How to Escape Tax Problems from Student Loan Discharges

Robin Mead


A new law just passed. They are no longer charging taxes for a disability discharge. If this is your situation, you don’t have to read this page! To qualify for this:

  1. Your loan must be discharged between 2018 and 2025
  2. Your loan must be discharged because of disability.

If your loan was discharged or forgiven for another reason, you should still read this page.

If your loan was forgiven at another time, you should still read this page.

About Taxes and Loan Discharges

If your student loan is discharged or “forgiven” you may be taxed on the amount that is discharged. This may happen now or it may happen in three years from now.

For some people, there is a way to get out of this problem, and for some people there is no way out. Read on . . .

🌻 How to Escape Tax Problems

If you have little or no assets, the IRS has a special reg called “insolvency exclusion” that can get you out of these tax problems.

You need to know about this regulation, and fill out the form. Sadly, many people do not know about it. Luckily, you are here reading this, so now you do.

If you and your spouse do not own a house or have any assets, they insolvency exclusion should be fairly simple: just fill out one form.

If you have assets, it gets more complicated. Insolvency Exclusion rules are complex.  Please be careful and research very thoroughly before going forward:

🌻 Good articles on insolvency exclusions

🌻 How Dahlia Escaped Tax Problems

“My federal loans were easily dismissed, but I had a huge scare when I got the tax form and I owed $30,000 in taxes. I was horrified and thought it had to be a mistake but no! Disability does not free you from this tax burden. I filed for insolvency exclusion, and the IRS said I didn’t have to pay. I hired a CPA to help me.

The real terrifying aspect of this story is that if I had been married to someone with a house or if I owned a home, they would have gone after the house. I would have been forced to sell it to pay the taxes due. Talk about getting kicked when you’re already knocked down.”

🌻 Double Check

Laws in this area continue to change. Please research for updates.

🌻 Tips & traps

Include everything. When calculating assets, make sure to include everything – all cars, property, houses, stocks, bonds, bank accounts and all financial accounts. In addition, make sure to count your clothes, personal items, furniture, tools, computer, jewelry, retirement plans, pensions, 401k, security deposits, cash face value of life insurance policies, and everything else.

If you own a house. This can be bad… or it can be good! If your house is underwater (you owe more than the house is worth), then that can help you get an insolvency exclusion. They look at your amount of debt vs. assets.

If you are married, they may or may not count your spouse’s assets and debt. If you are married filing jointly, they will count. If you are married filing separately, it depends on the communal property laws in your state. Some tax advisors recommend to file separately for this reason.

Interest does not mean interest. On the IRS worksheet it say “interest in pension plans.” That just means the whole value of your pension plan. Tricky!

You may still owe taxes. Even if you are insolvent, you may still owe some taxes on the discharge. It depends how much you are insolvent by.

Talk to an accountant. If you have assets, it’s a good idea do this now. Don’t wait til year three.

Giving Things Away

🌻 If you are on SSI or Medicaid, do not give away assets or money. Do not transfer a car or house into someone else’s name. If you co-own a house, do not take your name off the deed. All of these things can cause big problems. You can spend your money, but you can not give it away.

🌻 If you plan to be on SSI or Medicaid in the next 3-5 years, the restrictions on giving things away may or may not apply to you. It will depend which program you apply for (there are many different Medicaid programs and some do not care at all what you do with assets). It will also depend how much money you give away and how much time has passed. Once again, spending money is always allowed, giving it away is sometimes a problem.

🌻 If you are on SSDI or Medicare, Social Security will not care what you do with your assets.

📍If you don’t know what you are on: How to Tell What You’re On

Updated January 2018. Please comment below with your questions, stories, input and ideas. Also: kindly let us know if any links on this page stop working. If you liked this page, please share with others by pressing one of these magic buttons: 

18 thoughts on “How to Escape Tax Problems from Student Loan Discharges”

