We all know life is uncertain and even if we don’t wish for it, unforseen medical troubles can hit anyone of us. But what happens to our student loans if we are stuck by a physical or mental disability? Paying off a loan becomes near to impossible in such a case. A student debt acts as an added financial burden along with medical expenditures for someone suffering with impairment. That’s when Student Loan Forgiveness Programs come into picture and help a student borrower to come out of debt.
While there are student loan forgiveness programs available to both kinds of student loans; federal student loans are much more advantageous for such forgiveness programs. This is mainly because federal student loans qualify for the student loan forgiveness and discharge plans offered by the federal government which cover borrowers of different kinds under the varied programs that it offers.
Discharge of Federal Student Loan
Discharge of a loan means when the borrower is no longer liable to repay one’s loan. In other words, the loan is cancelled and the debt burden is removed. In the US economy, discharge of loan is generally associated with student loan, home loans and mortgages. However, discharge of a loan does not necessarily imply bankruptcy. There can be some other reasons as well for discharge of loan. The Federal Student Aide, an office of the US Department of Education offers for forgiveness, cancellation and discharge of student loans under different circumstances to help student borrowers in genuine need.
Other than discharge for bankruptcy, an individual might be eligible for a discharge if he/she withdrew from school but the school did not pay a refund that it owed to the U.S. Department of Education or in some cases, to the lender. There is another plan called The Federal Perkins Loan Cancellation that applies to individuals who perform certain types of public services or certain types of occupations such as Teacher, Member of the U.S. armed forces, Nurse or medical technician et cetera. Also, an individual with Federal Student Loan might qualify for Total and permanent disability discharge programme if they are incapable of arranging in any gainful activity because of physical or mental impairment.
Permanent Disability Loan Discharge
An individual with William D. Ford Federal Direct Loan programme loan, Federal Family Education Loan programme loan or Federal Perkins Loan might qualify for Total and permanent disability discharge programme if they are incapable of arranging in any gainful activity because of physical or mental impairment. However, they are certain conditions for such impairment, such as the impairment has lasted or can be expected to last for 60 consecutive or is expected to end up in death.
For an individual’s federal student loans to be discharged, he/she needs to provide information to the US Department of Education to prove one’s permanent disability. It is only after proper evaluation of that information that the US Department of Education discharges the loan. Veterans looking for such a discharge facility have to produce documents from the US Department of Veterans Affairs showing that the department has recognized that the individual is suffering from a disability to work.
To apply for Total and Permanent Disability Discharge Program, one needs to reach the Nelnet Total and Permanent Disability Servicer via a call, email or online application. Nelnet will provide further information on how to apply for a TPD discharge of loan. Nelnet will also direct the loan holder to suspend the receipt of payment for a period of up to 120 days. The Education Department will then decide for discharge of loan on the basis of the honesty of the borrower’s claims.
What comes as a shock after discharge of student loan is the tax implication that follows such a step. Amount of discharge of student loan is considered to be taxable income. The borrower needs to prove his/ her hardship in paying the tax bill in order to get it reduced by the agency imposing tax. There is also a provision for monthly payments of the tax bill by filling form 9465. A lump-sum payment made to the IRS can also be requested as a payment made as ‘offer in compromise’. The tax liabilities that student loans discharge carry, is sometimes referred to as government’s way of giving from one hand and taking away from the other. Therefore, it becomes important for the borrower to analyse the terms and conditions before availing the benefit of discharge of student loan.
No one can predict what future holds in store. The most we can do is to secure ourselves against foreseen complications. Similarly, while availing student debt, a prudent borrower must take into consideration worst possibilities that one might be forced to face in future. One such possibility is permanent mental or physical disability. As mentioned above, while federal student aide provides an effective solution to overcome debt in case of such impairment, the solution comes with a heavy tax liability which must also be considered well in advance. However, the Federal government is taking measured to reduce this burden and benefit a larger amount of people with each amendment every passing year.