Question: The US Department of Education had me sign and my doctor sign some paperwork. They found that I was total permanently disabled to work. So I cannot work and I cannot pay back these loans. How can I get these loans off my credit?
Answer: Let me first advise you to check with the US Department of Education to accurately verify how long it takes to get the loans removed from your credit reports. It depends on when your loans were permanently discharged.
What Total Discharge Means to Credit
If you are granted a final discharge, it will be reported to the 3 major credit bureaus. Typically it can take up to 90 days for the credit bureaus to update information. You should not have to do anything. The Department of Education is supposed to notify the credit bureaus to delete any adverse credit history resulting from nonpayment of the discharged loan.
You will need to monitor your credit reports to see if the US Department of Education has updated your reports at the 3 major credit bureaus. You are entitled to a free credit report from each of the 3 major credit bureaus (Experian, TransUnion and Equifax) once every 12 months. Order them online at: www.annualcreditreport.com.
Wait approximately 90 days from the date of permanent discharge and see if the student loans have been removed. If not request a letter stating the student loans should be deleted so you can send it directly to the credit bureaus yourself.
Also, any loan payments that were received after the date the physician certified your discharge application should be returned to you.
Your Income will be Monitored
Total and permanent disability is defined as being unable to work and earn money because of an injury or illness that is expected to continue indefinitely. However, although your loans may be eligible for immediate discharge, any income you may earn is subject to a 3-year monitoring period from the date of discharge.
During the 3-year monitoring period that begins on the date the discharge is granted, the Department of Education will monitor any earnings from employment and check to see if you received any new student loans.
If during the 3-year monitoring period your annual income from employment exceeds the poverty guidelines for a family of two in your state or you receive a new student loan, your discharged loan will be reinstated. A reinstated loan will be put back on your credit reports.
The Department of Education will require you submit documentation of your employment earnings on an annual basis such as: (1) Filed income tax return; (2) Submit Pay Stubs showing year-to-date income; (3) Submit a W2 form; or (4) Submit a Social Security Statement. If no income was earned then you must submit a letter signed by you specifying the tax year(s) for which no income was earned.
Cancellation of Debt Equals Taxable Income
Hopefully the Department of Education informed you the discharged student loans are is considered taxable income. The IRS considers most types of cancelled debt taxable income. Lenders must report cancelled debts of $600 or more to the IRS on a 1099-C form.
Unless you worked a prior job that entitled you to student loan forgiveness, such as certain medical, teaching or law enforcement positions, you would not have to pay taxes on the canceled student loan debt.
But there is no tax break for student loan debt that has been cancelled due to disability, despite the fact that borrowers who qualify for cancellation are considered totally and permanently disabled.
The only other option to avoid paying taxes on the canceled student loan debt is that you were insolvent immediately prior to the discharge.
If you haven’t already done so, consult a tax professional to get your options on dealing with a 1099C form. The good news is if you do receive a 1099C form it will only be a one-time occurrence. The best of luck to you.