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.