Student loan debt: Tax and other considerations

By Claudia L. Kelley, CPA, Ph.D., and C. Kevin Eller, Ph.D.



  • The COVID-19 pandemic has renewed focus on the student loan debt crisis. In response to the pandemic, under a provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and a presidential order, government-held federal student loans are in administrative forbearance through the end of 2020, meaning that no payments need to be made on the loans and interest does not accrue on the suspended payments during that time.
  • The CARES Act also made payments on an employee's student loan principal and interest by an employer under an education assistance program excludable from the employee's income.
  • On their own, an increasing number of employers have created student loan repayment assistance programs to help recruit and retain quality employees.
  • To make student loan repayment more manageable, the U.S. Department of Education offers several forms of income-driven repayment plans for federal student loans. A growing number of colleges also offer income-share agreements that pay the cost of a student's college education in exchange for a set percentage of the individual's future income for a certain number of years.
  • Borrowers may be eligible to have student debt forgiven without incurring cancellation-of-debt income in certain situations, such as where the borrower agrees to work for a certain period in an underserved profession or underserviced geographic area, the borrower becomes insolvent or bankrupt, or the borrower's school ceases operation.
  • Distributions from 529 plans or retirement plans may also be options for borrowers to make student loan payments.

Prior to the COVID-19 pandemic, the competition to attract and retain talent was fierce. While national unemployment has surged, in certain industries the shortage of qualified workers remains.1 According to a recent survey by the organization American Student Assistance, one benefit employees find desirable is assistance with paying off their student loan debt.2

Student loan repayment assistance, which started as a niche offering by a few companies, is becoming a more common workplace benefit. Since 2018, the number of employers offering student loan assistance has doubled, and these employer-offered programs are expected to continue growing despite a stagnant economy,3 in part because of tax benefits introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.4

This article examines the student loan burden in the United States, reviews programs designed to assist borrowers with repayment, and discusses the tax issues associated with student loan repayment assistance programs and debt forgiveness. Although tax implications are the primary focus of this article, alternative ways of repaying student loans are also discussed.

Consequences of student loan debt

With regularity, major news sources are publishing articles about the crushing student loan debt burden. There are more than 45 million American borrowers who collectively owe nearly $1.6 trillion in student loan debt, a burden amounting to nearly 8% of national income.5 Forty-six percent of federal student loan borrowers surveyed said they expected to struggle making their payments once forbearance relief ended under the CARES Act.6 Research shows that post-college debt often compels people to delay marriage and reduces the borrower's ability to purchase a house and save for retirement. Excessive debt can also affect a student's post-college career choice, employment decisions, and enrollment in graduate programs.7

Fifty-nine percent of respondents to a survey conducted in May 2020 reported facing increased stress, anxiety, and depression stemming from their student loans during the pandemic.8 Furthermore, financial stress and anxiety have been shown to affect an employee's ability to concentrate and job satisfaction. Individuals and employers are increasingly aware of the student loan debt crisis and are looking for solutions.

CARES Act provisions

The CARES Act, enacted in March 2020, provided relief to students in several ways. First, federal student loans were automatically placed into administrative forbearance until Sept. 30, 2020, which meant payments were not required until that time. Interest did not accrue on the suspended payments nor was the interest capitalized into the loan balance.9 In August 2020, President Donald Trump issued a memorandum extending similar relief until Dec. 31, 2020.10 Because only government-held federal student loans are covered by these actions, millions of student loan borrowers with private loans and commercially issued federally guaranteed loans are not provided relief. Private lenders may offer their own help, however; borrowers should contact their lender for assistance. For example, private lenders have entered into an agreement with several states to provide student relief options similar to what the CARES Act did for those with federal student loans.11

Under a separate provision, the CARES Act created temporary incentives for employers to help pay their employees' student loan debt. The act expanded, until the end of 2020, the types of employer-provided educational assistance that an employee can exclude from gross income under Sec. 127 to include the payment by the employer of the principal or interest on any qualified higher education loans as defined in Sec. 221(d)(1) for education of the employee. The loan repayments, which must be made under a written educational assistance program, are subject to the overall $5,250 per employee limit for all educational assistance.12

The employer may pay either the employee or the lender, and the amount paid, as well as being excluded from gross income, is not subject to payroll taxes. (However, if the employer pays student loan interest, the employee cannot deduct the interest under Sec. 221.) Collectively, these tax breaks may provide a great benefit to both the employer and employee, although they are currently set to expire after 2020.

