Due to its unique character, student loans may receive special treatment apart from other forms of indebtedness.
Cancellation of debt is generally treated as income, per IRC Section 108, unless certain extreme exceptions apply (such as insolvency by the indebted taxpayer). However, the recipient of a student loan debt cancellation would not have to include the discharged debt in income if the loan contained a provision that the debt will be cancelled if the recipient works for a certain period of time in certain professions for a broad class of employers. Also, effective for years after Jan. 1, 2015, federal student loans discharged under either the Department of Education’s closed school discharge or the defense to repayment process may be excluded from cancellation of debt income.
If the taxpayer does not meet the above circumstances, then cancelled student loan debt will be includable in income, subject to qualified exceptions (including certain bankruptcy filings) in the Internal Revenue Code.
Answered by: James J. Newhard, CPA, is the owner of James J. Newhard CPA in Paoli, Pa.