Print Page | Contact Us | Sign In | Register
News & Press: EFC in the News

Delaware State News

Saturday, November 26, 2016  
Share |

COMMENTARY: Demand an End to ‘Unfair Tax on Forgiven Loans’

By U.S. Sen. Chris Coons
November 26, 2016 

The grief and pain of losing of a child is unimaginable. The strength and durability of character of those forced to pick up the pieces in the months and years following such a loss is an inspiration. I believe it’s up to lawmakers to do everything we can to support families in these situations, which is why I’ve led a group of Republicans, Democrats, and Independents in Congress to introduce the Stop Taxing Death and Disability Act.

A commitment to making difficult days a little easier is why the federal government forgives student loan debt for families of children who have died or Americans who have become permanently disabled. This same commitment should extend to the tax burden that comes with that loan forgiveness.

The U.S. Department of Education forgives student loans for individuals because of death or total and permanent disability. This is a sensible, compassionate policy. However, these Americans who suffer great personal loss or severe injury are often shocked to learn that through an unfortunate quirk in current law, the Internal Revenue Service may require them to pay income tax on the very loans the Department of Education has forgiven. A one-time discharge of loans can result in tens of thousands of dollars in immediate tax liability.

Under current law, the IRS treats the amount of student loans forgiven as income, which must be reported on an individual’s tax return. Borrowers are given the colorfully named Form 1099C and instructed to report these discharged loans as a type of income, which is subject to tax. Instead of helping families heal, this misguided policy simply replaces one financial burden with another.

The consequences are real. Take the Delawarean who had more than $30,000 of student loans discharged following a permanent disability, only to learn that he might be subject to a significant tax. Or the member of my staff, who experienced this harrowing situation with his family after his older brother passed away in 2009. When his brother died at age 23, six months after graduating from college, his parents were liable for his brother’s student loans.

Reeling from the loss of a child, it took years of miscommunication and negotiations with their loan servicers for his parents to finally have the loans forgiven in 2015. This year, they were surprised to receive a notice stating that the $75,000 in loan forgiveness should be declared as income on their tax return, which could result in tens of thousands of dollars in taxes owed to the IRS. Tragically, we see similar stories in communities across the United States.

It doesn’t have to be this way. I believe that stories like these should be, at worst, nothing more than a bad dream — not living nightmares for American families. To end this, I worked together with Republican Sen. Rob Portman of Ohio and Independent Sen. Angus King of Maine to introduce a bill in both the House and Senate to fix this problem. Our bipartisan, bicameral proposal, the Stop Taxing Death and Disability Act, is simple: it eliminates this unfair tax on forgiven loans because it serves no public policy purpose.

Under current law, student loans belonging to a borrower whose college closes, or for individuals who work in certain public service fields, already have their loans forgiven tax-free. Why should student loans forgiven for death or disability be treated any differently?

Since we introduced this bill, we have been gratified by the groundswell of support it has received. The Stop Taxing Death and Disability Act has been endorsed by more than 25 groups within the disability, education and veterans’ communities, including the American Legion, the Christopher & Dana Reeve Foundation, the Education Finance Council, and Student Veterans for America.

But we need to work faster. Earlier this year, the Department of Education identified nearly 400,000 Americans with total and permanent disabilities who are eligible for discharge of their federal student loans. Just this month, I joined with Sen. Portman and Sen. King to urge the Department of Veteran Affairs to streamline the disability verification process to ensure that any veteran who is permanently disabled is discharged of their federal student loan. Such a discharge is allowed under current law, but the lack of coordination between the Department of Education and Veterans Affairs is leaving behind potentially thousands of veterans who could otherwise have loans forgiven.

However, even many of the veterans who would benefit from executive action could face this same surprise tax bill following their loan forgiveness. That’s why it is critical that Congress pass the Stop Taxing Death and Disability Act to help give grieving families closure after their loans are discharged. In September, the bill was unanimously approved by the House Ways and Means Committee, and I am hopeful that the bill becomes law before the end of this year.

Despite our divided political climate, we have a rare opportunity to turn this commonsense, bipartisan bill into law. If you agree that taxing death and disability is an insensitive and useless policy, join us by spreading the word that time is running out. Let’s take action to end this tax and make this misguided policy nothing more than what it should be — a bad dream.

EDITOR’S NOTE: U.S. Sen. Chris Coons is the junior senator representing Delaware in Washington.