Employer programs that assist with student loans

Eighty-six percent of young workers say they would commit to their employer for five years if the employer helped pay off their student loans.13 Below are two examples of employer-provided student debt assistance programs that were created prior to the CARES Act.14 Unless a student loan payment made by an employer is made in 2020 under an educational assistance program and the payment meets the CARES Act requirements described above, or is made under a plan with a similar structure to the Abbott program discussed below, the student loan payment likely will be taxable to the employee as compensation.15


In June 2018, the health care company Abbott implemented a program that helps employees pay their student loans and save for retirement.16 A survey Abbott conducted with research firm YouGov showed that nine out of 10 college students with student loans are looking for a company with student loan assistance, and six out of 10 working adults would consider switching companies to gain a student loan debt benefit.17 Interestingly, Abbott is currently the only company with a private letter ruling from the IRS approving the structure of its program.18

The idea behind Abbott's Freedom 2 Save program is that employees paying student loans were generally unable to contribute to retirement savings plans and were therefore unable to receive Abbott's 5% matching retirement contribution. This essentially resulted in employees with student loans receiving less compensation than their loan-free colleagues. The new plan allows employees with student loans to pay down their loans without missing out on the employer matching retirement contributions.

Under the Freedom 2 Save plan, Abbott will make an employer nonelective retirement contribution on behalf of an employee conditioned on the employee making student loan repayments (SLR nonelective contributions). The program is voluntary, and all employees eligible to participate in the company's 401(k) plan are eligible to participate in the SLR program. Under the program, if an employee makes a student loan repayment during the period equal to at least 2% of the employee's compensation for the pay period, then Abbott will make an SLR nonelective contribution to the employee's 401(k) as soon as practical after the end of the year equal to 5% of the employee's eligible compensation for the pay period.

Abbott found this program structure more valuable for employees because the payment is not taxed immediately as cash rewards and the investment grows tax deferred. Many individuals under the burden of large student loan debt are unable to put money into retirement savings, often losing the company match as a result.19 The Abbott structure works to alleviate this issue.


KPMG's approach involves student loan avoidance rather than repayment assistance. KPMG has created a Master of Accounting With Data and Analytics Program, and the company funds tuition, fees, books, and a stipend to cover room and board to a select group of students accepted into the program.20 Students take courses and obtain their degree from one of the universities participating in the program. The amount received is included in the student's income. KPMG also pays the student for an approximate amount of taxes due on the funds. The program includes an internship and a full-time associate position with the firm.

Students commit to work for KPMG for three years after graduation; otherwise, 100% of the tuition, fees, books, and stipend (including taxes paid) must be paid back to KPMG. If the student is required to repay the amounts paid by KPMG for their education, the student may be able to deduct the repayment under the claim-of-right doctrine and, if applicable, Sec. 1341. KPMG's program is another example of how employers are attracting talented employees while also assisting with the cost to educate these individuals.

Repayment of student loan assistance

If an employee fails to meet contractual obligations under an employer's student loan repayment assistance program, he or she may be required to repay a portion, or all, of the benefit received, depending upon the requirements of the program. Employees who recognized income as a result of the employer's paying their student loan debt and who in a later year are required to repay all or a portion of the student loan payment to the employer, may be able to take a deduction under the claim-of-right doctrine for the amount repaid in the year of repayment.21

