Revisiting Relief for the Taxation of Student Loan Discharge and Cancellation

Abstract

To be truly effective, any policy of student debt discharge and cancellation must also provide clarity on the tax treatment of that cancellation. Standard tax law treats many forms of cancelled debt as a form of taxable income, just like wages and salaries. If that tax treatment applies to student debt cancellation, it could impose significant financial hardship at exactly the point when a borrower should instead be relieved of hardship. It would in effect require immediate payment of 25 percent to 35 percent of the canceled debt principal for most people, in the form of taxes. The tax treatment of student debt cancellation is a complicated hodgepodge of rules that appear to treat cancelled debt differently depending on the reason for the cancellation.

Keywords: student debt, tax law, debt cancellation, student loan

JEL Classification: I22, I23