Student loan borrowers whose education debt has been canceled because their college closed or engaged in fraud will no longer face a tax bill, relief that arrives as applications for forgiveness continue to grow.
On Wednesday, the Internal Revenue Service issued guidance shielding borrowers from having their discharged federal and private loans treated as taxable income. The measure is effective for education loans canceled on or after Jan. 1, 2016. Anyone affected by the new policy may claim a credit or refund for an overpayment of taxes.
“Though it took far too long, I’m glad that the IRS and Treasury Department took this step to protect these defrauded student loan borrowers from paying yet another unnecessary bill,” Sen. Patty Murray, D-Wash., said. “This is welcome news for those who have received a loan discharge, but there are still far too many cheated students stuck with a worthless degree still waiting for relief.”
Murray, alongside Democratic Sens. Richard Durbin of Illinois and Ron Wyden of Oregon, wrote the IRS and Treasury in September 2018 urging them to clarify that former students of ITT Technical Institute would not be taxed on canceled federal loans. Murray and Wyden requested similar guidance in July of that year for former Corinthian Colleges students whose private loans were canceled.
The IRS on Wednesday expanded an existing measure that granted tax relief to former students of Corinthian and American Career Institutes whose federal loans were canceled under statutes known as closed-school discharge and borrower defense to repayment.
All students enrolled at the time a school closes or who withdrew 120 days before a shutdown are entitled to have their federal loans canceled unless they continue their studies elsewhere. Federal law also gives the Education Department authority to cancel the federal debt of students whose colleges misled them about graduation or job placement rates to get them to enroll.
The closure of Corinthian and ITT Technical, for-profit chains charged with fraud and predatory lending, ushered in a flood of debt relief claims and applications for closed school discharge at the Education Department in the past five years. Since then, other for-profit colleges have shuttered, further increasing claims.
There are more than 300,000 borrower defense to repayment claims at the Education Department. The Trump administration held off on approving applications for a year, citing ongoing litigation with Corinthian students who challenged the use of partial loan forgiveness.
The Education Department resumed issuing approvals and denials of claims last month after updating its formula by using a sliding scale based on a borrower’s wages to determine loan forgiveness. Higher education experts say the new formula will result in substantially less loan cancellation than before.
Toby Merrill, director at the Project on Predatory Student Lending, a legal-aid group representing the Corinthian students, praised the IRS guidance as “a step in the right direction to ensure students do not suffer tax consequences after finally achieving loan relief. This is yet another indicator that loan cancellation for students defrauded by for-profit colleges is the right thing for the government to do.”