We have been discussing the problems facing the students left holding the bag when for-profit Corinthian Colleges Inc. closed all of its schools last year. The problem wasn’t just that Corinthian closed its schools; it was that the company had defrauded the students by, among other things, misrepresenting job placement figures. These students were crime victims, but they were still liable for their school loans.
The federal government has given considerable thought to how these borrowers can get out from under federal school loans. The U.S. Department of Education has two programs to help: the closed school program and the defense of repayment process.
Qualifying borrowers may have the balance of their loans discharged, and they may even be reimbursed for amounts already paid on the loan. As we said in our last post, though, the programs may wipe out the debt, but they do not wipe out the tax problems that accompany loan forgiveness.
Enter the IRS with its revised rule for Corinthian students (Rev. Proc. 2015-57).
The closed school process applies to students who were enrolled when Corinthian shut down operations, but only if the student did not transfer credits earned at Corinthian to a similar program offered by a different institution. Generally, students who withdrew from a closed school within 120 days of its closing date also qualify for the program. Corinthian students have more leeway: If they withdrew on or after June 20, 2014, they may qualify.
Closed school program loan forgiveness only applies to federal Direct Loans, Federal Family Education Loan Program loans — loans from private lenders that are backed by the federal government — and Federal Perkins Loans.
The IRS has agreed not to treat the discharged loan amounts as taxable income. Nor will the agency require students to amend returns for earlier years during which they took the education credit or deducted interest paid on one of the Corinthian loans.
The rules are a little different for students who have already graduated but believe they were victims of fraud.
We’ll explain in our next post.
Source: Accounting Today, “IRS Gives Tax Break to Former Corinthian College Students,” Michael Cohn, Dec. 4, 2015