Borrowers Defense/Student Loans

[Dailey]

Good Afternoon, 

 As of Aug 2023, I was approved for Borrower's Defense Against Repayment for my student loans. The total debt including interest that was written off was $45,000, without interest 28,334.00.  I live in Tennessee. I have not received the Cancellation of Debt form yet, but I do have all the letters from Nelnet, StudentAid.gov and US Dept of Education showing my approval. All of the student loan debt has been removed from my credit history, as well. Will this affect my return next year? Will I need to include this in my income? Will I be required to pay taxes on it? Is it easier to pay for someone to sit down and go over and complete my taxes for me OR is it an easy process using TurboTax? I am due for a small refund of $1,109, will that affect anything? Thank you for your assistance with my questions. This event is greatly appreciated! 

[MelanieCPA · Accepted solution]

Hi @Dailey 

Glad to hear that you were approved for the Borrower Defense To Repayment for your student loans.  Federal loans that are discharged based on the Closed School or Defense to Repayment discharge process loan forgiveness under Borrower Defense to Repayment is not treated as taxable under federal law.

And because you live in Tennessee, you do not prepare a state income tax return.

If you receive any additional information from the lenders or tax notices TurboTax will help walk you through these questions.  Remember we also offer Live Help and our Full Service tax assistance as well that you can use as you prepare your tax return for 2023.

Thank you!

Melanie

[Cdmarshall6411]

What about this same situation in other states, such as MN?

[marctu]

The IRS has stated that loans discharged through the Borrower Defense to Repayment program are not taxable income. This is because the program eliminates federal student loans for borrowers who were misled by their college or whose school violated state laws or engaged in misconduct.  See: Income from discharge of indebtedness 

One should be aware that  currently as written here: Borrower Defense Updates there is an injunction in place for the regulations that are above.

Prior to the injunction only five states were on track to tax forgiven student loans: Arkansas, Indiana, North Carolina, Mississippi, and Wisconsin. 

Just for visibility, since your follow up question was about  Minnesota, you can look here as well:  Cancellation of Education Loans Minnesota Department of Revenue 

Minnesota specifically states:  If your discharged education loans were not taxable federally, they are not taxable on your Minnesota return.

I hope this was helpful and thank you for the follow up question @Cdmarshall6411

All the best,

Marc T.

TurboTax Live Tax Expert

[Arcwelder]

@marctu  Does this injuntion mean that the 5 taxing states now cannot tax BDTR discharge? I'm in NC and they have stated they did not adopt federal guidelines for taxation of forgiveness.