Student Loan Debt Cancellation Income Exclusion
Normally, when a debt is forgiven the amount of the cancelled debt is taxable income to the debtor, unless it is specifically excluded by the tax code. Sec 9675 of the ARPA makes student loan forgiveness free from income tax for 2021 through 2025.
This provision applies to any loan provided expressly for post-secondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower, if such loan was made, insured, or guaranteed by:
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The United States, or an instrumentality or agency thereof; a State, territory, or possession of the United States, or the District of Co1umbia, or any political subdivision thereof; or an eligible educational institution (as defined in IRC Sec 25A)
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Any private education loan (as defined in section 140(a)(7) of the Truth in Lending Act)
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Any loan made by any educational organization described in IRC Sec 170(b)(1)(A)(ii) if such loan is made pursuant to:
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an agreement with any entity described in (A), above, or any private education lender (as defined in section 140(a) of the Truth in Lending Act) under which the funds from which the loan was made were provided to such educational organization, or
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a program of such educational organization which is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in IRC Sec 501(c)(3) and exempt from tax under IRC Sec 501(a); or
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Any loan made by an educational organization described in IRC Sec 170(b)(1)(A)(ii) or by an organization exempt from tax under IRC Sec501(a) to refinance a loan to an individual to assist the individual in attending any such educational organization but only if the refinancing loan is pursuant to a program of the refinancing organization which is designed as described in subparagraph (C)(ii) above.
However, the preceding sentence shall not apply to the discharge of a loan made by an organization described in subparagraph (C) or made by a private education lender (as defined in section 140(a)(7) of the Truth in Lending Act) if the discharge is on account of services performed for either such organization or for such private education lender.
Strategy
Within the AGI limits, up to $2,500 of interest on debt to finance higher education is deductible as an adjustment to AGI. Generally, taxpayers perceive this debt to be Government Student Loans. However, this is not the only debt whose interest will qualify for this deduction.
Thus, virtually any debt, including credit card (if used only for education expenses) and home equity debt may qualify (however, see more about “Home Equity Debt” and the “Unsecured Election” in Chapter 7.4). Counsel your clients who already have or are likely to borrow for higher education expenses on how debt other than Government Loans can qualify for the deduction. Don’t overlook existing debt they have that qualifies.