Taxability of Student Loan Forgiveness

February 14, 2014 by  
Filed under Loan Forgiveness Info

You are aware of the student loan forgiveness programs. But do you know the taxability of this sort of program? Here is the answer for you!

There is a definition of “student loan” in IRC section 108(f)(2) which states that it includes any loan that are given to help a person in attending a learning institute. The United States or any US agency or a state government and or any other political subdivision of a state government can give this student loan. Besides this, the charitable organizations that control a public hospital are capable of providing the students with their required loan. Many of the educational institutes also have the power to offer the students the loan, but in such cases, the finances must be provided from the provided from the other three resources stated above or you have to make the loan under a reimbursement assistance program of that learning institution, which is intended to persuade the students of that organization to serve in professions or in places that haven’t meet with the requirements.

Some of the loan forgiveness programs come under the tax while some are not taxable. According to the regulations of the recent times, the amount that the Government forgives is actually the taxable income of that year when the loan was written off. However, there are some exceptions to this rule. In reality, the Government excludes the student loan forgiveness program from the earnings in case this forgiveness is dependent on the student who is working for a particular number of years in any occupation.

There are numerous student loan forgiveness programs that are not taxable; for instance, the Public service loan forgiveness, forgiveness for teacher loan, assistance program of loan repaying of the law school as well as the National Health Service Corps Loan Repayment Program don’t fall under the taxes. However, if there are any Loan discharges for closed schools or any case of false certification or unpaid reimbursement, then these are considered as the taxable earnings. Any loan at the time of death or disability too is regarded as the taxable earnings. In addition to this, the mercy on the outstanding balance under income-contingent reimbursement as well as earning-based refunds after 25 years is also considered taxable earnings.

The treatments of loan forgiveness vary with states, which means different states have their different taxable loan forgiveness programs. For instance, in Pennsylvania, the student loan forgiveness program is not regarded as the taxable income.

Many applications as well as suggestions are being given to the Government in order that other types of student loan forgiveness plan are excluded from the list of the taxable earnings. For example, it is proposed that the forgiveness of income-contingent settlement after 25 years should not be considered under the taxable incomes, however, nothing has finalized still now. According to the common people, any person who is not able to pay the taxes on his or her forgiveness from his or her income should not be pressurized to repay that loan..