Lenders Should Not Report Student Loans Discharged Under ARPA

Ferrone & Associates CPAsUncategorized

Lenders and services of most student loans should not file Form 1099-C, Cancellation of Debt, for loans in 2021 through 2025. On Tuesday, The IRS stated that borrowers do not have to include these forgiven amounts as income for tax purposes.

Additionally, the guidance in Notice 2022-1 (https://www.irs.gov/pub/irs-drop/n-22-01.pdf) pertains to a provision of the American Rescue Plan Act (ARPA), P.L 117-2, passed in March 2021. ARPA also added a special rule in Sec. 108(f) (5) providing that taxpayers’ gross income does not include any amount discharged after Dec. 31, 2020. or before Jan. 1, 2026. This pertains to certain loans provided for postsecondary educational expenses, whether through an educational institution or directly to the borrower. 

Furthermore, the covered loans are those made, insurer, or guaranteed by the United States or its instrumentalities or agencies; a state, territory, or possession of the United States or the District or any of their political subdivisions; or made by an eligible educational institution, as defined in Sec. 25A. Provisions made by educational organizations and private lenders cover certain student loans.

Ultimately, the notice advises lenders and servicers of these loans. They are not required to, and should not, file information returns or payee statements (i.e., Form 1099-C). Reporting an applicable discharge of student debt to the IRS or to the borrower could cause the IRS to erroneously issue a notice of underreported income and confuse the borrower.