Prior to passage of this law, the government would forgive student loans held by debtors who became permanently disabled, but the amount of the forgiven debt was considered taxable income by the IRS. You may remember the story of Will Milzarski, a military veteran who was wounded and disabled while fighting in Afghanistan. The Department of Education forgave about a quarter of a million dollars in student loans, but the IRS sent Mr. Milzarski a tax bill for $62,000.
The Stop Taxing Death and Disability Act, which was adopted by Congress with bipartisan support, eliminates this unfair tax provision. Under the new law, all student-loan debt (including private student loans) that is forgiven due to the death or disability of the debtor is exempt from federal income taxes.
In addition, the law gives a tax break to the parents of student-loan debtors. Parents who owe student loans on behalf of their children may obtain a student-loan discharge if their child becomes disabled. And parents who obtain such a discharge won't be taxed on the forgiven debt.
So, is the glass half full or half empty?
On the good side, passage of this modest and noncontroversial bill is a sign that Republicans and Democrats can work together to pass student-loan reform legislation. The bill's three co-sponsors--Senators Rob Portman (R-Ohio), Chris Coons (D-Delaware), and Angus King (I-Maine) are to be commended for getting this little bill adopted.
But on the other hand, as Mr. Rhode pointed out, the bill did not address the enormous tax liability that college borrowers face who are in income-driven repayment plans (IDRs). More than six million student debtors are enrolled in IDRs, and most of them are making monthly loan payments so small that they will never pay off their loans. Why? Because the monthly payments aren't large enough to cover accruing interest on the underlying debt.
People locked into IDRs are obligated to make monthly loan payments for terms that stretch out for 20, 25 and even 30 years. At the end of the repayment term, any remaining unpaid debt is forgiven, but the amount of the forgiven debt is considered taxable income.
In other words, a student debtor who successfully completes a 20-year IDR sheds one unpayable debt to the Department of Education and acquires another unpayable debt to the IRS.
Nevertheless, the fact that Congress passed the Stop Taxing Death and Disability Act is a good sign. Maybe Democrats and Republicans can build on this tiny victory to enact more sweeping student-loan reform.
For example, perhaps a bipartisan coalition could rally behind the Warren-McCaskill bill to stop the IRS from garnishing the Social Security checks of elderly student-loan defaulters. Who in good conscience could vote against that bill?
And is it too much to hope that Congress might someday reform the Bankruptcy Code and allow suffering student-loan borrowers to discharge their crushing student loans in bankruptcy?
|Will Milzarski, Wounded Veteran (photo credit: Chicago Tribune)|
Associated Press. Wounded Michigan vet gets student loan debt forgiven, but now IRS wants $62,000. Chicago Tribune, October 20, 2017.
Judith Putnam. Student debt forgiven, but wounded vet gets $62,000 tax bill. USA Today, October 20, 2017.
Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.
Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.
Steve Rhode. 15 Seconds of Positive News About Student Loans and Congress. Get Out of Debt Guy, February 15, 2108.
Some physical or mental impairments can qualify you for a total r permanent disability discharge on your federal student loans and/or TEACH grant service obligation. U.S. Department of Education web site (undated).