Student Loan Discharge - Updated

Posted by Reeve Foundation Staff in Daily Dose on April 19, 2016 # Advocacy and Policy

Should you discharge your student loans because of a Total and Permanent Disability (TPD)? That is a big and permanent decision. A TPD discharge could have tax and health insurance consequences for you and others in your household.

Loans discharged through TPD are considered a type of income by the IRS. Choosing a TPD discharge could mean that you have to file a tax return when you otherwise would not be required to file. A TPD discharge could also increase the taxes you owe. If you file taxes with another person, a TPD discharge could affect them, too. You might want to talk with a tax professional about these issues before applying for a TPD discharge.

TPD discharges can also affect eligibility for certain types of medical insurance and could change how much you pay for insurance. Loans discharged through TPD count as taxable income. Such a change to your income could affect:

  • How much tax you owe
  • Your eligibility for Medicaid
  • Eligibility for Medicaid or the Children’s Health Insurance Program for other people in your household
  • How much you and others in your household pay for health insurance bought through health care exchanges (sometimes called “marketplaces” or “Obamacare exchanges”)
  • How much you owe in co-pays or other cost sharing

Health insurance rules can be different in different states, so you should talk with a trained health insurance navigator in your state before applying for a TPD discharge. You can find trained navigators at healthcare.gov and disability specific help from the National Disability Navigator Resource Collaborative.

This change in income will not affect:

  • Social Security Disability Insurance or Supplemental Security Income payments
  • Your eligibility for Medicare

Update: The Department of Education has released a fact sheet on Total and Permanent Disability Discharge for Federal Student Loan Borrowers.

Questions? Please contact our team of Information Specialists.