If the amount of repayment is less than $3,000, for employees the deduction would be a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income floor.22 It is important to note that miscellaneous itemized deductions subject to the 2% floor are not available for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026. However, under Sec. 1341, relief is available for certain repayments over $3,000.23 Employees who itemize their deductions and made repayments during the tax year that meet the Sec. 1341 requirements can deduct the amount repaid as an "other itemized deduction" on line 16 of Schedule A (Form 1040), Itemized Deductions, or take a credit in the amount of the decrease in tax that would have resulted if the repayment amount had not been included in the employee's income. The credit is reported on line 13 of Schedule 3 (Form 1040), Additional Credits and Payments.24

Discharge of student debt

Prior to the COVID-19 pandemic, the Brookings Institution projected that based on current trends in student loan defaults, nearly 40% of all borrowers who started college in 2003—2004 would default on their student loans by 2023.25 Borrowers who default may have their wages garnished, income tax refunds taken, and credit ratings reduced, further increasing the financial insecurity of the borrower.

In some situations, a borrower may be eligible to have student debt discharged. Typically, the amount of debt discharged is taxable income to the borrower. If individuals are upset about having to report taxable income as a result of canceled debt, it is worth emphasizing to them that they are still better off than they would be if the loan had not been discharged. For instance, while a single individual with $50,000 of taxable income and $70,000 of additional income from debt forgiveness may be pushed into the 24% tax bracket and face an additional tax liability of $16,800, they are still much better off financially because they avoided paying back $70,000 of debt and interest, resulting in an after-tax cash flow of $53,200.26

If certain requirements are met, however, the discharged debt is not taxable income. As discussed below, it may be possible to exclude a discharge of student debt from income in cases where, for instance, the borrower enters an underserved profession, the college or school has closed down, or the borrower is insolvent or permanently and totally disabled. Also, in certain relatively rare situations, student debt can be discharged in bankruptcy.

Debt discharge for entering certain professions

A taxpayer generally recognizes income equal to the portion of debt that is canceled.27 However, Sec. 108 allows a taxpayer to exclude a discharge of debt from gross income in certain cases.28 In particular, the discharge of all or part of a student loan is excluded from gross income if, pursuant to a provision in the loan, it was discharged as a result of the borrower's working for a period of time in certain professions for any of a broad class of employers.29 In order to encourage participation in public service activities, for instance, many educational organizations sponsor programs that offer students an opportunity to have their student loan debt discharged by working for a period of time in a public service organization.

Typically, the lender forgives some or all of the student's debt in exchange for the student's commitment to serve in a public service occupation or underserviced geographic area. In other cases, the original student loan is refinanced in exchange for the student's commitment to work in a public service-oriented occupation.30 The lender must generally be a government entity or tax-exempt education institution.

The exclusion does not apply if the loan terms require the services to be provided to one or a few specified employers, such as a specific hospital. In such a case, the discharge would result in compensation income. Sec. 108(f)(1) specifies that the loan terms must require the student to work "in certain professions for any of a broad class of employers," and an acceptable broad class may include, for example, hospitals in rural areas in the United States. The exclusion only applies to specified loan forgiveness programs and does not apply to other financial incentive programs designed to attract workers, which are typically considered compensation and do not represent loan forgiveness.

Debt forgiven where college ceased operations (or misled borrower)

Widely publicized cases of for-profit colleges folding and leaving students with no degree and large amounts of debt have led to the discharge of certain student loans by the U.S. Department of Education.31 There is both a "Closed School" discharge process and a Defense to Repayment discharge process based on misrepresentations made to students.32 While these Education Department programs forgive the loans, it remained unclear in some cases whether the debt forgiveness resulted in gross income to the borrower. The IRS was concerned that the analysis involved in determining whether another exception would apply (e.g., the insolvency exception, discussed below) would impose a compliance burden on both the IRS and the students with very little resulting taxable income. As a result, Rev. Procs. 2015-57 and 2017-24 state that the IRS will not assert that a taxpayer recognizes gross income as a result of the Defense to Repayment discharge process or Closed School discharge process.

