Tax Relief Bill in the Works for Student Loan Write-Offs

Senate bill would alter IRS code; income-based and income-driven repayment plans would no longer be taxable.
By John Sandman ,

People who have had their student loan balances written off through a loan forgiveness program typically breathe a sigh of relief.

But their problems aren't over. That's because the amount of the loan write-off is treated as taxable income by the IRS. A bill introduced this week by the U.S. Senate would change that.

The Student Loan Tax Relief Act, introduced by Senators Bob Menendez (D-N.J.) and Elizabeth Warren (D-Mass.) eliminates this hidden tax liability on forgiven student loan debt. The bill was co-sponsored by three Senate Democrats, Ron Wyden (D-Ore.), Debbie Stabenow (D-Mich.) and Cory Booker (D-N.J.).

"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."

Warren pointed to unfair and unpredictable gaps in the process. "Unfortunately, the tax consequences of student loan forgiveness is a mess," said Warren. "Sometimes the government charges students taxes and other times there are no taxes if the student loans are forgiven."

The bill would amend the 1986 Internal Revenue Code to exempt all discharged student from being treated as taxable income. In addition to the loan discharges because of the death or disability of the borrower, the law would include loans that have had balances written off following the completion of federal income-based repayment (IBR) and income-contingent repayment (ICR) loan forgiveness programs that are now subject to taxation. Warren noted that "[w]ith outstanding student debt in the United States eclipsing $1.2 trillion and slowing the economy, taxing forgiven loans defeats the purpose of alleviating the burden and further exacerbates the nation's student debt crisis."

The bill is not without precedent. Last year, Warren helped secure favorable tax guidance for borrowers defrauded by Corinth‎ian Colleges, the for-profit college that went bankrupt in 2015. After learning that the loans, which were discharged under the Education Department's Borrower Defense to Repayment authority could be considered taxable income, Warren sent a letter to the Treasury Department pointing out Treasury's additional options for providing relief.

In December, the Treasury Department released new guidelines which stated that "the Internal Revenue Service (IRS) will not assert that certain taxpayers, whose Federal student loans are discharged under the Department of Education's 'Defense to Repayment' discharge process, must recognize gross income as a result of this discharge process." These guidelines set the stage for similar tax treatment available for other student loans, including those in the Menendez-Warren Bill.

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