Under the Higher Education Act, individuals and families can apply to have federal students loans forgiven if the recipient dies or becomes disabled to a high degree. However, the forgiven debt is taxed as income--for many families, this can add tens of thousands of dollars in taxes. Not only are the taxes due the year the debt is forgiven, but the additional income can often bump families into a higher tax bracket, meaning that it's taxed at a higher rate.
"I've heard from several families who have found themselves in this situation, and it's absolutely tragic. You're dealing with the loss of a child or your spouse becomes disabled, then all of a sudden a tax bill for
Pingree's bill would create a reasonable method to address the issue by:
1) Allowing the taxes to be paid over 15 years, interest free;
2) Spreading out the tax liability of the forgiven debt over 15 years, to minimize effects on the taxable rate;
3) Excludes the income from calculations for means-tested federal benefits, like SNAP.
In 2012, 57,000 borrowers who passed away had their loans discharged, and another 95,000 borrowers had them cancelled after they weredetermined to be permanently and totally disabled. Disability standards are extremely strict--an individual must prove they will have no ability to work for the next five years.
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