In Rev. Proc. 2020-11 the IRS expanded the relief for taxpayers who took out federal and private student loans in order to attend institutions that closed or misled borrowers. This procedure provides that if a taxpayer's federal student loans are discharged under the Closed School discharge process or the Defense to Repayment discharge process or if their private student loans are discharged based on a settlement of a legal cause of action resolving allegations of unlawful business practices, including unfair, deceptive, and abusive acts and practices, against not-for-profit or for-profit schools or private lenders:

  • Taxpayers will not recognize gross income from discharged loans;
  • Taxpayers will not have to report gross income under the tax benefit rule in the year of discharge for education tax credits, student interest deductions, or qualified tuition-related deductions taken in prior years attributable to the proceeds of the discharged loan; and
  • Creditors are not required to file information returns for the discharged debt pursuant to the IRS procedure.33

The insolvency exception

Another basis for student loan borrowers to exclude cancellation-of-debt (COD) income is that they are insolvent.34 A taxpayer is insolvent if the taxpayer's total liabilities exceed the fair market value of their total assets immediately before the discharge.35 The exclusion only applies to the amount of discharged debt in excess of the taxpayer's assets. The theory for this exclusion is that the taxpayer should not be burdened with the tax liability on the discharge when the taxpayer is unable to pay the debt or the tax.

To determine the insolvency amount (liabilities in excess of assets) the IRS takes into consideration all assets owned by the taxpayer including bank accounts, investments, real estate, business ownership, and retirement savings. Liabilities may include credit card debt and mortgage debt along with student loan debt. Proving insolvency involves a facts-and-circumstances-based investigation, often requiring the individual to seek legal advice and incur additional costs. As a result, borrowers who may qualify for the exception may be unable to take advantage of the exclusion due to the administrative costs.

Permanent and total disability

Individuals whose student loan debt is discharged because of death or total and permanent disability may exclude the debt discharge from gross income.36 This exclusion applies to loans discharged after 2017 and before 2026.

Trump signed a presidential memorandum on Aug. 21, 2019, ordering the federal government to expedite the discharge of federal student loan debt of permanently disabled military veterans.37 While the federal student loan debt of veterans and other individuals who are permanently and totally disabled was already eligible for forgiveness under the Department of Education's Total and Permanent Disability Discharge program,38 the memorandum noted that the process was overly complicated and difficult, which prevented some eligible veterans from receiving discharges.

Some private student lenders also offer disability and death discharges.39

Bankruptcy situations

Student loans are the second highest consumer debt category behind mortgages. Unlike other consumer debt, such as mortgages and credit card debt, student loans ordinarily cannot be discharged in bankruptcy.40 An exception exists if the individual is experiencing undue financial hardship. The most common test for undue hardship is the Brunner test,41 which requires an individual to show that:

  1. He or she cannot maintain, based on current income and expenses, a minimal standard of living for himself or herself and dependents if forced to pay off student loans;
  2. Additional circumstances exist indicating that this condition is likely to persist for a significant portion of the repayment period of the student loans; and
  3. The individual has made good-faith efforts to repay the loans.

To meet the good-faith-efforts requirement, the borrower does not actually have to make payments, but merely attempt to make payments (i.e., make efforts to find a workable payment plan). One bankruptcy court in Pennsylvania has recommended the following approach to the undue hardship test: "Where a family earns a modest income and the family budget, which shows no unnecessary or frivolous expenditures, is still unbalanced, a hardship exists from which a debtor may be discharged of his student loan obligations."42

Filing for bankruptcy should be a last resort for student borrowers. Bankruptcy appears on the individual's credit report and impacts the person's ability to obtain a mortgage for a number of years. Bankruptcy is also an indicator of financial irresponsibility and can jeopardize the debtor's professional licenses or job prospects. The courts tend to interpret the Brunner test strictly; qualifying for a hardship requires an extensive investigation of the individual's facts and circumstances. As a result, it is very difficult to discharge student loan debt in bankruptcy.

The COVID-19 Student Loan Relief Act of 2020 and the Student Borrower Bankruptcy Relief Act of 2019, which would eliminate or amend the section of the Bankruptcy Code that prevents student loans from being dischargeable, are before Congress.43 To date, this legislation has not been enacted.

