Wednesday, February 27, 2013

The Bad News About Student Loan Disability Discharge

What the .....!

A few weeks ago I wrote about the challenges of chronic illness.  One of the challenges is financial hardships, from huge medical bills to a reduced income potential.  For me, personally, I am currently considered permanently disabled and unable to work due to the symptoms of my multiple chronic illnesses.

Despite my numerous efforts to "get better," I've been disabled for over 8 years now.

When I first became disabled in 2004 with the chronic pain and fatigue of fibromyalgia, I thought my former employer's short- and long-term disability insurances would kick in with disability income so I could keep paying all my bills.  I didn't know back then that the long term disability coverage would terminate after 2 years because it limited benefits for those diagnosed with fibromyalgia.

I appealed their decision, I went through the entire appeals process and was unable to get them to reverse their decision.

I found out the hard way that my safety net had a huge hole in it.  I went from earning a living to living on disability and taking a 61% pay cut. How to continue making my monthly student loan payments became one more boulder on a growing mountain of financial problems.

I was grateful in 2006 for the relief my student loan servicer offered.  I asked for a temporary disability forbearance, i.e., to be able to temporarily stop making my loan payments.  Back then I still hoped my situation might be temporary, that my doctors' would be able to get me back on my feet and working again.

To that end, I diligently followed my doctors' advice and complied with all the things they wanted me to do: take medications, go physical therapy, agree to trigger point injections, schedule deep injections and try acupuncture.

Time passed.  All those treatments my doctors prescribed failed to improve my symptoms.  I rapidly approached the 3 year time limit on requesting temporary disability forbearance. 

My next option with my student loan servicer was loan forgiveness due to total and permanent disability.  At first, I was almost reluctant to take this option, mostly because it seemed like a big declaration of "I'm not ever going to get better!"  But I felt like I had no choice; our budget was already lean and there wasn't any money for us to start making payments again.

This was a separate application process.  I needed to have my doctor complete a form verifying that I was permanently disabled.  Now that filled me with trepidation.  Have you ever needed to ask a doctor to put into writing that you are permanently disabled?  Because when you do, they look at you like you're asking them to admit they aren't able to help you.

Apparently doctors aren't good at stating the obvious.  My doctor initially balked when I asked her, despite the fact that there was absolutely no improvement in my symptoms or functioning over the past five years.  She only agreed after she asked if I was on Social Security Disability.  Somehow knowing I was on SSDI made it O.K. for her to say I was permanently disabled.

I got what I needed.  But to this day I just don't understand the moral dilemma my request presented her.

Now you don't get your loan forgiven overnight if you are totally and permanently disabled.  There is a 3 year conditional discharge waiting period.  Fortunately, student loan payments are suspended during this time.  

I was OK with waiting for 3 years, because if somehow I did improve and was able to work again, I would have gladly started repaying my loan again.  After all, it was my student loans that picked up all the school expenses that my part-time job didn't while I was in graduate school.  Those loans helped me earn a degree that launched my career in social work, a career that I really and truly miss.

At the beginning of last year it was crunch time.  My 3 year conditional discharge period was coming to an end.  There was some very important paperwork I needed to submit to my student loan servicer and I ran into some problems getting it faxed to them.  I needed to resort to snail mail, sent certified, to confirm it got to them.

After the anxiety of filing out forms, getting my doctor to say I was totally and permanently disabled and dotting the i's and crossing the t's on the final paperwork, I got word at the end of Spring 2012 that my disability discharge had been approved.  I thought my worries about my student loans were over.  Thank goodness!

Then I got a 1099-C form in the mail this past January from my student loan servicer.  I wasn't expecting it.  So I did some research and discovered that my discharged student loan debt was reported to the IRS as income.

I don't remember my student loan servicer ever telling me that my discharged loan would be considered income.

So we did our taxes early this year, cringing at the thought that we would owe the Feds and the state money this year.  Money we don't really have.

Sure enough, we have a whole new financial problem on our hands. We are straddled with a new debt, payable on April 15th, that will accrue interest and penalties if not paid on time.  So despite my best efforts, it feels like that mountain of financial problems only keeps getting bigger and bigger.

I guess the only "good" news is that my student loan debt is relatively small, at least compared to the woman featured in this article: New Jersey Woman's Student Loan Debt Creates Tax Nightmare.  And I am not alone in dealing with this; it's my spouse's income that will be getting us out of this latest pickle.

