Family grieving son's loss hit with large tax bill

[TexasTowelie]

Andrew Wall was just months out of college and working on a farm in Hawaii when he collapsed. It was the first sign of the brain tumor that would claim his life days after his 23rd birthday.

The rugby-playing English major from Annapolis left behind a shocked and grieving family. Understandably, his relatives weren't focused on the financial implications of his death.

It wasn't until years later that the tax bill arrived.

The U.S. Department of Education and private lenders might write off student loans when a borrower dies or becomes severely disabled. But a quirk in federal law requires the Internal Revenue Service to treat the forgiven debt as taxable income.

Read more: http://www.baltimoresun.com/news/maryland/bs-md-irs-student-loan-tax-20160715-story.html

[marybourg]

1. It's not a quirk. Forgiven debt IS taxable income.

Before it was, wise guys used to make "loans" to corporate officers, directors and highly-compensated employees, instead of paying salaries, and then "forgive" the debt. Viola! Tax free forgiven loans instead of taxable income.

Families who were subject to gift and estate taxes used to play the same game. Instead of a gift or a bequest which would have been taxed --a "loan" was given, then forgiven. Voilà! Tax free forgiven loans instead of taxable gifts and bequests.

Of course, Congress could pass laws exempting lower-income people and the estates or parents of students who die, and they haven't done so. But it's not a "quirk"; the government gave someone the money that created the debt and forgiving a debt is the same as giving a gift.

[SheilaT]

2. Shouldn't the tax bill go to the young man's estate?

Of course, if the parents co-signed (never a good idea, alas) then they are on the hook for this.

People mostly do not understand what a big deal co-signing for a loan is. Way bac, more than forty years ago, I had friends who'd co-signed for a loan, and then were stuck when the "friend" simply disappeared. This is back when we were all young, in our early and mid twenties, and just didn't understand what could happen. I consider myself fortunate that I got to learn from the experience of others.

I have actually co-signed on occasion. About two decades ago my brother was needing to start all over after a job loss, and I guaranteed his apartment. Had he just taken off during the first year's lease, I'd have been on the hook for the rent, but he'd gotten a job by the time I co-signed, and always paid his rent. Lucky for me.

[fleabiscuit]

3. Wow. The things one learn.

Sounds like all parents that can afford it need to consider whole life insurance on their kids starting at about age 9. And I'm not being sarcastic. I can still remember the mother of my best friend mentioning having life insurance on her boys when I was a kid. Made sense to me even when I was ten, we were the wild bunch playing outside, hitch hiking, fishing along and on rivers, hunting, etc.

Edit to add; BTW everyone has survived to bumping up to SS age.

[TexasTowelie]

4. Precisely.

A life insurance policy on children is sound economic planning if for nothing else than paying for funeral and burial expenses if the child dies.

There is also the future economic value of children as they gather education. In the situation described in the article the parents provided at least a six-figure amount in direct expenses as they raised their son until he was no longer a minor. The future economic value of their son would also be a more valuable consideration if there was a scenario where he might have to help provide assistance for a sibling that had some type of disability that rendered the sibling unemployable or later in life if he assisted in the care of one of the parents.

[merrily]

5. When the federal student loan program began (non-GI Bill),

the government made low interest loans to students. As part of national defense, I believe. (Actually, I am not sure if the government made the loans directly or just regulated them more heavily.)

Then, the program got privatized. Then bank lobbyists got hold of federal legislators and made student loans among the most onerous loans going. And you have to buy them when you're 18, don't know Schick from Shinola and don't have other choices anyway.*

This is neoliberalism in action. Help the rich and powerful at the expense of those with no options and also at the expense of a nation as a whole, which benefits when its population is better educated and higher earning. Gee, if high school seniors only had a well-heeled lobby.....


*To be fair, there were abuses, like people declaring bankruptcy as soon as they got out of grad school, but those abuses could have been fixed by not allowing discharge in bankruptcy under certain conditions that indicated bad faith. For that matter, people should not file bankruptcy in bad faith.