  1. Thank you Sleepy Girl for this wonderful news and excellent selection of referrals for more on the student loan discharge process for human beings with disabilities. It’s encouraging to see a glimmer of common sense sparkling from the depths of madness that is our federal government. I just learned that a collection agency hired by the DOE is attaching my disability benefits for 15%. The reason I’m just learning of it is because the notices intended to alert me were sent to an outdated address from more than 20 years ago, about as long ago as this student loan tragic comedy began. It’s hard to say what actually transpired because oddly, no one seems to want to talk about it. I applied to Chico State back in the late 80s with a full business admin scholarship awarded by General Electric to earn my bachelor’s degree. Chico State accepted me with open arms. I transferred in from Cal Poly, Pomona with transcripts that clearly and plainly document that I was the recipient of GE’s full scholarship. Right away, my academic advisor urged me to apply for financial aid and later, student loans, explaining that it was the usual procedure for scholarship students. She assured me that my completion of the bachelor’s degree program would trigger GE’s release of the scholarship funds and Chico State would distribute them to take care of any loans outstanding. I completed the degree work making the dean’s list and various recognition awards several times along the way, as a single mother of four working part-time. I later set out seeking employment more commensurate to my new degree and was surprised how meager the response was. Then, even more surprising, I started receiving phone calls and correspondence in attempts to collect the loans. All inquiries to Chico State by anyone attempting to verify my qualifications receive in response Chico State’s refusal to even acknowledge that I ever attended their institution. However dedicated I was, however hard I worked, it makes no difference. Chico State denies my family all rights to actualize the benefits of my bachelor’s degree as much today as historically, Chico State has since the early 90s. And no one attempting to collect the loans were interested in listening to my emphatic insistence that my educational costs were covered by a full scholarship. Speed forward almost two decades, and the disinterest is unchanged but for the greater propensity to come right out and call me a liar. GE advised that they regularly release scholarship funds on a recipient’s matriculation in an accredited school, and not on their completion of the degree program as Chico State’s academic advisor explained it to me. GE issues hundreds of scholarships annually, with each assigned a unique number. With only my name to go by, it would be a monumental task to locate details of my particular scholarship without this unique number. Over the course of time after earning my degree, my children’s father passed away at age 45 from heart attack and we later lost our home. My father passed away shortly after. Most of our belongings, things of their father’s, and some of my father’s things went into storage. Filled with countless memories of one of the most tragic, difficult periods of our lives, these belongings stayed tucked away in storage a very long time and were finally retrieved a few months ago. Most of it still remains in a storage area built into the garage at the home of one of my sons. Carefully re-beginning where these memories left off, my journey’s walk back to the past continues, one box at time. Also packed away in one of the multitude of boxes is the paperwork provided on my award of the scholarship where it’s strongly suspected I will find the unique number assigned by GE’s database system. Back in the day, I also sought resolution by phoning Chico State’s finance department and spoke with a gentleman who told me, “We’re not required to keep scholarship records for more than five years.” Disposal of scholarship records actively linked to student loan records makes no sense, and I said so. The gentleman responded, “mmm” and for the remainder of the call, he responded to every question and statement I made in the same manner, “mmm.” Oddly, from that day forward, all went silent. No one called, corresponded, or even whispered a hint to me about student loans; Until a few days ago, about 12 years later, when out of left field like a shot in the dark, and to my complete and total surprise, there they were, dipping their hands into my already impoverished resources, ripping out a wad of cash. The federal government apparently cannot survive until they’ve swept away every last remaining crumb of the hopes and dreams my family briefly held of a promised better future and brighter tomorrows, before they crushed them to rubble, allowing Chico State to go its merry way, unaccountable. I called the SSA and after a one-hour hold period, asked if that’s allowed to occur without advance notice or opportunity to respond, and the woman’s answer is chilling. She said, “Ma’am, this is the federal government you’re dealing with and yes, it’s allowed.” As a result of whatever notice[s] it’s claimed were mailed to a 20-year inactive address, I don’t have a copy of the Treasury Department’s notice letter. A copy must be submitted along with a request for a “hardship packet” or the hardship packet will not be sent. A hardship packet is the necessary paperwork to complete and return to seek temporary relief due to the substantial hardship to result if the attachment of disability benefits isn’t temporarily suspended. If granted, temporary relief will allow persons in my predicament to temporarily stop the attachment of their disability benefits and time to do things such as apply for a permanent disability discharge. But without a copy of the letter, I’m told I have to wait until the money taken from my disability benefits is received, and then I can verbally request by phone a hardship packet. This is not something anyone will keep me informed about. It requires me to call every few days over the next two weeks or possibly longer, to ask if they’ve received the money taken from by benefits. It seems tremendously ludicrous and here’s why. Federal government agencies share information and even system access to data. Where one federal arm is in a cooperative exchange with another federal arm, and that exchange enables the first to take a portion of certain benefits that the second is fiduciarily entrusted to manage, it makes no sense that the first wouldn’t think to verify the beneficiary’s mailing address with the second, where the second is required by law to maintain a current address in its records. Nor does it make sense that one federal arm has no means to verify that a second federal arm completed a necessarily required act or have any means to secure a copy of the written document used by the first as a vehicle to complete the act. If one hand hasn’t a clue what the other did or did not do, how is anyone to trust the actions of either or their other data-sharing associates are valid? I find nothing acceptable about shifting the burden of an entrusted federal agency’s mistake onto the back of the very citizen already negatively, and directly impacted by that same agency’s actions, especially when it’s a mistake that critically delays the citizen’s ability to effectively respond to those actions in an effort to minimize the harm caused. And does the federal government actually need all the information solicited on the packet-reams of forms they ship out, later take back in, and then review, to figure out whether a 15% attachment against an annual fixed sum of disability benefits already below the federal poverty guideline amount, will create a hardship? And where it concerns disability loan forgiveness, does the DOE so substantially out-qualify the SSA’s level of disability determination expertise, that it justifies the DOE’s forcing people to undergo the DOE’s demand for licensed physician certification, scrutinizing litany of forms, and 3-year surveillance monitoring, so the DOE can figure out whether a federally documented permanently disabled person is permanently disabled, or not? Is it not bad enough that of all the acts a human being may commit, defaulting on a student loan is the only one given equal footing of no statute of limitations as otherwise only applies to an act of murder? And to that, the federal government adds that students applying for a loan discharge must also endure this “1984” Big Brother tracking of their private lives for 3 years merely based on their status as human beings with disabilities? Does no one see this modernly given new face on America’s education act as even a bit disturbing? How much cost do these last two procedures alone tally up every business day of every year at the American taxpayers’ expense? How many students could benefit from earning a degree or credential for free, with the money that the DOE spends to duplicate the work already performed by the SSA? This is an election year, and I think these are questions our running candidates and incumbent legislators need to responsibly answer before you cast your fully-informed vote.