But what can all those other disabled workers with student loan debt like Kim do? How can they be expected to pay huge IRS tax bills when their earning potential is reduced and their savings are spent on medical bills?  Some of them don't even file a tax return because they now live below the poverty line.  Just imagine getting a horrid surprise from the IRS saying you owe taxes on income that, well, you didn't really get when your loan got forgiven!

I know the powers that be want to make defaulting on Federal student loans hard and painful.  In fact, student loans have historically been excluded from bankruptcy proceedings.  But I think you'll agree that when it comes to total and permanent disability there really needs to be some legislative reform on this issue.

This is completely unfair and burdensome to the disabled. (Yes, I know...life is unfair, yada yada, yada.)

At the very least, how about telling folks up front about the tax implications of loan forgiveness?  Or offering to help by spreading the "income" across several different tax years to make the tax burden more manageable?

My unsolicited advice for those of you going through this process RIGHT NOW: talk to a bankruptcy lawyer.  Ask them if you can get your student loans discharged through bankruptcy so you won't get hit with a huge tax bill you can't pay. Because I hate to say this, but depending on the size of your loans and resulting tax bill, you might be filing for bankruptcy anyway...  But hey, take this advice with a grain of salt, because I'm not a lawyer or a student loan servicer, so what do I know?

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Unknown said...

Thanks for sharing your experience with dealing with a student loan. I found your post to be very helpful and will definitely share it.

elana r. snyder said...

ty selena. admittedly i did not read every word because it is tough for me to read on the computer screen. my inability to pay back my student loans due to disability and hoemlessness ruined my credit. my surprise was that the irs is garnishing for the loan even tho' my only income is disability. i'm almost 50 and don't even care anymore about ruined credit. you know those little 325 dollar gifts the govt gives once in a whle, that is the sort of thing that is garnished. i am not married so have no safety net and have pretty much given up on a society that i'm disgusted with. ur a great writer

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Anonymous said...

I'm sorry you have to go through this Selena. I hope your illness gets better. I too have an illness which caused me to drop out of college and incur insurmountable debt, (that's why I'm here on you page). I'm still sick and I still don't have a degree even though I only have 27 hours left. I hope things get better for all of us.

Anonymous said...

You may be able to keep from having to pay taxes on a forgiven student loan if you are disabled and are "indigent" at the time it is forgiven. See a CPA for assistance with the appropriate tax forms.

Anonymous said...

PLEASE call a good CPA (not a tax preparer like H&R Block) and have them calculate your tax burden after using IRS Form 928. I suspect STRONGLY that you will be relieved of some of not all of the tax burden if you use this form. Good luck. (If you have already filed, you can amend if needed)

Anonymous said...

Sorry, that should have read IRS Form 982, not 928 :-)


Anonymous said...

If you don't own anything, you don't have to pay the govt. If your write off was done in poverty you don't have to pay the taxes. There is a form you can file. Sorry, I don't have the number, but call the IRS and then tell them what write off you have. In total and permanent disability most SINGLE people are broke. The job goes, then the medical insurance and any savings is gone soon. That leaves you with either a mortgage or a rental to pay for. This is usually not a problem, unless you are rich to begin with!

Trish Morda said...

Sorry about all your problems. I also have fibromyalgia, but with Norco I can control my pain enough to work part-time, although I have chronic fatigue as well. Unfortunately, like child support,taxes, and student loans cannot be discharged in bankruptcy.

Traci said...

Thanks for sharing this! I too have Fibromyalgia and on social security! We filed bankruptcy and was mislead by our attorney in regards to our student loans. We filed chap 13 on his suggestion as we could add our student loans. So we did thinking that would take care of them what he didn't tell us is that you are paying them ten cents on the dollar of your loan amount,but they do not have to forgive the rest after discharge like other creditors do. They are protected by the government! So for five years interest accrued on our loans( we consolidated our loans together in 2001),we went from owing $78,000 ti $125,000 and got a bill fir $1100 payments! Even though we barely make ends meet without this payment, my tiny disability check and my husband only makes 35,000/yr Sallie Mae does not take medical bills,child expenses,food,rent etc into consideration for financial hardship forbearance,deferment or income based repayment so we don't qualify for any of it! I was considering the disability forgiveness,but that sounds like it won't help either! So no matter how we have tried to make our lives better,they just get worse! Student loan debt is a crime! I feel sorry for our young adults just starting their lives and having that much debt already hanging over their heads and most of them can't find jobs! Something needs to change!

