Advocates will recall that in 2012, the Department of Education amended its regulations governing discharge of federal student loans based on total and permanent disability. See the December edition of the Disability Law News, here. But not all disabled borrowers were aware of or able to take advantage these provisions.
As part of the March 2015 Presidential Student Aid Bill of Rights Memorandum, President Obama required the Secretary of Education and the Director of the Office of Management and Budget, in consultation with the Commissioner of Social Security, to develop a plan to identify federal student loan borrowers who receive Social Security Disability Insurance (SSDI) and determine which beneficiaries qualify for a total and permanent disability discharge of their student loans. In April, the Department of Education announced it will begin contacting borrowers identified by this match to inform them of the loan cancellation process.
Of the people the Department identified, over 100,000 of those borrowers have been certified for the Treasury Offset Program, meaning that they are at risk of losing federal tax refunds, and of having a portion of their Social Security benefits taken. While the new matching program is intended to help SSDI recipients apply for this relief, it will not automatically stop those offsets from occurring. Borrowers still need to apply for relief. A Department of Education website includes information on how to get a “total and permanent disability” discharge of federal student loan debt. There is also an online application. http://www.disabilitydischarge.com/Application-Process/.
Proving Total and Permanent Disability
A challenge to discharge faced by disabled borrowers is proving their disabilities are total and permanent. While the new matching program will help, some borrowers may still need to demonstrate status. A borrower must submit either a physician’s certification, or an SSA notice of an award for SSDI or SSI benefits indicating that the borrower’s scheduled disability review will be within five to seven years. Advocates familiar with SSA’s Continuing Disability Review (CDR) process will recognize these time frames as associated with the classification of the impairment for which benefits were granted. See 42 U.S.C. §§421(i) & 1382c(a)(3)(H)(ii); 20 CFR §§ 404.1590(c) & (d), 416.990(c) & (d), which defines the categories:
- Medical Improvement Not Expected (MINE) cases: SSA will review once every 5 to 7 years.
- Medical Improvement Possible (MIP) cases: SSA will review once every 3 years.
- Medical Improvement Expected (MIE) cases: SSA will review 6-18 months following finding of disability.
If not identified through the matching program, finding out how an impairment has been classified can be challenging. If the SSA notice of award does not indicate when the next scheduled disability review will occur, this information is available by calling the local SSA office or by calling 800.772.1213 and requesting a Benefits Planning Query. The Benefits Planning Query will show when the next review is scheduled to occur. The CDR date can also be tracked down in the Disability Determination Transmittal completed around the time an ALJ decision is issued, which might be accessible in the electronic file. The “Diary Code” is included in Box 17. Information about Box 17 and the various codes can be found at https://secure.ssa.gov/poms.nsf/lnx/0426510020.
What about those MIE cases that are not reviewed in a timely fashion? The preamble to the original Department of Education regulations suggests that if a borrower originally classified as MIP or MIE is able to demonstrate that s/he has nevertheless remained on disability benefits more than five years without a CDR and has not performed substantial gainful activity, the loan may be dischargeable. See 70 Fed. Reg. 212, 66,088 (Nov. 1, 2012).
Tax Consequences of Student Loan Discharge
Yet another wrinkle with student loan discharges involves potential tax consequences. The canceled debt may be taxable. Depending on the borrower’s circumstances, dealing with cancellation of debt issues can be very complicated. Some exceptions to taxation may apply, such as insolvency – where a borrower’s debts exceed his or her assets. The insolvency test treats all assets the same; therefore, borrowers who own homes and cars out right are unlikely to be insolvent even though that asset is not liquid.
The National Consumer Law Center (NCLC) has been advocating that taxing these discharges is grossly unfair to some of the most vulnerable student loan borrowers. NLCL reports signs of hope. The President’s budget proposed to eliminate the taxation of all loans forgiven or canceled due to a U.S. Department of Education program, including disability and death discharges. There is some movement in Congress as well, with a bi-partisan bill pending in the Senate.
Borrowers whose loans are discharged and later receive a 1099-C should be sure to seek competent tax advice. Unfortunately, resources are woefully lacking for low-income borrowers. The IRS has indicated that cancellation of debt issues for student loan debt are out of the scope of its Volunteer Income Tax Assistance (VITA) programs (which provide free tax preparation servicers for low-income taxpayers). In some circumstances, low-income borrowers may be able to seek assistance from Low Income Tax Clinics.