A Maine couple whose son died shortly after graduating from college thought they’d escaped the burden of repaying his student loans when the debts were cancelled, but they had to pay a $24,000 tax bill because the IRS regards the loan forgiveness as taxable income.
“In the midst of your grief, you’re faced with paying an enormous — one big tax bill, on the entire amount of the loan being forgiven,” Maine Sen. Angus King, an independent who caucuses with the Democratic minority, said during a Thursday floor speech.
King is one of a trio of senators who introduced legislation Thursday to change that. The bill, co-sponsored by Ohio Republican Rob Portman and Chris Coons, D-Del., would exempt loans forgiven after tragedies like this from being treated as taxable income. It would also allow parents of students who develop “a total and permanent disability” to apply for tax-free loan forgiveness.
“Families grieving the loss or permanent disability of a child did nothing wrong, and they should not be punished by the federal government with a massive tax bill,” Portman said in a Thursday statement. “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.”
About 387,000 disabled Americans qualify for loan forgiveness, according to the Department of Education, but would have to pay the “surprise tax” if they had the debts cancelled.
“In total, these borrowers have a combined loan balance of over $7.7 billion, and roughly 179,000 are currently in default,” the Education Department reported Tuesday. “As required by federal law, over 100,000 of those borrowers with defaulted loans … are therefore at risk of losing federal tax refunds, and of having their Social Security benefits offset.”
King said the taxation is an unintended consequence of the loan forgiveness. “If we’re going to forgive the student loans, which makes total sense and has been the law for some time, to then turn around and say that that loan forgiveness is than taxable … just isn’t right,” he said.
