Published on March 1, 2014
Student Loan Discharge Due to Disability Presented to the Social Security Lawyers Section Seminar, February 2014 Presented by B. Thomas Golden
How does this relate to Social Security? Federal regulations changed in 2013 to allow for the discharge of qualified federal student loans if the applicant has a Notice of Award from the Social Security Administration that indicates the case will not be reviewed for at least 5 years. In reality, very few cases have a 5 or more diary date. One Social Security employee stated that 5 to 7 year diary dates are for blind people or those with advanced cancer – things that have a very low probability of getting better. A peek through a pile of award letters showed about 1 in 5 awards will fit in. This was a small sample files and may be way off the mark. Nobody under 50 in my sample had a 5 or more year diary date.
What loans qualify? Federal Student Loans - YES William D. Ford Federal Direct Loan (Direct Loan) Program loans; Federal Family Education Loan (FFEL) Program loans; Federal Perkins Loan (Perkins Loan) Program loans; and TEACH Grant service obligations. Private Student Loans– NO If you are not sure if a loan is federal or private, you can check http://www.nslds.ed.gov/nslds_SA/ or simply call the lender and ask.
What is “disabled?” 28 USC § 1087 The Secretary shall discharge the borrower’s liability on a student loan if a student borrower who has received a loan described in subparagraph (A) or (B) of section 1078(a)(1) of this title Dies, or Becomes permanently and totally disabled (as determined in accordance with regulations of the Secretary), or Is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, has lasted for a continuous period of not less than 60 months, or can be expected to last for a continuous period of not less than 60 months , or has been determined by the Secretary of Veterans Affairs to be unemployable due to a service-connected condition
What is “disabled?” 34 CFR § 682.200 Definitions (each type of student loan has its own regulations in the CFR) Totally and permanently disabled. The condition of an individual who— (1) Is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that— (i) Can be expected to result in death; (ii) Has lasted for a continuous period of not less than 60 months; or (iii) Can be expected to last for a continuous period of not less than 60 months; or (2) Has been determined by the Secretary of Veterans Affairs to be unemployable due to a service-connected disability. Substantial gainful activity. A level of work performed for pay or profit that involves doing significant physical or mental activities, or a combination of both.
Application Process What the regulations say: The borrower or representative must notify the Secretary of the intent to apply for TPD. If you notify a lender, the lender must then direct the borrower to notify the Secretary. Actually a good idea, because the Secretary can determine each lender/servicer and then direct each lender/servicer to suspend collection activity for no more than 120 days. The borrower is told that the stay will end after 120 days and collection will resume on the loans if the borrower does not submit a total and permanent disability discharge application to the Secretary within that time.
Application Process In reality: Call Nelnet, the corporation chosen to administer this program. Call Nelnet at 888.303.7818 from 8:00 a.m. to 8:00 p.m. Email Nelnet at DisabilityInformation@Nelnet.net. Start the process online at https://secure.disabilitydischarge.com/registration If you are going to jump in and represent somebody, you need to complete the Total and Permanent Disability Discharge: Applicant Representative Designation form.
A Little Paperwork
How to Prove Disability The application must contain— (also covered in the Application) An SSA notice of award for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits indicating that the borrower's next scheduled disability review will be within five to seven years OR A certification by a physician, who is a doctor of medicine or osteopathy legally authorized to practice in a State, that the borrower is totally and permanently disabled as described in paragraph (1) of the definition of that term in § 682.200(b) The borrower must submit the application described in paragraph (c)(2)(iv) of this section to the Secretary within 90 days of the date the physician certifies the application OR Proof of unemployability from the VA.
Decision making process The Department of Education refers individuals with inquiries on this process to contact Nelnet. Department does not keep statistics on approval/denial rates. Department stated that a Nelnet employee does make the discharge decision. Department did not have any information as to the qualifications or job title of the employee making the decision. Multiple phone calls and emails to Nelnet seeking information on the procedures and documentation used in the disability discharge process were ignored.
Results - Approval Approved Your eligible loans are discharged. You will receive a 1099-C. You win a three year monitoring period (unless it was a VA unemployability case) You must: Promptly notify the Secretary of any changes in the borrower's address or phone number; Promptly notify the Secretary if the borrower's annual earnings from employment exceed $15,730 (higher in AK and HI), or whatever that year’s poverty level for a family of two is; Provide the Secretary, upon request, with documentation of the borrower's annual earnings from employment, on a form approved by the Secretary; or Promptly notify the Secretary if the borrower receives a notice from the SSA indicating that the borrower is no longer disabled or that the borrower's continuing disability review will no longer be the five- to seven-year period indicated in the SSA notice of award for SSDI or SSI benefits.
Results - Denial Denied Request re-evaluation File new application For re-evaluations and new applications: If the borrower requests re-evaluation in accordance with paragraph (c)(3)(v)(D) of this section or submits a new total and permanent disability discharge application in accordance with paragraph (c)(3)(v)(E) of this section, the request must include new information regarding the borrower's disabling condition that was not provided to the Secretary in connection with the prior application at the time the Secretary reviewed the borrower's initial application for a total and permanent disability discharge. Contact the Federal Student Aid Ombudsman Group at (877) 557-2575 You could file a federal lawsuit. Where you will be a legal trailblazer. The only lawsuit I could find regarding this process what the lawsuit that pushed the Department of Education to make the 2013 changes. The suit alleged due process violations with respect to the process and outcome of the disability discharge process. Then again, if you have exhausted the administrative process, what is stopping you?
How to lose your discharge The Department will reinstate your obligation to repay your discharged federal student loans or if at any time during the 3-year monitoring period: You have annual employment earnings that exceed the Poverty Guideline amount for a family of two in your state, regardless of your actual family size; You take out a new federal student loan; You got federal student loan money after you filed an application for TPD then failed to return of the full amount of the disbursement within 120 days of the disbursement date; or You receive a notice from the SSA stating that you are no longer totally and permanently disabled, or that your disability review will no longer be the 5-year or 7-year review period indicated in your most recent SSA notice of award for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits.
Is Disability Discharge a Good Idea? Sometimes it is a great idea. Sometimes it might make things worse. The Department of Education states that a 1099-C will be issued for individuals who have student loans discharged due to disability. This could cause a substantial tax burden on your client. The IRS can levy federal benefits to satisfy a tax obligation. Avoid the 1099-C tax problem by proving insolvency to the IRS. Make sure to have your client get the insolvency advise from a competent tax professional. IRS website has some insolvency information about IRS Form 982.
Other Options PAYE – Pay As You Earn. Only if all federal loans were disbursed after October 1, 2007. Payment is 10% of income above 150 percent of the federal poverty level for family size. Unpaid loans discharged after 10 years for public service workers, 20 years, for all others. IBR – Income Based Repayment. 15%, of the excess of income over 150% of the poverty line for family size. Unpaid loans discharged after 10 years for public service workers, 25 years, for all others. Bankruptcy. File adversary proceeding in bankruptcy to show that payment of the debt will impose an undue hardship on the debtor and dependents.
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