Student Loan Cancelation Forgiveness
An individual does not include student loan forgiveness as cancelation of debt (COD) income if the discharge was made under a provision of the loan that all or part of the indebtedness would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of generally public employers. An example is a doctor for any public hospital in a rural area of the U.S. (IRC Sec. 108(f)(1))
As part of the Affordable Care Act, the law was amended to include amounts received by an individual in tax years beginning after Dec. 31, 2008; the gross income exclusion for amounts received under the National Health Service Corps loan repayment program or certain State loan repayment programs is modified to include any amount received by an individual under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas as determined by the State. (IRC Sec. 108(f)(4))
The Tax Cuts and Jobs Act (TCJA) of 2017 includes a provision that the discharge of an eligible student loan in 2018 through 2025 because of the student’s death or total and permanent disability does not result in discharge of debt income. (IRC Sec. 108(f)(5)(A))
The IRS has said that certain discharged student loans are not considered income. These include discharges under the Department of Education’s Defense to Repayment or Closed School programs for loans taken out to finance attendance at schools owned by Corinthian Colleges, Inc. (CCI) (Rev Proc 2015-57) and American Career Institutes, Inc. (ACI)
(Rev Proc 2017-24), as well as loans discharged based on a settlement of a legal cause of action against CCI, ACI, or certain private lenders (Rev Proc 2018-39)
In Rev Proc 2020-11, the IRS expanded the relief to taxpayers who took out federal or private student loans to finance attendance at a nonprofit or for-profit school (other than CCI and ACI) that meets the definition of an "institution of higher education" under 20 U.S.C. § 1001(a) or (b), or a for-profit school that meets the definition of a proprietary institution of higher education when the loans are discharged by the Education Department based on the Closed School or Defense to Repayment discharge process. The relief also applies to private loans discharged based on a settlement of a legal cause of action resolving various allegations of unlawful business practices, including unfair, deceptive, and abusive acts and practices against a nonprofit or for-profit school or private lenders that made student loans to finance attendance at these schools. Thus, the discharged debt is not includible as gross income.
Rev Proc 2020-11 is effective for federal student loans discharged by the Education Department in tax years beginning on or after January 1, 2016, under the Closed School or Defense to Repayment discharge process, and for private student loans discharged in tax years beginning on or after January 1, 2016, based on a settlement of a legal cause of action. For prior tax years when canceled debt from one of these qualifying discharged loans was previously included as taxable income, the return may be amended if the statute of limitations period for claiming a refund hasn’t expired. No adjustment is required for an education credit or student loan interest deduction claimed on the original return or the return for the year of discharge.
Student Loans Forgiven From 2021 Through 2025
Per the American Rescue Plan of 2021, special tax rules apply to student loans forgiven between the years of 2021 and 2025.
The American Rescue Plan, signed into law March 11, 2021, provides that student loans forgiven in 2021 through 2025 will be free from income tax if the loan was 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 Columbia, 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 Lend1ing 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 Sec 501(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.