IRS exempts some forgiven student loans from taxes

In a decision that will bring relief to tens of thousands of student loan borrowers, the IRS has expanded the pool of people who will not have to pay taxes on the balance of their forgiven loans.

The agency said its ruling would provide “appropriate” relief to borrowers by waiving taxes on both federal and private loans that are forgiven because their schools misled them or closed abruptly. Such borrowers could otherwise be left with cripplingly high tax bills.

The decision expands an exemption that was granted to borrowers at Corinthian Colleges and the American Career Institute, two failed forprofit schools that stranded their students with incomplete degrees and credits that were hard to transfer. In those circumstances, the Education Department allows borrowers to have their federal loan debts eliminated through its Closed School Discharge program.

That program was flooded with new applicants after the sudden closure of more than 40 campuses operated by Dream Center Education Holdings, which imploded last year. The schools failed after Dream Center improperly withheld millions of dollars in federal aid money that was owed to students and used the cash to cover operating expenses. More than 25,000 students were affected.

The IRS decision also covers borrowers who have their loans eliminated through a program know as Borrower Defense to Repayment, which allows loans to be forgiven when schools act fraudulently, such as through deceptive recruitment. But that program has virtually stopped functioning under Education Secretary Betsy DeVos, and the department is fighting a deluge of lawsuits over her attempts to curtail it.

The Education Department could not immediately provide data on how many borrowers had received closedschool discharges. One advocacy group, Student Defense, said that at least 30,000 had their loans discharged in the past year, but that reflects only a portion of the total.

No borrowers had debts eliminated through a borrower defense discharge in the first nine months of last year, according to Education Department data.

The agency said its ruling would provide “appropriate” relief to borrowers by waiving taxes on loans that are forgiven because their schools misled them or closed abruptly.