Anonymous said...

I know this is really late, but you may qualify for a tax exemption due to insolvency. You will need to read up on it, but essentially it is a form that shows that you had no money before your loans were forgiven.

Anonymous said...

I had my loans discharged over five years ago. However, with the prevalence of on line schools, I now want to go to online grad school. I will be calling NelNet tomorrow, to see if it is even possible! BTW, I am still totally and permanently disabled.

Redhead girl with Lupus/RA said...

Dear Selena,
I know this is a few years later...but WOW, I felt like I could have written this (except I have Lupus, RA, MCTD, AND Fibromyalgia!
It's an ugly world when one is really sick and honestly, the Nurses & MD's are mostly all burned out & soooo obviously HATE their profession! As a former Health Professional myself, it is almost too much to swallow. It breaks my heart every time I have to go to the MD & am treated very poorly. Even if i DO mention I am a doctor, I get MORE ego thrown at me!! I am by no means aggressive or passive aggressive! I simply want/need HELP! I have lived with this awful combo of diseases for 12+ years and I can honestly say that I am ONLY alive bc of my knowledge of pharmacology. I have been thru the whole "battery" of meds... none successful, all with horrendous side effects and every road is "blocked", it seems!
My body somehow triggered these Dz's when I became pregnant & I begged the OB/GYN for help, knowing something was VERY wrong w me but not getting a diagnosis into my children were 2 & 4! Had I become pregnant again I've no doubt it WOULD HAVE killed me, since with each pregnancy it increases many-fold. By the time our daughter was 2 yrs old, I was too sick to even stand up! I slept non-stop and had my share if incompetent physicians, more than one could possibly imagine!
And.,. I stupidly did NOT file for short-term disability for 2 reasons: 1. My employer was a small business owner & told me it would reflect terribly on myself as well as on HER (she was lying but I was young & naive). 2. I refused to believe or accept that I WAS in fact "disabled"! I did myself no favors as I fought 9 more years for SSDi and finally received it just last year after going to COURT to finally get it after applying for it 3x! The judge was so gracious & nice, nothing like I anticipated. He gave me all he could but now we are stuck w this nightmare of a huge tax bill and my poor husband has barely kept us "above water" all these years!
He didn't deserve this ... & neither do our children. We've been through so much that it's a miracle we are still married, quite honestly. We were "advised" to divorce but we couldn't just divorce & separate our family bc of stupid taxes! I know there are plenty of ppl out there willing to go to quite extremes for ANY amount of $$ but .... WE ARE NOT THOSE PEOPLE! :) We figure it'll "wipe us out" financially but we've been living like this for YEARS! Yes, it would be really nice not to have that huge amount over our heads but ... I don't know what else to say!
I DO have a question if You or anyone else might know: Since I was just approved LAST YEAR and I still have this 3 year (now 2 year) waiting period... will I not be receiving that "surprise" in the mail this year??? I hope SOMEONE has this answer!
My dz is attacking major organs (I need heart surgery- a pacemaker implanted & a pain pump too bc my pain is soooo out of control, I just cannot stand it much longer!)!
Thank you for your story, Selena. It made me not feel so alone.
Redhead girl :)

Anonymous said...

Thank you for sharing your experience. I have been on short term disability for almost six months due to coming out of remission and have just completed forms for long term disability through my employer which begins late March. In addition to the stress created by this illness, the harrowing journey through the financial issues feels like it creates more stress for me than anything else I am dealing with. I have to make calls every month to talk to those I owe money too and the harassing calls are ongoing. I had to stop going to classes last fall due to my illness and was given a medical letter that kept me out through this spring. I was just 12 hours away from my degree with hopes of continuing on for my bachelors. Yesterday I received my first letter from Nelnet stating it is time to pay back my loans. I will contact them later. Every day I hope for remission from my autoimmune disorder which has not responded to treatments so far. I am starting a new treatment tomorrow. Thank you all for your posts which provided information I may need in the future. Blessings to you all.