5.
Student Loan Cancellations and Repayment Assistance
Student loan repayment assistance may be tax free. Student loan repayments provided under certain federal and state repayment programs are tax free. See Student Loan Repayment Assistance,
later, for more information.
If you fulfill certain requirements, two types of student loan assistance may be tax free. The types of assistance discussed
in this chapter are:
Student Loan Cancellation
Generally, if you are responsible for making loan payments, and the loan is canceled (forgiven), you must include the amount
that was forgiven in
your gross income for tax purposes. However, if your student loan is canceled, you may not have to include any amount in income.
This section
describes the requirements for tax-free treatment of canceled student loans.
To qualify for tax-free treatment, your loan must contain a provision that all or part of the debt will be canceled if you
work:
-
For a certain period of time,
-
In certain professions, and
-
For any of a broad class of employers.
The loan must have been made by a qualified lender to assist the borrower in attending an eligible educational institution.
Qualified lenders.
These include the following.
-
The government—federal, state, or local, or an instrumentality, agency, or subdivision thereof.
-
A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital and whose employees
are
considered public employees under state law.
-
An eligible educational institution, if the loan is made:
-
As part of an agreement with an entity described in (1) or (2) under which the funds to make the loan were provided to the
educational
institution, or
-
Under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet
needs or in
areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or
a tax-exempt section
501(c)(3) organization.
In satisfying the service requirement in (3)(b), the student must not provide services for the lender organization.
Section 501(c)(3) organization.
This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of
the following purposes.
-
Charitable.
-
Religious.
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Educational.
-
Scientific.
-
Literary.
-
Testing for public safety.
-
Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic
facilities or
equipment).
-
The prevention of cruelty to children or animals.
Eligible educational institution.
This is an educational 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 educational activities.
If you refinanced a student loan with another loan from an eligible educational institution or a tax-exempt organization,
that loan may also be
considered as made by a qualified lender. It is considered made by a qualified lender if it meets the requirements of (3)(b)
under Qualified
lenders beginning in the previous column.
Student Loan Repayment Assistance
Loan repayment programs provide student loan repayment assistance to participants on the condition that those participants
provide certain
services, generally primary health services, in areas where shortages of these services exist. In tax years beginning before
2004, such amounts given
to participants for the sole purpose of repaying their student loans were taxable to the recipients.
Beginning in 2004, student loan repayment assistance you receive under the following programs is tax free.
You cannot deduct the interest you paid on a student loan to the extent payments were made through your participation in the
above programs. This
is effective for repayment assistance received after December 1, 2003.
