Sens. Chris Coons, D-Delaware; Angus King, I-Maine; and Rob Portman, R-Ohio, re-introduced legislation to eliminate a tax penalty levied on student loans forgiven for families after the death of their child and Americans who develop permanent disabilities.
Congressmen Peter Roskam, R-Illinois; and Ron Kind, D-Wisconsin, are re-introducing a House companion bill. Sens. Johnny Isakson, R-Georgia; Debbie Stabenow, D-Michigan; John Hoeven, R-North Dakota; Patty Murray, D-Washington; Cory Gardner, R-Colorado; Tom Carper, D-Delaware; Susan Collins, R-Maine; Tim Kaine, D-Virginia; Richard Blumenthal, D-Connecticut; and Dianne Feinstein, D-California, also joined as original co-sponsors of the bill.
While the federal government forgives certain federal student loans in the case of the death or disability of the borrower, the IRS treats this canceled debt as income, which can result in thousands of dollars in immediate tax liability. The Stop Taxing Death and Disability Act would eliminate this tax. The tax on discharged loans also prevents the Department of Education from streamlining the loan forgiveness process.
The senators’ interest in this issue was spurred by the outreach from constituents around the country, including in Delaware, Maine and Ohio, who were facing the consequences of this misguided policy.
The federal government authorizes the forgiveness of certain federal loans in the case of the death or total and permanent disability of the borrower, including student loan discharge for death or for disability.
Despite these provisions, individuals with personal loss or injury are often shocked to learn that the IRS requires them to pay income tax on the amount of student loans forgiven by the federal government and private lenders.
The Stop Taxing Death and Disability Act:
— Exempts from income tax federal and private student loans that are discharged due to the death of a child or total and permanent disability. Congress exempts certain discharged federal student loans from income taxes. Under Section 108(f) of the Internal Revenue Code, public sector employees, including teachers, public defenders and librarians, who meet length of service requirements, are exempt from paying income tax on discharged loans. The Higher Education Act also provides for the tax-exempt forgiveness of student loans due to the closure of a borrower’s school. This bill adds federal and private student loan discharges as a result of death or total and permanent disability to the existing list of tax-exempt discharges.
— Allows a parent whose child develops a total and permanent disability to qualify for student loan discharge. The bill resolves an inconsistency in statute by authorizing the Department of Education to discharge federal loans owed by a parent of a child who becomes totally and permanently disabled. Currently, parents are allowed to discharge federal student loans if they develop a total and permanent disability, or if their child dies, but not if their child develops a total and permanent disability. The bill also exempts this new type of discharge from income tax.