Student loans account for a substantial portion of this country’s total indebtedness. Outstanding student loan debt is estimated at $1.5 to 1.6 trillion. The U.S. Department of Education (DOE) holds almost all of this debt, giving it substantial power over repayment, forgiveness, and discharge. Normally, discharge of debt is considered a taxable event. The IRS has established revenue procedures creating a “safe harbor” for discharges under certain DOE programs. Our Los Angeles tax advisors observed that it recently issued a new revenue procedure expanding that safe harbor.
Student Loan Discharge Programs
The DOE maintains several programs that allow partial or total discharge of student loan debt in specific situations. These programs only apply to student loans made or guaranteed by the DOE.
Closed School Discharge
The Higher Education Act (HEA) of 1965, as amended in 1986, directs the DOE to discharge the student loan debt of a borrower who is unable to complete their studies because their school closes, or because of certain fraudulent actions on the part of the school. Borrowers must apply to the DOE to obtain a discharge under this program. They must be able to demonstrate that they were either enrolled in the school or on an “approved leave of absence” at the time of closure, or that they withdrew 120 days or less before the school closed.