"I'm still excited about the settlement for ITT Tech students," said Lewis, who has worked with over 5,000 college loan debtors in the last three years.
"In many cases, private lenders can garnishee wages to pay loans, but now the ITT Tech collections have to stop. And besides," Lewis said, "paying tax on these discharged private loan debts is better than having your pay garnisheed. At least you have control of your paycheck."
She said ITT Tech students should expect a 1099-C tax form in the mail.
In the meantime, she said, "we're waiting on the current administration to pass a law allowing discharge of private loans to also be nontaxable."
If you owe tax
ITT Tech isn't the only for-profit college that the Consumer Finance Protection Bureau has sued. The CFPB also took on Corinthian Colleges and Bridgepoint Education, and halted illegal student loan servicing practices at the biggest banks, including Wells Fargo, Discover, and Citibank.
Mark Kantrowitz, publisher of Savingforcollege.com, says students whose loans are canceled have three options: If you are truly insolvent (meaning your total debts exceed your total assets), you may be able to convince the IRS to ignore all or part of the income from the canceled debt. Check out IRS Publication 4681 and file IRS Form 982 to do that, he said.
Otherwise, you can try negotiating a settlement with the IRS by submitting an offer in compromise. In that case, you will need to file IRS Form 656.
Finally, you can ask the IRS for a payment plan to spread out the tax bill over multiple installments.
"Let's say you have $25,000 in loans canceled," said Kantrowitz. "The IRS treats that as $25,000 in income, so assuming a marginal tax rate of 24 percent, you would owe about $6,000 in taxes."