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Topic: TPD Student Loan Discharge with Nelnet -- Need Some Info I Cannot Find  (Read 1692 times)
StarrySkies
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« on: November 07, 2015, 04:04:46 PM »

I have some questions about the relatively (2012?) new and stricter procedures for student loan discharges. I looked on Nelnet's site and googled for the answers on other sites, and could not find exactly what I am looking for. I hope someone knows on here. Maybe someone who has experience doing this. Anyway, here are the questions:

(1) It is made clear that a 1099-c will be issued to the IRS in the amount of the forgiven loan. All fine and good. However, WHEN do they report to and send the 1099-c to the IRS? At the time the "3 year monitoring period" starts? Or after the 3 year monitoring period is over and they have given final approval of your status as TPD? It would make more sense to do it then in case a person does not ultimately pass the 3 year monitoring period. Why should people pay all the income tax on a "forgiven" loan which ends up not forgiven in the end? AFAIK, the 1099-c issuance date (pre-monitoring vs. post-monitoring) is not discussed at all on Nelnet.

(2) When they say that income from employment during the monitoring period cannot be more than the poverty rate for 2 people, if you are married and filing together, does that also include your spouse's income from employment or just yours? Another thing Nelnet does not specify.

(3) What is the income monitoring method Nelnet uses? For example, do you send them your tax returns every year? Do they just access it independently via Social Security's or the IRS's computer records of each individual's reported income? Are they monitoring anything else besides income?

Some questions about tax strategies for anyone who has done it:

(A) Did you file for insolvency to reduce the tax? When filing for insolvency, if married and filing jointly, is spouse's income and assets taken into account also? In your experience, do they count just assets or do they include yearly income?

(B) I looked for Income Averaging (where the IRS lets you average your income for a few years rather than pay a lot on a windfall amount in one year), but I found out that is no longer available to taxpayers who are not farmers or fisherman. Too bad, it would help a lot of people with TPD of student loans.

(C) Just a comment. In order to qualify for a disability discharge, borrowers must be able to show that they are no longer able to engage in substantial gainful activity. Yet, despite showing this, the IRS can levy a potentially devastating tax burden on the borrower. The disabled should be exempt from treating cancelled student loan debt as income for tax purposes. What does the IRS think? If my $35,000 student loan is discharged, that means I was handed $35,000 in cash and I will be able to just cut them check for the "owed taxes"?

TIA!
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Helper
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« Reply #1 on: November 07, 2015, 04:45:00 PM »

Re: question  #1 - people report getting the 1099-c at the beginning of the monitoring period - not the end.
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Age at Application: 26 age of onset (but I did not apply until 28)
Date Applied: August 2011
First Approval/Denial Date: November 2011
Additional Info: I was fortunate to be approved on my initial application due to extensive medical records (12+ doctors) & documentation of unsuccessful work attempts even with significant accommodations
Bonzai
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« Reply #2 on: November 07, 2015, 05:00:55 PM »

Yes, having your student loans discharged due to becoming permanently disabled can be a nightmare.  At the beginning (thanks Helper) of the 3-year wait period after filing for it, NelNet will issue a 1099-C to you and the IRS.  The amount of the loan discharged is counted as other income for that year, and has created problems for many people.  IRS publication 4681 covers Canceled Debts,
Foreclosures, Repossessions, and Abandonments.

See: https://www.irs.gov/pub/irs-pdf/p4681.pdf

Quote
Student Loans:  Certain student loans provide that all or part of the  debt  incurred  to  attend  a  qualified  educational  institution  will  be  canceled  if  the  person who received the loan works for a certain period of time in certain professions for any of a broad class of employers.
If your student loan is canceled as the result of this type of provision, the cancellation of this debt  is  not  included  in  your  gross  income.  To qualify  for  this  treatment,  the  loan  must  have been made by:
1.  The Federal Government, a state or local government, or an instrumentality, agency, or subdivision of one of those governments,
2.  A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are considered public employees under state law, or
3.  An educational institution (defined later):
a.  Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or
b.  As part of a program of the institution designed to encourage students to serve in occupations or areas with unmet needs and under which the services provided are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization  (defined later).
A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a tax-exempt section 501(a) organization under  its  program  designed  as  described in (3)(b).
Exception.
Generally,  the  cancellation  of  a student loan made by an educational institution because of services you performed for that institution  or  another  organization  that  provided funds for the loan must be included in the gross income on your tax return.
Education loan repayment assistance.
Education loan repayments made to you by the National  Health  Service  Corps  Loan  Repayment Program  or  a  state education  loan  repayment program  eligible  for  funds  under  the  Public Health Service Act are not taxable if you agree to provide primary health services in health professional shortage areas.
Amounts you received after 2008 under any other state loan repayment or loan forgiveness program  also  are  not  taxable.  The  program must be intended to increase the availability of health  care  services  in  underserved  areas or areas with a shortage of health professionals.
Educational institution.
An educational institution  is  an  organization  with  a  regular  faculty and curriculum and a regularly enrolled body of students in attendance at the place where the educational activities are carried on.
Section  501(c)(3)  organization.
A  section 501(c)(3) organization is a tax-exempt corporation,  community  chest,  fund,  or  foundation  organized  and  operated  exclusively  for  one  or more of the following purposes.
Charitable.
Educational.
Fostering national or international amateur sports competition (but only if none of the organization's activities involve providing athletic facilities or equipment).
Literary.
Preventing cruelty to children or animals.
Religious.
Scientific.
Testing for public safety.

Quote
[size=11]Insolvency
Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the FMV (Full Monetary Value) of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach  of  your  creditors  under  the law, such as your interest in a pension plan and the value of your retirement account). Liabilities
include:
The entire amount of recourse debts,
The amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt, and
The amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt to the extent nonre-
course debt in excess of the FMV of the property subject to the debt is forgiven.[/size]

IRS Publication 4681 has a worksheet to determine Insolvency.