    1. Thank you for sharing this story. I’m sorry to hear all they have put you through. I very much hope the discharge works out. If your income is low, you can also look into income based repayment plans. They are usually relatively easy/quick to get started, and many people on disability owe $0 per month when they do income based repayment. I’m not sure how long it takes to get a discharge decision, but one possibility is you could start an income based repayment plan right away while your discharge application is being completed/processed.


  2. I was told by the collection agency that the income based repayment plan requires that I make 9 timely payments before it becomes an available option. I don’t know if the sums taken from my benefits through attachment qualify as timely payments. Ten or twenty years ago, I was pretty up-to-date with the ins and outs of the various options, but many of those have changed and given that collections efforts completely stopped decades ago, I incorrectly assumed Chico State must have finally followed through as promised and there didn’t appear reason for concern any longer. I’m still waiting for the receipt of the last sum taken from my benefits to be acknowledged when I can request their “hardship packet” to seek temporary relief. I’m no longer familiar with the details of a disability discharge though I’m supposed to receive the forms required for that any day now by mail. It seems it required each loan be identified by named type and account number and the slightest slip up in attention to detail can leave a loan still outstanding even when DOE approves a discharge. Attention to detail isn’t as much a problem as having no idea what any of this information is. It seems difficulties can also arise with identifying the holder due to the rapid turn-over of these loans being sold over and over between numerous buyers. All these factors and likely more are certain to effect the time frame a discharge can take, if enough time is even allowed to track down all this information to apply for it. If I remember correctly, it seems once a discharge packet is sent out, the time to complete and return it is limited. I doubt anything to stream-line this process has taken place over the last two decades to make it any easier so I’m in for an uphill battle. And that’s about the only certainty given by this entire ordeal at the time.


    1. I would not talk to any collection agency about this. They often lie. Talk directly to the department of education, or read the materials on their website.

      If you are applying for a disability discharge, there is no reason why you would need to work with a collection agency or bother with their “hardship package.”

      Many of the readers here have gotten disability discharges, and report that the process is easy as long as you have a doctor who is willing to sign your form.

      If you can’t or don’t want to apply for a discharge, you can sign up for income based repayment plan instead. Apply directly with the department of education.

      Hope this helps and hope it goes well for you. ❤


  3. Thank you for this advise and you’re absolutely right. The collection agency’s only interest is the collection of money. It doesn’t take much encouragement to dissuade me from talking to them again. I’ve said all there is to say to these people, that their barking up the wrong tree. I don’t expect them to listen anymore than those from decades ago. On the other hand, I don’t expect them to assume liberty to call me a liar, either. They’ve already attached my benefits so there’s really no need I can think for them to call me at all.

