Portman's Bipartisan Stop Taxing Death and Disability Act Included in Senate Tax Reform Bill

November 15, 2017 | Press Releases

Bill Ends Student Loan Tax Penalty for Families Suffering from Child’s Death or Permanent Disability; Student Loans that are ‘Forgiven’ after Death or Permanent Disability of the Lender Still Face Thousands in New Tax Payments

WASHINGTON, D.C. – Today, U.S. Senator Rob Portman (R-OH) announced that his Stop Taxing Death and Disability Act, legislation he introduced earlier this year with Senators Chris Coons (D-DE) and Angus King (I-ME), has been included in the Senate tax reform bill. The bill is designed to eliminate a tax penalty levied on student loans forgiven for families after the death of their child and Americans who develop permanent disabilities.  The bill also allows a parent whose child develops a total and permanent disability to qualify for student loan discharge. Congressman Peter Roskam (R-IL) and Ron Kind (D-WI) introduced a companion bill in the House. Portman discussed the legislation on Fox News earlier this year with Senator Coons.

While the federal government forgives certain federal student loans in the case of the death or disability of the borrower, the IRS treats this cancelled debt as income, which can result in tens of thousands of dollars in immediate tax liability. The Stop Taxing Death and Disability Act would eliminate this unfair tax, which simply replaces one financial burden with another and serves no public policy purpose.  The tax on discharged loans is not only an unnecessary tax, but it also prevents the Department of Education from streamlining the loan forgiveness process.

Portman’s interest in this issue was spurred by the outreach from constituents in Ohio who were facing the consequences of this misguided policy. 

“Families like the Carducci family of Steubenville, Ohio, who have a child who has become permanently and totally disabled are going through unimaginable grief,” Portman said. “Because of this tragic disability, they cannot afford a massive student loan bill.  Other families have a lost a child, and are forced to pay a significant tax penalty, sometimes of tens of thousands of dollars, on forgiven student loans while they are still grieving. The last thing that families in these situations need is that kind of financial burden. I am pleased this bill has been included as part of the Senate tax reform plan. I hope to see it signed into law soon to provide relief to these families at a difficult time.”

The federal government authorizes the forgiveness of certain federal loans in the case of the death or total and permanent disability of the borrower, including:

  • Student loan discharge for death.  Congress has acknowledged the tragic circumstances of when a parent loses a child by authorizing 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.  Each year, thousands of Americans, including veterans, develop disabilities or chronic health conditions so severe that they are determined by the federal government to be totally and permanently disabled. In recognition of the tremendous burden of their disabilities, Congress authorized the Department of Education to forgive outstanding federal student loans held by these 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.

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 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. 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; Student Veterans of America; Veterans Education Success; Tragedy Assistance Program for Survivors; American Council on Education; National Association of Student Financial Aid Administrators (NASFAA); Access Group; the American Federation of Teachers; 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; ACCSES; American Association of People with Disabilities; Bazelon Center for Mental Health; Community Legal Services of Philadelphia; Disability Rights Education and Defense Fund; Mental Health America; National Association of State Head Injury Administrators; Parent to Parent USA; Special Needs Alliance; United Cerebral Palsy

"Student Veterans of America applauds the dedication Senators Coons, King and Portman have shown in supporting the families of fallen service members,” said Will Hubbard, Vice President of Public Affairs, 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 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."