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No tax on latest group of forgiven student loans

February 18, 2022

Debt-cancellation_canceled-forgiven-debt

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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TO WRAP UP 2026

It’s over! With October’s extended filing deadline behind us, it is now time to focus on year-end moves to reduce your 2026 tax bill. 

You’ll find ways to do just that on the Tax Tips page (see the More Tax Posts drop-down menu at the top of the blog), as well as the separate tax tip pages for each month, notably October through December. If you’re on the Tax Tips page, you’ll find a monthly list at the end of this column. If you’re on another blog page, you can head straight to the October tips; at the bottom of that tips page you’ll find links to all the other 11 months’ collections of tax advice.

Not to spoil what you’ll find in that tax advice, but it does cover such things as tax deductions for charitable donations, investment moves that could reduce tax due, and ways to max out your tax-favored retirement savings. 

Finally, as the year winds down, things get hectic. There are lots of other things to occupy our time, like the much more fun upcoming holidays. But don’t lose sight of taxes, since timing is key. To be of use, most tax moves must be made by the end of the tax year. That’s Thursday, Dec. 31, which also is the last business day of the year. 

So that you don’t miss that final tax year deadline, also keep an eye on the countdown clock below. It will keep you on top of just how much time is left to make important, tax-saving moves. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

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