Cancellation of Student Loan

Generally, if you are responsible for making loan payments, and the loan is canceled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes. However, if your student loan is canceled, you may not have to include any amount in income.

Qualifying Loans

To qualify for tax-free treatment, your loan must contain a provision that all or part of the debt will be canceled if you work:

For a certain period of time,

In certain professions, and

For any of a broad class of employers.

The loan must have been made by a qualified lender to assist the borrower in attending an eligible educational institution.

Qualified lenders

These include the following:

The government - federal, state, or local, or an instrumentality, agency, or subdivision thereof.

A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital and whose employees are considered public employees under state law.

An eligible educational institution, if the loan is made:

As part of an agreement with an entity described in (1) or (2) under which the funds to make the loan were provided to the educational institution, or

Under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

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