After much criticism, the Department of Education has made it easier in recent years for disabled borrowers to have their federal student loans discharged. But now, as more people are qualifying for loan forgiveness, many of them are running into an unexpected consequence: They are often shocked to learn that they basically exchanged one debt for another, according to consumer advocates and tax and credit specialists.
While millions of debts — including credit cards and mortgages — are canceled each year, the group of borrowers whose loans have been discharged because of a “total and permanent disability” has grown sharply to more than 115,700 in 2013, from nearly 61,600 in 2011 and fewer than 15,000 in 2008, according to the Department of Education. But under current tax law, the amount of debt forgiven is generally taxable, so some disabled borrowers end up with tax bills they cannot afford.