The letter Sen. Elizabeth Warren sent to the Treasury Department was 14 pages long and included four tables and 36 footnotes. It covered an obscure rule that forces severely disabled borrowers to pay taxes on student loans that have been canceled — potentially costing them thousands of dollars.
Warren argued that the agency had the power to fix the problem using its administrative authority — and urged officials to do so immediately.
“Treasury’s failure to issue guidance will harm borrowers and taxpayers,” she wrote in the letter, sent this month.
Warren's letter provides a window into a key strategy that the influential Massachusetts Democrat could deploy to drive progressive policies in a new presidential administration. Already, Warren and other liberal lawmakers have made it clear that they will oppose high-level appointments of people who have ties to Wall Street or who have supported free trade and financial deregulation. But Warren is also expected to rely on a less visible approach of pushing top officials to flex their administrative muscle.
Such efforts could prove critical if Congress remains divided, as polls suggest is likely, but could still be subject to legal challenges. President Obama tried to circumvent gridlock on Capitol Hill by issuing executive orders intended to halt deportations of illegal immigrants who arrived as children and force power plants to reduce their carbon emissions, among others, earning the ire of Republicans who criticized the moves as an overreach of power. Both cases have been reviewed by the Supreme Court, with justices deadlocking over the former and delaying the latter for now.
The reliance on executive orders also places greater emphasis on members of the president’s Cabinet, who must figure out how to implement them. Labor Secretary Thomas Perez, for example, has won praise among progressives for curbing conflicts of interest among financial advisers and broadening paid family leave. This spring, as part of an effort by the White House to tackle student debt, the Education Department identified nearly 400,000 borrowers too disabled to pay back their federal loans.
Under current rules, the government can cancel borrowers’ student debts if they become “totally and permanently disabled.” However, few know about the benefit or apply for it. The White House estimated the borrowers identified this spring held more than $7.7 billion in debt that had not been forgiven.
“Americans with disabilities have a right to student loan relief,” U.S. Education Undersecretary Ted Mitchell said at the time. “And we need to make it easier, not harder, for them to receive the benefits they are due.”
But the program comes with a catch: The canceled debt could be considered taxable income. In her letter to Treasury, Warren estimated that the average loan amount for an affected borrower was about $18,000 — potentially triggering what some experts are calling a “tax bomb.” Failure to pay could disqualify borrowers from other government benefits and even result in garnishment of their Social Security checks.
“The streamlined loan discharge process could leave borrowers who are totally and permanently disabled even worse off than before their loan was discharged,” Warren wrote.
Warren argued that many of the disabled borrowers would likely also be considered “insolvent” — a designation that would allow Treasury to waive any taxes connected to discharged loans. But claiming that benefit requires complicated paperwork, and Warren called on the department to clearly carve out disabled borrowers. Just last year, Treasury effectively waived taxes for students who were defrauded by the now-defunct Corinthian College and whose loans were forgiven.
A Treasury spokesperson said the department is still analyzing Warren’s letter and supports legislative efforts to address the issue. This spring, Sens. Christopher A. Coons (D-Del.), Rob Portman (R-Ohio) and Angus King (I-Maine) proposed a bill that would have fixed the problem for disabled borrowers and others. A few months later, Warren and Sen. Robert Menendez (D-N.J.) introduced similar legislation.
Neither bill made it out of committee. But Warren’s letter argues that Treasury doesn’t need to wait for Congress to help disabled borrowers.
“There is no justification for imposing demanding and unnecessary compliance burdens,” she wrote.