Paying for higher education

To help lower their student loan burden, individuals may wish to consider alternative approaches to paying for college or paying down student debt. Some of these alternatives include income-based repayment plans, Sec. 529 plan distributions to pay loans, state and local tax incentives, and retirement account hardship distributions, as discussed below.

Income-based repayment plans

There are various types of income-based repayment plans, including so-called income-share agreements (ISA) that a number of colleges offer. Under an ISA, a funder (public or private company) pays for a student's college education in exchange for a set percentage of the individual's future income for a certain number of years.44 Students with low incomes pay less, and students with high incomes pay more. In certain situations, ISAs can offer advantages over a traditional student loan. For example, students with ISAs will always have affordable payments since payments go up and down with income, reducing the likelihood that students will fall behind on their payments and suffer other credit problems. Many times, these payments do not start until the student obtains a job with a certain salary. But while low-income students often end up paying less with an ISA than with a traditional loan, high-income students often end up paying more, thereby offsetting the losses ISA funders have from funding students who do worse than expected.

An increasing number of universities and private investment companies are offering ISAs, which can ease borrowers' debt burden and enable more students to fund their college education.

The Department of Education also offers several forms of income-based repayment plans for federal student loans. These include the Pay as You Earn Repayment Plan, the Revised Pay as You Earn Repayment Plan, the Income-Based Repayment Plan, and the Income-Contingent Repayment Plan.45 Under the Education Department repayment plans, the student's payment obligation will cease if the principal loan balance is repaid before the end of the repayment period. Borrowers and their advisers should be diligent in reviewing the plan details, as each Education Department plan has specific requirements and features.

Under the Education Department plans, any remaining student loan balance is forgiven if the loans are not fully repaid at the end of the designated repayment period. The forgiven amount will be taxable income to the debtor.

Because income-driven repayment plans often lower the monthly payment and extend the repayment period, the student will likely end up paying more in interest over time.

Sec. 529 plan distributions to pay loans

The Setting Every Community Up for Retirement Enhancement (SECURE) Act,46 enacted in December 2019, expands the benefits of Sec. 529 college savings plans by allowing families to take tax-free distributions for purposes of student loan repayment. Principal and interest payments toward a qualified student loan will be considered a qualified 529 expense. The portion of the interest paid with tax-free Sec. 529 earnings is not eligible for the student loan interest deduction.

The law has an aggregate lifetime limit of $10,000 in student loan repayments per 529 plan beneficiary and $10,000 per each of the beneficiary's siblings.47 If the $10,000 limit is exceeded, the earnings portion of the excess distribution is included in the individual's income and subject to the 10% penalty. The limit on student loan distributions applies to an individual from all 529 plans; it cannot be avoided by receiving distributions from more than one account. A distribution to a sibling of the designated plan beneficiary is applied to the sibling's $10,000 lifetime limit, not the beneficiary's.48

State and local tax incentives

In an effort to support business growth, states and local governments are exploring innovative strategies to recruit new college graduates. For example, due to a shrinking population, Niagara Falls, N.Y., implemented a program to help pay off student loans for up to two years if the individual agreed to live in certain neighborhoods. New York state has the Teachers of Tomorrow campaign designed to use state grant money to pay off student loans of teachers who agree to work in underprivileged neighborhoods. Many communities have been exploring innovative ways to be successful in attracting and retaining young professionals. Assisting borrowers with student loan debt is a promising strategy. Readers are encouraged to research state and local programs, as there seems to be an increasing use of these incentives.

Retirement account hardship distributions

Employees burdened by student loan debt, including the debt of a family member, may have savings in a 401(k) plan or similar tax-deferred plan that can be withdrawn and used in the case of hardship. A hardship distribution is included in income and subject to the early-withdrawal penalty.49 A distribution is made on account of hardship if the distribution is necessary to satisfy an immediate and heavy financial need.50 Whether an employee has an immediate and heavy financial need is determined based upon all the relevant facts and circumstances.51 A financial need could be considered immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.52

For distributions after 2019, whether a hardship distribution is necessary to satisfy an employee's immediate and heavy financial need is determined under standards set out in Regs. Sec. 1.401(k)-1(d)(3)(iii). The hardship distribution may not exceed the amount of the employee's need, including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated as a result of the distribution. A distribution is not treated as necessary to satisfy an employee's immediate and heavy financial need if the need may be relieved from other resources that are reasonably available to the employee, including assets of the employee's spouse and minor children.53 The employee must provide a written representation that he or she has insufficient liquid assets to satisfy the financial need.54 A plan administrator may rely upon this representation unless the administrator has knowledge to the contrary.

