Paul L. Caron

Sunday, May 15, 2011

Federal Student Loan Forgiveness and Cancellation of Indebtedness Income

Jonathan M. Layman (J.D. 2011, Capital) has published Comment, Forgiven But Not Forgotten: Taxation of Student Loans Under the Income-Based-Repayment Plan, 39 Cap. U. L. Rev. 131 (2011). Here is part of the Introduction:

This comment provides a comprehensive review of the law of cancellation of indebtedness income and also describes several Federal Student Loan programs and how such programs address the cancellation of indebtedness issue. Using this background, the comment discusses the apparent inconsistency in the law that exempts cancellation of indebtedness income under some student loan programs but not others. Finally, the comment argues for a change in the law to exempt cancellation of indebtedness income from loans forgiven under the income-based-repayment plan. The author hopes that this comment will provide the reader with a greater understanding of the tax consequences of forgiven debt as well as an appreciation of the need to implement new legislation protecting taxpayers who participate in the income-based-repayment plan from potentially massive tax liability in a single year.

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So what would be the implications of this forgiveness on the student's Credit Score?

Posted by: Abhishek | Jun 2, 2011 12:22:56 AM

Those who argue for the "simplification" or "flat tax" as part of a tax reform proposal never seem to address complications like this one, and items like exclusion of life insurance proceeds (except under the transfer for value rules) and exclusion of damages received as a result of physical injury (but not mental or emotional distress)that are part of the tax code.

Posts like this do a great service in demonstrating that tax reform and tax simplification is just not the easy, one step process that its proponents support.

Posted by: Sid (real one) | May 15, 2011 8:02:04 AM