The Internal Revenue Service (IRS) has issued guidance for some taxpayers who took out federal or private student loans to finance attendance at a nonprofit or for-profit school. The guidance offers relief for students whose loans have been discharged by the Department of Education and who meet specific criteria.
Typically, a discharge of indebtedness is a taxable event: the cancellation of debt is treated as income to the debtor. Under this recent guidance, affected students will not recognize income as a result of the discharge. That means that the taxpayer should not report the amount of the discharged loan on his or her federal income tax return.
The break applies to students who:
- Participated in Closed School discharge process. The Closed School discharge process allows the Department of Education to discharge a federal student loan obtained by a student (or the student’s parent) who attended school at the time it closed or who withdrew from the school just before it closed.