The IRS Won’t Tax Corinthian Students' Forgiven Loans… But What About Everyone Else?

Given the horrible news of late, it’s understandable how some notices end up situated below the fold, buried in the back pages of newspapers and magazines, or relegated to non-mainstream outlets.

Such is the case involving a recent Internal Revenue Service pronouncement. It concerns students who borrowed from the federal government to finance the cost of their tuition at the now-defunct Corinthian Colleges Inc., which operated schools under the names Everest, Heald and WyoTech.

According to the IRS, not only are these former students’ loans eligible for discharge under the Department of Education’s rules governing school closures, but the value of their forgiven debts will also now be exempted from taxation.

When a lender elects to forgo repayment on a portion (or perhaps all) of its borrower’s remaining obligation — whether to close out the loan or in conjunction with a permanent modification to the agreement — the IRS views the value of that waivered remittance as ordinary income, subject to taxation. The rationale behind that interpretation is straightforward: If the money that was borrowed doesn’t have to be paid back, it wasn’t really “borrowed” in the first place.

So why the about-face from the IRS?

Perhaps policymakers worried that Corinthian’s closure would leave education borrowers in the same untenable financial predicament as mortgagors when the value of their fundamentally important investment (real estate, in this case) collapsed not long ago. Lawmakers responded to that crisis by approving a temporary measure to exempt from taxation the balances that were written off by the lenders as part of the loan-modification process.

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But if policymakers truly believe that those who are legitimately in need of relief should not be additionally burdened by a tax on the value of that relief, why have they elected to limit this most recently-granted exemption to so few federal student loan borrowers when there are many more who are apt to experience the same difficulty when their balances are ultimately discharged under a government-sponsored Income-Based Repayment and Pay As You Earn programs?

And then there is the matter of their credit bureau reports and scores.

The government contends that the degrees that Corinthian students financed with taxpayer-backed loans failed to move the economic needle for their households, leaving them with debts they haven’t the means to repay, as their credit reports attest. Still more student loan borrowers are forced to endure bureaucratic delays and obfuscations as they endeavor to attain the relief to which they are legally entitled on loans that were improperly structured at the outset, as their reports also attest.

Considering the extent to which the government is busily restructuring its troubled loan portfolio and its now apparent willingness to remedy the punitive nature of the tax code in that regard — albeit in one instance — it’s time that lawmakers extended the same consideration to all modified debts, and directed the credit bureaus to expunge all related derogatory payment histories as well.

It’s bad enough that higher education debtors are treated as second-class consumers with regard to the virtual inability to discharge these debts in bankruptcy. Let’s not compound that sin by favoring some student borrowers over others.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.