Whoa

This is big news:

The Obama administration plans to forgive $7.7 billion in federal student loans held by nearly 400,000 permanently disabled Americans.

By law, anyone with a severe disability is eligible to have the government discharge their federal student loans. The administration took steps four years ago to make the process easier by letting people who are totally and permanently disabled use their Social Security designation to apply for a discharge, but few took advantage. The Department of Education is now taking it upon itself to identify eligible borrowers and guide them through the steps to discharge their loans.

"Too many eligible borrowers were falling through the cracks, unaware they were eligible for relief," said Education Under Secretary Ted Mitchell in a statement. "Americans with disabilities have a right to student loan relief. And we need to make it easier, not harder, for them to receive the benefits they are due."

Working with the Social Security Administration, the department has been identifying borrowers receiving disability payments and have the specific designation of "Medical Improvement Not Expected," which indicates they are eligible for the discharge. The agencies found 387,000 matches in its first review. About 179,000 of those people are currently in default on their loans, putting them at risk of losing their tax refunds and having their Social Security benefits garnished.

In the article, Persis Yu, the National Consumer Law Center's student loan borrower assistance project director, is quoted saying that the matching program "is a great first step, but the administration needs to go further to ensure that no borrower who has a right to student loan relief has their benefits taken."

What Yu is referring to, as @centeredmama generously explained to me on Twitter (which I'm sharing with her permission) is that, because the "forgiven debt counts as income on that year's tax returns," it can "mess up eligibility for aid/services." That is, the forgiven debt is not broken out from income, so it looks as though someone has earned more than they have, which can then trigger a reduction in benefits.

The letters that the government will be sending to eligible debt-holders will inform them "of the tax implication of the discharge, since the government has the right to tax the amount of money forgiven," but it may not be entirely clear that it could affect their disability benefits. And, based on Yu's comment, it seems as though the mechanism to safeguard against a reduction in benefits hasn't yet been put in place.

I'm having trouble finding out further specifics, but I wanted to provide the heads-up, and anyone with expertise in this area that I lack is both welcome and encouraged to drop additional information in comments.