HR-5204-114
Placed on the Union Calendar, Calendar No. 674.
What it does
This bill would remove federal income tax on student loan debt that is cancelled because a borrower dies or becomes permanently and totally disabled. It would also require the Department of Education to cancel Parent PLUS loans when the student for whom the loan was taken out becomes permanently and totally disabled or has a long-term disabling condition expected to last at least 60 months — expanding a cancellation right that currently only applies when the student dies.
Who benefits
Borrowers with federal or private student loans who become permanently and totally disabled, and who would otherwise owe income tax on the cancelled debt amount. Surviving family members of deceased student loan borrowers who would otherwise face a tax bill on discharged loan balances. Parents who took out Parent PLUS loans on behalf of a student who later becomes permanently and totally disabled — they would gain a new right to have those loans cancelled. Families already in financial distress due to a death or serious disability in the household.
Who is hurt
The federal government would collect less tax revenue, as discharged loan amounts that are currently taxable as income would no longer be. Private lenders whose loans are discharged due to death or disability would also lose the indirect benefit of the current tax treatment. Taxpayers broadly may be affected if the revenue loss is offset by spending reductions or other tax increases elsewhere, though the bill does not specify any offset.
Supporters argue
Supporters argue that taxing cancelled student debt at the moment of a borrower's death or severe disability is a policy that strikes families at their most vulnerable. When a loan is discharged because someone has died or can no longer work due to a permanent disability, no actual money changes hands — the borrower or their estate receives no cash, yet under current law they face a tax bill as if they had. This creates a situation where grieving families or newly disabled individuals must find money to pay taxes on a debt that was simply erased. Supporters contend this is fundamentally unfair and that the tax code should not treat the forgiveness of a debt under tragic circumstances the same as ordinary income. The bill also closes a gap in Parent PLUS loan policy by extending discharge rights to cases of severe student disability, not just death, aligning the treatment of disability with the existing treatment of death.
Opponents argue
Opponents argue that the existing tax treatment of cancelled debt reflects a longstanding principle in the tax code: when a financial obligation is eliminated, the person relieved of that obligation has received an economic benefit equivalent to income, and that benefit should be taxed consistently regardless of the circumstances. They contend that creating a special carve-out for student loan discharges due to death or disability — without a revenue offset — adds to the federal deficit and sets a precedent for further erosion of the cancellation-of-debt income rules. Opponents may also argue that the bill's expansion of Parent PLUS loan discharge rights for student disability represents a new unfunded federal mandate on the Department of Education, and that the 60-month disability threshold, while defined, may be difficult to administer consistently and could be subject to fraud or abuse without stronger verification requirements.