can delay. But he does not have that power,” Pelosi said in a press conference in late July. “That has to be an act of Congress.”

There has been considerable talk of student loan forgiveness for all borrowers, but neither the Biden administration nor Congress has made any concrete plans for broad cancellation.

Nonetheless, the Education Department has provided relief to other borrowers through borrower defense to repayment — a remedy for borrowers defrauded by their schools — since the start of the new administration:

  • In March, the department announced it would extend full relief to borrowers approved for borrower defense debt cancellation, which totaled $1 billion in loan debt for 72,000 borrowers. The previous administration had approved these borrowers for partial relief.
  • In June, the department canceled debt for 18,000 borrowers who had attended ITT Technical Institute, a for-profit chain of schools that closed in 2016, relief that totaled $500 million.
  • In July, the department discharged $55.6 million for 1,800 new borrower defense claims.
  • In August, the department announced it retroactively waived interest on the student loans for 47,000 current and former active-duty service members. Future service members will also automatically benefit from this student loan interest benefit.

Your options when federal student loan payments resume

For the vast majority of borrowers who have not had their federal student loans discharged, payments resume at the end of the forbearance period on Feb. 1.

For those who are struggling financially, the period before the end of forbearance can be used as a trial period. Set aside your monthly student loan bill to get into the habit of making payments, but also to see if you are capable of paying your loan bill in full.

If you’re having trouble setting aside those payments, or if you already know you’ll have trouble making payments come Feb. 1, contact your servicer before payments resume to find a repayment option that works for you. Then, once your payments resume, you will go straight into that repayment plan. Income-driven repayment reduces payments to a percentage of your disposable income, even as low as $0.

Borrowers who are confident they’ll be able to resume making payments come Feb. 1 should consider making payments during the final forbearance extension. Doing so will help pay off loans faster as well as decrease the total interest paid on the loans.

Copyright 2021 Nexstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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