    I don’t have my notes in front of me but it seems the Treasury Dept. is where the hardship packet came in. It’s a little murky because I was switched back and forth between people speaking for the Dept. of Education [disability discharge] and the Treasury Dept. As I understand it, the Treasury Dept. can suspend an attachment once a hardship is established. But since they sent their mailings to the wrong address, I don’t have a copy of their letter to submit with a request asking them to send me the packet. And apparently, they can’t verify from their own records whether they sent the letter or not, so require that I wait until they confirm receipt of the money taken from my benefits. Once they do, they can send me a hardship packet if I request one by phone. The person I spoke with at the Dept. of Education is sending the paperwork for a disabled medical discharge.

    I really appreciate your dialog on this. It’s encouraging to learn that many of your other readers made it through this process without the nightmare of pitfalls I’ve been worrying myself with. I need to take a breath and stop putting the cart before the horse, and just take it a step at a time.

    Your suggestion about going straight to the source is also great advice. The Treasury Dept. and Dept. of Education both have online resources and I should be looking there instead of guessing and relying on memory of things in the past. It’s amazing how the simpler things get overlooked in a mind scrambled by stress.

    Thank you again, for your guidance and reminders of how to go about this and keep it simple. You are a guiding light and very much appreciated.


    1. Great work, Sheryl.

      I did not know the treasury department had a hardship program, so I don’t know what that entails. Thanks for letting me know about it.

      Yes, we’ve heard from many people who got either discharges or income based repayment plans without problems. Both ways are good, so if one doesn’t work out you can always try the other.

      I am very glad you are looking into all of this. It seems like what happened in the past was really unfair and I am glad you are finally finding a way out of it. ❤


  4. I just called the number back [800-621-3115] for the hardship packet and was routed to a department within the Dept. of Education. There’s a 30-day deadline to complete the form and provide proof of income and expenses. It takes up to 75 days for a suspension of an attachment to go through. I also called to apply for a disability discharge [888-303-7818;]. There are two ways to establish permanent disability. One way is by submitting an SSA Form 2459 that states their medical review schedule is every 5 or 7 years. If it states every 3 years, the person doesn’t qualify. The second way is with a doctor’s certification form which the woman I spoke with said most people go with. Once the application for discharge is received, a letter goes out acknowledging its receipt. A second letter goes out following the review either approving or requesting more information.

    You hit the nail on the head about what happened in the past. It’s proved nearly a barrier to my moving forward with this because I feel as though my doing so is an admission that this whole thing stems from my irresponsible failure to act. There’s possibility I could actually prove Chico State’s omissions once I locate the scholarship documents buried in the mountain of boxes recently moved from storage. There’s a head-strong, stubborn part of me screaming for justice as a point of principle, and then there’s that part of me that asks how much more of myself do I want to give to this ordeal. Doubtless one day, I’ll come across these documents and I’m just hoping I can live with myself after having gone these other routes I just initiated this morning.

    I also have to accept my own weaknesses in the aftermath of deaths and losing our home, when “going autopilot” was my last clutch to sanity enabling me to carry my children through it with as little lasting ill effect as possible. I stuffed everything away into storage to deal with another day, and all the documents of the student loan – scholarship battle along with it. When the phone calls and letters stop coming, I allowed it as an extended reprieve from all those things too painful to revisit and that’s where I dropped the ball. I could have used that time to get my ducks in a row and go after Chico State, and I didn’t.

    But all my children, today, are healthy, mindful, and strongly independent and survived that tragic period in our past with minimal lasting effects and I think my gratefulness for that is why I’m here right now, about to do what I’m not exactly thrilled about, but what will bring closure to this chapter. We didn’t get to share in the promised brighter tomorrows that I worked for, but I can step forward and enjoy my time with them in peace. And I really can’t think of much else able to beat that.


    1. Good job moving forward with this. I know it is hard to let go of injustice in the past, but I hope this next step will bring you peace.

      If you apply for hardship I would be interested to hear your experience. I don’t know this particular hardship program, but other hardship programs I have seen can be more difficult to qualify for and sometimes require appeals.

      Income based repayment is not difficult to sign up for and anyone can do it. It is a very common program.

      Disability discharge, if your doctor fills out the form correctly, should also be not too difficult.


