Help: I’m a disabled senior and I can’t pay my student loans

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The Credible Money Coach explains how disability discharge works for federal student loan borrowers. (Credible)

Dear Credible Money Coach,

I’m a 75-year-old senior who resides alone. I took a student loan out about 20 years ago. I became disabled and had to drop out. My disability was then changed to retirement. I rely on my Social Security. After my bills, I’m not left with much per month to survive on. I previously was put on forbearance years ago and am now facing a possible delinquency in September. I do not know what to do. Is there any advice you can offer to relieve me of this stress? If they attach my monthly retirement, I'm afraid I will be facing homelessness. — R

Hello R, and thank you for your question. Making ends meet in retirement can be difficult, even when you don’t have debt to deal with. For the 6% of student loan borrowers between the ages of 60 and 69 who still owe a total of more than $88 billion, financial disaster can be just one missed loan payment away.

You mention that your student loan was put into forbearance, which leads me to believe it’s a federal student loan. That’s actually good news, as federal student loans have certain advantages private student loans don’t — including the opportunity for forgiveness or discharge.

Types of federal student loan discharge

You’ve probably heard a lot in the news in the past year or so about student loan forgiveness. You might think it’s a new concept, but it’s really not. For many years, the federal government has provided opportunities for eligible borrowers to have some or all of their federal student loan debt wiped clean.

Public Service Loan Forgiveness is the most common forgiveness program, and anyone can qualify for it, provided they meet the program requirements. Most notably, to qualify you’d have to work a certain number of years for a government or not-for-profit entity while making student loan payments under an income-driven repayment plan.

It’s also possible to have federal student loans discharged, which has the same ultimate effect as forgiveness but different requirements. A borrower becoming totally and permanently disabled could make them eligible for federal student loan discharge.

How disability discharge works

If you have a Direct Loan (subsidized or unsubsidized), a Federal Family Education Loan (FFEL), or Federal Perkins Loan, you may be able to have those loans discharged if you become completely and permanently disabled.

You’ll need to provide your loan servicer with documentation of your disability. This could be a disability determination from the VA (if you’re a veteran), a Social Security Administration notice of award for disability benefits, or a physician’s certification on the Department of Education’s discharge application.

The Department of Education uses loan servicer Nelnet to manage disability discharges. If your discharge application is approved, Nelnet will notify you of next steps.

How to get disability discharge

If the Social Security Administration has records of your disability, you might not need to do anything to get the discharge. In September 2021, the Department of Education announced it would begin automatically granting disability discharges to borrowers identified as totally and permanently disabled in the SSA database.

But if you didn’t get a notice of automatic discharge, you’ll need to apply through Nelnet to get a disability discharge of your federal student loans. You can get more information and start the process online at disabilitydischarge.com. Keep in mind that at some point you’ll have to mail a physical copy of your application and documentation of disability to complete the application process.

Previously, people who qualified for a disability discharge could be required to pay federal income tax on the forgiven amount. But a change in the law allows people who receive a disability discharge between Jan. 1, 2018, and Dec. 31, 2025, to exclude the amount from their federal taxable income.

Discharge alternatives

R, if for some reason you’re not able to qualify for a disability discharge, you might consider going on an income-driven repayment plan for your federal student loans. The plans are designed to set student loan payments at an amount you can afford each month. The downside is, they can extend the time it takes to completely pay off the loan. But some of these plans also forgive your remaining debt after you’ve made a set number of payments over a set number of years. Just be aware there may be tax implications that you need to consider.

As a last resort, you could consider refinancing your loans to get a lower interest rate and extend the repayment period, which can lower your monthly payment amount. This should be your last choice if you have federal loans, though, because refinancing them into a private student loan means you’ll lose the benefits of federal student loans.

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About the author: Dan Roccato is a clinical professor of finance at University of San Diego’s Knauss School of Business, Credible Money Coach personal finance expert, a published author, and entrepreneur. He held leadership roles with Merrill Lynch and Morgan Stanley. He’s a noted expert in personal finance, global securities services and corporate stock options. You can find him on LinkedIn.