Minnesota Law Review

Death and Taxes: The Crushing Tax Burden After a Student Loan Is Discharged Due to Death of a Student

The country is currently facing a student loan crisis, with the amount of outstanding student loan debt exceeding the amount of credit card and auto loan debt. Students, often uninformed of the intricacies in their lending options, may have the option to choose federal or private student loans. Unbeknownst to many borrowers, the Internal Revenue Service (IRS) treats private and federal student loan borrowers very differently. Under the current tax code, if a federal student loan borrower dies with outstanding student loan debt, his loans are dis-charged and his family is not assigned a tax burden. By contrast, if a private student loan borrower dies with outstanding student loan debt, his loans may be discharged, but his family is assigned a tax burden on the amount of the discharged debt. The result is families with thousands of dollars of taxable income they did not actually realize, forcing many of them into bankruptcy with large amounts of federal tax debt.

This Note argues that the current state of the tax code is inconsistent with other discharge of indebtedness exceptions, particularly bankruptcy, foreclosure, and federal student loans. This Note further argues that the current state of the tax code is inconsistent with tax theories, particularly the “ability to pay” and the “benefit received” theories as well as public policy. Lastly, this Note argues that Congress should create an exception for discharged debt due to student death, and proposes sufficient statutory language drawing on the language of other Title 26 provisions.

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