Portman Introduces Bipartisan Student Loan Forgiveness Bill

April 14, 2016 | Press Releases

Washington, D.C. –Today, Senator Rob Portman (R-Ohio), along with Senators Chris Coons (D-DE), and Angus King (I-ME), introduced legislation—the Stop Taxing Death and Disability Act—to eliminate a tax penalty on families whose student loans are forgiven as the result of the death or permanent disability of their child. Because loan forgiveness is considered income for tax purposes, families in this situation can be charged tens of thousands of dollars in taxes, even while grieving the loss of a child.

Families grieving the loss or permanent disability of a child did nothing wrong,” Portman said.And they should not be punished by the federal government with a massive tax bill. The same tragic reason they cannot pay back their student loans is the reason that they cannot afford an enormous tax increase so contrary to the purposes of our student loan system. Our bipartisan bill will fix this problem once and for all.

NOTE: Yesterday, the Department of Education announced that it has identified 387,000 totally and permanently disabled Americans that were eligible for, but had not received, loan forgiveness. Rather than simply eliminating the debt, the Department of Education requires borrowers to apply for discharge to ensure they are aware for the potential tax consequences associated with the discharge. If the tax was removed, these loans could be discharged immediately.

The Portman/Coons/King bill has been endorsed by: The American Legion; Iraq and Afghanistan Veterans of America (IAVA); Military Officers Association of America (MOAA); 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 (NCLC); The Institute for College Access and Success (TICAS), Young Invincibles; Education Finance Council; 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.

 “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."

"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. 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). "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."

"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. "This bill will ensure that vulnerable student loan borrowers are not forced to trade an unaffordable student loan debt for an unaffordable tax debt. We applaud Senators Coons, King and Portman for their leadership on solving this problem. Congress should move quickly to pass this legislation."

Under current law, the federal government authorizes the forgiveness of certain federal loans in the case of the death or total and permanent disability of the borrower.

  • Student loan discharge for death: Congress has authorized the Department of Education to forgive outstanding federal student loans that a parent borrowed on behalf of their child prior to their child’s death. Many private lenders also discharge student loans that are co-signed by a parent if their child dies.
  • Student loan discharge for disability: in 1965, Congress authorized the Department of Education to forgive outstanding federal student loans held by permanently disabled Americans. Many private lenders also discharge student loans as a result of total and permanent disability.

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. A one-time discharge can result in tens of thousands of dollars in immediate tax liability. 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 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. Under Section 108(f) of the Internal Revenue Code, public sector employees, including teachers, public defenders and librarians, who meet certain 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 borrower’s school. The Stop Taxing Death and Disability Act 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.