After January 1, 2018 borrowers whose student loans are forgiven due to “total and permanent disability” no longer have to pay federal income taxes on those forgiven loans. Anyone who is permanently disabled, including military veterans, will no longer be hit with a tax bill when their student loans are eliminated (referred to by the IRS as ‘forgiveness of debt’).
The Bad News in the 2018 Tax Law:
Unfortunately, the change is not retroactive. This is all part of a massive overhaul of the tax code spelled out by the Tax Cuts and Jobs Act. Those borrowers whose loans were forgiven before January 1, 2018 will still have to pay the taxes (as ordinary income); but should talk to their accountant to see if there are other exceptions (see IRS form 982).
Note: according to the U.S. Government Accountability Office, the Department of Education forgives about $2 billion in loans owed by disabled borrowers every year.
Who can be considered Disabled?
Veterans who cannot work as a result of service-related injuries aren’t the only disabled borrowers who can qualify for federal student loan forgiveness. Anyone who’s receiving disability benefits from the Social Security Administration, or has been certified as “totally and permanently disabled” by a physician, may qualify.
Seniors Social Security Seized to Pay Student Loans:
Issues for older borrowers (age 50 and older) who default on federal student loans and must repay that debt with a portion of their Social Security benefits often have held their loans for decades and had about 15 percent of their Social Security benefit payment withheld.
