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The Bad News About Student Loan Disability Discharge

Posted Feb 27 2013 10:33am
What the .....!

A few weeks ago I wrote about the challenges of chronic illness .  One of the challenges is financial hardships, from huge medical bills to a reduced income potential.  For me, personally, I am currently considered permanently disabled and unable to work due to the symptoms of my multiple chronic illnesses.

Despite my numerous efforts to "get better," I've been disabled for over 8 years now.

When I first became disabled in 2004 with the chronic pain and fatigue of fibromyalgia, I thought my former employer's short- and long-term disability insurances would kick in with disability income so I could keep paying all my bills.  I didn't know back then that the long term disability coverage would terminate after 2 years because it limited benefits for those diagnosed with fibromyalgia.

I appealed their decision, I went through the entire appeals process and was unable to get them to reverse their decision.

I found out the hard way that my safety net had a huge hole in it.  I went from earning a living to living on disability and taking a 61% pay cut. How to continue making my monthly student loan payments became one more boulder on a growing mountain of financial problems.

I was grateful in 2006 for the relief my student loan servicer offered.  I asked for a temporary disability forbearance, i.e., to be able to temporarily stop making my loan payments.  Back then I still hoped my situation might be temporary, that my doctors' would be able to get me back on my feet and working again.

To that end, I diligently followed my doctors' advice and complied with all the things they wanted me to do: take medications, go physical therapy, agree to trigger point injections, schedule deep injections and try acupuncture.

Time passed.  All those treatments my doctors prescribed failed to improve my symptoms.  I rapidly approached the 3 year time limit on requesting temporary disability forbearance. 

My next option with my student loan servicer was loan forgiveness due to total and permanent disability.  At first, I was almost reluctant to take this option, mostly because it seemed like a big declaration of "I'm not ever going to get better!"  But I felt like I had no choice; our budget was already lean and there wasn't any money for us to start making payments again.

This was a separate application process.  I needed to have my doctor complete a form verifying that I was permanently disabled.  Now that filled me with trepidation.  Have you ever needed to ask a doctor to put into writing that you are permanently disabled?  Because when you do, they look at you like you're asking them to admit they aren't able to help you.

Apparently doctors aren't good at stating the obvious.  My doctor initially balked when I asked her, despite the fact that there was absolutely no improvement in my symptoms or functioning over the past five years.  She only agreed after she asked if I was on Social Security Disability.  Somehow knowing I was on SSDI made it O.K. for her to say I was permanently disabled.

I got what I needed.  But to this day I just don't understand the moral dilemma my request presented her.

Now you don't get your loan forgiven overnight if you are totally and permanently disabled.  There is a 3 year conditional discharge waiting period.  Fortunately, student loan payments are suspended during this time.  

I was OK with waiting for 3 years, because if somehow I did improve and was able to work again, I would have gladly started repaying my loan again.  After all, it was my student loans that picked up all the school expenses that my part-time job didn't while I was in graduate school.  Those loans helped me earn a degree that launched my career in social work, a career that I really and truly miss.

At the beginning of last year it was crunch time.  My 3 year conditional discharge period was coming to an end.  There was some very important paperwork I needed to submit to my student loan servicer and I ran into some problems getting it faxed to them.  I needed to resort to snail mail, sent certified, to confirm it got to them.

After the anxiety of filing out forms, getting my doctor to say I was totally and permanently disabled and dotting the i's and crossing the t's on the final paperwork, I got word at the end of Spring 2012 that my disability discharge had been approved.  I thought my worries about my student loans were over.  Thank goodness!

Then I got a 1099-C form in the mail this past January from my student loan servicer.  I wasn't expecting it.  So I did some research and discovered that my discharged student loan debt was reported to the IRS as income.

I don't remember my student loan servicer ever telling me that my discharged loan would be considered income.

So we did our taxes early this year, cringing at the thought that we would owe the Feds and the state money this year.  Money we don't really have.

Sure enough, we have a whole new financial problem on our hands. We are straddled with a new debt, payable on April 15th, that will accrue interest and penalties if not paid on time.  So despite my best efforts, it feels like that mountain of financial problems only keeps getting bigger and bigger.

I guess the only "good" news is that my student loan debt is relatively small, at least compared to the woman featured in this article: New Jersey Woman's Student Loan Debt Creates Tax Nightmare .  And I am not alone in dealing with this; it's my spouse's income that will be getting us out of this latest pickle.

But what can all those other disabled workers with student loan debt like Kim do? How can they be expected to pay huge IRS tax bills when their earning potential is reduced and their savings are spent on medical bills?  Some of them don't even file a tax return because they now live below the poverty line.  Just imagine getting a horrid surprise from the IRS saying you owe taxes on income that, well, you didn't really get when your loan got forgiven!

I know the powers that be want to make defaulting on Federal student loans hard and painful.  In fact, student loans have historically been excluded from bankruptcy proceedings.  But I think you'll agree that when it comes to total and permanent disability there really needs to be some legislative reform on this issue.

This is completely unfair and burdensome to the disabled. (Yes, I is unfair, yada yada, yada.)

At the very least, how about telling folks up front about the tax implications of loan forgiveness?  Or offering to help by spreading the "income" across several different tax years to make the tax burden more manageable?

My unsolicited advice for those of you going through this process RIGHT NOW: talk to a bankruptcy lawyer.  Ask them if you can get your student loans discharged through bankruptcy so you won't get hit with a huge tax bill you can't pay. Because I hate to say this, but depending on the size of your loans and resulting tax bill, you might be filing for bankruptcy anyway...  But hey, take this advice with a grain of salt, because I'm not a lawyer or a student loan servicer, so what do I know?
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