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Students who owe loans whose education debt has been canceled as a result of their colleges engaging in fraud or have been closed will not face a tax bill anymore. The relief comes as the number of applications seeking loan forgiveness continues to increase.

IRS issues guidance to protect student borrowers

The Internal Revenue Service has issued guidance that protects borrowers from having their private and federal loans treated as income tax. This measure applies for education loans that were canceled from January 1, 2016, onwards. Therefore individuals affected by this new measure could claim refund or credit for the overpaid taxes.

Senator Patty Murray indicated that the thought had taken too long, and he was glad the Treasury Department and IRS had taken the step to protect defrauded student loan borrowers from paying the unnecessary bill. He added that this was a welcome move for individuals that have received a loan discharge. He, however, stated that there are still several students defrauded who are waiting for relief.

In September 2018, Murray wrote to the Treasury and IRS asking them to clarify those former ITT Technical Institute students should not be taxed because of canceled federal loans. Equally Democratic Senator Ron Wyden of Oregon and Richard Durbin of Illinois made similar requests for clarification in 2018 regarding former students for Corinthian Colleges whose private loans got canceled.

Former Corinthian and American Career Institute Students get relief

The IRS seems to have heeded the requests, and on Wednesday, they expanded the current measure granting tax relief to former Corinthian and American Career Institute students whose loans were canceled. The loans were canceled under the closed-school discharge statute and the borrower defense to repayment.

The measure provides for cancellation of student loans for students enrolled in a school when it closes or those who withdrew 120 days before the closure. However, for those who will continue studies elsewhere, they will have to repay. Also, the Federal law gives the Education Department the power to cancel federal loans for students whose colleges mislead them about job placement rates and graduation.