Why Obama is forgiving the student loans of nearly 400,000 people

Hundreds of thousands of student loan borrowers will now have an easier path to getting their loans discharged, the Obama administration announced Tuesday.

The Department of Education will send letters to 387,000 people they’ve identified as being eligible for a total and permanent disability discharge, a designation that allows federal student loan borrowers who can’t work because of a disability to have their loans forgiven. The borrowers identified by the Department won’t have to go through the typical application process for receiving a disability discharge, which requires sending in documented proof of their disability. Instead, the borrower will simply have to sign and return the completed application enclosed in the letter.

If every borrower identified by the Department decides to have his or her debt forgiven, the government will end up discharging more than $7.7 billion in debt, according to the Department.

“Americans with disabilities have a right to student loan relief,” Ted Mitchell, the undersecretary of education, said in a statement. “And we need to make it easier, not harder, for them to receive the benefits they are due.”

About 179,000 of the borrowers identified by the Department are in default on their students

loans, and of that group more than 100,000 are at risk of having their tax refunds or Social Security checks garnished to pay off the debt. Often borrowers losing out on these benefits aren’t even aware that they’re eligible for a disability discharge, said Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center.

“Borrowers just frankly don’t know about this program,” she said. “In the past it’s been incredibly complicated to apply and that process has been getting better over time, but some people just assume that it’s not going to work.” The letters will help make more borrowers aware of their rights, Yu said.

The government identified eligible borrowers by matching Department of Education data on

student loan borrowers with Social Security Administration data to determine which federal student loan borrowers are receiving disability benefits and whose conditions aren't expected to improve.

Yu commended the collaboration and applauded the announcement, but she said she wished it went one step further by automatically stopping collections and garnishment on borrowers the government identified as eligible for a disability discharge. The Department may struggle to reach some borrowers because they don’t have their most updated information on file, she noted. In addition, some borrowers who qualify for discharge because of a psychological reason -- such as anAlzheimer’s patient -- may not be capable of understanding the materials they receive, she said.

“We identify you as somebody who qualifies for this, so as long as we’ve identified you can we at least stop taking your money?” Yu said.

Eligible borrowers who do decide to take advantage of the discharge option should be aware that the forgiven debt may be considered taxable income. The Obama administration asked Congress in its 2017 budget proposal to get rid of the tax penalties for disability discharges, but meanwhile borrowers may find themselves paying taxes on the forgiven loans.

Despite these drawbacks, Adam Minsky, a Boston-based lawyer who specializes in student loan issues, said he’s “cautiously optimistic,” about the announcement and will be watching to see how it plays out. “When you’re already totally and permanently disabled it can be challenging to go through this process without some help,” he said. “If this helps people that are clearly eligible for discharge get one with less red tape, less waiting and less uncertainty, that’s great.”