The (Non)Taxation of Student Debt Cancellation: Statutory Misinterpretation and Normative Conflict

Abstract

Student debt cancellation is an increasingly important form of subsidy for higher education and reflects a shift toward financing higher education with income-contingent loans. But the legal formalities of debt cancellation expose borrowers to the risk of taxation, especially after 2025. This paper shows that the IRS and Treasury's position that student debt cancellation is sometimes taxable is based on a misreading of the tax code and its history. I further argue that this misreading arises in part because of the conflicting norms of tax policy and non-tax social policy, a conflict that arises in other transfer contexts as well.

Keywords: student loans, student debt, tax law, higher education finance, statutory interpretation, general welfare exclusion

JEL Classification: H52, H53, I22, K34