ONE THING CONCERNS ME ABOUT THIS TOPIC

I have searched the board and don't find where any of us have advised to set-up an Income Based Repayment plans with the IRS.  The IRS is known for filing liens against those who owe back taxes.  If you set-up an Income Based Repayment plan and have only disability income, then you may qualify for a $0.00 monthly payment plan that would be discharged after successfully paying nothing for 30 years.  It would prevent tax liens that negatively affect your credit.  If you already have a tax lien(s), then participating in a $0.00 repayment program for six months can get the lien released, and then you can file to have the lien withdrawn due to being in a repayment program.

Lots of hoops to jump through, but we all know how to do that by now.
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"If one of these engines fails, how far will the other one take us?"
"All the way to the scene of the crash!" - Ron White
Name: Bonzai
Location: TN
Age at Application: 47
Disability: BP 1, OSA, HTN, DM II, Arthritis Knee
Date Applied: Feb 08
First Approval/Denial Date: Denied Dec 08
Reconsideration Approval/Denial Date: Denied Mar 09
Hearing Date: second hearing June 2012
ALJ Approval/Denial Date: Approval - Aug 2012
Date Award Letter Received: Oct 2012
Date Back Pay Received: Late Sept 2012
Additional Info: remanded

« Last Edit: November 07, 2015, 05:31:51 PM by Bonzai »
newdawn
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« Reply #3 on: November 07, 2015, 06:35:11 PM »

The income-based repayment (IBR) plan has been mentioned on the boards, but perhaps too infrequently. I believe diamonds1.5, for example, did IBR until getting a discharge by doctor filling out paperwork.

Hudgins17 mentions IBR as an alternative to Total and Permanent Disability (TPD) discharge here (but doesn't mention about the loan being discharged after 30 years): http://ssdfacts.com/forum/index.php/topic,17661.0.html

madmike discusses IBR as an option here but gives a 20 year timeframe: http://ssdfacts.com/forum/index.php/topic,19835.0.html

There are 2 good ways to go about student loan forgiveness.

1:  Do the total discharge which requires your disability review to be between 5-7 years.  Takes 3 years to be discharged and once discharged the balance due is zero.  The amount discharged will be considered income and taxes will have to be paid on this amount.  Insolvency can reduce the taxes owed depending on assets/debt ratio (including the student loan debt).

2:  Sign up for the income based payment plan with the remaining balanced discharged after 20 years.  Most on disability will qualify for a monthly payment amount of 0.00.  After 20 years the remaining balanced will be discharged and taxes will have to be paid (if the tax law has not changed by then for student loan debt).  This has the downside of still having the debt until 20 years, but the upside that the taxes do not have to be paid immediately.  This also requires yearly applications and keeping it up-to-date which can be hard for 20 years.


I'm reading that the max repayment period for IBR plans is 25 years for "those who are not new borrowers on or after July 1, 2014." https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven#repayment-period
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Name: Dawn
Location: IL
Age at Application: 31
Disability: Depression, anxiety
Date Applied: 11/2013
First Approval/Denial Date: 03/2014
Reconsideration Approval/Denial Date: 11/2014
Hearing Date: 11/13/2015 (Friday the 13th!)
ALJ Approval/Denial Date: 01/15/2016 Fully Favorable (rec'd 01/21)
Date Award Letter Received: 02/17/2016 (rec'd 02/20)
Date Back Pay Received: 02/13/2016 (paper check)
Additional Info: 02/09/16 mySSA account updated with approval info. 02/22 rec'd medicare card in mail. Hired lawyer after reconsideration denial. Requested an in-person hearing.
Bonzai
Administrator
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« Reply #4 on: November 07, 2015, 06:40:49 PM »

Thanks!   Main18

I was too focused on getting a tax lien released and then withdrawn - which may or may not apply, depending on circumstances.
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"If one of these engines fails, how far will the other one take us?"
"All the way to the scene of the crash!" - Ron White
Name: Bonzai
Location: TN
Age at Application: 47
Disability: BP 1, OSA, HTN, DM II, Arthritis Knee
Date Applied: Feb 08
First Approval/Denial Date: Denied Dec 08
Reconsideration Approval/Denial Date: Denied Mar 09
Hearing Date: second hearing June 2012
ALJ Approval/Denial Date: Approval - Aug 2012
Date Award Letter Received: Oct 2012
Date Back Pay Received: Late Sept 2012
Additional Info: remanded
sadandcrying
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« Reply #5 on: August 07, 2017, 06:54:21 PM »

I had over $34k in student loans. This is what I went through when I became disabled; I got my first 1099-C as soon as the education department can get it to you. I got mine that I needed to include with my next years tax filing.

If you normally file a joint return (I did) then do so. But, you have the right to file whichever way you pay the lower tax. You don't lose rights during this process, you gain.

The USDE sends you a 1099-C for the whole amount at once, & no they will not send you smaller amounts for 1099-C's even though that's how you got the money. Since they discharge it all at once, provided you're approved, they 1099-C you for the amount of the discharge, not how you received it.

Nelnet sends you a follow-up letter of disability and income during that period for you to report. I got 1 a year for 3 years. This has nothing to do with the discharge and the IRS is involved in the process at all. That said, since it's the Federalies, they can subpoena what ever they feel like they need.




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Yours truly,
John
Name: John
Location: Drexel, North Carolina
Age at Application: 52
Disability: Parkinson's Disease; DBS Surgery
Date Applied: 5/20/2013
First Approval/Denial Date: 8/20/2013
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