The “total and permanent disability discharge” is hard to get, but it is something that you should definitely consider if you have a very severe disability. Your student loans will also be discharged if you die.
Unfortunately for borrowers, private student loans do not have these protections. You can ask your private lender for relief, but these lenders are not required by law to help you. Some private lender are now offering disability and death discharges. Sallie Mae, for example, announced a total and permanent disabilty program for Smart Option borrowers as well as forgiveness of unpaid balances if a primary borrower dies. Wells Fargo announced a similar program in December 2010.
DISABILITY
Disability Discharge Self-Help Packet
Current Disability Discharge Form (Issued August 16, 2010)
Total and Permanent Disability
As of July 1, 2010, this discharge requires certification from a doctor that you are unable to work and earn money because of an illness or injury that is expected to result in death, last for a continuous period of not less than 60 months or can be expected to last for a continuous period of not less than 60 months (5 years). This is more restrictive than many other federal disability programs, but less restrictive than the prior standard.
In addition, veterans who have been determined by the Secretary of Veterans Affairs to be unemployable due to a service-connected condition qualify for this discharge without having to provide additional documentation from a doctor. The Department has released a letter with more information for veterans applying for this discharge. Veterans that obtain a discharge in this way are eligible for a refund of any student loan payments received by the Department of Education after the effective date of the V.A. determination.
FFEL, Direct and Perkins loans are eligible for the disability discharge. Parents with PLUS loans may apply for discharge based on their own disabilities, not those of their children. If two parents have a PLUS loan and only one becomes disabled, the other parent remains obligated to repay the loan.
The more information you can submit at the outset about your disability, the better. Tell your doctor to be prepared to get follow-up letters and requests from the loan holder and Department of Education. In some cases, your doctor will be given a very short period of time to respond to these requests. The Department says that it is now sending these notices to borrowers to alert them if their doctors are not responding to requests for additional information. If you get this notice, you should contact your doctor as soon as possible.
ALERT: Important changes to the disability discharge program will go into effect July 1, 2013. We will write about those changes closer to the effective date. The Department issued these final rules on November 1, 2012.
You must send the application to the loan holder within 90 days of the date the doctor signed the form. It is a good idea to send by certified mail and get a receipt. You should ask your servicer for the correct address to send the form. If you have a Perkins loan, you should check with the school or whichever entity is collecting on behalf of the school. The school will then send your application to the Department.
This self-help packet will help you apply for a disability discharge.
If you have a FFEL loan, the holder, such as a guaranty agency, will make a preliminary determination. If you make it through this preliminary round, the application will be sent to the Department of Education for further review. If the Department agrees with the preliminary decision, you will get a final discharge if your application is approved. (Prior to July 2010, there was a conditional discharge period).
After a final discharge, the Department will continue to evaluate you for three years and can reinstate the loan in certain circumstances. The three year period begins on the date the discharge was granted. Your loan will not be reinstated as long as you do not take out any new federal student loans or TEACH grants during the three years and as long as you do not have earnings from work that are more than 100% of the poverty level for a family of two. This means that you are allowed to try to work, but if you earn more than this amount, the Department assumes you are not really permanently disabled.
Even though you can work in this limited way during the three year “watch period”, you cannot be working at the time the doctor signs the form. The Department will monitor your earnings during this three year period by requiring you to submit documentation of employment earnings, usually on an annual basis. The Department only considers earnings from work, not from disability, retirement or other “non-work” pay. The Department allows you to submit a number of different types of documents to prove that you do not have earnings above the limit, including:
1. Filed income tax return, with all attachments,
2. Pay stubs showing year-to-date income,
3. W2, or
4. Social Security Statement. (Visit www.ssa.gov/mystatement. You must set up an account to see, download, save and print your full statement of earnings.)
NOTE: According to the Department, if you did not earn income from employment, you can send a letter signed by you or your representative specifying the tax year(s) for which no income was earned.
If you received a disbursement of a federal loan after the date the doctor signed the form, you can still qualify for the discharge as long as you return the funds to the loan holder within 120 days of the disbursement date.
Nelnet, the Department of Education’s servicer for disability discharge applications says that the process can take anywhere from a couple of days to a few months, depending on the completeness of the application and the response time of the physician if it is necessary to contact the physician for additional information. Although the process can take a long time, collection efforts should stop once you submit a completed application until a decision is made.
A final discharge means that the loan is canceled and all payments, whether voluntary or involuntary, received after the doctor signed the form should be returned. You may appeal denials to federal court. You will get a notice of final discharge. The Department is now using newer notices to alert borrowers when discharges are final (end of 3 year monitoring period) and if applications are rejected.
ALERT: The amounts discharged due to disability may be taxable income. The Department says that it is required to report to the I.R.S. the discharge of any debt greater than $600 as income in the year that the loan was discharged, not at the end of the three year monitoring period. However, you may not have to pay taxes. For example, you may be able to claim insolvency status using I.R.S. Form 982. It is a good idea to consult a tax professional for more information.
