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IRS declines to fix student loan tax problem

On the heels of a recent post on this blog discussing how recipients of disability payments from the Social Security Administration can get their student loans forgiven, some sources claim that at a recent meeting, the Department of the Treasury, which controls the Internal Revenue Service, indicated that it had no intentions of changing its policy to collect taxes on all forgiven student loan debt, including that owed by disabled New Jersey residents.

A noted Democratic senator had laid out the case that the current practice puts disabled people in a sticky situation. On the one hand, getting a student loan forgiven when a person is disabled is probably a good thing, but the person who gets the benefit also has to pay taxes on the amount of the debt that was forgiven as per longstanding tax policy.

The problem is that if these disabled people do not pay their tax obligation, they can see their disability checks garnished by the IRS until the IRS gets its tax revenue. Because people on disability rarely have enough income to pay off the tax debt by other means, garnishment is often the only option.

For its part, the Treasury indicated that it felt a change in the current practice needs to come via a new federal law passed by Congress. While Congress does have the power to make this change, political difficulties might make it hard to actually pass a relief measure.

The most recent discussion of this issue came about because, as part of the current President's initiative to reduce student loan debt, the Department of Education has been matching those who are on disability against its list of those who owe loans. The Department has been contacting these people to encourage them to seek loan forgiveness.

Source: The Washington Post, "Feds refuse to stop taxing the canceled student debt of severely disabled people," Danielle-Douglas-Gabriel, Dec. 23, 2016.

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