Statement on Non-Taxability of Borrower Defense Loan Discharges

WASHINGTON, DC – Student Defense issued a statement today applauding the Internal Revenue Service and Department of the Treasury’s January 15, 2020 determination that discharges provided under the borrower defense regulation will not be treated as taxable income.

"When the government discharges a federal loan because a student was defrauded, it is common sense that the student should not be taxed on the relief,” said Student Defense President Aaron Ament. "Although Secretary DeVos still refuses to grant or deny borrower defense claims, at least we now know that, if claims ever are granted, at the end of the day borrowers will not suffer large, and potentially debilitating, tax bills.”

For years, the student advocacy community has called on the IRS to treat borrower defense discharges as non-taxable. Previously, Treasury and the IRS made special exceptions to taxability in two limited cases—for Corinthian Colleges and American Career Institute borrowers—but had not addressed the larger question of taxability for all borrower defense discharges. This uncertainty left borrowers vulnerable to large tax bills on debt that was discharged based on their school’s misconduct.