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A graduation ceremony in Tullahoma, Tenn., May 6, 2017. In a decision that will bring relief to tens of thousands of student loan borrowers whose schools abruptly shut down or used misleading practices, the Internal Revenue Service says they won’t have to pay taxes on their forgiven balances. (Joe Buglewicz/The New York Times)
A graduation ceremony in Tullahoma, Tenn., May 6, 2017. In a decision that will bring relief to tens of thousands of student loan borrowers whose schools abruptly shut down or used misleading practices, the Internal Revenue Service says they won’t have to pay taxes on their forgiven balances. (Joe Buglewicz/The New York Times)

In a decision that will bring relief to tens of thousands of student loan borrowers, the Internal Revenue Service has expanded the pool of people who will not have to pay taxes on the balance of their forgiven loans.

The IRS said its ruling would provide “appropriate” relief to borrowers by waiving taxes on both federal and private loans that are forgiven because their schools misled them or closed abruptly. Such borrowers could otherwise be left with cripplingly high tax bills.

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The decision announced Wednesday expands an exemption that was granted to borrowers at Corinthian Colleges and the American Career Institute, two failed for-profit schools that stranded their students with incomplete degrees and credits that were hard to transfer. In those circumstances, the Education Department allows borrowers to have their federal loan debts eliminated through its Closed School Discharge program.

That program was flooded with new applicants after the sudden closure of more than 40 campuses operated by Dream Center Education Holdings, which imploded last year. The schools failed after Dream Center improperly withheld millions of dollars in federal aid money that was owed to students and used the cash to cover operating expenses. More than 25,000 students were affected by the closure.

The IRS decision also covers borrowers who have their loans eliminated through a program know as Borrower Defense to Repayment, which allows loans to be forgiven when schools act fraudulently, such as through deceptive recruiting practices. But that program has virtually stopped functioning under Education Secretary Betsy DeVos, and the department is fighting a deluge of lawsuits over her attempts to curtail it.

An Education Department spokesman said the department could not immediately provide data on how many borrowers had received closed-school discharges. One advocacy group, Student Defense, said that at least 30,000 borrowers had their loans discharged in the past year, but that figure reflected only a portion of the total.

No borrowers had debts eliminated through a borrower defense discharge in the first nine months of last year, according to the latest Education Department data.

c.2020 The New York Times Company

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