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No tax on latest group of forgiven student loans


The U.S. Department of Education announced this week the cancelation of another $415 million in federal student loan debt.

This batch of debt was owed by nearly 16,000 borrowers whose for-profit colleges violated law and educational standards. It brings to around $16 billion the total student debt that has been discharged for more than 680,000 individuals.

Uncle Sam's action definitely is good news for those misled students.

However, it also raises some questions in connection with another government agency, the Internal Revenue Service.

Canceled debt income issues: Normally, any canceled or discharged debt amount counts as income. Officially, it's known as Cancelation of Debt Income, or CODI (you knew there had to be an acronym), and is taxed at ordinary rates. That means while a person might no longer have to pay a $3,000 loan (good), she now owes tax on that wiped-out amount (bad).

But the American Rescue Plan Act, the COVID-19 relief bill signed by President Joe Biden back in March 2021, eliminated the tax cost of forgiven student debt. The educational cost tax exclusion will last through 2025.

Types of canceled student debt: There are, of course, some requirements to be met.

Basically, the forgiven student loan must fall under one of several types of educational debt forgiveness. The possibilities include —

  • Public Service Loan Forgiveness (PSLF), designed to forgive federal student loans for those who work for a government or certain nonprofit organizations.
  • Teacher Loan Forgiveness, which provides eligible teachers with student loan forgiveness of up to $17,500 on their Direct Loans or Federal Stafford Loans after they work for a designated time at specified educational institutions. Teachers must work for five consecutive years at an elementary school, secondary school or educational service agency serving low-income students.
  • Closed school discharge is available if a school closes under certain circumstances.
  • Perkins Loan cancellation for the full loan amount is possible if the loan recipient works in a qualifying public service job or as an eligible volunteer for five years.
  • Total and permanent disability discharge if the student can't work because of a documented incapacitation.
  • Discharge due to death allows for federal student loans to be discharged with no obligation to heirs
  • False certification discharge is when a school falsely certifies eligibility to receive the loan.
  • Borrower Defense to Repayment discharge is possible when a school misrepresented or acted in other ways deemed fraudulent in connection with student admissions, transferability of credits, or career prospects.

Debt by deceived students: This week's discharged student debt falls into the Borrower Defense to Repayment category. It upped the total amount of approved relief under this loan relief category to approximately $2 billion for more than 107,000 borrowers.

Among the students benefiting from this latest Education Department action are those who took loans to attend DeVry University, once one of the nation's largest for-profit college chains, as well former students at ITT Technical Institute's nursing program, the Minnesota School of Business (also known as Globe University), and Westwood College.

"The Department remains committed to giving borrowers discharges when the evidence shows their college violated the law and standards,” said U.S. Secretary of Education Miguel Cardona. "Students count on their colleges to be truthful. Unfortunately, today's findings show too many instances in which students were misled into loans at institutions or programs that could not deliver what they'd promised."

"When colleges and career schools put their own interests ahead of students, we will not look the other way," added Federal Student Aid Chief Operating Officer Richard Cordray, who also cited assistance from the Federal Trade Commission and attorneys general in Colorado, Illinois, and New Mexico.

"These offices provided key evidence that played a significant role in reaching the findings [that led to the discharged debt]," Cordray said. "Moving forward, we intend to expand our collaboration with federal and state partners to serve students."

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