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April 14, 2016

King Introduces Bill to End Tax Penalty on Student Loan Forgiveness for Permanently Disabled Americans and Families Suffering from the Death of a Child

Maine family’s story inspires bipartisan bill to ensure that borrowers don’t face new, unforeseen tax burden when student loans are forgiven after death or permanent disability

WASHINGTON, D.C. – Moved by the story of a Maine family, U.S. Senators Angus King (I-Maine), Chris Coons (D-Del.), and Rob Portman (R-Ohio) today introduced bipartisan legislation to eliminate a tax penalty levied on families whose student loans are forgiven after the death or permanent disability of their child. While the federal government forgives certain federal student loans in the case of the death or disability of the borrower, the Internal Revenue Service (IRS) still levies an income tax on this cancelled debt which can result in tens of thousands of dollars in immediate tax liability. The Stop Taxing Death and Disability Act would eliminate this unfair tax, which simply replaces one financial burden with another and serves no public policy purpose.  The tax on discharged loans is not only unfair, but it also remains a key barrier that prevents the Department of Education from streamlining the loan forgiveness process.

“To think that a person who becomes disabled or a family that loses a child would be forced to reach into their pocket to pay the IRS taxes on student loans that have already been forgiven is just wrong,” Senator King said. “It’s unfair and it only serves to heap totally unnecessary financial hardship on folks when they’re already trying to cope with personal tragedy. This fix is not only common sense, it’s just the right thing to do and I hope we can act on this bill soon so that no one else in Maine or across the country has to be the victim of this senseless policy.”

Senator King’s interest in this issue was spurred in part by the outreach of Donald and Nora Brennen, Topsham residents whose son Keegan passed away unexpectedly in 2012 from a non-traumatic brain aneurysm. Keegan had recently graduated from the New Hampshire Institute of Art and had used federal and private student loans to finance his education. While both the federal government and the private lender forgave the outstanding balances on Keegan’s loans, the IRS notified the Brennens that the federal tax code treats this forgiven debt as taxable income and presented them with a $24,500 tax bill. Mirroring the federal code, Maine state tax law also treated the loans as income and required a payment of $6,300. These notices presented a devastating financial blow to the Brennen family, who have since had to dip into their 401(k) to help pay the bill. The Brennens are now on a payment plan with the IRS, sending over $400 per month in tax payments to the agency.

“Keegan’s student loans were forgiven because he did not have a chance to use his education. As we see it, the IRS has profited and continues to profit from our son’s death,” said Donald and Nora Brennen. “We wholeheartedly support Senator King’s legislation, which would prevent other families from having to experience the financial hardship we’ve endured because of this unfair policy.”

On Tuesday, the Department of Education announced that it has identified 387,000 totally and permanently disabled Americans that were eligible for, but had not received loan forgiveness. Rather than simply eliminating the debt, the Department of Education requires borrowers to apply for discharge to ensure they are aware for the potential tax consequences associated with the discharge. If the tax was removed, these loans could be discharged immediately.

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.  Congress acknowledged the tragic circumstances of when a parent loses a child by authorizing the Department of Education to forgive outstanding federal student loans that a parent borrowed on behalf of their child prior to their child’s death. Many private lenders also discharge student loans that are co-signed by a parent if their child dies.
  • Student loan discharge for disability.  Each year, thousands of Americans, including veterans, develop disabilities or chronic health conditions so severe that they are determined by the federal government to be totally and permanently disabled. In recognition of the burden their disabilities may present, in 1965, Congress authorized the Department of Education to forgive outstanding federal student loans held by these Americans. Many private lenders also discharge student loans as a result of total and permanent disability.

Despite these provisions, individuals who suffer great personal loss or severe 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. A one-time discharge can result in tens of thousands of dollars in immediate tax liability.

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 already 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 simply 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.

The bill has been endorsed by: The American Legion; Iraq and Afghanistan Veterans of America (IAVA); Military Officers Association of America (MOAA); Student Veterans of America; Veterans Education Success; Tragedy Assistance Program for Survivors; American Council on Education; National Association of Student Financial Aid Administrators (NASFAA); National Council of Higher Education Resources (NCHER); National Consumer Law Center (NCLC); The Institute for College Access and Success (TICAS); Young Invincibles; Education Finance Council; American Foundation for the Blind; American Network of Community Options and Resources (ANCOR); Association of University Centers on Disabilities; Autistic Self Advocacy Network; Christopher & Dana Reeve Foundation; Goodwill Industries International; Justice in Aging; Lutheran Services in America Disability Network; National Academy of Elder Law Attorneys; National Alliance on Mental Illness; National Association of Councils on Developmental Disabilities; National Association of Disability Representatives; National Disability Rights Network; National Down Syndrome Congress; National Organization of Social Security Claimants’ Representatives (NOSSCR) Paralyzed Veterans of America; The Arc of the United States; United Spinal Association; and the National Disability Institute.


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