Student loan borrowers who have been deceived by their colleges got some good news this week.
The IRS granted relief to any borrower whose federal or private loan was discharged by the Department of Education as a result of the DOE’s closed school or borrower defense discharge process or due to a legal case settlement. Those borrowers won’t have to recognize the forgiven loan amount as gross income, which is the usual treatment for discharged loans.
In addition, the House of Representatives passed a resolution that would prevent the DOE, under Secretary Betsy DeVos, from implementing a new borrower defense rule that would slash the number of eligible borrowers who could qualify for loan forgiveness. The vote was 231 to 180. Six Republicans voted for the measure.
The IRS decision affects loans used to finance attendance at nonprofit and for-profit schools except those owned by Corinthian Colleges or the American Career Institute, since those borrowers previously received IRS relief.
Sen. Elizabeth Warren, D-Mass., who promotes student loan forgiveness in her presidential campaign and fought for the tax exemption for Corinthian Colleges students in 2015, praised the IRS decision for expanding the tax exemption “to protect more students from additional hardship.”
Defrauded students will have a harder time getting future loans discharged under a new DOE borrower defense rule set to take effect July 1 for loans made on or after that date. The House resolution would prevent that, but the Senate would have to follow suit. The rule could also be delayed by a court challenge, which has happened with other rules proposed by the current DOE.
The new rule requires that a borrower apply for loan forgiveness within three years of leaving college, which would eliminate hundreds of thousands of existing claims, according to Beth Stein, special advisor to The Institute for College Access & Success (TICAS).