by Mike Saunders

You may have heard that the Trump Administration is now going to automatically forgive the federal student loans of veterans who have a 100 percent disability rating or who have been designated “Individually Unemployable” (IU) by the Department of Veterans’ Affairs (VA).

Here is what is known: the new automatic Total and Permanent Disability (TPD) discharge process for veterans went into effect on August 21, 2019. Eligible borrowers will receive notification of their eligibility by mid-September from student loan servicing company Nelnet. Going forward, veterans will still have the right to weigh their options and to decline loan discharge within 60 days of notification of their eligibility. Unless the borrower elects to decline loan relief, the loan discharge will occur approximately 60 days after notification of eligibility. For the first cohort of eligible veterans, automatic loan forgiveness those who had not already applied for the program finally went live at the end of November and will continue on a quarterly basis.

Note: If you decline to opt-out and have your loans discharged but wish to take out federal student loans in the future, the law states that the Secretary of Education can REINSTATE those discharged loans. Regulations provide that you may receive another loan discharge only if your medical condition subsequently declines, as determined by a doctor.

According to the Department of Education (ED), ED has already begun to notify matched borrowers that are eligible for discharge under the new automatic Total and Permanent Disability (TPD) Discharge process for veterans. When the loans have been discharged any defaults that appeared on credit reports before the effective date of disability, as determined by VA, will remain on the credit report but it will also reflect paid status as a result of the discharge.

For TPD discharged loans that are in default, the Department will notify the current loan holder that the loans are discharged and provide that lender with the discharge date. The discharge date is the effective date when VA determined the borrower was designated IU or received their 100 percent disability rating. Any unpaid loan that was reported to the credit agencies after the discharge date will be removed from the veteran’s credit report. In some cases, this resolves the default on a borrower’s credit. However, if the default occurred before the borrower’s effective date of disability, it will not remove the entire default history.

The letters from ED do not tell you of the potential state tax consequences – in fact, they say that it is the veteran’s responsibility to contact their state department of revenue to find out if they have to pay any state taxes. As of last December, 40 out of 50 states and the District of Columbia followed the IRS rule, which does not consider federal student loans discharged due to death or disability to be taxable income. The states where there may be tax consequences are: Arizona, Arkansas, California, Georgia, Iowa, Massachusetts, Minnesota, Mississippi, Pennsylvania, and Virginia. ED needs to be fully transparent about possible state tax consequences. They should tell severely disabled veterans if they will have to pay state taxes or not in the letters they send.

Here is what is unknown: It is unclear at this point if ED will take any further steps to help veterans who were wrongly put into default beyond taking unpaid debts that occurred after the effective date of disability off of credit reports. Restitution of any garnished payments, especially tax refunds and VA disability payments, is essential. Additionally, some veterans were disqualified from receiving subsidized housing because they were wrongly put into default of student loans that they were eligible to have discharged. It remains to be seen what the federal government can do to right this wrong; it may take Congressional action to fix.