Outstanding student loan debt in the United States now totals more than $1.2 trillion. To put that into perspective, the entire gross domestic product (GDP) of the State of New York, the third-largest in the country, is just $1.4 trillion. With numbers like that, it’s no surprise that student loans have become an increasingly complicated economic issue as students and families take out large loans to pay for college and are unable to pay them back.
New loan forgiveness programs were supposed to make it easier for those students who were unable to pay, but a provision in the Tax Code can make a bad situation worse: the amount of the loan forgiveness is considered income for federal tax purposes. In other words, if your student loan debt of, say, $25,000, is written off, that same amount, $25,000, is treated as though you received cash in hand – and it’s taxed.
That tax treatment doesn’t just include student loans in default but also those that are discharged because of death or disability or those with balances written off under federal income-based repayment (IBR) and income-contingent repayment (ICR) loan forgiveness programs.
Senators Bob Menendez (D-NJ) and Elizabeth Warren (D-MA) are hoping to change that. The pair, together with Ron Wyden (D-OR), Debbie Stabenow (D-MI), and Cory Booker (D-NJ) have introduced the Student Loan Tax Relief Act. The Act would exempt student loans discharged for any reason from being taxed as income.
“Students and families are being crushed by student debt, dragging down the economy and holding back an entire generation,” said Menendez, a member of the Senate Finance Committee. “If you’re able to get your student loans forgiven and secure a fresh financial start, you shouldn’t then be saddled with an unexpected tax bill. This places an unfair added burden, especially on families grappling with a tragic loss who inherit the debt from students who will never be able to pay back their loans.”
Menendez is likely alluding to the fact that some student loans are still payable – or taxable – after death. In 2012, Regina Friend made news when she was hit with a $14,000 tax bill on a $55,400 loan taken out to pay for her son’s education. Regina Friend’s son, Roswell Friend, committed suicide in August just after graduation. In a twist, the loan used to pay for his education was forgiven by lender Sallie Mae, but Friend was later blindsided by the tax bill. She’s not alone: reports indicate that the U.S. Department of Education canceled $2.7 billion in student loans in 2011 due to death, disability, or bankruptcy. Under current law, that amount is taxable to the borrowers. Under the Student Loan Tax Relief Act, those amounts would be exempt from tax.
You can read the text of the bill here (downloads as a pdf).
