Debt Discharge Tax Relief Announced for Corinthian Colleges Students

Students who took out federal student loans to finance attendance at schools owned by the now-defunct Corinthian Colleges Inc. and whose loans are discharged under the Department of Education’s Defense to Repayment or Closed School discharge processes will not have to recognize income as a result of that debt discharge, the IRS announced on Thursday (Rev. Proc. 2015-57). Over 50,000 borrowers may be eligible for discharges under the Education Department’s programs.

In addition to not having to recognize discharge-of-indebtedness income, borrowers will not have to increase their taxes owed in the year of discharge (or in a prior year) if the borrower claimed a Sec. 25A education credit attributable to payments made with the proceeds of the discharged loan. The IRS will also not assert that these borrowers must increase their income in the year of discharge if the borrower took a deduction in a prior year under Sec. 221 or 222 attributable to interest or qualified tuition payments paid with proceeds from a discharged loan.

Corinthian Colleges operated a number of for-profit schools throughout the United States, but it ceased operations in April 2015 after the Education Department announced it was fining the school $30 million for misrepresentation, and it filed for Chapter 11 bankruptcy protection in May 2015.

—Alistair Nevius (anevius@aicpa.org) is The Tax Adviser’s editor-in-chief.