Student loan woes could continue in 2017Article added by Marlene Y. Satter on January 3, 2017
Marlene Satter

Marlene Y. Satter

Joined: April 29, 2015

The Treasury Department disagreed with congressional Democrats’ quest for tax relief for disabled students whose student debt is discharged. The news follows a GAO report which says student debt is the road to poverty for thousands of elderly Americans. (Photo: iStock)

2016 [ended] on bad news about student loans and how they drag down the financial well-being not just of students, but of the elderly.

RELATED: Cutting student loan debt’s effect on retirement

In a coal-in-the-stocking move the week before Christmas, the Treasury Department declined to go along with congressional Democrats’ quest for tax relief for impoverished, severely disabled students whose student debt is discharged — and that comes on top of a Government Accounting Office report that says student debt is the road to poverty for many thousands of elderly Americans.

The Huffington Post reports the Treasury declined to issue “guidance” requested by several Democratic senators that would have specified that those with student debt who are eligible for the “Total and Permanent Disability” loan discharge (a category of borrowers with especially severe disabilities) would not risk an income tax penalty.

RELATED: 12 rules for student loan repayment

Without that guidance, the report says, the discharged loan could end up counting as income subject to taxation, and that could cost already-impoverished borrowers “a potentially significant sum.”

The report says “Treasury officials discussed two alternative approaches that the Internal Revenue Service or Department of Education could enact, but failed to lay out a timeline or make a compelling case that the measures would be as effective as action by Treasury…”

Borrowers qualify for the “Total and Permanent Disability” loan discharge if they are recipients of Social Security Disability Insurance or Supplemental Security Income benefits, and if the Social Security Administration has given them the designation “medical improvement not expected,” meaning recovery is highly unlikely.

In addition, they must not earn more than the federal poverty level for a family of two, which in 2016 has been approximately $16,000 annually.

In a statement, Treasury spokesman Rob Runyan said of the agency’s refusal, “The Obama Administration has repeatedly urged Congress to enact legislative changes to address the possible tax consequences of loan forgiveness faced by these borrowers, as well as others with student loans. Congress has not yet enacted these legislative changes. Treasury continues to work with the Department of Education to evaluate possible alternatives that could address the situations faced by these borrowers‎.”

However, Treasury did issue guidance this year on some kinds of loan discharges for real estate investors and grantor trusts that would exempt them from taxable income.

Although student loans for handicapped and impoverished borrowers are likely not to be found to be taxable income, those borrowers could face an automatic audit, expensive tax advisory services and substantial stress.

But wait, there’s more bad news on student loan debt. In another report, the Huffington Post says the GAO report on student loan debt found that “[m]ore than 110,000 senior citizens had their Social Security checks garnished in 2015 to pay off student loans they’d already defaulted on. Nearly 70,000 Americans over the age of 50 are living in poverty as their Social Security benefits are cut to pay off student loan debts."

According to the report, 68 percent of older borrowers living in poverty with Social Security garnishment are only seeing their benefit cuts devoted to interest and fees. As a result, their overall debt level is not falling, and without a new source of income it never will.

Incidentally, the federal government is actually making a profit out of this system, since every time a debt collector hits a Social Security check it pays the U.S. Treasury Department $15.

Senator Elizabeth Warren, D-Mass., said in a statement, “Our government is shoving tens of thousands of seniors and people with disabilities into poverty through garnishment every year ― and charging them $15 every month for the privilege ― just so that the Department of Education can collect a little bit more interest and keep boosting the government’s student loan profits. This is predatory and counterproductive.”

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