  5. When the guy from the collection agency called, he mentioned income based repayment while pressing me to name a number as an amount of monthly payment I was willing to promise them. He told me it required the account be current, with 9 timely payments, and then I could apply. I’d just learned of their attachment and didn’t feel comfortable negotiating with them. When he picked up on that, he asked if he could transfer me to a supervisor and against my better judgment, I agreed. The “supervisor” is the woman that sealed the deal when she tried to threaten me and put words in my mouth, and then called me a liar. They just blind-sided me with their attachment and her demeanor only added insult to injury so I told her, “I think we’re done here.”

    I’m just learning my way around ED’s massive number of websites so I’ll try targeting a direct search for income based payment to learn more. Interestingly, I stumbled across an option related to “misleading” and “misconduct” by schools tied to requirements of law, with no specifics as to which laws. But it can be taken “regardless of eligibility for other options” which is kind of intriguing.

    You’ve got it – I’ll keep you posted on the hardship packet process as it unfolds. Please know anything I find that you can use to batten your bridges to freedom is yours. Thanks again for your prompt responses and help, and being here, and pretty much just thank you for You.


    1. We’ve heard from a number of readers who did Income Based Repayment with success. Depending on income, if disability check is low enough, many of them would up owing $0 per month 🙂


  6. ps ~ I meant to ask you if there’s any particular reason that a doctor’s certification is preferred by most over the SSA Form 2459 when applying for a disability discharge. [thx!]


    1. As far as I know, both ways are equally good.

      Many people don’t have the 5 year review cycle. The 3 year seems to be more common. Do you know what you are on?

      You can’t go by how often you get reviews, because they are often late (some people are on a 3 year cycle but only get an actual review every 5 years)

      Liked by 1 person

  7. By the way, I have never heard this nine timely payments thing. You can probably apply for income based repayment tonight online. I think it is fast to apply for. 🙂


  8. SSA’s never sent anything that I’m aware of that says what review cycle I’m on. Back around 2005, they sent a fairly extensive packet of forms as a review. Since then, I only recall one or two one-page forms with 7 questions and I’m not even sure how long ago the last one was – quite awhile, though.

    The SSA Form 2459 or Benefits Planning Query [BPQY] gives a host of information. It’s sometimes used for disability reviews but generally, it’s used for work planning by agencies helping people who “want to start working or stay on the job”. There’s conflicting info about whether it can be requested by phone or has to be requested in person. Where systems are heavily automated, I can imagine a request for one triggering unintended expectations.

    You note an interesting aspect about the collection agency’s IBR claims. Fed. Student Aid’s website says that to qualify for one of four different income-based or income-driven plans, loans can’t be in default and there has to be at least 3 on-time, voluntary payments. Options to get out of default are to rehabilitate or consolidate loans and that’s where things can get complicated, involving current loan holders and different spins that each option puts on which payment plans are available.

    It seems loans left dormant for decades – as here, with no one working the account, no calls, letters, no credit reporting, absolutely nothing – that suddenly stir back to life like something in Frankenstein’s lab, bring along their own set of issues that otherwise, won’t usually be encountered. I was a first-year law student when Grave’s Disease took me horns down and left for dead in the midst of this state of dormancy, but from that time there’s a load of case law with findings that say a creditor can’t “sit on its laurels doing nothing, then later rise calling foul” expecting the courts’ equity.

    It stands to good reason as here, seems illustrated – except, as said earlier, student loans in default are held equal to acts of murder where no statute of limitations are concerned. That, at least to me, shows how far legislators are willing to go to tip the scales in favor of bankers, at the life-sentence expense of their own constituents who happen to be students whose only goal is to become productive contributors to the Constitutional social fabric we call “The United States”. These are legislators seemingly helpless to stop pushing the elitist envelope while not appearing to notice the envelope left the table a long time ago.


    1. I don’t think there is any risk in requesting your bpqy. The person who answers the phone might not know what it is, so you might havee to ask more than one person.

      I didn’t realize that about ibr and default loans. If they have been garnishing your check, you might not be in default. Either way, you can always fill out the online application, it doesn’t take long and the worst thing that can happen is they say no 🙂


  9. With IBR it seems the word “voluntary” payment excludes involuntary attachments. And knowing that voluntary payments are “constructively” taken as an admission to owing the debt in California courts only triggers the hard-headed part of me screaming for justice. It’s like Doc Holiday’s [Val Kilmer] line in the movie Tombstone, “Even my own hypocrisies have their limits.” : D


    1. from what I read, the voluntary payments are not required for IBR. If I were you, i would apply. It’s easy to apply and the worst that happens is they say no and you try something else.


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