Texarkana, TX 77° Tue H 85° L 60° Wed H 84° L 62° Thu H 85° L 63° Weather Sponsored By:

Student loans canceled? You are still on the hook for taxes

Student loans canceled? You are still on the hook for taxes

July 1st, 2019 by The Philadelphia Inquirer in Features

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.

"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."

Your death actually can improve matters: Section 11031 of the Tax Cuts and Jobs Act of 2017 established an exclusion from income for discharges of federal and private student loans due to death or disability in effect from 2018 through 2025.

However, "the discharge of the (ITT) student loans is not due to death or disability. Accordingly, the new law does not apply," Kantrowitz said. "Plus, these were private loans. So the settlement merely cancels the remaining debt and clears the credit histories."

If you were an ITT Tech or other for-profit college student, contact the Pennsylvania Attorney General's office hotline: 1-800-441-2555. Or you can email scamsattorneygeneral.gov; complaint forms are available on the website at www.attorneygeneral.gov.


Tax credit as solution

Presidential hopeful Sen. Elizabeth Warren (D., Mass.) tackled this taxable income conundrum.

Under her plan, Americans with student debt would not have to pay income taxes on canceled loans.

"This new type of student loan forgiveness would join the ranks of other exceptions to cancellation of debt income," wrote Adele Kilgus, a CPA with Drucker & Scaccetti, in a note to clients last month.

Warren claims debt forgiveness would be paid for by what she coined the "Ultra-Millionaire Tax," although Kilgus is dubious.

"As tax geeks, whenever we hear about new proposed legislation, we like to get to the nitty-gritty of its tax impact. Sen. Warren, as president or not, will have an uphill battle getting this bill through both houses" of Congress, she said.

Getting Started/Comments Policy

Getting started

  1. 1. If you frequently comment on news websites then you may already have a Disqus account. If so, click the "Login" button at the top right of the comment widget and choose whether you'd rather log in with Facebook, Twitter, Google, or a Disqus account.
  2. 2. If you've forgotten your password, Disqus will email you a link that will allow you to create a new one. Easy!
  3. 3. If you're not a member yet, Disqus will go ahead and register you. It's seamless and takes about 10 seconds.
  4. 4. To register, either go through the login process or just click in the box that says "join the discussion," type your comment, and either choose a social media platform to log you in or create a Disqus account with your email address.
  5. 5. If you use Twitter, Facebook or Google to log in, you will need to stay logged into that platform in order to comment. If you create a Disqus account instead, you'll need to remember your Disqus password. Either way, you can change your display name if you'd rather not show off your real name.
  6. 6. Don't be a huge jerk or do anything illegal, and you'll be fine.

Texarkana Gazette Comments Policy

The Texarkana Gazette web sites include interactive areas in which users can express opinions and share ideas and information. We cannot and do not monitor all of the material submitted to the website. Additionally, we do not control, and are not responsible for, content submitted by users. By using the web sites, you may be exposed to content that you may find offensive, indecent, inaccurate, misleading, or otherwise objectionable. You agree that you must evaluate, and bear all risks associated with, the use of the Gazette web sites and any content on the Gazette web sites, including, but not limited to, whether you should rely on such content. Notwithstanding the foregoing, you acknowledge that we shall have the right (but not the obligation) to review any content that you have submitted to the Gazette, and to reject, delete, disable, or remove any content that we determine, in our sole discretion, (a) does not comply with the terms and conditions of this agreement; (b) might violate any law, infringe upon the rights of third parties, or subject us to liability for any reason; or (c) might adversely affect our public image, reputation or goodwill. Moreover, we reserve the right to reject, delete, disable, or remove any content at any time, for the reasons set forth above, for any other reason, or for no reason. If you believe that any content on any of the Gazette web sites infringes upon any copyrights that you own, please contact us pursuant to the procedures outlined in the Digital Millennium Copyright Act (Title 17 U.S.C. § 512) at the following address:

Copyright Agent
The Texarkana Gazette
15 Pine Street
Texarkana, TX 75501
Phone: 903-794-3311
Email: webeditor@texarkanagazette.com