Check out this policy brief for more information about the tax consequences of death and disability discharges.
Disability Discharge Tips and FAQs
Q: Is it possible to work and still be eligible for a disability discharge?
A: Even though the government may say otherwise, the answer should be yes. You are allowed to earn less than 100% of the poverty line for a family of two during the three year “watch period” after a final discharge is granted. This allows you to explore whether you can get back in the workforce. However, you will not be eligible if you were working at the time the doctor signs the application form.
Q. Can I qualify if I have a disability that prevents me from working in the occupation for which I was trained?
A: Not if you are able to work in a different occupation. To be eligible, your disability must make you unable to engage in any type of substantial gainful activity.
Q: Is evidence of a Social Security or Veterans Affairs disability decision sufficient to qualify for a student loan discharge?
A: For Social Security, no. For V.A., yes, if you have been determined to be unemployable due to a service-connected condition.
Be advised that there will be some changes to these procedures starting on July 1, 2013. The Department of Education announced the most important change when it issued final regulations on November 1, 2012 allowing certain Social Security recipients to apply for the student loan discharge using their Social Security status as proof of disability. This change goes into effect on July 1, 2013.
Q: Does it matter when my disability began?
A: No. Prior to July 2008, doctors signing disability discharge forms had to certify when the disability began. The rules were changed so that doctors must sign that you are disabled as of the date that they sign the form.
Q: Can I apply again if I was denied the first time?
A: Yes. This is more likely to be successful if there was a minor problem the first time around such as the doctor’s failure to fill in his license number. But you can also reapply if you have been able to gather stronger evidence of your disability. If the denial is based on a technical problem, you should also ask if you can correct the problem without having to reapply.
Q: How do I know the reason for the denial?
A: The best way is if the notice explains the reasons. In the past, most borrowers received a notice with a very general reason for denial such as “medical review failure.” You should not assume that “medical review failure” means that your application was denied on the medical merits. You should contact the loan holder or Department of Education Disability Unit and ask for the specific reasons for the denial. The Department says that it is now using notices that list the reasons for denials.
If you cannot resolve the problem informally, the denial may be appealed under the judicial review provision of the Administrative Procedures Act.
Q: How can I prove I’m not working during the three year “watch” period if I am not required to file taxes?
A: The easiest way to prove that you do not have earnings above the allowable limit is to provide a copy of your annual tax return. The Department allows you to submit a number of different types of documents to prove that you do not have earnings above the limit, including:
1. Filed income tax return, with all attachments,
2. Pay stubs showing year-to-date income,
3. W2, or
4. Social Security Statement. (Visit www.ssa.gov/mystatement. You must set up an account to see, download, save and print your full statement of earnings.)
If you are not required to file taxes, the Department of Education says that it will accept a signed, written statement that you are not working and/or that you do not have earnings above the allowable limit.
Q: What happens if I get a final discharge and later want to take out a new federal loan?
A: You will have to get a doctor to certify that you are able to work. You will also have to sign a statement that the new loan cannot be discharged in the future based on any current impairment unless that impairment substantially deteriorates. The Department claims that this will also be required if your loan is reinstated under the new rules that went into effect on July 1, 2010.
Q: Who can I contact at the Department for more information?
A: The Department has set up a Total and Permanent Disability Unit at Nelnet, the Department’s disability servicer contractor. Borrowers can contact the Unit by phone at: 1-888-303-7818, by e-mail at disabilityinformation@nelnet.net, or by regular mail at Nelnet Total and Permanent Disability Servicer, 3015 South Parker Road, Suite 400, Aurora, CO 80014. (This contact information is subject to change. Be sure and check the Department’s disability discharge web site for updates).
DEATH
Your government loans will not survive your death. This means that your estate will not have to pay back your student loans. Also, the death of both parents with a PLUS loan (assuming both took out the loan) is grounds for the “death discharge.” The death of only one of the two obligated parents does not cancel a PLUS loan. A parent can also discharge a PLUS loan if the student for whom the parent received the loan dies.
Discharge because of the borrower’s death (or, in the case of PLUS Loans, the death of the student for whom the parent borrowed) is based on an original or certified copy of the death certificate submitted to the school (for a Federal Perkins Loan) or to the holder of the loan (for a FFEL or Direct Stafford Loan).
ALERT: A death discharge may have tax consequences that could impact the borrower’s estate or surviving parents with PLUS loans if their child dies. However, there are exceptions to taxation, such as insolvency, that may apply. It is a good idea to consult a tax professional for more information.
WARNING FOR PRIVATE LOAN BORROWERS: There is no administrative discharge for private student loans when the borrower dies. Private loan debts will be handled the same way as other debts. That means that they will be part of the borrower’s estate. This estate settlement process (also called probate) varies by state. However, some private lenders will consider discharges in these circumstances.
RSS