In a rare moment of bipartisanship at the end of 2017, a bill was introduced and signed into law that finally deals with the issue of tax liability for forgiven student federal and private student loan debt from the death of the student or disability.
Rob Portman (R-OH) introduced the legislation with Senators Chris Coons (D-DE) and Angus King (I-ME). It was titled The Stop Taxing Death and Disability Act.
While the federal government forgives certain federal student loans in the case of the death or disability of the borrower, the IRS treats this canceled debt as income, which can result in tens of thousands of dollars in immediate tax liability. The Stop Taxing Death and Disability Act eliminated this unfair tax, which simply replaces one financial burden with another and serves no public policy purpose.
The Stop Taxing Death and Disability Act:
Exempts from income tax federal and private student loans that are discharged due to the death of a child or total and permanent disability. Congress already exempts certain discharged federal student loans from income taxes.
Allows a parent whose child develops a total and permanent disability to qualify for student loan discharge. The bill resolves an inconsistency in statute by authorizing the Department of Education to discharge federal loans owed by a parent of a child who becomes totally and permanently disabled. Currently parents are allowed to discharge federal student loans if they develop a total and permanent disability, or if their child dies, but not if their child develops a total and permanent disability. The bill also exempts this new type of discharge from income tax.
While Congress still has not tackled the bigger issue of forgiven student loan debt from income-driven repayment plans at least they’ve death and disability to a short list of tax-free forgiveness situations: Public Service Loan Forgiveness and tax-exempt forgiveness of student loans due to the closure of a borrower’s school.