Bill Would Exempt Death and Disability Loan Discharges From Income Tax

By Stephen Payne, Policy & Federal Relations Staff

Sen. Chris Coons (D-DE), Sen. Angus King (I-ME), and Sen. Rob Portman (R-OH) introduced the Stop Taxing Death and Disability Act on Thursday, April 14. This bill, supported by NASFAA, would exclude loan forgiveness from death or disability, including the Total and Permanent Disability (TPD) loan discharge, from the calculation of gross income for income tax purposes.

Tragically under current law, borrowers who are eligible for TPD discharges or parents eligible for discharge if they borrowed loans on behalf of, or co-signed with, a child who later passed away must report that forgiveness amount as income.

"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," King said in a press release after the bill’s introduction. "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."

On Tuesday, April 12 the Department of Education (ED) announced a collaboration with the Social Security Administration (SSA) to proactively identify borrowers who may be eligible for TPD discharges. In a related Electronic Announcement released the same day, ED provided some reminders on TPD discharges, but emphasized, "Schools and loan holders should not need to alter existing systems or TPD discharge procedures" in light of the almost 400,000 federal student loan borrowers identified through SSA as eligible for TPD discharges so far in 2016.

NASFAA joined 31 other national higher education, military, veterans, and disability rights organizations in support of this legislation.

Because this bill modifies Internal Revenue Service (IRS) code, the bill will be considered by the Senate Finance Committee, instead of by the Senate Health, Education, Labor, and Pensions (HELP) Committee that typically has jurisdiction over higher education policy. A companion bill has yet to be released in the House.

For more bills introduced this session of Congress related to tax policy and student aid, check out NASFAA’s Legislative Tracker, which includes a dedicated page for tax issues.

 

Publication Date: 4/26/2016


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