Cancellation of law school loan in exchange for public service work wasn't included in income
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Rev Rul 2008-34, 2008-28 IRB IRS website: http://www.irs.gov/
Summary. In a revenue ruling, the IRS has ruled that the forgiveness of a law student's loan in exchange for the borrower working for a certain period of time in a qualifying law-related public service position wasn't includible in his/her gross income. The revenue ruling clarified that a law school loan made under a Loan Repayment Assistance Program generally satisfies the requirements of Code Sec. 108(f).
Background. In the case of an individual, gross income doesn't include any amount which (but for this rule) would be includible in gross income by reason of the discharge of all or part of any student loan if the discharge was made under a provision of the loan that all or part of the indebtedness would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers. (Code Sec. 108(f)(1))
RIA illustration : A student received $100,000 under a medical educational loan program. Under the terms of the program, one-fifth of the loan (or $20,000) is canceled each year he practices medicine in a qualifying state hospital. He doesn't include those amounts in income.
Facts. An individual, who we'll call Joel, attended law school and accumulated debt on his student loan. Neither the loans nor the underlying loan documents addressed whether any of the indebtedness would be forgiven if Joel worked in a particular profession for a specified period of time. However, Joel's law school offered a Loan Repayment Assistance Program (LRAP) to help reduce the student loan debt of graduates who engage in public service. The LRAP was designed to encourage graduates to enter into public service in occupations or areas with unmet needs. After Joel graduated from law school, he signed an LRAP promissory note and accepted the terms and conditions of the law school's LRAP loan.
Under the LRAP, the law school made loans that refinanced the graduates' original student loan(s). To qualify, a graduate had to work in a law-related public service position for, or under the direction of, a tax-exempt charitable organization or a governmental unit, including positions in: (1) a public interest or community service organization, (2) a legal aid office or clinic, (3) a prosecutor's office, (4) a public defender's office, or (5) a state, local, or federal government office. The LRAP loan amount was based on the graduate's outstanding student loan debt and annual income. After the graduate worked for the required period in a qualifying position, the law school forgave all or part of his LRAP loan.
Conclusions. In Rev Rul 2008-34, IRS concluded that the terms of the LRAP loan satisfied the requirements of Code Sec. 108(f)(1), and the LRAP loan was a “student loan� under Code Sec. 108(f)(2). Consistent with the requirement in Code Sec. 108(f)(1) to work in certain professions for a certain period of time, Joel's loan was forgiven under the terms of the LRAP loan, only if he worked for a certain minimum period of time in a qualifying law-related public service position.
Further, Rev Rul 2008-34 noted that the LRAP was designed to encourage its students to engage in public service in occupations or areas with unmet needs. All of the positions listed in the LRAP were for, or under the direction of, a governmental unit or a tax-exempt charitable organization. In addition, the LRAP loan was made to refinance A's original student loans.
RIA Research References: For cancellation of debt under student loan programs, see FTC 2d/FIN ¶ J-7508; United States Tax Reporter ¶ 1084.04; TaxDesk ¶ 188,006.
Source: Federal Taxes Weekly Alert (preview) 06/26/2008, Volume 54, No. 26 via RIA Newsstand 6/23/08 (Part of Westlaw's Checkpoint Resources) via Ref Librarian Mary Rumsey
