Saranac Hale Spencer, The News Journal
Thousands of families who suffer the death of a child each year also end up facing a huge tax bill if their child’s student loans have been forgiven.
Those loans, both federal and private, are often cleared if the student who has borrowed them dies or becomes disabled. But the Internal Revenue Service treats the amount that has been excused as income for the family and taxes it accordingly.
That can add up to tens of thousands of dollars owed to the IRS.
Sen. Chris Coons has proposed a bill that would end the practice.
Since the idea of forgiving those loans is to ease the burden on grieving families, Coons said, “This is, in my view, a common sense bill.”
While his office was researching the issue before putting the bill together, one aide recognized a familiar situation. Eric Wall, a legislative correspondent in Coons’ office, had a brother who died just months after graduating from college in 2009.
“I realized that my family might be in a similar situation,” Wall said, since his brother had taken out loans to go to Mount St. Mary’s University in Northern Maryland and his parents had co-signed on those loans.
His brother, Andrew Wall, graduated in May of 2009 and was diagnosed with a brain tumor two months later. He died in November of that year, four days after his 23rd birthday.
“It’s one of those illnesses that comes out of the blue,” Wall said, and the whole family – all three brothers and their parents – dealt with it differently. “It was really devastating for my folks,” he said.
As Eric Wall was looking into the issue of taxing forgiven student loans at work earlier this year, he asked his parents what had happened to his brother’s student loans.
For a while afterward, they had continued to pay them as usual, he said. Then, they found out that they could have the loans forgiven, which wasn’t made clear to them.
“My brother was clearly eligible, but, they didn’t know it,” he said, touching on another issue related to the bill. Many people who are dealing with the death of a family member or disability of their own don’t even know that they are eligible to clear student loans.
The federal Department of Education announced earlier this year that it would be working with the Social Security Administration to identify student-loan borrowers who are likely eligible for loan forgiveness due to disability. So far, about 387,000 people have been identified and the department sent out letters notifying them last month.
After the Wall family learned they could have Andrew’s loans cleared, they spent years working toward that.
Finally, last year, they got the loans cleared, Eric Wall said. But, when they got the tax bill, “they were blind-sided – they had no idea,” he said.
The amount of the loan that is forgiven is generally taxed as regular income, according to the IRS, and the Wall family is working with an accountant to figure out exactly how much that will be for them.
The average amount of student debt at graduation for the class of 2014 was just short of $30,000, according to the latest annual report from the Institute for College Access and Success.
Although the IRS didn’t immediately have available the amount of revenue it collects on student loans forgiven for death or disability, the Department of Education estimated that the total amount of the loans carried by the 387,000 people likely eligible for disability forgiveness are worth $7.7 billion.
And, according to the Department of Education, a total of 65,000 people had federal student loans discharged due to death in 2014.
Gary Stepsis, 68, who lives in Millsboro and sent his three children to college in the 1990s, is among those who is eligible for student loan forgiveness due to disability. He suffers from bi-polar disorder and post traumatic stress disorder, Stepsis said.
“First of all, if they’re going to do discharges, they should not be taxable,” he said.
He supports Coons’ bill, which is working its way through the Senate as the House crafts its own version of the bill – Rep. Peter Roskam, (R) Illinois, introduced a version earlier this month.