How New Government Policies Impact Student Loans

Did you know that about 44 million Americans owe more than $1.5 trillion in student loans? Student loans are by far some of the most widespread types of loans that plague people into their adult life. For the most part, people struggle to pay these loans off for their entire adult existence. It is no wonder that so many people allow these loans to default – it seems hopeless to get them paid off.

One way to get student loans forgiven was to claim that the school you attended defrauded you in some way or had some sort of academic misconduct. To date, more than 160,000 people have used this method to get their student loans forgiven. These claims almost always affect for-profit schools that stand more than 7,000 strong in the country.

The Changes the Government is Making to the Student Loan Discharge Taxes

One such proposal to change student loans seeks to clamp down on the number of loan forgiveness avenues starting with the one that over 160,000 people have used so far: those who have been defrauded by their schools.

While this proposal elicited strong criticism from all corners with some people claiming that the government does not care about the welfare of students, there are even more changes that were proposed. Some quite favorable!

Changes in Student Loan Death and Disability Discharge Tax Rules

The government has made a myriad of changes to federal tax laws, but for about 44 million Americans with student loans, it is the changes that took effect on January 1, 2018, that matter the most. As things stand, it is now much easier for those who are eligible to discharge their student loans.

Death and Permanent Disability Student Loan Discharges No Longer Taxable

Thanks to new government policy, student debt discharged due to total and permanent disability or death is no longer considered income and therefore not taxable.

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While this is definitely good news, it is important to note that this law is not retroactive and those who were awarded total and permanent disability student loan discharge in 2017 or earlier will still have to pay those taxes. This law only covers those who get awarded this discharge as of January 1, 2018, to December 31, 2025 (that is when the bill expires although Congress can renew it if they see fit).

Why are These Changes Important?

Those who are not very familiar with loan discharge may not realize or even appreciate just how important these changes are to people with student loans. Before these changes were made, one of the biggest hurdles to anyone wishing to get their loan discharged, even for legitimate reasons, was the fact that the discharge came with a hefty tax burden.

So much so that a vast majority of people opted to stay away from seeking their student loan discharge despite being eligible for the same. Under these new changes, that tax burden is now gone, and more people who are eligible and deserving can now seek student loan discharge.

What are the Benefits of the New Tax Law Changes to “Total & Permanent Disability Discharge?

Apart from the obvious benefit of saving people money when it comes to taxes associated with the discharge, the new tax law changes have a myriad of other benefits to those are eligible for TPD discharge. These include:

It offers them financial security: People can now hold on to the money they would have used to pay off the discharge taxes and use it for other things such as medical bills, put it in their savings or even have it as a buffer against tough financial times. It is good to know that this money will be in your account when you need it as opposed to with the Federal Government where you can’t touch it.
Your income does not have to be inflated anymore: Before these changes came about, most student loan holds had inflated income reports just because they received some money through their student loan discharge. This inflated income sometimes disqualified people who needed it from important programs such as Medicaid and SSI. Thanks to these new changes, people no longer have to choose between discharging their student loans debts, monthly living stipend or health insurance. They can simply have it all.
People no longer have to prolong their loan forgiveness: Before these changes came about, people chose to prolong their loan forgiveness despite being eligible because they did not want to shoulder the heavy financial burden the taxes associated with the discharge would impose on them. With this new law, anyone who is eligible can now pursue total student loan discharge as opposed to choosing an income-based repayment plan that requires monthly repayments and a pile of annual paperwork just to report this income.
They can pay off other loans now: With the money saved, people can now pay off other loans and build up their credit which could lead to a better economic standing especially for those under TPD discharge.

While the new tax law applies to both federal and private student loans as well, it is important to note that many private lenders do not offer the option to discharge the student loan due to total and permanent disability reasons. However, if you took out a loan with lending institutions such as: New York Higher Education Services Corp, Wells Fargo, Sallie Mae, or Discover, you can be eligible for a TPD discharge. If you want to know whether or not you are eligible for TPD discharge, visit the Federal Student Aid’s website to find out.