WASHINGTON, D.C. – In late December, Congress passed a bipartisan bill introduced by U.S. Senators Chris Coons (D-Del.), Angus King (I-Maine), and Rob Portman (R-Ohio) to eliminate a tax penalty on student loans that are forgiven due to death or permanent disability. President Trump signed the bill into law just before the new year.

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 eliminates this unfair tax. 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.

“I’m pleased that the bipartisan Stop Taxing Death and Disability Act was enacted into law. Taxing Americans who are grieving the death of a child or adjusting to a life-changing permanent disability is simply unconscionable,” said Senator Coons. “We forgive these student loans because that’s the right thing to do as a country.  Requiring these Americans to pay a surprise tax on student loan forgiveness serves no public policy purpose whatsoever.”

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 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.

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