The short, short version of my story is that I borrowed 43K to go to law school. I did not finish for personal reasons and could not make my loan payments. My lender would not make arrangements with me. After default, I got my loans reinstated and consolidated. Then I got put on an income-based repayment plan (in which I am still participating). Today I owe 180K.
If I get my loans discharged for my disability, the IRS considers this "Cancellation of Debt Income" and taxes this income, fully, the year that the loan is forgiven. I am hoping to get an "insolvency exclusion" to avoid the tax, which would compound my problems.
Several suggestions have been made to change the IRS's involvement in death and disability loan discharges. This year is an excellent time to push for these changes, as the Senate HELP Committee is working to reauthorize the HEA (Higher Education Act) of 1965, which contains these (and many other) student loan laws desperately in need of reform.
2/13/14 My loan has been transferred from EdFinancial to Nelnet's total and permanent disability servicing unit. It has been discharged (back to the date my Dr. filled out the paperwork. I am now in the 3-year post-discharge monitoring period (I cannot earn more than the Poverty Guideline for a family of 2, regardless of family size or get a Direct Loan, Perkins Loan, or TEACH grant). I will receive my 1099-C at the beginning of next year, because my paperwork was sent in 1/14/14. I will need to file for the insolvency exclusion with the IRS just before this happens AND reduce my tax basis to keep from having to owe income tax on the 180K.
2/26/14 I have found out that I should have had my insolvency exclusion before my loan was discharged. I am going to consult an excellent tax atty. about what to do next. If H.R. 3892 gets passed, I will no longer have this problem with the IRS.
2/28/14 I have not read this bill sufficiently: loans discharged before the enactment of the bill are still under THE IRS' DOMAIN. I have been referred to an ex-IRS agent, who is now a taxman. I am going to consult with him ASAP and do my homework on HR3892 so I will know EXACTLY what options may be available to me. If I have to, I'll throw the probationary period, get my dang loans re-instated, and try again or go a different route. Irregardless, they cannot bleed a turnip.
~Amanda Lee Brown