Senators Seek Student Loan Tax Break for Severely Disabled, Including Vets

Americans with permanent disabilities, including veterans, would not have to pay taxes on student loans forgiven by the federal government and private lenders under a new bipartisan bill in the Senate.

The Stop Taxing Death and Disability Act would eliminate the tax that the Internal Revenue Service levies on forgiven student loan debt, considered income, as a result of death or disability. The bill also would relieve the tax debt on discharged student loans for families whose child has died, or has developed permanent disabilities.

The Education Department and many private student loan lenders forgive student loans on behalf of borrowers if their child dies, or the borrowers themselves are rendered permanently disabled or develop severe chronic health conditions. But the IRS tax penalty on the cancelled debt can be thousands of dollars.

“Taxing people who have had their federal and private student loans canceled due to a total and permanent disability or because of the death of their child is grossly unfair and defeats the purpose of those loan cancellation programs,” said Persis Yu, director of the National Consumer Law Center's Student Loan Borrower Assistance Project.

Sens. Chris Coons, D-Del.; Angus King, I-Maine; and Rob Portman, R-Ohio, are sponsoring the legislation. The senators’ constituents reached out to their offices, including a Maine family whose son, a recent college graduate with student loans, died from a brain aneurysm in 2012. “Although the federal government and private lender forgave the outstanding loan balances, the parents were then presented with a tax bill of over $24,000 from the IRS,” according to a statement from Coons’ office. “This family has since had to dip into their 401(k) to pay the bill and are now sending over $400 per month in tax payments to the agency.”

The Stop Taxing Death and Disability Act also ensures that parents whose child becomes totally disabled can qualify for student loan forgiveness as well as the tax exemption. “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,” according to a press release from Coons.

Congress already exempts certain groups from paying income tax on forgiven student loans, including public sector employees who remain in their jobs for a while. The Education Department has identified 387,000 totally and permanently disabled individuals eligible for, but not currently receiving loan forgiveness.

Several vets’ groups support the bill, including the American Legion and the Iraq and Afghanistan Veterans of America.