The Department of Education and the Social Security Administration jointly are doing yeoman's work in identifying about 387,000 severely disabled and insolvent Americans saddled with federal student debt they can't repay and informing them that the law allows their loans to be forgiven. But one agency still needs to act to make sure these people aren't hit with a tax penalty when that happens: the Internal Revenue Service.
Thus far the IRS has been silent, even though Sen. Elizabeth Warren (D-Mass.) tried to poke it awake last month with a stern letter. Time may be getting short, because the election places the White House and both houses of Congress in the hands of a Republican Party that often has displayed disdain for the plight of people on disability.
So what's the IRS waiting for?
The affected persons have been judged to be totally and permanently disabled and to have annual income below the federal poverty level for a family of two, or less than about $16,000. About 80% of those in this category of disability had zero earnings in 2014, according to the Social Security Administration; of the 16% who report any earnings at all, the average is about $8,000. Their median net worth is $200 — and that might even be an overstatement. But their average student loan balance is $18,000. About half already are in default on their loans, the Education Department says. Under federal law, as disabled and insolvent borrowers they're eligible to have their federal student loans zeroed out.
But few of the eligible borrowers have been taking advantage of the law. Some may have been dissuaded by the Education Departmen's demand for extensive documentation of their medical condition. Some may not even have known about the law.
In April, the Education Department and Social Security Administration got proactive by matching up their databases to identify permanently disabled borrowers, whose medical records are kept by the latter agency. Eligible borrowers were to get a letter explaining their eligibility for loan forgiveness and a streamlined application form.
"Too many eligible borrowers were falling through the cracks, unaware they were eligible for relief," Education Undersecretary Ted Mitchell said at the time. "Americans with disabilities have a right to student loan relief. And we need to make it easier, not harder, for them to receive the benefits they are due."
The problem is that under federal tax rules, the balance on forgiven debt can count as income — and the Education Department's discharge of a loan triggers automatic notification to the IRS. As Nancy Altman, chair of the advocacy group Social Security Works, told President Obama in a letter Monday, that could turn the relief offered the victims into "a cruel joke."
"Those totally and permanently disabled will simply owe money to a different agency of the government," she wrote. "This makes no sense."
Even if the recipient owes no taxes — and many of them have virtually no taxable income — they may end up hearing from IRS collection agents or even facing an audit.
"Imagine someone with no income and $200 net worth getting a letter from the IRS saying, 'You owe us $18,000,'" a disability advocate remarked.
Warren tried to goad the IRS into issuing a no-action guideline for these borrowers — a blanket rule that tax on student loan forgiveness for the severely disabled should be presumed to be waived. That would avert unnecessary pain for the borrowers and the government agencies alike, she observed. Disabled persons who fail to declare their loan discharges on tax returns could lose their disability benefits or eligibility for other state and federal assistance, or face liens on their bank accounts. Meanwhile, the IRS will be wasting time and money trying to collect from people who almost certainly owe nothing.
The IRS' failure to act, Warren said in her Oct. 7 letter to Treasury Secretary Jack Lew and IRS Commissioner John Koskinen, is "inexplicable, given clear evidence that these borrowers, who have an average student loan balance of $18,000, are insolvent." Without IRS guidance, the Education Department will have to send 387,000 tax forms to the recipients and the IRS, which will have to process the loan forgiveness as though it's a taxable event. We've asked the IRS for an update on its rulemaking, and will pass it on if we hear back.
Warren pointed out that there's good precedent for such IRS rulemaking: Corinthian College. In that case, students who took out student loans for courses at the bankrupt for-profit educational company got loan and tax forgiveness all at once. By last June, $171 million in federal student loans owed by more than 11,000 Corinthian students had been forgiven, with many more of the schools' 350,000 former students likely to be ruled eligible.
"Rather than requiring hundreds of thousands of these borrowers to complete complex paperwork to demonstrate their eligibility for this exception," Warren observed, "Treasury acted to protect these students and ease their compliance burden."
Warren's letter attracted a flurry of attention when it was released last month, but it was interpreted at the time as a pressure tactic aimed at keeping presumptive President-elect Hillary Clinton on the progressive side of Democratic policy. With Donald Trump's victory and GOP retention of control of the House and Senate, the likelihood is great that IRS action on this issue, as well as many others, will grind to a halt at least for several months.
Potentially of greater concern is the GOP's penchant for demonizing the disabled as no-good layabouts, even though eligibility for Social Security disability is difficult to obtain and hardly a path to wealth. The beneficiaries of the student loan forgiveness program are people without any reasonable likelihood of experiencing medical improvement or moving back into gainful employment. They're entitled to this assistance by law, and the IRS should help them get it.
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