Acting to clarify the practical impact of a COVID relief provision passed earlier this year, the IRS announced in Notice 2022-1 (Notice) that lenders are not required and should not issue forms 1099-C when certain student loans are canceled. . Lenders and their agents should act now to review their tax reporting procedures to comply with the Notice.
For your information, the American Rescue Plan Act of 2021 (ARPA) amended Section 108 of the Internal Revenue Code (Code) to expand the types of student debt relief that will be excluded from income.
Prior to the enactment of ARPA, Section 108 of the Code provided narrow exceptions to the general rule requiring the inclusion of Debt Cancellation Income (COD). The exceptions that apply to COD income from the discharge of student loans:
- in exchange for a provision requiring certain work for a certain period by certain professionals (for example, a doctor in a public hospital in a rural area), or
- due to the death or total and permanent disability of a student.
Relief has also been provided for COD income resulting from certain other student loan releases, such as loans released as part of the Department of Education’s closed school process or the defense release process on repayment. .
ARPA has added additional relief by excluding from gross income certain student loan releases that occur after December 31, 2020 and before January 1, 2026. The new “student loan release” exclusion applies to the following types of loans:
- Loans provided specifically for post-secondary education expenses if the loan has been made, insured or guaranteed by a federal, state or local government entity or qualifying educational institution.
- Loans for private education (as defined in Section 140 (a) (7) of the Loan Truth Act).
- Any loan made by any educational institution that qualifies as a 50% charitable organization (for the purposes of the charitable donation tax deduction) (most non-profit colleges and universities) if the loan is made in under an agreement with a government entity (described in point (1)) or any private education lender that has granted the loan to the educational institution, or as part of a program of the educational institution education that is designed to encourage its students to take jobs with unmet needs or in areas with unmet needs and in which the services provided by the students (or alumni) are for or under the direction of a government unit or tax-exempt charity.
- Any loan made by an educational organization considered to be a 50% charity or by a tax-exempt organization to refinance a loan to an individual to help the individual attend an educational organization, but only if the refinancing loan is part of a program of the refinancing organization which is designed as described in point (3).
The release of a loan granted by an educational institution or a private education lender is however not excluded under the above rules, if the release is due to services rendered either to the organization or to to the private education lender.
It is important to note that this ARPA provision did not, in itself, require the cancellation of a student loan. The ARPA Code change with respect to the COD Broad Income Exception only applies to how a student loan discharge is handled for tax reporting purposes.
To sum up, normally IRS Form 1099-C is used by lenders to report the release of debt upon the occurrence of certain identifiable events. If applicable, the lender should file Form 1099-C with the IRS and provide a copy to the borrower. If the debt that is discharged is a student loan described above, however, the Notice states that the IRS does not want to:
- the lender files a Form 1099-C with the IRS, as this could result in a computer-generated notice from the IRS to the borrower of unreported income, or
- provide a Form 1099-C to the borrower as this could cause confusion for the borrower.