In my last post about a new bill addressing student loan debt forgiveness, I mentioned that student loan debt that is forgiven may be viewed as taxable income. I wanted to further clarify my earlier statements. As with most things, there are exceptions.
Generally speaking, debt that is forgiven is typically viewed as income by the IRS and this means that it will be taxed. Again, this is a very general rule. But, there are many exceptions to this rule. For example, from 2007 to 2014, this general rule did not apply to short sales with mortgage debt that is cancelled or forgiven because of the Mortgage Forgiveness Debt Relief Act.
Similarly, with student loans, the specific area in the code that refers to gross income exclusions for student loans is 26 U.S.C. Sec. 108(f). In addition, the IRS has a publication available here that states if you work for a 501(c)(3) tax-exempt organization for a certain period of time under certain conditions, then your student loan forgiven debt will be discharged and not viewed as gross income. Within the publication and within the student loan debt forgiveness programs, there are additional parameters that must be met by the borrower (too long to go into for this post, but I can save it for another post if readers are interested in learning more). But, in short, there is an exception to student loan debt forgiveness taxability. Additional information about student loan debt forgiveness is available in this other IRS publication on page 4 available here.