Cancellation of Student Loan Debt Is/May Not Always Be Taxable


By John Kohler

Generally, when debt is forgiven, it is considered to be a taxable event to the individual who originally incurred the debt. In certain situations, some debt forgiveness is considered non taxable, as is the case with some student loan debt. The federal government has programs available to certain professions with "unmet needs" that forgive these individuals' student loan debt. When accepting student loan forgiveness, taxpayers should be aware that the forgiveness of debt could result in taxable income for that year and determine if they are eligible to meet certain criteria enabling non taxable treatment.

Non taxable student loan forgiveness eligibility requirements state that an individual must have the loan with a qualified lender, related to attendance at an eligible education institution, and the debt must contain a provision that all or part of the debt is eligible to be cancelled if the taxpayer: works for a certain period of time; in a specified profession; and for any class of employers. The IRS defines an eligible education institution as an institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its education activities. A qualified lender is the government (United States or state), a public benefit tax-exempt corporation, or an eligible institution. The debt must be used for the taxpayer's education for service in one of the occupations with unmet needs. The IRS lists these occupations that have unmet needs as medicine, nursing, teaching and law.

Loans that have been refinanced may qualify for the tax-exempt treatment if they have been made under a refinancing organization that meets the qualified lender status.

You will not qualify for the tax-exempt debt forgiveness if the debt is forgiven because of services you performed for the education institution that made the loan or another organization that provided the funds.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter

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