Bill introduced to exempt taxes on discharged debt from disability, student loan forgiveness program

student with pile of books and lots of IOUs
Bill to make student loan forgiveness program tax free

Two days after the Obama Administration announced comprehensive reforms to the federal student loan forgiveness program for people with severe disabilities, a bipartisan group of senators is pushing for additional changes to ensure the forgiven debt is tax free.

Under current law, the Internal Revenue Service treats discharged income the same as income. As a result, student whose loans are forgiven, after meeting the rigid criteria of having a “total and permanent” disability, are hit with a one-time tax bill on the discharged income, sometimes in the tens of thousands of dollars.

Parents who co-sign for their children’s student loans run into the same scenario, in the event that their child dies and still owes student loan debt.

“Families grieving the loss or permanent disability of a child did nothing wrong. And they should not be punished by the federal government with a massive tax bill,” Sen. Rob Portman (R-OH) said in a news release. “The same tragic reason they cannot pay back their student loans is the reason that they cannot afford an enormous tax increase so contrary to the purposes of our student loan system. Our bipartisan bill will fix this problem once and for all.”

The Stop Taxing Death and Disability Act, introduced April 14, would eliminate this tax burden. In doing so, the discharged debt would be treated the same as that under the popular public interest forgiveness loan program, among other loan forgiveness programs.

The Consortium for Citizens with Disabilities praised the proposal, noting the impact the change will have on borrowers’ eligibility for public benefit programs.

Since the discharged debt is treated as income, people can become ineligible for certain means-tested benefits programs, according to a statement from the CCD, signed by the National Disability Rights Network and 18 other disability rights organizations. Similarly, the IRS has authority to garnish payments from Social Security Disability Income and other benefit sources, if the individual owes taxes on the discharged debt.

The bill, which applies to both federal and private loans, is sponsored by Senators Portman (R-Ohio), Chris Coons (D-DE) and Angus King (I-ME).

The Obama Administration called on Congress in its fiscal 2017 budget to pass legislation to stop treating student debt as income under the total and permanent disability discharge program, according to Marketwatch.

“Taxing Americans who are grieving the death of a child or adjusting to a life-changing disability is simply unconscionable,” Senator Coons said in a news release. “We forgive these student loans because that’s the right thing to do as a country. Requiring these Americans to pay a surprise tax is counter to the intent of forgiving the loans in the first place and serves no public policy purpose whatsoever.”

Disability Rights Washington, the publisher of Rooted in Rights, is the designated protection and advocacy agency in Washington, and a member of the National Disability Rights Network.

2 responses to “Bill introduced to exempt taxes on discharged debt from disability, student loan forgiveness program

  1. As parents of 3 adults with disabilities, 2 in college, we are struggling to keep our heads above water to get our 26 & 28-year olds to the point where they can support themselves independently & become Tax-Paying Citizens.
    We are 64 years old ourselves semi-retired/self-employed & It is a challenge to pay for college AND hold on to the small retirement. Due to the cost of raising these boys we never were able to save for retirement;what little we have is from a small inheritance. This law could make it possible for us to keep our heads above water. Hundreds of parents of disabled adults have their children living at home with them & receive little if any SSI. We MUST have places for our disabled adults to live (and work) when parents are too fragile to care for their children themselves. Don’t count on family; rarely are there family members who can take on the task of caring for an adult with disabilities in addition to their other family duties.

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