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A one-time discharge can result in tens of thousands of dollars in immediate tax liability

  • By: Richard F. Hussey
  • Published: September 15, 2022

A one-time discharge can result in tens of thousands of dollars in immediate tax liability

  • 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. Under Section 108(f) of the Internal Revenue Code, public sector employees, including teachers, public defenders and librarians, who meet length of service requirements, are exempt from paying income tax on discharged loans. The Higher Education Act also provides for the tax-exempt forgiveness of student loans due to the closure of a borrowers Florida installment loans laws school. This bill simply adds federal and private student loan discharges as a result of death or total and permanent disability to the existing list of tax-exempt discharges.
  • 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.

The bill has been endorsed by: The American Legion; Iraq and Afghanistan Veterans of America (IAVA); Military Officers Association of America (MOAA); the American Federation of Teachers; Access Group; Student Veterans of America; Veterans Education Success; Tragedy Assistance Program for Survivors; American Council on Education; National Association of Student Financial Aid Administrators (NASFAA); National Council of Higher Education Resources (NCHER); National Consumer Law Center (on behalf of its low-income clients); The Institute for College Access and Success (TICAS), Young Invincibles; Education Finance Council; Higher Education Loan Coalition; American Foundation for the Blind; American Network of Community Options and Resources (ANCOR); Association of University Centers on Disabilities; Autistic Self Advocacy Network; Christopher Dana Reeve Foundation; Goodwill Industries International; Justice in Aging; Lutheran Services in America Disability Network; National Academy of Elder Law Attorneys; National Alliance on Mental Illness; National Association of Councils on Developmental Disabilities; National Association of Disability Representatives; National Disability Rights Network; National Down Syndrome Congress; National Organization of Social Security Claimants Representatives (NOSSCR); Paralyzed Veterans of America; The Arc of the United States; United Spinal Association; and the National Disability Institute.

It is common sense that someone who cannot pay back their student loans due to a total and permanent disability cannot afford to pay taxes on the discharge of those loans,” said Kim Musheno, Chair of the Consortium for Citizens with Disabilities (CCD)

“Student Veterans of America applauds the dedication Senators Coons, King and Portman have shown in supporting the families of fallen service members,” said Derek Fronabarger, Director of Policy, Student Veterans of America. “Fallen service members with student loans are eligible to have their student loans discharged, however, this discharged amount of debt is considered income and is taxable. In the past, we have seen families who have lost a loved one, receive a tax bill for this discharged student debt. It is unconscionable that the families of the fallen in their time of grief are burdened by this backwards policy. This bill aims at changing this tax issue so that those families who have already paid the ultimate price are not additionally saddled by a discharged student loan tax. We at SVA fully support this bill and hope to see it move forward quickly.”

Despite these provisions, individuals who suffer great personal loss or severe injury are often shocked to learn that the IRS requires them to pay income tax on the amount of student loans forgiven by the federal government and private lenders

“The Stop Taxing Death and Disability Act of 2016 would make an important difference to people with work limiting disabilities who have their student loans discharged. “CCD thanks Senators Coons, King, and Portman for introducing this legislation to ensure that people with disabilities are no longer hurt by the unintended economic consequences of utilizing this important loan discharge provision.”

Richard Hussey

Richard F. Hussey has been licensed to practice law since 1982.
He maintains admission to the California State Bar, Florida Bar,
and the Federal District Courts for the Southern Districts of
Florida and California. Read More