Why Won’t Treasury Do Its Job on Behalf of Student-Loan Borrowers With Disabilities?
Prior to January 20, the Obama administration would be wise to take a number of important actions on a variety of issues. On the President's to-do list should be a phone call to his Treasury Secretary instructing him to take one simple action that will help the most vulnerable Americans among us.
President Obama has correctly identified student debt as a serious national concern. While it would take legislation to address the issue comprehensively, the Obama administration has been taking administrative steps to deliver relief to borrowers. One involves those who are totally and permanently disabled, and so are unable to earn an income and pay back their federal student loans.
People who find themselves in that situation are entitled, under the law, to have those loans canceled. The problem is that most of them do not know they are entitled to the relief. Under an initiative begun last Spring, the Department of Education and the Social Security Administration have collaborated to locate those who fit the criteria. That is excellent work, but it requires the cooperation of the Department of the Treasury.
Unless the Treasury Department rules that the loan amounts canceled by the Department of Education are not taxable income to those borrowers, the relief is a cruel joke. Those totally and permanently disabled will simply owe money to a different agency of the government. This makes no sense.
Treasury has clear authority to rule that the amount of the canceled loans are not taxable income. Indeed, it has multiple lines of authority. The law provides, for example, that insolvent individuals do not owe federal tax on their canceled debt. An overwhelming 84 percent of those who are totally and permanently disabled have zero in annual earnings. The median net worth of those who receive Social Security disability insurance benefits – a larger group than those eligible for loan forgiveness – is a miniscule $200. And that is just one of the multiple laws that give Treasury the power to act.
But, unless Treasury uses the authority it has and acts, these impoverished beneficiaries with total and permanent disabilities will be required to file complicated and burdensome forms to obtain the relief on a case by case basis, if they even are aware they are entitled to it.
Working behind the scenes, Senator Elizabeth Warren (D-MA) has sought to get Treasury to do its job and issue guidelines expressly stating that the imputed tax on loans canceled by the Department of Education under this initiative is presumed waived. That simple and commonsense step would save the government and its citizens time, money, and aggravation.
Not only is the action simple, Treasury has already taken it previously with respect to borrowers who are arguably less in need of relief. Just last December, for example, Treasury issued the following guidance for students who took out loans to attend schools that were run by Corinthian Colleges, Inc., where widespread fraud was found:
The Treasury Department and the IRS believe that most borrowers whose Corinthian student loans are discharged . . . would be able to exclude from gross income all or substantially all of the discharged amounts….However, determining whether one or more of these exceptions is available to each affected borrower would require a fact intensive analysis of the particular borrower's situation to determine the extent to which the discharged amount is eligible for exclusion, under each of the potentially available exceptions. The Treasury Department and the IRS are concerned that such an analysis would impose a compliance burden on taxpayers, as well as an administrative burden on the IRS, that is excessive in relation to the amount of taxable income that would result. Accordingly the IRS will not assert that a taxpayer within the scope of this revenue procedure recognizes gross income as a result of the [Corinthian student loan] discharge process.
So why has Treasury not acted with respect to those who are determined to be totally and permanently disabled? Is it a failure of leadership by the Treasury Secretary who is either too busy or too indifferent to take action? Is it a sluggish bureaucracy? Or is it fear that the action will be criticized by Republicans in Congress who have demonized those with disabilities as cheats and fraudsters? Whatever the explanation, time is running out.
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