Nov 28, 2016

Action Needed Before Inauguration Day

     From Michael Hiltzik writing in the Los Angeles Times:
The Department of Education and the Social Security Administration jointly are doing yeoman’s work in identifying about 387,000 severely disabled and insolvent Americans saddled with federal student debt they can’t repay and informing them that the law allows their loans to be forgiven. But one agency still needs to act to make sure these people aren’t hit with a tax penalty when that happens: the Internal Revenue Service.
Thus far the IRS has been silent, even though Sen. Elizabeth Warren (D-Mass.) tried to poke it awake last month with a stern letter. Time may be getting short, because the election places the White House and both houses of Congress in the hands of a Republican Party that often has displayed disdain for the plight of people on disability.
 The affected persons have been judged to be totally and permanently disabled and to have annual income below the federal poverty level for a family of two, or less than about $16,000. About 80% of those in this category of disability had zero earnings in 2014, according to the Social Security Administration; of the 16% who report any earnings at all, the average is about $8,000. Their median net worth is $200 — and that might even be an overstatement. But their average student loan balance is $18,000. About half already are in default on their loans, the Education Department says. Under federal law, as disabled and insolvent borrowers they’re eligible to have their federal student loans zeroed out.
But few of the eligible borrowers have been taking advantage of the law. Some may have been dissuaded by the Education Department’s demand for extensive documentation of their medical condition. Some may not even have known about the law.
In April, the Education Department and Social Security Administration got proactive by matching up their databases to identify permanently disabled borrowers, whose medical records are kept by the latter agency. Eligible borrowers were to get a letter explaining their eligibility for loan forgiveness and a streamlined application form. ...
The problem is that under federal tax rules, the balance on forgiven debt can count as income — and the Education Department’s discharge of a loan triggers automatic notification to the IRS....
Even if the recipient owes no taxes — and many of them have virtually no taxable income — they may end up hearing from IRS collection agents or even facing an audit. ...
Warren tried to goad the IRS into issuing a no-action guideline for these borrowers — a blanket rule that tax on student loan forgiveness for the severely disabled should be presumed to be waived. That would avert unnecessary pain for the borrowers and the government agencies alike, she observed.
     By the way, on September 15, 2014, I called on Social Security and the Department of Education to do a database match and automatically cancel the federal student debt for as many of the disabled as possible. A database match program to do exactly what I called for was announced on April 12, 2016. I'd like to think I deserve credit for coming up with this idea but who knows. It should have been obvious to Social Security and the Department of Education without anyone from the outside suggesting it. I don't know why they took so long to do it.

15 comments:

Anonymous said...

The 2016 database match did NOT automatically cancel student loan debt. It could not do so, because that would create a tax burden on people whose debt was discharged.

The people matched via database were those with "medical improvement not expected" CDR calendars, which automatically qualifies them for Total and Permanent Disability discharges under Department of Education rules. They were sent notices telling them they could apply for TPD discharges and that there were tax consequences to doing so. Some people chose to apply, while others are waiting to see if the tax rules change.

Athena said...

The IRS does allow individuals to claim insolvency as a reason to not pay taxes on forgiven debts, and many of those whose loans are forgiven would qualify for the insolvency exclusion. The problems are 1) disseminating that information, and 2) helping people who can't file a return without help to properly claim insolvency

AKM said...

These people would do well to use the IBR or Income Based Repayment plan for Federal Loans. This program uses the TAXABLE income for people to determine the monthly repayment amount. If the taxable income is ZERO then the monthly payment amount is ZERO. For people with an SSDI benefit as their only income, and if that benefit is under $25,000 then their only income is nontaxable which will result in a zero monthly payment. having the loan forgiven may or may not have a negative effect on their credit score; I wish I knew the answer to that one. I am disabled BUT would not want my loan forgiven as I do not know the effect on my credit, which is something I do not want effected in a negative way. Randomly acting to cancel someone’s student debt may have negative consequences for the individual.

Anonymous said...

I agree with both posts above.

This article is totally inaccurate in stating that someone with a net worth of $200 would owe taxes on a disability discharge.

I would like to see the policies changed here, but in the meantime, the LA Times would do a lot more good in the world by informing people about IRS insolvency exclusions and/or Income based repayment plans.

____________________________

p.s. I could be wrong, but I do not think disability discharges affect credit scores.

Lance Moon said...

Hi,
There must be a law relating to the psychological injury, and must comes under the personal injury law cases. The state must deal a case of psychological injury as a personal injury, where the accused must be punished a rigorous imprisonment for at least seven years though it can be increased according to the crime committed by the accused if he found guilty. If the law exists then please let me know about it by replying to my post.
Thanks

Anonymous said...

2:27 pm, " helping people who can't file a return without help to properly claim insolvency". So the people that have education loans can't figure out how to file a return? What kind of education did they borrow money for???

Anonymous said...

@2:27 Law School!

Anonymous said...

@2:27, thanks for the hearty LOL!

Anonymous said...

I dont think many people are using this option because they arent being identified by the SSA/EDU. I sure know I wasnt contacted. Nobody seems to be able to tell me why, either. Ive been on SSDI for 10 years now.

Athena said...

@9:18, you really think people with mental disabilities that preclude work are necessarily in shape to file taxes, however well-educated they may be?

Anonymous said...

"I dont think many people are using this option because they arent being identified by the SSA/EDU. I sure know I wasnt contacted. Nobody seems to be able to tell me why, either. Ive been on SSDI for 10 years now."

they only contacted people with "permanently" disabled status.

If you were not contacted, you probably don't have this status. it does not matter that you have been on disability for ten years.

So you won't be automatically eligible for a disability discharge.....

BUT you can still get one by having your doctor sign a form that you are totally and permanently disabled.

Anonymous said...

There are numerous instances here in Mississippi where individuals are roped into getting loans to attend classes to train for occupations inappropriate to their skill set or abilities. I met these people when I worked for Legal Services. What kind of education did they get? None. For instance, a man with DUI's on his record and an 8th grade education was talked into taking out a $20,000.00 for truck driving school. In most of these cases, the school got the money, they did not see any of it.
Also, while it never hurts to maintain good credit, disability is knock on your credit in the first place. Lenders like wages they can attach if you don't pay.

Anonymous said...

I did the TPD discharge, after using the IBR option for years. The IBR while great only kicks the debt down the road, and each year you have to re-apply (even tho i'm still disabled and still on disability) and the providers each process those IBRs themselves, so i have actually had my IBR returned to me saying i re-applied too early while navient and fed loans just accepted it and approved it immediately. So IBR is not perfect, it keeps the people in debt, and at risk every year of having to all of a sudden have payments due of hundreds of dollars if the agency in charge screws up or delays the paperwork processing which has happened more than once. So no IBR is not a good option for people with disabilities. Also the ability to have the debt cleared in 3 years versus 20 years is a big difference.

My biggest concern now though is not the IRS because i am insolvent. But i am worried about the 3 year post TPD monitoring period where even a change in my disability review timeline can trigger my loans returning. My concern now is not that my condition will improve (that'd that a miracle and 10 years of FDA trials). IT is that trump and the republicans will now mess with Social Security in a way that either takes disability away completely or changes how the review timelines happen and then BAM i'm still disabled but because a law changed my loans return, and then will IBR even be available with TRUMP as president?

Anonymous said...

1:37 this is a great representation of the real world consequences not intended by the law. Thanks for giving a complete picture. These are the stories that the lawmakers need to hear. It is questionable if they have the heart to listen, but there is hope, even the Grinch had his heart grow this time of year!

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