In the summer of 2014, the Minnesota Office of Higher Education ordered Corinthian Colleges Inc. to stop enrolling students from this state. At that point, though, about 300 students from Minnesota were enrolled in traditional and on-line programs operated by the for-profit college system. (Corinthian’s sole Minnesota campus was the Everest Institute in Eagan.)
Corinthian eventually closed Everest down in April 2015. Any students still in the system were left with mountains of student debt and course credits that other institutions were reluctant to transfer. Many graduates had already felt the sting of realizing that their pricey educations had not prepared them for the jobs they thought they would get.
The U.S. Department of Education responded by encouraging students to take advantage of the closed school debt forgiveness program or the defense to repayment process. Every silver lining has a cloud, though, and the Closed School and borrower defense options had a fairly large one.
At tax time, the dollar amount forgiven could be classified as taxable income.
For the most part, the tax code treats any debt written off by the creditor as income. The IRS has added exceptions — for example, mortgage refinancing obtained through the federal Home Affordable Modification Program — but forgiven student loans were not among them.
Rather than allowing Corinthian students to forgo paying Peter while still robbing Paul, the IRS announced in early December that Corinthian students would be exempt from the rule. Specifically, the new rule (Rev. Proc. 2015-57) will not treat federal student loans discharged under the defense of repayment discharge process as taxable income.
For the most part.
We’ll explain in our next post.
Accounting Today, “IRS Gives Tax Break to Former Corinthian College Students,” Michael Cohn, Dec. 4, 2015
U.S. Department of Education Federal Student Aid, “Information About Debt Relief for Corinthian College Students,” accessed at studentaid.ed.gov on Jan. 6, 2015