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February 16, 2017

King, Portman, Coons Reintroduce Bipartisan Bill to End Student Loan Tax Penalty for Families Suffering from Child’s Death or Permanent Disability

Families whose student loans are ‘forgiven’ after death of a child, or Americans with a permanent disability, still face thousands in new tax payments

WASHINGTON, D.C. – Today, U.S. Senators Angus King (I-Maine), Rob Portman (R-Ohio), and Chris Coons (D-Del.) 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. 

Congressman Peter Roskam (R-IL) and Ron Kind (D-WI) are also re-introducing a House companion bill today, and Senators Johnny Isakson (R-Ga.), John Hoeven (R-Neb.), Cory Gardner (R-Colo.), Susan Collins (R-Maine), Tom Carper (D-Del.), Tim Kaine (D-Va.), Debbie Stabenow (D-Mich.), Richard Bluementhal (D-Conn.), Patty Murray (D-Wash.) and Dianne Feinstein (D-Calif.) also have 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 cancelled debt as income, 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 an unnecessary tax, but it also prevents the Department of Education from streamlining the loan forgiveness process.

“For the federal government to hit a family who just lost their child, or a person who just became disabled, with a surprise tax on a forgiven loan is not only appalling – it’s plain wrong,” Senator King said. “No one in America should have to endure the pain or financial hardship caused by this senseless policy. This bill is not only a common-sense fix, it’s just the compassionate and right thing to do.”

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.

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 has 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 tremendous burden of their disabilities, 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); the American Federation of Teachers; Access Group; 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 (on behalf of its low-income clients); The Institute for College Access and Success (TICAS), Young Invincibles; Education Finance Council; Higher Education Loan Coalition; 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.

“Student Veterans of America applauds the dedication Senators Coons, King and Portman have shown in supporting the families of fallen service members,” said Derek Fronabarger, Director of Policy, Student Veterans of America. “Fallen service members with student loans are eligible to have their student loans discharged, however, this discharged amount of debt is considered income and is taxable. In the past, we have seen families who have lost a loved one, receive a tax bill for this discharged student debt. It is unconscionable that the families of the fallen in their time of grief are burdened by this backwards policy. This bill aims at changing this tax issue so that those families who have already paid the ultimate price are not additionally saddled by a discharged student loan tax. We at SVA fully support this bill and hope to see it move forward quickly.”

“The Stop Taxing Death and Disability Act of 2016 would make an important difference to people with work limiting disabilities who have their student loans discharged. It is common sense that someone who cannot pay back their student loans due to a total and permanent disability cannot afford to pay taxes on the discharge of those loans,” said Kim Musheno, Chair of the Consortium for Citizens with Disabilities (CCD). “CCD thanks Senators Coons, King, and Portman for introducing this legislation to ensure that people with disabilities are no longer hurt by the unintended economic consequences of utilizing this important loan discharge provision.”

“Taxing people who have had their federal and private student loans canceled due to a total and permanent disability or because of the death of their child is grossly unfair and defeats the purpose of those loan cancellation programs,” said Persis Yu, director of the National Consumer Law Center's Student Loan Borrower Assistance Project.  “This bill will ensure that vulnerable student loan borrowers are not forced to trade an unaffordable student loan debt for an unaffordable tax debt. We applaud Senators Coons, King and Portman for their leadership on solving this problem. Congress should move quickly to pass this legislation.”


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