In addition to the above conditions, the plan may require additional conditions be met for a distribution to be treated as necessary to satisfy an employee's immediate and heavy financial need. For example, while under Sec. 401 and the regulations, employees do not have to take a plan loan as a condition before taking a hardship distribution, a plan may include a condition that an employee is required to take a nontaxable plan loan available under the plan or another plan of the employer before a hardship distribution is made.55

For plan years beginning after 2018, account earnings and employer contributions may be included in hardship distributions.56 One disadvantage of taking a distribution from a qualified savings plan is that the withdrawal reduces the amount in the account that is growing tax deferred.57

Section 2202 of the CARES Act provides expanded distribution options and favorable tax treatment for up to $100,000 of COVID-19-related distributions from qualified retirement plans to qualified individuals. To qualify for the special treatment, the individual, his or her spouse, or a dependent of the individual must have been diagnosed with COVID-19 or experienced certain financial or work-related hardships due to COVID-19. The distribution can be included in the employee's gross income over a three-year period and is not subject to either 20% withholding or a 10% penalty. The CARES Act also temporarily increased the limit on nontaxable loans from qualified employer retirement plans to individuals who meet the same COVID-19-related criteria discussed above. Further discussion of these changes is beyond the scope of this article. Individuals may consider using these retirement plan funds to make student loan repayments until the borrower's financial condition improves.

Student loan debt tax planning suggestions

Here are some tax planning tips and suggestions taxpayers and their advisers should consider:

1. With interest rates near record lows, it is a good time to refinance private student loans. Not everyone will be able to refinance. Individuals with good credit scores and sufficient income are most likely to be approved.

2. While federal student loans are in forbearance due to the pandemic and no payments are required, individuals who are able to make debt payments should consider doing so. Any payments made will go straight to the principal and save interest.58

3. Companies can assist employees in paying student loans and in saving for retirement. Abbott's Freedom 2 Save program is an example of how to amend an existing qualified retirement plan to provide a valuable tax-favored benefit to employees with student debt.

4. As of this writing, the CARES Act's exclusion from income for employer-made student loan repayments is set to expire after 2020. The exclusion is subject to a $5,250 limit and is not phased out. The student loan interest deduction is phased out based upon income. Individuals may be able to structure these benefits for the optimum tax savings.

5. Under the CARES Act's exclusion, any amount paid by an employer toward student loan interest is not eligible for a student loan interest deduction by the employee. Employers may be able to work around this restriction by targeting their payments to apply to just principal, thereby allowing the borrower's payment to cover the interest and qualify for the student loan interest deduction.

6. Public service loan forgiveness programs provide that amounts discharged are not considered income. Individuals must be careful to comply with the specific program requirements. The Education Department's Federal Student Aid Office's Public Service Loan Forgiveness webpage provides guidance and helpful tools, available at

7. Individuals whose institutions of higher education ceased operations and folded (or misled borrowers) should be aware of the safe harbor relief provided by Rev. Proc. 2020-11 for debt discharged under the Closed School discharge process or the Defense to Repayment discharge process. Individuals to whom Rev. Proc. 2020-11 applies may claim a credit or refund for an overpayment of tax for the years for which the period of limitation has not expired.59

8. Income-share agreements ultimately benefit students who are unable to find a job with a high enough salary to repay a loan. However, students who end up earning high salaries may pay more than they would have with a student loan. Individuals and their advisers should investigate the costs of ISA programs carefully, as well as the tax effects.

