Disabled Veterans May Receive Automatic Student Loan Forgiveness Under New Bill

‘FREED Vets Act’ Would Provide Average Benefit of $24,000 in Loan Forgiveness Per Eligible Disabled Veteran

Nearly 34,000 disabled veterans may receive automatic and total forgiveness for federally-guaranteed student loans. That’s the object of new legislation introduced in the House.

The bill, entitled the Federally Requiring Education Debt Discharges for Veterans Act, or FREED Vets Act, would direct the Department of Education to automatically dismiss all outstanding federal student loans for eligible veterans. Under the bill, forgiveness would require no action on the affected veterans’ part. No application would be required. The federal government would use VA data to crosscheck the identities of veterans who meet the required debt discharge criteria and simply cancel outstanding student loan debt outright.

“Congress has an obligation to ease the challenges our veterans face when they come home and return to civilian life,” Rep. Connor Lamb, D-Pa. and a sponsor of the House draft of the bill said in a statement. “This important bipartisan legislation provides a clear pathway for eligible disabled veterans to receive a benefit they have earned through their service and sacrifice.”

The law would not only apply to the veteran’s own student loan debt, but also to federally guaranteed student loans they have taken out to pay for their children’s education, as well.

Unlike other forms of forgiven debt, any forgiven debt under the TPD Forgiveness Program is free of federal income tax. However, it could result in state or local income tax liability.

Background

The Department of Education has identified over 42,000 veterans who are eligible for total and permanent disability (TPD) discharges. On average, each of these veterans owes nearly $24,000, for a total of more than $1 billion in outstanding debt. Over 25,000 of them are in default – which is not surprising since these veterans have been designated as unemployable due to service-disconnected disabilities.

The Department of Education had previously reached out to these borrowers, having received a list of disabled veterans from the VA. Education Department officials sent customized letters to each identified veterans explaining their right to have their debt canceled. However, the veterans were required to complete and return an application form in order for their student loan debts to be discharged. Fewer than 9,000 of them applied, though, leaving 34,000 still owing.

Rep. Conor Lamb (D-PA) speaks with a disabled veteran while touring a VA facility.

Current law

Under current law, many of these veterans who are 100 percent disabled are eligible for loan forgiveness upon application. Additionally, the Higher Education Opportunity Act of 2008 directs the Secretary of Education to discharge the obligation of any borrower “designated by the Secretary of Veterans Affairs to be unemployable due to a service-connected condition.” The law also says that the disabled veteran borrower “shall not be required to present additional documentation of his or her disability (20 U.S.C. § 1087(a)(2))

Recently, 51 state attorneys’ general wrote to U.S. Secretary of Education Betsy DeVos, urging her to make forgiveness for these individuals automatic. That is, they wanted her to unilaterally erase the student loan balances of all eligible veterans, regardless of whether these veterans had applied for it.

The state attorneys general wanted to remove the application requirements altogether. “The requirements imposed by the Department may prove insurmountable obstacles to relief for many eligible veterans due to the severe nature of their disabilities,” they said. But the Department of Education had been resisting granting unilateral, automatic debt forgiveness because of concerns that some disabled veterans and their families would be blindsided by new tax liabilities at the state and local level.

The letter was signed by the Attorneys General of every state except Alabama, Arizona, and Texas.

The Law of Unintended Consequences

Normally, forgiven debts are taxed to the borrower as ordinary income, realized in the year the forgiveness occurs. So a borrower in the 20% effective tax bracket who gets a debt of $25,000 forgiven could face a tax bill of $5,000.

But that changed in late 2017 with the passage of the Tax Cuts and Jobs Act. This law made student loan forgiveness under this program federally tax-free. However, some states would still assess a state income tax on forgiven debts. Veterans in high-tax states like California, Oregon, and New York would have an immediate tax liability of potentially thousands of dollars if they were to receive federal loan forgiveness from the Department of Education.

Moreover, Department of Education spokesperson Liz Hill also argues that receiving debt forgiveness under this program could preclude those disabled veterans benefitting from total disability loan forgiveness from ever being able to take out a federally-guaranteed student loan in the future.

“The Department recognizes the sacrifices veterans and their families have made for our country, which is why we’ve streamlined the TPD discharge process through the data matching process with the VA,” Liz Hill, a spokeswoman for the Education Department, said in an email. “The last thing we want to do is cause unintended consequences — like impact future federal student aid or create a state or local tax liability — for men and women who have given so much.”

Support.

Supporters of the measure argue that these concerns could be addressed by making some small tweaks to the policy. “Any concerns that some disabled veterans might not want their student loans discharged can be addressed by providing veterans notice and an opportunity to opt-out of loan forgiveness or to seek reinstatement of their loans,” wrote the state attorneys general.

It’s still early in the process, but the bill has already received bipartisan co-sponsorship. In addition to Rep. Lamb, the bill has also attracted Rep. Isakson (R – Georgia) and Reps. Joe Courtney (D -Connecticut), Andy Levin, (D – Michigan)., Brian Fitzpatrick (R-Pennsylvania) and Guy Reschenthaler, R-Pennsylvania).

Also, a companion bill was introduced in the Senate by Senate Armed Services Committee Ranking Member Jack Reed, (D-Rhode Island). It, too, has received bipartisan support, with one cosponsor thus far, Sen. Johnnie Isakson (R-Georgia).

The president has also called for student loan forgiveness for disabled veterans. If the bill passes Congress, it is unlikely to find much of an obstacle in Congress.

What To Do Now?

If you’re a disabled veteran and you believe you may qualify for this program, the best thing to do is to apply immediately and get your loan balances wiped out as soon as possible. There is little sense in either in making additional payments on a loan that may be automatically forgiven if and when the bill passes (we think this bill has legs!). And if you are not making payments or currently in default, there’s no sense in letting this unpaid loan continue to damage your credit rating.

However, if you are in a state that has an income tax, you may want to consider any possible tax liability before applying. You will come out ahead, even if there’s a state tax. The tax will never be more than a small fraction of the amount forgiven. At most, only residents in about 10 states will face any state tax consequences. But you do want to make sure you have some cash on hand to pay whatever tax may be due.

 

To Apply Now

If you are an eligible disabled veteran and you would like to apply under the program, you can visit the Department of Education’s site at https://secure.disabilitydischarge.com/registration or contact:

Phone: 888.303.7818

Office Hours:

Monday – Friday 8:00 AM – 8:00 PM (ET)

Email: [email protected]

Can Private Student Loans Ever Be Discharged Through Bankruptcy?

Student Loan Policy Help from Attorneys General

Tags: , , , , , , , , , , ,

Leave a Reply