The Stop Taxing Death and Disability Act would (i) exempt from federal income tax liability any amounts forgiven relating to federal and private education loans that are discharged due to the death or total and permanent disability of a student, and (ii) allow the parent of a student who becomes totally and permanently disabled to have their federal loan discharged.
The federal government forgives certain federal student loans in the case of the death or disability of the borrower. However, the Internal Revenue Service treats the cancelled debt as income, which can result in tens of thousands of dollars in tax liability that generally accrues in a lump sum in the quarter in which the debt is cancelled. Introduced on April 14, 2016, by Senators Chris Coons (D-DE), Angus King (I-ME) and Rob Portman (R-OH), the Stop Taxing Death and Disability Act would eliminate this tax burden. Such a change in the law would, for tax purposes, treat these discharges on par with closed school discharges and forgiveness for public service employment, which are not taxed.