9. Student borrowers resorting to bankruptcy should consult a local bankruptcy attorney. Bankruptcy involves state-specific laws that are used to apply the federal tax rules. Currently, student loans are generally not dischargeable in bankruptcy; however, it may be possible under the undue financial hardship test, as discussed above.

10. The deduction for student loan interest is phased out at higher levels of modified adjusted gross income, whereas the exclusion for student loan distributions from 529 plans has no phaseout. Many families use a combination of income, 529 savings, and loans to pay for college. Contributions to a 529 plan can be made throughout college or after graduation, providing a good opportunity for relatives to help pay the student's loans.

11. Federal student loan rates are set each year by Congress and are tied to the yield of 10-year Treasury notes. They are set each spring and effective for the upcoming academic year. Rates on private loans are affected by the federal rates. The current unusually low rates reduce the cost of borrowing significantly. College graduates who are unable to find a job during the pandemic may consider borrowing for graduate studies, especially given the low rates.

12.Tax advisers are in a position to help their clients plan for the future. All options, including splitting the cost of tuition between the student and the parents, and using IRAs and other savings vehicles, should be considered.


1 Stahl, "4 Industries That Are Still Hiring in the Midst of COVID-19," Forbes (April 1, 2020), available at

2 American Student Assistance Young Workers and Student Debt Survey Report Methodology (February 2017), available at

3 Kuchar, "Companies Are Now Getting a Tax Break to Help Employees Pay Down Student Loans During Coronavirus," Money (April 14, 2020), available at

4 Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136.

5 Ingraham, "7 Ways $1.6 Trillion in Student Loan Debt Affects the U.S. Economy," The Washington Post (June 25, 2019), available at

6 "New Data Shows COVID-19 and Economic Downturn Crushing Student Loan Borrowers,"

7 Rothstein and Rouse, "Constrained After College: Student Loans and Early Career Occupational Choices," 95 Journal of Public Economics 149 (2011).

8 Swaminathan, "Student Loan Borrowers Face 'Increased Stress, Anxiety, and Depression' Amid Coronavirus Shock, Survey Finds," Yahoo Finance (May 21, 2020), available at

9 CARES Act §3513.

10 Memorandum on Continued Student Loan Payment Relief During the COVID-19 Pandemic (Aug. 8, 2020), available at

11 Lake, "How States Are Helping Private Student Loan Borrowers During Coronavirus," Fox Business (June 12, 2020), available at The states include California, Colorado, Connecticut, Illinois, Massachusetts, New Jersey, Vermont, Virginia, and Washington state, as well as Washington, D.C.

12 Sec. 127(c)(1)(B), as amended by CARES Act §2206.

13 American Student Assistance Young Workers and Student Debt Survey Report Methodology (February 2017), available at The survey polled 502 young workers between the ages of 22 and 33 and 451 human resources managers.

14 Examples of other companies offering a student loan repayment benefit are PwC, NVIDIA, LiveNation, Staples, First Republic, Aetna, Chegg, and Hulu. In addition, the U.S. Department of Justice, the U.S. Department of Agriculture, and other federal agencies offer student loan repayment programs to attract and retain qualified candidates for specific positions in government service.

15 Sec. 61(a)(1).

16 Abbott Press Release, "Abbott Announces Freedom 2 Save Program for Employees to Address Student Debt" (June 26, 2018), available at

17 Abbott Press Release, "Nearly 9 Out of 10 College Students With Student Debt Say It's Important to Find a Company That Offers Loan Relief" (May 15, 2019), available at

18 IRS Letter Ruling 201833012.

19 Abbot, "Got Student Debt? We've Got You" (June 26, 2019), available at

20 KPMG, "KPMG Master of Accounting With Data and Analytics Program" (2019), available at

21 Lewis, 340 U.S. 590 (1951).

22 Sec. 67(g).

23 Sec. 1341. See requirements in Secs. 1341(a) and (b) and the related regulations.

24 See Schedule A (Form 1040) 2019 instructions for line 16, available

25 Scott-Clayton, "The Looming Student Loan Default Crisis Is Worse Than We Thought," Brookings Institution (Jan. 11, 2018), available at

26 This example ignores the amount of interest and the time value of money.

27 Sec. 61(a)(11).

28 Sec. 108(f). A person whose debt is discharged may receive a Form 1099-C from the lender, but failure to receive the form does not make the COD income nontaxable (Ngatuvai, T.C. Summ. 2004-143).

