Is money received from a law school's LRAP, for the sole purpose of making monthly student loan payments while working in the public interest, taxable income?

[IsabellaG · Accepted solution]

It depends. 

See  Rev. Rul. 2008-34, which describes the circumstances under which a law school loan may be considered a nontaxable student loan, and the debt forgiveness would be nontaxable. If this is your situation, then it wouldn't be taxable.

But if your LRAP assistance is structured as a grant,  it could be considered taxable income.

[kellyisrael046]

The program looks like this, and the money seems to be structured as a forgivable loan (that is, the loan is forgiven at the end of the year as long as I adhere to all the program requirements and maintain qualifying employment for the whole year: <a rel="nofollow" target="_blank" href="https://www.wcl.american.edu/school/admissions/finaid/financial-literacy/pilrap/">https://www.wcl.am...>

[IsabellaG]

Did you receive a tax document for this money? A 1099?

[kellyisrael046]

Would that be nontaxable? I have to be confident here to ensure whether I know to include it or not on my taxeable income.

[kellyisrael046]

No, not at all.

[IsabellaG]

From what I just read in your link, this is structured as a non-taxable forgivable loan, which would be just that: nontaxable.

[kellyisrael046]

In that case, I will not include this loan on my taxes at all. Thank you!

[IsabellaG]

You're welcome, that's correct.

[kellyisrael046]

One legal detail that's been bothering me as a lawyer myself, though. 2008-34 keeps on mentioning the LRAP as "refinancing" the borrower's existing student loans, and that being a necessary component. It's true that I took out the student loans in question specifically to attend that law school, and so they're essentially giving me a loan to repay the money I owe them in the first place (or at least, owe the federal government because of them), and conditioning it on me working in the public service (which I am). Does that count as "refinancing" the loan, even though the federal government technically holds all my loans?

[IsabellaG]

Yes, that's the point of the program. See if the circumstances in this IRS document apply to you. <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-drop/rr-08-34.pdf">https://www.irs.gov/pub/irs-drop/rr-08-34.pdf</a>

[kellyisrael046]

I feel like I don't know what this means: "Under the LRAP, the law school makes loans that refinance the
graduates’ original student loan(s)." My loans haven't changed--- I'm just repaying them using the money given to me by the school that I took the original student loans out to attend. All the other circumstances listed apply to both the program and me.

[IsabellaG]

I see what you mean, but that is the same thing as refinancing for these purposes. It's like taking a debt consolidation loan to pay off other loans.

[kellyisrael046]

O.K. then! Thanks!

[IsabellaG]

You're welcome!