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Student loans were canceled? Great, but you are still on the hook for taxes.

Erin Arvedlund, The Philadelphia Inquirer on

Published in Business News

Good news: If you have private student loans from the now-defunct ITT Technical schools, your loans have been canceled.

Bad news: You may owe taxes, as the IRS views the loans as income.

Pennsylvania's attorney general last week announced a national settlement for more than $168 million in debt relief for 18,000 former students of ITT Tech. In Pennsylvania, 570 former ITT Tech students are eligible for $5.3 million in debt relief.

ITT Tech pressured students by pulling them out of class and threatening expulsion if they did not accept the loan terms, the attorney general said. ITT filed for bankruptcy in 2016.

The reason students may still owe tax? Private student loans are treated differently from federal loans, especially when discharged.

Blame a quirk in the tax code. If a bank lent you money, that loan isn't considered income. But if the loan is forgiven, suddenly the IRS views that as taxable income.

 

"If someone forgives a debt, it is as if someone gave you money, and you paid off the loan," said Jane Scaccetti, cofounder of the Drucker & Scaccetti tax accounting firm.

There are further quirks. Federal loans that are discharged are not viewed as income. But discharged private loans are still viewed as income by the IRS, said Student Loan Doctor founder Sonia Lewis, who operates a debt counseling business in Philadelphia.

The IRS issued guidance after the for-profit Corinthian Colleges closed, advising that federal loans are not taxable. In July 2018, the Department of Treasury issued a ruling extending the 2015 relief for Corinthian federal student loan borrowers to Corinthian private student loan borrowers. Members of Congress are urging the IRS to do the same for students with private loans.

But that's not the law of the land yet.

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