Publication 970 |
2008 Tax Year |
5.
Student Loan Cancellations and Repayment Assistance
Law school loan repayment assistance programs. You can consider a loan made under a law school Loan Repayment Assistance Program (LRAP) to be a qualifying loan for purposes
of tax-free student loan cancellation. See Student Loan Repayment Assistance below.
If you fulfill certain requirements, two types of student loan assistance may be tax free. The types of assistance discussed
in this chapter are:
Student Loan Cancellation
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. This section describes the requirements for tax-free treatment of canceled student 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.
In satisfying the service requirement in item 3b, the student must not provide services for the lender organization.
Section 501(c)(3) organization.
This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of
the following purposes.
-
Charitable.
-
Religious.
-
Educational.
-
Scientific.
-
Literary.
-
Testing for public safety.
-
Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic
facilities or equipment).
-
The prevention of cruelty to children or animals.
Eligible educational institution.
This is an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled
body of students in attendance at the place where it carries on its educational activities.
If you refinanced a student loan with another loan from an eligible educational institution or a tax-exempt organization,
that loan may also be considered as made by a qualified lender. It is considered made by a qualified lender if it meets the
requirements of item 3b under
Qualified lenders
beginning in the previous column.
Student Loan Repayment Assistance
Loan repayment assistance programs (LRAP) provide help in repaying student loans for those who work in public service occupations
or in areas with unmet needs. Examples of such occupations are health care professionals in underserved areas, attorneys in
legal-aid offices and prosecutor's or public defender's offices, and classroom teachers in subject areas with shortages.
An LRAP loan refinances your original student loan(s). After you work for a certain minimum period of time in a qualifying
position, all or part of your student loan indebtedness is forgiven.
The amount of your loan that is forgiven is tax-free if the LRAP meets certain criteria. Repayment assistance received under
the following programs has been determined to be tax free.
If your repayment assistance is from a source other than those listed, contact the program administrator to see if the LRAP
qualifies for tax-free assistance. The program must meet the qualifications listed earlier in this chapter under
Qualifying Loans
.
You cannot deduct the interest you paid on a student loan to the extent payments were made through your participation in the
above programs.
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