Student Loan Forgiveness After Death or Disability Shouldn’t Incur Huge Tax Bill

In 2012, just months after graduating from New Hampshire Institute of Art, Donald and Nora Brennan’s son, Keegan, died unexpectedly of a brain aneurysm. Keegan and his parents had taken out $78,000 in student loans for Keegan. The student loans were forgiven, but while the Brennans were still grieving for their son’s death, they were slapped with a tax bill of more than $33,000.

With Congress set to tackle a massive, contentious tax law proposal, there is a simple, bipartisan reform it can do right now to help thousands of grieving parents like the Brennans and hundreds of thousands of student loan borrowers with total and permanent disabilities – many of whom are disabled veterans.

With $1.4 trillion of student loan debt on the books and 8 million borrowers in default, many people face challenges in dealing with this debt. But student loan debt is especially burdensome for people who have disabilities that prevent them from being able to work and for emotionally devastated parents who took out a student loan for a child who has died. The challenges are even more immense for veterans transitioning out of military service and coping with a service-related disability.

There are programs designed to help these borrowers.  But the programs come with a big catch: the possibility of a very large tax bill. Solving this problem is simple and inexpensive, but bills designed to fix this problem died in Congress last year and have yet to move this year.

When a borrower dies or becomes permanently disabled before paying off a student loans, the loans can be discharged, relieving the disabled borrower or surviving family members of the burden of paying off a loan they often cannot afford. And there is a special program that allows veterans to seek federal student loan forgiveness if they receive a 100 percent disability rating by the Department of Veterans Affairs. These are good, common-sense ways to help families who are dealing with a disability or a loss with the burden of student debt.

But loan forgiveness comes with an unexpected side effect: The Internal Revenue Service may treat the amount of the forgiven loan as taxable income. Although some will be able to exempt this income because they are insolvent, not all will qualify. As a result, a family that was relieved to have a student loan forgiven may then end up struggling to pay a big tax bill — all while dealing with the death of a child.

For many of these borrowers, this tax has collateral consequences. In order to pay the tax liability, some borrowers could be forced to sell their homes, cars or other necessary assets. Some borrowers could even lose eligibility for Medicaid because the income eligibility guidelines include canceled debt. The federal government should not require borrowers to give up medical care or the assets necessary to maintain basic necessities.

Disabled veterans, borrowers with disabilities and bereaved families should not be put under this kind of financial stress. Student loan forgiveness after a student’s death or disability – a policy intended to relieve a financial burden – should not lead to a huge tax bill.

In 2016, the American Legion and the National Consumer Law Center joined 33 other veterans service organizations and community organizations to support passage of the Stop Taxing Death and Disability Act, which would rid the tax burden on forgiven loans. These efforts to rid the tax burden on forgiven loans have bipartisan support – even passing unanimously in the Ways and Means committee, and was reintroduced this year in both the Senate and House.

The bills are sponsored in each chamber by more than a dozen representatives from both parties and have a very low price tag, but despite the valiant efforts of their sponsors, they are stalled in the House Ways and Means and Senate Finance committees. Meanwhile, disabled borrowers and parents of deceased borrowers nationwide are still facing heavy tax bills on their forgiven loans due to a lack of Congressional action.

The proposed Stop Taxing Death and Disability Act is a commonsense bipartisan measure that would immediately benefit thousands of Americans of every background and political stamp. Our injured veterans, bereaved families, and disabled student loan borrowers deserve relief now. So, what is Congress waiting for?

John Kamin is an assistant director at the American Legion, the nation’s largest wartime veterans service organization. Persis Yu is the director of the National Consumer Law Center’s Student Loan Borrower Assistance Project

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