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Posted: April 14, 2016

How to qualify for Obama's new student loan forgiveness initiative

ANN ARBOR, MI, - JANUARY 27: Students cheer as U.S. President Barack Obama appears at the University of Michigan January 27, 2012 in Ann Arbor, Michigan. Obama spoke about college afoordability to the crowd of more than 3000 students, saying that he is pressuring Congress for new initiatives. (photo by Bill Pugliano/Getty Images)
Bill Pugliano
ANN ARBOR, MI, - JANUARY 27: Students cheer as U.S. President Barack Obama appears at the University of Michigan January 27, 2012 in Ann Arbor, Michigan. Obama spoke about college afoordability to the crowd of more than 3000 students, saying that he is pressuring Congress for new initiatives. (photo by Bill Pugliano/Getty Images)

By Constance Brinkley-Badgett

The Obama administration announced Tuesday a plan to forgive $7.7 billion in federal student loans held by an estimated 387,000 permanently disabled Americans, of which roughly half, 179,000, are in default.

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While the administration tried to streamline the discharge of student loans for the permanently disabled four years ago, few eligible borrowers took advantage. Now, the Department of Education is starting to identify and contact eligible borrowers to help them take the necessary steps to discharge their loans.

“In 2012, the administration took steps to streamline the process to allow for Americans who are totally and permanently disabled (TPD) to use their Social Security designation to apply to have their loans discharged. But too many eligible borrowers were falling through the cracks, unaware they were eligible for relief,” U.S. Education Undersecretary Ted Mitchell said in a prepared statement. “Under the new process, we will notify potentially eligible borrowers about the benefit and guide them through steps needed to discharge their loans, helping thousands of borrowers. Americans with disabilities have a right to student loan relief. And we need to make it easier, not harder, for them to receive the benefits they are due.”

Starting April 18, borrowers identified in the match will receive a letter from the government explaining the steps needed to receive a discharge. They will not be required to submit documentation of their eligibility, unlike disabled borrowers who apply for the discharge on their own. Notification letters will be sent over a 16-week period and will be followed by a second letter after 120 days.

The letters will inform borrowers of the tax implications of the discharge, since the government can tax the loan amount forgiven. While the president’s 2017 budget proposal seeks to exclude TPD discharges and other Department of Education loan forgiveness programs from taxable income, it will require congressional action to make that happen.

What to do if you’re eligible but not contacted

Eligible borrowers who do not receive notification from the Education Department can initiate the necessary steps to have their student loans forgiven by following the steps outlined on an Education Department website:

  1. If you are a veteran, you can submit documentation from the U.S. Department of Veterans Affairs showing that the VA has determined that you are unemployable because of a service-connected disability.
  2. If you are receiving Social Security disability insurance or Supplemental Security Income benefits, you can submit a Social Security Administration notice of award for SSDI or SSI benefits saying that your next scheduled disability review will be within five to seven years from the date of your most recent SSA disability determination.
  3. You can submit certification from a physician that you are totally and permanently disabled. Your physician must certify that you are unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that:
  • Can be expected to result in death
  • Has lasted for a continuous period of no less than 60 months
  • Can be expected to last for a continuous period of no fewer than 60 months

Initial notification letters will be sent over a 16-week period and will be followed up with a second letter that will be sent 120 days after the initial letter if a signed application is not received. Notification will also include information to ensure that borrowers understand the potential tax implications of the benefit and can make an informed decision about electing a discharge.

Help for non-eligible student loan borrowers

Defaulting on a loan seriously damages your credit score, and because student loans are rarely discharged in bankruptcy, the debt can haunt borrowers for decades. (You can see how your student loans are currently affecting your credit scores for free on Credit.com.)

There are some options for people who are behind on payments to get back on track, even if forgiveness isn’t an option. To get out of default, you can combine eligible loans with a federal Direct Consolidation Loan, or you can go through the government’s default rehabilitation program. If you make nine consecutive on-time payments (the payments can be extremely low), your account goes back into good standing, and the default is removed from your credit report.

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