(istock)

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.

“The creation of 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,” said Persis Yu, the National Consumer Law Center’s student loan borrower assistance project director. “Borrowers receiving SSDI need these payments to survive.”

Starting next week, borrowers identified in the match will receive a letter from the government explaining the steps needed to receive a discharge. They will not be required to submit documentation of their eligibility, unlike disabled borrowers who apply for the discharge on their own. Notification letters will be sent over a 16-week period, and followed up with a second letter after 120 days.

The letters will inform borrowers of the tax implication of the discharge, since the government has the right to tax the amount of money forgiven.

Tuesday’s announcement is an outgrowth of President Obama’s Student Aid Bill of Rights, which directed federal agencies to overhaul the way Americans repay student loans.