Will My Student Loans Be Forgiven if I'm Approved for Disability Benefits?

Question

I've applied for Social Security disability benefits due to breast cancer. If I'm approved, can I get my student loans forgiven?

Answer

If you have federal student loans, you may be eligible to have your loans cancelled through a "total and permanent disability" (TPD) discharge. A discharge means that you don't have to repay the loans (with some exceptions—see below).

Which loans are eligible for discharge? You can get a TPD discharge for William D. Ford Federal Direct Loan Program loans, Federal Family Education Loan (FFEL) Program loans, Federal Perkins Loans, or Teacher Education Assistance for College and Higher Education (TEACH) Grant service obligations. Other loan programs and private loans have their own discharge rules.

Who is eligible for a discharge? The rules for a federal TPD discharge are similar to Social Security's eligibility rules, but more difficult to meet. Being approved for Social Security disability benefits does not necessarily mean that you will be approved for a TPD discharge. Here are the rules (note that the federal loan discharge rules changed significantly in 2010):

You must be unable to do any "substantial gainful activity" (work involving significant physical and/or mental actives) because of a medically determinable physical or mental impairment that has lasted 60 months, can be expected to last for 60 months, is expected to result in death, or is due to a 100% military-service-connected disability.

There are two differences between this definition of disability and Social Security's. First, Social Security requires that your inability to work last, or be expected to last, only one year, not five years. Second, Social Security doesn't automatically grant disability for service-connected disabilities.

However, those who receive a Social Security disability award with a five to seven year review date, meaning that they are classified in a group called "Medical Improvement Not Expected" (MINE), should automatically qualify for a federal loan discharge.

How do I apply for a discharge? To apply for a TPD discharge, you must complete a TPD Discharge Application and have your doctor certify that you are disabled. Your doctor has to fill out a section of the application stating your diagnosis, the severity of your condition, and the limitations caused by your condition. You submit the application to your loan servicer; you must submit an application for each loan holder. (To find out who your loanholder is, see Nolo's article Who Is Your Student Loan Holder?)

Are any negative effects of applying for a discharge? If you are approved for a total and permanent disability discharge, you are subject to a three-year monitoring period during which your income is monitored. If you have over a certain amount of income during this period (not counting disability payments), your obligation to repay the loan may be reinstated. The level of income allowed is your state's poverty guidelines for a family of two.

In addition, you will have to jump through a few hoops to get federal student loans in the future, and if you request a new loan within three years of your discharge, you have to resume payments on the discharged loan.

Lastly, you may be taxed on the amount of the discharged loans.

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