Student loan forgiveness and closed school discharges
Applying for financial aid for school doesn’t usually involve thinking about what to do with student loan debt if the school closes. But it is a question that many students are asking after this summer’s news of school closures across the country. And the answer involves taxes.
Students with certain federal loans may apply for a closed school discharge of their debt. In this case, the forgiven amount is not taxable. Not all students and not all loans will meet the qualification criteria and students (or their parents) may need to investigate other options regarding loans that were used for tuition.
Other loans, like those covering living expenses, could still be forgiven. However, the students could owe income taxes on the amount of forgiven debt. In this case, they will get a tax form in the mail reporting that amount as income and may need to include it on their tax return.
Even if they receive the tax form reporting their forgiven debt, students could still qualify to exclude that income from their tax return if they can show they were insolvent or qualify for another exclusion.
“It is very important for students to sit down with a tax professional this year. They need to explain whether they transferred their credits, applied for a closed school discharge or applied for cancellation through their loan service provider under another situation,” said Lynn Ebel, manager at The Tax Institute at H&R Block.