Student Loan Discharge due to borrower defense in Indiana

[Im_justpeachy]

We received a student loan discharge due to borrower defense. This was not something we applied for; rather, it was provided by the DOE based on the college attended. In Indiana, discharged student loan debt due to borrower defense may be taxable. According to the Indiana Department of Revenue website taxation of these types of discharge very. How can I determine if our discharge will be taxed at the state and local level?

[SabrinaD2]

It depends. In Indiana, the taxability of discharged student loan debt due to borrower defense varies based on specific circumstances. According to the Indiana Department of Revenue, while some discharged student loans are taxable, there are exceptions.

To Determine Taxability

Review the Indiana Department of Revenue website: see table below and check the Indiana Department of Revenue's page on student loan forgiveness for detailed information and any updates on the taxability of different types of student loan discharges.

Let me know if additional information is needed

[gudgel89]

It says borrower's defense varies in picture above. How do we know what the variables are? We need more clarity. It says you can not call them at IN.gov and to ask a tax professional. How does the tax professional find out this specific information for their client? Thanks!

[AmyC]

If you fall under the tech student or or college went out of business categories, then it is not taxable. Otherwise, it is.

Note: ITT students who had their debt discharged do not have to pay federal, state, or state/local income taxes (IRS Rev. Proc. 2020-11). In addition, loans discharged pursuant to the settlement in Sweet v. Cardona will not be required to be added back in determining Indiana adjusted gross income.

[gudgel89]

So does a fraudulent & misconduct school fall under that category? Thanks for your help

[DaveF1006]

It depends on the school. To get your loans discharged, you would apply for borrowers defense here.

[gudgel89]

I do have a borrower’s defense discharge loan from last May for Art institute due to fraudulent & misconduct. So if ITT is not required to pay state taxes than I was curious about Art Institutes as well. 

[gudgel89]

Anyone have an answer to why ITT is exempt from taxes and other schools that have been deemed as fraudulent & misconduct are not exempt? Why is ITT different?

[SusanY1]

We are not sure what the criteria were for making the list, but the schools listed HERE are the ones currently eligible under Borrower Defense Fund discharge rules.  

[gudgel89]

Thank you. My school is on the list you shared.  But Indiana government site only lists ITT and sweet vs cardona are exempt. I hope it’s because in.gov hasn’t updated with the new schools on the borrowers defense. Hopefully they will before tax season is over. 

[SusanY1]

After reviewing THIS information from Indiana, it seems that what makes ITT different is when the school was placed on the list used for federal returns.  Indiana "coupling" with federal tax law is static meaning that it's coupled at a given point in time and any changes to federal tax law have to be reviewed by your state legislature before the changes are adopted by Indiana.  Although, it could potentially be because the school had its headquarters within the state in Carmel, Indiana (but I am just guessing that this could be a connection.)

In any case, you will need to wait for Indiana to include your school before you can assume that the discharge of your debt is free from state tax.  Watching and waiting may pay off in the form of not having to include the income without having to amend your return at a later date.  

@gudgel89 

[gudgel89]

I really appreciate your answer. Other employees on these threads have given such basic answers that just dance around your question. Thanks for taking the time & looking into getting a valid answer. Have a great day! 

[Im_justpeachy]

I was able to find some information after digging through IN information online. First, in the document where it says that the ITT that is discharged pursuant to, if you actually read that document it sounds like it does include more than just ITT. I also found a piece of Indiana Legislation that is going through for approval and it notes circumstances where discharged loans are already exempt from tax. The document notes discharges due to borrower defense as one of those already exempted items. If you're at all concerned, I would reach out to a CPA within the state of indiana. But based on what I've seen, I don't think we need to pay tax on the Art Institute discharged debt in Indiana as long as it was due to borrower defense and part of the group discharged by the DOE (we did not apply for any sort of discharge, but it was granted simply because we attended that school during certain dates.)

[gudgel89]

Thank you so much for that information!!!! I really appreciate your extra time in trying to help in this matter. You rock!! I have reached out to Indiana Dept of Revenue last Friday with the list of defrauded schools. Below is the email I received back from them. 
 

For student loan discharges such as the ones listed below, Indiana will follow the same treatment as the IRS for inclusion/exclusion of income from the discharged debt.  In other words, no Indiana addback is required for discharges due to borrower’s defense or similar misconduct.

Thank you,

Jeff Raney

Tax Policy Division

Indiana Department of Revenue