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Safe Harbor for Taxpayers with Discharged Student Loans


The IRS recently established a safe harbor that extends relief to taxpayers who took out student loans, whether federal or private, to finance attendance at a post-secondary educational institution. Relief has also been offered to creditors who would usually be required to file returns and provide the IRS with payee statements to discharge indebtedness. Determining who qualifies for this safe harbor can be complicated, so if you took out a student loan in order to attend a non-profit or for profit school, it is important to contact an experienced tax law attorney who can explain your options.

Who Qualifies for the Student Loan Safe Harbor?

The recently insisted safe harbor applies only to taxpayers who obtained a federal or private student loan to finance their education and:

  • Whose federal loans have been discharged by the Education Department based on the recent closure of the student’s school;
  • Whose private loans have been discharged based on the settlement of a lawsuit based on allegations of unfair, deceptive, or abusive acts against an educational institution or private lender that issued student loans;
  • Who can establish, as a defense against repayment, that an educational institution’s actions would support a cause of action under state law, including claims based on fraudulent or material misrepresentations; or
  • Who are participating in legal proceedings brought against an institution by a state or federal agency for the use of unlawful business practices.

Under the safe harbor exemptions, individuals who fall under one of these categories are not required to report the amount of the discharged loan when calculating gross income on their federal tax returns.

Recapturing Tax Credits and Deductions

As a part of the relief offered to certain students, the IRS’ new safe harbor also does not require qualifying taxpayers to increase the taxes they owe in the year of discharge or in the prior year if they received an education tax credit that is attributable to payments made with the proceeds of a discharged loan. Similarly, eligible taxpayers are not required to increase their gross income for the year of discharge if they previously claimed:

  • A deduction that is attributable to interest paid on a discharged loan; or
  • A deduction that can be attributed to payments made towards qualified tuition and related expenses if made with proceeds from the loan in question.

Information Reporting

Out of concern that filing information returns (as usually required in the case of a discharged debt) could lead to the issuance of underreporter notices and that supplying payee statements to taxpayers would cause confusion in light of the new safe harbor, the IRS has also taken steps to absolve certain creditors of the responsibility of filing information returns and furnishing payee statements when discharging student debt.

Speak with a Dedicated Florida Tax Attorney

Please contact 386-490-9949 today if you have questions about the new regulations regarding the  student loan safe harbor and a member of our legal team will help you schedule a free one-on-one case review with experienced Florida tax & IRS lawyer Ronald Cutler, P.A. today.