Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Government Forgives Certain Student Loan Debts

The amount of student loans outstanding has been called an economic ticking time bomb by some experts – with a long list of reasons why more and more students are having a hard time paying back the borrowed funds. Student loan debt can be difficult to have discharged even in bankruptcy. But there are ways to do so, one of which is the Department of Education’s “Defense to Repayment” discharge process. Another is their “Closed School” discharge process.

The Defense to Repayment discharge process allows the Department of Education to discharge certain loans if the borrower can establish an act or omission that gives rise to a cause of action against the school under applicable state law. The cause of action must directly relate to the loan or to the school’s provision of educational services for which the loan was provided. Claims against the school for things such as personal injury or allegations of harassment would not qualify for this process.

The Closed School discharge process allows the Department of Education to discharge certain loans for a school that closed within 120 days of attending it and you have not yet completed all the coursework for the program. This discharge process does not apply if you are completing a comparable education program at another school through an agreement between the schools or if you transferred academic credits at the closed school to another school.

Once you have your debt forgiven, then you have to determine if you must include it in taxable income. In general, debt forgiven is taxable as income though there are exceptions here too. Recently released IRS Rev. Proc. 2015-57 addresses some rules related to the discharge processes noted above and may be beneficial for you to review.

By Dale F. Jensen, CPA