Owing on a debt you cannot repay is bad enough, but owing federal taxes on that debt after you no longer have to repay it is even worse. Federal tax law requires that in most cases when a loan is forgiven, the amount that is written off by the lender is taxable income to the previous debtor.
Sen. Debbie Stabenow, D-Michigan, thinks that it is unfair when the debt was incurred under fraudulent circumstances, specifically to pay for college. She has introduced a bill that would protect defrauded borrowers from being taxed on their forgiven student loan debt, called the Student Tax Relief Act.
Her bill, S. 3008, was drafted in the wake of the Corinthian Colleges, Inc. downfall and the federal investigation that followed. The Department of Education discovered that the now-defunct for-profit chain defrauded students at more than 100 schools in more than 20 states across the country.
Following the fraud finding, the Education Department told students who borrowed money to attend Corinthian classes that they would not have to repay those loans. Affected students can apply for loan forgiveness through the department’s Federal Student Aid division.
As of March 1, nearly 9,000 claims have been processed from former Corinthian students nationwide, totaling more than $132 million, according to The Education Department. The Corinthian students were also provided special tax relief on the amounts written off by the Department of Education.
Stabenow’s bill, which has 7 Democratic co-sponsors in the Senate, would give the same tax relief to students in similar educational fraud cases.
“When students take out loans to attend college, they should get a fair deal and a fair shot,” said Stabenow in announcing the introduction of the Student Tax Relief Act. “No student should be the victim of false advertising from a college that promises skills or job placement. And the last thing they deserve is to be hit with an enormous tax burden on their forgiven loans.”
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