New Tax Law Closes Student Loan Catch-22

Kristi Khughes May 14, 2018

Borrowers who are considered totally and permanently disabled are eligible to have their federal student loan forgiven.  See page 2 of the December 2014 Disability Law News https://empirejustice.org/wp-content/uploads/2018/05/December-2014-Disability-Law-News.pdf.  In recent years, the Department of Education has actually been working with the Social Security Administration (SSA) to identify borrowers eligible for discharge. But one of the downsides of discharge? The amount of forgiven debt counted as income for tax purposes could cause a borrower’s federal taxes to go up. Some borrowers with disabilities faced financial distress from tax bills because they qualified for debt relief – a Catch-22.


Due to a recent change in federal law, borrowers whose student loans are forgiven on or after Jan. 1, 2018, due to “death or total and permanent disability” no longer have to pay federal income taxes on those forgiven loans. For more detail about student loan forgiveness and the new tax law, see https://www.consumerfinance.gov/about-us/blog/help-here-people-severe-disabilities-struggling-student-loans/?eType=EmailBlastContent&eId=df197fc4-5565-4296-ad57-31a7dd41e620.