President Trump has scared a lot of student loan borrowers with his proposed changes to various student loan forgiveness and repayment programs. However, Trump’s student loan proposals aren’t law – so while borrowers need to be vigilant, they shouldn’t change their plans based on proposals. So far in his presidency, there has only been one major change for borrowers – and it’s surprisingly positive.
With President Trump’s Tax Cuts And Jobs Act (the new tax law that went into effect on January 1, 2018), he changed a key student loan law that made death and disability discharge tax free. This is a big deal for the borrowers who are impacted by death and disability discharge, and let’s break down why.
How Death And Disability Discharge Works
Federal student loans have a provision where, in cases of death or permanent disability, your student loans are discharged. In the case of death, the idea of discharging student loans is pretty clear cut.
However, in the case of disability, student loan discharge is harder to come by. The Department of Education outlines the steps to disability discharge here, but in general, it requires that you demonstrate that you are totally and permanently disabled. This can be done in the following ways:
- You have a service-related disability and the Department of Veterans affairs certifies that you are 100% disabled
- You are receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits and that your next scheduled disability review will be within 5 to 7 years from the date of your most recent SSA disability determination
- Your doctor certifies that you are permanently disabled with a condition that has lasted for at least 60 months and will continue to last for at least 60 months
Given that, in these disability situations, there is no likelihood you’d be able to repay your student loans, it makes sense your loan would be discharged.
The Tax Implications Of Student Loan Discharges
In general, any debt forgiven or discharged in the United States is considered ordinary income for tax purposes. What this means is, if you have $100,000 in student loan debt discharged, you’d receive a 1099-C and would have to report the debt forgiven as income. This can have huge tax consequences for borrowers.
For example, if you have $50,000 in student loan debt forgiven or discharged, you could see your tax bill rise by $10,000 or more! And this is technically for income you never earned – so coming up with the money for the tax bill might be impossible.
Considering that borrowers who are disabled have little to no income, this would be an impossible bill to pay. And while there are “loopholes” like insolvency, it might not apply to all, and it would require professional tax preparation to figure it out. More costs for an individual who likely can’t pay.
A second area of pain was for Parent PLUS Loan borrowers who’s child died. With Parent PLUS Loans, parents take out loans to pay for their children’s education. If the child dies, the loan is discharged, but the parents would be on the hook for the income resulting from the discharge. So, not only would a parent have to deal with the loss of a child, but they would have to deal with a huge tax bill as a result. This was one of the reasons why we don’t recommend parents borrow to pay for their children’s college.
However, as of January 1, 2018, President Trump made Death and Disability Discharge tax-free. This is a huge win for borrowers in this situation.
The Benefit Impact For Disabled Student Loan Borrowers
Another major consideration for disabled student loan borrowers is benefit eligibility. Most disabled student loan borrowers receive Federal and state benefits to assist with their care. These benefits are based on income – and if disabled individuals earn too much money, they could lose their benefits.
In cases of disability discharge, prior to the law change, this happened. If a borrower saw $100,000 in student loan debt discharged, suddenly they have $100,000 in income. That would disqualify them from aid programs that are needed for care. This was a significant issue for some borrowers who saw their loans discharged.
With the change in law to allow for disability discharge to be tax free, not only can disabled borrowers get student loan forgiveness, but they don’t have to worry about negative impacts to their benefits as a result.
This Is A Win For Borrowers
The bottom line is that this is a positive change for student loan borrowers. While it doesn’t impact many, those who were impacted suffered serve negative consequences. This change is a step in the right direction, and hopefully allows some borrowers to not worry about the consequences of getting their student loans discharged.