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.
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:
Congressman Peter Roskam (R-IL) and Ron Kind (D-WI) are also re-introducing a House companion bill today, and web 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.
While both the federal government and the private lender forgave the outstanding balances on Keegans 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
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 its 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, its just the compassionate and right thing to do.
Senator Kings 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. 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.
- 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 childs 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.