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Advocates Call on Department of Education to Remove False Tax Information on Loan Discharge Application

December 17, 2021

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Advocates Call on Department of Education to Remove False Tax Information on Loan Discharge Application
Borrowers “may be improperly discouraged from applying for a discharge” due to misleading language

Student Defense, together with partners at Justice in Aging and the Delaware Community Legal Aid Society, Inc., are once again calling on the Department of Education to remove false and misleading tax information on applications for federal student loan discharges for borrowers eligible for “Total & Permanent Disability” (TPD) discharges. In a joint letter to Richard Cordray, Chief Operating Officer of the Office of Federal Student Aid, the advocates assert that the misinformation could dissuade borrowers from seeking financial relief and even subject them to unnecessary tax liability.

“Although TPD discharges have not been considered taxable income by the IRS since January 1, 2018, the front of the TPD application still provides [a] false warning,” the letter states, citing the organizations’ April 2021 Rulemaking Petition. Based on information available on the Department’s website, borrowers also receive a similar misleading warning if they become eligible for a TPD discharge through the Department’s “matching” program with the Social Security Administration.

This is the third time this year that Student Defense has called on the Department to rectify the matter, having raised the issue in their Rulemaking Petition and again in communications with the Department’s Office of General Counsel. “Unfortunately, however, over eight months after we raised this issue (and nearly four years after TPD discharges became non-taxable), the Department still falsely warns borrowers that the discharge may be considered taxable income,” the advocates write. The advocates further note that eligible borrowers “may be improperly discouraged from applying for a discharge due to the government providing incorrect tax information,” or may unnecessarily pay taxes on the discharged amount.

The letter also comes on the heels of an Executive Order issued by President Biden on December 13 requiring agencies to improve customer experience, and to “deliver the level of service that the public expects and deserves.” A full copy of the letter can be found on the Student Defense website.