29 Sec. 108(f).

30 The U.S. Department of Education offers a public service loan and a teacher loan forgiveness program, and many states offer state-sponsored teacher loan forgiveness programs as well.

31 Rev. Proc. 2015-57 and Rev. Proc. 2017-24. Examples include the Corinthian College and American Career Institute closures.

32 To have their federal student loans discharged, students must submit an application to the Education Department. See a complete list of closed schools at

33 Rev. Proc. 2020-11 is effective for loans discharged beginning on or after Jan. 1, 2016.

34 Sec. 108(a)(1)(B).

35 Sec. 108(d)(3) and Rev. Rul. 92-53.

36 Sec. 108(f)(5)(A)(iii).

37 Presidential Memorandum on Discharging the Federal Student Loan Debt of Totally and Permanently Disabled Veterans (Aug. 21, 2019), available at

38 Federal Student Aid Office of the U.S. Department of Education, "Total and Permanent Disability Discharge," available at

39 See, e.g., National Consumer Law Center, "Cancellation and Settlement," available at

40 11 U.S.C. §523(a)(8). Prior to 1976, student loan debt could be discharged in bankruptcy. Congress then changed the law. Student loans were dischargeable if they had been in repayment for a certain number of years. In 2005, Congress extended this protection to private student loans.

41 Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987). The Bankruptcy Code does not define undue hardship.

42 Correll v. Union Nat'l Bank of Pittsburgh (In re Correll), 105 B.R. 302, 306 (Bankr. W.D. Pa. 1989).

43 S. 1414, introduced May 9, 2019, sponsored by Sen. Richard J. Durbin, D-Ill.; H.R. 7655, introduced July 16, 2020, sponsored by Rep. Mary Gay Scanlon, D-Pa. See also Minsky, "Proposal: Discharge Student Loans for Those Harmed by Pandemic and Recession," Forbes (July 16, 2020), available at

44 Pentis, "Income-Share Agreements vs. Student Loans: Which Is Right for Your Profession?" Lending (April 4, 2019), available at

45 Federal Student Aid Office of the U.S. Department of Education, "Income-Driven Repayment (IDR) Plan Request," available at

46 Setting Every Community Up for Retirement Enhancement Act, P.L. 116-94.

47 Sec. 529(c)(9)(A), as amended by SECURE Act §302(b)(1).

48 Sec. 529(c)(9)(C)(i).

49 Sec. 401(k)(2)(B)(i)(IV); Sec. 72(t).

50 Regs. Sec. 1.401(k)-1(d)(3)(i).

51 There is a safe harbor for distributions for certain expenses for medical care, tuition, casualty, etc. See Regs. Sec. 1.401(k)-1(d)(3)(ii).

52 Regs. Sec. 1.401(k)-1(d)(3)(ii)(A).

53 Regs. Sec. 1.401(k)-1(d)(3)(iii)(B).

54 Regs. Sec. 1.401(k)-1(d)(3)(iii)(B)(2).

55 Regs. Sec. 1.401(k)-1(d)(3)(iii)(C).

56 Sec. 401(k)(14)(A).

57 Distributions to pay current-year education expenses are not subject to the 10% early-withdrawal penalty. Additionally, funds in an IRA can be withdrawn at any time; however, the amount withdrawn may be subject to income tax and the early-withdrawal penalty.

58 Congress could one day decide to provide some type of widespread student loan forgiveness, but it is prudent to have a debt repayment plan instead of relying on potential debt forgiveness.

59 Sec. 6511(a) (three years from the date the return was filed or two years from the date the tax was paid, whichever is later).



Claudia L. Kelley, CPA, Ph.D., is a professor, and C. Kevin Eller, Ph.D., is an associate professor, both in the Walker College of Business at Appalachian State University in Boone, N.C. For more information about this article, contact


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