Can Debt Be Forgiven Due to Disability?

Individuals with disabilities may qualify for debt forgiveness, primarily through specific federal programs like those for federal student loans. Understanding these options can provide significant financial relief for those whose disabilities affect their earning capacity. This article outlines available programs, required documentation, the application process, and post-forgiveness obligations.

Specific Debt Forgiveness Programs

The primary avenue for debt forgiveness due to disability is the Total and Permanent Disability (TPD) discharge. This program applies to federal student loans and Teacher Education Assistance for College and Higher Education (TEACH) Grant service obligations. It provides relief to borrowers unable to engage in substantial gainful activity due to a medically determinable physical or mental impairment. The TPD discharge can eliminate the obligation to repay various federal loan types, including William D. Ford Federal Direct Loans, Federal Family Education Loan (FFEL) Program loans, and Federal Perkins Loans. While federal student loans are eligible, private student loans generally do not qualify for TPD discharge, though some private lenders may offer their own disability relief options.

Defining Disability and Required Documentation

To qualify for a Total and Permanent Disability discharge, a borrower must demonstrate total and permanent disability through one of three methods.

VA Documentation

One method involves providing documentation from the U.S. Department of Veterans Affairs (VA) confirming a 100% service-connected disability or individual unemployability rating. Veterans meeting these criteria may be automatically identified for discharge.

SSA Documentation

A second method involves documentation from the Social Security Administration (SSA). This includes an SSA notice of award for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits. The documentation must indicate the next continuing disability review is scheduled within five to seven years from the last SSA disability determination, the disability onset date was at least five years prior to the application, or the individual qualifies based on a compassionate allowance.

Medical Professional Certification

The third option is certification from a licensed medical professional (MD, DO, NP, PA, or certified psychologist). The professional must attest that the borrower’s physical or mental impairment prevents them from engaging in any substantial gainful activity. The impairment must be expected to result in death, have lasted for a continuous period of at least 60 months, or be expected to last for a continuous period of at least 60 months.

The specific forms for TPD discharge, such as the application and physician’s certification forms, are available through the official TPD discharge website or by contacting the designated servicer. Borrowers should carefully complete these forms, providing all necessary personal and disability-related information.

Navigating the Application Process

The Total and Permanent Disability (TPD) discharge application process is managed by Nelnet, the servicer for the U.S. Department of Education. Borrowers can initiate the application online, by mail, or through other designated methods. Upon receiving an application, Nelnet contacts loan holders to suspend collection activities for up to 120 days during review, pausing payments.

Some borrowers, such as certain veterans with qualifying VA disability determinations or individuals identified through SSA data matches, may experience an automatic discharge process without needing to apply. All other applicants must submit a complete TPD discharge application with required documentation. After submission, the application is reviewed for eligibility and completeness. If additional information is needed, Nelnet communicates this to the applicant. The discharge decision is then communicated to the borrower, and if approved, loan holders are notified to discharge the debt.

Understanding Post-Forgiveness Obligations

Once a Total and Permanent Disability (TPD) discharge is approved, borrowers should consider tax implications and monitoring periods. For discharges occurring between January 1, 2018, and December 31, 2025, the discharged loan amount is not considered taxable income for federal tax purposes. After 2025, unless this provision is extended, discharged debt may again be considered taxable income at the federal level.

While federal tax implications are waived during this period, state tax laws vary. Borrowers should consult their state tax office or a tax professional to understand if their state imposes income tax on discharged debt.

For TPD discharges based on Social Security Administration documentation or a physician’s certification, a three-year post-discharge monitoring period traditionally applied. During this period, borrowers were required to report annual earnings and notify the Department of Education of address or disability status changes. Recent regulatory changes, effective July 1, 2023, eliminated this three-year income monitoring period for most TPD discharges. However, if a borrower with a TPD discharge based on SSA documentation or a physician’s certification takes out a new federal student loan or TEACH Grant, their previously discharged loans could be reinstated. TPD discharges based on VA documentation are not subject to any monitoring period. If a loan is reinstated, the borrower becomes responsible for repayment, though interest accrued during the discharge period might be waived.